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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 31, 2020
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-38926
Slack Technologies, Inc.
(Exact name of registrant as specified in its charter)
| | | | | |
Delaware | 26-4400325 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
500 Howard Street
San Francisco, California 94105
(Address of principle executive offices including zip code)
(415) 630-7943
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class A Common Stock, $0.0001 par value per share | WORK | The New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes or ☐ No.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes or ☐ No.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☐ |
| | Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes or ☒ No
There were 483,125,892 shares of the registrant’s Class A common stock outstanding and 87,398,710 shares of the registrant’s Class B common stock outstanding as of August 17, 2020.
TABLE OF CONTENTS
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, which are statements that involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “shall,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
•the effect of uncertainties related to the global COVID-19 pandemic on U.S. and global economies, our business, results of operations, financial condition, demand for Slack, sales cycles, customer retention, and the health of our customers' businesses;
•our future financial performance, including our revenue, cost of revenue, and operating expenses;
•our ability to maintain the security and availability of Slack;
•our ability to increase the number of organizations on Slack and paid customers;
•our ability to grow or maintain our Net Dollar Retention Rate;
•our ability to achieve widespread adoption;
•our ability to optimize the pricing for Slack;
•our ability to effectively manage our growth and future expenses;
•our ability to maintain our network of partners;
•our ability to enhance Slack to respond to new technologies and requirements of organizations on Slack;
•our estimated market opportunity;
•the future benefits to be derived from new third-party applications and integrations;
•our ability to maintain, protect, and enhance our intellectual property;
•our ability to comply with modified or new laws and regulations applying to our business;
•the attraction and retention of qualified employees and key personnel;
•our anticipated investments in sales and marketing and research and development;
•the sufficiency of our cash, cash equivalents, and investments to meet our liquidity needs;
•our ability to service the interest on our convertible notes and repay such notes, to the extent required;
•our ability to successfully defend litigation brought against us; and
•the increased expenses associated with being a public company.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. 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.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon these statements.
_________________
Unless the context requires otherwise, we are referring to Slack Technologies, Inc. together with its subsidiaries when we use the terms the “Company,” “we,” “our,” or “us.”
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SLACK TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
| | | | | | | | | | | |
| As of | | |
| July 31, 2020 | | January 31, 2020 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 1,316,395 | | | $ | 498,999 | |
Marketable securities | 216,957 | | | 269,593 | |
Accounts receivable, net | 111,950 | | | 145,844 | |
Prepaid expenses and other current assets | 58,340 | | | 55,967 | |
Total current assets | 1,703,642 | | | 970,403 | |
Restricted cash | 38,490 | | | 38,490 | |
Strategic investments | 42,826 | | | 28,814 | |
Property and equipment, net | 98,729 | | | 102,340 | |
Operating lease right-of-use assets | 185,911 | | | 197,830 | |
Intangible assets, net | 18,019 | | | 13,530 | |
Goodwill | 76,204 | | | 48,598 | |
Other assets | 37,306 | | | 41,701 | |
Total assets | $ | 2,201,127 | | | $ | 1,441,706 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 12,778 | | | $ | 16,893 | |
Accrued compensation and benefits | 68,154 | | | 65,196 | |
Accrued expenses and other current liabilities | 23,823 | | | 32,123 | |
Operating lease liability | 30,707 | | | 30,465 | |
Deferred revenue | 382,675 | | | 375,263 | |
Total current liabilities | 518,137 | | | 519,940 | |
Convertible senior notes, net | 630,326 | | | — | |
Operating lease liability, noncurrent | 185,166 | | | 196,378 | |
Deferred revenue, noncurrent | 732 | | | 1,451 | |
Other liabilities | 67 | | | 38 | |
Total liabilities | 1,334,428 | | | 717,807 | |
Commitments and contingencies (Note 8) | | | |
Stockholders’ equity: | | | |
| | | |
| | | |
Common stock | 57 | | | 56 | |
Additional paid-in-capital | 2,235,200 | | | 1,945,446 | |
Accumulated other comprehensive income (loss) | 929 | | | (71) | |
Accumulated deficit | (1,386,680) | | | (1,236,621) | |
Total Slack Technologies, Inc. stockholders’ equity | 849,506 | | | 708,810 | |
Noncontrolling interest | 17,193 | | | 15,089 | |
Total stockholders’ equity | 866,699 | | | 723,899 | |
Total liabilities and stockholders’ equity | $ | 2,201,127 | | | $ | 1,441,706 | |
See accompanying notes to condensed consolidated financial statements.
SLACK TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | | | Six Months Ended July 31, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Revenue | $ | 215,864 | | | $ | 144,973 | | | $ | 417,514 | | | $ | 279,794 | |
Cost of revenue | 28,387 | | | 31,106 | | | 53,989 | | | 49,680 | |
Gross profit | 187,477 | | | 113,867 | | | 363,525 | | | 230,114 | |
Operating expenses: | | | | | | | |
Research and development | 94,201 | | | 217,769 | | | 185,426 | | | 268,872 | |
Sales and marketing | 109,122 | | | 136,392 | | | 219,442 | | | 203,230 | |
General and administrative | 52,788 | | | 123,356 | | | 103,442 | | | 160,100 | |
Total operating expenses | 256,111 | | | 477,517 | | | 508,310 | | | 632,202 | |
Loss from operations | (68,634) | | | (363,650) | | | (144,785) | | | (402,088) | |
Interest expense | (11,552) | | | (208) | | | (14,394) | | | (321) | |
Interest income and other income, net | 6,952 | | | 3,319 | | | 11,660 | | | 10,509 | |
Loss before income taxes | (73,234) | | | (360,539) | | | (147,519) | | | (391,900) | |
Provision (benefit) for income taxes | (81) | | | (923) | | | 61 | | | (403) | |
Net loss | (73,153) | | | (359,616) | | | (147,580) | | | (391,497) | |
Net income (loss) attributable to noncontrolling interest | 1,695 | | | (54) | | | 2,479 | | | 1,397 | |
Net loss attributable to Slack | $ | (74,848) | | | $ | (359,562) | | | $ | (150,059) | | | $ | (392,894) | |
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Basic and diluted net loss per share: | | | | | | | |
Net loss per share attributable to Slack common stockholders, basic and diluted | $ | (0.13) | | | $ | (0.98) | | | $ | (0.27) | | | $ | (1.58) | |
Weighted-average shares used in computing net loss per share attributable to Slack common stockholders, basic and diluted | 564,351 | | | 368,533 | | | 560,921 | | | 249,222 | |
See accompanying notes to condensed consolidated financial statements.
SLACK TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | | | Six Months Ended July 31, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
Net loss | $ | (73,153) | | | $ | (359,616) | | | $ | (147,580) | | | $ | (391,497) | |
Other comprehensive income (loss), net of tax: | | | | | | | |
Change in unrealized gain or loss on marketable securities | 75 | | | (41) | | | 1,000 | | | 379 | |
Other comprehensive income (loss), net of tax | 75 | | | (41) | | | 1,000 | | | 379 | |
Comprehensive loss | (73,078) | | | (359,657) | | | (146,580) | | | (391,118) | |
Comprehensive income (loss) attributable to noncontrolling interest | 1,695 | | | (54) | | | 2,479 | | | 1,397 | |
Comprehensive loss attributable to Slack | $ | (74,773) | | | $ | (359,603) | | | $ | (149,059) | | | $ | (392,515) | |
See accompanying notes to condensed consolidated financial statements.
SLACK TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | | Additional Paid-In-Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Noncontrolling Interest | | Total Stockholders' Equity |
| | Shares | | Amount | | | | | | | | | | |
Balance at January 31, 2020 | | 555,360 | | | $ | 56 | | | $ | 1,945,446 | | | $ | (71) | | | $ | (1,236,621) | | | $ | 15,089 | | | $ | 723,899 | |
Exercise of stock options | | 1,062 | | | — | | | 1,932 | | | — | | | — | | | — | | | 1,932 | |
Vesting of early exercised stock options | | — | | | — | | | 2 | | | — | | | — | | | — | | | 2 | |
Issuance of common stock upon settlement of restricted stock units (RSUs) | | 4,724 | | | — | | | — | | | — | | | — | | | — | | | — | |
Equity component of convertible senior notes, net of issuance costs | | — | | | — | | | 223,622 | | | — | | | — | | | — | | | 223,622 | |
Purchases of capped calls related to convertible senior notes | | — | | | — | | | (105,570) | | | — | | | — | | | — | | | (105,570) | |
Other comprehensive income | | — | | | — | | | — | | | 925 | | | — | | | — | | | 925 | |
Issuance of common stock for employee share purchase plan | | 820 | | | — | | | 16,610 | | | — | | | — | | | — | | | 16,610 | |
Stock-based compensation | | — | | | — | | | 53,711 | | | — | | | — | | | — | | | 53,711 | |
Net income (loss) | | — | | | — | | | — | | | — | | | (75,211) | | | 784 | | | (74,427) | |
Balance at April 30, 2020 | | 561,966 | | | 56 | | | 2,135,753 | | | 854 | | | (1,311,832) | | | 15,873 | | | 840,704 | |
Exercise of stock options | | 766 | | | — | | | 1,693 | | | — | | | — | | | — | | | 1,693 | |
Vesting of early exercised stock options | | — | | | — | | | 972 | | | — | | | — | | | — | | | 972 | |
Issuance of common stock upon settlement of restricted stock units (RSUs) | | 5,016 | | | 1 | | | (1) | | | — | | | — | | | — | | | — | |
Other comprehensive income | | — | | | — | | | — | | | 75 | | | — | | | — | | | 75 | |
Distributions to noncontrolling interest holders | | — | | | — | | | — | | | — | | | — | | | (375) | | | (375) | |
Shares issued related to a business combination | | 1,660 | | | — | | | 39,495 | | | — | | | — | | | — | | | 39,495 | |
Stock-based compensation | | — | | | — | | | 57,288 | | | — | | | — | | | — | | | 57,288 | |
Net income (loss) | | — | | | — | | | — | | | — | | | (74,848) | | | 1,695 | | | (73,153) | |
Balance at July 31, 2020 | | 569,408 | | | $ | 57 | | | $ | 2,235,200 | | | $ | 929 | | | $ | (1,386,680) | | | $ | 17,193 | | | $ | 866,699 | |
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| Convertible Preferred Stock | | | | Common Stock | | | | Additional Paid-In-Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Noncontrolling Interest | | Total Stockholders' Equity |
| Shares | | Amount | | Shares | | Amount | | | | | | | | | | |
Balance at January 31, 2019 | 373,372 | | | $ | 1,392,101 | | | 127,573 | | | $ | 13 | | | $ | 105,633 | | | $ | (498) | | | $ | (665,563) | | | $ | 9,920 | | | $ | 841,606 | |
Exercise of stock options | — | | | — | | | 2,694 | | | — | | | 2,907 | | | — | | | — | | | — | | | 2,907 | |
Vesting of early exercised stock options | — | | | — | | | — | | | — | | | 88 | | | — | | | — | | | — | | | 88 | |
Issuance of restricted stock awards (RSAs) | — | | | — | | | 505 | | | — | | | — | | | — | | | — | | | — | | | — | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | 420 | | | — | | | — | | | 420 | |
Stock-based compensation | — | | | — | | | — | | | — | | | 3,639 | | | — | | | — | | | — | | | 3,639 | |
Net income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | (33,332) | | | 1,451 | | | (31,881) | |
Balance at April 30, 2019 | 373,372 | | | 1,392,101 | | | 130,772 | | | 13 | | | 112,267 | | | (78) | | | (698,895) | | | 11,371 | | | 816,779 | |
Exercise of stock options | — | | | — | | | 8,046 | | | 1 | | | 6,804 | | | — | | | — | | | — | | | 6,805 | |
Vesting of early exercised stock options | — | | | — | | | — | | | — | | | 69 | | | — | | | — | | | — | | | 69 | |
Cancellation of restricted stock awards (RSAs) | — | | | — | | | (10) | | | — | | | — | | | — | | | — | | | — | | | — | |
Repurchase of early exercised stock options | — | | | — | | | (2) | | | — | | | — | | | — | | | — | | | — | | | — | |
Conversion of convertible preferred stock to common stock in connection with direct listing | (373,372) | | | (1,392,101) | | | 373,372 | | | 37 | | | 1,392,064 | | | — | | | — | | | — | | | — | |
Issuance of common stock upon settlement of restricted stock units (RSUs) | — | | | — | | | 30,388 | | | 3 | | | (3) | | | — | | | — | | | — | | | — | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (41) | | | — | | | — | | | (41) | |
Stock-based compensation | — | | | — | | | — | | | — | | | 285,787 | | | — | | | — | | | — | | | 285,787 | |
Net loss | — | | | — | | | — | | | — | | | — | | | — | | | (359,562) | | | (54) | | | (359,616) | |
Balance at July 31, 2019 | — | | | $ | — | | | 542,566 | | | $ | 54 | | | $ | 1,796,988 | | | $ | (119) | | | $ | (1,058,457) | | | $ | 11,317 | | | $ | 749,783 | |
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See accompanying notes to condensed consolidated financial statements.
SLACK TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | | | | | | | | | | |
| Six Months Ended July 31, | | |
| 2020 | | 2019 |
Cash flows from operating activities: | | | |
Net loss | $ | (147,580) | | | $ | (391,497) | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | |
Depreciation and amortization | 13,641 | | | 12,657 | |
| | | |
Stock-based compensation | 110,999 | | | 289,426 | |
Amortization of debt discount and issuance costs | 12,619 | | | — | |
Noncash operating lease expense | 17,343 | | | — | |
Amortization of deferred contract acquisition costs | 6,898 | | | 3,290 | |
Net amortization of bond premium (discount) on debt securities available for sale | 381 | | | (1,736) | |
Change in fair value of strategic investments | (5,820) | | | (2,884) | |
Other non-cash charges | (218) | | | (359) | |
Changes in operating assets and liabilities: | | | |
Accounts receivable | 33,548 | | | 15,258 | |
Prepaid expenses and other assets | (4,539) | | | (10,161) | |
Accounts payable | (4,038) | | | (1,436) | |
Operating lease liabilities | (16,371) | | | — | |
Accrued compensation and benefits | 2,955 | | | 19,758 | |
Deferred revenue | 5,703 | | | 44,650 | |
Other current and long-term liabilities | (2,321) | | | 9,229 | |
Net cash provided by (used in) operating activities | 23,200 | | | (13,805) | |
Cash flows from investing activities: | | | |
Purchases of marketable securities | (100,302) | | | (59,553) | |
Maturities of marketable securities | 147,913 | | | 268,951 | |
Sales of marketable securities | 5,650 | | | 166,074 | |
Net cash acquired from a business combination | 6,571 | | | — | |
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Purchases of property and equipment | (8,743) | | | (28,269) | |
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Purchase of strategic investments | (9,025) | | | (5,470) | |
Proceeds from liquidation of strategic investments | 789 | | | 2,858 | |
Net cash provided by investing activities | 42,853 | | | 344,591 | |
Cash flows from financing activities: | | | |
Proceeds from issuance of convertible senior notes, net of issuance costs | 841,329 | | | — | |
Purchases of capped calls related to convertible senior notes | (105,570) | | | — | |
Proceeds from exercise of stock options | 4,599 | | | 10,275 | |
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Payments of contingent consideration for acquisitions | (5,250) | | | (5,000) | |
Issuance of common stock for employee stock purchase plan | 16,610 | | | — | |
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Distributions to noncontrolling interest holders | (375) | | | — | |
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Other financing activities | — | | | (556) | |
Net cash provided by financing activities | 751,343 | | | 4,719 | |
Net increase in cash, cash equivalents and restricted cash | 817,396 | | | 335,505 | |
Cash, cash equivalents and restricted cash at beginning of period | 537,489 | | | 201,260 | |
Cash, cash equivalents and restricted cash at end of period | $ | 1,354,885 | | | $ | 536,765 | |
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Supplemental disclosure of cash flow information: | | | |
Cash paid for income taxes | $ | 1,894 | | | $ | 455 | |
Non-cash investing and financing activities: | | | |
Increase (decrease) in purchases of property and equipment included in liabilities | $ | (1,349) | | | $ | 1,476 | |
Fair value of common stock issued as consideration for a business combination | $ | 39,495 | | | $ | — | |
Vesting of early exercised stock options | $ | 974 | | | $ | 157 | |
Unrealized short-term gain on marketable securities | $ | 991 | | | $ | 505 | |
See accompanying notes to condensed consolidated financial statements.
SLACK TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
Note 1. Description of Business and Summary of Significant Accounting Policies
Business
Slack Technologies, Inc. (the “Company” or “Slack”) operates a business technology software platform that brings together people, applications, and data and sells its offering under a software-as-a-service model. The Company was incorporated in Delaware in 2009 as Tiny Speck, Inc. In 2014, the Company changed its name to Slack Technologies, Inc. and publicly launched its current offering. The Company is headquartered in San Francisco, California.
Fiscal Year
The Company’s fiscal year ends on January 31. References to fiscal year 2021, for example, refer to the fiscal year ended January 31, 2021.
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”), regarding interim financial reporting. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated financial statements include 100% of the accounts of wholly owned and majority-owned subsidiaries and the ownership interest of minority investors is recorded as noncontrolling interest.
The unaudited condensed consolidated balance sheet as of January 31, 2020 included herein was derived from the audited financial statements as of that date, but does not include all disclosures, including certain notes required by U.S. GAAP on an annual reporting basis. In management's opinion, the unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the balance sheets, statements of comprehensive loss, statements of stockholders’ equity, and statements of cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year or any future period.
These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2020.
Convertible Senior Notes
In April 2020, the Company issued $862.5 million aggregate principal amount of 0.50% convertible senior notes due April 15, 2025 in a private offering, including the initial purchasers’ exercise in full of their option to purchase additional notes (the “Notes”). See Note 7 for additional details.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. These estimates are based on information available as of the date of the condensed consolidated financial statements. On a regular basis, management evaluates these estimates and assumptions; however, actual results could materially differ from these estimates due to risks and uncertainties, including uncertainty in the current economic environment related to the outbreak of the novel coronavirus pandemic (“COVID-19”).
The Company’s most significant estimates and judgments involve revenue recognition, stock-based compensation including the estimation of fair value of common stock, valuation of strategic investments, valuation of acquired goodwill and intangibles from acquisitions, period of benefit for deferred contract acquisition costs, fair value of the liability and equity components of the Notes, and uncertain tax positions.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk primarily consist of cash and cash equivalents, restricted cash, marketable securities, and accounts receivable. For cash, cash equivalents, restricted cash, and marketable securities, the Company is exposed to credit risk in the event of default by the financial institutions to the extent of
the amounts recorded on the accompanying condensed consolidated balance sheets that are in excess of federal insurance limits. For accounts receivable, the Company is exposed to credit risk in the event of nonpayment by customers to the extent of the amounts recorded on the accompanying condensed consolidated balance sheets. The Company sells its services to a wide variety of customers. If the financial condition or results of operations of any significant customers deteriorates substantially, operating results could be adversely affected. To reduce credit risk, management performs credit evaluations of the financial condition of significant customers. The Company does not require collateral from its credit customers and maintains reserves for estimated credit losses on customer accounts when considered necessary. Actual credit losses may differ from the Company’s estimates.
No customer accounted for 10% or greater of total accounts receivable as of July 31, 2020 and January 31, 2020. There were no customers representing 10% or greater of revenue for the three and six months ended July 31, 2020 and 2019.
Summary of Significant Accounting Policies
The Company’s significant accounting policies are discussed in “Index to Consolidated Financial Statements–Note 1. Description of Business and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in its Annual Report on Form 10-K filed with the SEC on March 12, 2020. There have been no significant changes to these policies during the six months ended July 31, 2020, except for the accounting policy for the Notes issued in April 2020.
Convertible Senior Notes
The Notes are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 470-20, Debt with Conversion and Other Options. Pursuant to ASC Subtopic 470-20, issuers of certain convertible debt instruments, such as the Notes, that have a net settlement feature and may be settled wholly or partially in cash upon conversion are required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The carrying amount of the liability component of the instrument is computed by estimating the fair value of a similar liability without the conversion option using a market-based approach. The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the instrument. The difference between the principal amount and the liability component represents a debt discount that is amortized to interest expense over the respective term of the Notes using the effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. In accounting for the issuance costs related to the Notes, the allocation of issuance costs incurred between the liability and equity components was based on their relative values.
Recently Adopted Accounting Standards
In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments, which requires an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. This guidance also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. The Company adopted Topic 326 as of February 1, 2020. The adoption of this new standard did not have a material impact on the accompanying condensed consolidated financial statements as credit losses are not expected to be significant based on historical collection trends, the financial condition of payment partners, and external market factors. The Company will continue to actively monitor the impact of the COVID-19 on expected credit losses.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software under ASC 350-40, in order to determine which costs to capitalize and recognize as an asset and which costs to expense. The Company adopted ASU No. 2018-15 as of February 1, 2020 using a prospective transition approach. The adoption of this new standard did not have a material impact on the accompanying condensed consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes which simplifies the accounting for income taxes by removing certain exceptions to the general principles of income taxes and reducing the cost and complexity in accounting for income taxes. The Company early adopted ASU No. 2019-12 as of February 1, 2020 using the prospective transition approach. The adoption of this new standard did not have a material impact on the accompanying condensed consolidated financial statements.
Recently Issued Accounting Standards Not Yet Adopted
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. ASU No. 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. ASU No. 2020-06 is effective for public companies for annual periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted for annual periods beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently evaluating the impact of this standard on its condensed consolidated financial statements and related disclosures.
Note 2. Revenue and Contract Costs
Contract Balances
Contract liabilities consist of deferred revenue. The changes in deferred revenue were as follows (in thousands):
| | | | | | | | | | | |
| Three Months Ended July 31, 2020 | | Six Months Ended July 31, 2020 |
Balance, beginning of period | $ | 381,073 | | | $ | 376,714 | |
Billings | 217,208 | | | 423,217 | |
Deferred revenue assumed in the Rimeto acquisition | 990 | | | 990 | |
Revenue | (215,864) | | | (417,514) | |
Balance, end of period | $ | 383,407 | | | $ | 383,407 | |
The majority of revenue recognized in the three months ended July 31, 2020 was from the deferred revenue balance as of April 30, 2020. The majority of revenue recognized in the six months ended July 31, 2020 was from the deferred revenue balance as of January 31, 2020.
Remaining Performance Obligations
The Company applies the practical expedient in ASC 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less, which applies primarily to its monthly and annual subscription contracts. As of July 31, 2020, the remaining performance obligations that were unsatisfied or partially unsatisfied at the end of the reporting period were $388.5 million, of which 57% is expected to be recognized in the twelve months following July 31, 2020, with the balance to be recognized as revenue thereafter.
Disaggregation of Revenue
The following table shows the Company’s revenue by geographic areas, as determined based on the billing address of its customers (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 31, | | | | Six Months Ended July 31, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
United States | $ | 134,214 | | | $ | 90,734 | | | $ | 259,601 | | | $ | 175,063 | |
International | 81,650 | | | 54,239 | | | 157,913 | | | 104,731 | |
Total | $ | 215,864 | | | $ | 144,973 | | | $ | 417,514 | | | $ | 279,794 | |
No individual foreign country contributed in excess of 10% of revenue for the three months or six months ended July 31, 2020 and 2019.
Deferred Contract Acquisition Costs, Net
The Company deferred incremental costs of obtaining a contract of $5.4 million and $6.0 million for the three months ended July 31, 2020 and 2019, respectively, and $18.0 million and $10.8 million for the six months ended July 31, 2020 and 2019, respectively. Deferred contract acquisition costs, net included in prepaid expenses and other current assets were $15.6 million and $11.2 million as of July 31, 2020 and January 31, 2020, respectively. Deferred contract acquisition costs, net included in other assets were $28.1 million and $21.4 million as of July 31, 2020 and January 31, 2020, respectively.
Amortized deferred contract acquisition costs were $3.8 million and $1.8 million for the three months ended July 31, 2020
and 2019, respectively, and $6.9 million and $3.3 million for the six months ended July 31, 2020 and 2019, respectively. There was no impairment loss in relation to the deferred contract acquisition costs for any period presented in the accompanying condensed consolidated statements of operations.
Note 3. Fair Value Measurements
The Company’s money market funds and sweep account are classified within Level 1 of the fair value hierarchy because they are valued using quoted prices in active markets. The Company’s commercial paper, U.S. agency and government securities, international government securities, certificates of deposit, and corporate bonds are classified within Level 2 of the fair value hierarchy because they have been valued using inputs other than quoted prices in active markets that are observable directly or indirectly. The Company’s strategic investments in privately held companies are classified within Level 3 of the fair value hierarchy because they have been valued using unobservable inputs for which the Company has been required to develop its own assumptions. Realized and unrealized gains and losses relating to the strategic investments are recorded in other income (expense), net in the accompanying condensed consolidated statements of operations.
The following tables provide the financial instruments measured at fair value on a recurring basis, within the fair value hierarchy (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
As of July 31, 2020 | | Level 1 | | Level 2 | | Level 3 | | Total |
Cash equivalents: | | | | | | | | |
Money market funds | | $ | 757,213 | | | $ | — | | | $ | — | | | $ | 757,213 | |
Certificates of deposit | | — | | | 145,318 | | | — | | | 145,318 | |
| | | | | | | | |
Total cash equivalents | | $ | 757,213 | | | $ | 145,318 | | | $ | — | | | $ | 902,531 | |
Marketable securities: | | | | | | | | |