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MarketScreener Homepage  >  Equities  >  Nyse  >  Palantir Technologies Inc.    PLTR

PALANTIR TECHNOLOGIES INC.

(PLTR)
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PALANTIR TECHNOLOGIES : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

11/13/2020 | 06:12am EST
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and the accompanying notes thereto included elsewhere in
this Quarterly Report on Form 10-Q and the consolidated financial statements and
the accompanying notes thereto included in our final prospectus (the
"Prospectus") filed with the Securities and Exchange Commission (the "SEC")
pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the
"Securities Act") on September 30, 2020. This discussion contains
forward-looking statements based upon current plans, expectations, and beliefs,
involving risks and uncertainties. Our actual results may differ materially from
those anticipated in these forward-looking statements. You should review the
section titled "Special Note Regarding Forward-Looking Statements" for a
discussion of forward-looking statements and the section titled "Risk Factors"
for a discussion of 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 and elsewhere in this
Quarterly Report on Form 10-Q. Our historical results are not necessarily
indicative of the results that may be expected for any period in the future.

Overview

We founded the company in 2003 to build software for use in counterterrorism operations.

In 2008, we released our first platform, Palantir Gotham ("Gotham"), for customers in the intelligence sector. Gotham enables users to identify patterns hidden deep within datasets, ranging from signals intelligence sources to reports from confidential informants.


Defense agencies in the United States then began using Gotham to investigate
potential threats and to help protect soldiers from improvised explosive
devices. Today, the platform is widely used by government agencies in the United
States and its allies. Our software is on the front lines, sometimes literally,
and that means so are we.

We later began working with leading companies across industries, including companies in the energy, transportation, financial services, and healthcare sectors. In 2016, we released our second software platform, Palantir Foundry ("Foundry"), to address a common set of challenges that we saw at large companies.

Foundry is becoming a central operating system not only for individual institutions but also for entire industries.

In 2017, for example, our partnership with Airbus expanded into a platform for the aviation industry, and today connects data from more than one hundred airlines and 9,000 aircraft around the world.


We believe that every large institution faces challenges that our platforms were
designed to address. Our focus in the near term is to build partnerships with
institutions that have the leadership necessary to effect structural change
within their organizations - to reconstitute their operations around data. Over
the long term, we believe that every large institution in the markets we serve
is a potential partner.

Direct Listing

On September 30, 2020, we completed a direct listing of our Class A common stock
(the "Direct Listing"), on the New York Stock Exchange (the "NYSE"). Immediately
prior to the direct listing and the filing of our amended and restated
certificate of incorporation, all outstanding shares of redeemable convertible
preferred stock and convertible preferred stock were converted into 797,743,185
shares of our Class B common stock, and all of our outstanding preferred stock
warrants were converted into common stock warrants, which resulted in the
reclassification of the warrants liability to additional paid-in capital.
Additionally, our restricted stock units



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("RSUs") had a performance vesting condition that was satisfied upon the
completion of the Direct Listing. Accordingly, the Direct Listing resulted in
the vesting and settlement of RSUs covering 68,149,214 shares of Class A common
stock and as a result we recorded cumulative stock-based compensation of
$769.5 million on September 30, 2020.

In addition, we incurred fees related to financial advisory, accounting, legal
and other professional services related to the Direct Listing and public company
readiness initiatives and recorded $53.7 million and $56.2 million primarily in
general and administrative expense for the three and nine months ended
September 30, 2020, respectively.

Our Business


For the three months ended September 30, 2020, we generated $289.4 million in
revenue, reflecting a 52% growth rate from the three months ended September 30,
2019, when we generated $190.5 million in revenue. In the nine months ended
September 30, 2020, we generated $770.6 million in revenue, reflecting a 50%
growth rate from the nine months ended September 30, 2019, when we generated
$513.2 million in revenue.

As of September 30, 2020, we had 132 customers, including leading companies in various commercial sectors as well as government agencies around the world.


We define a customer as an organization from which we have recognized revenue in
a reporting period. For large government agencies, where a single institution
has multiple divisions, units, or subsidiary agencies, each such division, unit,
or subsidiary agency that enters into a separate contract with us and is
invoiced as a separate entity is treated as a separate customer. For example,
while the U.S. Food and Drug Administration, Centers for Disease Control, and
National Institutes of Health are subsidiary agencies of the U.S. Department of
Health and Human Services, we treat each of those agencies as a separate
customer given that the governing structures and procurement processes of each
agency are independent.

We have built lasting and significant customer relationships with some of the
world's leading government institutions and companies. Our average revenue per
customer in the nine months ended September 30, 2020 was $5.8 million, which
grew 38% from $4.2 million per customer in the nine months ended September 30,
2019. Our top twenty customers, based on our revenue in the nine months ended
September 30, 2020, generated $471.1 million in revenue, or 61% of our total
revenue in that period. From those top twenty customers, we generated an average
revenue per customer of $23.6 million during the nine months ended September 30,
2020, which grew 36% from $17.4 million per customer in the nine months ended
September 30, 2019.

Coronavirus ("COVID-19") Impact


As a result of COVID-19, we have taken precautionary measures in order to
minimize the risk of the virus to our employees, our customers, and the
communities in which we operate, including the suspension of all non-essential
business travel of employees and the temporary closure of all of our major
offices. Although the majority of our workforce currently works remotely, there
has been minimal disruption in our ability to ensure the effective operation of
our software platforms.

The economic consequences of the COVID-19 pandemic have been challenging for
certain of our customers and prospective customers. While the broader
implications of the COVID-19 pandemic on our results of operations and overall
financial performance remain uncertain, the COVID-19 pandemic has, to date, not
had a material adverse impact on our results of operations. The economic effects
of the pandemic and resulting societal changes are currently not predictable.

The pandemic has made clear to many of our customers that accommodating the extended timelines ordinarily required to realize results from implementing new software solutions is not an option during a crisis. As a result,

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customers are increasingly adopting our software, which can be ready in days, over internal software development efforts, which may take months or years.


We have seen a decrease in our travel and office-related expenditures, including
temporary closures of our offices globally and reductions in related operating
expenses, related to the ongoing pandemic. However, improvement of our
contribution metric in the first nine months of this year has also been driven
by the expansion of existing customer accounts, improved sales efficiency, and
the increasing deployment of centralized hosting and other software deployment
infrastructure. While we expect our travel and office-related expenditures to
increase moving forward, especially once we reopen our offices, we do not expect
such expenditures to return to their pre-pandemic levels, given that we have
made significant investments in enabling employees to work with customers
remotely.

See the section titled "Risk Factors" included elsewhere in this Quarterly Report on Form 10-Q and our final Prospectus for further discussion of the possible impact of the COVID-19 pandemic on our business.

Expansion & Growth


We expanded into the commercial sector in recent years. In the three months
ended September 30, 2020, 44% of our revenue came from commercial customers and
56% came from government agencies. In the nine months ended September 30, 2020,
45% of our revenue came from commercial customers and 55% came from government
agencies.

Large organizations in the commercial and government sectors face similar challenges when it comes to managing data, and we intend to expand our reach in both markets moving forward.


We have also expanded significantly outside the United States. In the three
months ended September 30, 2020, we generated 54% of our revenue from customers
in the United States and the remaining 46% from customers abroad. In the nine
months ended September 30, 2020, we generated 51% of our revenue from customers
in the United States and the remaining 49% from customers abroad.

Our operating results have improved significantly in recent years when excluding
stock-based compensation. In the three and nine months ended September 30, 2020,
we incurred losses from operations of $847.8 million and $1.0 billion,
respectively, or losses from operations of $0.8 million and income from
operations of $11.8 million, respectively, when excluding stock-based
compensation. In the three and nine months ended September 30, 2019, our losses
from operations were $144.1 million and $429.0 million, respectively, or
$92.4 million and $264.3 million, respectively, when excluding stock-based
compensation.

In the nine months ended September 30, 2020, our gross profit was
$488.5 million, reflecting a gross margin of 63%, or 79% when excluding
stock-based compensation. In the nine months ended September 30, 2019, our gross
profit was $346.7 million, reflecting a gross margin of 68%, or 71% when
excluding stock-based compensation. In the three months ended September 30,
2020, our gross profit was $140.0 million, reflecting a gross margin of 48%, or
81% when excluding stock-based compensation. In the three months ended
September 30, 2019, our gross profit was $125.5 million, reflecting a gross
margin of 66%, or 70% when excluding stock-based compensation.

Our Business Model

Our customers pay us to use the software platforms we have built.


As of September 30, 2020, we expect to generate revenue under our existing
customer contracts for an additional 3.6 years on average, including existing
contractual obligations and assuming that our customers exercise all of the
contractual options available to them, although this may change as we enter into
new contracts or if



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customers terminate for convenience. We calculate this duration on a
dollar-weighted basis to adjust for small deals. The timing of our customer
billings and receipt of payments varies from contract to contract. Revenue is
generally recognized over the contract term. Our contracts generally include
terms that allow the customer to terminate the contract for convenience.

Our business model with respect to acquiring and growing our accounts has three
phases: (1) Acquire, (2) Expand, and (3) Scale. We categorize all customers into
cohorts on December 31st each year.

Our decisions about which customer relationships require further investment may
change over time, based on our assessment of the potential long-term value that
our software can generate for them.

As a result, customers may move back and forth through phases, as relationship
needs and our assessment of the merits of further investment change. We enter
into initial pilots with customers, generally at our own expense and without a
guarantee of future returns, in order to access a unique set of opportunities
that others may pass over for lack of resources and shorter investment horizons.

Some customers may have a rapid Acquire phase followed by a long Expand phase.
Others may skip the Expand phase altogether and move immediately into the Scale
phase. We manage customers at the account level, not by industry or sector, so
that we can optimize on the specific growth opportunities for each.

In 2019, we generated a total of $742.6 million in revenue, of which
$0.6 million came from customers in the Acquire phase, $176.3 million came from
customers in the Expand phase, and $565.7 million came from customers in the
Scale phase.

In the nine months ended September 30, 2020, those same customers from 2019
generated a total of $747.7 million in revenue. New customers acquired during
the nine months ended September 30, 2020 generated an additional $22.8 million
in revenue and will be assigned a cohort as of December 31, 2020. A more
detailed discussion of the three phases, for purposes of illustration of how we
manage accounts across the business, follows below.

Acquire

We actively pursue discussions with existing and prospective customers in order to identify ways in which our software platforms can provide long-term value.


In the first phase, we typically acquire new opportunities with minimal risk to
our customers through short-term pilot deployments of our software platforms at
no or low cost to them. We believe in proving the value of our platforms to our
customers. During these short-term pilots, we operate the accounts at a loss. We
believe that our investments during this phase will drive future revenue growth.

We define a customer or potential customer as being in the Acquire phase if, as
of the end of a calendar year, we have recognized less than $100,000 in revenue
from the customer that respective year. Customers may make nominal payments in
connection with the evaluation of our software that we do not consider material
in evaluating the performance of our accounts.

We evaluate the success of customer accounts in the Acquire phase based on the
revenue such accounts generate in the following year. In 2019, we generated
$0.6 million in revenue from customers in the Acquire phase, which yielded a
contribution loss of $65.4 million. In the nine months ended September 30, 2020,
those same customers generated $41.1 million in revenue which yielded a
contribution loss of $4.2 million.



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Expand

Our investment in this second phase is often significant as we seek to understand the principal challenges faced by our customers and ensure that our software delivers value and results.


We define a customer in the Expand phase as any customer from which we have
recognized more than $100,000 in revenue in a calendar year and whose account
had a negative contribution margin during the year at issue, as determined as of
the end of the year. In this phase, we operate at a loss, as measured by
contribution margin, in order to drive future revenue growth and margin
expansion.

In 2019, we generated $176.3 million in revenue from customers that were in the
Expand phase as of the end of that year, with a contribution margin of (43)%. In
the nine months ended September 30, 2020, those same customers generated
$254.4 million in revenue, with a contribution margin of 41%.

Scale


As customer accounts mature, our investment costs relative to revenue generally
decrease, while the value our software provides to our customer increases, often
significantly, as usage of the platform increases across the customer's
operations. In this third phase, after having installed and configured the
software across an entire enterprise, customers become more self-sufficient in
their use of our platforms, including developing software and applications that
run on top of our platforms, while still continuing to benefit from the support
of our operations and maintenance ("O&M") services.

We define a customer in the Scale phase as any customer from which we recognized
more than $100,000 in revenue in a calendar year and whose account had a
positive contribution margin during the year at issue, as determined as of the
end of the year.

It is in the Scale phase of our partnerships with customers that we generally
see contribution margin on particular accounts improve. In 2019, we generated
$565.7 million in revenue from customers in the Scale phase, with a contribution
margin of 55%. In the nine months ended September 30, 2020, those same customers
generated $452.2 million in revenue with a contribution margin of 69%.

We believe that our customers will move into the Scale phase over the long term.
We also believe that contribution margin for Scale phase accounts will increase
further as we become more efficient at deploying our software platforms across
the entirety of our customers' operations and at managing and operating our
software.

Government Contracts

Our partnerships with government agencies in the United States and abroad have had and will continue to have a significant impact on our business.


As of September 30, 2020, the total remaining deal value of the contracts that
we had been awarded by government agencies in the United States and allied
countries around the world, including existing contractual obligations and
contractual options available to those government agencies, was $1.3 billion, up
14% from December 31, 2019, when the total value of such contracts was
$1.1 billion.

When calculating the total value of such contracts, we do not include government
contracts totaling $2.6 billion, as of September 30, 2020, that we have been
awarded where the funding of such contracts - also known as indefinite delivery,
indefinite quantity ("IDIQ") contracts - has not yet been determined. Funding of
such contracts is not guaranteed. The majority of our government contracts are
subject to termination for convenience provisions, and the U.S. federal
government is prohibited from exercising contract options more than one year in
advance. As a result, there can be no guarantee that our contracts with
government customers will not be terminated or that contract options will be
exercised.



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Key Business Measure

In addition to the measures presented in our condensed consolidated financial statements, we use the following key non-GAAP business measure to help us evaluate our business, identify trends affecting our business, formulate business plans and financial projections, and make strategic decisions.

Contribution Margin


We believe that the revenue we generate relative to the costs we incur in order
to generate such revenue is an important measure of the efficiency of our
business. We define contribution margin as revenue less our cost of revenue and
sales and marketing expenses, excluding stock-based compensation, divided by
revenue. At the end of each year, we categorize each customer account into one
of the three phases based on its revenue and contribution margin for that year.

Revenue is allocated to each customer account directly. The cost of revenue and
sales and marketing costs include both the costs associated with the deployment
and operation of our software as well as expenses associated with identifying
new customers and expanding partnerships with existing ones. Our software
engineers working with existing customers often manage the deployment and
operation of our platforms as well as identify new ways that those platforms can
be used. To calculate the contribution by customer, we allocate cost of revenue
and sales and marketing expenses, excluding stock-based compensation, to an
account pro rata based on headcount and time spent on the account during the
period. To the extent certain costs or personnel are not directly assigned to a
specific account, they are allocated pro rata based on total headcount staffed
during such period. Direct costs, such as third-party cloud hosting services,
are directly allocated to the account to which they relate.

Contribution margin, both across our business and on specific customer accounts,
is intended to capture how much we have earned from customers after accounting
for the costs associated with deploying and operating our software, as well as
any sales and marketing expenses involved in acquiring and expanding our
partnerships with those customers, including allocated overhead. We exclude
stock-based compensation as it is a non-cash expense.

We believe that our contribution margin across the business and on specific
customer accounts provides an important measure of the efficiency of our
operations over time. We have included contribution margin because it is a key
measure used by our management to evaluate our performance, and we believe that
it also provides useful information to investors and others in understanding and
evaluating our operating results in the same manner as our management team. Our
calculation of contribution margin may differ from similarly titled measures, if
any, reported by other companies. Contribution margin should not be considered
in isolation from, or as a substitute for, financial information prepared in
accordance with GAAP.

For more information about contribution margin, including the limitations of this measure, and a reconciliation to loss from operations, see the section titled "- Non-GAAP Reconciliations" below.

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Non-GAAP Reconciliations


We use the non-GAAP measures contribution margin; gross profit and gross margin,
excluding stock-based compensation; and income (loss) from operations, excluding
stock-based compensation to help us evaluate our business, identify trends
affecting our business, formulate business plans and financial projections, and
make strategic decisions. We exclude stock-based compensation, which is a
non-cash expense, from these non-GAAP financial measures because we believe that
excluding this item provides meaningful supplemental information regarding
operational performance and provides useful information to investors and others
in understanding and evaluating our operating results in the same manner as our
management team. Our definitions may differ from the definitions used by other
companies and therefore comparability may be limited. In addition, other
companies may not publish these or similar metrics. Further, these metrics have
certain limitations, as they do not include the impact of certain expenses that
are reflected in our condensed consolidated statement of operations. Thus, our
non-GAAP contribution margin; gross profit and gross margin, excluding
stock-based compensation; and income (loss) from operations, excluding
stock-based compensation should be considered in addition to, not as a
substitute for, or in isolation from, measures prepared in accordance with GAAP.

We compensate for these limitations by providing reconciliations of these
non-GAAP measures to the most comparable GAAP measures. We encourage investors
and others to review our business, results of operations, and financial
information in its entirety, not to rely on any single financial measure, and to
view these non-GAAP measures in conjunction with the most directly comparable
GAAP financial measures.

Contribution Margin

The following table provides a reconciliation of contribution margin for the
three and nine months ended September 30, 2020 and 2019 (in thousands, except
percentages):




                                                   Three Months Ended                 Nine Months Ended
                                                      September 30,                     September  30,
                                                  2020             2019             2020              2019
Loss from operations                         $  (847,777 )$  (144,140 )$ (1,017,107 )$  (428,993 )
Add:
Research and development expenses (1)             57,146           60,849           156,832          180,591
General and administrative expenses (1)          107,130           60,411           226,455          165,985
Stock-based compensation                         846,959           51,763         1,028,914          164,650

Contribution                                 $   163,458$    28,883$    395,094$    82,233

Contribution margin                                   56 %             15 %              51 %             16 %





  (1)  Excludes stock-based compensation.




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Gross Profit and Gross Margin, Excluding Stock-Based Compensation

The following table provides a reconciliation of gross profit and gross margin, excluding stock-based compensation for the three and nine months ended September 30, 2020 and 2019 (in thousands, except percentages):




                                                   Three Months Ended               Nine Months Ended
                                                      September 30,                  September  30,
                                                  2020            2019            2020            2019
Gross profit                                  $  140,026$  125,468$  488,538$  346,726
Add: stock-based compensation                     94,385           7,183         120,285          16,520

Gross profit, excluding stock-based
compensation                                  $  234,411$  132,651

$ 608,823$ 363,246


Gross margin, excluding stock-based
compensation                                          81 %            70 %            79 %            71 %


Income (Loss) from Operations, Excluding Stock-Based Compensation

The following table provides a reconciliation of income (loss) from operations, excluding stock-based compensation for the three and nine months ended September 30, 2020 and 2019 (in thousands):




                                                  Three Months Ended                 Nine Months Ended
                                                     September 30,                     September  30,
                                                 2020             2019             2020              2019
Loss from operations                        $  (847,777 )$  (144,140 )$ (1,017,107 )$  (428,993 )
Add: stock-based compensation                   846,959           51,763    

1,028,914 164,650


Income (loss) from operations, excluding
stock- based compensation                   $      (818 )$   (92,377 )

$ 11,807$ (264,343 )

Components of Results of Operations

Revenue


We generate revenue from the sale of subscriptions to access our software in our
hosted environment with O&M services ("Palantir Cloud"), software subscriptions
in our customers' environments with ongoing O&M services ("On-Premises
Software"), and professional services.

Palantir Cloud


Our Palantir Cloud subscriptions grant customers the right to access the
software functionality in a hosted environment controlled by Palantir and are
sold together with stand-ready O&M services, as further described below. We
promise to provide continuous access to the hosted software throughout the
contract term. Revenue associated with Palantir Cloud subscriptions is
recognized over the contract term on a ratable basis, which is consistent with
the transfer of control of the Palantir services to the customer.

On-Premises Software


Sales of our software subscriptions grant customers the right to use functional
intellectual property, either on their internal hardware infrastructure or on
their own cloud instance, over the contractual term and are also sold together
with stand-ready O&M services. O&M services include critical updates and support
and maintenance



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services required to operate the software and, as such, are necessary for the
software to maintain its intended utility over the contractual term. Because of
this requirement, we have concluded that the software subscriptions and O&M
services, which together we refer to as our On-Premises Software, are highly
interdependent and interrelated and represent a single distinct performance
obligation within the context of the contract. Revenue is generally recognized
over the contract term on a ratable basis.

Professional Services


Our professional services support the customers' use of the software and
include, as needed, on-demand user support, user-interface configuration,
training, and ongoing ontology and data modeling support. Professional services
contracts typically include the provision of on-demand professional services for
the duration of the contractual term. These services are typically coterminous
with a Palantir Cloud or On-Premises Software subscriptions. Professional
services are on-demand, whereby we perform services throughout the contract
period; therefore, the revenue is recognized over the contractual term.

Cost of Revenue


Cost of revenue primarily includes salaries, stock-based compensation expense,
and benefits for personnel involved in performing O&M and professional services,
as well as third-party cloud hosting services, allocated overhead, and other
direct costs.

We expect that cost of revenue will increase in absolute dollars as our revenue grows and will vary from period-to-period as a percentage of revenue.

Sales and Marketing


Our sales and marketing efforts span all stages of our sales cycle, including
personnel engaging with or executing pilots at new or existing customers. Sales
and marketing costs primarily include salaries, stock-based compensation
expense, and benefits for personnel involved in executing on pilots and customer
growth activities, as well as third-party cloud hosting services for our pilots,
marketing and sales event-related costs, and allocated overhead. Sales and
marketing costs are generally expensed as incurred.

We expect that sales and marketing expenses will increase in absolute dollars as
we continue to invest in our potential and current customers, in growing our
business and enhancing our brand awareness.

Research and Development


Our research and development efforts are aimed at continuing to develop and
refine our platforms, including adding new features and modules, increasing
their functionality, and enhancing the usability of our platforms. Research and
development costs primarily include salaries, stock-based compensation expense,
and benefits for personnel involved in performing the activities to develop and
refine our platforms, internal use third-party cloud hosting services and other
IT-related costs, and allocated overhead. Research and development costs are
expensed as incurred.

We plan to continue to invest in personnel to support our research and development efforts. As a result, we expect that research and development expenses will increase in absolute dollars for the foreseeable future as we continue to invest to support these activities.

General and Administrative

General and administrative costs include salaries, stock-based compensation expense, and benefits for personnel involved in our executive, finance, legal, human resources, and administrative functions, as well as third-party professional services and fees, and allocated overhead.

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We expect that general and administrative expenses will increase in absolute
dollars as we hire additional personnel and enhance our systems, processes, and
controls to support the growth in our business as well as our increased
compliance and reporting requirements as a public company.

Interest Income

Interest income consists primarily of interest income earned on our cash, cash equivalents, and restricted cash balances.

Interest Expense

Interest expense consists primarily of interest expense and commitment fees incurred under our credit facilities.

Other Income (Expense), Net

Other income (expense), net consists primarily of foreign currency exchange gains and losses and our share of income and losses from our equity method investments.

Change in Fair Value of Warrants


The change in the fair value of warrants consists of the net changes in the fair
value of our liability classified warrants to purchase redeemable convertible
and convertible preferred stock that were remeasured at the end of each
reporting period. In connection with the Direct Listing, all of the Company's
outstanding preferred stock warrants were converted into common stock warrants,
which resulted in the reclassification of the warrants liability to additional
paid-in capital. As such, we do not expect additional charges related to the
fair value of these warrants.

Provision (Benefit) for Income Taxes

Provision (benefit) for income taxes consists of income taxes related to foreign and state jurisdictions in which we conduct business.

Segments


We have two operating segments, commercial and government, which were determined
based on the manner in which the chief operating decision maker ("CODM"), who is
our chief executive officer, manages our operations for purposes of allocating
resources and evaluating performance. Various factors, including our
organizational and management reporting structure and customer type, were
considered in determining these operating segments.

Our operating segments are described below:



    •     Commercial: This segment primarily serves customers working in
          non-government industries.



• Government: This segment primarily serves customers that are agencies in

the U.S. federal government and non-U.S. governments.



Segment profitability is evaluated based on contribution and contribution
margin, which is segment revenue less the related costs of revenue and sales and
marketing expenses, excluding stock-based compensation expense. To the extent
costs of revenue or sales and marketing expenses are not directly attributable
to a particular segment, they are allocated based upon headcount at each segment
during the period. We use it, in part, to evaluate the performance of, and
allocate resources to, each of our segments. It excludes certain operating
expenses that are not allocated to segments because they are separately managed
at the consolidated corporate level. These



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unallocated costs include stock-based compensation expense, research and development costs, and general and administrative costs, such as legal and accounting. Contribution margin is segment contribution divided by revenue.

Results of Operations

The following table summarizes our condensed consolidated statements of operations data (in thousands):




                                                  Three Months Ended                Nine Months Ended
                                                     September 30,                    September 30,
                                                 2020            2019             2020             2019
Revenue                                      $  289,366$  190,541$    770,582$  513,197
Cost of revenue(1)                              149,340          65,073           282,044         166,471

Gross profit                                    140,026         125,468           488,538         346,726
Operating expenses:
Sales and marketing(1)                          334,911         119,666           536,082         337,255
Research and development(1)                     313,915          75,880           466,530         229,728
General and administrative(1)                   338,977          74,062     

503,033 208,736


Total operating expenses                        987,803         269,608     

1,505,645 775,719


Loss from operations                           (847,777 )      (144,140 )      (1,017,107 )      (428,993 )
Interest income                                     494           3,390             4,312          12,953
Interest expense                                 (2,085 )          (173 )         (12,325 )          (395 )
Change in fair value of warrants                 (9,201 )           784               811           2,743
Other income (expense), net                      (3,293 )         2,305             1,218           1,858

Loss before provision (benefit) for income
taxes                                          (861,862 )      (137,834 )      (1,023,091 )      (411,834 )
Provision (benefit) for income taxes             (8,543 )         2,026            (5,043 )         8,485

Net loss                                     $ (853,319 )$ (139,860 )$ (1,018,048 )$ (420,319 )

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




                                       Three Months Ended                    Nine Months Ended
                                          September 30,                        September 30,
                                     2020              2019               2020               2019
Cost of revenue                   $    94,385$     7,183$     120,285$    16,520
Sales and marketing                   263,958            15,898             322,353            56,242
Research and development              256,769            15,031             309,698            49,137
General and administrative            231,847            13,651             276,578            42,751

Total stock-based compensation expense (i) (ii) $ 846,959$ 51,763$ 1,028,914$ 164,650





        (i)  On September 30, 2020, in connection with the Direct Listing, we
             incurred $769.5 million and $8.4 million of stock-based

compensation

             using the accelerated attribution method related to the

satisfaction

             of the performance-based vesting condition for RSUs and growth units,
             respectively, that had satisfied the service-based vesting condition
             as of such date.


        (ii)  During the three months ended September 30, 2020 and 2019, we
              incurred modification charges of $7.8 million, and $4.6 million,
              respectively, related to the repricing of certain options held by
              our employees. During the nine months ended September 30, 2020 and
              2019, we incurred modification charges of $89.5 million, and
              $14.2 million, respectively, related to the repricing of certain
              options held by our employees.




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The following table sets forth the components of our condensed consolidated statements of operations data as a percentage of revenue:





                                                   Three Months Ended                  Nine Months Ended
                                                      September 30,                      September 30,
                                                 2020              2019              2020            2019
Revenue                                            100 %             100 %             100 %           100 %
Cost of revenue                                     52                34                37              32

Gross profit                                        48                66                63              68
Operating expenses:
Sales and marketing                                116                63                70              66
Research and development                           108                40                61              45
General and administrative                         117                39                64              41

Total operating expenses                           341               142               195             152

Loss from operations                              (293 )             (76 )            (132 )           (84 )
Interest income                                     -                  2                 1               3
Interest expense                                    (1 )              -                 (2 )            -
Change in fair value of warrants                    (3 )               1                -                1
Other income (expense), net                         (1 )               1                -               -

Loss before provision (benefit) for
income taxes                                      (298 )             (72 )            (133 )           (80 )
Provision (benefit) for income taxes                (3 )               1                (1 )             2

Net loss                                          (295 )%            (73 )%           (132 )%          (82 )%


Comparison of the Three Months Ended September 30, 2020 and 2019

Revenue



                              Three Months Ended
                                September 30,                          Change
                            2020              2019             Amount             %
      Revenue:
      Government      $      162,561$      96,801$      65,760            68 %
      Commercial             126,805            93,740            33,065            35 %

      Total revenue   $      289,366$     190,541$      98,825            52 %



Revenue increased by $98.8 million, or 52%, for the three months ended
September 30, 2020 compared to the three months ended September 30, 2019.
Revenue from government customers increased by $65.8 million, or 68%, for the
three months ended September 30, 2020 compared to the three months ended
September 30, 2019, primarily in the United States. Of the increase,
$46.7 million was from customers existing as of December 31, 2019. Revenue from
commercial customers increased by $33.1 million, or 35%, for the three months
ended September 30, 2020 compared to the three months ended September 30, 2019.
The increase is primarily due to an increase of $24.3 million from customers
existing as of December 31, 2019.



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Cost of Revenue and Gross Profit




                              Three Months Ended
                                 September 30,                            Change
                           2020                2019               Amount              %
   Cost of revenue   $      149,340$       65,073$      84,267             129 %
   Gross profit             140,026             125,468             14,558              12 %
   Gross margin                  48 %                66 %              (18 )%


Cost of revenue for the three months ended September 30, 2020 increased by
$84.3 million, or 129%, compared to the three months ended September 30, 2019.
The increase was primarily due to increases in personnel costs of $89.0 million,
which included an increase of $87.2 million in stock-based compensation expense
primarily due to the recognition of cumulative stock-based compensation expense
upon the Direct Listing related to the Company's RSUs as well as vesting of
stock options, and an increase of $4.3 million primarily driven by an increase
in headcount attributable to cost of revenue functions to support new and
existing customers. These costs were partially offset by a decrease in
travel-related expenses and other personnel costs of $2.5 million as a result of
COVID-related travel restrictions and company-wide initiatives to decrease
overall travel. Additionally, there was an increase of $2.1 million related to
other direct deployment costs, offset by decreases of $3.4 million related to
third-party cloud hosting services and $3.4 million related to allocated
overhead, including office related expenses.

Our gross margin for the three months ended September 30, 2020 decreased by 18%
compared to the three months ended September 30, 2019. Gross margin decreased
primarily as a result of cumulative stock-based compensation expense related to
the Company's RSUs recognized upon the Direct Listing. For the three months
ended September 30, 2020 and 2019, gross margin, excluding stock-based
compensation would have increased by 11% to 81%.

Operating Expenses



                                                   Three Months Ended
                                                     September 30,                              Change
                                                2020                2019                Amount               %
Sales and marketing                       $      334,911$     119,666$      215,245             180 %
Research and development                         313,915              75,880              238,035             314 %
General and administrative                       338,977              74,062              264,915             358 %

Total operating expenses                  $      987,803$     269,608$      718,195             266 %



Sales and Marketing

Sales and marketing expenses increased by $215.2 million, or 180%, for the three
months ended September 30, 2020 compared to the three months ended September 30,
2019. The increase was primarily driven by increases in personnel costs of
$230.2 million, which included an increase of $248.1 million in stock-based
compensation expense primarily due to the recognition of cumulative stock-based
compensation expense upon the Direct Listing related to the Company's RSUs and
growth units, as well as vesting of stock options; and an increase of
$8.0 million related to an increase in headcount attributable to our sales and
marketing functions. These costs were partially offset by a decrease of
$25.9 million in travel-related expenses and other personnel costs as a result
of COVID-related travel restrictions and company-wide initiatives to decrease
overall travel. Additionally, there was a decrease of $15.0 million related to
allocated overhead, including office related expenses.



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Research and Development


Research and development expenses increased by $238.0 million, or 314%, for the
three months ended September 30, 2020 compared to the three months ended
September 30, 2019. The increase was primarily driven by increases in personnel
costs of $244.0 million, which included an increase of $241.7 million in
stock-based compensation expense primarily due to the recognition of cumulative
stock-based compensation expense upon the Direct Listing related to the
Company's RSUs as well as vesting of stock options, and an increase of
$5.1 million related to an increase in headcount attributable to our research
and development functions. These costs were partially offset by a decrease of
$2.8 million in travel-related expenses and other personnel costs as a result of
COVID-related travel restrictions and company-wide initiatives to decrease
overall travel. Additionally, there was a decrease of $6.0 million in
third-party cloud hosting services generally as a result of volume-based
discounts.

General and Administrative


General and administrative expenses increased by $264.9 million, or 358%, for
the three months ended September 30, 2020 compared to the three months ended
September 30, 2019. The increase in expenses was primarily driven by increases
in personnel costs of $220.7 million, which included an increase of
$218.2 million in stock-based compensation expense primarily due to the
recognition of cumulative stock-based compensation expense upon the Direct
Listing related to the Company's RSUs and growth units, as well as vesting of
stock options; and an increase of $3.2 million related to an increase in
headcount attributable to our general and administrative functions; These costs
partially offset by a decrease of $0.7 million in travel-related expenses and
other personnel costs primarily as a result of COVID-related travel restrictions
and company-wide initiatives to decrease overall travel. Additionally, there
were increases of $42.7 million in legal professional services primarily related
to the Direct Listing and $8.0 million for other professional services related
to the Direct Listing and corporate IT and consulting functions to support
initiatives for becoming a public company and the overall growth of our
operations, which were offset by a decrease of $6.5 million related to allocated
overhead, including office related expenses.

Interest Income



                                       Three Months Ended
                                         September 30,              Change
                                       2020            2019         Amount
               Interest income   $    494$    3,390$ (2,896 )

Interest income decreased by $2.9 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily due to a reduction in U.S. interest rates on interest earned from our cash, cash equivalents, and restricted cash.


Interest Expense




                                       Three Months Ended
                                         September  30,            Change
                                     2020            2019          Amount
               Interest expense   $ (2,085 )$       (173)$ (1,912 )


Interest expense increased by $1.9 million for the three months ended
September 30, 2020 compared to the three months ended September 30, 2019. The
increase was primarily due to the absence of outstanding debt during the three
months ended September 30, 2019.



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Change in Fair Value of Warrants



                                               Three Months Ended
                                                 September 30,             Change
                                               2020            2019        Amount

Change in fair value of warrants $ (9,201 )$ 784$ (9,985 )



The gain on the change in fair value of warrants decreased by $10.0 million for
the three months ended September 30, 2020 compared to the three months ended
September 30, 2019. The change was primarily due to adjustments to the fair
value of the warrants immediately before reclassifying them from a liability to
equity, partially offset by an increase in the fair value of the securities
underlying certain warrants during the three months ended September 30, 2020 as
compared to the changes in the fair value of the underlying securities during
the three months ended September 30, 2019.

Other Income (Expense), Net



                                            Three Months Ended
                                               September 30,            Change
                                            2020           2019         Amount
          Other income (expense), net   $   (3,293 )$    2,305$ (5,598 )

Other income (expense), net decreased by $5.6 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily due to changes in net realized and unrealized gains from foreign exchange transactions.

Provision (Benefit) for Income Taxes




                                                Three Months Ended
                                                  September  30,            Change
                                                 2020          2019         Amount

Provision (benefit) for income taxes $ (8,543 )$ 2,026$ (10,569 )



Provision (benefit) for income taxes decreased by $10.6 million for the three
months ended September 30, 2020 compared to the three months ended September 30,
2019. The change in provision (benefit) for income taxes was primarily due to
decreases in profits from our international operations, benefits from
stock-based compensation windfalls, and the revaluation of our UK deferred tax
assets as a result of a change in the UK corporate tax rate enacted during the
current quarter.

Comparison of the Nine Months Ended September 30, 2020 and 2019

Revenue




                               Nine Months Ended
                                September  30,                       Change
                             2020            2019           Amount             %
         Revenue:
         Government      $   420,257$   242,843$   177,414              73 %
         Commercial          350,325         270,354          79,971              30 %

         Total revenue   $   770,582$   513,197$   257,385              50 %





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Revenue increased by $257.4 million, or 50%, for the nine months ended
September 30, 2020 compared to the nine months ended September 30, 2019. Revenue
from government customers increased by $177.4 million, or 73%, for the nine
months ended September 30, 2020 compared to the nine months ended September 30,
2019, primarily in the United States. Of the increase, $148.5 million was from
customers existing as of December 31, 2019. Revenue from commercial customers
increased by $80.0 million, or 30%, for the nine months ended September 30, 2020
compared to the nine months ended September 30, 2019. The increase was primarily
due to an increase of $67.1 million from customers existing as of December 31,
2019.

Cost of Revenue and Gross Profit



                                  Nine Months Ended
                                    September 30,                    Change
                                 2020            2019          Amount          %
           Cost of revenue   $  282,044$ 166,471$ 115,573          69 %
           Gross profit         488,538        346,726        141,812          41 %
           Gross margin              63 %           68 %           (5 )%


Cost of revenue increased by $115.6 million, or 69%, for the nine months ended
September 30, 2020 compared to the nine months ended September 30, 2019. The
increase was primarily due to increases in personnel costs of $123.3 million,
which included an increase of $103.8 million in stock-based compensation expense
primarily due to the recognition of cumulative stock-based compensation expense
upon the Direct Listing related to the Company's RSUs and vesting of stock
options, as well as the incremental charge from the repricing of certain
options; and an increase of $23.2 million primarily driven by an increase in
headcount attributable to cost of revenue functions to support new and existing
customers. These costs were partially offset by a decrease in travel-related
expenses and other personnel costs of $3.7 million as a result of COVID-related
travel restrictions and company-wide initiatives to decrease overall travel.
Such increases to cost of revenue were also offset by decreases of $6.1 million
related to third-party cloud hosting services generally as a result of
volume-based discounts and $2.6 million related to other direct deployment
costs.

Our gross margin for the nine months ended September 30, 2020 decreased by 5%
compared to the nine months ended September 30, 2019. Gross margin decreased
primarily as a result of cumulative stock-based compensation expense related to
the Company's RSUs recognized upon the Direct Listing. For the nine months ended
September 30, 2020, gross margin, excluding stock-based compensation would have
increased by 8% to 79% compared to the nine months ended September 30, 2019.

Operating Expenses



                                         Nine Months Ended
                                           September 30,                   Change
                                        2020            2019          Amount         %
      Sales and marketing          $   536,082$ 337,255$ 198,827         59 %

Research and development 466,530 229,728 236,802 103 %

General and administrative 503,033 208,736 294,297 141 %

Total operating expenses $ 1,505,645$ 775,719$ 729,926 94 %




Sales and Marketing

Sales and marketing expenses increased by $198.8 million, or 59%, for the nine
months ended September 30, 2020 compared to the nine months ended September 30,
2019. The increase was primarily due to increases in personnel costs of
$215.9 million, which included an increase of $266.1 million in stock-based
compensation expense primarily due to the recognition of cumulative stock-based
compensation expense upon the Direct



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Listing related to the Company's RSUs and growth units, and vesting of stock
options, as well as the incremental charge from the repricing of certain
options. Such increase was partially offset by decreases of $49.8 million in
travel-related expenses and other personnel costs as a result of COVID-related
travel restrictions and company-wide initiatives to decrease overall travel and
$17.1 million related to allocated overhead, including office related expenses.

Research and Development


Research and development expenses increased by $236.8 million, or 103%, for the
nine months ended September 30, 2020 compared to the nine months ended
September 30, 2019. The increase was primarily due to increases in personnel
costs of $250.0 million, which included an increase of $260.6 million in
stock-based compensation expense primarily due to the recognition of cumulative
stock-based compensation expense upon the Direct Listing related to the
Company's RSUs and vesting of stock options, as well as the incremental charge
from the repricing of certain options. Such increase was partially offset by a
decrease of $10.5 million in travel-related expenses and other personnel costs
as a result of COVID-related travel restrictions and company-wide initiatives to
decrease overall travel, as well as a decrease of $11.8 million in third-party
cloud hosting services generally as a result of volume-based discounts.

General and Administrative


General and administrative expenses increased by $294.3 million, or 141%, for
the nine months ended September 30, 2020 compared to the nine months ended
September 30, 2019. The increase in expenses was primarily driven by increases
in personnel costs of $231.9 million which included an increase of
$233.8 million in stock-based compensation expense primarily due to the
recognition of cumulative stock-based compensation expense upon the Direct
Listing related to the Company's RSUs and growth units, and vesting of stock
options, as well as the incremental charge from the repricing of certain
options; an increase of $4.1 million primarily driven by an increase in
headcount attributable to general and administrative functions, $51.3 million in
legal professional services primarily related to the Direct Listing and
$17.9 million for other professional services related to the Direct Listing and
corporate IT and consulting functions to support initiatives for becoming a
public company and the overall growth of our operations. These costs were
partially offset by decreases of $6.0 million in travel-related expenses and
other personnel costs primarily as a result of COVID-related travel restrictions
and company-wide initiatives to decrease overall travel, and $6.8 million in
allocated overhead, including office related expenses.

Interest Income



                                      Nine Months Ended
                                        September 30,           Change
                                      2020         2019         Amount
                 Interest income   $    4,312$ 12,953$    (8,641)

Interest income decreased by $8.6 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily due to a reduction in U.S. interest rates on interest earned from our cash, cash equivalents, and restricted cash during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019.


Interest Expense



                                       Nine Months Ended
                                         September 30,             Change
                                      2020           2019          Amount
               Interest expense   $   (12,325)$    (395)$ (11,930 )


Interest expense increased by $11.9 million for the nine months ended
September 30, 2020 compared to the nine months ended September 30, 2019. The
increase was primarily due to the absence of outstanding debt during the nine
months ended September 30, 2019.



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Change in Fair Value of Warrants



                                               Nine Months Ended
                                                 September 30,              Change
                                              2020            2019          Amount

Change in fair value of warrants $ 811$ 2,743 $

(1,932)



The gain on the change in fair value of warrants decreased by $1.9 million for
the nine months ended September 30, 2020 compared to the nine months ended
September 30, 2019. The change was primarily due to adjustments to the fair
value of the warrants immediately before reclassifying them from a liability to
equity, partially offset by an increase in the fair value of the securities
underlying certain warrants during the nine months ended September 30, 2020 as
compared to the nine months ended September 30, 2019.

Other Income (Expense), Net



                                            Nine Months Ended
                                              September 30,             Change
                                            2020          2019          Amount
          Other income (expense), net   $     1,218$    1,858$     (640)

Other income (expense), net decreased by $0.6 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily due to changes in net realized and unrealized gains from foreign exchange transactions.

Provision (Benefit) for Income Taxes



                                                 Nine Months Ended
                                                   September 30,             Change
                                                 2020          2019          Amount

Provision (benefit) for income taxes $ (5,043 )$ 8,485$ (13,528 )



Provision (benefit) for income taxes decreased by $13.5 million for the nine
months ended September 30, 2020 compared to the nine months ended September 30,
2019. The change in provision (benefit) for income taxes was primarily due to
decreases in profits from our international operations, benefits from
stock-based compensation windfalls, and the revaluation of our UK deferred tax
assets as a result of a change in the UK corporate tax rate enacted during the
current quarter.

Liquidity and Capital Resources


Since our inception, we have generated negative cash flows from operations and
have financed our operations primarily through the sale of our equity
securities, borrowings under our credit facilities, and payments received from
our customers. For many customers, we bill and collect payment for the entire
contract term in advance of our performance of the related obligations. We
believe our existing cash and cash equivalents will be sufficient to meet our
working capital and capital expenditure needs for at least the next 12 months.

As of September 30, 2020, our accumulated deficit balance was $4.8 billion, and our principal sources of liquidity were $1.8 billion of cash and cash equivalents, exclusive of additional restricted cash of $130.1 million.

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Cash and cash equivalents consist primarily of cash on deposit with banks as
well as institutional money market funds. Restricted cash primarily consists of
cash and certificates of deposit that are held as collateral against letters of
credit and guarantees we are required to maintain for various purposes.

As of September 30, 2020, we had fully drawn down the $200.0 million available
term commitment under the 2014 Credit Facility and had $200.0 million revolving
credit facility available and undrawn. For more information, see the section
titled "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Credit Facilities."

Additionally, during the nine months ended September 30, 2020, we sold 206,500,523 shares of our Class A common stock at $4.65 per share for net proceeds of approximately $942.5 million, which is net of issuance costs of $17.7 million.


The following table summarizes our cash flows for the periods indicated (in
thousands):



                                                                   Nine Months Ended
                                                                     September 30,
                                                                 2020             2019
Net cash (used in) provided by:
Operating activities                                         $ (278,320 )$ (500,048 )
Investing activities                                             (9,975 )        (10,947 )
Financing activities                                            817,344    

(59,434 ) Effect of foreign exchange on cash, cash equivalents, and restricted cash

                                                    (678 )   

(2,992 )


Net increase (decrease) in cash, cash equivalents, and
restricted cash                                              $  528,371$ (573,421 )



Operating Activities

Net cash used in operating activities was $278.3 million for the nine months
ended September 30, 2020. The factors affecting our operating cash flows during
this period were our net loss of $1.0 billion, offset by non-cash charges of
$1.0 billion, and changes in net operating assets and liabilities of
$303.1 million. The net change in operating assets and liabilities were
primarily due to net decrease of $171.1 million in deferred revenue and customer
deposits due to increases in revenue recognized from amounts billed and
collected in prior periods, and an increase in assets of $143.3 million
primarily due to an increase in accounts receivable driven by the timing of
billings to and collections from our customers. The non-cash charges primarily
consisted of $1.0 billion in stock-based compensation expense, and $10.3 million
of depreciation and amortization.

Net cash used in operating activities was $500.0 million for the nine months
ended September 30, 2019. The factors affecting our operating cash flows during
this period were our net loss of $420.3 million, offset by non-cash charges of
$171.4 million, and changes in net operating assets and liabilities of
$251.2 million. The net change in operating assets and liabilities were
primarily due to net decrease of $124.7 million in deferred revenue and customer
deposits due to increases in revenue recognized from amounts billed and
collected in prior periods, an increase in assets of $110.6 million primarily
due to an increase in accounts receivable. The non-cash charges primarily
consisted of $164.7 million in stock-based compensation expense and $9.5 million
of depreciation and amortization.

Investing Activities

Net cash used in investing activities was $10.0 million for the nine months ended September 30, 2020, which consisted of purchases of property and equipment of $7.5 million and purchase of an equity method investment of $2.5 million.




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Net cash used in investing activities was $10.9 million for the nine months ended September 30, 2019, which consisted of purchases of property and equipment.

Financing Activities


Net cash provided by financing activities was $817.3 million for the nine months
ended September 30, 2020, which primarily consisted of $942.5 million of net
proceeds from the issuance of common stock, $199.4 million of net proceeds from
borrowings under our credit facilities, and $79.5 million of proceeds from the
exercise of common stock options, partially offset by repayments of
$400.0 million of debt.

Net cash used in financing activities was $59.4 million for the nine months
ended September 30, 2019, which primarily consisted of $168.0 million for the
redemption of redeemable convertible preferred stock, and $7.1 million net cash
used for repurchases of common stock, partially offset by $100.0 million of net
proceeds from the issuance of common stock, $9.3 million of proceeds from
exercise of common stock options, and $7.5 million of proceeds from the sale of
redeemable convertible preferred stock.

Credit Facilities

2014 Credit Facility


In October 2014, we entered into an unsecured revolving credit facility (the
"2014 Credit Facility"). The 2014 Credit Facility bears interest at the London
Interbank Offered Rate ("LIBOR") plus a margin of 2.75% per annum, subject to
certain adjustments, and incurs a commitment fee of 0.375% assessed on the daily
average undrawn portion of revolving commitments. Interest and commitment fees
are payable at the end of an interest period or at each three-month interval if
the interest period is longer than three months.

In December 2019, we entered into an amendment to the 2014 Credit Facility to
include an additional $150.0 million term loan and secured the credit facility
with substantially all of our assets. Upon entering into this amendment, we drew
down the $150.0 million term loan and $150.0 million under the existing
revolving credit facility. The term loan portion of the 2014 Credit Facility was
fully repaid and terminated as of December 31, 2019.

In June 2020, we amended the 2014 Credit Facility to include a $150.0 million
term loan, extend the maturity date to June 4, 2023, and add an additional
lender. Additionally, this amendment increased the requirement to maintain
minimum liquidity to $50.0 million, and we were provided with an option to
increase the total commitments by up to an additional $200.0 million, subject to
the lenders' approval. All other terms and conditions remained substantially the
same upon the effectiveness of the amendment. Upon entering into this amendment,
we drew down the total available term loan commitment of $150.0 million.

In July 2020, we entered into another amendment to the 2014 Credit Facility,
which added an additional lender and provided for an increase of $50.0 million
to the revolving credit facility and a $50.0 million term loan. The incremental
commitments were provided under the same terms as the existing commitments under
the 2014 Credit Facility. During July 2020, we drew down the additional
available term loan of $50.0 million and repaid the $150.0 million outstanding
revolving credit facility.

As of September 30, 2020, we had a $200.0 million term loan outstanding under the 2014 Credit Facility and an additional $200.0 million undrawn revolving credit facility available.

Contractual Obligations and Commitments


Our contractual obligations and commitments primarily consist of operating lease
commitments for our facilities and non-cancelable purchase commitments related
to third-party cloud hosting services. For additional



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information, refer to Note 8. Commitments and Contingencies to our condensed
consolidated financial statements included elsewhere in this Quarterly Report on
Form 10-Q. There has been no material change in our contractual obligations and
commitments other than in the ordinary course of business since our fiscal year
ended December 31, 2019. See our Prospectus for additional information regarding
the Company's contractual obligations.

Off-Balance Sheet Arrangements


We did not have, during the periods presented, 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


Our condensed consolidated financial statements and the accompanying notes
thereto included elsewhere in this Quarterly Report on Form 10-Q are prepared in
accordance with GAAP. The preparation of condensed consolidated financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue, costs and expenses, and
related disclosures. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances. Actual results could differ significantly from our estimates. To
the extent that there are differences between our estimates and actual results,
our future financial statement presentation, financial condition, results of
operations, and cash flows will be affected.

There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates discussed in the Prospectus except for the determination of the fair value of our common stock, which is used in estimating the fair value of stock-based awards at grant date as discussed below.


Prior to our Direct Listing, our common stock was not publicly traded; therefore
we estimated the fair value of our common stock as discussed in the Prospectus.
Following our Direct Listing, the closing sale price per share of our common
stock as reported on the NYSE on the date of grant is used to determine the fair
value of our common stock. Our significant accounting policies are discussed in
"Notes to Consolidated Financial Statements - Note 2. Significant Accounting
Policies" in the Prospectus.

JOBS Act Accounting Election

We are an emerging growth company, as defined in the JOBS Act. Under the JOBS
Act, emerging growth companies can delay adopting new or revised accounting
standards issued subsequent to the enactment of the JOBS Act until those
standards apply to private companies. We have elected to use this extended
transition period for complying with certain new or revised accounting standards
that have different effective dates for public and private companies until the
earlier of the date we (i) are no longer an emerging growth company or
(ii) affirmatively and irrevocably opt out of the extended transition period
provided in the JOBS Act. As a result, our condensed consolidated financial
statements may or may not be comparable to companies that comply with new or
revised accounting pronouncements as of public companies' effective dates.

Recent Accounting Pronouncements

For information on recently issued accounting pronouncements, refer to Note 2. Significant Accounting Policies in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

                                       55

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