SUMO LOGIC, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q) – marketscreener.com

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SUMO

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12/08/2021 | 06:04am

You should read the following discussion and analysis of our financial condition

and results of operations together with our condensed consolidated financial

statements and the related notes and other financial information included

elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form

10-K for the year ended

January 31, 2021

, filed with the

SEC

on

March 12, 2021

.

Some of the information contained in this discussion and analysis or set forth

elsewhere in this Quarterly Report on Form 10-Q, including information with

respect to our plans and strategy for our business, includes forward-looking

statements that involve risks and uncertainties. You should review the sections

titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors”

for a discussion of forward-looking statements and important factors that could

cause actual results to differ materially from the results described in or

implied by the forward-looking statements contained in the following discussion

and analysis. The last day of our fiscal year is

January 31

. Our fiscal quarters

end on

April 30

,

July 31

,

October 31

, and

January 31

. Our fiscal year ending

January 31, 2022

is referred to herein as fiscal 2022. Our fiscal years ended

January 31, 2021

and 2020 are referred to herein as fiscal 2021 and fiscal 2020,

respectively.

Overview

Sumo Logic

is the pioneer of Continuous Intelligence, a new category of

software, which enables organizations of all sizes to address the challenges and

opportunities presented by digital transformation, modern applications, and

cloud computing. Our Continuous Intelligence Platform enables organizations to

automate the collection, ingestion, and analysis of application, infrastructure,

security, and IoT data to derive actionable insights within seconds. Continuous

Intelligence leverages AI/ML capabilities, and is provided as a multi-tenant

cloud service that allows organizations to more rapidly deliver reliable

applications and digital services, protect against modern security threats, and

consistently optimize their business processes in real time. This empowers

employees across all lines of business, development, IT, and security teams with

the data and insights needed to address the technology and collaboration

challenges required for modern business. With our Continuous Intelligence

Platform, executives and employees have the intelligence they require to take

prescriptive action in real time-a modern business imperative.

We generate revenue through the sale of subscriptions to customers that enable

them to access our cloud-native platform. We recognize subscription revenue

ratably over the term of the subscription, which is generally one year, but can

be three years or longer. We offer multi-tiered paid subscription packages for

access to our platform, the pricing for which differs based on a variety of

factors, including volume of data to be ingested, duration of data retention,

and breadth of access to platform features and functionalities. Our subscription

packages encourage customers to expand their adoption of our platform by

providing them with the flexibility to ingest and analyze large volumes of data

and the ability to access a broad suite of platform features and functionalities

without incurring overage fees, as well as insights into their usage patterns.

We also deliver basic customer support with each of our paid subscription

packages, and customers have the ability to purchase subscriptions to our

premium support service.

Our go-to-market strategy consists of self-service adoption through our website,

an inside sales team, a field sales team, and a partner channel. We offer free

trials that enable potential customers to experience the benefits of our

platform, and we see significant conversion from our trial users to paid

customers, with approximately one-third of our new customers in fiscal 2021

having been free trial users who converted into paying customers. We leverage

our user community to proactively identify trends, gather global insights, and

create new use cases, thereby empowering us to deliver out-of-the-box value to

our customers. We employ a land-and-expand business model centered around our

platform offerings, which have a rapid time to value for our customers and are

easily extensible to multiple use cases across a business. We utilize the

analytical capabilities of our platform and our customer success team to

understand how our customers use, and how they would benefit from expanding

their use of, our platform. This understanding helps us successfully upsell and

cross sell to our existing customers.

The power of our platform, and the benefits that it delivers to customers, has

driven rapid growth in our revenue. For the nine months ended

October 31, 2021

and 2020, our revenue was

$175.1 million

and

$148.5 million

, respectively,

representing a period over period growth rate of 18%. We generated GAAP

operating losses of

$90.8 million

and

$58.0 million

for the nine months ended

October 31, 2021

and 2020, respectively. We define non-GAAP operating loss as

loss from operations excluding stock-based compensation and related employer

payroll taxes, amortization of acquired intangible assets, and

acquisition-related expenses. We generated non-GAAP operating losses of

$37.1

million

and

$24.3 million

for the nine months ended

October 31, 2021

and 2020,

respectively. See “Non-GAAP Financial Measures” for the reconciliation of GAAP

operating loss to non-GAAP operating loss.

Impact of COVID-19

As a result of the COVID-19 pandemic, we have temporarily closed or reduced

capacity at our offices, continue to require many of our employees and

contractors to work remotely, and have reduced business travel, all of which

represent a significant disruption in how we operate our business. Additionally,

in

May 2020

, as part of our efforts to respond to the COVID-19 pandemic and

ensure longer-term financial stability, we initiated cost reduction measures,

including a headcount reduction. The operations of our partners and customers

have likewise been disrupted, and we believe this has caused delays in renewal

decisions for some of our

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existing customers, caused customers to request concessions such as extended

payment terms or better pricing, and affected contraction or churn rates for our

customers. While the duration and extent of the COVID-19 pandemic depends on

future developments that cannot be accurately predicted at this time, such as

the duration and spread of the outbreak, the emergence of variants of the virus,

the extent and effectiveness of containment actions, and the effectiveness of

vaccination efforts, it has already had an adverse effect on the global economy

and the ultimate societal and economic impact of the COVID-19 pandemic remains

unknown. In 2021, the Delta variant of COVID-19 has become the dominant strain

in numerous countries around the world, including

the United States

, and it is

more contagious than other previously identified COVID-19 strains. However, we

believe that the COVID-19 pandemic will continue to accelerate customer

transformation into digital businesses, which we anticipate could generate

additional opportunities for us in the future. Due to our subscription-based

business model, the effect of the COVID-19 pandemic may not be fully reflected

in our revenue until future periods. See “Risk Factors – The global COVID-19

pandemic has harmed and could continue to harm our business and results of

operations” for further discussion of the challenges and risks we have

encountered and could encounter related to the COVID-19 pandemic.

Key Factors Affecting Our Performance

New Customer Acquisition

Our business depends, in part, on our ability to add new customers. As

businesses transition to the public cloud and with the increasing number of

cloud-native businesses, continuous intelligence will become even more of a

strategic imperative. We believe this growing adoption of cloud infrastructure

across all organizations will continue to drive demand for our platform and

broaden our customer base. Since our platform has offerings for organizations of

all sizes and across industries, including organizations of all stages of cloud

maturity, we believe these market changes present a significant opportunity for

growth. As of

October 31, 2021

, we had over 2,300 customers worldwide, spanning

organizations of a broad range of sizes and industries. However, we anticipate

that continued economic uncertainty around the COVID-19 pandemic may adversely

affect our ability to add new customers in the future. We will continue to focus

on new customer acquisition by investing in sales and marketing to build brand

awareness, expanding our community, and driving adoption of our platform as we

further capture the opportunity in our addressable market.

We define a customer as a separate legal entity, such as a company or an

educational or government institution, that is under a paid contract with us or

with which we are negotiating a renewal contract at the end of a given period.

Given our historical experience of customer renewals, if we are in active

discussions for a renewal or upgrade, we continue to include customers with

expired contracts in our customer count until the customer either renews its

contract or negotiations terminate without renewal. In situations where an

organization has multiple subsidiaries or divisions that separately contract

with us, we typically treat only the parent entity as the customer instead of

treating each subsidiary or division as a separate customer. However, we count

each purchaser of our self-service offering as a unique customer, regardless of

other subscriptions such organization may have.

Expanding within our Existing Customer Base

Our business depends, in part, on the degree to which our land-and-expand

strategy is successful. Our customers often initially adopt our platform for a

specific use case and subsequently increase their adoption as they realize the

benefits and flexibility of our platform. We have been successful in expanding

our existing customers’ adoption of our platform as demonstrated by our

dollar-based net retention rate, which we consider an indicator of our ability

to retain and expand revenue from existing customers over time. Our dollar-based

net retention rate has fluctuated between approximately 115% and 130% each

quarter of the prior three fiscal years. In the first quarter of fiscal 2022,

our dollar-based net retention rate declined below 115% and in the second and

third quarters of fiscal 2022, it further declined a few percentage points below

110%. The decline was driven by the combination of slower than historic

expansion in the install base and higher than historical churn. We anticipate

that our dollar-based net retention may continue to decline and it will take

several quarters before we start to see sustained improvement in our

dollar-based net retention rate due to our dollar-based net retention calculated

on a 4 quarter trailing average. Our efficient land-and-expand model has helped

us accelerate adoption within our largest customers, as evidenced by our

customers with over

$100,000

of ARR, which was 438 as of

October 31, 2021

and

349 as of

October 31, 2020

.

We define ARR as the annualized recurring revenue run-rate from all customers

that are under contract with us at the end of the period or with which we are

negotiating a renewal contract. Given our historical experience of customer

renewals, if we are in active discussions for a renewal, we continue to include

customers with expired contracts in our ARR until the customer either renews its

contract or negotiations terminate without renewal. For certain customers whose

revenue may fluctuate from month to month based upon their specific contractual

arrangements, we calculate ARR using the annualized monthly recurring revenue,

or MRR, run-rate (MRR multiplied by 12). This enables us to calculate our

anticipated recurring revenue for all customers based on our packaging and

licensing models, which we believe provides a more accurate view of our

anticipated recurring revenue.

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We calculate our dollar-based net retention rate by first identifying customers,

or the Base Customers, in a particular quarter, or the

Base Quarter

. We then

divide the ARR attributable to the Base Customers in the same quarter of the

subsequent year, or the

Comparison Quarter

, by the ARR attributable to those

Base Customers in the

Base Quarter

. Our dollar-based net retention rate in a

particular quarter is obtained by averaging the result from that particular

quarter with the corresponding results from each of the prior three quarters.

Continued Investment

in Technology Leadership and Innovation

We intend to extend our leadership position by continuing to innovate, bringing

new technologies to market, honing best practices, and driving thought

leadership. Our success depends, in part, on our ability to sustain innovation

and technology leadership in order to maintain a competitive advantage. We

expect to continue to invest in research and development to increase our revenue

and achieve long-term profitability, and we intend to continue extending the

applicability of our platform as well as improving the value of our offerings

for our customers. We believe that our platform is highly differentiated and has

broad applicability to a wide variety of use cases, and we will continue to

invest in developing and enhancing platform features and functionality to

further extend the adoption of our platform. Additionally, we will continue to

evaluate opportunities to acquire or invest in businesses, offerings,

technologies, or talent that we believe could complement or expand our platform,

enhance our technical capabilities, or otherwise offer growth opportunities.

Once we complete acquisitions, we must successfully integrate and manage these

acquisitions to realize their benefits.

International Expansion

We intend to continue to invest in our international operations to grow our

business outside of

the United States

. We generated 20% and 14% of our revenue

outside

the United States

during the three months ended

October 31, 2021

and

2020, respectively, and 18% and 15% for the nine months ended

October 31, 2021

and 2020, respectively. We believe that global demand for Continuous

Intelligence and for the functionality of our platform will continue to increase

as international businesses undergo digital transformations and adopt

cloud-based technologies. We currently have a sales presence throughout

Asia-Pacific

Japan

, or APJ, and

Europe

, with sales offices in

Sydney, Australia

,

Tokyo, Japan

, and

London, United Kingdom

, and we further increase our global

reach with our over 250 international channel partners. International expansion

over the long term represents a significant opportunity and we plan to continue

to invest in growing our presence internationally, both through expanding our

sales and marketing efforts and leveraging channel and other ecosystem partners.

Acquisition of

Sensu, Inc.

On

June 10, 2021

, we completed the acquisition of

Sensu, Inc.

(“Sensu”), a

privately-held software company that is a leader in open source monitoring. The

addition of Sensu is expected to accelerate our observability strategy by

providing customers with an affordable and scalable end-to-end solution for

infrastructure and application monitoring. The aggregate amount recorded as

purchase consideration was

$32.7 million

, of which

$8.6 million

was paid or to

be paid in cash, and

$24.1 million

was comprised of 1,123,697 shares of common

stock. Additionally, 71,644 shares of common stock were issued and will be

recorded as stock-based compensation, and we assumed 33,267 options to purchase

shares of common stock granted under Sensu’s equity plan. See Note 5 to our

condensed consolidated financial statements.

Acquisition of DF Labs S.p.A.

On

May 24, 2021

, we completed the acquisition of DF Labs S.p.A. (“DFLabs”), a

privately-held Italian corporation and a leader in security orchestration,

automation and response (“SOAR”) technology. The combination of our Cloud SIEM

and DFLabs’ solution will provide customers with comprehensive cloud-native

security intelligence solutions. The aggregate amount recorded as purchase

consideration was

$41.7 million

, of which

$35.3 million

was paid in cash, and

$6.4 million

was comprised of 334,815 shares of common stock. Additionally,

143,492 shares of common stock were issued and will be recorded as stock-based

compensation. See Note 5 to our condensed consolidated financial statements.

Components of Results of Operations

Revenue

We generate subscription revenue through the sale of subscriptions to customers

that enable them to access our cloud-native platform. Subscription terms are

generally one year, but can be three years or longer, and a substantial majority

of our contracts are non-cancelable. Subscription revenue is driven by sales of

our multi-tiered paid subscriptions, the pricing for which differs based on a

variety of factors, including volume of data expected to be ingested, duration

of data retention, and breadth of access to our platform features and

functionalities. Due to the ease of using our platform, professional services

revenue from configuration, implementation, and training services constituted

approximately 1% of our total revenue for the nine months ended

October 31, 2021

and 2020.

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Cost of Revenue

Cost of revenue includes all direct costs to deliver and support our platform,

including personnel and related costs, third-party hosting fees related to our

cloud platform, amortization of internal-use software and acquired developed

technology, as well as allocated facilities and IT costs.

As new customers purchase access to our platform and our existing customer base

expands their utilization of our platform, we will incur greater cloud hosting

costs related to the increased volume of data being hosted. We will continue to

invest additional resources in our platform infrastructure and customer support

organizations to expand the capabilities of our platform features and ensure

that our customers are realizing the full benefit of our platform. The level and

timing of investment in these areas could affect our cost of revenue in the

future.

Gross Profit and Gross Margin

Gross profit represents revenue less cost of revenue, and gross margin is gross

profit expressed as a percentage of revenue. Our gross margin may fluctuate from

period to period as our revenue fluctuates, and has been and will continue to be

affected by various factors, including the timing and amount of investments to

maintain or expand our cloud hosting capability, the continued growth of our

platform and customer support teams, increased compensation expenses, as well as

amortization of costs associated with capitalized internal-use software and

acquired intangible assets. We expect our gross profit to increase and our gross

margin to increase modestly over the long term due to the continued growth in

the use of our platform and cost efficiencies related to our cloud hosting

services, although our gross margins could fluctuate from period to period

depending on the interplay between the factors described above.

Operating Expenses

Our operating expenses consist of research and development, sales and marketing,

and general and administrative expenses. Personnel and related expenses are the

most significant component of operating expenses and consist of salaries,

employee benefit costs, payroll taxes, bonuses, sales commissions,

travel-related expenses, and stock-based compensation expense, as well as the

allocated portion of overhead costs for facilities and IT. Operating expenses

also include cloud infrastructure fees and other services related to staging and

development efforts for our platform.

Research and Development

Research and development expenses consist primarily of costs related to

research, design, maintenance, and minor enhancements of our platform that are

expensed as incurred. These costs consist primarily of personnel and related

expenses, including allocated overhead costs, contractor and consulting fees

related to the design, development, testing, and enhancement of our platform,

and software, hardware, and cloud infrastructure fees for staging and

development related to research and development activities necessary to support

growth in our employee base and in the adoption of our platform. We expect that

our research and development expenses will increase in dollar value as we

continue to increase our investments in our platform. However, we anticipate

research and development expenses will decrease as a percentage of our revenue

over the long term, although they may fluctuate as a percentage of our revenue

from period to period depending on the timing of expenses.

Sales and Marketing

Sales and marketing expenses consist primarily of personnel and related expenses

including allocated overhead costs and commissions, costs of general marketing

and promotional activities, including free trials of our platform, fees for

professional services related to marketing, and software and hardware to support

growth in our employee base. Sales commissions earned by our sales force that

are considered incremental costs of obtaining a subscription with a customer are

deferred and amortized on a straight-line basis over the expected period of

benefit, which we have determined to be five years. We expect that our sales and

marketing expenses will increase in dollar value over the long term, though the

dollar value of such expenses may fluctuate in the near term. We believe that

sales and marketing expenses will continue to be our largest operating expense

for the foreseeable future as we expand our sales and marketing efforts. We

expect that our sales and marketing expenses will increase as a percentage of

our revenue over the near term, but decrease over the long term, although they

may fluctuate as a percentage of revenue from period to period depending on the

timing of expenses.

General and Administrative

General and administrative expenses consist primarily of personnel and related

expenses associated with our executive, finance, legal, human resources,

information technology and security, and other administrative personnel. In

addition, general and administrative expenses include non-personnel costs, such

as fees for professional services such as external legal, accounting, and

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other consulting services, hardware and software costs, certain taxes other than

income taxes, and overhead costs not allocated to other departments.

We expect to incur additional expenses as a result of operating as a public

company, including expenses related to compliance with the rules and regulations

of the

SEC

and the listing standards of the Nasdaq Global Select Market, and

increased expenses for insurance, investor relations, and fees for professional

services. We expect that our general and administrative expenses will increase

in dollar value as our business grows. However, we expect that our general and

administrative expenses will decrease as a percentage of our revenue as our

revenue grows over the long term, although they may fluctuate as a percentage of

revenue from period to period depending on the timing of expenses.

Interest and Other (Expense) Income, Net

Interest and other (expense) income, net primarily consists of interest and

investment income and foreign currency transaction gains (losses).

Interest Expense

Interest expense primarily consists of interest incurred in connection with our

past borrowings under our revolving line of credit facility.

Provision (Benefit) for Income Taxes

Provision (benefit) for income taxes consists primarily of income taxes in

certain foreign jurisdictions in which we conduct business. We maintain a full

valuation allowance on our federal and state net deferred tax assets as we have

concluded that it is not more likely than not that the deferred tax assets will

be realized.

Results of Operations

The following table sets forth our condensed consolidated statements of

operations data for the periods indicated:

Three Months Ended October 31, Nine Months Ended October 31,

2021 2020 2021 2020

(in thousands)

Revenue

$ 62,016

$

51,868 $ 175,076 $ 148,485

Cost of revenue(1)(2)(4)


20,384 13,601 55,557 42,140

Gross profit 41,632 38,267 119,519 106,345

Operating expenses:

Research and development(1)(4) 25,464 18,753 69,768 51,756

Sales and marketing(1)(2)(3)(4) 33,565 26,904 95,300 80,534

General and administrative(1)(4) 14,015 15,507 45,258 32,096

Total operating expenses 73,044 61,164 210,326 164,386

Loss from operations (31,412) (22,897) (90,807) (58,041)

Interest and other (expense) income, net (19) (322) 34 (249)

Interest expense (44) (290) (133) (654)

Loss before provision for income taxes (31,475) (23,509) (90,906) (58,944)

Provision (benefit) for income taxes (639) 417 (1,107) 764

Net loss

$ (30,836) $ (23,926) $ (89,799) $ (59,708)

____________

(1)Includes stock-based compensation expense and related employer payroll taxes

as follows:

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Three Months Ended October 31, Nine Months Ended October 31,

2021 2020 2021 2020

(in thousands)

Cost of revenue

$ 192 $ 213 $ 558 $ 314

Research and development(a) 6,538 5,728 17,499 9,606

Sales and marketing 3,794 4,747 11,807 7,863

General and administrative(b) 2,727 8,255 10,821 10,883

Total stock-based compensation expense and

related employer payroll taxes

$ 13,251

$

18,943 $ 40,685 $ 28,666


(a)See Note 10 to our condensed consolidated financial statements for the

capitalized stock-based compensation expense related to internal-use software

development costs.

(b)See Note 10 to our condensed consolidated financial statements for the

incremental stock-based compensation expense related to transfers of our common

stock by our current and former employees to existing investors for amounts over

the estimated fair value at the date of the transaction.

(2)Includes amortization of acquired intangible assets as follows:

Three Months Ended October 31, Nine Months Ended October 31,

2021 2020 2021 2020

(in thousands)

Cost of revenue

$ 3,614 $ 1,706 $ 8,157 $ 5,117

Sales and marketing 150 – 233 –

Total amortization of acquired intangible

assets

$ 3,764 $ 1,706

$ 8,390 $ 5,117


(3)We recorded sales and marketing expenses for additional compensation and

other costs related to the employment status of certain current and former

employees of

$1.5 million

during the nine months ended

October 31, 2020

. As of

January 31, 2021

, we had recorded

$4.5 million

related to these claims, which

were paid as part of a signed settlement agreement during the nine months ended

October 31, 2021

. For more information, see “Legal Proceedings.”

(4)Includes acquisition-related expenses as follows:

Three Months Ended October 31, Nine Months Ended October 31,

2021 2020 2021 2020

(in thousands)

Cost of revenue

$ 97

$ –

$ 151

$ –

Research and development 297 – 535 –

Sales and marketing 95 – 181 –

General and administrative – – 3,756 –

Total acquisition-related expenses

$ 489

$ – $ 4,623 $ –

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The following table sets forth our condensed consolidated statements of

operations data expressed as a percentage of revenue:

Three Months Ended October 31, Nine Months Ended October 31,

2021 2020 2021 2020

Revenue 100 % 100 % 100 % 100 %

Cost of revenue 33 26 32 28

Gross profit 67 % 74 % 68 % 72 %

Operating expenses:

Research and development 41 36 40 35

Sales and marketing 54 52 54 54

General and administrative 23 30 26 22

Total operating expenses 118 % 118 % 120 % 111 %

Loss from operations (51) (44) (52) (39)

Interest and other (expense) income, net – (1) – –

Interest expense – – – 1

Loss before provision for income taxes (51) (45) (52) (40)

Provision (benefit) for income taxes (1) 1 (1) –

Net loss (50) % (46) % (51) % (40) %

____________

Note: Certain figures may not sum due to rounding.

Comparison of Three Months Ended

October 31, 2021

and 2020

Revenue

Three Months Ended October 31,

2021 2020 Change % Change

(dollars in thousands)

Revenue $ 62,016

$ 51,868 $ 10,148

20 %

Revenue increased by

$10.1 million

, or 20%, during the three months ended

October 31, 2021

compared to the three months ended

October 31, 2020

. Excluding

revenue from our current largest revenue customer, which represented

$4.6

million

in revenue for the three months ended

October 31, 2021

compared to

$3.8

million

for the three months ended

October 31, 2020

, the increase in revenue

would have been 19%. We estimate that approximately 85% of the increase in

revenue was attributable to growth from existing customers and approximately 15%

was attributable to new customers. In particular, the number of customers with

greater than

$100,000

of ARR increased to 438 as of

October 31, 2021

from 349 as

of

October 31, 2020

.

Cost of Revenue, Gross Profit, and Gross Margin

Three Months Ended October 31,

2021 2020 Change % Change

(dollars in thousands)

Cost of revenue

$ 20,384 $ 13,601 $ 6,783

50 %

Gross profit 41,632 38,267 3,365 9 %

Gross margin 67 % 74 %

Cost of revenue increased by

$6.8 million

, or 50%, during the three months ended

October 31, 2021

compared to the three months ended

October 31, 2020

. The

increase in cost of revenue was primarily due to a

$4.9 million

increase in

third-party hosting fees, other services, and personnel costs related to

providing access to and supporting our platform, and a

$1.9 million

increase in

amortization of acquired developed technology primarily as a result of our

acquisitions of Sensu and DFLabs in the second quarter of fiscal 2022. Our gross

profit increased

$3.4 million

and gross margin decreased 7% primarily as a

result of increased amortization of acquired developed technology and increased

third-party hosting fees.

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Research and Development

Three Months Ended October 31,

2021 2020 Change % Change

(dollars in thousands)

Research and development

$ 25,464 $ 18,753 $ 6,711

36 %

Percentage of revenue 41 % 36 %

Research and development expenses increased by

$6.7 million

, or 36%, during the

three months ended

October 31, 2021

compared to the three months ended

October

31, 2020

. The increase in research and development expenses was primarily driven

by a

$6.0 million

increase in personnel and related expenses directly associated

with an increase in headcount, including an increase in allocated overhead

costs, of which

$0.8 million

was related to stock-based compensation expense and

related employer payroll taxes. This increase in personnel and related costs

also included a

$0.2 million

decrease in capitalized internal-use software. In

addition, software, hardware, and cloud infrastructure fees for staging and

development increased

$0.5 million

.

Sales and Marketing

Three Months Ended October 31,

2021 2020 Change % Change

(dollars in thousands)

Sales and marketing

$ 33,565 $ 26,904 $ 6,661

25 %

Percentage of revenue 54 % 52 %

Sales and marketing expenses increased by

$6.7 million

, or 25%, during the three

months ended

October 31, 2021

compared to the three months ended

October 31,

2020

. The increase in sales and marketing expenses was primarily driven by a

$3.8 million

increase in personnel and related expenses associated with an

increase in headcount, including an increase in allocated overhead costs, which

was partially offset by a

$1.0 million

decrease related to stock-based

compensation expense and related employer payroll taxes. In addition, we had a

$1.9 million

increase related to advertising, marketing, and promotional

activities, a

$1.3 million

increase in recruiting fees and third-party public

relations and marketing services, and a

$0.5 million

increase in software and

cloud hosting fees for our customer free trials and customer proofs of value.

General and Administrative

Three Months Ended October 31,

2021 2020 Change % Change

(dollars in thousands)

General and administrative

$ 14,015 $ 15,507 $ (1,492)

(10) %

Percentage of revenue 23 % 30 %

General and administrative expenses decreased by

$1.5 million

, or 10%, during

the three months ended

October 31, 2021

compared to the three months ended

October 31, 2020

. The decrease in general and administrative expenses was driven

by a

$5.5 million

decrease in stock-based compensation expense and related

employer payroll taxes. This decrease was offset by a

$1.3 million

increase in

personnel and related expenses due to an increase in headcount, a

$1.7 million

increase in professional services, and a

$0.8 million

increase in insurance

related costs.

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Interest and Other (Expense) Income, Net

Three Months Ended October 31,

2021 2020 Change % Change

(dollars in thousands)

Interest and other (expense) income, net $ (19) $ (322) $ 303


(94) %

Interest and other (expense) income, net increased by

$0.3 million

, or 94%,

during the three months ended

October 31, 2021

compared to the three months

ended

October 31, 2020

. The increase in interest and other (expense) income, net

was driven by an increase in interest income.

Interest Expense

Three Months Ended October 31,

2021 2020 Change % Change

(dollars in thousands)

Interest expense $ (44)

$ (290) $ 246

(85) %

Interest expense decreased by $0.2 million, or 85%, during the three months

ended October 31, 2021 compared to the three months ended October 31, 2020. The

decrease in interest expense was primarily driven by interest incurred on

borrowings under our revolving line of credit facility in the prior period.

Comparison of Nine Months Ended October 31, 2021 and 2020

Revenue


Nine Months Ended October 31,

2021 2020 Change % Change

(dollars in thousands)

Revenue

$ 175,076 $ 148,485 $ 26,591

18 %

Revenue increased by

$26.6 million

, or 18%, during the nine months ended

October

31, 2021

compared to the nine months ended

October 31, 2020

. Excluding revenue

from our current largest revenue customer, which represented

$11.8 million

in

revenue for the nine months ended

October 31, 2021

compared to

$12.0 million

for

the nine months ended

October 31, 2020

, the increase in revenue would have been

20%. We estimate that approximately 80% of the increase in revenue was

attributable to growth from existing customers, and approximately 20% was

attributable to new customers. In particular, the number of customers with

greater than

$100,000

of ARR increased to 438 as of

October 31, 2021

from 349 as

of

October 31, 2020

.

Cost of Revenue, Gross Profit, and Gross Margin

Nine Months Ended October 31,

2021 2020 Change % Change

(dollars in thousands)

Cost of revenue

$ 55,557 $ 42,140 $ 13,417

32 %

Gross profit 119,519 106,345 13,174 12 %

Gross margin 68 % 72 %

Cost of revenue increased by

$13.4 million

, or 32%, during the nine months ended

October 31, 2021

compared to the nine months ended

October 31, 2020

. The

increase in cost of revenue was primarily due to an

$10.3 million

increase in

third-party hosting fees and other services related to providing access to and

supporting our platform and an increase in amortization of acquired developed

technology of

$3.0 million

primarily as a result of our acquisitions of Sensu

and DFLabs in the second quarter of fiscal 2022. Our gross profit increased

$13.2 million

while gross margin decreased 4% primarily as a result of increased

amortization of acquired developed technology and increased third-party hosting

fees.

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Research and Development

Nine Months Ended October 31,

2021 2020 Change % Change

(dollars in thousands)

Research and development

$ 69,768 $ 51,756 $ 18,012

35 %

Percentage of revenue 40 % 35 %

Research and development expenses increased by

$18.0 million

, or 35%, during the

nine months ended

October 31, 2021

compared to the nine months ended

October 31,

2020

. The increase in research and development expenses was primarily driven by

a

$17.4 million

increase in personnel and related expenses directly associated

with an increase in cost per head and increase in headcount, including an

increase in allocated overhead costs, of which

$7.9 million

was related to

stock-based compensation expense and related employer payroll taxes. This

increase in personnel and related costs also included a

$1.2 million

decrease in

capitalized internal-use software. In addition, software, hardware, and cloud

infrastructure fees for staging and development increased

$0.4 million

.

Sales and Marketing

Nine Months Ended October 31,

2021 2020 Change % Change

(dollars in thousands)

Sales and marketing

$ 95,300 $ 80,534 $ 14,766

18 %

Percentage of revenue 54 % 54 %

Sales and marketing expenses increased by

$14.8 million

, or 18%, during the nine

months ended

October 31, 2021

compared to the nine months ended

October 31,

2020

. The increase in sales and marketing expenses was primarily driven by a

$11.6 million

increase in personnel and related expenses associated with an

increase in headcount, including an increase in allocated overhead costs, of

which

$3.9 million

was related to stock-based compensation expense and related

employer payroll taxes. This increase in personnel and related costs was

partially offset by a non-recurring

$1.5 million

expense related to compensation

and other costs related to the employment status of certain current and former

employees recorded during the first quarter of fiscal 2021. In addition, we had

a

$3.0 million

increase in recruiting fees and third-party public relations and

marketing services and a

$1.1 million

increase in software and cloud hosting

fees for our customer free trials and customer proofs of value.

General and Administrative

Nine Months Ended October 31,

2021 2020 Change % Change

(dollars in thousands)

General and administrative

$ 45,258 $ 32,096 $ 13,162

41 %

Percentage of revenue. 26 % 22 %

General and administrative expenses increased by

$13.2 million

, or 41%, during

the nine months ended

October 31, 2021

compared to the nine months ended

October

31, 2020

. The increase in general and administrative expenses was primarily

driven by a

$6.4 million

increase in professional services, of which

$3.8

million

related to the acquisition-related expenses for our acquisitions of

Sensu and DFLabs, a

$4.0 million

increase in insurance related costs, and a

$2.2

million

increase in personnel and related expenses associated with an increase

in headcount.

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Interest and Other (Expense) Income, Net

Nine Months Ended October 31,

2021 2020 Change % Change

(dollars in thousands)

Interest and other (expense) income, net $ 34 $ (249) $ 283


(114) %

Interest and other (expense) income, net increased by

$0.3 million

, or 114%,

during the nine months ended

October 31, 2021

compared to the nine months ended

October 31, 2020

. The increase in interest and other (expense) income, net was

primarily driven by an increase in interest income.

Interest Expense

Nine Months Ended October 31,

2021 2020 Change % Change

(dollars in thousands)

Interest expense $ (133)

$ (654) $ 521

(80) %

Interest expense decreased by

$0.5 million

, or 80%, during the nine months ended

October 31, 2021

compared to the nine months ended

October 31, 2020

. The

decrease in interest expense was primarily driven by interest incurred on

borrowings under our revolving line of credit facility in the prior period.

Non-GAAP Financial Measures

In addition to our financial information presented in accordance with GAAP, we

believe the following non-GAAP financial measures are useful to investors in

evaluating our operating performance. We use the following non-GAAP financial

measures, collectively, to evaluate our ongoing operations and for internal

planning and forecasting purposes, including the preparation of our annual

operating budget and quarterly forecasts, to evaluate the effectiveness of our

business strategies, and to communicate with our board of directors concerning

our financial performance. We believe that non-GAAP financial measures, when

taken together with the corresponding GAAP financial measures, may be helpful to

investors because they provide consistency and comparability with past financial

performance and meaningful supplemental information regarding our performance by

excluding certain items that may not be indicative of our business, results of

operations, or outlook. The non-GAAP financial measures are presented for

supplemental informational purposes only, have limitations as analytical tools,

and should not be considered in isolation or as a substitute for financial

information presented in accordance with GAAP and may be different from

similarly-titled non-GAAP financial measures used by other companies. In

addition, other companies, including companies in our industry, may calculate

similarly-titled non-GAAP financial measures differently or may use other

measures to evaluate their performance, all of which could reduce the usefulness

of our non-GAAP financial measures as tools for comparison. Investors are

encouraged to review the related GAAP financial measures and the reconciliation

of these non-GAAP financial measures to their most directly comparable GAAP

financial measures, and not to rely on any single financial measure to evaluate

our business.

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Non-GAAP Gross Profit and Non-GAAP Gross Margin

We define non-GAAP gross profit and non-GAAP gross margin as gross profit and

gross margin, respectively, excluding stock-based compensation and related

employer payroll taxes, amortization of acquired intangible assets, and

acquisition-related expenses.

Three Months Ended October 31, Nine Months Ended October 31,

2021 2020 2021 2020

(dollars in thousands)

Gross profit

$ 41,632 $ 38,267

119,519 106,345

Add: Stock-based compensation and related employer

payroll taxes


192 213 558 314

Add: Amortization of acquired intangible assets 3,614 1,706 8,157 5,117

Add: Acquisition-related expenses 97 – 151 –

Non-GAAP gross profit

$ 45,535 $ 40,186 $ 128,385 $ 111,776

Gross margin 67 % 74 % 68 % 72 %

Non-GAAP gross margin 73 % 77 % 73 % 75 %

Non-GAAP Operating Loss and Non-GAAP Operating Margin

We define non-GAAP operating loss and non-GAAP operating margin as loss from

operations and operating margin, respectively, excluding stock-based

compensation and related employer payroll taxes, amortization of acquired

intangible assets, and acquisition-related expenses.

Three Months Ended October 31, Nine Months Ended October 31,

2021 2020 2021 2020

(dollars in thousands)

Loss from operations

$ (31,412)

$ (22,897) $ (90,807) $ (58,041)

Add: Stock-based compensation and related employer

payroll taxes


13,251 18,943 40,685 28,666

Add: Amortization of acquired intangible assets 3,764 1,706 8,390 5,117

Add: Acquisition-related expenses 489 – 4,623 –

Non-GAAP operating loss

$ (13,908) $ (2,248) $ (37,109) $ (24,258)

Operating margin (51) % (44) % (52) % (39) %

Non-GAAP operating margin (22) % (4) % (21) % (16) %

Non-GAAP Net Loss

We define non-GAAP net loss as loss from operations, excluding stock-based

compensation and related employer payroll taxes, amortization of acquired

intangible assets, and acquisition-related expenses.

Three Months Ended October 31, Nine Months Ended October 31,

2021 2020 2021 2020

(in thousands)

Net loss

$ (30,836)

$

(23,926) $ (89,799) $ (59,708)

Add: Stock-based compensation and related

employer payroll taxes


13,251 18,943 40,685 28,666

Add: Amortization of acquired intangible assets 3,764 1,706 8,390 5,117

Add: Acquisition-related expenses 489 – 4,623 –

Non-GAAP net loss

$ (13,332) $ (3,277) $ (36,101) $ (25,925)

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Free Cash Flow

We define free cash flow as cash used in operating activities less purchases of

property and equipment and capitalized internal-use software costs. We believe

free cash flow is a useful indicator of liquidity that provides our management,

board of directors, and investors with information about our future ability to

generate or use cash to enhance the strength of our balance sheet and further

invest in our business and pursue potential strategic initiatives.

Three Months Ended October 31, Nine Months Ended October 31,

2021 2020 2021 2020

(in thousands)

Cash used in operating activities

$ (12,689)

$

(18,299) $ (19,946) $ (46,205)

Less: Purchases of property and equipment

(498) (168) (1,799) (358)

Less: Capitalized internal-use software costs – (246) – (1,205)

Free cash flow $ (13,187) $

(18,713) $ (21,745) $ (47,768)


Cash used in investing activities

$ (10,228)

$

(414) $ (328,288) $ (1,563)

Cash provided by financing activities $ 4,647 $ 328,141 $ 22,606 $ 353,858


Liquidity and Capital Resources

Since inception, we have financed our operations primarily through subscription

revenue from customers accessing our cloud-native platform and the net proceeds

of issuances of equity securities. We have incurred losses and generated

negative cash flows from operations, as reflected in our accumulated deficit of

$487.6 million

as of

October 31, 2021

. In the third quarter of fiscal 2021 we

completed our initial public offering, or IPO, and we received net proceeds of

$342.7 million

, after deducting underwriters’ discounts and commissions and

offering costs of

$31.8 million

, including the exercise of the underwriters’

option to purchase additional shares. As of

October 31, 2021

, we had

$78.3 million

in cash and cash equivalents and

$283.8 million

in marketable

securities.

We believe our existing cash and cash equivalents, marketable securities, and

cash provided by sales of access to our platform will be sufficient to meet our

projected operating requirements for at least the next 12 months, despite the

uncertainty in the changing market and economic conditions as a result of the

COVID-19 pandemic, which may have an impact on our available cash due to

customer requests for extended payment terms or better pricing. As a result of

our revenue growth plans, both domestically and internationally, we expect that

losses and negative cash flows from operations may continue in the foreseeable

future. Our future capital requirements will depend on many factors, including

our subscription growth rate, subscription renewals, billing timing and

frequency, pricing changes, the timing and extent of spending to support

development efforts, the expansion of sales and marketing activities, the

introduction of new and enhanced platform features and functionality, the

continued market adoption of our platform, and the impact of the COVID-19

pandemic on our business and results of operations, the business of our

customers, and the economy. We may in the future pursue acquisitions of

businesses, technologies, assets, and talent.

In

February 2021

, we entered into an Amended and Restated Loan and Security

Agreement with

Silicon Valley Bank

, or the SVB Agreement, which provides for a

revolving line of credit. The SVB Agreement amends and restates the Loan and

Security Agreement dated as of

January 31, 2016

. Under the SVB Agreement, we can

borrow up to

$50 million

. Interest on any drawdown accrues at the prime rate

minus a spread rate ranging from 0.25% to 0.75%, as determined by our adjusted

quick ratio, subject to either a 3.00% or 2.50% floor depending on the adjusted

quick ratio. The SVB agreement is secured by substantially all of our assets and

includes restrictive covenants, in each case subject to certain exceptions, that

limit our ability to, among other things: incur debt, grant liens, make

acquisitions, suffer changes in control, make investments, make certain

dividends or distributions, repurchase or redeem stock, dispose of or transfer

assets, and enter into transactions with affiliates. Pursuant to the SVB

Agreement, we are also required to maintain a minimum adjusted quick ratio of

1.25 to 1.00. The SVB Agreement also contains customary events of default, upon

which

Silicon Valley Bank

may declare all or a portion of our outstanding

obligations payable to be immediately due and payable. As of

October 31, 2021

,

we did not have any debt outstanding.

We typically invoice our subscription customers annually in advance, and in

certain cases, we invoice upfront for multi-year contracts. Therefore, a

substantial source of our cash is from such prepayments, which are included on

our condensed consolidated balance sheets as deferred revenue. Deferred revenue

consists of billed fees for our subscriptions, prior to satisfying the criteria

for revenue recognition, which are subsequently recognized as revenue in

accordance with our revenue recognition policy. As of

October 31, 2021

, future

estimated revenue related to performance obligations from non-cancelable

contracts that were unsatisfied or partially unsatisfied was

$294.2 million

, of

which we expect to recognize revenue of

$194.3 million

over the next 12 months,

with the

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remaining balance recognized thereafter. As of

October 31, 2021

, we had deferred

revenue of

$124.3 million

, of which

$118.7 million

was recorded as a current

liability and is expected to be recognized as revenue within the next 12 months,

subject to applicable revenue recognition criteria.

Cash Flows

The following table shows a summary of our cash flows for the periods presented:

Nine Months Ended October 31,

2021 2020

(in thousands)

Net cash provided by (used in):

Operating activities

$ (19,946) $ (46,205)

Investing activities

$ (328,288) $ (1,563)

Financing activities $ 22,606

$ 353,858

Operating Activities

Our largest source of operating cash is cash collections from sales of

subscriptions to our customers. Our primary uses of cash from operating

activities are for personnel and related expenses, marketing expenses, and

third-party hosting and software costs. In the last several years, we have

generated negative cash flows from operating activities and have supplemented

working capital requirements through net proceeds from equity financings.

Cash used in operating activities for the nine months ended

October 31, 2021

of

$19.9 million

consisted of our net loss of

$89.8 million

, adjusted for non-cash

charges of

$63.8 million

and net cash inflows of

$6.0 million

provided by

changes in our operating assets and liabilities. Non-cash charges primarily

consisted of stock-based compensation of

$39.1 million

, amortization of deferred

sales commissions of

$11.4 million

, depreciation and amortization of

$9.9

million

, and

$3.1 million

of non-cash operating lease costs. Net cash inflows

from changes in operating assets and liabilities were primarily the result of a

$16.4 million

increase in deferred revenue resulting from increased billings for

subscriptions, a

$6.1 million

increase in accounts payable and accrued expenses

due to timing of payments to vendors, a

$1.9 million

decrease in accounts

receivable due to collections being greater than billings during the period, and

a

$1.0 million

decrease in prepaid expenses and other assets related to the

timing of payments to vendors and amortization of prior amounts paid. Net cash

inflows were partially offset by cash outflows resulting from a

$16.3 million

increase in deferred sales commissions due to commissions paid on new bookings

and a

$3.4 million

decrease in lease liabilities due to monthly rental payments

for our operating leases.

Cash used in operating activities for the nine months ended

October 31, 2020

of

$46.2 million

consisted of our net loss of

$59.7 million

, adjusted for non-cash

charges of

$43.2 million

and net cash outflows of

$29.6 million

provided by

changes in our operating assets and liabilities. Non-cash charges primarily

consisted of stock-based compensation of

$28.7 million

, amortization of deferred

sales commissions of

$8.1 million

, and depreciation and amortization of

$6.2

million

. Changes in operating assets and liabilities primarily reflected a

$17.7

million

increase in deferred sales commissions due to commissions paid on new

bookings, a

$14.7 million

increase in accounts receivable due to new billings

being greater than collections during the period, and a

$2.3 million

increase in

prepaid expenses related to the timing of advance payments to vendors and

amortization of prior amounts paid. These changes were partially offset by a a

$2.4 million

increase in other noncurrent liabilities for payroll taxes, which

were deferred under the Coronavirus Aid, Relief, and Economic Security (“CARES”)

Act, a

$1.7 million

increase in deferred revenue resulting from increased

billings for subscriptions, and a

$1.6 million

increase in accounts payable and

accrued expenses due to timing of payments to vendors.

Investing Activities

Cash used in investing activities for the nine months ended

October 31, 2021

of

$328.3 million

primarily consisted of purchases of marketable securities of

$359.6 million

, cash paid for acquisitions, net of cash and restricted cash

acquired of

$40.3 million

, and

$1.8 million

in purchases of property and

equipment primarily related to leasehold improvements and purchases of computers

for new employees partially offset by

$73.4 million

of maturities and sales of

marketable securities.

Cash used in investing activities for the nine months ended

October 31, 2020

of

$1.6 million

primarily consisted of

$1.2 million

of capitalized internal-use

software costs.

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Financing Activities

Cash provided by financing activities for the nine months ended

October 31, 2021

of

$22.6 million

primarily consisted of proceeds from common stock option

exercises of

$18.0 million

and proceeds from employee stock purchase plan of

$4.7 million

.

Cash provided by financing activities for the nine months ended

October 31, 2020

of

$353.9 million

primarily consisted of proceeds from the completion of our IPO

of

$349.2 million

, net of underwriting discounts, and proceeds from common stock

option exercises of

$6.1 million

. We also borrowed and repaid the outstanding

balance under the SVB Agreement.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations at

January 31, 2021

:

Payments Due by Period

Total Less than 1 1-3 Years 3-5 Years More than

Year 5 Year

(in thousands)

Operating lease commitments(1)

$ 12,348 $ 5,320 $ 6,623 $ 405

$ –

Hosting commitments 190,341 60,341 130,000 – –

Other commitments 1,110 1,110 – – –

Total

$ 203,799 $ 66,771 $ 136,623 $ 405

$ –

____________

(1)Includes the Company’s office locations even if they are not considered

operating leases under ASC 842.


The commitment amounts in the table above are associated with contracts that are

enforceable and legally binding and that specify all significant terms,

including fixed or minimum services to be used, fixed, minimum, or variable

price provisions, and the approximate timing of the actions under the contracts.

Indemnification Agreements

In the ordinary course of business, we enter into agreements of varying scope

and terms pursuant to which we agree to indemnify customers, vendors, lessors,

business partners, and other parties with respect to certain matters. Some of

these indemnification provisions do not provide for a maximum potential amount

of future payments we could be obligated to make. No demands have been made upon

us to provide indemnification under such agreements, and there are no claims

that we are aware of that could have a material effect on our condensed

consolidated balance sheets, condensed consolidated statements of operations and

condensed consolidated statements of comprehensive loss, or condensed

consolidated statements of cash flows.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any

off-balance sheet financing arrangements or any relationships with

unconsolidated entities or financial partnerships, including entities sometimes

referred to as structured finance or special purpose entities, that were

established for the purpose of facilitating off-balance sheet arrangements or

other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

We prepared our condensed consolidated financial statements and the related

notes thereto, included elsewhere in this Quarterly Report on Form 10-Q, in

accordance with GAAP. In preparation of these condensed consolidated financial

statements, management is required to make estimates and assumptions that affect

the reported amounts of assets and liabilities, and disclosures of contingent

assets and liabilities, as of the date of the financial statements, and the

reported amounts of income and expenses during the reporting period. These

estimates are based on information available as of the date of the financial

statements and may involve subjective or significant judgment by management;

therefore, actual results could differ from the estimates made by management. We

refer to accounting estimates of this type as critical accounting policies and

estimates.

Our significant accounting policies are described in the section titled “Summary

of Significant Accounting Policies” in Note 2 in our Annual Report on Form 10-K

for the year ended

January 31, 2021

. There have been no significant changes to

these policies for the nine months ended

October 31, 2021

except as described in

the section titled “Summary of Significant Accounting Policies” in Note 2 to our

condensed consolidated financial statements included elsewhere in this Quarterly

Report on Form 10-Q.

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Recent Accounting Pronouncements

See Note 2 to our condensed consolidated financial statements included elsewhere

in this Quarterly Report on Form 10-Q for more information about the impact of

certain recent accounting pronouncements on our condensed consolidated financial

statements.

Item 3. Qualitative and Quantitative Disclosures about Market Risk

We are exposed to market risks in the ordinary course of our business. Market

risk represents the risk of loss that may impact our financial position due to

adverse changes in financial market prices and rates. Our market risk exposure

is primarily the result of fluctuations in interest rates and foreign currency

exchange rates.

Interest Rate Risk

As of

October 31, 2021

, we had

$69.2 million

of cash equivalents invested in

money market funds and

$0.4 million

was restricted cash primarily related to

outstanding letters of credit established in connection with lease agreements

for our facilities. In addition, we had

$283.8 million

in marketable securities,

which consisted of

U.S. Treasury

securities, corporate debt securities,

commercial paper, foreign government obligations, supranational securities, and

certificates of deposits. Our cash and cash equivalents are held for working

capital purposes. We do not enter into investments for trading or speculative

purposes.

A hypothetical 10% relative change in interest rates during any of the periods

presented would not have had a material impact on our results of operations.

Foreign Currency Exchange Risk

Our reporting currency is the

U.S.

dollar, and the functional currency of our

foreign subsidiaries is the respective local currency. The assets and

liabilities of each of our foreign subsidiaries are translated into

U.S.

dollars

at exchange rates in effect at each balance sheet date. Adjustments resulting

from translating foreign functional currency financial statements into

U.S.

dollars are recorded as a separate component on the condensed consolidated

statements of comprehensive loss. Equity transactions are translated using

historical exchange rates. Expenses are translated using the average exchange

rate during the year. Gains or losses due to transactions in foreign currencies

are included in interest and other (expense) income, net in our condensed

consolidated statements of operations.

The volatility of exchange rates depends on many factors that we cannot forecast

with reliable accuracy. We have experienced and will continue to experience

fluctuations in foreign exchange gains and losses related to changes in foreign

currency exchange rates. In the event our foreign currency denominated assets,

liabilities, revenue, or expenses increase, our results of operations may be

more greatly affected by fluctuations in the exchange rates of the currencies in

which we do business. We have not engaged in the hedging of foreign currency

transactions to date, although we may choose to do so in the future.

A hypothetical 10% change in the relative value of the

U.S.

dollar to other

currencies during any of the periods presented would not have had a material

effect on our results of operations.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation and supervision of our principal

executive officer and our principal financial officer, evaluated the

effectiveness of our disclosure controls and procedures (as defined in Rules

13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended

(the “Exchange Act”)) as of the end of the period covered by this Quarterly

Report on Form 10-Q. Our disclosure controls and procedures are designed to

provide reasonable assurance that information we are required to disclose in

reports that we file or submit under the Exchange Act is recorded, processed,

summarized, and reported within the time periods specified in

SEC

rules and

forms, and that such information is accumulated and communicated to our

management, including our principal executive officer and principal financial

officer, as appropriate, to allow timely decisions regarding required

disclosure.

Our principal executive officer and principal financial officer concluded that,

as of

October 31, 2021

, our disclosure controls and procedures were effective at

the reasonableness assurance level.

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Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting

identified in connection with the evaluation required by Rule 13a-15(d) and

15d-15(d) of the Exchange Act that occurred during the quarter ended

October 31,

2021

that have materially affected, or are reasonably likely to materially

affect, our internal control over financial reporting.

Inherent Limitation on the Effectiveness of Internal Control

The effectiveness of any system of internal control over financial reporting,

including ours, is subject to inherent limitations, including the exercise of

judgment in designing, implementing, operating, and evaluating the controls and

procedures, and the inability to eliminate misconduct completely. Accordingly,

in designing and evaluating the disclosure controls and procedures, management

recognizes that any system of internal control over financial reporting,

including ours, no matter how well designed and operated, can only provide

reasonable, not absolute assurance of achieving the desired control objectives.

In addition, the design of disclosure controls and procedures must reflect the

fact that there are resource constraints and that management is required to

apply its judgment in evaluating the benefits of possible controls and

procedures relative to their costs. Moreover, projections of any evaluation of

effectiveness to future periods are subject to the risk that controls may become

inadequate because of changes in conditions, or that the degree of compliance

with the policies or procedures may deteriorate. We intend to continue to

monitor and upgrade our internal controls as necessary or appropriate for our

business, but cannot assure you that such improvements will be sufficient to

provide us with effective internal control over financial reporting.

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