Braze(BRZE) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited financial statements, management's analysis of financial condition, market risks, and internal controls Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive loss, stockholders' equity, and cash flows, along with detailed notes explaining significant accounting policies, revenue recognition, fair value measurements, and other financial details for the periods ended July 31, 2022, and January 31, 2022 Condensed Consolidated Balance Sheets (Unaudited) Condensed Consolidated Balance Sheets (Unaudited) | ASSETS (in thousands) | July 31, 2022 | January 31, 2022 | | :-------------------- | :------------ | :--------------- | | Cash and cash equivalents | $80,881 | $478,937 | | Marketable securities | $425,754 | $35,156 | | Total current assets | $580,904 | $608,185 | | TOTAL ASSETS | $702,093 | $666,262 | | LIABILITIES (in thousands) | July 31, 2022 | January 31, 2022 | | :-------------------- | :------------ | :--------------- | | Deferred revenue | $135,794 | $126,260 | | Total current liabilities | $184,306 | $159,966 | | TOTAL LIABILITIES | $229,198 | $161,444 | | TOTAL STOCKHOLDERS' EQUITY | $470,551 | $501,583 | Condensed Consolidated Statements of Operations (Unaudited) Condensed Consolidated Statements of Operations (Unaudited) | (in thousands, except per share amounts) | Three Months Ended July 31, 2022 | Three Months Ended July 31, 2021 | Six Months Ended July 31, 2022 | Six Months Ended July 31, 2021 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $86,131 | $55,756 | $163,626 | $103,633 | | Gross profit | $58,779 | $37,001 | $110,368 | $69,071 | | Loss from operations | $(35,107) | $(12,150) | $(74,756) | $(25,175) | | Net loss | $(33,413) | $(12,613) | $(73,046) | $(25,766) | | Net loss attributable to Braze, Inc. | $(32,886) | $(12,228) | $(72,155) | $(25,062) | | Net loss per share, basic and diluted | $(0.35) | $(0.60) | $(0.77) | $(1.25) | Condensed Consolidated Statements of Comprehensive Loss (Unaudited) Condensed Consolidated Statements of Comprehensive Loss (Unaudited) | (in thousands) | Three Months Ended July 31, 2022 | Three Months Ended July 31, 2021 | Six Months Ended July 31, 2022 | Six Months Ended July 31, 2021 | | :-------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(33,413) | $(12,613) | $(73,046) | $(25,766) | | Change in foreign currency translation adjustments | $(193) | $105 | $(755) | $(25) | | Unrealized gains (losses) on marketable securities | $(1,164) | $5 | $(2,359) | $(35) | | Comprehensive loss, net | $(34,770) | $(12,503) | $(76,160) | $(25,826) | | Comprehensive loss attributable to Braze, Inc. | $(34,243) | $(12,118) | $(75,269) | $(25,122) | Condensed Consolidated Statements of Convertible Preferred Stock, Redeemable Non-controlling Interest and Stockholders' Equity (Deficit) (Unaudited) Stockholders' Equity (Deficit) Activity (in thousands) | Item | Balance at April 30, 2022 | Balance at July 31, 2022 | | :-------------------------------------------------- | :------------------------ | :----------------------- | | Redeemable Noncontrolling Interest | $2,871 | $2,344 | | Additional Paid-in Capital | $741,291 | $761,412 | | Accumulated Deficit | $(254,230) | $(287,116) | | Total Stockholders' Equity | $484,673 | $470,551 | | Item | Balance at January 31, 2022 | Balance at July 31, 2022 | | :-------------------------------------------------- | :------------------------ | :----------------------- | | Redeemable Noncontrolling Interest | $3,235 | $2,344 | | Additional Paid-in Capital | $717,175 | $761,412 | | Accumulated Deficit | $(214,961) | $(287,116) | | Total Stockholders' Equity | $501,583 | $470,551 | - Stock-based compensation for the six months ended July 31, 2022, was $34,484 thousand, significantly higher than $12,624 thousand for the same period in 2021[36] Condensed Consolidated Statements of Cash Flows (Unaudited) Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands) | Cash Flow Activity | Six Months Ended July 31, 2022 | Six Months Ended July 31, 2021 | | :-------------------------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by/(used in) operating activities | $1,600 | $(8,414) | | Net cash (used in)/provided by investing activities | $(403,799) | $18,885 | | Net cash provided by financing activities | $5,411 | $2,584 | | Net change in cash, cash equivalents, and restricted cash | $(398,056) | $12,883 | | Cash, cash equivalents, and restricted cash, end of period | $84,917 | $45,901 | Supplemental Cash Flow Disclosure (in thousands) | Non-Cash Investing and Financing Activities | Six Months Ended July 31, 2022 | Six Months Ended July 31, 2021 | | :------------------------------------------ | :----------------------------- | :----------------------------- | | Stock-based compensation capitalized to internal-use software | $379 | $18 | | Unrealized net loss on marketable investment securities | $(2,359) | $(35) | Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Company Overview - Braze, Inc. operates as a cloud-based customer engagement platform, facilitating real-time interactions between brands and customers across various channels[48] - The Company will cease to qualify as an emerging growth company as of the end of the fiscal year ended January 31, 2023, leading to increased reporting requirements and compliance costs[50] 2. Summary of Significant Accounting Policies - The Company early adopted ASC 842 (Leases) and ASC 326 (Credit Losses) on February 1, 2022, with Topic 842 resulting in a $59.6 million right-of-use asset and a $61.3 million lease liability[68][69] - No single customer accounted for 10% or more of total revenue or accounts receivable for the periods presented, indicating diversified customer concentration[58][59] 3. Revenue from Contracts with Customers Total Revenue by Type (in thousands) | Revenue Type | Three Months Ended July 31, 2022 | Three Months Ended July 31, 2021 | Six Months Ended July 31, 2022 | Six Months Ended July 31, 2021 | | :------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Subscription | $81,727 | $51,727 | $154,563 | $96,435 | | Professional services and other | $4,404 | $4,029 | $9,063 | $7,198 | | Total | $86,131 | $55,756 | $163,626 | $103,633 | Total Revenue by Geography (in thousands) | Geography | Three Months Ended July 31, 2022 | Three Months Ended July 31, 2021 | Six Months Ended July 31, 2022 | Six Months Ended July 31, 2021 | | :---------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | United States | $49,875 | $33,592 | $95,227 | $62,457 | | International | $36,256 | $22,164 | $68,399 | $41,176 | | Total | $86,131 | $55,756 | $163,626 | $103,633 | Remaining Performance Obligations (in millions) | Date | Total | Less than 1 Year | 1-5 Years | | :--------- | :---- | :--------------- | :-------- | | July 31, 2022 | $410.5 | $274.2 | $136.3 | | January 31, 2022 | $373.6 | $237.8 | $135.8 | 4. Variable Interest Entity and Redeemable Non-Controlling Interest - Braze KK, a Japanese subsidiary, is consolidated, with investors holding a redeemable non-controlling interest classified in mezzanine equity due to a future put right[83][85] - Stock options issued to Braze KK employees are classified as a liability within Other long-term liabilities, totaling $0.1 million as of July 31, 2022[84] 5. Fair Value Measurements Financial Instruments Measured at Fair Value (in thousands) | Category | July 31, 2022 Total | January 31, 2022 Total | | :-------------------- | :------------------ | :------------------- | | Cash equivalents | $474 | $439,627 | | Marketable securities | $425,754 | $35,156 | | Total | $426,228 | $474,783 | - Money market funds and U.S. government bonds are classified as Level 1, while foreign government bonds, corporate debt securities, and asset-backed securities are Level 2[88] 6. Marketable Securities Marketable Securities (in thousands) | Security Type | July 31, 2022 Estimated Fair Value | January 31, 2022 Estimated Fair Value | | :-------------------- | :------------------------------- | :-------------------------------- | | U.S. government securities | $323,577 | $4,006 | | Foreign bonds | $3,015 | $3,203 | | Corporate debt securities | $97,763 | $3,020 | | Asset-backed securities | $1,399 | $5,934 | | Total | $425,754 | $35,156 | - Unrealized losses on marketable available-for-sale debt securities totaled $(2,450) thousand as of July 31, 2022, primarily due to market volatility from expected interest rate increases[90][92] Investment Income (in thousands) | Item | Three Months Ended July 31, 2022 | Three Months Ended July 31, 2021 | Six Months Ended July 31, 2022 | Six Months Ended July 31, 2021 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Interest income | $1,956 | $117 | $2,399 | $340 | | Investment income | $2,158 | $23 | $2,614 | $86 | 7. Property and Equipment, Net Property and Equipment, Net (in thousands) | Category | July 31, 2022 | January 31, 2022 | | :-------------------------------------------------- | :------------ | :--------------- | | Capitalized internal-use software | $6,542 | $5,353 | | Computer equipment, office equipment, and software | $6,657 | $3,833 | | Leasehold improvements | $9,184 | $2,470 | | Total property and equipment, net | $16,276 | $7,393 | - Total depreciation and amortization expense for property and equipment was $1.9 million for the six months ended July 31, 2022, up from $1.4 million in the prior year[97] 8. Prepaid Expenses and Other Current Assets Prepaid Expenses and Other Current Assets (in thousands) | Category | July 31, 2022 | January 31, 2022 | | :-------------------------------------------------- | :------------ | :--------------- | | Prepaid software subscriptions | $14,557 | $19,396 | | Investment interest receivable | $2,367 | $259 | | Total prepaid expenses and other current assets | $26,296 | $29,588 | 9. Accrued Expenses and Other Current Liabilities Accrued Expenses and Other Current Liabilities (in thousands) | Category | July 31, 2022 | January 31, 2022 | | :-------------------------------------------------- | :------------ | :--------------- | | Accrued compensation and employee benefit costs | $17,664 | $14,075 | | Accrued commissions | $4,226 | $5,961 | | Total accrued expenses and other current liabilities | $34,981 | $31,623 | 10. Employee Benefit Plans - Matching contributions to the 401(k) plan increased to $3.0 million for the six months ended July 31, 2022, from $1.7 million in the prior year[102] 11. Stockholder's Equity (Deficit) - The Company has a dual-class common stock structure, with Class A common stock having one vote per share and Class B common stock having ten votes per share[103] - A charitable donation of 96,465 shares of Class A common stock resulted in a $4.3 million expense recognized in general and administrative expenses during the six months ended July 31, 2022[104] 12. Employee Stock Plans - No stock options were granted during the three and six months ended July 31, 2022[109] - RSUs granted during the six months ended July 31, 2022, totaled 2,468,566 shares with a weighted-average grant date fair value of $36.55[112] Stock-based Compensation Expense (in thousands) | Category | Three Months Ended July 31, 2022 | Three Months Ended July 31, 2021 | Six Months Ended July 31, 2022 | Six Months Ended July 31, 2021 | | :-------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cost of revenue | $911 | $177 | $1,831 | $367 | | Sales and marketing | $5,439 | $1,957 | $11,106 | $4,295 | | Research and development | $6,921 | $1,571 | $13,094 | $4,158 | | General and administrative | $3,842 | $1,945 | $8,053 | $3,786 | | Total stock-based compensation, net of capitalized amounts | $17,113 | $5,650 | $34,084 | $12,606 | | Capitalized stock-based compensation expense | $299 | $0 | $531 | $0 | | Total stock-based compensation expense | $17,412 | $5,650 | $34,615 | $12,606 | 13. Commitments and Contingencies - Liabilities for indirect tax contingencies were $0.5 million as of July 31, 2022, a decrease from $1.3 million at January 31, 2022[120] - The Company believes no material loss will be incurred from legal or regulatory proceedings in excess of amounts recognized in financial statements[121] 14. Leases Operating Lease Costs (in thousands) | Lease Cost Type | Three Months Ended July 31, 2022 | Six Months Ended July 31, 2022 | | :-------------------- | :------------------------------- | :----------------------------- | | Operating lease cost | $3,397 | $6,893 | | Variable lease cost | $675 | $1,260 | | Short-term lease cost | $568 | $1,120 | | Total net lease cost | $4,640 | $9,273 | Operating Lease Liabilities (in thousands) | Maturity Period | Total Future Undiscounted Lease Payments | | :-------------------- | :--------------------------------------- | | 2023 | $5,096 | | 2024 | $11,363 | | 2025 | $10,529 | | 2026 | $8,264 | | 2027 | $7,300 | | Thereafter | $24,449 | | Total | $67,001 | | Less: Imputed interest | $(11,751) | | Total reported lease liability | $55,033 | - As of July 31, 2022, the weighted-average remaining lease term was 6.7 years with a weighted-average discount rate of 5.4%[124] 15. Income Taxes - The effective tax rate for the six months ended July 31, 2022, was (0.1)%, compared to (1.3)% for the same period in 2021[125] - The Company maintains a full valuation allowance against its net deferred tax assets, indicating uncertainty about their future realization[126] 16. Net Loss per Share Net Loss per Share Attributable to Braze, Inc. Common Stockholders (Basic and Diluted) | (in thousands, except per share amounts) | Three Months Ended July 31, 2022 | Three Months Ended July 31, 2021 | Six Months Ended July 31, 2022 | Six Months Ended July 31, 2021 | | :-------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss attributable to Braze, Inc. | $(32,886) | $(12,228) | $(72,155) | $(25,062) | | Weighted-average shares used to calculate net loss per share | 94,103 | 20,329 | 93,668 | 20,004 | | Net loss per share | $(0.35) | $(0.60) | $(0.77) | $(1.25) | 17. Related Party Transactions - The Company purchased approximately $1.0 million in services from Datadog, Inc. during the six months ended July 31, 2022, a vendor whose CFO joined Braze's board in May 2021[129] 18. Subsequent Events - In August 2022, the Company granted 0.6 million shares of Class A common stock as RSUs to employees, with a grant date fair value of $32.1 million[130] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of Braze's business, discusses key factors affecting its performance, analyzes the components of its results of operations, and compares financial results for the three and six months ended July 31, 2022 and 2021. It also covers liquidity, capital resources, critical accounting policies, and the impact of the JOBS Act Overview - Braze is a leading cloud-based customer engagement platform that enables brands to create real-time, personalized interactions with consumers[133] Key Financial Highlights (in millions) | Metric | Three Months Ended July 31, 2022 | Three Months Ended July 31, 2021 | Six Months Ended July 31, 2022 | Six Months Ended July 31, 2021 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $86.1 | $55.8 | $163.6 | $103.6 | | YoY Revenue Growth | 54.5% | - | 57.9% | - | | Net Loss | $(33.4) | $(12.6) | $(73.0) | $(25.8) | | Net Cash Provided by Operating Activities | - | - | $1.6 | $(8.4) | | Non-GAAP Free Cash Flow | - | - | $(9.0) | $(10.3) | Factors Affecting Our Performance - The Company had 1,599 customers as of July 31, 2022, and aims to expand its customer base across various verticals and regions[138] - Monthly active users (MAU) grew to 4.1 billion as of July 31, 2022, from 3.7 billion as of January 31, 2022, indicating platform usage expansion[142] Dollar-Based Net Retention Rate (Trailing 12 Months Ended July 31) | Customer Segment | 2022 | 2021 | | :-------------------- | :--- | :--- | | All customers | 126% | 125% | | Customers with ARR of $500,000 or more | 130% | 135% | - Approximately 42% of revenue for the six months ended July 31, 2022, was generated outside the United States, up from 40% in the prior year, reflecting international expansion[147] - The Company continues to invest in research and development to enhance its platform, particularly in artificial intelligence capabilities and channel offerings[148] - The COVID-19 pandemic has not had a materially negative impact on the Company's business, but the global situation and its potential effects are continuously monitored[149] Components of Results of Operations - Revenue is primarily generated from subscription services, based on monthly active users, message volume, platform access, and add-on products, with professional services as a secondary source[150][151] - Cost of revenue includes third-party cloud infrastructure, application service providers, and personnel-related costs, expected to increase with business growth[155][156] - Operating expenses (sales & marketing, R&D, G&A) are significantly driven by personnel costs and are expected to increase as the Company expands operations and global footprint[158] - Other income (expense), net, primarily consists of net exchange gains or losses on foreign currency transactions and investment income[167] - The Company maintains a full valuation allowance on its net deferred tax assets, indicating that realization of these assets is not more likely than not[168] Results of Operations Comparison of the Three Months Ended July 31, 2022 and July 31, 2021 Revenue Comparison (Three Months Ended July 31, in thousands) | Metric | 2022 | 2021 | Change | % Change | | :------- | :----- | :----- | :----- | :------- | | Revenue | $86,131 | $55,756 | $30,375 | 54.5% | - Subscription revenue increased by $30.0 million (58.0%), with 48.2% from existing customers and 51.8% from new customers. International revenue grew by 64%[171] Gross Profit and Margin Comparison (Three Months Ended July 31, in thousands) | Metric | 2022 | 2021 | Change | % Change | | :---------- | :----- | :----- | :----- | :------- | | Cost of revenue | $27,352 | $18,755 | $8,597 | 45.8% | | Gross profit | $58,779 | $37,001 | $21,778 | 58.9% | | Gross margin | 68.2% | 66.4% | - | - | - Gross margin increased to 68.2% due to economies of scale, optimized tech stack costs, and increased personnel efficiencies[174] Operating Expenses Comparison (Three Months Ended July 31, in thousands) | Expense Category | 2022 | 2021 | Change | % Change | | :-------------------- | :----- | :----- | :----- | :------- | | Sales and marketing | $50,007 | $27,492 | $22,515 | 81.9% | | Research and development | $23,336 | $11,595 | $11,741 | 101.3% | | General and administrative | $20,543 | $10,064 | $10,479 | 104.1% | - Other income, net, increased significantly to $1.7 million from $(0.3) million, primarily driven by investment income from IPO proceeds[180] Comparison of the Six Months Ended July 31, 2022 and July 31, 2021 Revenue Comparison (Six Months Ended July 31, in thousands) | Metric | 2022 | 2021 | Change | % Change | | :------- | :----- | :----- | :----- | :------- | | Revenue | $163,626 | $103,633 | $59,993 | 57.9% | - Subscription revenue increased by $58.1 million (60%), with 54% from existing customers and 46% from new customers. International revenue grew by 66%[181] Gross Profit and Margin Comparison (Six Months Ended July 31, in thousands) | Metric | 2022 | 2021 | Change | % Change | | :---------- | :----- | :----- | :----- | :------- | | Cost of revenue | $53,258 | $34,562 | $18,696 | 54.1% | | Gross profit | $110,368 | $69,071 | $41,297 | 59.8% | | Gross margin | 67.5% | 66.6% | - | - | - Gross margin increased to 67.5%, driven by increased stock-based compensation, employee headcount, and Class A common stock valuation, alongside economies of scale[183] Operating Expenses Comparison (Six Months Ended July 31, in thousands) | Expense Category | 2022 | 2021 | Change | % Change | | :-------------------- | :----- | :----- | :----- | :------- | | Sales and marketing | $96,051 | $51,843 | $44,208 | 85.3% | | Research and development | $44,956 | $23,392 | $21,564 | 92.2% | | General and administrative | $44,117 | $19,011 | $25,106 | 132.1% | - General and administrative expenses included a $4.3 million charitable donation of Class A common stock[187] - Other income, net, increased to $1.8 million from $(0.3) million, primarily due to higher investment income from IPO proceeds[188] Liquidity and Capital Resources - As of July 31, 2022, the Company's principal source of liquidity was $506.6 million in cash, cash equivalents, and marketable securities[190] - The Company had an accumulated deficit of $287.1 million as of July 31, 2022, and generated $1.6 million in net cash from operating activities for the six months ended July 31, 2022[191][194] Cash Flows Summary (Six Months Ended July 31, in thousands) | Cash Flow Activity | 2022 | 2021 | | :-------------------------------------------------- | :----- | :----- | | Net cash provided by/(used in) operating activities | $1,600 | $(8,414) | | Net cash (used in)/provided by investing activities | $(403,799) | $18,885 | | Net cash provided by financing activities | $5,411 | $2,584 | Non-GAAP Free Cash Flow (Six Months Ended July 31, in thousands) | Metric | 2022 | 2021 | | :-------------------------------------------------- | :----- | :----- | | Net cash provided by/(used in) operating activities | $1,600 | $(8,414) | | Less: Purchases of property and equipment | $(9,844) | $(755) | | Less: Capitalized internal-use software costs | $(783) | $(1,172) | | Non-GAAP Free cash flow | $(9,027) | $(10,341) | - Future funding requirements include $177.2 million in non-cancelable purchase commitments and $67.7 million in operating lease obligations as of July 31, 2022, primarily due over the next five years[204] Critical Accounting Policies and Estimates - There have been no material changes to critical accounting policies and estimates from those previously reported in the Annual Report, other than those referenced in Note 2[209] Recently Adopted Accounting Pronouncements - Refer to Note 2, 'Summary of Significant Accounting Policies,' for a discussion of recent accounting pronouncements[210] JOBS Act Accounting Election - The Company will cease to qualify as an 'emerging growth company' as of January 31, 2023, leading to the loss of certain exemptions from reporting requirements and extended transition periods for accounting standards[212] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the Company's exposure to market risks, including inflation, interest rate, and foreign currency exchange rate risks, and assesses their potential impact on financial position and results of operations Inflation Risk - Inflation has not had a material effect on the Company's business, financial condition, or results of operations, but an inability to offset higher costs through price increases could be harmful[215] Interest Rate Risk and Market Risk - As of July 31, 2022, the Company held $506.6 million in cash, cash equivalents, and marketable securities, with $425.8 million invested in various debt securities[216] - A hypothetical 10% change in interest rates would not have a material impact on the consolidated financial statements[217] Foreign Currency Exchange Rate Risk - The Company's reporting currency is the U.S. dollar, and most sales are U.S. dollar-denominated, limiting significant foreign currency risk on revenue, except for Yen-denominated sales in Japan[218] - Operating expenses are denominated in local currencies (primarily US, UK, Singapore, Japan), making consolidated results subject to foreign currency fluctuations[218] - The Company does not currently hedge foreign currency transactions, and a hypothetical 10% change in exchange rates would not materially affect foreign exchange gains/losses[219] Item 4. Controls and Procedures This section details the evaluation of the Company's disclosure controls and procedures, identifies existing material weaknesses in internal control over financial reporting, outlines the remediation plan, and discusses the inherent limitations of control systems Evaluation of Disclosure Controls and Procedures - The Company's disclosure controls and procedures were not effective as of July 31, 2022, due to identified material weaknesses in internal control over financial reporting[222] - Despite the material weaknesses, management concluded that the unaudited condensed consolidated financial statements are fairly stated in all material respects in accordance with GAAP[224] Material Weaknesses - Three unremediated material weaknesses persist as of July 31, 2022: (1) insufficient written policies/procedures for financial reporting, (2) lack of properly designed controls for revenue recognition (ASC 606), and (3) inadequate IT controls for financial statement relevant systems[226] Remediation Plan - A detailed remediation plan has been developed, including hiring additional resources, engaging external assistance, and developing new IT general and process-level controls[227] - Control weaknesses are not yet considered remediated as new controls require a period of operation and testing to confirm effectiveness[227] Changes in Internal Control Over Financial Reporting - No material changes in internal control over financial reporting occurred during the period, but steps are ongoing to remediate identified material weaknesses[228] 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[229] PART II. OTHER INFORMATION This section details legal proceedings, comprehensive risk factors, equity sales, and other required disclosures for the reporting period Item 1. Legal Proceedings This section states that the Company is not currently a party to any legal proceedings that would materially adversely affect its business, operating results, cash flows, or financial condition, while acknowledging the potential costs and management burden of future litigation - As of the report date, the Company is not involved in any litigation that is believed to have a material adverse effect on its business, operating results, cash flows, or financial condition[232] - Defending legal proceedings can be costly and impose a significant burden on management and employees, with uncertain outcomes[232] Item 1A. Risk Factors This comprehensive section outlines various risks and uncertainties that could materially and adversely affect the Company's business, financial condition, and results of operations, categorized by growth, business and brand, third-party dependence, privacy and data security, legal and litigation, intellectual property, socioeconomic factors, public company status, and stock ownership Risk Factors Summary - Key risks include unstable market conditions, rapid revenue growth not being indicative of future performance, need for additional capital, operating losses, intense competition, reliance on third-party infrastructure, stringent privacy laws, material weaknesses in internal controls, and concentrated voting control due to dual-class stock structure[234][235][236] Risks Related to Our Growth and Capital Requirements - Unstable market and economic conditions, including inflation, higher interest rates, and international conflicts, may seriously impact the business, financial condition, and share price[237][238] - Rapid historical revenue growth may not be indicative of future performance, and the annual growth rate is expected to decline as the business matures[239][240] - The Company may require additional capital to support growth, which might not be available on acceptable terms or could result in dilution to stockholders[242] - A history of operating losses and an accumulated deficit of $287.1 million as of July 31, 2022, indicate that future profitability is not guaranteed due to ongoing investments[247][248] Risks Related to Our Business and Our Brand - The market for customer engagement products is highly competitive, with established companies and new entrants posing significant challenges due to greater resources and potential pricing advantages[253][254] - Failure to attract new customers and retain existing ones, or to adapt to rapidly changing technology and evolving industry standards, could adversely affect the business[257][259][260][261] - Dependence on customer renewals and expansion, coupled with potential pricing pressures and contractual limitations, could impair the ability to scale the business efficiently[263][264][267] - The Company's reliance on a single platform means that any failure to achieve continued market acceptance or proper performance could lead to reputational harm, market share decline, and liability claims[270][273][274] - Managing rapid growth and increasing operational complexity, including international expansion and maintaining company culture, poses significant challenges that could adversely affect financial results[291][292][293][295][296][301][302] - Loss of key senior management or inability to attract and retain highly skilled employees could seriously harm the business and future growth prospects[298][299][300] Risks Related to Our Dependence on Third-Parties - The business relies heavily on third-party providers for sending consumer engagement messages (email, SMS) and mobile operating systems (Apple, Google) for notifications; disruptions could lead to customer loss[316][317][319] - Substantial reliance on cloud-based infrastructure providers, particularly Amazon Web Services (AWS); any disruption, capacity limitation, or termination of services could adversely affect operations and customer access[321][322][327] - Growth is partly dependent on strategic relationships with third-party partners; failure to establish or maintain these relationships could impair market competitiveness and revenue growth[328][330] Risks Related to Privacy, Data Security and Data Protection Laws - The Company is subject to stringent and evolving data privacy and security laws globally (e.g., HIPAA, CCPA, EU/UK GDPR), with non-compliance potentially leading to significant fines, litigation, and reputational harm[331][334][335][336][341] - Increasing data localization and cross-border data transfer laws, particularly in Europe, could impede business operations and increase compliance costs[337][338][340] - Security breaches or unauthorized access to customer or company data could severely harm reputation, reduce demand for the platform, and result in significant liabilities and operational disruptions[342][343][346] Risks Related to Other Laws and Litigation - Changes in internet-related laws, regulations, or infrastructure could diminish demand for the platform and negatively impact the business[349][350][351] - Non-compliance with anti-corruption, anti-bribery, and anti-money laundering laws (e.g., FCPA) can lead to criminal or civil liability, investigations, and reputational damage[357][358][359] - Governmental export and import controls, including those related to encryption technology and sanctions, could impair the ability to compete internationally and result in liability for violations[361][362][363][366] - International operations may lead to adverse tax consequences due to differing tax laws, transfer pricing challenges, and potential limitations on the use of net operating losses (NOLs)[367][368] Risks Related to Intellectual Property - Reliance on third-party licensed software and open-source software carries risks, including increased costs, reduced service levels, potential litigation, and challenges to proprietary source code[373][374][375] - Failure to protect proprietary technology and intellectual property rights (patents, trademarks, trade secrets) through legal means or against misappropriation could substantially harm the business and competitive advantage[379][380][382][386] - The Company may be subject to costly intellectual property infringement claims by third-parties, which could divert management attention, require significant damages, or limit the ability to use certain technologies[387][388][389] - Potential liability or reputational harm could arise from customer activities, content, or data stored on the Company's servers, especially if such use violates laws or industry standards[390][391][393] Risks Related to Socioeconomic Factors - Future revenue and results could be harmed if the increased demand from certain industries, observed during the COVID-19 pandemic, does not continue post-pandemic[395][396] - The ongoing impact of COVID-19, including new variants and challenges of a hybrid work model, could adversely affect workforce, economies, and financial markets[397][398][399][401] - Natural catastrophic events and human-made problems (e.g., power disruptions, cyberattacks, global pandemics, terrorism) may disrupt business operations and lead to system interruptions or data loss[402][403] Risks Related to Being a Public Company - As an 'emerging growth company,' reduced reporting and disclosure requirements may make Class A common stock less attractive to investors, and the loss of this status by January 31, 2023, will increase compliance costs[404][405][406][407] - Three material weaknesses in internal control over financial reporting remain unremediated, posing a risk to the accuracy and timeliness of financial reporting and potentially leading to loss of investor confidence[408][409][411][414][415] Risks Related to Ownership of Our Class A Common Stock - The Company does not intend to pay dividends in the foreseeable future, meaning investor returns will depend solely on Class A common stock price appreciation[417][418] - The dual-class common stock structure concentrates voting control with executive officers, directors, and significant holders, limiting the influence of Class A common stockholders[420][421][422] - Anti-takeover provisions in charter documents and Delaware law could make an acquisition more difficult and limit attempts by stockholders to influence management[425][426][429] - Future sales of Class A common stock in the public market, including from exercised options and settled RSUs, could depress the market price and impair the ability to raise capital[434][436][437] General Risk Factors - The market price of Class A common stock may be highly volatile due to various factors, including financial performance, analyst expectations, and general economic conditions, potentially leading to loss of investment[439][440][441] - Issuance of additional capital stock for financings, acquisitions, or equity incentive plans will dilute existing stockholders' ownership interests[442][443] - If securities or industry analysts publish negative reports or cease coverage, the share price and trading volume could decline[445][446] - Operating as a public company incurs increased costs and requires substantial management time for compliance with regulations[447][448] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on the absence of unregistered sales of equity securities and details the use of proceeds from the Company's initial public offering, confirming no material change in the planned use of funds Unregistered Sales of Equity Securities - There were no unregistered sales of equity securities during the period[449] Use of Proceeds - The Company closed its initial public offering on November 19, 2021, selling 7.5 million shares of Class A common stock at $65.00 per share, generating $487.5 million in gross proceeds[450] - Net proceeds after deducting underwriting discounts and offering expenses were $456.8 million, with no material change in the planned use of these proceeds[451] Issuer Purchases of Equity Securities - There were no issuer purchases of equity securities during the period[452] Item 3. Defaults Upon Senior Securities This section states that there are no defaults upon senior securities to report - Not applicable[454] Item 4. Mine Safety Disclosures This section indicates that there are no mine safety disclosures required for the Company - Not applicable[455] Item 5. Other Information This section states that there is no other information to report - None[456] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications and XBRL-related documents - The exhibits include certifications from the Chief Executive Officer and Chief Financial Officer, as well as various Inline XBRL documents for financial data[460][462] - Certifications under Exhibit 32 are furnished, not filed, and are not incorporated by reference into other SEC filings[463] SIGNATURES This section contains the required signatures for the Quarterly Report on Form 10-Q, confirming its submission by authorized officers - The report was duly signed on September 12, 2022, by William Magnuson, Chief Executive Officer, and Isabelle Winkles, Chief Financial Officer[467]