SMARTSHEET INC. The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. These statements are often identified by the use of words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate," or "continue," and similar expressions or variations. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including but not limited to those discussed in the section titled "Risk Factors" and in other parts of this Annual Report on Form 10-K. Our fiscal year endsJanuary 31 . A discussion and analysis of our financial condition, results of operations, and cash flows for the year endedJanuary 31, 2020 compared to the year endedJanuary 31, 2019 is included in Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedJanuary 31, 2020 filed with theSEC onMarch 31, 2020 . OverviewSmartsheet is the enterprise platform for dynamic work. We empower anyone to drive meaningful change. Our leading cloud-based platform enables teams and organizations to plan, capture, manage, automate, and report on work at scale, resulting in more efficient processes and better business outcomes. We were founded in 2005 with a vision to build a universal application for work management that does not require coding capabilities. Unstructured or dynamic work is work that has historically been managed using a combination of email, spreadsheets, whiteboards, phone calls, and in-person meetings to communicate with team members and complete projects and processes. It is frequently changing, often ad-hoc, and highly reactive to new information. Our platform helps manage this kind of unstructured work and serves as a single source of truth across work processes, fostering accountability and engagement within teams, leading to more efficient decision-making and better business outcomes. We generate revenue primarily from the sale of subscriptions to our cloud-based platform. For subscriptions, customers select the plan that meets their needs and can begin usingSmartsheet within minutes. We offer four subscription levels: Individual, Business, Enterprise, and Premier, the pricing for which varies by the capabilities provided. Customers can also purchase Connectors, which provide data integration and automation to third-party applications. We also offer Dynamic View, Data Uploader, Control Center and Accelerators, which enable customers to implement solutions for a specific use case or for large scale projects, initiatives, or processes. We acquired 10,000ft inMay 2019 which augmented our product portfolio by providing resource allocation and planning. We acquiredBrandfolder, Inc. ("Brandfolder") inSeptember 2020 , which provides a centralized platform to organize, discover, control, distribute, and measure all forms of digital content. Combining Brandfolder capabilities withSmartsheet will create dynamic solutions that manage workflows around content and collaboration. Professional services are offered to help customers create and administer solutions for specific use cases and for training purposes. Customers can begin using our platform by purchasing a subscription directly from our website or through our sales force, starting a free trial, or working as a collaborator on a project. Impact of COVID-19 InDecember 2019 , a novel coronavirus ("COVID-19") was first reported. InJanuary 2020 , theWorld Health Organization ("WHO") declared COVID-19 a Public Health Emergency of International Concern, and inMarch 2020 , the WHO characterized it as a pandemic. 48 -------------------------------------------------------------------------------- Tab le of Contents In response to reports of COVID-19, our executive leadership team and the human resources leadership team began ongoing monitoring of the COVID-19 situation. Beginning in earlyFebruary 2020 , and aligning with guidance provided by government agencies and international organizations, we took measures to restrict travel, institute a broad work-from-home policy, and limit visitors and office services. Bymid-March 2020 , and again aligning with guidance provided by government agencies and international organizations, we restricted all travel, mandated a work-from-home policy across our global workforce, fully closed our offices to all visitors and services, and moved all in-person customer-facing events to be virtual. As ofJanuary 31, 2021 , all of our offices remain subject to restrictions which limit levels of allowed in-person contact, with restrictions aligned with guidance relevant to the office's specific geographic location. During the year endedJanuary 31, 2021 , purchasing decisions of certain customers were impacted and sometimes deferred due to uncertainties around COVID-19. We experienced some limitations in our ability to deliver consulting and training services, primarily due to travel restrictions. As long as the global economic environment is influenced by COVID-19, our existing customers may be hesitant to expand their use ofSmartsheet and may be more likely to churn. The broader implications of the global emergence of COVID-19 on our business, operating results, and overall financial performance remain uncertain and depend on certain developments, including the duration and spread of the outbreak, impact on our customers and our sales cycles, impact on our partners and employees, and impact on the economic environment and financial markets, all of which are uncertain and cannot be predicted. As we continue to operate in the current environment, modifications to our usual circumstances include modifications to employee travel, employee work locations, and marketing events, among others. We expect that our customers and potential customers will take actions to reduce operating expenses and moderate cash flows, including by delaying purchase decisions and requesting extended billing and payment terms. We will continue to actively monitor the situation and may take further actions that alter our business operations, as may be required by federal, state, or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers, and shareholders. Key Business Metrics We review the following key business metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.
2021 2020 2019
Average annualized contract value per domain-based customer
$ 5,103 $ 3,643 $ 2,454 Dollar -based net retention rate for all customers (trailing 12 months) 123 % 135 % 134 %
Customers with annualized contract values of
11,874 9,079 6,192
Customers with annualized contract values of
1,515 961 444
Customers with annualized contract values of $100
thousand or more 588 350 147
Average ACV per domain-based customer
We use average annualized contract value ("ACV") per domain-based customer to
measure customer commitment to our platform and sales force productivity. We
define average ACV per domain-based customer as total outstanding ACV for
domain-based subscriptions as of the end of the reporting period divided by the
number of domain-based customers as of the same date. We define domain-based
customers as organizations with a unique email domain name.
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Dollar-based net retention rate
We calculate dollar-based net retention rate as of a period end by starting with
the ACV from the cohort of all customers as of the 12 months prior to such
period end ("Prior Period ACV"). We then calculate the ACV from these same
customers as of the current period end ("Current Period ACV"). Current Period
ACV includes any upsells and is net of contraction or attrition over the
trailing 12 months, but excludes subscription revenue from new customers in the
current period. We then divide the total Current Period ACV by the total Prior
Period ACV to arrive at the dollar-based net retention rate.
The dollar-based net retention rate is used by us to evaluate the long-term
value of our customer relationships and is driven by our ability to retain and
expand the subscription revenue generated from our existing customers.
Components of Results of Operations
Revenue
Subscription revenue
Subscription revenue primarily consists of fees from customers for access to our
cloud-based platform. We recognize subscription revenue ratably over the term of
the subscription period beginning on the date access to our platform is
provided, as no implementation work is required, assuming all other revenue
recognition criteria have been met.
Professional services revenue
Professional services revenue primarily includes fees for consulting and
training services. Our consulting services consist of platform configuration and
use case optimization, and are primarily invoiced on a time and materials basis,
with some smaller engagements being provided for a fixed fee. We recognize
revenue for our consulting services as those services are delivered. Our
training services are delivered either remotely or at the customer site.
Training services are charged for on a fixed-fee basis and we recognize revenue
as the training program is delivered. Our consulting and training services are
generally considered to be distinct, for accounting purposes, and we recognize
revenue as services are performed or upon completion of work.
Cost of revenue and gross margin
Cost of subscription revenue
Cost of subscription revenue primarily consists of expenses related to hosting
our services and providing support, including employee-related costs such as
salaries, wages, and related benefits, third-party hosting fees, software and
maintenance costs, amortization of acquisition-related intangibles, payment
processing fees, allocated overhead, costs of outside services to supplement our
internal teams, costs of Connectors between Smartsheet and third-party
applications, and travel-related expenses.
We intend to continue to invest in our platform infrastructure and our support
organization. As of January 31, 2021 , we transitioned substantially all of our
infrastructure from a combination of third-party co-location data centers and
public cloud service providers to the public cloud.
Cost of professional services revenue
Cost of professional services revenue consists primarily of employee-related
costs for our consulting and training teams, costs of outside services to
supplement our internal teams, allocated overhead, software-related costs,
billable expenses, and travel-related costs.
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Gross margin
Gross margin is calculated as gross profit expressed as a percentage of total
revenue. Our gross margin may fluctuate from period to period as our revenue mix
fluctuates, and as a result of the timing and amount of investments to expand
our hosting capacity, our continued building of application support and
professional services teams, and increased share-based compensation expense. As
we continue to invest in technology innovation, we expect our gross margin to
moderately decline.
Operating expenses
Research and development
Research and development expenses consist primarily of employee-related costs,
software-related costs, allocated overhead, costs of outside services used to
supplement our internal staff, and travel-related costs. We consider continued
investment in our development talent and our platform to be important for our
growth. We expect our research and development expenses to increase in absolute
dollars as our business grows and to gradually decrease over the long-term as a
percentage of total revenue due to economies of scale.
Sales and marketing
Sales and marketing expenses consist primarily of employee-related costs, costs
of general marketing and promotional activities, allocated overhead,
software-related costs, amortization of acquisition-related intangibles,
travel-related expenses, and costs of outside services used to supplement our
internal staff. Commissions earned by our sales force that are incremental to
each customer contract, along with related fringe benefits and taxes, are
capitalized and amortized over an estimated useful life of three years. We
expect that sales and marketing expenses will increase in absolute dollars as we
expect more of our future revenue to come from our inside and direct sales
models, rather than through digital self-service sales. We expect sales and
marketing costs to gradually decrease over the long-term as a percentage of
total revenue due to economies of scale.
General and administrative
General and administrative expenses consist primarily of employee-related costs
for accounting, finance, legal, IT, and human resources personnel. In addition,
general and administrative expenses include non-personnel costs, such as
accounting and legal fees, costs of outside services used to supplement our
internal staff, allocated overhead, software-related costs, taxes, licenses and
insurance, bad debt expense, bank charges, and travel-related expenses.
We are incurring additional expenses as a result of operating as a public
company, including costs to comply with the rules and regulations applicable to
companies listed on a national securities exchange, costs related to compliance
and reporting obligations pursuant to the rules and regulations of the SEC and
the Sarbanes-Oxley Act of 2002, and increased expenses for insurance, investor
relations, and professional services. We expect our general and administrative
expenses to increase in absolute dollars as our business grows, and to gradually
decrease over the long term as a percentage of total revenue due to economies of
scale.
Interest income
Interest income consists of interest income from our investment holdings. In
light of the current near-zero interest rate environment, consistent with the
year ended January 31, 2021 , we expect our interest income in the near term to
remain insignificant.
Other income (expense), net
Other income (expense), net primarily consists of interest expense associated
with our finance leases, which were terminated during the year ended January 31,
2021 , and foreign exchange gains and losses.
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Income tax provision (benefit)
Our income tax provision (benefit) consists primarily of a partial release of
our valuation allowance, income taxes in foreign jurisdictions and state income
taxes. We maintain a valuation allowance on our U.S. federal, state and certain
foreign deferred tax assets as we have concluded that it is not more likely than
not that the deferred tax assets will be realized.
Results of Operations
The following tables set forth our results of operations for the periods
presented and as a percentage of our total revenue for those periods:
Year Ended January 31,
2021 2020 2019
(in thousands)
Revenue
Subscription $ 352,782 $ 244,058 $ 157,529
Professional services 32,731 26,824 20,193
Total revenue 385,513 270,882 177,722
Cost of revenue
Subscription(1) 59,374 32,707 19,297
Professional services(1) 26,165 20,193 14,552
Total cost of revenue 85,539 52,900 33,849
Gross profit 299,974 217,982 143,873
Operating expenses
Research and development(1) 118,722 95,469 58,841
Sales and marketing(1) 230,281 176,060 106,067
General and administrative(1) 71,443 50,227 34,049
Total operating expenses 420,446 321,756 198,957
Loss from operations (120,472) (103,774) (55,084)
Interest income 1,444 8,410 3,307
Other income (expense), net 296 (462) (1,815)
Net loss before income tax provision (benefit) (118,732) (95,826) (53,592)
Income tax provision (benefit) (3,753) 114 293
Net loss $ (114,979) $ (95,940) $ (53,885) (1) Amounts include share-based compensation expense as follows:
Year Ended January 31,
2021 2020 2019
(in thousands)
Cost of subscription revenue $ 4,385 $ 1,392 $ 346
Cost of professional services revenue 2,146 1,259 466
Research and development 25,072 14,260 5,873
Sales and marketing 25,921 12,937 5,163
General and administrative 14,498 7,716 4,055
Total share-based compensation expense* $ 72,022 $ 37,564 $ 15,903
*Includes amortization related to share-based compensation expense that was capitalized in internal-use
software and other assets in previous periods.
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The following table sets forth the components of our results of operations, for each of the periods presented, as a percentage of total revenue.
Year Ended January 31,
2021 2020 2019
Revenue
Subscription 92 % 90 % 89 %
Professional services 8 10 11
Total revenue 100 100 100
Cost of revenue
Subscription 15 12 11
Professional services 7 7 8
Total cost of revenue 22 20 19
Gross profit 78 80 81
Operating expenses
Research and development 31 35 33
Sales and marketing 60 65 60
General and administrative 19 19 19
Total operating expenses 109 119 112
Loss from operations (31) (38) (31)
Interest income - 3 2
Other income (expense), net - - (1)
Net loss before income tax provision (benefit) (31) (35) (30)
Income tax provision (benefit) (1) - -
Net loss (30) % (35) % (30) %
Note: Certain amounts may not sum due to rounding
Comparison of the years ended January 31, 2021 and 2020
Revenue
Year Ended January 31, Change
2021 2020 Amount %
(dollars in thousands)
Revenue
Subscription $ 352,782 $ 244,058 $ 108,724 45 %
Professional services 32,731 26,824 5,907 22 %
Total revenue $ 385,513 $ 270,882 $114,631 42 %
Percentage of total revenue
Subscription revenue 92 % 90 %
Professional services revenue 8 % 10 %
Subscription revenue increased $108.7 million or 45%, for the year ended
January 31, 2021 compared to the year ended January 31, 2020 . The increase in
revenue between periods was driven by increased sales of user-based subscription
plans, which contributed $77.0 million of the increase, followed by sales of
pre-configured capabilities, which contributed $31.7 million of the increase.
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The increase in professional services revenue was primarily driven by increasing
demand for our remotely delivered consulting and training services, partially
offset by a decline in in-person consulting and training engagements due to
COVID-19.
Cost of revenue, gross profit, and gross margin
Year Ended January 31, Change
2021 2020 Amount %
(dollars in thousands)
Cost of revenue
Subscription $ 59,374 $ 32,707 $ 26,667 82 %
Professional services 26,165 20,193 5,972 30 %
Total cost of revenue $ 85,539 $ 52,900 $ 32,639 62 %
Gross profit $ 299,974 $ 217,982 $ 81,992 38 %
Gross margin
Subscription 83 % 87 %
Professional services 20 % 25 %
Total gross margin 78 % 80 %
Cost of subscription revenue increased $26.7 million , or 82%, for the year ended
January 31, 2021 compared to the year ended January 31, 2020 . The increase was
primarily due to an increase of $11.7 million in employee-related expenses due
to increased headcount, of which $2.8 million was related to share-based
compensation expense, an increase of $8.2 million in hosting fees, an increase
of $2.2 million in software-related costs, an increase of $1.8 million in
amortization of acquisition-related intangibles, an increase of $1.3 million in
allocated overhead costs, an increase of $0.9 million in costs of outside
services to supplement our internal staff, an increase of $0.6 million in costs
of Connectors with third-party applications, and an increase of $0.2 million in
credit card processing fees. This was partially offset by a decrease of $0.2
million in travel-related costs.
Our gross margin for subscription revenue was 83% and 87% for the years ended
January 31, 2021 and 2020, respectively. The decrease in gross margin during the
year ended January 31, 2021 was driven primarily by migration of our application
from our co-location data centers into the public cloud, which at times during
the fiscal year led us to incur both the costs related to co-location data
centers and the costs related to the public cloud.
Cost of professional services revenue increased $6.0 million , or 30%, for the
year ended January 31, 2021 compared to the year ended January 31, 2020 . The
increase was primarily due to an increase of $5.0 million in employee-related
expenses, of which $0.8 million was related to share-based compensation expense,
an increase of $1.9 million in costs of outside services to supplement our
internal staff, and an increase of $0.2 million in allocated overhead costs.
This was partially offset by a decrease of $0.7 million in billable expenses, a
decrease of $0.3 million in travel-related costs, and a decrease of $0.1 million
in software-related costs.
Our gross margin for professional services revenue was 20% and 25% for the year
ended January 31, 2021 and 2020, respectively. The decrease in gross margin
during the year ended January 31, 2021 was primarily driven by increases in
personnel expenses and costs of outside personnel to supplement our staff,
partially offset by decreases in billable and travel-related expenses.
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Operating expenses
Research and development expenses
Year Ended January 31, Change
2021 2020 Amount %
(dollars in thousands)
Research and development $ 118,722 $ 95,469 $ 23,253 24 %
Percentage of total revenue 31 % 35 %
Research and development expenses increased $23.3 million , or 24%, for the year
ended January 31, 2021 compared to the year ended January 31, 2020 . The increase
was primarily due to an increase of $20.8 million in employee-related expenses
due to increased headcount, of which $10.8 million was related to share-based
compensation expense, an increase of $3.7 million in software-related costs, and
an increase of $0.7 million in allocated overhead. This was partially offset by
a decrease of $1.2 million in costs of outside services to supplement our
internal staff, and a decrease of $0.7 million in travel-related costs.
Sales and marketing expenses
Year Ended January 31, Change
2021 2020 Amount %
(dollars in thousands)
Sales and marketing $ 230,281 $ 176,060 $ 54,221 31 %
Percentage of total revenue 60 % 65 %
Sales and marketing expenses increased $54.2 million , or 31%, for the year ended
January 31, 2021 compared to the year ended January 31, 2020 . The increase was
primarily due to an increase of $54.9 million in employee-related expenses due
to increased headcount, of which $12.8 million related to increased share-based
compensation expense, an increase of $2.7 million in allocated overhead costs,
an increase of $1.7 million in amortization of acquisition-related intangibles,
an increase of $1.3 million in software-related costs, and an increase of $0.2
million in costs of outside services used to supplement our internal staff. This
was partially offset by a decrease of $3.5 million in general marketing and
advertising costs, and a decrease of $3.1 million in travel-related costs.
General and administrative expenses
Year Ended January 31, Change
2021 2020 Amount %
(dollars in thousands)
General and administrative
Percentage of total revenue 19 % 19 %
General and administrative expenses increased $21.2 million , or 42%, for the
year ended January 31, 2021 compared to the year ended January 31, 2020 . The
increase was primarily due to an increase of $14.9 million in employee-related
expenses due to increased headcount, of which $6.8 million related to increased
share-based compensation expense, an increase of $2.2 million in accounting,
internal control, and tax related costs, an increase of $1.5 million in legal
fees, an increase of $1.3 million in software-related costs, an increase of $1.0
million in bad debt expense, an increase of $0.6 million in allocated overhead
costs, an increase of $0.5 million in costs of other outside services used to
supplement our internal staff, and an increase of $0.2 million in bank charges.
This was partially offset by a decrease of $0.8 million in travel-related costs
and a decrease of $0.2 million in taxes, licenses, and insurance.
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Interest income
Year Ended January 31, Change
2021 2020 Amount %
(dollars in thousands)
Interest income $ 1,444 $ 8,410 $ (6,966) (83) %
Percentage of total revenue - % 3 %
For the year ended January 31, 2021 compared to the year ended January 31, 2020 ,
the decrease in interest income of $7.0 million was driven by the decline in
interest rates year over year.
Other income (expense), net
Year Ended January 31, Change
2021 2020 Amount %
(dollars in thousands)
Other income (expense), net $ 296 $ (462) $ 758 164 %
Percentage of total revenue - % - %
For the year ended January 31, 2021 compared to the year ended January 31, 2020 ,
the change in other income (expense), net was driven by a net $0.2 million
change from realized foreign currency loss recorded during the year ended
January 31, 2020 to realized foreign currency gain recorded during the year
ended January 31, 2021 , a net $0.2 million change from unrealized foreign
currency loss recorded during the year ended January 31, 2020 to unrealized
foreign currency gain recorded during the year ended January 31, 2021 , a $0.2
million decrease in other expense, and a $0.1 million decrease in interest
expense.
Income tax provision (benefit)
Year Ended January 31, Change
2021 2020 Amount %
(dollars in thousands)
Income tax provision (benefit) $ (3,753) $ 114 $ (3,867) N/M*
Percentage of total revenue (1) % - %
*N/M = Not meaningful
The income tax benefit increased by $3.9 million for the year ended January 31,
2021 compared to the year ended January 31, 2020 . The increase was primarily
related to a partial release of our valuation allowance resulting from the
purchase accounting for the acquisition of Brandfolder. In connection with the
acquisition of Brandfolder, we recorded a net deferred tax liability which
provides an additional source of taxable income to support the realization of
the pre-existing deferred tax assets.
Quarterly Results of Operations and Other Data
The following tables set forth selected unaudited quarterly statements of
operations and comprehensive loss data for each of the eight fiscal quarters
ended January 31, 2021 , as well as the percentage of total revenue that each
line item represents for each quarter. The information for each of these
quarters has been prepared on the same basis as the audited annual consolidated
financial statements included elsewhere in this Annual Report and, in the
opinion of management, includes all adjustments, which consist only of normal
recurring adjustments, necessary for the fair presentation of the results of
operations for these periods. This data should be read in conjunction with our
audited consolidated financial statements and related notes included elsewhere
in this Annual Report. These quarterly results are not necessarily indicative of
our results of operations to be expected for any future period.
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Three Months Ended
Jan. 31, 2021 Oct. 31, 2020 Jul. 31, 2020 Apr. 30, 2020 Jan. 31, 2020 Oct. 31, 2019 Jul. 31, 2019 Apr. 30, 2019
(in thousands, except per share data)
Revenue
Subscription $ 101,107 $ 90,890 $ 83,622 $ 77,163 $ 71,067 $ 64,355 $ 58,315 $ 50,321
Professional services 8,764 8,043 7,600 8,324 7,452 7,170 6,329 5,873
Total revenue 109,871 98,933 91,222 85,487 78,519 71,525 64,644 56,194
Cost of revenue
Subscription(1) 17,480 17,417 12,696 11,781 9,657 8,867 7,982 6,201
Professional services(1) 6,870 6,313 6,322 6,660 5,995 5,231 4,683 4,284
Total cost of revenue 24,350 23,730 19,018 18,441 15,652 14,098 12,665 10,485
Gross profit 85,521 75,203 72,204 67,046 62,867 57,427 51,979 45,709
Operating expenses
Research and development(1) 32,273 32,369 28,089 25,991 27,973 25,049 22,210 20,238
Sales and marketing(1) 62,522 59,197 53,779 54,783 50,491 50,896 39,260 35,413
General and administrative(1) 19,771 19,530 17,046 15,096 14,499 13,330 11,457 10,939
Total operating expenses 114,566 111,096 98,914 95,870 92,963 89,275 72,927 66,590
Loss from operations (29,045) (35,893) (26,710) (28,824) (30,096) (31,848) (20,948) (20,881)
Interest income 11 14 92 1,327 2,337 2,810 2,114 1,149
Other income (expense), net 401 (25) 134 (214) (219) 187 (319) (112)
Loss before income tax provision
(benefit) (28,633) (35,904) (26,484) (27,711) (27,978) (28,851) (19,153) (19,844)
Income tax provision (benefit) 32 (3,933) 75 73 182 5 (39) (35)
Net loss $ (28,665) $ (31,971) $ (26,559) $ (27,784) $ (28,160) $ (28,856) $ (19,114) $ (19,809)
Net loss per share, basic and
diluted $ (0.23) $ (0.26) $ (0.22) $ (0.23) $ (0.24) $ (0.25) $ (0.17) $ (0.19)
(1) Amounts include share-based compensation expense as follows:
Three Months Ended
Jul. 31 , Apr. 30 ,
Jan. 31, 2021 Oct. 31, 2020 Jul. 31, 2020 Apr. 30, 2020 Jan. 31, 2020 Oct. 31, 2019 2019 2019
(in thousands)
Cost of subscription revenue
$ 1,113 $ 895 $ 435 $ 366$ 356 $ 235 Cost of professional services revenue 571 576 566 433 401 343 298 217 Research and development 7,236 6,509 6,199 5,128 4,737 3,934 3,317 2,272 Sales and marketing 7,565 6,512 6,738 5,105 4,036 3,516 3,276 2,108 General and administrative 4,265 3,833 3,544 2,856 2,243 2,170 1,839 1,464 Total share-based compensation expense$ 20,891 $ 18,553 $ 18,160 $ 14,417 $ 11,852 $ 10,329 $ 9,086 $ 6,296 57
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All values from the statement of operations and comprehensive loss, expressed as
percentage of total revenue were as follows:
Three Months Ended
Jan. 31, Oct. 31, Jul. 31, Apr. 30, Jan. 31, Oct. 31, Jul. 31, Apr. 30,
2021 2020 2020 2020 2020 2019 2019 2019
Revenue
Subscription 92 % 92 % 92 % 90 % 91 % 90 % 90 % 90 %
Professional services 8 8 8 10 9 10 10 10
Total revenue 100 100 100 100 100 100 100 100
Cost of revenue
Subscription 16 18 14 14 12 12 12 11
Professional services 6 6 7 8 8 7 7 8
Total cost of revenue 22 24 21 22 20 20 20 19
Gross profit 78 76 79 78 80 80 80 81
Operating expenses
Research and development 29 33 31 30 36 35 34 36
Sales and marketing 57 60 59 64 64 71 61 63
General and administrative 18 20 19 18 18 19 18 19
Total operating expenses 104 112 108 112 118 125 113 119
Loss from operations (26) (36) (29) (34) (38) (45) (32) (37)
Interest income - - - 2 3 4 3 2
Other income (expense), net - - - - - - - -
Net loss before income tax
provision (benefit) (26) (36) (29) (32) (36) (40) (30) (35)
Income tax provision
(benefit) - (4) - - - - - -
Net loss (26) % (32) % (29) % (33) % (36) % (40) % (30) % (35) %
Note: Certain amounts may not sum due to rounding
Quarterly revenue trends
Our quarterly revenue increased sequentially in each of the periods presented
due primarily to an increase in sales of user-based subscription plans, followed
by sales of pre-configured capabilities.
Our professional services business was impacted by COVID-19 restrictions,
including our loss of ability to travel and deliver in-person training and
consulting services. This impact negatively affected parts of the first fiscal
quarter of fiscal 2021, and the entirety of every other fiscal quarter of fiscal
2021. As such, we recorded a decrease in professional services revenue during
the three months ended July 31, 2020 as compared to the three months ended April
30, 2020 . In addition, we believe that our professional services business is
subject to negative seasonal trends during the holiday period of our fourth
fiscal quarter due to the fewer number of business days during this period. The
overall growth in our business has offset this seasonal trend to date, but its
impact may be more pronounced in future periods.
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Quarterly cost of revenue and gross margin trends
During fiscal 2020, our quarterly gross margin remained relatively consistent,
varying between 80% and 81%. During fiscal 2021, we worked on migration of our
platform infrastructure from hosting in co-location data centers onto the public
cloud. During this process, at times, we incurred dual expenses associated with
hosting which negatively impacted our gross margin especially during the three
months ended October 31, 2020 . In addition, throughout fiscal 2021, our gross
margin was negatively impacted by higher share-based compensation expenses. We
expect our gross margin to remain below 80% in future periods, primarily due to
higher share-based compensation expenses.
Quarterly operating expense trends
Total operating expenses generally increased for the fiscal quarters presented
primarily due to the addition of personnel, related overhead, and investments in
hardware and software in connection with the expansion of our business.
Our research and development expenses as a percent of revenue decreased during
each three-month period in fiscal 2021 against its comparable year-ago period,
due to economies of scale.
Our sales and marketing expenses as a percentage of total revenue generated in
the three months ended October 31, 2019 increased due to our ENGAGE customer
conference. During the three months ended October 31, 2020 , we held our ENGAGE
conference through an entirely remote setting, because of COVID-19 restrictions,
and therefore did not experience a similar quarterly increase in expenses.
During the fiscal year ending January 31, 2022 , we intend to continue to host
ENGAGE virtually.
Our general and administrative expenses were impacted throughout fiscal 2021,
and especially during the three months ended July 31, 2020 and October 31, 2020 ,
by additional investments made in our SOX compliance and internal audit program.
Non-GAAP Financial Measures
In addition to our results determined in accordance with generally accepted
accounting principles in the United States ("GAAP"), we believe the
following non-GAAP financial measures are useful in evaluating our operating
performance. We use the below referenced non-GAAP financial measures,
collectively, to evaluate our ongoing operations and for internal planning and
forecasting purposes. We believe that non-GAAP financial measures, when taken
collectively, may be helpful to investors because they provide consistency and
comparability with past financial performance, and assist in comparisons with
other companies, some of which use similar non-GAAP financial measures to
supplement their GAAP results. The non-GAAP financial measures are presented for
supplemental informational purposes only, and should not be considered a
substitute for financial measures presented in accordance with GAAP, and may be
different from similarly-titled non-GAAP measures used by other companies. A
reconciliation is provided below for each non-GAAP financial measure to the most
directly comparable financial measure stated in accordance with GAAP. Investors
are encouraged to review the related GAAP financial measures and the
reconciliation of these non-GAAP financial measures to their most directly
comparable GAAP financial measures.
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Limitations of non-GAAP financial measures
Our non-GAAP financial measures have limitations as analytical tools and you
should not consider them in isolation or as a substitute for an analysis of our
results under GAAP. There are a number of limitations related to the use of
these non-GAAP financial measures versus their nearest GAAP equivalents. First,
free cash flow and calculated billings are not substitutes for net cash used in
operating activities and total revenue, respectively. Similarly, non-GAAP gross
profit and non-GAAP operating loss are not substitutes for gross profit and
operating loss, respectively. Second, other companies may calculate similar
non-GAAP financial measures differently or may use other measures as tools for
comparison. Additionally, the utility of free cash flow as a measure of our
financial performance and liquidity is further limited as it does not represent
the total increase or decrease in our cash balance for a given period.
Furthermore, as calculated billings are affected by a combination of factors,
including the timing of sales, the mix of monthly and annual subscriptions sold
and the relative duration of subscriptions sold, and each of these elements has
unique characteristics in the relationship between calculated billings and total
revenue, our calculated billings activity is not closely correlated to revenue
except over longer periods of time.
Non-GAAP gross profit and non-GAAP gross margin
We define non-GAAP gross profit as gross profit adjusted for share-based
compensation expense and amortization of acquisition-related intangible assets.
Non-GAAP gross margin represents non-GAAP gross profit as a percentage of total
revenue.
Year Ended January 31,
2021 2020 2019
(dollars in thousands)
Gross profit $ 299,974 $ 217,982 $ 143,873
Add:
Share-based compensation expense(1) 6,531 2,651 812
Amortization of acquisition-related intangible assets(2) 3,656
1,831 456
One-time costs of acquisition - 69 -
Non-GAAP gross profit $ 310,161
Gross margin 78 % 80 % 81 %
Non-GAAP gross margin 80 % 82 % 82 %
(1) Includes amortization related to share-based compensation expense that was
capitalized in internal-use software and other assets in previous periods.
(2) Consists entirely of amortization of intangible assets that were recorded
as part of purchase accounting and contribute to revenue generation. The
amortization of intangible assets related to acquisitions will recur in future
periods until such intangible assets have been fully amortized.
Non-GAAP operating loss and non-GAAP operating margin
We define non-GAAP operating loss as loss from operations adjusted for
share-based compensation expense, amortization of acquisition-related intangible
assets, and one-time costs of acquisition. Non-GAAP operating margin represents
non-GAAP operating loss as a percentage of total revenue.
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Year Ended January 31,
2021 2020 2019
(dollars in thousands)
Loss from operations $ (120,472) $ (103,774) $ (55,084)
Add:
Share-based compensation expense(1) 72,022 37,564 15,903
Amortization of acquisition-related intangible assets(2) 6,266
2,734 480
One-time acquisition costs 977 686 196
Non-GAAP operating loss $ (41,207)
Operating margin (31) % (38) % (31) %
Non-GAAP operating margin (11) % (23) % (22) %
(1) Includes amortization related to share-based compensation expense that was
capitalized in internal-use software and other assets in previous periods.
(2) Consists entirely of amortization of intangible assets that were recorded
as part of purchase accounting and contribute to revenue generation. The
amortization of intangible assets related to acquisitions will recur in future
periods until such intangible assets have been fully amortized.
Non-GAAP net loss
We define non-GAAP net loss as net loss adjusted for share-based compensation
expense, amortization of acquisition-related intangible assets, one-time costs
of acquisition, non-recurring income tax adjustments associated with mergers and
acquisitions, and remeasurement of convertible preferred stock warrant
liability.
Year Ended January 31,
2021 2020 2019
(in thousands)
Net loss $ (114,979) $ (95,940) $ (53,885)
Add:
Share-based compensation expense(1) 72,022 37,564 15,903
Amortization of acquisition-related intangible assets(2) 6,266
2,734 480
One-time acquisition costs 977 686 196
Release of valuation allowance (4,014) - -
Remeasurement of convertible preferred stock warrant
liability - - 1,326
Non-GAAP net loss $ (39,728) $ (54,956) $ (35,980)
(1) Includes amortization related to share-based compensation expense that was
capitalized in internal-use software and other assets in previous periods.
(2) Consists entirely of amortization of intangible assets that were recorded
as part of purchase accounting and contribute to revenue generation. The
amortization of intangible assets related to acquisitions will recur in future
periods until such intangible assets have been fully amortized.
Free cash flow
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We define free cash flow as net cash provided by (used in) operating activities
less cash used for purchases of property and equipment, capitalized internal-use
software, and payments on finance lease obligations. We believe free cash flow
facilitates period-to-period comparisons of liquidity. We consider free cash
flow to be a key performance metric because it measures the amount of cash we
generate from our operations after our capital expenditures and payments on
finance lease obligations. We use free cash flow in conjunction with traditional
GAAP measures as part of our overall assessment of our liquidity, including the
preparation of our annual operating budget and quarterly forecasts, to evaluate
the effectiveness of our business strategies, and to communicate with our board
of directors concerning our liquidity.
Year Ended January 31,
2021 2020 2019
(in thousands)
Net cash used in operating activities $ (15,648) $ (10,870) $ (2,855)
Less:
Purchases of property and equipment (4,176) (5,153) (5,767)
Capitalized internal-use software (7,608) (6,699) (3,017)
Payments on principal of finance leases (4,129) (4,167) (3,253)
Free cash flow $ (31,561) $ (26,889) $ (14,892)
Calculated billings
We define calculated billings as total revenue plus the change in deferred
revenue in the period. Because we recognize subscription revenue ratably over
the subscription term, calculated billings can be used to measure our
subscription sales activity for a particular period, to compare subscription
sales activity across particular periods, and as an indicator of future
subscription revenue.
Because we generate most of our revenue from customers who are invoiced on an
annual basis, and because we have a wide range of customers, from those who pay
us less than $200 per year to those who pay us more than $2.5 million per year,
we experience seasonality and variability that is tied to typical enterprise
buying patterns and contract renewal dates of our largest customers. Our
calculated billings results for the year ended January 31, 2021 were negatively
affected by economic circumstances caused by COVID-19. We expect that our
billings trends will continue to vary in future periods based on the timing and
size of new and renewal bookings, changes to the economic environment inclusive
of those related to COVID-19, and other factors.
Year Ended January 31,
2021 2020 2019
(in thousands)
Total revenue $ 385,513 $ 270,882 $ 177,722
Add:
Deferred revenue (end of period) 223,997 158,809 96,133
Less:
Deferred revenue (beginning of period) 158,809 96,133 57,281
Calculated billings $ 450,701 $ 333,558 $ 216,574
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Non-GAAP weighted average shares outstanding
We use non-GAAP weighted average shares outstanding in calculating non-GAAP
earnings per share. Our number of non-GAAP weighted average shares outstanding
is calculated after assuming conversion of all outstanding preferred stock into
shares of common stock either at the beginning of the fiscal period presented or
when issued, if later.
Year Ended January 31,
2021 2020 2019
(in thousands)
GAAP weighted-average shares outstanding used in
computing net loss per share, basic and diluted 120,663 112,991 83,141
Add: common shares that would have resulted from
conversion of convertible preferred stock at the
beginning of the period, or when granted (if later), on a
weighted average basis - - 16,698
Non-GAAP weighted-average shares outstanding used in computing net loss per share, basic and diluted
120,663 112,991 99,839
Liquidity and Capital Resources
As of January 31, 2021 , our principal sources of liquidity were cash and cash
equivalents totaling $442.2 million , which were held for working capital
purposes. Our cash equivalents were comprised primarily of money market funds.
We have generated significant operating losses and negative cash flows from
operations as reflected in our accumulated deficit and consolidated statements
of cash flows. We expect to continue to incur operating losses and negative cash
flows from operations for the foreseeable future.
We have financed our operations primarily through payments received from
customers for subscriptions and professional services, net proceeds we received
through sales of equity securities, option exercises, and contributions from our
2018 Employee Stock Purchase Plan ("ESPP"), finance leases, and interest income.
We believe our existing cash, cash equivalents, and cash provided by sales of
our products and services will be sufficient to meet our working capital and
capital expenditure needs for at least the next 12 months. Our future capital
requirements will depend on many factors, including our subscription growth
rate, subscription renewal activity, billing frequency, the timing and extent of
spending to support development efforts, the expansion of sales and marketing
activities, the introduction of new and enhanced product offerings, and the
continuing market adoption of our product. We may, in the future, enter into
arrangements to acquire or invest in complementary businesses, services, and
technologies, including intellectual property rights. We may be required to seek
additional equity or debt financing. In the event that additional financing is
required from outside sources, we may not be able to raise it on terms
acceptable to us, or at all. If we are unable to raise additional capital or
generate cash flows necessary to expand our operations and invest in new
technologies, our ability to compete successfully could be reduced, and this
could harm our results of operations.
A significant majority of our customers pay in advance for annual subscriptions.
Therefore, a substantial source of our cash is from our deferred revenue, which
is included on our consolidated balance sheet as a liability. Deferred revenue
consists primarily of the unearned portion of billed fees for our subscriptions,
which is recognized as revenue in accordance with our revenue recognition
policy. As of January 31, 2021 , we had deferred revenue of $224.0 million , of
which $222.7 million was recorded as a current liability and was expected to be
recognized as revenue in the subsequent 12 months, provided all recognition
criteria are met.
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Cash flows
The following table summarizes our cash flows for the periods indicated:
Year Ended January 31,
2021 2020 2019
(in thousands)
Net cash used in operating activities $ (15,648) $ (10,870) $ (2,855)
Net cash used in investing activities (85,057) (90,043) (13,784)
Net cash provided by financing activities 25,793 402,022 171,321
Effects of changes in foreign currency exchange rates on cash, cash equivalents, and restricted cash
471 (25) (36)
Net increase (decrease) in cash, cash equivalents,
and restricted cash $ (74,441) $ 301,084 $ 154,646
Operating activities
Our largest sources of operating cash are cash collections from our customers
for subscription and professional services. Our primary uses of cash from
operating activities are for employee-related expenditures and sales and
marketing expenses. Historically, we have generated negative cash flows from
operating activities during most fiscal years, and have supplemented working
capital requirements through net proceeds from the sale of equity securities.
During the year ended January 31, 2021 , net cash used in operating activities
was $15.6 million , driven by our net loss of $115.0 million , adjusted for
non-cash charges of $131.7 million , and net cash outflows of $32.4 million
provided by changes in our operating assets and liabilities. Non-cash charges
primarily consisted of share-based compensation expense, amortization of
deferred commissions, depreciation of property and equipment, non-cash operating
lease costs, and amortization of intangible assets. Fluctuations in operating
assets and liabilities included an increase in deferred revenue of $60.5 million
and an increase in accounts receivable of $43.1 million , both due to an increase
in billings. Additionally, there was an increase in deferred commissions of
$43.0 million due to increased customer sales, a decrease in operating lease
liabilities of $7.7 million driven by lease payments and offset by slower office
expansions due to COVID-19, an increase in accounts payable and accrued expenses
of $6.4 million due to increase in overall purchasing activity and timing of
when vendor invoices are received and paid, an increase in other long-term
assets of $5.8 million , an increase in other long-term liabilities of $3.9
million , and an increase in prepaid expenses and other current assets of $3.7
million .
During the year ended January 31, 2020 , net cash used in operating activities
was $10.9 million , driven by our net loss of $95.9 million , adjusted for
non-cash charges of $78.8 million , and net cash inflows of $6.3 million provided
by changes in our operating assets and liabilities. Non-cash charges primarily
consisted of share-based compensation expense, amortization of deferred
commissions, depreciation of property and equipment, amortization of lease
right-of-use assets, and amortization of intangible assets. Fluctuations in
operating assets and liabilities included an increase in deferred revenue of
$61.6 million , an increase in deferred commissions of $39.0 million , an increase
in accounts receivable of $26.0 million , an increase in accounts payable and
accrued expenses of $21.4 million , an increase in operating lease right-of-use
assets of $12.2 million , an increase in operating lease liabilities of $5.6
million , an increase in prepaid expenses and other current assets of $3.9
million , a decrease in other long-term liabilities of $1.0 million , and an
increase in other long-term assets of $0.3 million .
Investing activities
Net cash used in investing activities during the year ended January 31, 2021 of
$85.1 million consisted of $125.1 million in payments for business acquisitions
net of cash acquired for the purchase of Brandfolder and the release of the $1.0
million holdback related to the January 2019 acquisition of TernPro, Inc. , spend
on capitalized internal-use software development of $7.6 million , and purchases
of property and equipment of $4.2 million . This was offset by proceeds from
early termination of short-term investments of $50.5 million and proceeds from
the sale of property and equipment of $1.3 million .
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Net cash used in investing activities during the year ended January 31, 2020 of
$90.0 million consisted of purchases of short-term investments of $100.5
million , payments for business acquisition, net of cash acquired, of $26.7
million , spend on capitalized internal-use software development of $6.7 million ,
purchases of property and equipment of $5.2 million , and a purchase of a
long-term investment of $1.0 million . This was offset by proceeds from maturity
of an investment of $50.0 million .
Financing activities
Net cash provided by financing activities during the year ended January 31, 2021
of $25.8 million was primarily due to $17.4 million in proceeds from the
exercise of stock options, and $14.8 million in proceeds from our ESPP, which
were partially offset by principal payments on finance leases of $4.1 million ,
taxes paid related to net share settlement of restricted stock units of $2.2
million , and payments of deferred follow-on offering costs of $0.1 million .
Net cash provided by financing activities during the year ended January 31, 2020
of $402.0 million was primarily due to $379.8 million in proceeds from the
follow-on offering, net of underwriters' discounts and commissions, discussed
further in Note 1 to our consolidated financial statements. Additionally, we had
$15.9 million in proceeds from the exercise of stock options, and $11.3 million
in proceeds from our ESPP, which were partially offset by principal payments on
finance leases of $4.2 million , and payments of deferred offering costs of $0.8
million .
Obligations and Other Commitments
Our contractual obligations consist primarily of obligations under our operating
leases for office space, our commitments with cloud-based hosting service
providers, and non-cancelable purchase commitments. The following table
summarizes our contractual obligations as of January 31, 2021 :
Payments Due by Period:
Less than 1 More than 5
year 1 to 3 years 3 to 5 years years Total
(in thousands)
Operating lease obligations $ 17,472 $ 35,429 $ 28,744 $ 21,548 $ 103,193
Other obligations(1) 29,733 51,093 13,518 - 94,344
Total contractual obligations $ 47,205 $ 86,522 $ 42,262 $ 21,548 $ 197,537
(1) Amounts include our commitment with cloud-based hosting service providers
for $17.3 million within one year, $42.1 million between one to three years, and
$11.3 million within three to five years.
Indemnification Agreements
In the ordinary course of business, we enter into agreements of varying scope
and terms pursuant to which we agree to indemnify customers, vendors, lessors,
business partners, and other parties with respect to certain matters, including,
but not limited to, losses arising out of the breach of such agreements,
services to be provided by us, or from intellectual property infringement claims
made by third parties. In addition, we have entered into indemnification
agreements with our directors and certain officers and employees that will
require us, among other things, to indemnify them against certain liabilities
that may arise by reason of their status or service as directors, officers, or
employees. An indemnification claim has been made to the Company related to
litigation in which a former director and shareholder are parties. On January
29, 2021 , Ryan Hinkle and Insight Venture Partners VII, L.P. and certain
affiliates filed a complaint against Smartsheet Inc. in the Superior Court of
Washington , King County , for the advancement of legal fees, costs, and expenses
incurred related to this indemnification claim. At this time, the Company cannot
reasonably estimate the probability or magnitude of any alleged indemnification
claim.
Off-Balance Sheet Arrangements
As of January 31, 2021 , we did not have any relationships with organizations or
financial partnerships, such as structured finance or special purpose entities
that would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes.
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Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements which have been prepared in
accordance with GAAP. The preparation of these consolidated financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets and liabilities and related disclosure of contingent assets and
liabilities, revenue and expenses. Generally, we base our estimates on
historical experience and on various other assumptions in accordance with GAAP
that we believe to be reasonable under the circumstances. Actual results may
differ from these estimates. We believe that the accounting policies discussed
below are critical to understanding our historical and future performance, as
these policies relate to the more significant areas involving management's
judgments and estimates.
Revenue recognition
We derive our revenue primarily from subscription services and professional
services. Revenue is recognized when control of these services is transferred to
our customers, in an amount that reflects the consideration we expect to be
entitled to in exchange for those services, net of any sales taxes.
We determine revenue recognition through the following steps:
•identification of the contract, or contracts, with a customer;
•identification of the performance obligations in the contract;
•determination of the transaction price;
•allocation of the transaction price to the performance obligations in the
contract; and
•recognition of revenue when, or as, we satisfy a performance obligation.
Subscription revenue
Subscription revenue primarily consists of fees from customers for access to our
cloud-based platform and involves a significant volume of transactions.
Subscription revenue is recognized on a ratable basis over the subscription
contract term, beginning on the date the access to our platform is provided, as
no implementation work is required, if consideration we are entitled to receive
is considered probable of collection. Subscription contracts generally have
terms of one year or one month, are billed in advance, and are non-cancelable.
The subscription arrangements do not allow the customer the contractual right to
take possession of the platform; as such, the arrangements are considered to be
service contracts.
Certain of our subscription contracts contain performance guarantees related to
service continuity. To date, refunds related to such guarantees have been
immaterial in all periods presented.
Professional services revenue
Professional services revenue primarily includes revenue recognized from fees
for consulting and training services. Our consulting services consist of
platform configuration and use case optimization, and are primarily invoiced on
a time and materials basis, monthly in arrears. Services revenue is recognized
over time, as service hours are delivered. Smaller consulting engagements are on
occasion provided for a fixed fee. These smaller consulting arrangements are
typically of short duration (less than three months). In these cases, revenue is
recognized over time, based on the proportion of hours of work performed,
compared to the total hours expected to complete the engagement. Configuration
and use case optimization services do not result in significant customization or
modification of the software platform or user interface.
Training services are billed in advance, on a fixed-fee basis, and revenue is
recognized after the training program is delivered, or after the customer's
right to receive training services expires.
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Associated out-of-pocket travel expenses related to the delivery of professional
services are typically reimbursed by the customer. Out-of-pocket expense
reimbursements are recognized as revenue at the point in time, or as, the
distinct performance obligation to which they relate is delivered. Out-of-pocket
expenses are recognized as cost of professional services as incurred.
On occasion, we sell our subscriptions to third-party resellers. The price at
which we sell to the reseller is typically discounted, as compared to the price
at which we would sell to an end customer, in order to enable the reseller to
realize a margin on the eventual sale to the end customer. As our pricing to the
reseller is fixed, and we do not have visibility into the pricing provided by
the reseller to the end customer, the revenue is recorded net of any reseller
margin.
Contracts with multiple performance obligations
Some of our contracts with customers contain multiple performance obligations.
We account for individual performance obligations separately, as they have been
determined to be distinct, i.e., the services are separately identifiable from
other items in the arrangement and the customer can benefit from them on their
own or with other resources that are readily available to the customer. The
transaction price is allocated to the distinct performance obligations on a
relative stand-alone selling price basis. Stand-alone selling prices are
determined based on the prices at which we separately sell subscription,
consulting, and training services, and based on our overall pricing objectives,
taking into consideration market conditions, value of our contracts, the types
of offerings sold, customer demographics, and other factors.
Deferred revenue
Deferred revenue is recorded for subscription services contracts upon
establishment of unconditional right to payment under a non-cancelable contract
before transferring the related services to the customer. Deferred revenue for
such services is amortized into revenue over time, as those subscription
services are delivered.
Similarly, we record deferred revenue for fixed-fee professional services upon
establishment of an unconditional right to payment under a non-cancelable
contract. Deferred revenue for training services is recognized as revenue upon
delivery of training services or upon expiration of customer's right to receive
such services. Deferred revenue for consulting services is recognized as revenue
as hours of service are delivered to the customer.
Deferred commissions
The majority of sales commissions earned by our sales force are considered
incremental and recoverable costs of obtaining a contract with a customer. Sales
commission are paid on initial contracts and on any upsell contracts with a
customer. No sales commissions are paid on customer renewals. Sales commissions
are deferred and then amortized on a straight-line basis over a period of
benefit that we have determined to be three years. We determined the period of
benefit by taking into consideration our customer contracts, expected customer
life, the expected life of our technology and other factors. Amortization
expense is included in sales and marketing expenses in the accompanying
statements of operations and comprehensive loss. We evaluate the period of
benefit and test for impairment whenever events or changes in circumstances
occur that could impact the recoverability of these assets.
Internal-use software development costs
We capitalize certain qualifying costs incurred during the application
development stage in connection with the development of internal-use software.
Costs related to preliminary project activities and post-implementation
activities are expensed in research and development ("R&D") as incurred. R&D
expenses consist primarily of employee-related costs, hardware- and
software-related costs, allocated overhead, costs of outside services used to
supplement our internal staff, and travel-related costs.
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Internal-use software costs of $9.5 million were capitalized in the year ended
January 31, 2021 , all of which related to costs incurred during the application
development stage of software development for our platform to which
subscriptions are sold. Internal-use software costs of $8.1 million were
capitalized in the year ended January 31, 2020 , of which $5.8 million related to
costs incurred during the application development stage of software development
for our platform to which subscriptions are sold.
Capitalized internal-use software costs are included within property and
equipment, net on the consolidated balance sheets, and are amortized over the
estimated useful life of the software, which is typically three years. The
related amortization expense is recognized in the consolidated statements of
operations and comprehensive loss within the function that receives the benefit
of the developed software. We evaluate the useful lives of these assets and test
for impairment whenever events or changes in circumstances occur that could
impact the recoverability of these assets. Amortization expense of capitalized
internal-use software costs totaled $3.6 million , $2.3 million , and $1.0 million
for the years ended January 31, 2021 , 2020 and 2019, respectively.
Leases
We determine if an arrangement is a lease at inception, and leases are
classified at commencement as either operating or finance leases.
Right-of-use ("ROU") assets and lease liabilities are recognized at commencement
date based on the present value of the future minimum lease payments over the
lease term. ROU assets also include any lease payments made. Operating lease ROU
assets are presented separately in long-term assets and finance lease ROU assets
are included in property and equipment, net on our consolidated balance sheets.
As our operating leases do not provide an implicit rate, we use our incremental
borrowing rate based on information available at the commencement date in
determining the present value of future payments. This rate is an estimate of
the collateralized borrowing rate we would incur on our future lease payments
over a similar term based on the information available at commencement date. Our
lease terms may include options to extend or terminate the lease when it is
reasonably certain that we will exercise that option. At January 31, 2021 , we
did not include any options to extend leases in our lease terms as we were not
reasonably certain to exercise them. Our lease agreements do not contain
residual value guarantees or covenants.
We utilize certain practical expedients and policy elections available under the
lease accounting standard. Leases with a term of one year or less are not
recognized on our consolidated balance sheets; we recognize lease expense for
these leases on a straight-line basis over the lease term. Additionally, we have
elected to include non-lease components with lease components for contracts
containing real estate leases for the purpose of calculating lease ROU assets
and liabilities, to the extent that they are fixed. Non-lease components that
are not fixed are expensed as incurred as variable lease payments. Our real
estate operating leases typically include non-lease components such as
common-area maintenance costs.
ROU assets are subject to evaluation for impairment or disposal on a basis
consistent with other long-lived assets.
Business combinations
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When we acquire a business, the purchase price is allocated to the assets
acquired and liabilities assumed based on their estimated fair values as of the
acquisition date. Any residual purchase price is recorded as goodwill. The
allocation of the purchase price requires management to make significant
estimates in determining the fair values of the assets acquired and liabilities
assumed, especially with respect to the identifiable intangible assets. These
estimates can include, but are not limited to, the cash flows that an asset is
expected to generate in the future, the appropriate weighted-average cost of
capital, the cost savings expected to be derived from acquiring an asset, its
expected remaining economic useful life, and the appropriate discount rate to
employ in the valuation analyses in order to properly account for the risk
associated with the asset's expected future cash flows. These estimates are
inherently uncertain. During the measurement period, which may be up to one year
from the acquisition date, adjustments to the fair value of these tangible and
intangible assets acquired and liabilities assumed may be recorded, with the
corresponding offset to goodwill. Upon the conclusion of the measurement period
or final determination of the fair value of assets acquired or liabilities
assumed, whichever comes first, any subsequent adjustments are recorded to our
consolidated statements of operations and comprehensive loss.
Goodwill on our consolidated balance sheets totaled $125.6 million and $16.5
million at January 31, 2021 and 2020, respectively. Goodwill is tested for
impairment annually on September 1 , or more frequently if events or changes in
circumstances indicate that impairment may exist. Based on the annual
assessment, no indicator of impairment was noted and therefore no goodwill
impairments were recorded during the years ended January 31, 2021 , 2020, or
2019.
Share-based compensation
We measure and recognize compensation expense for all share-based awards granted
to employees and directors, based on the estimated fair value of the award on
the date of grant. Expense is recognized on a straight-line basis over the
vesting period of the award based on the estimated portion of the award that is
expected to vest.
We use the Black-Scholes option pricing model to measure the fair value of stock
option awards when they are granted. We make several estimates in determining
share-based compensation expense and these estimates generally require
significant analysis and judgment to develop. These assumptions and estimates
are as follows:
Fair value of common stock. As our stock was not publicly traded prior to our
IPO, we were required to estimate the fair value of common stock, as discussed
in "Valuation of Common Stock" below.
Expected term. The expected term of options represents the period that
share-based awards are expected to be outstanding. We estimate the expected term
using the simplified method due to the lack of historical exercise activity for
our company.
Risk-free interest rate. The risk-free interest rate is based on the implied
yield available at the time of the option grant in the U.S. Treasury securities
at maturity with a term equivalent to the expected term of the option.
Expected volatility. Expected volatility is based on an average volatility of
stock prices for a group of publicly traded peer companies. In considering peer
companies, we assess characteristics such as industry, state of development,
size and financial leverage.
Dividend yield. We have never declared or paid any cash dividends and do not
plan to pay cash dividends in the foreseeable future, and, therefore, use an
expected dividend yield of zero.
If any assumptions used in the Black-Scholes option pricing model change
significantly, share-based compensation for future awards may differ materially
compared with the awards granted previously.
In addition to the assumptions used in the Black-Scholes option pricing model,
we must also estimate a forfeiture rate to calculate the share-based
compensation expense for awards. Our forfeiture rate is derived from historical
employee termination behavior. If the actual number of forfeitures differs from
these estimates, additional adjustments to compensation expense will be
required.
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Valuation of common stock
Given the absence of an active market for our common stock prior to our IPO, our
board of directors was required to estimate the fair value of our common stock
at the time of each option grant based upon several factors, including its
consideration of input from management and contemporaneous third-party
valuations.
The exercise price for all stock options granted was at the estimated fair value
of the underlying common stock, as estimated on the date of grant by our board
of directors in accordance with the guidelines outlined in the American
Institute of Certified Public Accountants , Valuation of Privately-Held-Company
Equity Securities Issued as Compensation. Each fair value estimate was based on
a variety of factors, which included the following:
•contemporaneous valuations performed by an unrelated third-party valuation
firm;
•the prices, rights, preferences and privileges of our preferred stock relative
to those of our common stock;
•the lack of marketability of our common stock;
•our actual operating and financial performance;
•current business conditions and projections;
•hiring of key personnel and the experience of our management;
•our history and the timing of the introduction of new applications and
capabilities;
•our stage of development;
•the likelihood of achieving a liquidity event, such as an initial public
offering or a merger or acquisition of our business given prevailing market
conditions;
•the market performance of comparable publicly traded companies; and
•U.S. and global capital market conditions.
In valuing our common stock, our board of directors determined the equity value
of our business using valuation methods they deemed appropriate under the
circumstances applicable at the valuation date.
One method, the market approach, estimates value based on a comparison of our
company to comparable public companies in a similar line of business. To
determine our peer group of companies, we considered public enterprise
cloud-based application providers and selected those that are similar to us in
size, stage of life cycle, and financial leverage. From the comparable
companies, a representative market value multiple is determined which is applied
to our operating results to estimate the value of our company. The market value
multiple was determined based on consideration of the last 12-month revenue and
the implied multiples for each of the comparable companies.
Another method, the prior sale of our stock approach, estimates value by
considering any prior arm's length sales of our equity. When considering prior
sales of our equity, the valuation considers the size of the equity sale, the
relationship of the parties involved in the transaction, the timing of the
equity sale, and our financial condition at the time of the sale.
Once an equity value was determined, our board of directors used one of the
following methods to allocate the equity value to each of our classes of stock:
(1) the option pricing method, or OPM; or (2) a probability weighted expected
return method, or PWERM.
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The OPM treats common stock and preferred stock as call options on a business,
with exercise prices based on the liquidation preference of the preferred stock.
Therefore, the common stock only has value if the funds available for
distribution to the holders of common stock exceed the value of the liquidation
preference of the preferred stock at the time of a liquidity event, such as a
merger, sale, or initial public offering, assuming the business has funds
available to make a liquidation preference meaningful and collectible by
shareholders. The common stock is modeled as a call option with a claim on the
business at an exercise price equal to the remaining value immediately after the
preferred stock is liquidated. The OPM uses the Black-Scholes option pricing
model to price the call option.
The estimated value of the common stock derived from the OPM is then discounted
by a non-marketability factor due to the fact that shareholders of private
companies do not have access to trading markets similar to those enjoyed by
shareholders of public companies, which impacts liquidity.
The PWERM employs various market approach calculations depending upon the
likelihood of various liquidation scenarios. For each of the various scenarios,
an equity value is estimated and the rights and preferences for each shareholder
class are considered to allocate the equity value to common shares. The common
stock value is then multiplied by a discount factor reflecting the calculated
discount rate and the timing of the event. Lastly, the common stock value is
multiplied by an estimated probability for each scenario. The probability and
timing of each scenario were based on discussions between our board of directors
and our management team. Under the PWERM, the value of our common stock is based
upon possible future exit events for our company.
Subsequent to the closing of the IPO on May 1, 2018 , the fair value of our
common stock is represented by the price quoted on the New York Stock Exchange .
Recent accounting pronouncements
See the sections titled "Summary of Significant Accounting Policies-Recently
adopted accounting pronouncements" in Note 2 to our Consolidated Financial
Statements for more information.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest rate risk
We had cash and cash equivalents totaling $442.2 million as of January 31, 2021 ,
of which $420.6 million was invested in money market funds. We had cash and cash
equivalents totaling $515.9 million as of January 31, 2020 , of which $303.9
million was invested in money market funds. Our cash and cash equivalents are
held for working capital purposes. We do not enter into investments for trading
or speculative purposes.
Our cash equivalents and our investment portfolio are subject to market risk due
to changes in interest rates. Due in part to these factors, our future
investment income may fall short of our expectations due to changes in interest
rates or we may suffer losses in principal if we are forced to sell securities
that decline in market value due to changes in interest rates. However, because
we classify our short-term investments as "available for sale," no gains or
losses are recognized due to changes in interest rates unless such securities
are sold prior to maturity or declines in fair value are determined to be
other-than-temporary.
A hypothetical 10% relative change in interest rates would not have had a
material impact on the value of our cash equivalents and short-term investments
as of January 31, 2021 or 2020.
Foreign currency exchange risk
Due to our international operations, although our sales contracts are primarily
denominated in U.S. dollars, we have foreign currency risks related to revenue
denominated in other currencies, such as the Euro, British Pound Sterling,
Australian dollar, and Canadian dollar, as well as expenses denominated in the
British Pound Sterling and Australian dollar. Changes in the relative value of
the U.S. dollar to other currencies may negatively affect revenue and other
operating results as expressed in U.S. dollars. We have not engaged in the
hedging of foreign currency transactions to date. We do not believe that an
immediate 10% increase or decrease in the relative value of the U.S. dollar to
other currencies would have a material effect on our operating results for the
years ended January 31, 2021 , 2020, or 2019.
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Item 8. Financial Statements and Supplementary Data
Index to the Consolidated Financial Statements
Report of Deloitte & Touche LLP, Independent Registered Public Accounting
Firm 73
Report of Independent Registered Public Accounting Firm 76
Consolidated Statements of Operations and Comprehensive Loss 77
Consolidated Balance Sheets 78Consolidated Statements of Change in Convertible Preferred Stock and Shareholders' Equity (Deficit)
79
Consolidated Statements of Cash Flows 80
Note 1. Overview and Basis of Presentation 82
Note 2. Summary of Significant Accounting Policies 83
Note 3. Revenue from Contracts with Customers 91
Note 4. Deferred Commissions 91
Note 5. Net Loss Per Share 91
Note 6. Fair Value Measurements 91
Note 7. Property and Equipment, Net 93
Note 8. Business Combinations 93
Note 9. Goodwill and Net Intangible Assets 98
Note 10. Share-Based Compensation 99
Note 11. Income Taxes 102
Note 12. Leases 105
Note 13. Commitments and Contingencies 107
Note 14. 401(k) and Pension Plans 107
Note 15. Related Party Transactions 108
Note 16. Geographic Information 108
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Report ofDeloitte & Touche LLP , Independent Registered Public Accounting Firm To the shareholders and the Board of Directors ofSmartsheet Inc. Opinions on the Consolidated Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheet ofSmartsheet Inc. and subsidiaries (the "Company") as ofJanuary 31, 2021 , the related consolidated statements of operations and comprehensive loss, change in convertible preferred stock and shareholders' equity (deficit), and cash flows, for the year then ended, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company's internal control over financial reporting as ofJanuary 31, 2021 , based on criteria established in Internal Control - Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of theTreadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as ofJanuary 31, 2021 , and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted inthe United States of America . Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as ofJanuary 31, 2021 , based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. Basis for Opinions The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with thePublic Company Accounting Oversight Board (United States ) (PCAOB) and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. 73 -------------------------------------------------------------------------------- Tab le of Contents Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Subscription Revenue - Refer to Notes 2 and 3 to the financial statements Critical Audit Matter Description The Company derives its revenues predominantly from subscription services. Subscription revenue primarily consists of fees from customers for access to the Company's cloud-based platform and involves a significant volume of transactions. The Company recognizes subscription revenue on a ratable basis over the subscription contract term, beginning on the date the access to their platform is provided, assuming all other revenue recognition criteria have been met. For the year endedJanuary 31, 2021 , subscription revenue was$352.8 million . We identified subscription revenue as a critical audit matter due to the significant volume of transactions. Performing procedures to audit subscription revenue required an increased extent of effort and auditor judgment, including the need to involve professionals with expertise in data analytics. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the Company's subscription revenue included the following, among others: •With the assistance of our data analytics specialists, we performed a recalculation of subscription revenue recorded through the Company's relevant systems utilizing key attributes of subscription revenue transaction data, including the transaction price and revenue recognition timing, among others. We compared our recalculation of expected subscription revenue to the Company's recorded subscription revenue. •For a sample of subscription revenue transactions, we evaluated the accuracy of the data used in our recalculation of subscription revenue by comparing key attributes utilized in our recalculation to source documents. •We tested the completeness of the subscription revenue transaction data by selecting transactions from independent sources and evaluated whether those transactions were included in the subscription revenue transaction data. •We performed an analysis of journal entries to evaluate the relationship between recorded subscription revenue entries in the general ledger to other audited account balances such as deferred revenues, accounts receivable, and cash. Business Combinations - Brandfolder - Refer to Note 8 to the financial statements Critical Audit Matter Description 74 -------------------------------------------------------------------------------- Tab le of Contents The Company completed the acquisition ofBrandfolder, Inc. for$152.5 million onSeptember 14, 2020 . The Company accounted for the transaction as a business combination using the acquisition method of accounting. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including intangible assets of$45.3 million that were primarily comprised of acquired software technology of$17.4 million and customer relationships of$23.9 million . Management estimated the fair value of the finite-lived software technology using the relief-from-royalty method under the income approach. The fair value determination of the software technology intangible assets required management to apply judgment which involved the use of significant assumptions with respect to the future revenue forecast, technology life, royalty rate, and the discount rate. Management estimated the fair value of the finite-lived customer relationships using the multi-period excess earnings method and an incremental cash flow approach. The fair value determination of the customer relationships intangible assets required management to apply judgment which involved the use of significant assumptions with respect to the future cash flows forecast, base year annual recurring revenue, customer churn rate, and the discount rate. Given the fair value determination of the software technology and customer relationships intangible assets forBrandfolder, Inc. required management to make significant estimates and assumptions related to the future revenue and cash flows forecast, technology life, royalty rate, base year annual recurring revenue, customer churn rate, and the discount rates, performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the future revenue and cash flows forecast, technology life, royalty rate, base year annual recurring revenue, customer churn rate, and the discount rates for the software technology and customer relationship intangible assets included the following, among others: •We assessed the reasonableness of management's estimates and assumptions included in the future revenue and cash flows forecast, base year annual recurring revenue, customer churn rate, and technology life by comparing the projections and other assumptions to historical results and certain peer companies. •With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodologies and (2) valuation assumptions such as discount rates, royalty rate, and long-term growth rate used in the future revenue and cash flows forecast, among others, by: •Testing the source information underlying the determination of the valuation assumptions and testing the mathematical accuracy of the calculations. •Developing a range of independent estimates and comparing those to the valuation assumptions selected by management. •We compared the estimated weighted average return on assets, internal rate of return, and the discount rates used in the valuation models and evaluated whether they were consistent with each other. /s/Deloitte & Touche LLP Portland, Oregon March 25, 2021
We have served as the Company's auditor since fiscal 2021.
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Smartsheet Inc.
Opinion on the Financial Statements
We have audited the consolidated balance sheet of Smartsheet Inc. and its
subsidiaries (the "Company") as of January 31, 2020 , and the related
consolidated statements of operations, of comprehensive loss, of change in
convertible preferred stock and shareholders' equity (deficit) and of cash flows
for each of the two years in the period ended January 31, 2020 , including the
related notes (collectively referred to as the "consolidated financial
statements"). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
January 31, 2020 , and the results of its operations and its cash flows for each
of the two years in the period ended January 31, 2020 in conformity with
accounting principles generally accepted in the United States of America .
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company
changed the manner in which it accounts for leases in fiscal year 2020.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the Company's
consolidated financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board
(United States ) (PCAOB) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance
with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or
fraud.
Our audits included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated
financial statements. We believe that our audits provide a reasonable basis for
our opinion.
/s/ PricewaterhouseCoopers LLP
Seattle, Washington
March 31, 2020
We served as the Company's auditor from 2012 to 2020.
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SMARTSHEET INC.
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except per share data)
Year Ended
2021 2020 2019
Revenue
Subscription $ 352,782 $ 244,058 $ 157,529
Professional services 32,731 26,824 20,193
Total revenue 385,513 270,882 177,722
Cost of revenue
Subscription 59,374 32,707 19,297
Professional services 26,165 20,193 14,552
Total cost of revenue 85,539 52,900 33,849
Gross profit 299,974 217,982 143,873
Operating expenses
Research and development 118,722 95,469 58,841
Sales and marketing 230,281 176,060 106,067
General and administrative 71,443 50,227 34,049
Total operating expenses 420,446 321,756 198,957
Loss from operations (120,472) (103,774) (55,084)
Interest income 1,444 8,410 3,307
Other income (expense), net 296 (462) (1,815)
Loss before income tax provision (benefit) (118,732) (95,826) (53,592)
Income tax provision (benefit) (3,753) 114 293
Net loss and comprehensive loss $ (114,979) $ (95,940) $ (53,885)
Net loss per share, basic and diluted $ (0.95)
120,663 112,991 83,141
See notes to consolidated financial statements.
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SMARTSHEET INC.
Consolidated Balance Sheets
(in thousands, except share data)
January 31,
2021 2020
Assets
Current assets
Cash and cash equivalents $ 442,200 $ 515,924
Short-term investments - 50,532
Accounts receivable, net of allowances of
102,648 56,863
Prepaid expenses and other current assets 13,524 7,643
Total current assets 558,372 630,962
Restricted cash 18 865
Deferred commissions 60,529 48,255
Property and equipment, net 28,613 26,981
Operating lease right-of-use assets 81,081 57,590
Intangible assets, net 54,139 15,155
Goodwill 125,605 16,497
Other long-term assets 3,432 1,409
Total assets $ 911,789 $ 797,714
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 2,851 $ 7,720
Accrued compensation and related benefits 47,861 39,635
Other accrued liabilities 17,263 12,428
Operating lease liabilities, current 17,059 13,020
Finance lease liabilities, current - 2,465
Deferred revenue 222,689 157,972
Total current liabilities 307,723 233,240
Operating lease liabilities, non-current 71,925 47,913
Finance lease liabilities, non-current - 1,664
Deferred revenue, non-current 1,308 837
Other long-term liabilities 3,904 -
Total liabilities 384,860 283,654
Commitments and contingencies (Note 13)
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares authorized, no
shares issued or outstanding as of January 31, 2021 and January 31,
2020 - -
Class A common stock, no par value; 500,000,000 shares authorized,
123,272,902 shares issued and outstanding as of
- -
Class B common stock, no par value; 500,000,000 shares authorized,
no shares issued and outstanding as of January 31, 2021 ;
500,000,000 shares authorized, no shares issued and outstanding as
of January 31, 2020 - -
Additional paid-in capital 898,366 770,518
Accumulated deficit (371,437) (256,458)
Total shareholders' equity 526,929 514,060
Total liabilities and shareholders' equity $ 911,789 $ 797,714
See notes to consolidated financial statements.
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SMARTSHEET INC.
Consolidated Statements of Change in Convertible Preferred Stock and
Shareholders' Equity (Deficit)
(dollars in thousands)
Convertible Preferred Stock Common Stock (Class A and B) Additional
Paid-in Accumulated Total Shareholders'
Shares Amount Shares Amount Capital Deficit Equity (Deficit)
Balances at January 31, 2018 67,619,377 $ 112,687 20,280,741 $ - $
25,892
- - 4,331,279 - 10,221 - 10,221
Taxes paid related to net share settlement of
equity awards - - - - (380) - (380)
Issuance of common stock upon net exercise of
warrant - - 134,603 - 2,598 - 2,598
Issuance of common stock in connection with
initial public offering, net of underwriting
discounts and issuance costs - - 11,745,088 - 160,401 - 160,401
Conversion of convertible preferred stock to
common stock in connection with initial public
offering (67,619,377) (112,687) 68,479,732 - 112,687 - 112,687
Share-based compensation expense - - - - 16,091 - 16,091
Net loss and comprehensive loss - - - - - (53,885) (53,885)
Balances at January 31, 2019 - - 104,971,443 - 327,510 (160,518) 166,992
Issuance of common stock under employee stock
plans - - 4,197,716 - 25,519 - 25,519
Issuance of common stock in connection with
follow-on public offering, net of underwriting
discounts, commissions and issuance costs - - 9,025,000 - 378,982 - 378,982
Share-based compensation expense - - - - 38,507 - 38,507
Net loss and comprehensive loss - - - - - (95,940) (95,940)
Balances at January 31, 2020 - - 118,194,159 - 770,518 (256,458) 514,060
Issuance of common stock under employee stock
plans - - 4,435,143 - 30,330 - 30,330
Taxes paid related to net share settlement of
equity awards - - - - (2,150) - (2,150)
Issuance of restricted stock awards, net of
cancellations - - 92,318 - - - -
Issuance of common stock for acquisition - - 551,282 - 25,872 - 25,872
Share-based compensation expense - - - - 73,796 - 73,796
Net loss and comprehensive loss - - - - - (114,979) (114,979)
Balances at January 31, 2021 - $ - 123,272,902 $ - $ 898,366 $ (371,437) $ 526,929
See notes to consolidated financial statements.
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SMARTSHEET INC.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended January 31,
2021 2020 2019
Cash flows from operating activities
Net loss $ (114,979) $ (95,940) $ (53,885)
Adjustments to reconcile net loss to net cash used in operating
activities:
Share-based compensation expense 71,750 37,493 15,903
Remeasurement of convertible preferred stock warrant liability - - 1,326
Depreciation and amortization of property and equipment 10,969 10,687 7,194
Amortization of deferred commission costs 30,691 19,806 10,770
Unrealized foreign currency (gain) loss (161) 82 37
Loss on disposal of assets 268 - -
Amortization of intangible assets 6,286 2,762 510
Non-cash operating lease costs 11,924 7,971 -
Changes in operating assets and liabilities:
Accounts receivable (43,112) (25,965) (15,265)
Prepaid expenses and other current assets (3,678) (3,909) 481
Operating lease right-of-use assets - (12,173) -
Other long-term assets (5,819) (339) 207
Accounts payable (4,915) 3,593 2,031
Other accrued liabilities 5,543 5,840 3,424
Accrued compensation and related benefits 5,811 11,994 8,732
Deferred commissions (42,965) (39,046) (24,493)
Other long-term liabilities 3,904 (1,003) 1,322
Deferred revenue 60,534 61,646 38,851
Operating lease liabilities (7,699) 5,631 -
Net cash used in operating activities (15,648) (10,870) (2,855)
Cash flows from investing activities
Purchases of short-term investments - (100,532) -
Proceeds from early termination of short-term investments 50,532 - -
Purchases of long-term investments - (1,000) -
Proceeds from maturity of investments - 50,000 -
Purchases of property and equipment (4,176) (5,153) (5,767)
Proceeds from sale of property and equipment 1,250 - -
Capitalized internal-use software development costs (7,608) (6,699) (3,017)
Payments for business acquisitions, net of cash acquired (125,055)
(26,659) (5,000)
Net cash used in investing activities (85,057) (90,043) (13,784)
Cash flows from financing activities Proceeds from initial public offering of common stock, net of underwriters' discounts and commissions
- - 163,844
Proceeds from follow-on offering of common stock, net of underwriters' discounts and commissions
- 379,828 -
Payments on principal of finance leases (4,129) (4,167) (3,253)
Payments of deferred offering costs (59) (798) (2,603)
Proceeds from exercise of stock options 17,373 15,905 6,649
Taxes paid related to net share settlement of restricted stock units
(2,150) - (380)
Proceeds from Employee Stock Purchase Plan 14,758 11,254 7,064
Net cash provided by financing activities 25,793 402,022 171,321
Effects of changes in foreign currency exchange rates on cash, cash equivalents, and restricted cash
471 (25) (36)
Net increase (decrease) in cash, cash equivalents, and restricted cash
(74,441) 301,084 154,646
Cash, cash equivalents, and restricted cash at beginning of period
516,789 215,705 61,059
Cash, cash equivalents, and restricted cash at end of period
$ 516,789 $ 215,705 80
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Tab le of Contents Supplemental disclosures Cash paid for interest$ 114 $ 243 $ 324 Cash paid for income taxes 168 106 8 Purchases of fixed assets under finance leases - 2,364 2,639
Right-of-use assets obtained in exchange for new operating lease liabilities
35,415 12,173 -
Accrued purchases of property and equipment (including internal-use software)
1,080 1,155 992
Deferred offering costs, accrued but not yet paid - 60 12
Share-based compensation capitalized in internal-use software development costs
1,986 1,014 189
Fair value of shares issued as consideration for acquisition 25,872
- -
See notes to consolidated financial statements.
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SMARTSHEET INC.
Notes to Consolidated Financial Statements
1. Overview and Basis of Presentation
Description of business
Smartsheet Inc. (the "Company," "we," "our") was incorporated in the State of
Washington in 2005, and is headquartered in Bellevue, Washington . The Company is
a leading cloud-based platform for dynamic work, enabling teams and
organizations of all sizes to plan, capture, manage, automate, and report on
work at scale. Customers access their accounts online via a web-based interface
or a mobile application. Some customers also purchase the Company's professional
services, which primarily consist of consulting and training services.
Collapse of dual class common stock structure
On September 19, 2019 , all outstanding shares of the Company's Class B common
stock automatically converted into the same number of shares of the Company's
Class A common stock, pursuant to the terms of the Company's amended and
restated articles of incorporation (the "Articles"). No additional shares of
Class B common stock will be issued following this conversion.
The conversion occurred pursuant to the Articles, which provide that each share
of Class B common stock would convert automatically, without further action by
the Company, into one share of Class A common stock at the close of business on
the date on which the outstanding shares of Class B common stock represented
less than 15% of the aggregate number of shares of Class A common stock and
Class B common stock then outstanding. In accordance with the Articles, the
shares of Class B common stock that converted as a result of the automatic
conversion were retired and will not be reissued by the Company.
Initial public offering
On May 1, 2018 , we completed our initial public offering ("IPO") in which we
issued and sold 11,745,088 shares of Class A common stock, inclusive of the
over-allotment, at a public offering price of $15.00 per share. We received net
proceeds of $160.4 million after deducting underwriting discounts and
commissions of $12.3 million and other issuance costs of $3.4 million .
Immediately prior to the closing of our IPO, all shares of our convertible
preferred stock automatically converted into an aggregate of 68.5 million shares
of Class B common stock. In addition, we authorized for future issuance a total
of 500 million shares of each Class A and Class B common stock, and 10 million
shares of preferred stock.
Follow-on offering
On June 14, 2019 , we completed a public equity offering in which we issued and
sold 9,025,000 shares of Class A common stock, inclusive of the exercised
over-allotment option, at a public offering price of $43.50 per share. In
addition, 5,810,000 shares of the Company's common stock were sold by selling
shareholders of the Company, inclusive of the over-allotment, as part of this
offering. We received net proceeds of $379.0 million after deducting
underwriting discounts and commissions of $12.8 million and other issuance costs
of $0.9 million . We did not receive any proceeds from the sale of common stock
by selling shareholders.
Basis of presentation
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America ("GAAP"), and applicable rules and regulations of the Securities and
Exchange Commission ("SEC") regarding financial reporting. The Company's fiscal
year ends on January 31 .
The consolidated financial statements include the results of Smartsheet Inc. and
its wholly owned subsidiaries, which are located in the United States , the
United Kingdom , and Australia . All intercompany balances and transactions have
been eliminated upon consolidation.
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In the opinion of management, the information contained herein reflects all adjustments necessary for a fair presentation of our consolidated financial statements. All such adjustments are of a normal, recurring nature. Use of estimates The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. The Company bases its estimates on historical experience and on other assumptions that its management believes are reasonable under the circumstances. Actual results could differ from those estimates. The Company's most significant estimates and judgments involve revenue recognition with respect to the allocation of transaction consideration for the Company's offerings; determination of the amortization period for capitalized sales commission costs; capitalization of internal-use software development costs; valuation of assets and liabilities acquired as part of business combinations; and incremental borrowing rate estimates for operating leases, among others. InDecember 2019 , the novel COVID-19 coronavirus ("COVID-19") was reported inChina and inMarch 2020 theWorld Health Organization declared it a pandemic. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers and our sales cycles, and impact on our employees, all of which are uncertain and cannot be predicted. As of the date of issuance of the financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates, judgments or revise the carrying value of our assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to our financial statements. Liquidity The Company continues to be subject to the risks and challenges associated with companies at a similar stage of development, including the ability to raise additional capital to support future growth. Since inception throughJanuary 31, 2021 , the Company has incurred losses from operations and accumulated a deficit of$371.4 million . Historically, the Company has financed its operations primarily through payments received from customers for subscriptions and professional services, net proceeds we received through sales of equity securities, option exercises, contributions from our 2018 Employee Stock Purchase Plan ("ESPP"), finance leases, and interest income. The Company believes its existing cash will be sufficient to meet its working capital and capital expenditure needs for at least the next 12 months. 2. Summary of Significant Accounting Policies Segment information The Company operates as one operating segment. The Company's chief operating decision maker is its Chief Executive Officer, who reviews consolidated financial information for purposes of making operating decisions, assessing financial performance, and allocating resources. Revenue recognition The Company derives its revenue primarily from subscription services and professional services. Revenue is recognized when control of these services is transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services, net of any sales taxes. The Company determines revenue recognition through the following steps: •identification of the contract, or contracts, with a customer; •identification of the performance obligations in the contract; 83
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•determination of the transaction price;
•allocation of the transaction price to the performance obligations in the
contract; and
•recognition of revenue when, or as, the Company satisfies a performance
obligation.
Subscription revenue
Subscription revenue primarily consists of fees from customers for access to the
Company's cloud-based platform and involves a significant volume of
transactions. Subscription revenue is recognized on a ratable basis over the
subscription contract term, beginning on the date the access to the Company's
platform is provided, as no implementation work is required, if consideration
the Company is entitled to receive is probable of collection. Subscription
contracts generally have terms of one year or one month, are billed in advance,
and are non-cancelable. The subscription arrangements do not allow the customer
the contractual right to take possession of the platform; as such, the
arrangements are considered to be service contracts.
Certain of the Company's subscription contracts contain performance guarantees
related to service continuity. To date, refunds related to such guarantees have
been immaterial in all periods presented.
Professional services revenue
Professional services revenue primarily includes revenue recognized from fees
for consulting and training services. The Company's consulting services consist
of platform configuration and use case optimization, and are primarily invoiced
on a time and materials basis, monthly in arrears. Services revenue is
recognized over time, as service hours are delivered. Smaller consulting
engagements are, on occasion, provided for a fixed fee. These smaller consulting
arrangements are typically of short duration (less than three months). In these
cases, revenue is recognized over time, based on the proportion of hours of work
performed, compared to the total hours expected to complete the engagement.
Configuration and use case optimization services do not result in significant
customization or modification of the software platform or user interface.
Training services are billed in advance, on a fixed-fee basis, and revenue is
recognized after the training program is delivered, or after the customer's
right to receive training services expires.
Associated out-of-pocket travel expenses related to the delivery of professional
services are typically reimbursed by the customer. Out-of-pocket expense
reimbursements are recognized as revenue at the point in time, or as the
distinct performance obligation to which they relate is delivered. Out-of-pocket
expenses are recognized as cost of professional services as incurred.
On occasion, the Company sells its subscriptions to third-party resellers. The
price at which the Company sells to the reseller is typically discounted, as
compared to the price at which the Company would sell to an end customer, in
order to enable the reseller to realize a margin on the eventual sale to the end
customer. As our pricing to the reseller is fixed, and the Company does not have
visibility into the pricing provided by the reseller to the end customer, the
revenue is recorded net of any reseller margin.
Contracts with multiple performance obligations
Some of the Company's contracts with customers contain multiple performance
obligations. The Company accounts for individual performance obligations
separately, as they have been determined to be distinct, i.e., the services are
separately identifiable from other items in the arrangement and the customer can
benefit from them on its own or with other resources that are readily available
to the customer. The transaction price is allocated to the distinct performance
obligations on a relative stand-alone selling price basis. Stand-alone selling
prices are determined based on the prices at which the Company separately sells
subscription, consulting, and training services, and based on the Company's
overall pricing objectives, taking into consideration market conditions, value
of the Company's contracts, the types of offerings sold, customer demographics,
and other factors.
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Accounts receivable and allowance for doubtful accounts Accounts receivable are primarily comprised of trade receivables that are recorded at the invoice amount, net of an allowance for doubtful accounts. Subscription fees billed in advance of the related subscription term represent contract liabilities and are presented as accounts receivable and deferred revenues upon establishment of the unconditional right to invoice, typically upon signing of the non-cancelable service agreement. Our typical payment terms provide for customer payment within 30 days of the date of the contract. The allowance for doubtful accounts is based on the Company's estimated expected credit losses derived upon assessment of various factors including historical trends on collectibility, composition of accounts receivable by aging, current market conditions, reasonable and supportable forecasts of future economic conditions, and other factors. As ofJanuary 31, 2021 , our allowance for doubtful accounts reflects increased collectibility concerns stemming from the macroeconomic conditions resulting from the COVID-19 pandemic and may increase in future periods as we ascertain further impacts to our customers and business. The estimated credit losses are recorded to the allowance for doubtful accounts in the consolidated balance sheets, with an offsetting decrease in related deferred revenue and a reduction of revenue or charge to general and administrative expense in the consolidated statements of operations and comprehensive loss. Activity related to the Company's allowance for doubtful accounts was as follows (in thousands): January 31, 2021 2020 2019 Beginning balance$ 2,989 $ 1,234 $ 457 Additions 6,540 3,384 1,626 Write-offs (2,596) (1,629) (849) Ending balance$ 6,933 $ 2,989 $ 1,234 Deferred revenue Deferred revenue is recorded for subscription services contracts upon establishment of unconditional right to payment under a non-cancelable contract before transferring the related services to the customer. Deferred revenue for such services is amortized into revenue over time, as those subscription services are delivered. Similarly, the Company records deferred revenue for fixed-fee professional services upon establishment of an unconditional right to payment under a non-cancelable contract. Deferred revenue for training services is recognized as revenue upon delivery of training services or upon expiration of customer's right to receive such services. Deferred revenue for consulting services is recognized as revenue as hours of service are delivered to the customer. Deferred commissions The majority of sales commissions earned by the Company's sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions are paid on initial contracts and on any upsell contracts with a customer. No sales commissions are paid on customer renewals. Sales commissions are deferred and then amortized on a straight-line basis over a period of benefit that the Company has determined to be three years. The Company determined the period of benefit by taking into consideration its customer contracts, expected customer life, the expected life of its technology, and other factors. Amortization expense is included in sales and marketing expenses in the accompanying statements of operations and comprehensive loss. The Company evaluates the period of benefit and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. Overhead allocations The Company allocates shared costs, such as facilities (including rent, utilities, and depreciation on equipment shared by all departments), and information technology costs to all departments based on headcount. As such, allocated shared costs are reflected in each cost of revenue and operating expense category. 85
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Cash, cash equivalents, and short-term investments The Company considers all highly liquid investments with an original maturity of three months or less from date of purchase to be cash equivalents. Investments with terms greater than three months but less than or equal to twelve months are included in short-term investments. Interest income earned on cash, cash equivalents, and short-term investments is recorded in interest income in the accompanying consolidated statements of operations and comprehensive loss. Restricted cash Restricted cash as ofJanuary 31, 2021 primarily consisted of$0.1 million related to Australian employee ESPP contributions. Restricted cash as ofJanuary 31, 2020 consisted of$0.9 million related to security deposits for the Company'sBellevue ,Boston ,London , andEdinburgh leases. Restricted cash as ofJanuary 31, 2019 consisted of$1.8 million related to collateral for irrevocable letters of credit (entered into during the year endedJanuary 31, 2019 ) for additional office space inBellevue , and$0.8 million primarily related to security deposits for the Company'sBellevue ,Boston ,London , andEdinburgh leases. Cash as reported on the consolidated statements of cash flows includes the aggregate amounts of cash and cash equivalents and restricted cash as shown on the consolidated balance sheets. Cash as reported on the consolidated statements of cash flows consists of the following (in thousands): January 31, 2021 2020 2019 Cash and cash equivalents$ 442,200
130 - -
Restricted cash 18 865 2,620
Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows
$ 442,348
Business combinations When we acquire a business, the purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of the assets acquired and liabilities assumed, especially with respect to the identifiable intangible assets. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital, the cost savings expected to be derived from acquiring an asset, its expected remaining economic useful life, and the appropriate discount rate to employ in the valuation analyses in order to properly account for the risk associated with the asset's expected future cash flows. These estimates are inherently uncertain. During the measurement period, which may be up to one year from the acquisition date, adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed may be recorded, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations and comprehensive loss. Acquisition costs, such as legal and consulting fees, are expensed as incurred.Goodwill and acquired intangible assets 86
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The Company evaluates goodwill for impairment at the reporting unit level on an annual basis (September 1 ), or whenever events or changes in circumstances indicate that impairment may exist. Events or changes in circumstances which could trigger an impairment review include, but are not limited to, a significant adverse change in customer demand or business climate or a significant decrease in expected cash flows. When evaluating goodwill for impairment, the Company may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If the Company does not perform a qualitative assessment, or if the Company determines that it is not more likely than not that the fair value of the reporting unit exceeds its carrying amount, the Company calculates the estimated fair value of the reporting unit. If the carrying amount of the reporting unit exceeds the estimated fair value, an impairment charge is recorded to reduce the carrying value to the estimated fair value. No impairment charges were recorded for the years endedJanuary 31, 2021 , 2020, or 2019. Acquired intangible assets consist of identifiable intangible assets, primarily software technology and customer relationships, resulting from our acquisitions. Intangible assets are recorded at fair value on the date of acquisition and amortized over their estimated useful lives. Property and equipment Property and equipment are recorded at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the following estimated useful lives: Computer equipment 3 years Computer software 3 years Furniture and fixtures 5-7 years Leasehold improvements are amortized over the shorter of the expected useful lives of the assets or the related lease term. Maintenance and repairs that do not improve or extend the lives of the respective assets are expensed as incurred. Internal-use software development costs The Company capitalizes certain qualifying costs incurred during the application development stage in connection with the development of internal-use software. Costs related to preliminary project activities and post-implementation activities are expensed in research and development ("R&D") as incurred. R&D expenses consist primarily of employee-related costs, hardware- and software-related costs, allocated overhead, costs of outside services used to supplement our internal staff, and travel-related costs. Internal-use software costs of$9.5 million were capitalized in the year endedJanuary 31, 2021 , all of which related to costs incurred during the application development stage of software development for the Company's platform to which subscriptions are sold. Internal-use software costs of$8.1 million were capitalized in the year endedJanuary 31, 2020 , of which$5.8 million related to costs incurred during the application development stage of software development for the Company's platform to which subscriptions are sold. Capitalized internal-use software costs are included within property and equipment, net on the consolidated balance sheets, and are amortized over the estimated useful life of the software, which is typically three years. The related amortization expense is recognized in the consolidated statements of operations and comprehensive loss within the function that receives the benefit of the developed software. Amortization expense of capitalized internal-use software costs totaled$3.6 million ,$2.3 million and$1.0 million for the years endedJanuary 31, 2021 , 2020 and 2019, respectively. Leases We determine if an arrangement is a lease at inception, and leases are classified at commencement as either operating or finance leases. 87
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Right-of-use ("ROU") assets and lease liabilities are recognized at commencement
date based on the present value of the future minimum lease payments over the
lease term. ROU assets also include any lease payments made. Operating lease ROU
assets are presented separately in long-term assets and finance lease ROU assets
are included in property and equipment, net on our consolidated balance sheets.
As our operating leases do not provide an implicit rate, we use our incremental
borrowing rate based on information available at the commencement date in
determining the present value of future payments. This rate is an estimate of
the collateralized borrowing rate we would incur on our future lease payments
over a similar term based on the information available at commencement date. Our
lease terms may include options to extend or terminate the lease when it is
reasonably certain that we will exercise that option. At January 31, 2021 , we
did not include any options to extend leases in our lease terms as we were not
reasonably certain to exercise them. The Company's lease agreements do not
contain residual value guarantees or covenants.
We utilize certain practical expedients and policy elections available under the
lease accounting standard. Leases with a term of one year or less are not
recognized on our consolidated balance sheets; we recognize lease expense for
these leases on a straight-line basis over the lease term. Additionally, we have
elected to include non-lease components with lease components for contracts
containing real estate leases for the purpose of calculating lease ROU assets
and liabilities, to the extent that they are fixed. Non-lease components that
are not fixed are expensed as incurred as variable lease payments. Our real
estate operating leases typically include non-lease components such as
common-area maintenance costs.
Impairment of long-lived assets
Long-lived assets, such as property and equipment, intangible assets, operating
lease ROU assets, and internal-use software development costs, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset group may not be recoverable. Recoverability of an
asset group is measured by comparing the carrying amount to the estimated
undiscounted future cash flows expected to be generated. If the carrying amount
exceeds the undiscounted cash flows, the assets are determined to be impaired
and an impairment charge is recognized as the amount by which the carrying
amount exceeds its fair value. No significant impairments of long-lived assets
were recorded during any of the periods presented.
Self-funded health insurance
In December 2017 , the Company elected to partially self-fund its health
insurance plan. To reduce its risk related to high-dollar claims, the Company
maintains individual and aggregate stop-loss insurance. The Company estimates
its exposure for claims incurred but not paid at the end of each reporting
period and uses historical claims data to estimate its self-insurance liability.
As of January 31, 2021 and 2020, the Company's net self-insurance reserve
estimate was $1.3 million and $0.9 million , respectively, included in other
accrued liabilities in the accompanying consolidated balance sheets.
Advertising expenses
Advertising and marketing costs are expensed as incurred, and are included in
sales and marketing expense in the consolidated statements of operations and
comprehensive loss. Advertising and marketing expenses, inclusive of lead
generation costs, were $31.6 million , $35.5 million , and $20.6 million for the
years ended January 31, 2021 , 2020, and 2019, respectively.
Deferred offering costs
Deferred offering costs of $3.4 million , primarily consisting of legal,
accounting, and other fees related to the IPO, were offset against proceeds upon
the closing of the IPO on May 1, 2018 . Deferred offering costs of $0.9 million
were offset against proceeds upon the closing of the follow-on offering on June
14, 2019 .
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Convertible preferred stock warrant liability The Company classified its warrant to purchase convertible preferred stock as a liability. The Company adjusted the carrying value of the warrant liability to fair value at the end of each reporting period utilizing the Black-Scholes option pricing model. The convertible preferred stock warrant liability was included on the Company's consolidated balance sheets and its revaluation was recorded as an expense in other income (expense), net on the consolidated statement of operations and comprehensive loss for the fiscal year ended 2019. Upon the closing of the IPO onMay 1, 2018 , the related warrant liability was reclassified to additional paid-in capital. Share-based compensation The Company measures and recognizes compensation expense for all share-based awards granted to employees and directors, based on the estimated fair value of the award on the date of grant. Expense is recognized on a straight-line basis over the vesting period of the award based on the estimated portion of the award that is expected to vest. The Company uses the Black-Scholes option pricing model to measure the fair value of stock option awards when they are granted. The Company makes several estimates in determining share-based compensation and these estimates generally require significant analysis and judgment to develop. Income taxes Income taxes are accounted for using the asset and liability method. Under this method, the Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The Company records a valuation allowance to reduce deferred tax assets to an amount for which realization is more likely than not. The Company evaluates and accounts for uncertain tax positions using a two-step approach. The first step is to evaluate if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company reflects interest and penalties related to income tax liabilities as a component of income tax expense. Concentrations of risk and significant customers Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash, cash equivalents, and accounts receivable. The Company maintains its cash accounts with financial institutions where deposits, at times, exceed theFederal Deposit Insurance Corporation ("FDIC") limits. No individual customer represented more than 10% of accounts receivable as ofJanuary 31, 2021 or 2020. No individual customer represented more than 10% of revenue for the years endedJanuary 31, 2021 , 2020, or 2019. Net loss per share Prior to the IPO, holders of the Company's convertible preferred stock participated in dividends with holders of the Company's common stock, but they were not contractually required to share in net losses. Accordingly, during those periods of income, the Company was required to use the two-class method of calculating earnings per share. The two-class method requires that earnings per share be calculated separately for each class of security. As the Company incurred losses during the periods presented, the Company used the methods described below to calculate net loss per share. The Company calculates basic net loss per share by dividing net loss by the weighted-average number of the Company's common stock shares outstanding during the respective period. Net loss is net loss minus convertible preferred stock dividends declared, of which there were none during the periods presented. 89
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The Company calculates diluted net loss per share using the treasury stock and
if-converted methods, which consider the potential impacts of outstanding stock
options, restricted stock units ("RSUs"), shares issuable pursuant to our ESPP,
warrants, and convertible preferred stock. Under these methods, the numerator
and denominator of the net loss per share calculation are adjusted for these
securities if the impact of doing so increases net loss per share. During the
periods presented, the impact is to decrease net loss per share and therefore
the Company is precluded from adjusting its calculation for these securities. As
a result, diluted net loss per share is calculated using the same formula as
basic net loss per share.
Recently adopted accounting pronouncements
We adopted Accounting Standard Update ("ASU") 2016-02, Leases - Topic 842 ("ASC
842") on February 1, 2019 using the optional transition method described in ASU
2018-11, Leases - Targeted Improvements. Under the optional transition method,
we recognized the cumulative effect of initially applying the guidance as an
adjustment to the operating lease ROU assets and operating lease liabilities on
our consolidated balance sheet on February 1, 2019 without retrospective
application to comparative periods.
The new lease standard requires lessees to recognize ROU assets and lease
liabilities on the balance sheet for operating leases, and also requires
additional quantitative and qualitative disclosures to enable users of the
financial statements to assess the amount, timing, and uncertainty of cash flows
arising from leases. In adopting ASC 842, we utilized certain practical
expedients available under the standard. These practical expedients include
waiving reassessment of conclusions reached under the previous lease standard as
to whether contracts contain leases and not recording ROU assets or lease
liabilities for leases with terms of 12 months or less.
As a result of implementing this guidance, we recognized a $53.4 million net
operating ROU asset and a $55.3 million operating lease liability, inclusive of
$1.9 million previously classified as deferred rent, in our consolidated balance
sheet as of February 1, 2019 . The adoption of ASC 842 did not have an impact on
our accumulated deficit on our consolidated balance sheet as of February 1, 2019
and is not expected to have a material impact on our consolidated statements of
operations and comprehensive loss. See Note 12, Leases, for additional
information regarding our leases.
In June 2016 , the FASB issued ASU 2016-13, Measurement of Credit Losses on
Financial Instruments, and has amended the standard thereafter, which modifies
the accounting methodology for most financial instruments. The guidance
establishes a new "expected loss model" that requires entities to estimate
current expected credit losses on financial instruments by using all practical
and relevant information. Additionally, any expected credit losses are to be
reflected as allowances rather than reductions in the amortized cost of
available-for-sale debt securities. The Company adopted the standard effective
February 1, 2020 . The adoption did not have a material effect on our
consolidated financial statements.
In August 2018 , the FASB issued ASU 2018-15, Customer's Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service
Contract, which aligns the requirements for capitalizing implementation costs
incurred in a hosting arrangement that is a service contract with the
requirements for capitalizing implementation costs incurred to develop or obtain
internal-use software. The Company adopted the standard effective February 1,
2020 on a prospective basis. During the year ended January 31, 2021 , a total of
$2.0 million of costs related to cloud-computing arrangements were capitalized
and were included in other long-term assets on the consolidated balance sheets
as of January 31, 2021 .
In December 2019 , the FASB issued ASU 2019-12, Simplifying the Accounting for
Income Taxes, which simplifies certain aspects of accounting for income taxes.
The guidance is effective for interim and annual reporting periods beginning
after December 15, 2020 , and early adoption is permitted. The adoption did not
have a material effect on the Company's consolidated financial statements.
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3. Revenue from Contracts with Customers During the years endedJanuary 31, 2021 , 2020, and 2019 the Company recognized$155.2 million ,$93.0 million , and$55.3 million of subscription revenue, respectively, and$3.4 million ,$2.1 million , and$1.5 million of professional services revenue, respectively, which were included in the deferred revenue balance as ofJanuary 31, 2020 , 2019, and 2018, respectively. As ofJanuary 31, 2021 , approximately$259.1 million of revenue, including amounts already invoiced and amounts contracted but not yet invoiced, was expected to be recognized from remaining performance obligations, of which$253.4 million related to subscription services and$5.7 million related to professional services. Approximately 91% of revenue related to remaining performance obligations is expected to be recognized in the next 12 months. 4. Deferred Commissions Deferred commissions were$60.5 million and$48.3 million as ofJanuary 31, 2021 and 2020, respectively. Amortization expense for deferred commissions was$30.7 million ,$19.8 million , and$10.8 million for the years endedJanuary 31, 2021 , 2020, and 2019, respectively. Deferred commissions are amortized over a period of three years and the amortization expense is recorded in sales and marketing on the Company's consolidated statements of operations and comprehensive loss. 5. Net Loss Per Share The following tables present calculations for basic and diluted net loss per share (in thousands, except per share data): Year Ended January 31, 2021 2020 2019 Numerator: Net loss$ (114,979) $ (95,940) $ (53,885) Denominator:
Weighted-average common shares outstanding 120,663 112,991
83,141
Net loss per share, basic and diluted
The following outstanding shares of common stock equivalents (in thousands) as
of the periods presented were excluded from the computation of diluted net loss
per share for the periods presented because the impact of including them would
have been anti-dilutive:
January 31,
2021 2020 2019Shares subject to outstanding common stock awards 11,299
12,215 13,297
Shares issuable pursuant to the Employee Stock
Purchase Plan 162 165 134
Total potentially dilutive shares 11,461 12,380 13,431
6. Fair Value Measurements
Assets and liabilities recorded at fair value in the consolidated financial
statements are categorized based upon the level of judgment associated with the
inputs used to measure their fair value. The lowest level of significant input
determines the placement of the fair value measurement within the following
hierarchical levels:
•Level 1: Observable inputs that reflect quoted prices (unadjusted) for
identical assets or liabilities in active markets.
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•Level 2: Observable inputs, other than Level 1 prices, such as quoted prices
for similar assets or liabilities, quoted prices in markets that are not active,
or other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities.
•Level 3: Unobservable inputs that are supported by little or no market
activity.
Assets and liabilities measured at fair value on a recurring basis
The following tables present information about the Company's financial assets
and liabilities that are measured at fair value and indicates the fair value
hierarchy of the valuation inputs used (in thousands):
January 31, 2021
Level 1 Level 2 Level 3 Total
Assets:
Cash equivalents:
Money market funds $ 378,281 $ - $ - $ 378,281
Total assets $ 378,281 $ - $ - $ 378,281
January 31, 2020
Level 1 Level 2 Level 3 Total
Assets:
Cash equivalents:
Money market funds $ 279,160 $ - $ - $ 279,160
Certificates of deposit - 50,585 - 50,585
Short-term investments:
Certificates of deposit - 50,532 - 50,532
Total assets $ 279,160 $ 101,117 $ - $ 380,277
The carrying amounts of certain financial instruments, including cash held in
banks, accounts receivable, and accounts payable, approximate fair value due to
their short-term maturities and are excluded from the fair value tables above.
It is the Company's policy to recognize transfers of assets and liabilities
between levels of the fair value hierarchy at the end of a reporting period. The
Company does not transfer out of Level 3 and into Level 2 until observable
inputs become available and reliable. There were no transfers between fair value
measurement levels during the years ended January 31, 2021 or 2020.
Assets and liabilities measured at fair value on a non-recurring basis
See Note 8, Business Combinations, and Note 9, Goodwill and Net Intangibles, of
these notes to our consolidated financial statements for fair value measurements
of certain assets and liabilities recorded at fair value on a non-recurring
basis.
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7. Property and Equipment, Net As of the dates specified below, property and equipment consisted of the following (in thousands):
January 31,
2021 2020
Computer equipment $ 9,630 $ 22,513
Computer software, purchased and developed 21,876 14,673
Furniture and fixtures 7,662 6,712
Leasehold improvements 5,500 4,501
Total property and equipment 44,668 48,399
Less: accumulated depreciation (16,055) (21,418)
Total property and equipment, net $ 28,613 $ 26,981
Depreciation expense was$11.0 million ,$10.7 million , and$7.2 million for the years endedJanuary 31, 2021 , 2020, and 2019, respectively. As ofJanuary 31, 2021 , we had no equipment under finance leases. As ofJanuary 31, 2020 , property and equipment included$14.2 million of data center equipment purchased under finance leases and related accumulated depreciation of$10.2 million . Depreciation expense related to finance leases, which is included in total depreciation expense described immediately above, was$3.1 million ,$4.3 million , and$3.6 million for the years endedJanuary 31, 2021 , 2020, and 2019, respectively. These leased assets are included in the computer equipment category in the table above. 8. Business Combinations Brandfolder OnSeptember 14, 2020 , we acquired 100% of the outstanding equity ofBrandfolder, Inc. ("Brandfolder"), aDelaware corporation, pursuant to an Agreement and Plan of Merger (the "Brandfolder Merger Agreement"). Combining Brandfolder capabilities withSmartsheet creates dynamic solutions that manage workflows around content and collaboration. The Company has included the financial results of Brandfolder in our consolidated financial statements from the acquisition date. We incurred acquisition costs of$1.0 million during the year endedJanuary 31, 2021 . These costs included legal and accounting fees and other costs directly related to the acquisition of Brandfolder and are recognized within general and administrative expenses in the consolidated statements of operations and comprehensive loss. The acquisition date fair value of the consideration transferred for Brandfolder was approximately$152.5 million , which consisted of the following (in thousands): Fair Value Cash$ 126,589 Class A Common Stock 25,872 Total$ 152,461 The fair value of the Class A Common Stock issued as part of the consideration paid for Brandfolder was determined on the basis of the closing market price ofSmartsheet's common shares on the acquisition date. Of the cash paid at closing,$0.8 million is held in a third-party escrow account for a 12-month period after closing to secure our indemnification rights under the Brandfolder Merger Agreement. Additionally, we granted certain continuing employees of Brandfolder restricted stock awards with service conditions, which total 96,620 shares of our Class A common stock with an aggregate grant date fair value of$4.5 million that will be accounted for as post-acquisition share-based compensation expense over the vesting period. We incurred share-based compensation expense related to these awards of$0.5 million during the year endedJanuary 31, 2021 . 93
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We accounted for the transaction as a business combination using the acquisition
method of accounting. We allocated the purchase price to the tangible and
identifiable intangible assets acquired and liabilities assumed based on their
respective estimated fair values on the acquisition date. Fair values were
determined using income and cost approaches. The fair value measurements of the
intangible assets were based primarily on significant unobservable inputs and
thus represent a Level 3 measurement as defined in ASC 820. The following table
summarizes the preliminary acquisition date fair values of assets acquired and
liabilities assumed as of the date of acquisition (in thousands):
September 14, 2020
Cash $ 2,530
Accounts receivable 2,649
Contract assets 1,620
Right-of-Use assets 895
Other assets 991
Intangible assets 45,270
Goodwill 109,108
Accounts payable, accrued expenses and other current liabilities (1,411)
Deferred revenue
(4,655)
Lease liabilities, non-current (522) Net deferred tax liability (4,014) Total $ 152,461 The excess purchase price consideration was recorded as goodwill, and is primarily attributable to the acquired assembled workforce and expanded market opportunities. The purchase price allocation was prepared on a preliminary basis and may be subject to further adjustments as additional information becomes available concerning the fair value of the assets acquired and liabilities assumed. The primary areas that remain preliminary as ofJanuary 31, 2021 relate to the fair values of intangible assets acquired, certain tangible assets and liabilities acquired, income taxes and residual goodwill. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date. The goodwill recognized upon acquisition is not expected to be deductible forU.S. federal income tax purposes. We engaged a third-party valuation specialist to aid our analysis of the fair value of the acquired intangibles. All estimates, key assumptions, and forecasts were either provided by or reviewed by us. While we chose to utilize a third-party valuation specialist for assistance, the fair value analysis and related valuations reflect the conclusions of management and not those of any third party. The estimated useful lives and fair values of the identifiable intangible assets at acquisition date were as follows (dollars in thousands): Fair Value Expected Useful Life Discount Rate Software technology$ 17,400 5 years 10.0 % Customer relationships 16,590 7 years 11.0 % Customer relationships - reseller 7,280 7 years 13.0 % Trade name 4,000 9 years 13.8 % Total intangible assets$ 45,270
The identifiable intangible assets were valued as follows:
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Software technology - we valued the finite-lived software technology using a
relief-from-royalty method under the income approach. This method estimates fair
value by forecasting avoided royalties, reducing them by maintenance-related
research and development expenses and taxes, and discounting the resulting net
cash flows to a present value using an appropriate discount rate. We applied
judgment which involved the use of significant assumptions with respect to the
future revenue forecast, technology life, royalty rate, and the discount rate.
Customer relationships - we valued the finite-lived customer relationships using
the multi-period excess earnings method. This method involves forecasting the
net earnings expected to be generated by the asset, reducing them by appropriate
returns on contributory assets, and then discounting the resulting net cash
flows to a present value using an appropriate discount rate. We applied judgment
which involved the use of the significant assumptions with respect to the future
cash flows forecast, base year annual recurring revenue, customer churn rate,
and the discount rate.
Customer relationships - reseller - we valued the finite-lived reseller-related
customer relationships using an incremental cash flow approach. This method
involves forecasting the incremental revenues expected to be generated by having
the existing reseller relationship in place at acquisition, reducing them by
appropriate operating expenses, taxes, and returns on contributory assets, and
then discounting the resulting net cash flows to a present value using an
appropriate discount rate. We applied judgment which involved the use of
significant assumptions with respect to the future cash flows forecast and the
discount rate.
Trade name - we valued the finite-lived trade name using the relief-from-royalty
method under the income approach. This method involves forecasting avoided
royalties, reducing them by income taxes, and then discounting the resulting net
cash flows to a present value using an appropriate discount rate. We applied
judgment which involved the use of significant assumptions with respect to our
income forecast.
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The related software technology amortization expense is recognized over its useful life within cost of revenues in the consolidated statements of operations and comprehensive loss. The amortization expense related to customer relationships and trade name intangible assets are recognized over their useful lives within sales and marketing in our consolidated statements of operations and comprehensive loss. The weighted-average amortization period of the acquired intangible assets is 6.4 years. The amounts of revenue and earnings of Brandfolder included in the Company's consolidated statements of operations and comprehensive loss from the acquisition date ofSeptember 14, 2020 toJanuary 31, 2021 are as follows (in thousands): January 31, 2021 Revenue $ 5,683 Loss before income tax benefit (4,758) The following unaudited pro forma financial information is for illustrative purposes only and summarizes the combined results of operations forSmartsheet Inc. and Brandfolder, as though the companies were combined as of the beginning of the Company's fiscal year 2020. The unaudited pro forma financial information was as follows (in thousands): January 31, 2021 2020 Revenue$ 397,160 $ 278,200
Loss before income tax provision (benefit) (122,148) (112,351) Net loss
(122,410) (107,374)
The pro forma financial information for all periods presented above has been
calculated after adjusting the results of Brandfolder to reflect the business
combination accounting effects resulting from this acquisition. It includes pro
forma adjustments related to the amortization of acquired intangible assets,
acquisition costs, share-based compensation expense, alignment of accounting
policies, deferred revenue fair value adjustment, and the related income tax
effects. The unaudited pro forma results have been prepared based on estimates
and assumptions, which we believe are reasonable; however, they are not
necessarily indicative of the consolidated results of operations had the
acquisition occurred on February 1, 2019 , or of future results of operations.
10,000ft
On May 1, 2019 , we acquired 100% of the outstanding equity of Artefact Product
Group, LLC ("Artefact Product Group " or "10,000ft"), a Washington limited
liability company, pursuant to an Agreement and Plan of Merger (the "Merger
Agreement"). The acquisition was complementary to our existing product
capabilities and accelerated our time to market for a resource planning software
solution. The aggregate consideration paid in exchange for all of the
outstanding equity interests of Artefact Product Group was approximately $27.8
million in cash, after a working capital adjustment of $0.2 million . Of the cash
paid at closing, after a reduction for the working capital adjustment, a total
of $2.8 million was held in a third-party escrow account to secure our
indemnification rights under the 10,000ft Merger Agreement. The $2.8 million was
released from escrow during the three months ended July 31, 2020 .
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We accounted for the transaction as a business combination using the acquisition method of accounting. We allocated the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition date. Excess purchase price consideration was recorded as goodwill, and is primarily attributable to the acquired assembled workforce and expected growth from the expansion of the acquired product offerings and customer base. The goodwill recognized upon acquisition is expected to be deductible forU.S. federal income tax purposes. We engaged a third-party valuation specialist to aid our analysis of the fair value of the acquired intangibles. All estimates, key assumptions, and forecasts were either provided by or reviewed by us. While we chose to utilize a third-party valuation specialist for assistance, the fair value analysis and related valuations reflect the conclusions of management and not those of any third party. 10,000ft's results of operations have been included in the Company's consolidated results of operations since the acquisition date. The major classes of assets and liabilities to which the Company allocated the purchase price, net of the$0.2 million working capital adjustment, were as follows (in thousands): May 1, 2019 Cash$ 1,150 Current assets 801 Intangible assets 16,090 Goodwill 11,001 Current liabilities (180) Deferred revenue (1,030) Total$ 27,832
The estimated useful lives and fair values of the identifiable intangible assets at acquisition date were as follows (dollars in thousands):
Fair Value Expected Useful Life
Software technology $ 8,000 5 years
Customer relationships 7,990 8 years
Trade name 100 32 months
Total intangible assets $ 16,090 The significant identified intangible assets, software technology and customer relationships, were valued as follows:
Software technology - we valued the finite-lived software technology using the
relief-from-royalty method under the income approach. This method reflects the
present value of the projected cash flows that are expected to be generated from
the licensing of the asset to third parties. We applied judgment which involved
the use of significant assumptions with respect to the base year revenue and the
royalty rate.
Customer relationships - we valued the finite-lived customer relationships using
the multi-period excess-earnings method. This method involves forecasting the
net earnings to be generated by the asset, reducing them by appropriate returns
on contributory assets, and then discounting the resulting net returns to a
present value using an appropriate discount rate. We applied judgment which
involved the use of the significant assumption of the royalty rate impacting the
returns on contributory assets for software technology.
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Fiscal 2019 Acquisition OnJanuary 11, 2019 ,Smartsheet Inc. purchased 100% of the issued and outstanding capital stock ofTernPro, Inc. in an all-cash transaction for a total purchase price of$6.0 million . As a result of this acquisition, the Company recorded goodwill of$5.2 million ; identifiable intangible assets of$0.8 million , of which$0.5 million related to acquired software technology, and$0.3 million related to customer relationships; and other net assets of less than$0.1 million . In addition, the Company recorded a long-term liability of$1.0 million related to a holdback payable on the 18-month anniversary of the closing date. As ofJanuary 31, 2020 , the liability of$1.0 million was classified as short-term, and was included within other accrued liabilities on the consolidated balance sheet. 9.Goodwill and Net Intangible Assets The changes in the carrying amount of goodwill during the years endedJanuary 31, 2021 and 2020 were as follows (in thousands):Goodwill balance as ofJanuary 31, 2019 $
5,496
Addition - acquisition of 10,000ft 11,181
Working capital adjustment - acquisition of 10,000ft (180)
Goodwill balance as ofJanuary 31, 2020
16,497
Addition - acquisition of Brandfolder 109,381
Measurement period adjustment - acquisition of Brandfolder (273)
Goodwill balance as ofJanuary 31, 2021 $
125,605
No goodwill impairments were recorded during the years endedJanuary 31, 2021 , 2020, or 2019. The following table presents the components of net intangible assets (in thousands): As of January 31, 2021 As of January 31, 2020 Gross Gross Carrying Accumulated Net Carrying Carrying Accumulated Net Carrying Amount Amortization Amount Amount Amortization Amount Acquired software technology$ 25,400 $ (4,115) $ 21,285 $ 9,866 $ (2,325) $ 7,541 Acquired customer relationships 32,150 (3,235) 28,915 8,350 (900) 7,450 Trade names 4,100 (233) 3,867 100 (28) 72 Patents 170 (111) 59 170 (91) 79 Domain name 13 - 13 13 - 13 Total$ 61,833 $ (7,694) $ 54,139 $ 18,499 $ (3,344) $ 15,155
The components of intangible assets acquired as of the periods presented were as follows (in thousands):
As of January 31, 2021 As of January 31, 2020
Net Carrying Weighted Average Net Carrying Weighted Average
Amount Life (Years) Amount Life (Years)
Acquired software technology $ 21,285 4.3 $ 7,541 4.0
Acquired customer relationships 28,915 6.5 7,450 7.1
Trade names 3,867 8.6 72 1.9
Total $ 54,067 5.8 $ 15,063 5.5
Amortization expense related to intangible assets was $6.3 million , $2.8
million , and $0.5 million for the years ended January 31, 2021 , 2020, and 2019,
respectively. As of January 31, 2021 , estimated remaining amortization expense
for the finite-lived intangible assets by fiscal year is as follows (in
thousands):
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2022 $ 10,074
2023 9,942
2024 9,942
2025 8,741
2026 7,023
Thereafter 8,404
Total $ 54,126
10. Share-Based Compensation
The Company has issued incentive and non-qualifying stock options to employees
and non-employee directors under the 2005 Stock Option/Restricted Stock Plan
("2005 Plan"), the 2015 Equity Incentive Plan ("2015 Plan"), and the 2018 Equity
Incentive Plan ("2018 Plan").
The Company has also issued RSUs to employees pursuant to the 2015 Plan and the
2018 Plan.
During the year ended January 31, 2021 , the Company issued restricted stock
awards ("RSAs") to certain Brandfolder employees subject to vesting conditions.
These shares were issued in a private placement transaction. As vesting of these
RSAs is dependent on continuous employment, these were not considered part of
the purchase price in accounting for the acquisition.
Employee stock options are granted with exercise prices at the fair value of the
underlying common stock on the grant date, in general vest based on continuous
employment over four years, and expire 10 years from the date of grant. Employee
RSUs are measured based on the grant date fair value of the awards and in
general vest based on continuous employment over four years. Shares offered
under our equity plans are authorized but unissued. The RSAs are measured based
on the grant date fair value of the awards and vest over a three-year period.
Stock options
The following table includes a summary of the option activity during the year
ended January 31, 2021 :
Weighted-Average Aggregate
Weighted-Average Remaining Contractual Intrinsic Value
Options Outstanding Exercise Price Term (years) (in thousands)
Outstanding at January 31, 2020 9,076,671 $ 8.18 7.3 $ 365,766
Granted 533,403 44.85
Exercised (2,868,335) 5.94
Forfeited or canceled (208,265) 11.05
Outstanding at January 31, 2021 6,533,474 12.07 6.4 376,789
Exercisable at January 31, 2021 4,479,472 6.92 5.9 281,419
Vested and expected to vest at January
31, 2021 6,451,907 11.81 6.4 373,727
The weighted-average grant date fair value per share of stock options granted
during the years ended January 31, 2021 , 2020, and 2019 was $18.95 , $17.11 , and
$4.66 , respectively. The total grant date fair value of stock options vested was
$11.1 million , $11.1 million , and $5.8 million during the years ended
January 31, 2021 , 2020, and 2019, respectively.
The intrinsic value of options exercised was $141.3 million , $136.6 million , and
$66.7 million during the years ended January 31, 2021 , 2020, and 2019,
respectively.
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Restricted stock units The following table includes a summary of the RSU activity during the year endedJanuary 31, 2021 : Number of Shares Weighted-Average Underlying Grant-Date Fair Value Outstanding RSUs per RSU Outstanding at January 31, 2020 3,138,330 $ 39.32 Granted 3,438,377 43.19 Vested (1,225,145) 39.27 Forfeited or canceled (586,322) 39.10 Outstanding at January 31, 2021 4,765,240 42.15 An RSU award entitles the holder to receive shares of the Company's common stock as the award vests, which is based on continued service. Non-vested RSUs do not have non-forfeitable rights to dividends or dividend equivalents. The weighted-average grant date fair value of RSUs granted during the years endedJanuary 31, 2021 , 2020, and 2019 was$43.19 ,$41.62 , and$26.12 , respectively. Restricted stock awards The following table includes a summary of RSA activity during the year endedJanuary 31, 2021 : Weighted-Average Grant-Date Fair Number of Shares Value per Share Outstanding at January 31, 2020 - $ - Granted 96,620 46.93 Vested - - Forfeited or canceled (4,302) 46.93 Outstanding at January 31, 2021 92,318 46.93 The weighted-average grant date fair value of RSAs granted during the year endedJanuary 31, 2021 was$46.93 . 2018 Employee Stock Purchase Plan InApril 2018 , we adopted our ESPP. The ESPP became effective onApril 26, 2018 , with the effective date of our IPO. Under our ESPP, eligible employees are able to acquire shares of our common stock by accumulating funds through payroll deductions of up to 15% of their compensation, subject to plan limitations. Purchases are accomplished through participation in discrete offering periods. Each offering period is six months (commencing eachMarch 25 andSeptember 25 ) and consists of one six-month purchase period, unless otherwise determined by our board of directors or our compensation committee. The purchase price for shares of our common stock purchased under our ESPP is 85% of the lesser of the fair market value of our common stock on (i) the first trading day of the applicable offering period or (ii) the last trading day of the purchase period in the applicable offering period. The following table includes a summary of shares available for issuance under our 2018 Plan and our 2018 ESPP during the year endedJanuary 31, 2021 : 100
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Shares Available for Issuance
2018 Plan 2018 ESPP
Balance at January 31, 2020 10,921,562 2,438,717
Authorized 5,909,708 1,181,942
Granted (3,971,780) (386,143)
Forfeited 794,587 -
Balance at January 31, 2021 13,654,077 3,234,516
The aggregate number of shares reserved for issuance under our ESPP will increase automatically onFebruary 1 of each of the first 10 calendar years after the first offering date under the ESPP by the number of shares equal to 1% of the total outstanding shares of our Class A common stock and Class B common stock as of the immediately precedingJanuary 31 (rounded to the nearest whole share) or such lesser number of shares as may be determined by our board of directors in any particular year. The aggregate number of shares issued over the term of our ESPP, subject to stock-splits, recapitalizations or similar events, may not exceed 20,400,000 shares of our Class A common stock. As ofJanuary 31, 2021 ,$6.8 million has been withheld on behalf of employees for a future purchase under the ESPP and is recorded in accrued compensation and related benefits in the consolidated balance sheet. Valuation assumptions The fair value of employee stock options and ESPP purchase rights was estimated using a Black-Scholes option pricing model with the following assumptions: Year Ended January 31, 2021 2020 2019 Employee Stock Options Risk-free interest rate 0.6%-0.7% 2.3%-2.6% 2.7%-2.9% Expected volatility 43.0%-43.5% 42.3%-42.5% 40.2%-40.8% Expected term (in years) 6.25 6.19-6.25 6.25 Expected dividend yield - % - % - % Employee Stock Purchase Plan Risk-free interest rate 0.1%-1.9% 1.9%-2.5% 2.0%-2.4% Expected volatility 39.9%-68.0% 38.3%-51.1% 38.3%-42.2% Expected term (in years) 0.50 0.49-0.50 0.33-0.49 Expected dividend yield - % - % - % The risk-free interest rate used in the Black-Scholes option pricing model is based on theU.S. Treasury yield that corresponds with the expected term at the time of grant. The expected term of an option is determined using the simplified method, which is calculated as the average of the contractual life and the vesting period. The expected term for the ESPP purchase rights is estimated using the offering period, which is typically six months. We estimate volatility for options using volatilities of a group of public companies in a similar industry, stage of life cycle, and size; and volatility of ESPP purchase rights using our own volatility history. The Company does not currently issue dividends and does not expect to for the foreseeable future. In addition to the assumptions used in the Black-Scholes option pricing model, we must also estimate a forfeiture rate to calculate the share-based compensation expense for awards. Our forfeiture rate is derived from historical employee termination behavior. If the actual number of forfeitures differs from these estimates, additional adjustments to compensation expense will be required. 101
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Given the absence of an active market for the Company's common stock prior to
the IPO, the board of directors was required to estimate the fair value of the
Company's common stock at the time of each option grant based on several
factors, including consideration of input from management and contemporaneous
third-party valuations. These valuations included consideration of enterprise
value and assessment of other common stock and convertible preferred stock
transactions occurring during the period.
Share-based compensation expense
Share-based compensation expense included in the consolidated statements of
operations and comprehensive loss was as follows (in thousands):
Year Ended
2021 2020 2019
Cost of subscription revenue $ 4,385 $ 1,392 $ 346
Cost of professional services revenue 2,146 1,259 466
Research and development 25,072 14,260 5,873
Sales and marketing 25,921 12,937 5,163
General and administrative 14,498 7,716 4,055
Total share-based compensation $ 72,022 $ 37,564 $ 15,903
As of January 31, 2021 , there was a total of $194.4 million of unrecognized
share-based compensation expense, which is expected to be recognized over a
weighted-average period of 2.85 years.
11. Income Taxes
The Company is liable for income taxes in the United States , the United Kingdom ,
and Australia .
U.S. and international components of loss before income tax provision (benefit)
were as follows (in thousands):
Year Ended January 31,
2021 2020 2019
United States $ (120,958) $ (96,810) $ (53,939)
Foreign 2,226 984 347
Loss before income tax provision (benefit)
The income tax provision (benefit) consisted of (in thousands):
Year Ended January 31,
2021 2020 2019
Current:
Federal $ - $ - $ -
State 115 85 34
Foreign 63 17 69
Total current tax provision (benefit) 178 102 103
Deferred and other:
Federal (3,117) - 203
State (898) - -
Foreign 84 12 (13)
Total deferred tax provision (benefit) (3,931) 12 190
Total income tax provision (benefit) $ (3,753) $ 114 $ 293
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Income tax benefit for the year endedJanuary 31, 2021 was recognized primarily due to a release of the Company's federal and state valuation allowance on deferred tax assets as a result of the deferred tax liabilities established for definite lived intangible assets from the acquisition of Brandfolder offset by income taxes in foreign jurisdictions and state income taxes. Income tax expense for the year endedJanuary 31, 2020 was recognized primarily due to income taxes in foreign jurisdictions and state income taxes. Income tax expense for the year endedJanuary 31, 2019 was recognized primarily due to changes in purchase accounting related to the acquisition of Converse.AI that reduced the overall acquired deferred tax liability. As a result, the increase in the valuation allowance was recognized in income tax expense. OnMarch 27, 2020 , the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was signed into law. The CARES Act provides numerous tax provisions and other stimulus measures including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion ofSocial Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. The Company elected to defer the employer portion ofSocial Security taxes and recorded the expense as incurred. As ofJanuary 31, 2021 these taxes totaled$7.8 million , of which$3.9 million was recorded in accrued compensation and related benefits and$3.9 million was recorded in other long-term liabilities on our consolidated balance sheet. The deferral of these taxes does not impact the Company's consolidated statements of operations and comprehensive loss. OnDecember 27, 2020 , the Consolidated Appropriations Act, 2021 was signed into law and extends several provisions of the CARES Act. The Company has determined that this Act will not have a significant impact on our effective tax rate. The reconciliation of federal statutory income tax to the Company's provision for income taxes is as follows (in thousands): Year Ended
2021 2020 2019
Expected provision at statutory federal rate
Tax credits (5,657) (5,798) (2,408)
Change in valuation allowance 51,296 47,412 17,487
Share-based compensation (24,057) (22,009) (4,631)
Other (401) 633 1,099
Total income tax provision (benefit) $ (3,753) $
114
U.S. federal tax net operating loss carryforwards ("NOLs") were approximately$390.6 million atJanuary 31, 2021 .U.S. federal NOLs of$336.1 million may be carried forward indefinitely, andU.S. federal NOLs of$54.5 million will expire on various dates starting in 2025. As ofJanuary 31, 2021 , the Company's tax credit carryforwards for income tax purposes were approximately$17.9 million net of uncertain tax positions for research and development credits. If not used, the tax credit carryforwards will begin to expire in 2031. Deferred income taxes reflect the net tax effects of loss and credit carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. 103
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The tax effects of temporary differences and related deferred tax assets and
liabilities as of
January 31,
2021 2020
Deferred tax assets:
Net operating loss carryforwards $ 95,219 $ 49,433
Deferred revenue 55,167 39,542
Lease liabilities 21,725 14,243
Tax credits 17,912 12,094
Share-based compensation 9,877 6,661
Accrued compensation 5,403 3,308
Other 570 625
Total deferred tax assets 205,873 125,906
Valuation allowance (159,673) (100,240)
Total deferred tax assets, net 46,200 25,666
Deferred tax liabilities:
Lease right-of-use assets (20,527) (13,475)
Capitalized commissions (14,745) (11,724)
Intangibles (10,057) (15)
Property and equipment (934) (431)
Total deferred tax liabilities (46,263) (25,645)
Net deferred tax assets/(liabilities) $ (63) $ 21
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period endedJanuary 31, 2021 . Such objective evidence limits the ability to consider other subjective evidence, such as the Company's projections for future growth. On the basis of this evaluation, the Company has established a full valuation allowance equal to itsU.S. andU.K. net deferred tax assets due to the uncertainty of future realization of the net deferred tax assets. The valuation allowance increased by$59.4 million during the year endedJanuary 31, 2021 . The increase in the valuation allowance was primarily related toU.S. federal and state losses incurred during the year. The calculation of the Company's tax obligations involves dealing with uncertainties in the application of complex tax laws and regulations. ASC 740, Income Taxes, provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. The Company has assessed its income tax positions and recorded tax benefits for all years subject to examination, based upon its evaluation of the facts, circumstances, and information available at each period end. For those tax positions where the Company has determined there is a greater than 50% likelihood that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is determined there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit has been recognized. The following is a tabular reconciliation of the total amounts of unrecognized tax benefits: 104
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Year Ended January 31,
2021 2020 2019
Balance, beginning of the year $ 3,339 $ 1,416 $ 683
Increases to tax positions taken during the current year 2,046 1,850 808
Increases to tax positions taken in prior years 11 73 -
Decreases to tax positions taken in prior years (113) - (75)
Balance, end of year $ 5,283 $ 3,339 $ 1,416
Although the Company believes that it has adequately reserved for its uncertain
tax positions, it can provide no assurance that the final tax outcome of these
matters will not be materially different. The Company makes adjustments to its
reserves when facts and circumstances change, such as the closing of a tax audit
or the refinement of an estimate. To the extent that the final tax outcome of
these matters is different than the amounts recorded, such differences will
affect the provision for income taxes in the period in which such determination
is made.
No liability was recorded for uncertain tax positions, or related interest or
penalties, as of January 31, 2021 and 2020. As of January 31, 2021
and 2020, the Company had $5.3 million and $3.3 million of unrecognized tax
benefits,
respectively, of which the total amount that would impact the effective tax rate, if recognized, is
$5.3 million and $3.3 million , respectively. Any impact on the effective tax
rate for unrecognized tax benefits would be offset by the impact of the
Company's full valuation allowance on its U.S. federal and state deferred tax
assets.
In the U.S. , the Company's tax years from 2005 to present remain effectively
open to examination by the Internal Revenue Service, as well as various state
and foreign jurisdictions.
Interest or penalties, if incurred, are recognized as a component of income tax
expense. Penalties and interest recognized were not material for the years ended
January 31, 2021 , 2020, and 2019.
12. Leases
The Company has operating leases primarily related to corporate offices and
certain equipment. During the year ended January 31, 2020 and during the nine
months ended October 31, 2020 the Company had finance leases primarily related
to data center equipment. During the three months ended January 31, 2021 the
Company paid off all finance leases.
Our leases have remaining lease terms of less than 1 year to 8 years, some of
which include options to extend the leases for up to 5 years.
The components of lease expense recorded in the consolidated statements of
operations and comprehensive loss were as follows (in thousands):
Year Ended January 31,
2021 2020
Operating lease cost $ 15,586 $ 11,494
Finance lease cost:
Amortization of assets 3,093 4,195
Interest on lease liabilities 114 250
Short-term lease cost 1,493 845
Variable lease cost 2,606 1,865
Total lease costs $ 22,892 $ 18,649
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Supplemental balance sheet information related to leases was as follows (in
thousands):
January 31,
Financial Statement Line Item 2021 2020
Assets:
Operating lease assets Operating lease right-of-use assets $ 81,081 $ 57,590
Finance lease assets Property and equipment, net - 3,939
Total leased assets $ 81,081 $ 61,529
Liabilities:
Current
Operating lease liabilities Operating lease liabilities, current $ 17,059 $ 13,020
Finance lease liabilities Finance lease liabilities, current - 2,465
Non-current
Operating lease liabilities Operating lease liabilities, non-current 71,925 47,913
Finance lease liabilities Finance lease liabilities, non-current - 1,664
Total lease liabilities $ 88,984 $ 65,062 Other information related to leases was as follows (dollars in thousands):
Year Ended
2021 2020
Supplemental cash flow information:
Cash paid for amounts included in the measurement of lease
liabilities:
Operating cash flows related to operating leases* $ 14,249 $ 9,990
Operating cash flows related to finance leases $ 114 $ 243
Financing cash flows related to finance leases $ 4,129 $ 4,167
Right-of-use assets obtained in exchange for lease obligations:
Operating leases $ 35,415 $ 12,173
Finance leases $ - $ 2,364
Weighted-average remaining lease term (in years):
Operating leases 6.2 5.8
Finance leases 0 1.8
Weighted-average discount rate:
Operating leases 5.1 % 5.9 %
Finance leases - % 4.7 %
*Includes cash paid for lease liability accretion of
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As of
Operating Leases
Fiscal 2022 $ 17,472
Fiscal 2023 17,698
Fiscal 2024 17,731
Fiscal 2025 15,396
Fiscal 2026 13,348
Thereafter 21,548
Total lease payments 103,193
Less: imputed interest (14,209)
Total $ 88,984
Total rent and related operating expenses recorded under Topic 840, the previous
lease standard, totaled $8.9 million for the year ended January 31, 2019 .
13. Commitments and Contingencies
Lease commitments
We have entered into various non-cancelable lease agreements related to our
corporate offices and certain equipment. For additional information regarding
our lease agreements, see Note 12.
Purchase commitments
During the year ended January 31, 2021 , the Company entered into a four-year
commitment with a cloud-based hosting service provider for $75.0 million . This
commitment replaced our three-year commitment for $15.0 million disclosed in our
audited consolidated financial statements as of and for the year ended
January 31, 2020 . As of January 31, 2021 , $67.5 million remained unpaid, of
which $16.3 million of upfront payments are to be paid in fiscal 2022, $18.8
million of upfront payments are to be paid in fiscal 2023, $21.3 million of
upfront payments are to be paid in fiscal 2024, and $11.3 million of upfront
payments are to be paid in fiscal 2025. Total payments may exceed upfront
payment amounts based on on-demand usage.
In the three months ended January 31, 2021 , the Company entered into a
three-year commitment with a separate cloud-based hosting service provider for
$3.2 million . As of January 31, 2021 , the entire commitment amount of $3.2
million remained unpaid. Payments are to be made monthly based on usage through
fiscal 2024.
Legal matters
An indemnification claim has been made against the Company by a former director,
Ryan Hinkle , and Insight Venture Partners VII, L.P. and certain affiliated
entities that are former shareholders of the Company (together with Hinkle, the
"IVP Parties"), relating to a purported class action litigation in which the IVP
Parties are defendants. On January 29, 2021 , the IVP Parties filed a complaint
against the Company in the Superior Court of Washington , King County , for the
advancement of legal fees, costs, and expenses incurred in defending the
purported class action claim. At this time, the Company cannot reasonably
estimate the probability or magnitude of any alleged indemnification claim and
does not believe that any advancement claim settlement would be material.
From time to time in the normal course of business, the Company may be subject
to various other legal matters such as threatened or pending claims or
proceedings. Although management currently believes that resolution of such
matters, individually and in the aggregate, will not have a material impact on
our financial position, results of operations, or cash flows, these matters are
subject to inherent uncertainties, and management's view of these matters may
change in the future.
14. 401(k) and Pension Plans
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InMarch 2008 , the Company initiated a 401(k) plan for the benefit of allUnited States employees. In the second quarter of fiscal 2021, we began to match 50% of each participant's contribution up to a maximum of 6% of the participant's eligible pay during the period. During the year endedJanuary 31, 2021 , we recognized an expense of$4.4 million related to matching contributions. No employer contributions were made to the 401(k) plan by the Company during the years endedJanuary 31, 2020 or 2019. InJanuary 2018 , the Company began contributing to a pension plan for the benefit of its employees based in theUnited Kingdom . InJanuary 2020 , the Company began contributing to a pension plan for the benefit of its employees based inAustralia . We recognized an expense related to employer contributions of$1.0 million ,$0.3 million , and less than$0.1 million during the years endedJanuary 31, 2021 , 2020 and 2019, respectively. 15. Related Party Transactions Certain members of the board of directors serve as directors of, or are executive officers of, and in some cases are investors in, companies that are customers or vendors of the Company. Certain of the Company's executive officers also serve as directors of, or serve in an advisory capacity to, companies that are customers or vendors of the Company. Related-party transactions were not material as of and for the years endedJanuary 31, 2021 , 2020, and 2019. 16. Geographic Information Revenue Revenue by geographic location is determined by the location of the Company's customers. The following table sets forth revenue by geographic area (in thousands): Year Ended January 31, 2021 2020 2019 United States$ 314,177 $ 214,492 $ 135,761 EMEA 37,463 29,246 21,087 Asia Pacific 15,325 12,969 11,863 Americas other than the United States 18,548 14,175 9,011 Total$ 385,513 $ 270,882 $ 177,722 No individual country other thanthe United States contributed more than 10% of total revenue during any of the periods presented. Long-lived assets Long-lived assets by geographic location is based on the location of the legal entity that owns the asset. The following table sets forth long-lived assets by geographic area (in thousands): January 31, 2021 United States$ 85,740 EMEA 5,007 Asia Pacific 2,020 Total$ 92,767
The table above includes property and equipment and operating lease right-of-use assets and excludes capitalized internal-use software costs and intangible assets.
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As ofJanuary 31, 2020 , there was no significant property and equipment and operating lease right-of-use assets owned by the Company outside ofthe United States . Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our principal executive officer (Chief Executive Officer) and principal financial officer (Chief Financial Officer), we conducted an evaluation (pursuant to Rule 13a-15(b) of the Exchange Act) of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, as ofJanuary 31, 2021 . Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in theSEC's rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as ofJanuary 31, 2021 at the reasonable assurance level. Management's Report on Internal Control over Financial Reporting Our management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withU.S. GAAP. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance withU.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as ofJanuary 31, 2021 , based on the framework in Internal Control - Integrated Framework issued by theCommittee of Sponsoring Organizations of theTreadway Commission (COSO) (2013 framework). Based on this evaluation our Chief Executive Officer and Chief Financial Officer have concluded that as ofJanuary 31, 2021 , our internal control over financial reporting was effective. The effectiveness of the Company's internal control over financial reporting as ofJanuary 31, 2021 has been audited byDeloitte & Touche LLP , an independent registered public accounting firm, as stated in their report, which is included in Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
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As of January 31, 2020 , we identified material weaknesses in our internal
control over financial reporting, as defined in the standards established by the
Sarbanes-Oxley Act of 2002. These material weaknesses related to (i) an
ineffective control environment as we did not have a sufficient complement of
resources with an appropriate level of controls knowledge and expertise
commensurate with our financial reporting requirements, (ii) design and
maintenance of effective information technology general controls for certain
information systems relevant to the preparation of the financial statements, and
(iii) design and maintenance of effective controls related to the completeness,
accuracy and occurrence of order entry and pricing during the billing and
revenue processes.
During the fiscal year ended January 31, 2021 , we executed on efforts designed
to remediate identified material weaknesses. Specifically, we:
•completed risk assessment and control design evaluation across multiple
financially relevant business processes and systems while working with one of
the four largest global accounting firms;
•designed and implemented IT general controls for all financially relevant
systems;
•enhanced processes and controls in our order entry and revenue recognition
cycles including as related to IT general controls around that cycle;
•hired a Senior Director of Internal audit with multiple years of internal
control experience who has led internal audit teams and who onboarded a team of
qualified internal auditors including a Senior Manager with significant IT
general control experience.
We have tested and evaluated the implementation of new or revised processes and
internal controls, in addition to all other financially relevant processes and
internal controls, to ascertain whether they are designed and operating
effectively to provide reasonable assurance that they will prevent or detect
material errors in our financial statements and have concluded that the material
weaknesses have been remediated as of January 31, 2021 .
Other than as stated above, there were no changes in our internal control over
financial reporting in connection with the evaluation required by Rules
13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three
months ended January 31, 2021 that materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Management recognizes that a control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud or
error, if any, have been detected. These inherent limitations include the
realities that judgments in decision making can be faulty, and that breakdowns
can occur because of a simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. The design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time,
controls may become inadequate because of changes in conditions, or the degree
of compliance with policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
Item 9B. Other Information
None.
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