Braze(BRZE) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides Braze, Inc.'s unaudited condensed consolidated financial statements and management's analysis for the quarter ended April 30, 2022 Item 1. Financial Statements This section presents Braze, Inc.'s unaudited condensed consolidated financial statements and related notes for the quarter ended April 30, 2022 Condensed Consolidated Balance Sheets (Unaudited) This section provides Braze, Inc.'s unaudited condensed consolidated balance sheets as of April 30, 2022, and January 31, 2022 | ASSETS | April 30, 2022 ($ thousands) | January 31, 2022 ($ thousands) | | :--------------------------- | :--------------------------- | :----------------------------- | | Cash and cash equivalents | 90,610 | 478,937 | | Marketable securities | 439,486 | 35,156 | | Total current assets | 598,765 | 608,185 | | TOTAL ASSETS | 716,298 | 666,262 | | LIABILITIES | | | | Total current liabilities | 180,979 | 159,966 | | TOTAL LIABILITIES | 228,754 | 161,444 | | TOTAL STOCKHOLDERS' EQUITY | 484,673 | 501,583 | - Cash and cash equivalents decreased significantly from $478.9 million to $90.6 million, while marketable securities increased from $35.2 million to $439.5 million, indicating a shift in asset allocation[26] - Total assets increased by approximately $50 million, driven by the increase in marketable securities and operating lease right-of-use assets[26] Condensed Consolidated Statements of Operations (Unaudited) This section presents Braze, Inc.'s unaudited condensed consolidated statements of operations for the three months ended April 30, 2022 and 2021 | Metric | Three Months Ended April 30, 2022 ($ thousands) | Three Months Ended April 30, 2021 ($ thousands) | | :--------------------------- | :---------------------------------------------- | :---------------------------------------------- | | Revenue | 77,495 | 47,877 | | Cost of revenue | 25,906 | 15,807 | | Gross profit | 51,589 | 32,070 | | Total operating expenses | 91,238 | 45,095 | | Loss from operations | (39,649) | (13,025) | | Net loss | (39,633) | (13,153) | | Net loss attributable to Braze, Inc. | (39,269) | (12,834) | | Net loss per share (basic & diluted) | (0.42) | (0.65) | - Revenue increased by 61.9% year-over-year, from $47.9 million in Q1 2021 to $77.5 million in Q1 2022[30] - Net loss attributable to Braze, Inc. significantly widened from $12.8 million to $39.3 million, primarily due to a substantial increase in operating expenses[30] Condensed Consolidated Statements of Comprehensive Loss (Unaudited) This section presents Braze, Inc.'s unaudited condensed consolidated statements of comprehensive loss for the three months ended April 30, 2022 and 2021 | Metric | Three Months Ended April 30, 2022 ($ thousands) | Three Months Ended April 30, 2021 ($ thousands) | | :------------------------------------------------------------------ | :---------------------------------------------- | :---------------------------------------------- | | Net loss | (39,633) | (13,153) | | Other comprehensive loss, net | (1,757) | (170) | | Comprehensive loss, net | (41,390) | (13,323) | | Comprehensive loss attributable to Braze, Inc. | (41,026) | (13,004) | - Other comprehensive loss increased significantly from $170 thousand in Q1 2021 to $1.76 million in Q1 2022, primarily driven by unrealized losses on marketable securities and foreign currency translation adjustments[34] Condensed Consolidated Statements of Convertible Preferred Stock, Redeemable Non-controlling Interest and Stockholders' Equity (Deficit) (Unaudited) This section presents Braze, Inc.'s unaudited condensed consolidated statements of stockholders' equity and related items as of April 30, 2022, and January 31, 2022 | Metric | April 30, 2022 ($ thousands) | January 31, 2022 ($ thousands) | | :----------------------------------- | :--------------------------- | :----------------------------- | | Redeemable Noncontrolling Interest | 2,871 | 3,235 | | Additional Paid-in Capital | 741,291 | 717,175 | | Accumulated Deficit | (254,230) | (214,961) | | Total Stockholders' Equity | 484,673 | 501,583 | - Total stockholders' equity decreased from $501.6 million to $484.7 million, primarily due to the accumulated deficit increasing by $39.3 million from net loss, partially offset by increases in additional paid-in capital from stock-based compensation and charitable stock donations[37] Condensed Consolidated Statements of Cash Flows (Unaudited) This section presents Braze, Inc.'s unaudited condensed consolidated statements of cash flows for the three months ended April 30, 2022 and 2021 | Cash Flow Activity | Three Months Ended April 30, 2022 ($ thousands) | Three Months Ended April 30, 2021 ($ thousands) | | :------------------------------------------------ | :---------------------------------------------- | :---------------------------------------------- | | Net cash provided by/(used in) operating activities | 17,921 | (3,807) | | Net cash (used in)/provided by investing activities | (407,803) | 17,153 | | Net cash provided by financing activities | 2,630 | 1,965 | | Net change in cash, cash equivalents, and restricted cash | (388,327) | 15,177 | | Cash, cash equivalents, and restricted cash, end of period | 94,646 | 48,195 | - Operating activities generated $17.9 million in cash in Q1 2022, a significant improvement from a $3.8 million cash outflow in Q1 2021[41] - Investing activities resulted in a substantial cash outflow of $407.8 million in Q1 2022, primarily due to increased purchases of marketable securities, contrasting with a $17.2 million inflow in Q1 2021[41] Notes to Condensed Consolidated Financial Statements (Unaudited) This section provides detailed notes on Braze, Inc.'s accounting policies, revenue recognition, fair value measurements, and other financial disclosures for the reported period 1. Company Overview Braze, Inc. is a cloud-based customer engagement platform operating as an emerging growth company, which has not experienced a material negative impact from the COVID-19 pandemic to date - Braze, Inc. is a cloud-based customer engagement platform that facilitates real-time experiences between brands and customers across various channels[47] - The company is an emerging growth company under the JOBS Act, utilizing extended transition periods for new accounting standards and reduced disclosure obligations[49] - Braze has not experienced a materially negative impact from the COVID-19 pandemic to date, but continues to monitor its potential effects[50] 2. Summary of Significant Accounting Policies This section outlines Braze's significant accounting policies, including the early adoption of ASC 842 (Leases) and Topic 326 (Credit Losses) on February 1, 2022 - Braze early adopted ASC 842 (Leases) on February 1, 2022, recognizing a $59.6 million right-of-use asset and a $61.3 million lease liability, without restating prior periods[68][70] - The company also early adopted Topic 326 (Credit Losses) on February 1, 2022, determining it had no material impact on consolidated financial statements[71] - Significant estimates and assumptions are made for revenue arrangements, deferred contract costs, stock-based compensation, operating leases, and tax assets, with increased judgment due to market volatility[54][55] 3. Revenue from Contracts with Customers Braze disaggregates revenue into subscription and professional services, with subscription being the primary driver, and recognized $59.5 million from deferred revenue in Q1 2022 | Revenue Type | Three Months Ended April 30, 2022 ($ thousands) | Three Months Ended April 30, 2021 ($ thousands) | | :---------------------------- | :---------------------------------------------- | :---------------------------------------------- | | Subscription | 72,836 | 44,708 | | Professional services and other | 4,659 | 3,169 | | Total | 77,495 | 47,877 | | Revenue Geography | Three Months Ended April 30, 2022 ($ thousands) | Three Months Ended April 30, 2021 ($ thousands) | | :---------------- | :---------------------------------------------- | :---------------------------------------------- | | United States | 45,352 | 28,865 | | International | 32,143 | 19,012 | | Total | 77,495 | 47,877 | - Revenue recognized from deferred revenue balances was $59.5 million for the three months ended April 30, 2022, up from $35.9 million in the prior year period[79] 4. Variable Interest Entity and Redeemable Non-Controlling Interest Braze operates Braze KK as a consolidated subsidiary and variable interest entity (VIE) to expand in the Japanese market, with its non-controlling interest classified as redeemable mezzanine equity - Braze KK is consolidated as a Variable Interest Entity (VIE) to expand the company's business in the Japanese market[84][85] - The non-controlling interest in Braze KK is classified as redeemable mezzanine equity due to investor put rights, but is not accreted to redemption value as redemption is not currently probable[86] 5. Fair Value Measurements Braze measures financial instruments at fair value, primarily classifying money market funds and U.S. government bonds as Level 1, and other debt securities as Level 2 | Financial Instrument | April 30, 2022 ($ thousands) | January 31, 2022 ($ thousands) | | :------------------------ | :--------------------------- | :----------------------------- | | Cash equivalents (Total) | 33,336 | 439,627 | | Marketable securities (Total) | 439,486 | 35,156 | | Total | 472,822 | 474,783 | - Money market funds and U.S. government bonds are classified as Level 1, while foreign government bonds, commercial paper, corporate debt securities, and asset-backed securities are classified as Level 2[89] 6. Marketable Securities Braze's marketable securities significantly increased to $439.5 million as of April 30, 2022, primarily in U.S. government securities, with unrealized losses due to interest rate expectations | Security Type | April 30, 2022 (Estimated Fair Value, $ thousands) | January 31, 2022 (Estimated Fair Value, $ thousands) | | :--------------------------- | :------------------------------------------------- | :------------------------------------------------- | | U.S. government securities | 353,913 | 4,006 | | Foreign bonds | 2,020 | 3,203 | | Commercial paper | 9,699 | 18,993 | | Corporate debt securities | 70,949 | 3,020 | | Asset-backed securities | 2,905 | 5,934 | | Total marketable securities | 439,486 | 35,156 | - The weighted-average remaining maturity of the investment portfolio was less than one year as of April 30, 2022[92] - Unrealized losses on marketable securities are primarily due to market volatility associated with expectations of aggressive interest rate increases by the Federal Reserve; no credit impairments were recorded[93] 7. Property and Equipment, Net Property and equipment, net, increased to $9.5 million as of April 30, 2022, driven by investments in capitalized internal-use software, computer equipment, and leasehold improvements | Asset Type | April 30, 2022 ($ thousands) | January 31, 2022 ($ thousands) | | :------------------------------ | :--------------------------- | :----------------------------- | | Capitalized internal-use software | 5,837 | 5,353 | | Computer equipment and software | 4,701 | 3,833 | | Leasehold improvements | 4,085 | 2,470 | | Total property and equipment, net | 9,497 | 7,393 | - Total depreciation and amortization expense for property and equipment was $1.0 million for the three months ended April 30, 2022, up from $0.6 million in the prior year[97] 8. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets decreased to $26.0 million as of April 30, 2022, primarily due to a reduction in prepaid software subscriptions | Asset Type | April 30, 2022 ($ thousands) | January 31, 2022 ($ thousands) | | :------------------------------ | :--------------------------- | :----------------------------- | | Prepaid software subscriptions | 12,531 | 19,396 | | Prepaid advertising | 1,192 | 704 | | Prepaid insurance | 3,501 | 4,372 | | Total prepaid expenses and other current assets | 26,006 | 29,588 | 9. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities decreased to $28.9 million as of April 30, 2022, mainly due to reductions in accrued software subscriptions and commissions | Liability Type | April 30, 2022 ($ thousands) | January 31, 2022 ($ thousands) | | :-------------------------------------- | :--------------------------- | :----------------------------- | | Accrued compensation costs | 14,269 | 14,075 | | Accrued software subscriptions | 2,458 | 3,217 | | Accrued commissions | 4,060 | 5,961 | | Total accrued expenses and other current liabilities | 28,870 | 31,623 | 10. Employee Benefit Plans Braze's matching contributions to its 401(k) plan increased to $1.8 million for the three months ended April 30, 2022, reflecting increased employee benefits - Matching contributions to the 401(k) plan increased to $1.8 million for the three months ended April 30, 2022, from $1.2 million in the prior year[102] 11. Stockholder's Equity (Deficit) Braze has a dual-class common stock structure and recorded a $4.3 million expense for a charitable donation of Class A common stock in Q1 2022 - Braze has Class A common stock (one vote per share) and Class B common stock (ten votes per share), with Class B convertible to Class A under certain conditions[103] - A charitable donation of 96,465 Class A common shares resulted in a $4.3 million expense in Q1 2022[104] 12. Employee Stock Plans Braze granted 1.6 million RSUs in Q1 2022, leading to a significant increase in total stock-based compensation expense to $17.2 million from $7.0 million in the prior year - No stock options were granted during the three months ended April 30, 2022, compared to 3.1 million shares granted in the prior year[109] - 1,594,649 Restricted Stock Units (RSUs) were granted during the three months ended April 30, 2022, with a weighted-average grant date fair value of $41.97[111] Stock-based compensation expense | Expense Category | Three Months Ended April 30, 2022 ($ thousands) | Three Months Ended April 30, 2021 ($ thousands) | | :--------------------------- | :---------------------------------------------- | :---------------------------------------------- | | Cost of revenue | 920 | 190 | | Sales and marketing | 5,667 | 2,338 | | Research and development | 6,173 | 2,587 | | General and administrative | 4,211 | 1,841 | | Total stock-based compensation expense | 17,203 | 6,956 | 13. Commitments and Contingencies Braze is subject to indirect taxes and legal proceedings, with $1.3 million in related liabilities recognized as of April 30, 2022, but no material loss is expected beyond recognized amounts - Braze is subject to indirect taxation (VAT, GST, sales and use tax) in various U.S. states and foreign jurisdictions[118] - Liabilities for indirect tax contingencies totaled $1.3 million as of April 30, 2022 and January 31, 2022[118] - The company is involved in various legal or regulatory proceedings but believes no material loss will be incurred in excess of recognized amounts[119] 14. Leases Braze's lease portfolio consists of office space, with a total net lease cost of $4.6 million for Q1 2022, a weighted-average remaining term of 6.8 years, and a discount rate of 5.4% Lease Cost Type | Lease Cost Type | Three Months Ended April 30, 2022 ($ thousands) | | :-------------------- | :---------------------------------------------- | | Operating lease cost | 3,496 | | Variable lease cost | 585 | | Short-term lease cost | 552 | | Total net lease cost | 4,633 | - The weighted-average remaining lease term for operating leases is 6.8 years, with a weighted-average discount rate of 5.4%[121] 15. Income Taxes Braze recorded minimal income tax expense and an effective tax rate of 0.0% for Q1 2022, maintaining a full valuation allowance against its net deferred tax assets - Income tax expense was $0.0 million for the three months ended April 30, 2022, compared to $0.2 million in the prior year[124] - The effective tax rate was 0.0% for the three months ended April 30, 2022, and (1.2)% for the same period in 2021[124] - Braze maintains a full valuation allowance against its net deferred tax assets, as it is not more likely than not that they will be realized[125] 16. Net Loss per Share Braze's basic and diluted net loss per share improved to $(0.42) in Q1 2022 from $(0.65) in the prior year, despite a higher net loss, due to increased weighted-average shares outstanding Net Loss per Share | Metric | Three Months Ended April 30, 2022 | Three Months Ended April 30, 2021 | | :------------------------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net loss attributable to Braze, Inc. ($ thousands) | (39,269) | (12,834) | | Weighted-average shares outstanding (thousands) | 93,250 | 19,669 | | Net loss per share (basic and diluted) | (0.42) | (0.65) | - Potentially dilutive securities, including options and RSUs, were excluded from diluted net loss per share as their inclusion would be anti-dilutive[128] 17. Related Party Transactions Purchases of services from Datadog, Inc. increased to $0.6 million in Q1 2022, following Datadog's CFO joining Braze's board - Purchases of services from Datadog, Inc. increased from $0.2 million in Q1 2021 to $0.6 million in Q1 2022, following Datadog's CFO joining Braze's board[129] 18. Subsequent Events In June 2022, Braze granted 0.7 million shares of Class A common stock as RSUs to employees, with a grant date fair value of $26.0 million - In June 2022, Braze granted 0.7 million shares of Class A common stock as RSUs to employees, with a grant date fair value of $26.0 million[130] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses Braze's business, performance factors, financial results for Q1 2022, liquidity, capital resources, and critical accounting policies, highlighting revenue growth and increased net losses Overview Braze is a leading cloud-based customer engagement platform generating revenue primarily from subscription fees based on monthly active users and message volume, utilizing a 'land-and-expand' model - Braze is a cloud-based customer engagement platform enabling real-time, personalized interactions across channels like push notifications, email, and in-product messaging[133] - Revenue is primarily generated from subscription fees based on monthly active users and message volume, with additional revenue from professional services[135] - The company uses a 'land-and-expand' business model, increasing revenue by expanding platform usage, adding new channels, and selling additional products to existing customers[136] Factors Affecting Our Performance Braze's performance is driven by customer acquisition, expansion within its existing base, international growth, and continuous innovation, with the COVID-19 pandemic having mixed impacts - Braze aims to acquire new customers in existing strong verticals (Retail & eCommerce, Financial Services, Media & Telecom, Health & Wellness, On-Demand services) and expand into new ones[138] - Monthly active users (MAU) increased from 3.7 billion to 4.1 billion as of April 30, 2022[142] - Dollar-based net retention rate for the trailing 12 months ended April 30, 2022, was 127% for all customers and 133% for customers with ARR of $500,000 or more[147] - International revenue accounted for approximately 41% of total revenue for the three months ended April 30, 2022, with plans for further expansion in Europe and Asia-Pacific[148] - The COVID-19 pandemic has caused a modest adverse impact on sales cycles but a modest positive impact on messaging volume from existing customers, and slower growth in certain operating expenses[151] Components of Results of Operations This section details Braze's revenue components (subscription, professional services), cost of revenue, gross profit, and operating expenses, anticipating continued investment and increased costs due to growth and public company operations - Revenue is primarily from subscription services (platform access, support, excess usage) recognized ratably, and professional services (training, configuration) recognized over up to six months[155][156][157] - Cost of revenue includes third-party cloud infrastructure, application service providers, personnel, and overhead, expected to increase with business growth[159][160] - Operating expenses (sales & marketing, R&D, G&A) are primarily driven by personnel costs and allocated overhead, with expected increases due to growth and public company requirements[162] Results of Operations (Comparison of the Three Months Ended April 30, 2022 and April 30, 2021) Braze reported a 61.9% revenue increase to $77.5 million in Q1 2022, but net loss widened due to a 63.9% increase in cost of revenue and significant rises in operating expenses, including a $4.3 million charitable stock donation | Metric | Three Months Ended April 30, 2022 ($ thousands) | Three Months Ended April 30, 2021 ($ thousands) | Change ($ thousands) | % Change | | :--------------------------- | :---------------------------------------------- | :---------------------------------------------- | :------------------- | :------- | | Revenue | 77,495 | 47,877 | 29,618 | 61.9% | | Cost of revenue | 25,906 | 15,807 | 10,099 | 63.9% | | Gross profit | 51,589 | 32,070 | 19,519 | 60.9% | | Gross margin | 66.6% | 67.0% | -0.4% pts | | | Sales and marketing | 46,044 | 24,351 | 21,693 | 89.1% | | Research and development | 21,620 | 11,797 | 9,823 | 83.3% | | General and administrative | 23,574 | 8,947 | 14,627 | 163.5% | | Loss from operations | (39,649) | (13,025) | (26,624) | 204.4% | | Net loss | (39,633) | (13,153) | (26,480) | 201.3% | - Subscription revenue increased by $28.1 million (62.9%), with 47.4% from existing customer expansion and 52.6% from new customers; international revenue increased by $13.1 million[175] - The increase in cost of revenue was driven by $3.3 million in hosting/infrastructure fees, $3.5 million in third-party messaging fees, and $3.1 million in personnel/overhead costs[176] - General and administrative expenses included a $4.3 million expense for a charitable donation of Class A common stock[183] Liquidity and Capital Resources Braze held $534.1 million in cash, cash equivalents, and marketable securities as of April 30, 2022, with operating activities generating $17.9 million in cash, while investing activities used $407.8 million - As of April 30, 2022, principal liquidity sources were $534.1 million in cash, cash equivalents, and marketable securities[185] Cash Flow Activity | Cash Flow Activity | Three Months Ended April 30, 2022 ($ thousands) | Three Months Ended April 30, 2021 ($ thousands) | | :------------------------------------------------ | :---------------------------------------------- | :---------------------------------------------- | | Net cash provided by/(used in) operating activities | 17,921 | (3,807) | | Net cash (used in)/provided by investing activities | (407,803) | 17,153 | | Net cash provided by financing activities | 2,630 | 1,965 | - Non-GAAP Free Cash Flow was $15.7 million for Q1 2022, compared to $(4.6) million for Q1 2021, driven by higher collections from seasonally higher billings[197][199] - Significant funding requirements include $182.0 million in non-cancelable purchase commitments and $71.2 million in operating lease obligations, primarily due over the next five years[201] Critical Accounting Policies and Estimates Braze's financial statements rely on continuous evaluation of estimates and assumptions, with no material changes to critical accounting policies reported beyond those in Note 2 - The preparation of financial statements requires management to make estimates and assumptions that affect reported amounts[204] - No material changes to critical accounting policies and estimates were reported, other than those referenced in Note 2[205] Recently Adopted Accounting Pronouncements This section refers to Note 2, Summary of Significant Accounting Policies, for a discussion of recently adopted accounting pronouncements JOBS Act Accounting Election As an 'emerging growth company,' Braze uses an extended transition period for new accounting standards, which may affect comparability and investor attractiveness - Braze, as an 'emerging growth company,' has elected to use the extended transition period for complying with new or revised accounting standards under the JOBS Act[207][208] - This election may make the company's financial statements less comparable to other public companies and potentially affect investor attractiveness[208] Item 3. Quantitative and Qualitative Disclosures About Market Risk Braze is exposed to market risks from interest rate fluctuations and foreign currency exchange rates, though a hypothetical 10% change in either would not materially impact financial statements Inflation Risk Inflation has not materially affected Braze's business, but an inability to offset rising costs through price increases could harm profitability - Inflation has not had a material effect on Braze's business, financial condition, or results of operations[210] - Inability to offset higher costs from inflationary pressures through price increases could harm the business[210] Interest Rate Risk and Market Risk Braze held $534.1 million in cash, cash equivalents, and marketable securities as of April 30, 2022, with a hypothetical 10% interest rate change not materially impacting financial statements - As of April 30, 2022, Braze held $534.1 million in cash, cash equivalents, and marketable securities, with $439.5 million invested in government bonds, commercial paper, corporate debt, and asset-backed securities[211] - A hypothetical 10% change in interest rates would not have a material impact on the consolidated financial statements[212] Foreign Currency Exchange Rate Risk Braze's foreign currency risk on revenue is limited as most sales are USD-denominated, but operating expenses in foreign currencies create some exposure, with a 10% change not materially affecting exchange gains/losses - Braze's reporting and functional currency is the U.S. dollar; substantially all sales are USD-denominated, limiting foreign currency risk on revenue[213] - Operating expenses are denominated in local currencies (primarily USD, GBP, SGD, JPY), exposing the company to fluctuations in foreign currency exchange rates[213] - A hypothetical 10% change in the U.S. dollar's value against other currencies would not have a material effect on realized and unrealized foreign exchange gains/losses[214] Item 4. Controls and Procedures Braze's management concluded that disclosure controls were not effective as of April 30, 2022, due to three unremediated material weaknesses, despite financial statements being fairly stated, and is actively implementing a remediation plan Evaluation of Disclosure Controls and Procedures Management concluded that disclosure controls and procedures were not effective as of April 30, 2022, due to material weaknesses, though financial statements are deemed fairly stated - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were not effective as of April 30, 2022[218] - The ineffectiveness is attributed to three material weaknesses in internal control over financial reporting[218] - Unaudited condensed consolidated financial statements are deemed fairly stated in all material respects in accordance with GAAP, despite the material weaknesses[219] Material Weaknesses Three material weaknesses remain unremediated as of April 30, 2022: insufficient accounting policies, inadequate revenue recognition controls, and deficient IT controls, posing risks of material misstatement - Three material weaknesses remain unremediated as of April 30, 2022: insufficient written policies for accounting and financial reporting, lack of properly designed revenue recognition controls (ASC 606), and inadequate information technology controls[221] - These deficiencies could result in a material misstatement of financial statements not being prevented or detected timely[221] Remediation Plan Braze has developed a detailed remediation plan, including hiring resources, adopting new information security policies, and improving IT general controls, with efforts ongoing until deemed effective - Braze has developed a detailed remediation plan, including hiring additional internal resources, engaging external assistance, adopting new information security policies, and developing program change management and user access controls[222][409][410][411] - Remediation efforts are ongoing, and control weaknesses are not considered remediated until new controls have been operational, tested, and deemed effective by management[222][413] Changes in Internal Control Over Financial Reporting No material changes in internal control over financial reporting occurred during the period, other than ongoing steps to remediate identified material weaknesses - No material changes in internal control over financial reporting occurred during the period covered by this Quarterly Report on Form 10-Q, other than ongoing steps to remediate identified material weaknesses[223] Inherent Limitations on Effectiveness of Controls Management acknowledges that control systems provide only reasonable, not absolute, assurance against error and fraud due to inherent limitations and resource constraints - Management acknowledges that control systems provide only reasonable, not absolute, assurance against error and fraud due to inherent limitations and resource constraints[224][225] PART II. OTHER INFORMATION This section provides additional information including legal proceedings, risk factors, equity security sales, and exhibits for the reported period Item 1. Legal Proceedings Braze is not currently involved in any litigation expected to have a material adverse effect on its business, though defending against legal proceedings can be costly - Braze is not currently a party to any litigation that is believed to have a material adverse effect on its business, operating results, cash flows, or financial condition[228] - Legal proceedings can be costly, divert management attention, and may not be fully covered by insurance[228] Item 1A. Risk Factors This section outlines various risks and uncertainties that could materially affect Braze's business, financial condition, and share price, including growth, competition, technology, data privacy, and legal compliance Risk Factors Summary Key risks include unstable market conditions, difficulty forecasting growth, need for capital, intense competition, dependence on customer renewals, platform innovation, data privacy, and public company challenges - Key risks include unstable market conditions, difficulty forecasting future results due to rapid growth, need for additional capital, intense competition, and dependence on customer renewals and platform innovation[230][231] - Other significant risks involve platform performance issues, data privacy and security compliance, reliance on third-party cloud providers, and challenges related to being a public company with a dual-class stock structure[231][232] Risks Related to Our Growth and Capital Requirements Braze faces risks from unstable market conditions, unsustainable rapid growth, potential need for additional capital, uncertain future profitability due to operating losses, and inaccurate market opportunity estimates - Unstable market and economic conditions, including inflation and geopolitical conflicts, may adversely affect Braze's business, financial condition, and share price[233][234] - Rapid revenue growth may not be indicative of future growth, and forecasting is difficult due to limited operating history at current scale and various fluctuating factors[235][237][240][242] - Braze has a history of operating losses ($39.6 million in Q1 2022) and may not achieve or sustain profitability due to substantial investments in technology, sales, marketing, and international expansion[244][245] - Estimates of market opportunity and growth forecasts may be inaccurate, and the business may fail to grow at similar rates even if the market expands[246][248] Risks Related to Our Business and Our Brand Braze faces intense competition, requires continuous innovation and adaptation to technological changes, must effectively manage rapid growth, and is exposed to substantial liabilities from indemnity provisions in customer agreements - Braze faces intense competition from established and emerging marketing solution providers, many with greater resources, which could lead to pricing pressure and market share loss[249][250][251][252] - The company's ability to attract and retain customers depends on adapting to rapidly changing technology, evolving industry standards, and changing customer needs, including potential regulatory restrictions on customer engagement tools[256][257] - Dependence on a single platform means its failure to achieve continued market acceptance, or issues with platform performance, defects, or disruptions, could severely harm the business and reputation[267][271][273][274][275] - Failure to effectively manage rapid growth, expand sales and marketing, maintain a strong brand, or retain senior management and skilled employees could adversely affect business operations and future growth prospects[265][266][287][288][289][290][291][292][297][298][299] - Indemnity provisions in agreements expose Braze to substantial liability for intellectual property infringement, privacy law violations, and data breaches, potentially leading to significant costs[303][304] Risks Related to Our Dependence on Third-Parties Braze heavily relies on third-party providers for messaging and cloud infrastructure, exposing it to service disruptions, policy changes, and security incidents, while growth depends on successful strategic partnerships - Braze depends on third-party services for email and SMS delivery, and Apple/Google services for mobile/web notifications; disruptions or policy changes could harm customer engagement and business[313][314][315][316][317] - Substantially all cloud-based platform infrastructure is outsourced to third-party hosting providers, primarily AWS; any disruption, capacity limitation, or security incident could impair operations, lead to customer claims, and harm reputation[318][319][320][323][324] - Growth depends on strategic relationships with cloud alliance, infrastructure, and technology partners; failure to establish or maintain these relationships could impair market competitiveness and revenue growth[325][326][327] Risks Related to Privacy, Data Security and Data Protection Laws Braze is subject to stringent and evolving global data privacy laws, with non-compliance risking significant fines and litigation, while security breaches could severely harm its reputation and incur substantial liabilities - Braze is subject to numerous data privacy and security obligations, including federal and state laws in the U.S. (e.g., HIPAA, COPPA, CCPA, CPRA) and international regulations (e.g., EU GDPR, U.K. GDPR, PIPEDA, CASL)[330][331][332][333] - Non-compliance with these laws can lead to significant statutory penalties, fines (up to 20 million euros or 4% of global revenue under EU GDPR), litigation, and bans on data processing[331][332][333][338] - Cross-border data transfer laws (e.g., EU GDPR restrictions, 2021 SCCs, UK Addendum) increase complexity and costs, potentially limiting business operations in certain jurisdictions[334][335][336][337] - Security breaches or unauthorized access to data, whether by Braze or third-party providers, could result in reputational harm, reduced demand, government enforcement actions, litigation, and significant financial losses[339][340][341][343][344] Risks Related to Other Laws and Litigation Braze faces risks from evolving internet laws, potential litigation, and compliance with anti-corruption, anti-bribery, and export/import control laws, with international operations and NOL limitations posing adverse tax consequences - Changes in internet-related laws, regulations, or infrastructure (e.g., taxes, fees, security threats) could diminish demand for Braze's platform[347][348][349] - Future litigation, including claims related to customer activities or content, could be costly, divert management resources, and harm reputation[350][351][390][391][392][393] - Braze is subject to anti-corruption, anti-bribery, and anti-money laundering laws (e.g., FCPA, U.K. Bribery Act); non-compliance can lead to criminal/civil liability, fines, and reputational harm[354][355][356][357] - U.S. export controls and economic sanctions, as well as foreign import/export regulations, could impair Braze's ability to compete internationally and subject it to liability for violations[358][359][361][362][363] - International operations may lead to adverse tax consequences due to differing tax laws, rates, and interpretations, and the ability to use net operating losses (NOLs) may be limited by ownership changes or regulatory changes[364][365][367][368][369][370] Risks Related to Intellectual Property Braze relies on third-party and open-source software, faces challenges in protecting its proprietary technology, and is exposed to intellectual property infringement claims, all of which could lead to increased costs or litigation - Reliance on third-party licensed software means inability to maintain licenses or errors/vulnerabilities could increase costs or reduce service levels[371][372] - Use of open-source software carries risks of unanticipated license conditions, potential requirements to release proprietary source code, and litigation over ownership rights[374][375][376] - Failure to protect proprietary technology and intellectual property (patents, trademarks, trade secrets) through legal means and contractual protections could substantially harm the business, as enforcement is difficult and costly[377][378][379][380][381][382][383][384] - Braze may be subject to intellectual property infringement claims by third-parties, which are costly to defend, could result in significant damages, and may require licensing or developing alternative technologies[385][386][388][389] Risks Related to Socioeconomic Factors Braze's future revenue could be harmed if pandemic-driven demand does not continue, its hybrid work model presents operational challenges, and catastrophic events could disrupt business operations - Future revenue and results could be harmed if increased demand from certain industries (e.g., e-commerce, at-home fitness) due to COVID-19 does not continue after the pandemic[395][396] - The distributed workforce and hybrid work model, influenced by the COVID-19 pandemic, may lead to operational inefficiencies or employee dissatisfaction[397][398] - Natural catastrophic events and human-made problems (e.g., power disruptions, cyberattacks, global pandemics) could cause system interruptions, reputational harm, and loss of critical data[400][401] Risks Related to Being a Public Company As an 'emerging growth company,' Braze benefits from reduced reporting but faces risks from unremediated material weaknesses in internal controls, which could affect financial reporting accuracy and investor confidence - As an 'emerging growth company,' Braze uses an extended transition period for accounting standards and reduced disclosure, which may make its Class A common stock less attractive to investors[402][404][406] - Three material weaknesses in internal control over financial reporting remain unremediated, posing a risk to financial reporting accuracy and potentially leading to loss of investor confidence or delisting[407][408][413][414] - Operating as a public company incurs significant finance, legal, accounting, and other expenses, requiring substantial management time for compliance with regulations[444][445] Risks Related to Ownership of Our Class A Common Stock Braze does not intend to pay dividends, its dual-class stock structure concentrates voting control, and future stock sales or anti-takeover provisions could affect market price and stockholder influence - Braze does not intend to pay dividends, so investor returns depend on Class A common stock price appreciation[416][417] - The dual-class stock structure (Class B has 10 votes/share) concentrates voting control (90.8% as of April 30, 2022) with executive officers, directors, and significant holders, limiting influence for Class A stockholders[418][419] - An active public trading market for Class A common stock may not develop or be sustained, impairing liquidity and potentially reducing fair value[423] - Anti-takeover provisions in charter documents and Delaware law could make company acquisition more difficult and limit stockholder influence on management[424][425][426][427] - Exclusive venue provisions in the certificate of incorporation for certain lawsuits may discourage actions against directors and officers[428][429][430][431] General Risk Factors The market price of Braze's Class A common stock may be highly volatile, future stock issuances will dilute existing stockholders, and negative analyst reports could cause share price and trading volume to decline - The market price of Class A common stock may be highly volatile due to fluctuations in financial condition, market conditions, and other factors, leading to potential investment losses[436][437][438] - Issuance of additional capital stock for financings, acquisitions, or equity incentive plans will dilute all other stockholders[439][440] - Negative research or cessation of coverage by securities analysts could cause the share price and trading volume to decline[441][442][443] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Braze issued 96,465 Class A common shares as an unregistered sale to a charitable fund and detailed the use of $456.8 million net proceeds from its November 2021 IPO, with no material change in planned use Unregistered Sales of Equity Securities On April 25, 2022, Braze issued 96,465 shares of Class A common stock to a charitable donor-advised fund for no consideration, exempt from registration - On April 25, 2022, Braze issued 96,465 shares of Class A common stock to a charitable donor-advised fund for no consideration, exempt from registration under Section 4(a)(2) of the Securities Act[446][447] Use of Proceeds Braze's November 2021 IPO generated net proceeds of $456.8 million, with no material change in the planned use of these funds - Braze's initial public offering in November 2021 generated net proceeds of $456.8 million after deducting underwriting discounts and offering expenses[448][449] - There has been no material change in the planned use of proceeds from the IPO[449] Issuer Purchases of Equity Securities Braze repurchased 875 unvested shares of Class A common stock from employees during April 2022 Issuer Purchases of Equity Securities | Period | Total Number of Shares Purchased | | :----------------------- | :------------------------------- | | April 1 - April 30, 2022 | 875 | - All purchases represent the repurchase of unvested shares of Class A common stock previously issued to employees[453] Item 3. Defaults Upon Senior Securities This item is not applicable to Braze, Inc. for the reported period Item 4. Mine Safety Disclosures This item is not applicable to Braze, Inc. for the reported period Item 5. Other Information This item indicates that there is no other information to report for the period Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including CEO and CFO certifications and Inline XBRL documents - Exhibits include certifications from the Chief Executive Officer and Chief Financial Officer (31.1, 31.2, 32) and Inline XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[459][461] - Certifications under Exhibit 32 are furnished, not filed, and not incorporated by reference into other filings[462]