ON24, INC. You should read the following discussion and analysis of our financial condition and results of operations together with the condensed consolidated financial statements and related notes included elsewhere in this Report on Form 10-Q. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in the section titled "Risk Factors" and in other parts of this Report on Form 10-Q. Overview We provide a leading, cloud-based digital experience platform that enables businesses to convert customer engagement into revenue through interactive webinar experiences, virtual event experiences and multimedia content experiences. Our platform's portfolio of interactive, personalized and content-rich digital experience products creates and captures actionable, real-time data at scale from millions of professionals every month to provide businesses with buying signals and behavioral insights to efficiently convert prospects into customers. Similar to what has taken place in the business-to-consumer (B2C) market, our digital experience platform empowers business-to-business (B2B) companies with insights to better personalize their engagement. Large social media platforms have been successful at leveraging experiences and insights of consumers on their platforms to enable B2C companies to effectively understand their potential consumers. While these have been effective in the B2C market, B2B companies often lack deep insights about prospective customers to effectively understand and engage them. Businesses today primarily use automated solutions, such as digital advertising and email, for marketing. While these automated solutions reach large numbers of prospective customers, they have generally failed to deepen customer engagement because they were designed with the simple purpose of pushing marketing messages in one direction-from the business to the prospective customer. For businesses to succeed, we believe their sales and marketing strategies must evolve from the era of automation to the era of engagement. Our platform provides an innovative way both to scale digital marketing and deepen prospective customer engagement. We believe our opportunity to help businesses convert digital engagement into revenue will continue to grow as industries modernize their sales and marketing processes, which has been accelerated by the COVID-19 pandemic. We sell subscriptions to our platform's experience products that are backed by analytics and our ecosystem of third-party integrations. Before 2013, we offered services and licensed software for managing webinars and virtual events primarily on a per event basis. In 2013, we transitioned to be a software-as-a-service company with the release of ON24 Elite and ON24 Virtual Environment as cloud-based subscription products. Substantially all of our customers subscribe to ON24 Elite, which enables customers to seamlessly broadcast video-based content and drive real-time interactivity in a single immersive experience. Our customers can host multiple tracks of their webinar experiences as a large-scale virtual event experience using ON24 Virtual Environment. In 2018, we launched two complementary experience products, ON24 Engagement Hub and ON24 Target, to provide our customers with a system for digital engagement, offering customers the ability to curate and disseminate rich, multimedia content experiences. In addition to our products, we also provide professional services such as experience management, monitoring and premium support services, which provide the opportunity for recurring revenue, as well as implementation and other services. In 2021, we launched ON24 Breakouts which expanded the functionality and interactivity of webinars built with ON24 Elite. For example, breakouts enable attendees and presenters to network with each other face-to-face, sales teams to connect immediately with prospects and subject matters experts to offer two-way communication to support customer education and training InOctober 2021 , we announced that we would be launching a new product on our platform named ON24 Go Live. ON24 Go Live is a new self-service virtual event solution for companies to stand up live-streaming video events faster and easier. Organizations can build a complete end-to-end external or internal event ranging from roadshows, customer conferences, virtual pop-ups, town halls, and company meeting, using pre-built templates and an easy-to-use and engaging interface. ON24 Go Live is planned to become available inNovember 2021 for early adopters. We deliver our platform products as cloud-based subscriptions that are easy to use and purpose-built for sales and marketing professionals. As ofSeptember 30, 2021 , we had over 2,000 customers. We have a highly engaged and loyal customer base leading to a successful land and expand strategy. Prior to developing our current cloud-based subscription model, we generated revenue from our Legacy offering, which primarily consisted of fully managed events and associated services. In connection with shifting to our current data-driven, cloud-based subscription model, we stopped selling our Legacy offering to new customers in 2018 and stopped selling it to all 23 -------------------------------------------------------------------------------- Table of Contents customers in 2020. As a result, substantially all Legacy revenue ceased afterDecember 2020 . Our revenue was$49.4 million and$151.6 million for the third quarter and first nine months of 2021, respectively, compared to$42.6 million and$103.7 million for the same periods of 2020, representing a period-over-period increase of 16% and 46%, respectively. Our revenue, excluding our Legacy offering, was$49.3 million and$151.5 million for the third quarter and first nine months of 2021, respectively, compared to$42.5 million and$101.7 million for the same periods of 2020 representing a period-over-period increase of 16% and 49%. We had a net loss of$9.4 million and$14.7 million for the third quarter and first nine months of 2021, respectively, compared to net income of$6.6 million and$11.2 million for the same periods of 2020. COVID-19 Update InDecember 2019 , an outbreak of COVID-19 emerged, and, byMarch 2020 , theWorld Health Organization declared COVID-19 a global pandemic. Governments acrossthe United States and around the world instituted measures in an effort to slow infection rates, including orders to shelter-in-place, travel restrictions and mandated business closure. This pandemic has had widespread, rapidly-evolving and unpredictable impacts on global societies, economies, financial markets and business practices. As conditions continue to fluctuate around the world, with vaccine administration rising in certain regions, governments and organizations have responded by adjusting their restrictions and guidelines accordingly. Our focus remains on promoting employee health and safety, serving our customers and ensuring business continuity. In compliance with applicable regulations and guidance, we partially reopened our offices in the second half of 2021 for employeeswho are fully vaccinated and want to work in that office. With different regions recovering at different rates, we continue to evaluate our plans to fully reopen our facilities. During the COVID-19 pandemic, digital has become the primary way for people to connect, work, learn and be entertained, and for businesses to engage with customers. The imperative to optimize digital sales and marketing investments to drive revenue conversion has become more important as businesses accelerate digital transformation initiatives in response to the COVID-19 pandemic, resulting in increased usage of our subscription and other platforms. Our revenue increased by 16% in the third quarter of 2021 and 46% in the first nine months of 2021 compared to the same respective periods of 2020, in part due to the impact of COVID-19. There is no assurance that we will continue to experience such accelerated growth. If the effects of the COVID-19 pandemic subside, particularly as more people get vaccinated, our customers and their users may resume in-person marketing activities in a way that decreases usage of our platform. The extent of the impact of COVID-19 on our business and financial performance may be influenced by a number of factors, many of which we cannot control, including the duration and spread of the pandemic, future spikes of COVID-19 infections resulting in additional preventative and mitigative measures, the severity of the economic decline attributable to or influenced by the pandemic, the timing and nature of a potential economic recovery, the impact on our customers and our sales cycles, and our ability to generate new business leads. For additional details, see the section titled "Risk Factors." Key Factors Affecting Our Performance Acquiring New Customers We are focused on continuing to grow the number of customers that use our platform. We define a customer as a unique organization, including its subsidiaries and affiliates, that has entered into an agreement for paid access to our platform. A single customer may have multiple agreements with us for separate divisions, subsidiaries or affiliates. Our operating results and growth prospects will depend in part on our ability to attract new customers. While we believe we have a significant market opportunity that our platform addresses, it is difficult to predict customer adoption rates or the future growth rate and size of the market for our platform. We will need to continue to invest in our sales and marketing functions in order to address this opportunity by hiring, developing and retaining talented sales personnelwho are able to achieve desired productivity levels in a reasonable period of time. Despite our strong growth to date, we believe our market is still relatively underpenetrated and, as a result, we see significant opportunity to market our solutions globally. We intend to pursue new customers through specialized and aligned sales teams focused on Enterprise customers, which includes companies with more than 2,000 employees, and Commercial customers, which includes companies with less than 2,000 customers. Retention and Expansion of ON24 Across Existing Customers We believe we can achieve significant growth by retaining and further penetrating our existing customer base with the addition of new users and new products, and through upsell and cross sell. Our multi-dimensional land and expand model drives onboarding and allows us to acquire customers via free trials, live demos and continuous engagement with an efficient sales and 24 -------------------------------------------------------------------------------- Table of Contents marketing investment. As we continue to drive more actionable revenue generating marketing insights, we believe that we have a significant opportunity to further increase sales among existing customers across different functional and geographic departments within each respective organization. Our ability to pursue this opportunity will require us to continue to retain our customers, scale our sales and marketing organization and otherwise increase our operating expenses, and we may not be successful on the timetable we anticipate, or at all, for any number of reasons, which may cause our results to vary from period to period. Innovation and Expansion of Our Platform We plan to continually develop new products that enhance the functionality of our platform, improve our user experiences and drive customer engagement in order to further capitalize on new opportunities. We intend to sell these new solutions to both existing and new customers, to drive an increase in revenue as the breadth and depth of our solutions and use cases expands. We also intend to continue investing in our platform and related infrastructure to improve capacity, security and scalability. These development efforts will require significant investments, some of which may be episodic or otherwise cause our expenses to vary from period to period. International Expansion We believe the expansion of real-time, revenue-generating marketing intelligence in international markets is a significant opportunity. For the third quarter and first nine months of 2021, approximately 25% and 26%, respectively, of our revenue came from outsidethe United States , compared to 24% and 23% for the same periods of 2020. We believe there is a compelling opportunity to expand our solutions internationally, both in countries where we currently operate and countries where we do not yet sell subscriptions to our solutions. Continuing to expand our international operations will require considerable management attention and other resources and may present challenges associated with complying with local expectations, customs, laws and regulations, which may impact our ability to sell subscriptions to our solutions and otherwise cause our results to vary from period to period. Key Business Metrics We review the following key business metrics to measure our performance, identify trends, formulate financial projections and make strategic decisions. Our methods for calculating these metrics may differ from similarly titled metrics at other companies, which may hinder comparability with other companies. The following table sets forth as of the dates indicated our number of customers, our annual recurring revenue (ARR) and our customers contributing at least$100,000 in ARR ($100k Customers) (in thousands): Sep 30, 2021 Jun 30, 2021 Mar 31, 2021 Dec 31, 2020 Sep 30, 2020 Jun 30, 2020 Mar 31, 2020 Customers 2,054 2,078 2,062 1,994 1,918 1,769 1,503 ARR$ 167,194 $ 164,130 $ 163,051 $ 153,362 $ 138,872 $ 114,183 $ 85,875 $100k Customers 359 345 325 302 271 229 161 Number of Customers Increasing awareness of our platform and its broad range of capabilities has enabled us to substantially expand our customer base. We define a customer as a unique organization, including its subsidiaries and affiliates, that has entered into an agreement for paid access to our platform. We serve customers of all sizes, ranging from small businesses to global Fortune 100 organizations across a diverse set of industries, including technology, financial services, healthcare, industrial and manufacturing, professional services and B2B information services companies. Our diverse customer base has grown from 760 customers as ofDecember 31, 2015 to over 2,000 customers as ofSeptember 30, 2021 . Our total customer count declined slightly compared to the first two quarters of 2021 with churn among our small and midsize customers representing the largest contributor to the decrease, partially offset by growth among our$100k Customers. Our platform is designed with a long-term view toward our customer relationships and to grow with customers as their needs expand. 25
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Annual Recurring Revenue
We believe that ARR is a key metric to measure our business because it is driven
by our ability to acquire new subscription customers and to maintain and expand
our relationship with existing subscription customers. ARR is calculated as the
sum of the annualized value of our subscription contracts as of the measurement
date, including existing customers with expired contracts that we expect to be
renewed. Our ARR amounts exclude professional services, overages from
subscription customers and Legacy revenue. Our ARR as of September 30, 2021 ,
December 31, 2020 and September 30, 2020 was $167.2 million , $153.4 million and
$138.9 million , respectively. Our ARR growth, which was occurring prior to the
COVID-19 pandemic, accelerated in 2020 partly in response to the COVID-19
pandemic, and has continued to grow in 2021, though at a slower pace. Despite
the slight decline of our total customer count at the end of third quarter of
2021 compared to the first two quarters of 2021, we have continued to grow our
ARR. This reflects our success in acquiring new customers and expanding
subscriptions with existing customers, partially offset by customer churn.
Customers Contributing $100,000 or More to ARR
We believe that our ability to increase our $100k Customers is a key indicator
for important components of the growth of our business, including our success in
expanding the use of our platform within large organizations. As of
September 30, 2021 , December 31, 2020 and September 30, 2020 , we had 359, 302
and 271 $100k Customers, respectively, demonstrating our continued penetration
of larger organizations.
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Results of Operations
We manage and operate as one reportable segment. The discussion below summarizes
our results of operations for the periods presented, which we derived from the
condensed consolidated financial statements included elsewhere in this Report.
The following tables set forth selected condensed consolidated statements of
operations data and for each of the periods presented:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(in thousands, except percentages)
Revenue:
Subscription and other platform $ 43,601 $ 34,356 $ 130,888 $ 81,379
Professional services 5,761 8,233 20,691 22,276
Total revenue 49,362 42,589 151,579 103,655
Cost of revenue:
Subscription and other platform (1) 8,718 5,425 24,382 14,405
Professional services (1) 3,349 3,195 10,252 8,883
Total cost of revenue 12,067 8,620 34,634 23,288
Gross profit 37,295 33,969 116,945 80,367
Operating expenses:
Sales and marketing (1) 26,591 15,756 75,981 40,495
Research and development (1) 9,114 4,660 25,222 13,272
General and administrative (1) 10,851 6,712 29,719 14,370
Total operating expenses 46,556 27,128 130,922 68,137
Income (loss) from operations (9,261) 6,841 (13,977) 12,230
Interest expense 65 228 402 633
Other (income) expense, net 106 (23) 433 226
Income (loss) before provision for
(benefit from) income taxes (9,432) 6,636 (14,812) 11,371
Provision for (benefit from) income taxes (32) 31 (65) 123
Net income (loss) (9,400) 6,605 (14,747) 11,248
(1)Includes stock-based compensation as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(in thousands)
Cost of revenue
Subscription and other platform $ 607 $ 31 $ 1,190 $ 78
Professional services 109 7 248 16
Total cost of revenue 716 38 1,438 94
Sales and marketing 2,364 162 5,627 450
Research and development 1,235 70 2,879 189
General and administrative 3,516 350 7,851 720
Total stock-based compensation expense
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Comparison of the Three and Nine Months Ended
Three Months Ended
As a % of As a % of
2021 Total Revenue 2020 Total Revenue $ Change % Change
(in thousands, except percentages)
Subscription and other platform $ 43,601 88% $ 34,356 81% $ 9,245 27%
Professional services 5,761 12% 8,233 19% (2,472) (30%)
Total revenue $ 49,362 100% $ 42,589 100% $ 6,773 16%
Nine Months Ended September 30,
As a % of As a % of
2021 Total Revenue 2020 Total Revenue $ Change % Change
(in thousands, except percentages)
Subscription and other platform $ 130,888 86% $ 81,379 79% $ 49,509 61%
Professional services 20,691 14% 22,276 21% (1,585) (7)%
Total revenue $ 151,579 100% $ 103,655 100% $ 47,924 46%
The increase in total revenue for the third quarter and first nine months of
2021 compared to the same periods in 2020 was primarily driven by an overall
increase in digital experience platform revenue and partially offset by a
decrease in Legacy revenue.
Three Months Ended
As a % of As a % of
2021 Total Revenue 2020 Total Revenue $ Change % Change
(in thousands, except percentages)
Digital Experience Platform
Subscription and other platform $ 43,564 88% $ 34,297 81% $ 9,267 27%
Professional services 5,761 12% 8,183 19% (2,422) (30)%
Total digital experience platform
revenue $ 49,325 100% $ 42,480 100% $ 6,845 16%
Legacy
Subscription and other platform $ 37 -%$ 59 -%$ (22) (37%) Professional service - -% 50 -% (50) (100%) Total Legacy revenue $ 37 -%$ 109 -%$ (72) (66%) Total revenue$ 49,362 100%$ 42,589 100%$ 6,773 16% 28
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Nine Months Ended September 30,
As a % of As a % of
2021 Total Revenue 2020 Total Revenue $ Change % Change
(in thousands, except percentages)
Digital Experience Platform
Subscription and other platform $ 130,789 86% $ 80,010 77% $ 50,779 63%
Professional services 20,666 14% 21,705 21% (1,039) (5)%
Total digital experience platform
revenue 151,455 100% 101,715 98% 49,740 49%
Legacy
Subscription and other platform 99 -% 1,369 1% (1,270) (93%) Professional service 25 -% 571 1% (546) (96%) Total Legacy revenue 124 -% 1,940 2% (1,816) (94%) Total revenue$ 151,579 100%$ 103,655 100%$ 47,924 46% Total digital experience platform revenue increased$6.8 million , or 16%, for the third quarter of 2021 and increased by$49.7 million , or 49%, for the first nine months of 2021, compared to the same periods of 2020. The increase for each respective period was primarily attributable to an increase in subscription and other platform revenue mainly due to increased purchases of our platform by our existing customers, and to a lesser extent increases in our customer base. Professional services revenue decreased$2.5 million , or 30%, for the third quarter of 2021 and decreased$1.6 million , or 7%, for the first nine months of 2021, compared to the same periods of 2020, primarily reflecting unusually high demand for our professional services in 2020 that continued into the first quarter of 2021. The decline in professional services revenue as a percentage of total revenue in both the third quarter and first nine months of 2021, as compared to the same periods in 2020, also reflects platform improvements that enable more customer self-service. Total Legacy revenue is immaterial for the third quarter of 2021 and 2020. The Legacy revenue for the first nine months of 2021 decreased$1.8 million , or 94%, compared to the same period of 2020 primarily attributable to a decrease in subscription and other Legacy platform revenue as we stopped selling our Legacy offering to new customers in 2018. Substantially all Legacy revenue ceased afterDecember 2020 . Cost of Revenue and Gross Margin
Three Months Ended
As a % of As a % of
2021 Total Revenue 2020 Total Revenue $ Change % Change
(in thousands, except percentages)
Subscription and other platform $ 8,718 18% $ 5,425 13% $ 3,293 61%
Professional services 3,349 7% 3,195 8% 154 5%
Total cost of revenue 12,067 24% $ 8,620 20% $ 3,447 40%
Gross profit $ 37,295 76% $ 33,969 80% $ 3,326 10%
Gross margin 76 % 80 %
Nine Months Ended
As a % of As a % of
2021 Total Revenue 2020 Total Revenue $ Change % Change
(in thousands, except percentages)
Subscription and other platform $ 24,382 16% $ 14,405 14% $ 9,977 69%
Professional services 10,252 7% 8,883 9% 1,369 15%
Total cost of revenue $ 34,634 23% $ 23,288 22% $ 11,346 49%
Gross profit $ 116,945 77% $ 80,367 78% $ 36,578 46%
Gross margin 77 % 78 %
29-------------------------------------------------------------------------------- Table of Contents Cost of Revenue Cost of revenue for the third quarter and first nine months of 2021 increased$3.4 million , or 40%, and$11.3 million , or 49%, respectively, compared to the same periods of 2020, primarily driven by an overall increase in digital experience platform revenue and partially offset by a decrease in Legacy cost of revenue. Total digital experience platform cost of revenue for the third quarter and first nine months of 2021 increased by$3.7 million , or 44%, and$12.5 million , or 56%, respectively, compared to the same periods of 2020. The increase in each respective period was primarily due to an increase in subscription and other platform cost of revenue of 3.4 million and 10.5 million, and an increase in professional services cost of revenue of$0.3 million and$2.0 million . The increase in total digital experience platform cost of revenue was primarily attributable to an increase in personnel-related expenses of$3.0 million and$9.1 million driven by both increased headcount to support our platform and deliver services and increased stock-based compensation expense of$0.7 million and$1.3 million . The increase in total digital experience platform cost of revenue in the first nine months of 2021 also reflected a$2.3 million increases in bandwidth, transmission and software costs due to the expansion of infrastructure and data centers. Total Legacy cost of revenue for the third quarter and first nine months of 2021 decreased by$0.2 million , or 96%, and$1.1 million , or 99%, respectively, compared to the same periods of 2020. The decrease in total Legacy cost of revenue in each respective period was primarily driven by a reduction in headcount and facilities allocation costs as we stopped selling our Legacy offering to new customers in 2018 and substantially all Legacy revenue ceased afterDecember 2020 . Gross Margin Gross margin was 76% for the third quarter of 2021 compared to 80% for the same period of 2020. Gross margin for the first nine months of 2021 remained relatively flat compared to the same period of 2020. The decrease in gross margin in the third quarter of 2021 was primarily attributable to the increase in digital experience subscription and other platform cost of revenue, which increased 64%, compared to our digital experience subscription and other platform revenue, which increased 27%. We expect gross margin to decrease in the remainder of 2021 as we continue to invest to scale the business. Operating Expenses Sales and Marketing Three Months Ended September 30, As a % of As a % of 2021 Total Revenue 2020 Total Revenue $ Change % Change (in thousands, except percentages) Sales and marketing$ 26,591 54%$ 15,756 37%$ 10,835 69% Nine Months Ended September 30, As a % of As a % of 2021 Total Revenue 2020 Total Revenue $ Change % Change (in thousands, except percentages) Sales and marketing$ 75,981 50%$ 40,495 39%$ 35,486 88% Sales and marketing expense increased$10.8 million , or 69%, for the third quarter of 2021 and$35.5 million , or 88%, for the first nine months of 2021, compared to the same periods of 2020. The increase in each respective period was primarily attributable to an increase in personnel-related expenses of$7.7 million and$25.6 million driven by both increased headcount to support the growth in our sales force and increased stock based compensation expense of$2.2 million and$5.2 million . The increase in sales and marketing expense in each respective period was also driven by an increase in advertising expenses of$2.2 million in the third quarter of 2021 and an increase in advertising, content marketing and demand generation activity of$7.1 million in the first nine months of 2021. The increase of$2.4 million in facilities and other expenses also contributed to the increased sales and marketing expense for the first nine months of 2021. We expect our sales and marketing expense to continue to increase in the remainder of 2021 to support increased demand for our digital experiences. 30 -------------------------------------------------------------------------------- Table of Contents Research and Development Three Months Ended September 30, As a % of As a % of 2021 Total Revenue 2020 Total Revenue $ Change % Change (in thousands, except percentages) Research and development$ 9,114 18%$ 4,660 11%$ 4,454 96% Nine Months Ended September 30, As a % of As a % of 2021 Total Revenue 2020 Total Revenue $ Change % Change (in thousands, except percentages) Research and development$ 25,222 17%$ 13,272 13%$ 11,950 90% Research and development expense increased$4.5 million , or 96%, for the third quarter of 2021 and$12.0 million , or 90%, for the first nine months of 2021, compared to the same periods of 2020. The increase in each respective period was primarily attributable to an increase of$3.3 million and$8.9 million in personnel-related expenses driven by both increased headcount for the development of our solutions and increased stock-based compensation expense of$1.2 million and$2.7 million . The increase of$1.9 million in contractor costs for development activities and$1.2 million in facilities and other expenses also contributed to the increase of research and development expense in the first nine months of 2021. We expect our research and development expense to continue to increase in the remainder of 2021 as we focus on further developing our platform and infrastructure. General and Administrative Three Months Ended September 30, As a % of As a % of 2021 Total Revenue 2020 Total Revenue $ Change % Change (in thousands, except percentages) General and administrative$ 10,851 22%$ 6,712 16%$ 4,139 62% Nine Months Ended September 30, As a % of As a % of 2021 Total Revenue 2020 Total Revenue $ Change % Change (in thousands, except percentages) General and administrative$ 29,719 20%$ 14,370 14%$ 15,349 107% General and administrative expense increased$4.1 million , or 62%, for the third quarter of 2021 and$15.3 million , or 107% for the first nine months of 2021, compared to the same periods of 2020. The increase in each respective period was primarily attributable to an increase of$4.0 million and$10.1 million in personnel-related expenses driven by both increased headcount and increased stock based compensation expense of$3.1 million and$7.1 million , as well as an increase of$1.3 million and$3.5 million in facilities and other expenses. The increase in general and administrative expense in the third quarter of 2021 was partially offset by a$1.5 million decrease in accounting and related expenses, which was primarily due to additional expense incurred beginning in the third quarter of 2020 in preparation for our IPO. The increase in general & administrative expense in the nine months of 2021 was also driven by a$1.8 million increase in professional and legal related expenses due to additional expenses incurred for IPO readiness in the first quarter of 2021 and ongoing costs associated with being a publicly traded company. We expect our general and administrative expense to increase in the remainder of 2021 as we increase the size of our general and administrative function to support the growth of our business. 31 -------------------------------------------------------------------------------- Table of Contents Interest Expense Three Months Ended September 30, As a % of As a % of 2021 Total Revenue 2020 Total Revenue $ Change % Change (in thousands, except percentages) Interest expense$ 65 -%$ 228 1%$ (163) (71%) Nine Months Ended September 30, As a % of As a % of 2021 Total Revenue 2020 Total Revenue $ Change % Change (in thousands, except percentages) Interest expense$ 402 0%$ 633 1%$ (231) (36%)
Interest expense for the third quarter and first nine months of 2021 decreased
Three Months Ended
As a % of As a % of
2021 Total Revenue 2020 Total Revenue $ Change % Change
(in thousands, except percentages)
Other (income) expense, net $ 106 -% $ (23) -% $ 129 561%
Nine Months Ended
As a % of As a % of
2021 Total Revenue 2020 Total Revenue $ Change % Change
(in thousands, except percentages)
Other (income) expense, net $ 433 -% $ 226 -% $ 207 92%
Other (income) expense, net for the third quarter and first nine months of 2021
increased
Three Months Ended
As a % of As a % of
2021 Total Revenue 2020 Total Revenue $ Change % Change
(in thousands, except percentages)
Provision for (benefit from)
income taxes $ (32) -% $ 31 -% $ (63) (203%)
Nine Months Ended
As a % of As a % of
2021 Total Revenue 2020 Total Revenue $ Change % Change
(in thousands, except percentages)
Provision for (benefit from)
income taxes $ (65) -% $ 123 -% $ (188) (153%)
32-------------------------------------------------------------------------------- Table of Contents The decrease in provision for income taxes in the third quarter and first nine months of 2021 compared to the same periods of 2020 was primarily driven by the tax benefits associated with the exercise of stock options and settlement of restricted stock units in a foreign jurisdiction. Liquidity and Capital Resources As ofSeptember 30, 2021 , we had cash, cash equivalents and marketable securities of$399.7 million . Our investments generally consist of money market funds, certificates of deposit,U.S. Treasury securities and debt securities, all of which are available for our current operations use. Our liquidity requirements arise primarily from our working capital needs, capital expenditures and debt service requirements. We historically funded our liquidity requirements through sales of convertible preferred stock, cash generated from our operations, borrowings and availability under our revolving credit facility, and most recently through our initial public offering of our common stock inFebruary 2021 . InFebruary 2021 , we closed our IPO in which we sold 7,599,928 shares of our common stock, which included 1,284,139 shares from the full exercise of the underwriters' option to purchase additional shares, at a public offering price of$50 per share. We received net proceeds of approximately$348.0 million after deducting the underwriting discount of approximately$26.6 million and offering costs of approximately$5.4 million . In the first quarter of 2021, we repaid in full the$22.4 million aggregate then outstanding principal balance of our line of credit under the revolving credit facility. Our principal uses of cash in recent periods have been to fund our operations, invest in research and development and to purchase investments. We believe our existing cash, cash equivalents and marketable securities will be sufficient to meet our needs for at least the next 12 months. Our future capital requirements will depend on many factors including our revenue growth rate, subscription renewal activity, billing frequency, the timing and extent of spending to support further sales and marketing and research and development efforts, as well as expenses associated with our international expansion, including the timing and extent of additional capital expenditures to invest in existing and new office spaces. We may in the future enter into arrangements to acquire or invest in complementary businesses, products, services and technologies, and we may need to seek additional equity or debt financing. In the event that additional financing is needed from outside sources, we may not be able to raise the necessary capital or raise the capital on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, results of operations and financial condition could be materially and adversely affected. The following table summarizes our cash flows for the periods presented (in thousands): Nine Months Ended September 30, 2021 2020 Net cash provided by operating activities$ 9,681 $ 26,839 Net cash used in investing activities$ (198,078) $ (674) Net cash provided by financing activities $
327,780
Operating Activities Our largest source of operating cash is cash collections from our customers for subscriptions to use our platform. Our primary uses of cash from operating activities are from personnel-related expenditures, costs related to hosting our platform and marketing expenses. Our cash flow from operating activities will continue to be influenced principally by the extent to which we increase spending on our business and our working capital requirements. Net cash provided by operating activities is primarily impacted by our net income (loss) adjusted for certain non-cash items such as stock-based compensation, depreciation and amortization, amortization of deferred contract acquisition costs, as well as the effect of changes in operating assets and liabilities. Our cash flows from operating activities provided net cash of$9.7 million for the nine months endedSeptember 30, 2021 compared to$26.8 million for the same period in 2020, a decrease of$17.1 million . The decrease was primarily attributable to the$26.0 increase in net loss and$12.8 million unfavorable changes in operating assets and liabilities between the periods, partially reduced by an increase in non-cash expenses of$21.7 million . The total non-cash adjustments for the nine months endedSeptember 30, 2021 was$34.0 million compared to$12.3 million for the same period of 2020. The$21.7 million favorable change of non-cash adjustment was primarily driven by an increase in stock-based compensation expense of$16.3 million and an increase in amortization of deferred contract acquisition costs of$3.8 million . 33 -------------------------------------------------------------------------------- Table of Contents Working capital used cash of$9.6 million for the nine months endedSeptember 30, 2021 compared to provided cash of$3.3 million for the same period in 2020, a decrease of cash inflow of$12.9 million . The unfavorable change in working capital in the comparative periods were impacted by, among other items, the timing of vendor payments and prepayments, timing of cash receipts from customers, timing of collections of accounts receivable, and increased business activities due to company growth. Investing Activities Net cash used in investing activities was$198.1 million for the nine months endedSeptember 30, 2021 compared to$0.7 million for the same period in 2020. The increase was primarily driven by an increase in purchases of marketable securities of$202.0 million and an increase in capital expenditures of$1.8 million , partially offset by an increase in proceeds from maturities and paydowns of marketable securities of$6.4 million . Our most significant capital expenditures have been investments in our equipment to support ongoing operations. We expect our capital investment will continue in the future. Financing Activities Net cash provided by financing activities was$327.8 million for the nine months endedSeptember 30, 2021 compared to$2.5 million for the same period in 2020. The increase was primarily driven by the proceeds of$353.4 million from our IPO, net of underwriting discounts, partially offset by the repayment of$22.5 million outstanding principal balance of our line of credit under our revolving credit facility, the payments of IPO related costs of$3.5 million , and payment of tax withholding obligation of$2.0 million related to net share settlement of exercising stock options. Debt Obligations Revolving Credit Facility InSeptember 2021 , we amended our revolving credit facility withComerica Bank with an effective date ofAugust 31, 2021 , which increases our borrowing capacity to a maximum of$50.0 million with a letter of credit sublimit of$4.0 million and a credit card sublimit of$1.0 million . The amendment allows us to borrow up to$50.0 million if we maintain at least$100.0 million on deposit withComerica Bank . If such deposit is less than$100.0 million , we may borrow up to the lesser of$50.0 million or an amount determined by our trailing five months of recurring revenue, annualized renewal rate and annualized monthly churn rate. The terms of the agreement permit voluntary prepayment without premium or penalty. The revolving credit facility matures inAugust 2024 and is secured by substantially all of our assets. We are required to pay a quarterly commitment fee of 0.15% per annum on the undrawn portion available under the revolving line of credit. Outstanding principal amounts on the revolving credit facility incur interest at a rate equal toComerica Bank's prime referenced rate, as defined in the loan agreement. Prior toAugust 31, 2021 , Interest on the revolving line of credit was the prime rate, as published by theWall Street Journal , plus 0.75% effectiveJuly 31, 2020 . The referenced prime rate was 3.25% as ofSeptember 30, 2021 and the prime rate was 3.25% as ofSeptember 30, 2020 . We borrowed$22.4 million against the revolving credit facility as ofDecember 31, 2020 , which was repaid in full during the first quarter of 2021. We incurred an immaterial amount of interest expense prior to our full repayment of the principal outstanding under our line of credit in the first quarter of 2021. Commitments and Contractual Obligations The following table summarizes our noncancelable contractual obligations as ofSeptember 30, 2021 (in thousands): Payments Due By Period Less than More than Total 1 year 1-3 years 3-5 years 5 years Operating lease obligations$ 9,928 $ 742 $ 4,985 $ 4,201 $ - Capital lease obligations 4,248 432 3,745 71 - Equipment loans 643 65 507 71 - Other (1) 5,997 690 5,202 105 - Total$ 20,816 $ 1,929 $ 14,439 $ 4,448 $ -
(1)Amounts represent our commitment under various software license and co-location facilities and services agreements. See Note 7 to condensed consolidated financial statements for additional information.
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Critical Accounting Policies and Estimates
There has been no significant change during this quarter to our critical
accounting policies and estimates as discussed in our Annual Report on Form 10-K
for the year ended December 31, 2020 .
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Other than the item discussed below, there has been no material change in our
exposure to market risks from that discussed in Item 7A of our Annual Report on
Form 10-K for the year ended December 31, 2020 .
Our exposure to changes in interest rates relates primarily to our investment
portfolio. Changes in U.S. interest rates affect the interest earned on our
cash, cash equivalents and investments and the fair value of those investments.
Our cash equivalents consist of money market mutual funds, which are not
significantly exposed to interest rate risk. Our marketable securities are
subject to interest rate risk because these securities primarily include a fixed
interest rate. As a result, the market values of these securities are affected
by changes in prevailing interest rates. We attempt to limit our exposure to
interest rate risk and credit risk by investing our investment portfolio in
instruments that meet the minimum credit quality, liquidity, diversification and
other requirements of our investment policy. Our marketable securities consist
of liquid, investment-grade securities. We do not enter into investments for
trading or speculative purposes.
The following table presents the hypothetical fair values of our marketable
securities assuming immediate parallel shifts in the yield curve of 50 basis
points ("BPS"), 100 BPS and 150 BPS as of September 30, 2021 (in thousands):
Fair Value as of
(150 BPS) (100 BPS) (50 BPS) September 30, 2021 50 BPS 100 BPS 150 BPS
Marketable securities $ 202,315 $ 202,314 $ 202,311 $ 201,896
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