Smartsheet(SMAR) - 2021 Q2 - Quarterly Report

Filing Details Registrant Information This section provides Smartsheet Inc.'s basic filing information for the Quarterly Report on Form 10-Q, including registration, stock exchange, and filer status - Registrant: Smartsheet Inc.[2] - Filing Period: Quarterly period ended July 31, 2020[2] Securities Registered | Title of each class | Trading Symbol(s) | Name of each exchange on which registered | | :------------------ | :---------------- | :---------------------------------------- | | Class A common stock, no par value per share | SMAR | The New York Stock Exchange | - Filer Status: Large accelerated filer[3] - Shares Outstanding (as of August 31, 2020): 120,609,808 shares of Class A common stock[5] Table of Contents Report Structure This section outlines the complete structure of the Quarterly Report on Form 10-Q, detailing all parts, items, and sub-sections Table of Contents | Table of Contents | Page | | :--- | :--- | | Part I. Financial Information | 4 | | Item 1. Financial Statements (unaudited) | 4 | | Condensed Consolidated Statements of Operations and Comprehensive Loss | 4 | | Condensed Consolidated Balance Sheets | 5 | | Condensed Consolidated Statements of Changes in Shareholders' Equity | 6 | | Condensed Consolidated Statements of Cash Flows | 8 | | Notes to Condensed Consolidated Financial Statements | 10 | | 1. Overview and Basis of Presentation | 10 | | 2. Summary of Significant Accounting Policies | 11 | | 3. Revenue from Contracts with Customers | 14 | | 4. Deferred Commissions | 14 | | 5. Net Loss Per Share | 14 | | 6. Fair Value Measurements | 15 | | 7. Business Combinations | 16 | | 8. Goodwill and Net Intangible Assets | 17 | | 9. Share-Based Compensation | 17 | | 10. Income Taxes | 19 | | 11. Leases | 20 | | 12. Commitments and Contingencies | 22 | | 13. Geographic Information | 22 | | 14. Subsequent Events | 22 | | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 23 | | Item 3. Quantitative and Qualitative Disclosures about Market Risk | 41 | | Item 4. Controls and Procedures | 41 | | Part II. Other Information | 43 | | Item 1. Legal Proceedings | 43 | | Item 1A. Risk Factors | 43 | | Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 71 | | Item 6. Exhibits | 71 | | Signatures | 72 | Special Note Regarding Forward-Looking Statements Forward-Looking Statements Disclaimer This section cautions that forward-looking statements are based on current expectations, subject to risks, and not guarantees of future performance - All statements other than historical facts, including future operating results, financial position, business strategy, plans, market growth, trends, and objectives, are considered forward-looking statements[9] - Forward-looking statements are based on current expectations and projections about future events and trends, including the macroeconomic impact of COVID-19[9] - These statements are subject to risks, uncertainties, and assumptions, including those detailed in 'Part II, Item 1A, Risk Factors,' and the company undertakes no obligation to update them[9][10] Part I. Financial Information Item 1. Financial Statements (unaudited) This section presents Smartsheet Inc.'s unaudited condensed consolidated financial statements and comprehensive notes for the periods ended July 31, 2020 and 2019 Condensed Consolidated Statements of Operations and Comprehensive Loss Condensed Consolidated Statements of Operations and Comprehensive Loss (Three Months Ended July 31) | (in thousands, except per share data) | 2020 | 2019 | | :------------------------------------ | :--- | :--- | | Total revenue | $91,222 | $64,644 | | Gross profit | $72,204 | $51,979 | | Total operating expenses | $98,914 | $72,927 | | Loss from operations | $(26,710) | $(20,948) | | Net loss and comprehensive loss | $(26,559) | $(19,114) | | Net loss per share, basic and diluted | $(0.22) | $(0.17) | Condensed Consolidated Statements of Operations and Comprehensive Loss (Six Months Ended July 31) | (in thousands, except per share data) | 2020 | 2019 | | :------------------------------------ | :--- | :--- | | Total revenue | $176,709 | $120,838 | | Gross profit | $139,250 | $97,688 | | Total operating expenses | $194,784 | $139,518 | | Loss from operations | $(55,534) | $(41,830) | | Net loss and comprehensive loss | $(54,343) | $(38,924) | | Net loss per share, basic and diluted | $(0.46) | $(0.36) | Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (as of July 31, 2020 vs. January 31, 2020) | (in thousands) | July 31, 2020 | January 31, 2020 | | :--------------- | :------------ | :--------------- | | Total assets | $788,883 | $797,714 | | Total liabilities | $283,158 | $283,654 | | Total shareholders' equity | $505,725 | $514,060 | - Cash and cash equivalents increased to $545,975 thousand as of July 31, 2020, from $515,924 thousand as of January 31, 2020[16] - Deferred revenue increased to $168,566 thousand as of July 31, 2020, from $157,972 thousand as of January 31, 2020[16] Condensed Consolidated Statements of Changes in Shareholders' Equity Changes in Shareholders' Equity (Six Months Ended July 31, 2020) | (dollars in thousands) | Balances at Jan 31, 2020 | Issuance of common stock under employee stock plans | Taxes paid related to net share settlement of equity awards | Share-based compensation expense | Comprehensive loss | Balances at July 31, 2020 | | :--------------------- | :----------------------- | :-------------------------------------------------- | :-------------------------------------------------------- | :------------------------------- | :----------------- | :----------------------- | | Additional Paid-in Capital | $770,518 | $14,082 | $(1,470) | $33,396 | — | $816,526 | | Accumulated Deficit | $(256,458) | — | — | — | $(54,343) | $(310,801) | - Total shareholders' equity decreased from $514,060 thousand at January 31, 2020, to $505,725 thousand at July 31, 2020, primarily due to comprehensive loss[23] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (Six Months Ended July 31) | (in thousands) | 2020 | 2019 | | :--------------- | :--- | :--- | | Net cash used in operating activities | $(25,603) | $(11,877) | | Net cash provided by (used in) investing activities | $43,876 | $(83,321) | | Net cash provided by financing activities | $11,638 | $391,809 | | Net increase in cash, cash equivalents, and restricted cash | $29,956 | $296,395 | - Cash paid for interest was $84 thousand in 2020, down from $118 thousand in 2019[29] - Cash paid for income taxes was $71 thousand in 2020, down from $121 thousand in 2019[29] Notes to Condensed Consolidated Financial Statements 1. Overview and Basis of Presentation This note describes Smartsheet Inc.'s cloud-based platform business and the basis of presentation for its unaudited financial statements - Smartsheet Inc. is a leading cloud-based platform for work execution, enabling teams to plan, capture, manage, automate, and report on work at scale[32] - Financial statements are prepared in conformity with GAAP and SEC rules for interim reporting, with certain information condensed or omitted[33] - Management makes estimates and judgments affecting reported amounts, with significant estimates involving revenue recognition, deferred commissions, internal-use software capitalization, business combinations, and operating leases[36] 2. Summary of Significant Accounting Policies This note summarizes Smartsheet's key accounting policies, including operating segment, accounts receivable, internal-use software, and new pronouncements - The Company operates as one operating segment[39] - Allowance for doubtful accounts reflects increased collectibility concerns due to macroeconomic conditions from the COVID-19 pandemic[41] Capitalized Internal-Use Software Costs | Period | Capitalized Costs (in millions) | | :----- | :------------------------------ | | 3 months ended July 31, 2020 | $2.2 | | 3 months ended July 31, 2019 | $2.2 (of which $1.4 related to platform) | | 6 months ended July 31, 2020 | $3.9 | | 6 months ended July 31, 2019 | $3.8 (of which $2.4 related to platform) | - No individual customer represented more than 10% of accounts receivable or revenue for the periods presented[51] - Adopted ASU 2016-13 (Credit Losses) and ASU 2018-15 (Cloud Computing Arrangement Costs) effective February 1, 2020, with ASU 2018-15 resulting in $0.9 million (3 months) and $1.6 million (6 months) of capitalized costs[52][53] 3. Revenue from Contracts with Customers This note details revenue recognized from subscription and professional services, including deferred revenue and remaining performance obligations Revenue Recognized from Deferred Revenue | Revenue Type | Three Months Ended July 31, 2020 | Three Months Ended July 31, 2019 | Six Months Ended July 31, 2020 | Six Months Ended July 31, 2019 | | :------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Subscription | $68.7 million | $45.3 million | $110.9 million | $68.5 million | | Professional services | $2.0 million | $1.9 million | $3.2 million | $1.9 million | - As of July 31, 2020, approximately $180.1 million of revenue was expected from remaining performance obligations ($176.6 million subscription, $3.4 million professional services), with 96% expected within the next 12 months[60] 4. Deferred Commissions This note provides the balances of deferred commissions and the associated amortization expense, which is recognized in sales and marketing over a three-year period Deferred Commissions Balance | As of | Amount (in thousands) | | :---- | :-------------------- | | July 31, 2020 | $51,700 | | January 31, 2020 | $48,300 | Deferred Commissions Amortization Expense | Period | Amount (in thousands) | | :----- | :-------------------- | | Three months ended July 31, 2020 | $7,400 | | Three months ended July 31, 2019 | $4,600 | | Six months ended July 31, 2020 | $14,100 | | Six months ended July 31, 2019 | $8,400 | 5. Net Loss Per Share This note presents the calculation of basic and diluted net loss per share, weighted-average shares, and excluded anti-dilutive common stock equivalents Net Loss Per Share Attributable to Common Shareholders | Period | Net Loss (in thousands) | Weighted-Average Shares Outstanding (in thousands) | Net Loss Per Share, Basic and Diluted | | :----- | :---------------------- | :----------------------------------------------- | :------------------------------------ | | Three Months Ended July 31, 2020 | $(26,559) | 119,921 | $(0.22) | | Three Months Ended July 31, 2019 | $(19,114) | 111,557 | $(0.17) | | Six Months Ended July 31, 2020 | $(54,343) | 119,400 | $(0.46) | | Six Months Ended July 31, 2019 | $(38,924) | 108,626 | $(0.36) | Potentially Dilutive Shares Excluded | As of July 31, | 2020 (in thousands) | 2019 (in thousands) | | :-------------- | :------------------ | :------------------ | | Shares subject to outstanding common stock awards | 13,103 | 13,348 | | Shares issuable pursuant to ESPP | 145 | 116 | | Total potentially dilutive shares | 13,248 | 13,464 | 6. Fair Value Measurements This note categorizes financial assets and liabilities measured at fair value based on a three-level hierarchy of valuation inputs - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1 prices), and Level 3 (unobservable inputs)[66] Financial Assets Measured at Fair Value (July 31, 2020) | (in thousands) | Level 1 | Level 2 | Level 3 | Total | | :------------- | :------ | :------ | :------ | :---- | | Money market funds | $518,263 | $— | $— | $518,263 | | Total assets | $518,263 | $— | $— | $518,263 | Financial Assets Measured at Fair Value (January 31, 2020) | (in thousands) | Level 1 | Level 2 | Level 3 | Total | | :------------- | :------ | :------ | :------ | :---- | | 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 | 7. Business Combinations This note details the acquisition of Artefact Product Group (10,000ft) for $27.8 million in cash, including purchase price allocation and goodwill - Acquired 100% of Artefact Product Group (10,000ft) on May 1, 2019, for approximately $27.8 million in cash[68] - The acquisition was complementary to existing product capabilities, accelerating time to market for a resource planning software solution[68] Purchase Price Allocation (May 1, 2019) | (in thousands) | Amount | | :------------- | :----- | | Cash | $1,150 | | Current Assets | $801 | | Intangible Assets | $16,090 | | Goodwill | $11,001 | | Current Liabilities | $(180) | | Deferred Revenue | $(1,030) | | Total | $27,832 | Identifiable Intangible Assets at Acquisition Date | Asset | Fair Value (in thousands) | 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 | | 8. Goodwill and Net Intangible Assets This note presents components of net intangible assets, including carrying amounts, amortization, and estimated remaining amortization expense, with no changes in goodwill - There were no changes in the carrying amount of goodwill or measurement period adjustments during the six months ended July 31, 2020[73] Components of Net Intangible Assets (as of July 31, 2020) | (in thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | | :------------- | :-------------------- | :----------------------- | :------------------ | | Acquired software technology | $9,866 | $(3,436) | $6,430 | | Acquired customer relationships | $8,350 | $(1,459) | $6,891 | | Trade names | $100 | $(47) | $53 | | Patents | $170 | $(101) | $69 | | Domain name | $13 | $— | $13 | | Total | $18,499 | $(5,043) | $13,456 | Estimated Remaining Amortization Expense for Finite-Lived Intangible Assets (as of July 31, 2020) | Fiscal Year | Amount (in thousands) | | :---------- | :-------------------- | | Remainder of Fiscal 2021 | $1,659 | | Fiscal 2022 | $2,897 | | Fiscal 2023 | $2,608 | | Fiscal 2024 | $2,607 | | Fiscal 2025 | $1,406 | | Thereafter | $2,266 | | Total | $13,443 | 9. Share-Based Compensation This note details Smartsheet's share-based compensation plans, including stock options, RSUs, ESPP, and total expense recognized across functional areas Stock Option Activity (Six Months Ended July 31, 2020) | | Options Outstanding | Weighted-Average Exercise Price | | :------------------------ | :------------------ | :------------------------------ | | Outstanding at January 31, 2020 | 9,076,671 | $8.18 | | Granted | 453,288 | $42.10 | | Exercised | (1,271,126) | $5.77 | | Forfeited or canceled | (126,557) | $10.98 | | Outstanding at July 31, 2020 | 8,132,276 | $10.40 | | Exercisable at July 31, 2020 | 5,026,994 | $6.19 | Restricted Stock Unit (RSU) Activity (Six Months Ended July 31, 2020) | | Number of Shares Underlying Outstanding RSUs | Weighted-Average Grant-Date Fair Value per RSU | | :------------------------ | :------------------------------------------- | :--------------------------------------------- | | Outstanding at January 31, 2020 | 3,138,330 | $39.32 | | Granted | 2,663,368 | $39.96 | | Vested | (613,006) | $39.28 | | Forfeited or canceled | (217,655) | $39.98 | | Outstanding at July 31, 2020 | 4,971,037 | $39.64 | Total Share-Based Compensation Expense | (in thousands) | Three Months Ended July 31, 2020 | Three Months Ended July 31, 2019 | Six Months Ended July 31, 2020 | Six Months Ended July 31, 2019 | | :------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Cost of subscription revenue | $1,113 | $356 | $2,008 | $591 | | Cost of professional services revenue | $566 | $298 | $999 | $515 | | Research and development | $6,199 | $3,317 | $11,327 | $5,589 | | Sales and marketing | $6,738 | $3,276 | $11,844 | $5,385 | | General and administrative | $3,544 | $1,839 | $6,400 | $3,303 | | Total share-based compensation expense | $18,160 | $9,086 | $32,578 | $15,383 | 10. Income Taxes This note discusses Smartsheet's income tax provision, effective tax rate, valuation allowance on deferred tax assets, and CARES Act impacts - The Company recorded a provision for income taxes of $0.1 million for the three and six months ended July 31, 2020, primarily due to foreign and state income taxes[89] - The effective tax rate differs from the U.S. federal statutory rate primarily due to a valuation allowance on U.S. federal, state, and certain foreign deferred tax assets[88] - The Company elected to defer the employer portion of Social Security taxes under the CARES Act, with a payable of $4.7 million as of July 31, 2020[91] 11. Leases This note details the company's operating and finance leases, including costs, balance sheet impact, cash flow, and remaining maturities Total Lease Costs | (in thousands) | Three Months Ended July 31, 2020 | Three Months Ended July 31, 2019 | Six Months Ended July 31, 2020 | Six Months Ended July 31, 2019 | | :------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Total lease costs | $5,885 | $4,292 | $11,580 | $8,591 | Lease Assets and Liabilities (as of July 31, 2020 vs. January 31, 2020) | (in thousands) | July 31, 2020 | January 31, 2020 | | :------------- | :------------ | :--------------- | | Operating lease right-of-use assets | $65,046 | $57,590 | | Finance lease assets | $1,821 | $3,939 | | Operating lease liabilities, current | $14,116 | $13,020 | | Finance lease liabilities, current | $1,916 | $2,465 | | Operating lease liabilities, non-current | $54,982 | $47,913 | | Finance lease liabilities, non-current | $866 | $1,664 | Weighted-Average Lease Terms and Discount Rates (as of July 31, 2020) | Lease Type | Remaining Lease Term (Years) | Discount Rate | | :--------- | :--------------------------- | :------------ | | Operating leases | 6.0 | 5.5% | | Finance leases | 1.5 | 4.6% | - Future non-cancelable lease payments for additional office space, not yet commenced, total $26.5 million over 8 years[95] 12. Commitments and Contingencies This note outlines Smartsheet's significant purchase commitments, including a $75.0 million cloud hosting agreement, and addresses legal matters - Entered into a four-year commitment with a cloud-based hosting service provider for $75.0 million during the three months ended July 31, 2020[97] - As of July 31, 2020, the entire $75.0 million commitment remained unpaid, with upfront payments scheduled through fiscal 2025[97] - The Company is not a party to any material legal proceedings but is monitoring an indemnification claim in a litigation involving a former director and shareholder[98] 13. Geographic Information This note provides a breakdown of Smartsheet's revenue by geographic location, with the United States as the primary contributor Revenue by Geographic Area (in thousands) | Geographic Area | Three Months Ended July 31, 2020 | Three Months Ended July 31, 2019 | Six Months Ended July 31, 2020 | Six Months Ended July 31, 2019 | | :-------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | United States | $74,238 | $50,884 | $143,224 | $95,039 | | EMEA | $8,819 | $7,323 | $17,524 | $13,572 | | Asia Pacific | $3,623 | $3,408 | $7,043 | $6,233 | | Americas other than the United States | $4,542 | $3,029 | $8,918 | $5,994 | | Total | $91,222 | $64,644 | $176,709 | $120,838 | - No individual country other than the United States contributed more than 10% of total revenue[99] - No significant property and equipment owned by the Company outside of the United States as of July 31, 2020, and January 31, 2020[100] 14. Subsequent Events This note discloses the agreement to acquire 100% of Brandfolder Inc. on August 23, 2020, for an estimated $150.0 million - On August 23, 2020, the Company agreed to acquire 100% of Brandfolder Inc. for an estimated $150.0 million[101] - The purchase consideration will consist of $124.0 million in cash and the remainder in Company common stock[101] - The acquisition is expected to close during the fiscal quarter ending October 31, 2020[101] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of Smartsheet Inc.'s financial condition and results, covering business, COVID-19 impact, metrics, revenue, expenses, non-GAAP measures, liquidity, and accounting policies Overview - Smartsheet is a leading cloud-based platform for work execution, enabling teams to plan, capture, manage, automate, and report on work at scale[103] - Revenue is primarily generated from subscriptions to its cloud-based platform, with offerings including various subscription levels (Individual, Business, Enterprise, Premier), connectors, and specialized solutions like Dynamic View and Control Center[105] - Customers can acquire subscriptions directly from the website, through the sales force, via free trials, or as collaborators[106] Impact of COVID-19 - The company implemented travel restrictions and a mandatory work-from-home policy for its global workforce starting in early February and mid-March 2020[108] - COVID-19 uncertainties impacted customer purchasing decisions, leading to deferrals, and limited the ability to deliver consulting and training services due to travel restrictions[109] - The broader implications of COVID-19 on business, operating results, and financial performance remain uncertain, with potential impacts including delayed purchase decisions and requests for extended billing/payment terms[110] Key Business Metrics Key Business Metrics (as of July 31) | Metric | 2020 | 2019 | | :----- | :--- | :--- | | Average annualized contract value per domain-based customer | $4,156 | $2,972 | | Dollar-based net retention rate for all customers (trailing 12 months) | 128% | 134% | | Customers with ACV of $5 thousand or more | 10,049 | 7,673 | | Customers with ACV of $50 thousand or more | 1,131 | 635 | | Customers with ACV of $100 thousand or more | 433 | 226 | - Average ACV per domain-based customer increased by 39.8% year-over-year, indicating stronger customer commitment and sales force productivity[112][113] - Dollar-based net retention rate decreased from 134% to 128%, reflecting changes in customer relationships and expansion[112][115] Components of Results of Operations - Subscription revenue is recognized ratably over the subscription period, while professional services revenue is recognized as services are delivered or upon completion[116][117] - Cost of subscription revenue includes hosting fees, support costs, and amortization of acquisition-related intangibles; the company is migrating infrastructure to the public cloud[118][119] - Gross margin may fluctuate due to revenue mix, timing of infrastructure investments, and share-based compensation, with an expected moderate decline due to technology innovation investments[121] - Operating expenses (R&D, S&M, G&A) are expected to increase in absolute dollars but gradually decrease as a percentage of total revenue due to economies of scale[123][124][126] - Interest income is expected to remain insignificant due to the current near-zero interest rate environment[127] - Income tax provision is not historically significant due to operating losses, with a valuation allowance on deferred tax assets[129] Results of Operations Total Revenue Growth (YoY) | Period | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | % Change | | :----- | :------------------ | :------------------ | :-------------------- | :------- | | Three Months Ended July 31 | $91,222 | $64,644 | $26,578 | 41% | | Six Months Ended July 31 | $176,709 | $120,838 | $55,871 | 46% | Subscription Revenue Growth (YoY) | Period | 2020 (in thousands) | 2019 (in thousands) | Change (in thousands) | % Change | | :----- | :------------------ | :------------------ | :-------------------- | :------- | | Three Months Ended July 31 | $83,622 | $58,315 | $25,307 | 43% | | Six Months Ended July 31 | $160,785 | $108,636 | $52,149 | 48% | Gross Margin Trends (YoY) | Period | Subscription Gross Margin 2020 | Subscription Gross Margin 2019 | Professional Services Gross Margin 2020 | Professional Services Gross Margin 2019 | | :----- | :----------------------------- | :----------------------------- | :-------------------------------------- | :-------------------------------------- | | Three Months Ended July 31 | 85% | 86% | 17% | 26% | | Six Months Ended July 31 | 85% | 87% | 18% | 27% | - Operating expenses increased significantly year-over-year for both three and six-month periods, driven by increased employee-related costs (including share-based compensation) and investments in R&D, sales & marketing, and G&A[137][138][139][150][151][152] - Interest income decreased by 96% for the three months and 57% for the six months ended July 31, 2020, primarily due to declining interest rates[140][153] Non-GAAP Financial Measures - Non-GAAP financial measures (gross profit, operating loss, net loss, free cash flow, calculated billings) are used to evaluate operating performance and provide consistency with past financial performance, but have limitations as analytical tools[155][156] Non-GAAP Gross Profit and Margin | (dollars in thousands) | Three Months Ended July 31, 2020 | Three Months Ended July 31, 2019 | Six Months Ended July 31, 2020 | Six Months Ended July 31, 2019 | | :--------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Non-GAAP gross profit | $74,438 | $53,244 | $143,368 | $99,583 | | Non-GAAP gross margin | 82% | 82% | 81% | 82% | Non-GAAP Operating Loss and Margin | (dollars in thousands) | Three Months Ended July 31, 2020 | Three Months Ended July 31, 2019 | Six Months Ended July 31, 2020 | Six Months Ended July 31, 2019 | | :--------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Non-GAAP operating loss | $(7,371) | $(10,820) | $(20,925) | $(24,875) | | Non-GAAP operating margin | (8)% | (17)% | (12)% | (21)% | Free Cash Flow | (in thousands) | Three Months Ended July 31, 2020 | Three Months Ended July 31, 2019 | Six Months Ended July 31, 2020 | Six Months Ended July 31, 2019 | | :------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Free cash flow | $(4,423) | $(7,310) | $(32,650) | $(20,401) | Calculated Billings | (in thousands) | Three Months Ended July 31, 2020 | Three Months Ended July 31, 2019 | Six Months Ended July 31, 2020 | Six Months Ended July 31, 2019 | | :------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Calculated billings | $97,266 | $79,450 | $187,158 | $148,572 | - Calculated billings for the six months ended July 31, 2020, were negatively affected by economic circumstances caused by COVID-19[167] Liquidity and Capital Resources - As of July 31, 2020, principal liquidity sources were cash and cash equivalents totaling $546.0 million[169] - The company has historically generated significant operating losses and negative cash flows from operations, expecting this trend to continue[169][174] - Deferred revenue of $169.3 million (with $168.6 million current) is a substantial source of cash, expected to be recognized as revenue in the subsequent 12 months[172] Summary of Cash Flows (Six Months Ended July 31) | (in thousands) | 2020 | 2019 | | :--------------- | :--- | :--- | | Net cash used in operating activities | $(25,603) | $(11,877) | | Net cash provided by (used in) investing activities | $43,876 | $(83,321) | | Net cash provided by financing activities | $11,638 | $391,809 | | Net increase in cash, cash equivalents, and restricted cash | $29,956 | $296,395 | - Net cash provided by investing activities in 2020 was $43.9 million, primarily from proceeds from early termination of short-term investments, a significant change from net cash used in 2019[177][178] - Net cash provided by financing activities decreased substantially in 2020 to $11.6 million from $391.8 million in 2019, which included proceeds from a follow-on offering[179][180] - The company has a four-year commitment with a cloud-based hosting service provider for $75.0 million and is monitoring an indemnification claim[181][182][183] - No off-balance sheet arrangements as of July 31, 2020[184] Critical Accounting Policies and Estimates - The company's significant accounting policies and estimates are discussed in Note 2 of the Annual Report on Form 10-K for the year ended January 31, 2020, with no significant changes during the six months ended July 31, 2020, except as noted in this report[186] - Recently adopted accounting pronouncements are detailed in Note 2 of the condensed consolidated financial statements[187] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section discusses Smartsheet's exposure to market risks, including interest rate and foreign currency exchange risk, with no material impact expected from hypothetical changes - The company had $546.0 million in cash and cash equivalents as of July 31, 2020, primarily invested in money market funds, subject to interest rate risk[189] - A hypothetical 10% relative change in interest rates would not have a material impact on the value of cash equivalents[191] - Foreign currency exchange risk exists due to revenue and expenses denominated in currencies like Euro, British Pound Sterling, Australian dollar, and Canadian dollar, but no hedging has been engaged in to date[192] - An immediate 10% increase or decrease in the relative value of the U.S. dollar to other currencies is not expected to have a material effect on operating results[192] Item 4. Controls and Procedures This section addresses management's evaluation of disclosure controls and procedures, concluding they were ineffective due to material weaknesses, despite fair financial statement presentation - Management concluded that disclosure controls and procedures were not effective as of July 31, 2020, due to material weaknesses in internal control over financial reporting[194] - Material weaknesses identified as of January 31, 2020, include an ineffective control environment (insufficient resources/expertise), ineffective IT general controls, and ineffective controls over order entry and pricing in billing/revenue processes[195] - Remediation efforts are underway, including risk assessment, IT general control design/implementation, process enhancements in revenue cycles, and hiring internal audit staff[197][200] - Despite material weaknesses, management concluded that the condensed consolidated financial statements fairly present the financial position, results of operations, and cash flows in conformity with GAAP[194][198] Part II. Other Information Item 1. Legal Proceedings This section states Smartsheet Inc. is not involved in material legal proceedings, but is monitoring an indemnification claim - The Company is not currently a party to any material legal proceedings or claims[203] - An indemnification claim has been made to the Company in a litigation involving a former director and shareholder, which the Company continues to monitor[203] Item 1A. Risk Factors This section outlines comprehensive risks for Smartsheet's Class A common stock, covering business, industry, COVID-19, competition, operations, regulatory, and stock ownership challenges - Investing in Class A common stock involves a high degree of risk, and actual results may differ materially from forward-looking statements[204] - The COVID-19 pandemic significantly impacts worldwide economic activity, posing risks such as increased collectibility concerns, reduced staff productivity, increased costs, customer churn, and challenges in acquiring new customers[207] - The company has a history of cumulative losses and cannot assure future profitability, expecting operating expenses to increase[208] - The market for collaborative work management platforms is highly competitive and fragmented, with competition from diversified global companies, startups, and large tech companies like Google and Microsoft[209][211] - Security breaches or unauthorized access to customer data could harm the platform's perceived security, lead to customer reduction, and incur significant liabilities[213][216] - Future growth depends on attracting new customers and expanding sales to existing ones, with renewal rates potentially declining due to various factors including customer satisfaction and economic conditions[220][221] - Quarterly operating results may fluctuate significantly due to factors like COVID-19 impact on customer segments, customer payment issues, sales cycles, and timing of expenses[222][223] - Reliance on third-party co-location data centers and public cloud service providers exposes the company to service outages, delays, or disruptions, which could harm business and operating results[225][229] - The company derives substantially all revenue from a single offering, making continued market demand for its cloud-based platform critical to success[230] - Rapid growth in personnel (from 274 to 1,780 employees between Jan 2016 and July 2020) places significant strain on management and infrastructure, requiring effective management to avoid operational difficulties[231][232] - Sales efforts targeting enterprise and government customers involve longer, more expensive sales cycles and potential implementation challenges, which could harm business[233][235] - Platform failures, inability to scale, or service outages could harm reputation, reduce market share, and lead to liability claims[236][238][240] - Failure to keep pace with rapid technological changes and evolving industry standards could make the platform less competitive[242][243] - Changes in privacy laws (e.g., GDPR, CCPA, invalidation of Privacy Shield) may reduce platform effectiveness, restrict operations, and lead to regulatory investigations or fines[245][246] - Loss of key personnel, including senior management, could disrupt business, especially given the lack of employment agreements and key person life insurance[247][248] - Growth depends on expanding the sales force, but competition for skilled personnel and challenges in recruiting, training, and retaining staff could adversely affect revenue growth[249][251][252] - Failure to maintain corporate culture during growth could impact innovation, teamwork, and ability to retain/recruit personnel[254] - Reliance on third-party software and services for critical business functions means defects or loss of access could negatively impact operations and reputation[259][272] - Use of 'open source' software carries risks of unanticipated license conditions, potential litigation, and requirements to release proprietary source code[274] - Failure to offer high-quality customer support could harm business and reputation, impacting sales and customer retention[275] - International expansion faces risks including foreign currency fluctuations, regulatory changes, tariffs, and difficulties in staffing and managing operations abroad[276][278][279] - Forecasts of market growth may be inaccurate, and the business may not grow at similar rates even if markets expand[280] - Changes in laws and regulations related to the Internet or infrastructure could diminish demand for the platform[281][283] - Failure to protect intellectual property rights (patents, copyrights, trademarks, trade secrets) could impair proprietary technology and brand[284][285] - Risk of being sued by third parties for alleged infringement of proprietary rights, leading to significant expenses, damages, or operational changes[286][287][288] - Being a public company incurs significant legal, accounting, and compliance expenses, diverting management's attention and potentially affecting executive/board member attraction/retention[289][291][292] - Identified material weaknesses in internal control over financial reporting could adversely affect financial reporting accuracy and timing, and lead to loss of investor confidence[293] - Acquisitions or investments may not realize anticipated benefits and could incur substantial costs, diverting resources and posing integration challenges[294][295] - Need for additional capital, with uncertainty about availability on favorable terms, could limit growth or business support[296][297] - Changes in accounting principles (GAAP) could harm reported financial results[298] - Exposure to additional sales tax or other tax liabilities due to evolving tax laws and interpretations, potentially increasing costs and harming business[299][301] - Ability to use net operating loss (NOLs) to offset future taxable income may be limited by ownership changes or regulatory changes[302][303] - Changes in tax laws or regulations could increase platform costs and harm business[304][306] - Exposure to foreign currency exchange rate fluctuations, which could make it difficult to detect underlying business trends and impact stock price[307][308] - Failure to comply with Federal Acquisition Regulations or anti-corruption and anti-money laundering laws (e.g., FCPA) could lead to penalties and adverse consequences[309][311] - Governmental export or import controls could limit ability to compete in foreign markets and subject the company to liability for violations[312][314] - Sales are generally weighted toward the end of each fiscal quarter, impacting timing of billings, revenue, and collections, and making performance prediction challenging[315][316] - Adverse societal, economic, and market conditions, political developments (e.g., Brexit), and reductions in productivity spending may harm business[317][318][319][321] - Catastrophic events (natural disasters, cyber-attacks, social unrest) may disrupt business operations, leading to system interruptions and reputational harm[322] - The market price of Class A common stock has been and will likely continue to be volatile due to numerous factors, including overall market fluctuations and company-specific events[323][324][326] - Sales of substantial amounts of Class A common stock by insiders or the perception of such sales could cause the market price to decline[327][330] - If securities or industry analysts publish inaccurate or unfavorable research, or cease coverage, the price and trading volume of Class A common stock could decline[331] - Provisions in corporate charter documents and Washington law could make an acquisition of the company more difficult and prevent attempts by shareholders to replace management[332][333][336] - Designation of Washington courts as the sole forum for certain actions could limit shareholders' ability to obtain a favorable judicial forum for disputes[337][338] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section confirms no unregistered sales of equity securities and no material change in IPO proceeds use - No unregistered sales of equity securities occurred[340] - There has been no material change in the planned use of proceeds from the IPO (effective April 26, 2018)[341] Item 6. Exhibits This section lists the exhibits filed as part of the Quarterly Report on Form 10-Q, including corporate governance documents, certifications from executive officers, and financial information presented in iXBRL format List of Exhibits | Exhibit Number | Exhibit Title | Form | File No. | Exhibit Filing Date | Filed Herewith | | :------------- | :------------ | :--- | :------- | :------------------ | :------------- | | 3.1 | Amended and Restated Articles of Incorporation | 10-Q | 001-38464 | June 12, 2018 | | | 3.2 | Amended and Restated Bylaws | 10-Q | 001-38464 | June 12, 2018 | | | 31.1 | Certification of Principal Executive Officer... | | | | X | | 31.2 | Certification of Principal Financial Officer... | | | | X | | 32.1* | Certification of Principal Executive Officer... | | | | X | | 32.2* | Certification of Principal Financial Officer... | | | | X | | 101 | iXBRL Financial Information | | | | X | | 104 | iXBRL Cover Page | | | | X | Signatures Executive Signatures This section contains the official signatures of Smartsheet Inc.'s President, CEO, CFO, and Treasurer, certifying the Quarterly Report - Report signed by Mark P. Mader, President and Chief Executive Officer, on September 4, 2020[346][347] - Report signed by Jennifer E. Ceran, Chief Financial Officer and Treasurer, on September 4, 2020[347][348]