SUMO LOGIC, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year endedJanuary 31, 2021 , filed with theSEC onMarch 12, 2021 . Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the sections titled "Special Note Regarding Forward-Looking Statements" and "Risk Factors" for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. The last day of our fiscal year isJanuary 31 . Our fiscal quarters end onApril 30 ,July 31 ,October 31 , andJanuary 31 . Our fiscal year endingJanuary 31, 2022 is referred to herein as fiscal 2022. Our fiscal years endedJanuary 31, 2021 and 2020 are referred to herein as fiscal 2021 and fiscal 2020, respectively. OverviewSumo Logic is the pioneer of Continuous Intelligence, a new category of software, which enables organizations of all sizes to address the challenges and opportunities presented by digital transformation, modern applications, and cloud computing. Our Continuous Intelligence Platform enables organizations to automate the collection, ingestion, and analysis of application, infrastructure, security, and IoT data to derive actionable insights within seconds. Continuous Intelligence leverages AI/ML capabilities, and is provided as a multi-tenant cloud service that allows organizations to more rapidly deliver reliable applications and digital services, protect against modern security threats, and consistently optimize their business processes in real time. This empowers employees across all lines of business, development, IT, and security teams with the data and insights needed to address the technology and collaboration challenges required for modern business. With our Continuous Intelligence Platform, executives and employees have the intelligence they require to take prescriptive action in real time-a modern business imperative. We generate revenue through the sale of subscriptions to customers that enable them to access our cloud-native platform. We recognize subscription revenue ratably over the term of the subscription, which is generally one year, but can be three years or longer. We offer multi-tiered paid subscription packages for access to our platform, the pricing for which differs based on a variety of factors, including volume of data to be ingested, duration of data retention, and breadth of access to platform features and functionalities. Our subscription packages encourage customers to expand their adoption of our platform by providing them with the flexibility to ingest and analyze large volumes of data and the ability to access a broad suite of platform features and functionalities without incurring overage fees, as well as insights into their usage patterns. We also deliver basic customer support with each of our paid subscription packages, and customers have the ability to purchase subscriptions to our premium support service. Our go-to-market strategy consists of self-service adoption through our website, an inside sales team, a field sales team, and a partner channel. We offer free trials that enable potential customers to experience the benefits of our platform, and we see significant conversion from our trial users to paid customers, with approximately one-third of our new customers in fiscal 2021 having been free trial users who converted into paying customers. We leverage our user community to proactively identify trends, gather global insights, and create new use cases, thereby empowering us to deliver out-of-the-box value to our customers. We employ a land-and-expand business model centered around our platform offerings, which have a rapid time to value for our customers and are easily extensible to multiple use cases across a business. We utilize the analytical capabilities of our platform and our customer success team to understand how our customers use, and how they would benefit from expanding their use of, our platform. This understanding helps us successfully upsell and cross sell to our existing customers. The power of our platform, and the benefits that it delivers to customers, has driven rapid growth in our revenue. For the six months endedJuly 31, 2021 and 2020, our revenue was$113.1 million and$96.6 million , respectively, representing a period over period growth rate of 17%. We generated GAAP operating losses of$59.4 million and$35.1 million for the six months endedJuly 31, 2021 and 2020, respectively. We define non-GAAP operating loss as loss from operations excluding stock-based compensation and related employer payroll taxes, amortization of acquired intangible assets, and acquisition-related expenses. We generated non-GAAP operating losses of$23.2 million and$22.0 million for the six months endedJuly 31, 2021 and 2020, respectively. See "Non-GAAP Financial Measures" for the reconciliation of GAAP operating loss to non-GAAP operating loss. Impact of COVID-19 As a result of the COVID-19 pandemic, we have temporarily closed or reduced capacity at our offices, continue to require many of our employees and contractors to work remotely, and have reduced business travel, all of which represent a significant disruption in how we operate our business. Additionally, inMay 2020 , as part of our efforts to respond to the COVID-19 pandemic and ensure longer-term financial stability, we initiated cost reduction measures, including a headcount reduction. The operations of our partners and customers have likewise been disrupted, and we believe this has caused delays in renewal decisions for some of our 27 -------------------------------------------------------------------------------- Table of Contents existing customers, caused customers to request concessions such as extended payment terms or better pricing, and affected contraction or churn rates for our customers. While the duration and extent of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the duration and spread of the outbreak, the emergence of variants of the virus, the extent and effectiveness of containment actions, and the effectiveness of vaccination efforts, it has already had an adverse effect on the global economy and the ultimate societal and economic impact of the COVID-19 pandemic remains unknown. In 2021, the Delta variant of COVID-19 has become the dominant strain in numerous countries around the world, includingthe United States , and is believed to be more contagious than other previously identified COVID-19 strains. However, we believe that the COVID-19 pandemic could also accelerate customer transformation into digital businesses, which we expect will generate additional opportunities for us in the future. Due to our subscription-based business model, the effect of the COVID-19 pandemic may not be fully reflected in our revenue until future periods. See "Risk Factors - The global COVID-19 pandemic has harmed and could continue to harm our business and results of operations" for further discussion of the challenges and risks we have encountered and could encounter related to the COVID-19 pandemic. Key Factors Affecting Our Performance New Customer Acquisition Our business depends, in part, on our ability to add new customers. As businesses transition to the public cloud and with the increasing number of cloud-native businesses, continuous intelligence will become even more of a strategic imperative. We believe this growing adoption of cloud infrastructure across all organizations will continue to drive demand for our platform and broaden our customer base. Since our platform has offerings for organizations of all sizes and across industries, including organizations of all stages of cloud maturity, we believe these market changes present a significant opportunity for growth. As ofJuly 31, 2021 , we had over 2,300 customers worldwide, spanning organizations of a broad range of sizes and industries. However, we expect that our ability to add new customers may be negatively impacted by current economic uncertainty in light of the COVID-19 pandemic. We will continue to focus on new customer acquisition by investing in sales and marketing to build brand awareness, expanding our community, and driving adoption of our platform as we further capture the opportunity in our addressable market. We define a customer as a separate legal entity, such as a company or an educational or government institution, that is under a paid contract with us or with which we are negotiating a renewal contract at the end of a given period. Given our historical experience of customer renewals, if we are in active discussions for a renewal or upgrade, we continue to include customers with expired contracts in our customer count until the customer either renews its contract or negotiations terminate without renewal. In situations where an organization has multiple subsidiaries or divisions that separately contract with us, we typically treat only the parent entity as the customer instead of treating each subsidiary or division as a separate customer. However, we count each purchaser of our self-service offering as a unique customer, regardless of other subscriptions such organization may have. Expanding within our Existing Customer Base Our business depends, in part, on the degree to which our land-and-expand strategy is successful. Our customers often initially adopt our platform for a specific use case and subsequently increase their adoption as they realize the benefits and flexibility of our platform. We have been successful in expanding our existing customers' adoption of our platform as demonstrated by our dollar-based net retention rate, which we consider an indicator of our ability to retain and expand revenue from existing customers over time. Our dollar-based net retention rate has fluctuated between approximately 115% and 130% each quarter of the prior three fiscal years. In the first quarter of fiscal 2022, our dollar-based net retention rate declined below 115% and in the second quarter of fiscal 2022, it further declined a few percentage points below 110%. The decline was driven by the combination of slower than historic expansion in the install base and higher than historical churn. We anticipate that our dollar-based net retention may continue to decline and it will take several quarters before we start to see sustained improvement in our dollar-based net retention rate due to our dollar-based net retention calculated on a 4 quarter trailing average. Our efficient land-and-expand model has helped us accelerate adoption within our largest customers, as evidenced by our customers with over$100,000 of ARR, which was 410 as ofJuly 31, 2021 and 330 as ofJuly 31, 2020 . We define ARR as the annualized recurring revenue run-rate from all customers that are under contract with us at the end of the period or with which we are negotiating a renewal contract. Given our historical experience of customer renewals, if we are in active discussions for a renewal, we continue to include customers with expired contracts in our ARR until the customer either renews its contract or negotiations terminate without renewal. For certain customers whose revenue may fluctuate from month to month based upon their specific contractual arrangements, we calculate ARR using the annualized monthly recurring revenue, or MRR, run-rate (MRR multiplied by 12). This enables us to calculate our anticipated recurring revenue for all customers based on our packaging and licensing models, which we believe provides a more accurate view of our anticipated recurring revenue. 28 -------------------------------------------------------------------------------- Table of Contents We calculate our dollar-based net retention rate by first identifying customers, or the Base Customers, in a particular quarter, or theBase Quarter . We then divide the ARR attributable to the Base Customers in the same quarter of the subsequent year, or theComparison Quarter , by the ARR attributable to those Base Customers in theBase Quarter . Our dollar-based net retention rate in a particular quarter is obtained by averaging the result from that particular quarter with the corresponding results from each of the prior three quarters.Continued Investment in Technology Leadership and Innovation We intend to extend our leadership position by continuing to innovate, bringing new technologies to market, honing best practices, and driving thought leadership. Our success depends, in part, on our ability to sustain innovation and technology leadership in order to maintain a competitive advantage. We expect to continue to invest in research and development to increase our revenue and achieve long-term profitability, and we intend to continue extending the applicability of our platform as well as improving the value of our offerings for our customers. We believe that our platform is highly differentiated and has broad applicability to a wide variety of use cases, and we will continue to invest in developing and enhancing platform features and functionality to further extend the adoption of our platform. Additionally, we will continue to evaluate opportunities to acquire or invest in businesses, offerings, technologies, or talent that we believe could complement or expand our platform, enhance our technical capabilities, or otherwise offer growth opportunities. Once we complete acquisitions, we must successfully integrate and manage these acquisitions to realize their benefits. International Expansion We intend to continue to invest in our international operations to grow our business outside ofthe United States . We generated 17% of our revenue outsidethe United States during the three and six months endedJuly 31, 2021 and 16% for the three and six months endedJuly 31, 2020 , respectively. We believe that global demand for Continuous Intelligence and for the functionality of our platform will continue to increase as international businesses undergo digital transformations and adopt cloud-based technologies. We currently have a sales presence throughoutAsia-Pacific -Japan , or APJ, andEurope , with sales offices inSydney, Australia ,Tokyo, Japan , andLondon, United Kingdom , and we further increase our global reach with our approximately 250 international channel partners. International expansion over the long term represents a significant opportunity and we plan to continue to invest in growing our presence internationally, both through expanding our sales and marketing efforts and leveraging channel and other ecosystem partners. Acquisition ofSensu, Inc. OnJune 10, 2021 , we completed the acquisition ofSensu, Inc. ("Sensu"), a privately-held software company that is a leader in open source monitoring. The addition of Sensu is expected to accelerate our observability strategy by providing customers with an affordable and scalable end-to-end solution for infrastructure and application monitoring. The aggregate amount recorded as purchase consideration was$32.7 million , of which$8.6 million was paid or to be paid in cash, and$24.1 million was comprised of 1,123,697 shares of common stock. Additionally, 71,644 shares of common stock were issued and will be recorded as stock-based compensation, and we assumed 33,267 options to purchase shares of common stock granted under Sensu's equity plan. See Note 5 to our condensed consolidated financial statements. Acquisition of DF Labs S.p.A. OnMay 24, 2021 , we completed the acquisition of DF Labs S.p.A. ("DFLabs"), a privately-held Italian corporation and a leader in security orchestration, automation and response ("SOAR") technology. The combination of our Cloud SIEM and DFLabs' solution will provide customers with comprehensive cloud-native security intelligence solutions. The aggregate amount recorded as purchase consideration was$41.7 million , of which$35.3 million was paid in cash, and$6.4 million was comprised of 334,815 shares of common stock. Additionally, 143,492 shares of common stock were issued and will be recorded as stock-based compensation. See Note 5 to our condensed consolidated financial statements. Components of Results of Operations Revenue We generate subscription revenue through the sale of subscriptions to customers that enable them to access our cloud-native platform. Subscription terms are generally one year, but can be three years or longer, and a substantial majority of our contracts are non-cancelable. Subscription revenue is driven by sales of our multi-tiered paid subscriptions, the pricing for which differs based on a variety of factors, including volume of data expected to be ingested, duration of data retention, and breadth of access to our platform features and functionalities. Due to the ease of using our platform, professional services revenue from configuration, implementation, and training services constituted approximately 1% of our total revenue for the six months endedJuly 31, 2021 and 2020. 29 -------------------------------------------------------------------------------- Table of Contents Cost of Revenue Cost of revenue includes all direct costs to deliver and support our platform, including personnel and related costs, third-party hosting fees related to our cloud platform, amortization of internal-use software and acquired developed technology, as well as allocated facilities and IT costs. As new customers purchase access to our platform and our existing customer base expands their utilization of our platform, we will incur greater cloud hosting costs related to the increased volume of data being hosted. We will continue to invest additional resources in our platform infrastructure and customer support organizations to expand the capabilities of our platform features and ensure that our customers are realizing the full benefit of our platform. The level and timing of investment in these areas could affect our cost of revenue in the future. Gross Profit and Gross Margin Gross profit represents revenue less cost of revenue, and gross margin is gross profit expressed as a percentage of revenue. Our gross margin may fluctuate from period to period as our revenue fluctuates, and has been and will continue to be affected by various factors, including the timing and amount of investments to maintain or expand our cloud hosting capability, the continued growth of our platform and customer support teams, increased compensation expenses, as well as amortization of costs associated with capitalized internal-use software and acquired intangible assets. We expect our gross profit to increase and our gross margin to increase modestly over the long term due to the continued growth in the use of our platform and cost efficiencies related to our cloud hosting services, although our gross margins could fluctuate from period to period depending on the interplay between the factors described above. Operating Expenses Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Personnel and related expenses are the most significant component of operating expenses and consist of salaries, employee benefit costs, payroll taxes, bonuses, sales commissions, travel-related expenses, and stock-based compensation expense, as well as the allocated portion of overhead costs for facilities and IT. Operating expenses also include cloud infrastructure fees and other services related to staging and development efforts for our platform. Research and Development Research and development expenses consist primarily of costs related to research, design, maintenance, and minor enhancements of our platform that are expensed as incurred. These costs consist primarily of personnel and related expenses, including allocated overhead costs, contractor and consulting fees related to the design, development, testing, and enhancement of our platform, and software, hardware, and cloud infrastructure fees for staging and development related to research and development activities necessary to support growth in our employee base and in the adoption of our platform. We expect that our research and development expenses will increase in dollar value as we continue to increase our investments in our platform. However, we anticipate research and development expenses will decrease as a percentage of our revenue over the long term, although they may fluctuate as a percentage of our revenue from period to period depending on the timing of expenses. Sales and Marketing Sales and marketing expenses consist primarily of personnel and related expenses including allocated overhead costs and commissions, costs of general marketing and promotional activities, including free trials of our platform, fees for professional services related to marketing, and software and hardware to support growth in our employee base. Sales commissions earned by our sales force that are considered incremental costs of obtaining a subscription with a customer are deferred and amortized on a straight-line basis over the expected period of benefit, which we have determined to be five years. We expect that our sales and marketing expenses will increase in dollar value over the long term, though the dollar value of such expenses may fluctuate in the near term. We believe that sales and marketing expenses will continue to be our largest operating expense for the foreseeable future as we expand our sales and marketing efforts. We expect that our sales and marketing expenses will increase as a percentage of our revenue over the near term, but decrease over the long term, although they may fluctuate as a percentage of revenue from period to period depending on the timing of expenses. General and Administrative General and administrative expenses consist primarily of personnel and related expenses associated with our executive, finance, legal, human resources, information technology and security, and other administrative personnel. In addition, general and administrative expenses include non-personnel costs, such as fees for professional services such as external legal, accounting, and 30 -------------------------------------------------------------------------------- Table of Contents other consulting services, hardware and software costs, certain taxes other than income taxes, and overhead costs not allocated to other departments. We expect to incur additional expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of theSEC and the listing standards of the Nasdaq Global Select Market, and increased expenses for insurance, investor relations, and fees for professional services. We expect that our general and administrative expenses will increase in dollar value as our business grows. However, we expect that our general and administrative expenses will decrease as a percentage of our revenue as our revenue grows over the long term, although they may fluctuate as a percentage of revenue from period to period depending on the timing of expenses. Interest and Other Income (Expense), Net Interest and other income (expense), net primarily consists of interest and investment income and foreign currency transaction gains (losses). Interest Expense Interest expense primarily consists of interest incurred in connection with our past borrowings under our revolving line of credit facility. Provision (Benefit) for Income Taxes Provision (benefit) for income taxes consists primarily of income taxes in certain foreign jurisdictions in which we conduct business. We maintain a full valuation allowance on our federal and state net deferred tax assets as we have concluded that it is not more likely than not that the deferred tax assets will be realized. Results of Operations The following table sets forth our condensed consolidated statements of operations data for the periods indicated: Three Months Ended July 31, Six Months Ended July 31, 2021 2020 2021 2020 (in thousands) Revenue$ 58,841
19,778 14,113 35,173 28,539
Gross profit 39,063 35,302 77,887 68,078
Operating expenses:
Research and development(1)(4) 23,861 15,304 44,304 33,003
Sales and marketing(1)(3)(4) 31,457 24,174 61,735 53,630
General and administrative(1)(4) 16,670 7,512 31,243 16,589
Total operating expenses 71,988 46,990 137,282 103,222
Loss from operations (32,925) (11,688) (59,395) (35,144)
Interest and other income (expense), net 69 (155) 53 73
Interest expense (3) (205) (89) (364)
Loss before provision for income taxes (32,859) (12,048) (59,431) (35,435)
Provision (benefit) for income taxes (810) 169 (468) 347
Net loss $ (32,049) $ (12,217) $ (58,963) $ (35,782)
____________(1)Includes stock-based compensation expense and related employer payroll taxes as follows:
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Three Months Ended July 31, Six Months Ended July 31,
2021 2020 2021 2020
(in thousands)
Cost of revenue $ 193 $ 39 $ 366 $ 101
Research and development(a) 6,103 1,849 10,961 3,878
Sales and marketing 4,291 1,589 8,013 3,116
General and administrative(b) 3,906 1,179 8,094 2,628
Total stock-based compensation expense and
related employer payroll taxes $ 14,493 $
4,656
(a)See Note 10 to our condensed consolidated financial statements for the
capitalized stock-based compensation expense related to internal-use software
development costs.
(b)See Note 10 to our condensed consolidated financial statements for the
incremental stock-based compensation expense related to transfers of our common
stock by our current and former employees to existing investors for amounts over
the estimated fair value at the date of the transaction.
(2)Includes amortization of acquired intangible assets as follows:
Three Months Ended July 31, Six Months Ended July 31,
2021 2020 2021 2020
(in thousands)
Cost of revenue $ 3,006 $ 1,706 $ 4,543 $ 3,411
Sales and marketing 83 - 83 -
Total amortization of acquired intangible
assets $ 3,089 $
1,706
(3)We recorded sales and marketing expenses for additional compensation and other costs related to the employment status of certain current and former employees of$1.5 million during the six months endedJuly 31, 2020 . As ofJanuary 31, 2021 , we had recorded$4.5 million related to these claims, which were paid as part of a signed settlement agreement during the six months endedJuly 31, 2021 . For more information, see "Legal Proceedings." (4)Includes acquisition-related expenses as follows: Three Months Ended July 31, Six Months Ended July 31, 2021 2020 2021 2020 (in thousands) Cost of revenue$ 54 $ -$ 54 $ - Research and development 238 - 238 - Sales and marketing 86 - 86 - General and administrative 2,540 - 3,756 - Total acquisition-related expenses$ 2,918 $
-
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Table of Contents The following table sets forth our condensed consolidated statements of operations data expressed as a percentage of revenue:
Three Months Ended July 31, Six Months Ended July 31,
2021 2020 2021 2020
Revenue 100 % 100 % 100 % 100 %
Cost of revenue 34 29 31 30
Gross profit 66 % 71 % 69 % 70 %
Operating expenses:
Research and development 41 31 39 34
Sales and marketing 53 49 55 56
General and administrative 28 15 28 17
Total operating expenses 122 % 95 % 121 % 107 %
Loss from operations (56) (24) (53) (36)
Interest and other income (expense), net - - - -
Interest expense - - - 1
Loss before provision for income taxes (56) (24) (53) (37)
Provision (benefit) for income taxes (2) 1 (1) -
Net loss (54) % (25) % (52) % (37) %
____________
Note: Certain figures may not sum due to rounding.
Comparison of Three Months Ended July 31, 2021 and 2020
Revenue
Three Months Ended July 31,
2021 2020 Change % Change
(dollars in thousands)
Revenue $ 58,841 $ 49,415 $ 9,426 19 %
Revenue increased by $9.4 million , or 19%, during the three months ended July
31, 2021 compared to the three months ended July 31, 2020 . Excluding revenue
from our current largest revenue customer, which represented $4.0 million in
revenue for the three months ended July 31, 2021 compared to $4.2 million for
the three months ended July 31, 2020 , the increase in revenue would have been
21%. We estimate that approximately 80% of the increase in revenue was
attributable to growth from existing customers and approximately 20% was
attributable to new customers. In particular, the number of customers with
greater than $100,000 of ARR increased to 410 as of July 31 , 2021from 330 as of
July 31, 2020 .
Cost of Revenue, Gross Profit, and Gross Margin
Three Months Ended July 31,
2021 2020 Change % Change
(dollars in thousands)
Cost of revenue $ 19,778 $ 14,113 $ 5,665 40 %
Gross profit 39,063 35,302 3,761 11 %
Gross margin 66 % 71 %
Cost of revenue increased by $5.7 million , or 40%, during the three months ended
July 31, 2021 compared to the three months ended July 31, 2020 . The increase in
cost of revenue was primarily due to a $4.4 million increase in third-party
hosting fees, other services, and personnel costs related to providing access to
and supporting our platform, and a $1.3 million increase in amortization of
acquired developed technology primarily as a result of our acquisitions of Sensu
and DFLabs in the second quarter of fiscal 2022. Our gross profit increased $3.8
million and gross margin decreased 5% primarily as a result of increased
amortization of acquired developed technology and increased third-party hosting
fees.
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Research and Development
Three Months Ended July 31,
2021 2020 Change % Change
(dollars in thousands)
Research and development $ 23,861 $ 15,304 $ 8,557 56 %
Percentage of revenue 41 % 31 %
Research and development expenses increased by $8.6 million , or 56% during the
three months ended July 31, 2021 compared to the three months ended July 31,
2020 . The increase in research and development expenses was primarily driven by
a $7.7 million increase in personnel and related expenses directly associated
with an increase in cost per head and increase in headcount, including an
increase in allocated overhead costs, of which $4.3 million was related to
stock-based compensation expense and related employer payroll taxes. This
increase in personnel and related costs also included a $0.5 million decrease in
capitalized internal-use software. In addition, software, hardware, and cloud
infrastructure fees for staging and development increased $0.7 million .
Sales and Marketing
Three Months Ended July 31,
2021 2020 Change % Change
(dollars in thousands)
Sales and marketing $ 31,457 $ 24,174 $ 7,283 30 %
Percentage of revenue 53 % 49 %
Sales and marketing expenses increased by $7.3 million , or 30%, during the three
months ended July 31, 2021 compared to the three months ended July 31, 2020 . The
increase in sales and marketing expenses was primarily driven by a $5.5 million
increase in personnel and related expenses associated with an increase in cost
per head and an increase in headcount, including an increase in allocated
overhead costs, of which $2.7 million was related to stock-based compensation
expense and related employer payroll taxes. In addition, we had a $1.2 million
increase in recruiting fees and third-party public relations and marketing
services and a $0.5 million increase in software and cloud hosting fees for our
customer free trials and customer proofs of value.
General and Administrative
Three Months Ended July 31,
2021 2020 Change % Change
(dollars in thousands)
General and administrative $ 16,670 $ 7,512 $ 9,158 122 %
Percentage of revenue 28 % 15 %
General and administrative expenses increased by $9.2 million , or 122%, during
the three months ended July 31, 2021 compared to the three months ended July 31,
2020 . The increase in general and administrative expenses was driven by a $3.4
million increase in personnel and related expenses, due to an increase in cost
per head and an increase in headcount, of which $2.7 million was related to
stock-based compensation expense and related employer payroll taxes. In
addition, professional services increased by $3.9 million , primarily related to
the acquisition-related expenses for our acquisitions of Sensu and DFLabs, and
insurance increased by $1.6 million .
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Interest and Other Income (Expense), Net
Three Months Ended July 31,
2021 2020 Change % Change
(dollars in thousands)
Interest and other income (expense), net $ 69
(145) %
Interest and other income (expense), net increased by $0.2 million , or 145%,
during the three months ended July 31, 2021 compared to the three months ended
July 31, 2020 . The increase in interest and other income (expense), net was
driven by an increase in interest income and decrease in foreign currency losses
compared to the prior period.
Interest Expense
Three Months Ended July 31,
2021 2020 Change % Change
(dollars in thousands)
Interest expense $ (3) $ (205) $ 202 (99) %
Interest expense decreased by $0.2 million during the three months ended July
31, 2021 compared to the three months ended July 31, 2020 . The decrease in
interest expense was primarily driven by interest incurred on borrowings under
our revolving line of credit facility in the prior period.
Comparison of Six Months Ended July 31, 2021 and 2020
Revenue
Six Months Ended July 31,
2021 2020 Change % Change
(dollars in thousands)
Revenue $ 113,060 $ 96,617 $ 16,443 17 %
Revenue increased by $16.4 million , or 17%, during the six months ended July 31,
2021 compared to the six months ended July 31, 2020 . Excluding revenue from our
current largest revenue customer, which represented $7.2 million in revenue for
the six months ended July 31, 2021 compared to $8.2 million for the six months
ended July 31, 2020 , the increase in revenue would have been 20%. We estimate
that approximately 80% of the increase in revenue was attributable to growth
from existing customers, and approximately 20% was attributable to new
customers. In particular, the number of customers with greater than $100,000 of
ARR increased to 410 as of July 31, 2021 from 330 as of July 31, 2020 .
Cost of Revenue, Gross Profit, and Gross Margin
Six Months Ended July 31,
2021 2020 Change % Change
(dollars in thousands)
Cost of revenue $ 35,173 $ 28,539 $ 6,634 23 %
Gross profit 77,887 68,078 9,809 14 %
Gross margin 69 % 70 %
Cost of revenue increased by $6.6 million , or 23%, during the six months ended
July 31, 2021 compared to the six months ended July 31, 2020 . The increase in
cost of revenue was primarily due to an $5.4 million increase in third-party
hosting fees and other services related to providing access to and supporting
our platform and an increase in amortization of acquired developed technology of
$1.1 million primarily as a result of our acquisitions of Sensu and DFLabs in
the second quarter of fiscal 2022. Our gross profit increased $9.8 million while
gross margin decreased 1% primarily as a result of increased amortization of
acquired developed technology.
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Research and Development
Six Months Ended July 31,
2021 2020 Change % Change
(dollars in thousands)
Research and development $ 44,304 $ 33,003 $ 11,301 34 %
Percentage of revenue 39 % 34 %
Research and development expenses increased by $11.3 million , or 34%, during the
six months ended July 31, 2021 compared to the six months ended July 31, 2020 .
The increase in research and development expenses was primarily driven by a
$11.4 million increase in personnel and related expenses directly associated
with an increase in cost per head and increase in headcount, including an
increase in allocated overhead costs, of which $7.1 million was related to
stock-based compensation expense. This increase in personnel and related costs
also included a $1.0 million decrease in capitalized internal-use software.
Sales and Marketing
Six Months Ended July 31,
2021 2020 Change % Change
(dollars in thousands)
Sales and marketing $ 61,735 $ 53,630 $ 8,105 15 %
Percentage of revenue 55 % 56 %
Sales and marketing expenses increased by $8.1 million , or 15%, during the six
months ended July 31, 2021 compared to the six months ended July 31, 2020 . The
increase in sales and marketing expenses was primarily driven by a $8.8 million
increase in personnel and related expenses associated with an increase in
headcount, including an increase in allocated overhead costs, of which $4.9
million was related to stock-based compensation expense. This increase in
personnel and related costs was partially offset by a non-recurring $1.5 million
expense related to compensation and other costs related to the employment status
of certain current and former employees recorded during the first quarter of
fiscal 2021. In addition, we had a $1.7 million increase in recruiting fees and
third-party public relations and marketing services and a $0.6 million increase
in software. These increases were offset by a decrease of $1.6 million in
advertising and promotional costs as a result of lower costs to host virtual
programs due to the COVID-9 pandemic.
General and Administrative
Six Months Ended July 31,
2021 2020 Change % Change
(dollars in thousands)
General and administrative $ 31,243 $ 16,589 $ 14,654 88 %
Percentage of revenue. 28 % 17 %
General and administrative expenses increased by $14.7 million , or 88%, during
the six months ended July 31, 2021 compared to the six months ended July 31,
2020 . The increase in general and administrative expenses was primarily driven
by a $6.4 million increase in personnel and related expenses that were
associated with an increase in cost per head and increase in headcount, of which
$5.5 million was related to stock-based compensation expense. Professional
services increased by $4.7 million , primarily related to the acquisition-related
expenses for our acquisitions of Sensu and DFLabs, and insurance increased by
$3.2 million .
Interest and Other Income (Expense), Net
Six Months Ended July 31,
2021 2020 Change % Change
(dollars in thousands)
Interest and other income (expense), net $ 53 $ 73 $ (20) (27) %
Interest and other income (expense), net decreased by less than $0.1 million , or
27%, during the six months ended July 31, 2021 compared to the six months ended
July 31, 2020 . The decrease in interest and other income (expense), net was
primarily driven by an increase in foreign currency losses compared to the prior
period.
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Interest Expense
Six Months Ended July 31,
2021 2020 Change % Change
(dollars in thousands)
Interest expense $ (89) $ (364) $ 275 (76) %
Interest expense decreased by $0.3 million during the six months ended July 31,
2021 compared to the six months ended July 31, 2020 . The decrease in interest
expense was primarily driven by interest incurred on borrowings under our
revolving line of credit facility in the prior period.
Non-GAAP Financial Measures
In addition to our financial information presented in accordance with GAAP, we
believe the following non-GAAP financial measures are useful to investors in
evaluating our operating performance. We use the following non-GAAP financial
measures, collectively, to evaluate our ongoing operations and for internal
planning and forecasting purposes, including the preparation of our annual
operating budget and quarterly forecasts, to evaluate the effectiveness of our
business strategies, and to communicate with our board of directors concerning
our financial performance. We believe that non-GAAP financial measures, when
taken together with the corresponding GAAP financial measures, may be helpful to
investors because they provide consistency and comparability with past financial
performance and meaningful supplemental information regarding our performance by
excluding certain items that may not be indicative of our business, results of
operations, or outlook. The non-GAAP financial measures are presented for
supplemental informational purposes only, have limitations as analytical tools,
and should not be considered in isolation or as a substitute for financial
information presented in accordance with GAAP and may be different from
similarly-titled non-GAAP financial measures used by other companies. In
addition, other companies, including companies in our industry, may calculate
similarly-titled non-GAAP financial measures differently or may use other
measures to evaluate their performance, all of which could reduce the usefulness
of our non-GAAP financial measures as tools for comparison. Investors are
encouraged to review the related GAAP financial measures and the reconciliation
of these non-GAAP financial measures to their most directly comparable GAAP
financial measures, and not to rely on any single financial measure to evaluate
our business.
Non-GAAP Gross Profit and Non-GAAP Gross Margin
We define non-GAAP gross profit and non-GAAP gross margin as gross profit and
gross margin, respectively, excluding stock-based compensation and related
employer payroll taxes recorded to cost of revenue and amortization of acquired
intangible assets.
Three Months Ended July 31, Six Months Ended July 31,
2021 2020 2021 2020
(dollars in thousands)
Gross profit $ 39,063 $ 35,302 77,887 68,078
Add: Stock-based compensation and related employer payroll taxes
193 39 366 101
Add: Amortization of acquired intangible assets 3,006 1,706 4,543 3,411
Add: Acquisition-related expenses 54 - 54 -
Non-GAAP gross profit $ 42,316 $ 37,047 $ 82,850 $ 71,590
Gross margin 66 % 71 % 69 % 70 %
Non-GAAP gross margin 72 % 75 % 73 % 74 %
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Non-GAAP Operating Loss and Non-GAAP Operating Margin
We define non-GAAP operating loss and non-GAAP operating margin as loss from
operations and operating margin, respectively, excluding stock-based
compensation and related employer payroll taxes, amortization of acquired
intangible assets, and acquisition-related expenses.
Three Months Ended July 31, Six Months Ended July 31,
2021 2020 2021 2020
(dollars in thousands)
Loss from operations $ (32,925) $ (11,688) $ (59,395) $ (35,144) Add: Stock-based compensation and related employer payroll taxes
14,493 4,656 27,434 9,723
Add: Amortization of acquired intangible assets 3,089 1,706 4,626 3,411
Add: Acquisition-related expenses 2,918 - 4,134 -
Non-GAAP operating loss $ (12,425) $ (5,326) $ (23,201) $ (22,010)
Operating margin (56) % (24) % (53) % (36) %
Non-GAAP operating margin (21) % (11) % (21) % (23) %
Non-GAAP Net Loss We define non-GAAP net loss as loss from operations, excluding stock-based compensation and related employer payroll taxes, amortization of acquired intangible assets, and acquisition-related expenses.
Three Months Ended July 31, Six Months Ended July 31,
2021 2020 2021 2020
(in thousands)
Net loss $ (32,049) $
(12,217)
14,493 4,656 27,434 9,723
Add: Amortization of acquired intangible assets 3,089 1,706 4,626 3,411
Add: Acquisition-related expenses 2,918 - 4,134 -
Non-GAAP net loss $ (11,549) $ (5,855) $ (22,769) $ (22,648)
Free Cash Flow
We define free cash flow as cash used in operating activities less purchases of
property and equipment and capitalized internal-use software costs. We believe
free cash flow is a useful indicator of liquidity that provides our management,
board of directors, and investors with information about our future ability to
generate or use cash to enhance the strength of our balance sheet and further
invest in our business and pursue potential strategic initiatives.
Three Months Ended July 31, Six Months Ended July 31,
2021 2020 2021 2020
(in thousands)
Cash used in operating activities $ (4,538) $ (16,783) $ (7,257) $ (27,906)
Less: Purchases of property and equipment (1,054) (175) (1,301) (190)
Less: Capitalized internal-use software costs - (488) - (959)
Free cash flow $ (5,592) $ (17,446) $ (8,558) $ (29,055)
Cash used in investing activities $ (51,823) $ (663) $ (318,060) $ (1,149) Cash provided by financing activities
890$ 17,959 $ 25,717 38 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Since inception, we have financed our operations primarily through subscription revenue from customers accessing our cloud-native platform and the net proceeds of issuances of equity securities. We have incurred losses and generated negative cash flows from operations, as reflected in our accumulated deficit of$456.8 million as ofJuly 31, 2021 . In the third quarter of fiscal 2021 we completed our initial public offering, or IPO, and we received net proceeds of$342.7 million , after deducting underwriters' discounts and commissions and offering costs of$31.8 million , including the exercise of the underwriters' option to purchase additional shares. As ofJuly 31, 2021 , we had$96.6 million in cash and cash equivalents and$275.1 million in marketable securities. We believe our existing cash and cash equivalents, marketable securities, and cash provided by sales of access to our platform will be sufficient to meet our projected operating requirements for at least the next 12 months, despite the uncertainty in the changing market and economic conditions as a result of the COVID-19 pandemic, which may have an impact on our available cash due to customer requests for extended payment terms or better pricing. As a result of our revenue growth plans, both domestically and internationally, we expect that losses and negative cash flows from operations may continue in the foreseeable future. Our future capital requirements will depend on many factors, including our subscription growth rate, subscription renewals, billing timing and frequency, pricing changes, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced platform features and functionality, the continued market adoption of our platform, and the impact of the COVID-19 pandemic on our business and results of operations, the business of our customers, and the economy. We may in the future pursue acquisitions of businesses, technologies, assets, and talent. InFebruary 2021 , we entered into an Amended and Restated Loan and Security Agreement withSilicon Valley Bank , or the SVB Agreement, which provides for a revolving line of credit. The SVB Agreement amends and restates the Loan and Security Agreement dated as ofJanuary 31, 2016 . Under the SVB Agreement, we can borrow up to$50 million . Interest on any drawdown accrues at the prime rate minus a spread rate ranging from 0.25% to 0.75%, as determined by our adjusted quick ratio, subject to either a 3.00% or 2.50% floor depending on the adjusted quick ratio. The SVB agreement is secured by substantially all of our assets and includes restrictive covenants, in each case subject to certain exceptions, that limit our ability to, among other things: incur debt, grant liens, make acquisitions, suffer changes in control, make investments, make certain dividends or distributions, repurchase or redeem stock, dispose of or transfer assets, and enter into transactions with affiliates. Pursuant to the SVB Agreement, we are also required to maintain a minimum adjusted quick ratio of 1.25 to 1.00. The SVB Agreement also contains customary events of default, upon whichSilicon Valley Bank may declare all or a portion of our outstanding obligations payable to be immediately due and payable. As ofJuly 31, 2021 , we did not have any debt balance outstanding. We typically invoice our subscription customers annually in advance, and in certain cases, we invoice upfront for multi-year contracts. Therefore, a substantial source of our cash is from such prepayments, which are included on our condensed consolidated balance sheets as deferred revenue. Deferred revenue consists of billed fees for our subscriptions, prior to satisfying the criteria for revenue recognition, which are subsequently recognized as revenue in accordance with our revenue recognition policy. As ofJuly 31, 2021 , future estimated revenue related to performance obligations from non-cancelable contracts that were unsatisfied or partially unsatisfied was$277.4 million , of which we expect to recognize revenue of$171.8 million over the next 12 months, with the remaining balance recognized thereafter. As ofJuly 31, 2021 , we had deferred revenue of$112.7 million , of which$108.0 million was recorded as a current liability and is expected to be recognized as revenue within the next 12 months, subject to applicable revenue recognition criteria. Cash Flows The following table shows a summary of our cash flows for the periods presented: Six Months Ended July 31, 2021 2020 (in thousands) Net cash provided by (used in): Operating activities$ (7,257) $ (27,906) Investing activities$ (318,060) $ (1,149) Financing activities$ 17,959 $ 25,717 39
-------------------------------------------------------------------------------- Table of Contents Operating Activities Our largest source of operating cash is cash collections from sales of subscriptions to our customers. Our primary uses of cash from operating activities are for personnel and related expenses, marketing expenses, and third-party hosting and software costs. In the last several years, we have generated negative cash flows from operating activities and have supplemented working capital requirements through net proceeds from equity financings. Cash used in operating activities for the six months endedJuly 31, 2021 of$7.3 million consisted of our net loss of$59.0 million , adjusted for non-cash charges of$41.4 million and net cash inflows of$10.3 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation of$26.2 million , amortization of deferred sales commissions of$7.2 million , depreciation and amortization of$5.6 million , and$2.1 million of non-cash operating lease costs. Net cash inflows from changes in operating assets and liabilities were primarily the result of a$14.7 million decrease in accounts receivable due to collections being greater than billings during the period, a$4.9 million increase in deferred revenue resulting from increased billings for subscriptions, and a$4.9 million decrease in prepaid expenses and other assets related to the timing of payments to vendors and amortization of prior amounts paid. Net cash inflows were partially offset by cash outflows resulting from a$9.5 million increase in deferred sales commissions due to commissions paid on new bookings, a$2.5 million decrease in accounts payable and accrued expenses due to timing of payments to vendors and a$2.2 million decrease in lease liabilities due to monthly rental payments for our operating leases. Cash used in operating activities for the six months endedJuly 31, 2020 of$27.9 million consisted of our net loss of$35.8 million , adjusted for non-cash charges of$19.1 million and net cash outflows of$11.2 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation of$9.7 million , amortization of deferred sales commissions of$5.2 million , and depreciation and amortization of$4.1 million . Net cash outflows from changes in operating assets and liabilities were primarily the result of a$6.9 million increase in deferred sales commissions due to commissions paid on new bookings, a$6.1 million decrease in deferred revenue resulting from decreased billings for subscriptions, a$2.5 million increase in accounts receivable due to new billings being greater than collections during the period, and a$0.8 million decrease in accounts payable and accrued expenses due to timing of payments to vendors. Net cash outflows were partially offset by cash inflows resulting from a$3.3 million decrease in prepaid expenses related to the timing of advance payments to vendors and amortization of prior amounts paid and a$1.7 million increase in other noncurrent liabilities for payroll taxes, which were deferred under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. Investing Activities Cash used in investing activities for the six months endedJuly 31, 2021 of$318.1 million primarily consisted of purchases of marketable securities of$291.7 million and cash paid for acquisitions, net of cash and restricted cash acquired of$40.3 million , partially offset by$15.2 million of maturities of marketable securities. Cash used in investing activities for the six months endedJuly 31, 2020 of$1.1 million primarily consisted of$1.0 million of capitalized internal-use software costs. Financing Activities Cash provided by financing activities for the six months endedJuly 31, 2021 of$18.0 million primarily consisted of proceeds from common stock option exercises of$13.3 million and proceeds from employee stock purchase plan of$4.7 million . Cash provided by financing activities for the six months endedJuly 31, 2020 of$25.7 million primarily consisted of proceeds from borrowings of$24.3 million under the SVB Agreement and proceeds from common stock option exercises of$2.1 million , partially offset by$0.6 million in payments of deferred offering costs associated with our initial public offering. 40 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations and Commitments The following table summarizes our contractual obligations atJanuary 31, 2021 : Payments Due by Period Total Less than 1 1-3 Years 3-5 Years More than Year 5 Year (in thousands) Operating lease commitments(1)$ 12,348 $ 5,320 $ 6,623 $ 405 $ - Hosting commitments 190,341 60,341 130,000 - - Other commitments 1,110 1,110 - - - Total$ 203,799 $ 66,771 $ 136,623 $ 405 $ - ____________
(1)Includes the Company's office locations even if they are not considered operating leases under ASC 842.
The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum, or variable price provisions, and the approximate timing of the actions under the contracts. Indemnification Agreements In the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we agree to indemnify customers, vendors, lessors, business partners, and other parties with respect to certain matters. Some of these indemnification provisions do not provide for a maximum potential amount of future payments we could be obligated to make. No demands have been made upon us to provide indemnification under such agreements, and there are no claims that we are aware of that could have a material effect on our condensed consolidated balance sheets, condensed consolidated statements of operations and condensed consolidated statements of comprehensive loss, or condensed consolidated statements of cash flows. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Critical Accounting Policies and Estimates We prepared our condensed consolidated financial statements and the related notes thereto, included elsewhere in this Quarterly Report on Form 10-Q, in accordance with GAAP. In preparation of these condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, as of the date of the financial statements, and the reported amounts of income and expenses during the reporting period. These estimates are based on information available as of the date of the financial statements and may involve subjective or significant judgment by management; therefore, actual results could differ from the estimates made by management. We refer to accounting estimates of this type as critical accounting policies and estimates. Our significant accounting policies are described in the section titled "Summary of Significant Accounting Policies" in Note 2 in our Annual Report on Form 10-K for the year endedJanuary 31, 2021 . There have been no significant changes to these policies for the six months endedJuly 31, 2021 except as described in the section titled "Summary of Significant Accounting Policies" in Note 2 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Recent Accounting Pronouncements See Note 2 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information about the impact of certain recent accounting pronouncements on our condensed consolidated financial statements. Item 3. Qualitative and Quantitative Disclosures about Market Risk We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and foreign currency exchange rates. 41 -------------------------------------------------------------------------------- Table of Contents Interest Rate Risk As ofJuly 31, 2021 , we had$87.1 million of cash equivalents invested in money market funds and$0.4 million was restricted cash primarily related to outstanding letters of credit established in connection with lease agreements for our facilities. In addition, we had$275.1 million in marketable securities, which consisted ofU.S. Treasury securities, corporate debt securities, commercial paper, foreign government obligations, supranational securities, and certificates of deposits. Our cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes. A hypothetical 10% relative change in interest rates during any of the periods presented would not have had a material impact on our results of operations. Foreign Currency Exchange Risk Our reporting currency is theU.S. dollar, and the functional currency of our foreign subsidiaries is the respective local currency. The assets and liabilities of each of our foreign subsidiaries are translated intoU.S. dollars at exchange rates in effect at each balance sheet date. Adjustments resulting from translating foreign functional currency financial statements intoU.S. dollars are recorded as a separate component on the condensed consolidated statements of comprehensive loss. Equity transactions are translated using historical exchange rates. Expenses are translated using the average exchange rate during the year. Gains or losses due to transactions in foreign currencies are included in interest and other income (expense), net in our condensed consolidated statements of operations. The volatility of exchange rates depends on many factors that we cannot forecast with reliable accuracy. We have experienced and will continue to experience fluctuations in foreign exchange gains and losses related to changes in foreign currency exchange rates. In the event our foreign currency denominated assets, liabilities, revenue, or expenses increase, our results of operations may be more greatly affected by fluctuations in the exchange rates of the currencies in which we do business. We have not engaged in the hedging of foreign currency transactions to date, although we may choose to do so in the future. A hypothetical 10% change in the relative value of theU.S. dollar to other currencies during any of the periods presented would not have had a material effect on our results of operations. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management, with the participation and supervision of our principal executive officer and our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified inSEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our principal executive officer and principal financial officer concluded that, as ofJuly 31, 2021 , our disclosure controls and procedures were effective at the reasonableness assurance level. Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter endedJuly 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitation on the Effectiveness of Internal Control The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, in designing and evaluating the disclosure controls and procedures, management recognizes that any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Moreover, projections of any evaluation of 42 -------------------------------------------------------------------------------- Table of Contents effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting. 43
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