DOCUSIGN, INC. 10-Q

Item 1. Financial Statements (unaudited) Condensed Consolidated Balance Sheets as of October 31, 2021 and January 31, 2021 5 Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended October 31, 2021 and 2020 6 Condensed Consolidated Statements of Stockholders' Equity for the Three and Nine Months Ended October 31, 2021 and 2020 7 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2021 and 2020 9 Notes to Condensed Consolidated Financial Statements 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 Item 3. Quantitative and Qualitative Disclosures About Market Risk 37 Item 4. Controls and Procedures 37 PART II - OTHER INFORMATION Item 1. Legal Proceedings 38 Item 1A. Risk Factors 38 Item 6. Exhibits 63 Exhibit Index 64 Signatures 65 DocuSign, Inc. | 2022 Form 10Q | 2 NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements involve substantial risk and uncertainties. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, market growth and trends, and objectives for future operations, and the impact of the ongoing coronavirus pandemic (the “COVID-19 pandemic”) on our financial conditions and results of operations are forward-looking statements. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about: ▪ our ability to effectively sustain and manage our growth and future expenses, and our ability to achieve and maintain future profitability; ▪ our expectations regarding the impact of the ongoing COVID-19 pandemic on our business, the businesses of our customers, partners and suppliers, and the economy; ▪ our ability to attract new customers and to maintain and expand our existing customer base; ▪ our ability to scale and update our software suite to respond to customers’ needs and rapid technological change; ▪ the effects of increased competition on our market and our ability to compete effectively; ▪ our ability to expand use cases within existing customers and vertical solutions; ▪ our ability to expand our operations and increase adoption of our software suite internationally; ▪ our ability to strengthen and foster our relationship with developers; ▪ our ability to expand our direct sales force, customer success team and strategic partnerships around the world; ▪ our ability to identify targets for and execute potential acquisitions; ▪ our ability to successfully integrate the operations of businesses we may acquire, or to realize the anticipated benefits of such acquisitions; ▪ our ability to maintain, protect and enhance our brand; ▪ the sufficiency of our cash and cash equivalents to satisfy our liquidity needs; ▪ our failure or the failure of our software suite of services to comply with applicable industry standards, laws and regulations; ▪ our ability to maintain, protect and enhance our intellectual property; ▪ our ability to successfully defend litigation against us; ▪ our ability to attract large organizations as users; ▪ our ability to maintain our corporate culture; ▪ our ability to offer high-quality customer support; ▪ our ability to hire, retain and motivate qualified personnel; ▪ our ability to estimate the size and potential growth of our target market; and ▪ our ability to maintain proper and effective internal controls. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements. You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, including risks and uncertainties related to the COVID-19 pandemic. Many risks and uncertainties are currently elevated by, and may or will continue to be elevated by, the COVID-19 pandemic. It is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements. DocuSign, Inc. | 2022 Form 10Q | 3 The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which such statements are made. We undertake no obligation to update any forward-looking statements after the date of this Quarterly Report on Form 10-Q or to conform such statements to actual results or revised expectations, except as required by law. DocuSign, Inc. | 2022 Form 10Q | 4 PART I - FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DOCUSIGN, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except per share data) October 31, 2021 January 31, 2021 Assets Current assets Cash and cash equivalents $ 503,884 $ 566,055 Investments—current 314,574 207,450 Accounts receivable, net of allowance for doubtful accounts of $ 6,388 and $ 5,362 as of October 31, 2021 and January 31, 2021 305,599 323,570 Contract assets—current 14,690 16,883 Prepaid expenses and other current assets 67,842 48,390 Total current assets 1,206,589 1,162,348 Investments—noncurrent 89,455 92,717 Property and equipment, net 177,832 165,039 Operating lease right-of-use assets 132,608 159,352 Goodwill 355,353 350,151 Intangible assets, net 102,802 121,828 Deferred contract acquisition costs—noncurrent 300,073 260,130 Other assets—noncurrent 45,791 24,942 Total assets $ 2,410,503 $ 2,336,507 Liabilities and Equity Current liabilities Accounts payable $ 47,712 $ 37,367 Accrued expenses and other current liabilities 81,065 66,566 Accrued compensation 144,741 156,158 Convertible senior notes—current 11,510 20,469 Contract liabilities—current 940,111 779,642 Operating lease liabilities—current 35,228 32,971 Total current liabilities 1,260,367 1,093,173 Convertible senior notes, net—noncurrent 718,821 693,219 Contract liabilities—noncurrent 17,070 16,492 Operating lease liabilities—noncurrent 136,240 165,704 Deferred tax liability—noncurrent 6,379 6,464 Other liabilities—noncurrent 32,057 32,328 Total liabilities 2,170,934 2,007,380 Commitments and contingencies ( Note 7 ) Convertible senior notes ( Note 6 ) — 3,390 Stockholders’ equity Preferred stock, $ 0.0001 par value; 10,000 shares authorized, 0 shares issued and outstanding as of October 31, 2021 and January 31, 2021 — — Common stock, $ 0.0001 par value; 500,000 shares authorized, 197,754 shares outstanding as of October 31, 2021; 500,000 shares authorized, 192,807 shares outstanding as of January 31, 2021 20 19 Treasury stock, at cost: 7 and 5 shares as of October 31, 2021 and January 31, 2021 ( 1,532 ) ( 1,048 ) Additional paid-in capital 1,650,714 1,702,254 Accumulated other comprehensive income (loss) ( 1,889 ) 4,964 Accumulated deficit ( 1,407,744 ) ( 1,380,452 ) Total stockholders’ equity 239,569 325,737 Total liabilities and equity $ 2,410,503 $ 2,336,507 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. DocuSign, Inc. | 2022 Form 10Q | 5 DOCUSIGN, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited) Three Months Ended October 31, Nine Months Ended October 31, (in thousands, except per share data) 2021 2020 2021 2020 Revenue: Subscription $ 528,573 $ 366,617 $ 1,473,266 $ 971,182 Professional services and other 16,890 16,306 53,119 50,967 Total revenue 545,463 382,923 1,526,385 1,022,149 Cost of revenue: Subscription 84,579 69,905 247,105 186,645 Professional services and other 31,396 27,926 87,892 75,833 Total cost of revenue 115,975 97,831 334,997 262,478 Gross profit 429,488 285,092 1,191,388 759,671 Operating expenses: Sales and marketing 275,619 209,944 777,110 576,729 Research and development 102,603 73,362 282,670 191,387 General and administrative 54,624 50,256 168,314 140,513 Total operating expenses 432,846 333,562 1,228,094 908,629 Loss from operations ( 3,358 ) ( 48,470 ) ( 36,706 ) ( 148,958 ) Interest expense ( 1,485 ) ( 7,769 ) ( 4,826 ) ( 23,013 ) Interest income and other income (expense), net ( 940 ) ( 311 ) 4,034 6,032 Loss before provision for (benefit from) income taxes ( 5,783 ) ( 56,550 ) ( 37,498 ) ( 165,939 ) Provision for (benefit from) income taxes ( 107 ) 1,941 2,033 4,916 Net loss $ ( 5,676 ) $ ( 58,491 ) $ ( 39,531 ) $ ( 170,855 ) Net loss per share attributable to common stockholders, basic and diluted $ ( 0.03 ) $ ( 0.31 ) $ ( 0.20 ) $ ( 0.92 ) Weighted-average number of shares used in computing net loss per share attributable to common stockholders, basic and diluted 197,597 186,423 195,996 184,767 Other comprehensive income (loss): Foreign currency translation gain (loss), net of tax $ ( 4,720 ) $ ( 2,413 ) $ ( 6,142 ) $ 1,112 Unrealized losses on investments, net of tax ( 415 ) ( 825 ) ( 711 ) ( 579 ) Other comprehensive income (loss) ( 5,135 ) ( 3,238 ) ( 6,853 ) 533 Comprehensive loss $ ( 10,811 ) $ ( 61,729 ) $ ( 46,384 ) $ ( 170,322 ) Stock-based compensation expense included in costs and expenses Cost of revenue—subscription $ 8,095 $ 5,777 $ 21,652 $ 14,655 Cost of revenue—professional services and other 7,270 6,005 19,250 15,355 Sales and marketing 49,663 36,881 134,720 93,851 Research and development 30,074 18,896 76,811 45,562 General and administrative 14,338 13,361 38,103 33,815 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. DocuSign, Inc. | 2022 Form 10Q | 6 DOCUSIGN, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) Common Stock Additional Paid-In Capital Treasury Stock Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders' Equity (in thousands) Shares Amount Balances at July 31, 2021 196,467 $ 20 $ 1,611,897 $ ( 1,219 ) $ 3,246 $ ( 1,402,068 ) $ 211,876 Settlement of convertible senior notes due in 2023 32 — ( 32 ) — — — ( 32 ) Exercise of stock options 357 — 9,358 — — — 9,358 Settlement of restricted stock units and employee stock purchase plan 767 — — — — — — Tax withholding on net share settlement of restricted stock units and employee stock purchase plan — — ( 106,098 ) ( 313 ) — — ( 106,411 ) Employee stock purchase plan 131 — 22,910 — — — 22,910 Employee stock-based compensation — — 112,679 — — — 112,679 Net loss — — — — — ( 5,676 ) ( 5,676 ) Other comprehensive loss, net — — — — ( 5,135 ) — ( 5,135 ) Balances at October 31, 2021 197,754 $ 20 $ 1,650,714 $ ( 1,532 ) $ ( 1,889 ) $ ( 1,407,744 ) $ 239,569 Balances at July 31, 2020 185,137 $ 19 $ 1,749,323 $ — $ 2,098 $ ( 1,249,549 ) $ 501,891 Exercise of stock options 171 — 1,945 — — — 1,945 Settlement of restricted stock units 1,015 — — — — — — Tax withholding on net share settlement of restricted stock units — — ( 114,277 ) ( 1,048 ) — — ( 115,325 ) Employee stock purchase plans 208 — 16,269 — — — 16,269 Employee stock-based compensation — — 82,981 — — — 82,981 Net loss — — — — — ( 58,491 ) ( 58,491 ) Other comprehensive loss, net — — — — ( 3,238 ) — ( 3,238 ) Balances at October 31, 2020 186,531 $ 19 $ 1,736,241 $ ( 1,048 ) $ ( 1,140 ) $ ( 1,308,040 ) $ 426,032 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. DocuSign, Inc. | 2022 Form 10Q | 7 DOCUSIGN, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (Continued) Common Stock Additional Paid-In Capital Treasury Stock Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders' Equity (in thousands) Shares Amount Balances at January 31, 2021 192,807 $ 19 $ 1,702,254 $ ( 1,048 ) $ 4,964 $ ( 1,380,452 ) $ 325,737 Cumulative impact of Accounting Standards Update 2020-06 adoption — — ( 86,144 ) — — 12,239 ( 73,905 ) Settlement of convertible senior notes due in 2023 619 1 ( 757 ) — — — ( 756 ) Exercise of stock options 1,468 — 21,176 — — — 21,176 Settlement of restricted stock units and employee stock purchase plan 2,586 — — — — — — Tax withholding on net share settlement of restricted stock units and employee stock purchase plan — — ( 333,991 ) ( 484 ) — — ( 334,475 ) Employee stock purchase plan 264 — 46,077 — — — 46,077 Charitable donation of common stock 10 — 3,000 — — — 3,000 Employee stock-based compensation — — 299,099 — — — 299,099 Net loss — — — — — ( 39,531 ) ( 39,531 ) Other comprehensive loss, net — — — — ( 6,853 ) — ( 6,853 ) Balances at October 31, 2021 197,754 $ 20 $ 1,650,714 $ ( 1,532 ) $ ( 1,889 ) $ ( 1,407,744 ) $ 239,569 Balances at January 31, 2020 181,254 $ 18 $ 1,685,167 $ — $ ( 1,673 ) $ ( 1,137,185 ) $ 546,327 Exercise of stock options 1,471 — 14,983 — — — 14,983 Settlement of restricted stock units 3,095 1 ( 1 ) — — — — Tax withholding on net share settlement of restricted stock units — — ( 250,449 ) ( 1,048 ) — — ( 251,497 ) Employee stock purchase plan 464 — 29,859 — — — 29,859 Issuance of common stock as consideration for acquisition 247 — 48,361 — — — 48,361 Employee stock-based compensation — — 208,321 — — — 208,321 Net loss — — — — — ( 170,855 ) ( 170,855 ) Other comprehensive income, net — — — — 533 — 533 Balances at October 31, 2020 186,531 $ 19 $ 1,736,241 $ ( 1,048 ) $ ( 1,140 ) $ ( 1,308,040 ) $ 426,032 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. DocuSign, Inc. | 2022 Form 10Q | 8 DOCUSIGN, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended October 31, (in thousands) 2021 2020 Cash flows from operating activities: Net loss $ ( 39,531 ) $ ( 170,855 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 61,163 51,455 Amortization of deferred contract acquisition and fulfillment costs 100,759 70,787 Amortization of debt discount and transaction costs 3,848 20,828 Non-cash operating lease costs 20,176 20,082 Stock-based compensation expense 290,536 203,238 Deferred income taxes ( 2,360 ) ( 1,050 ) Other 5,598 1,206 Changes in operating assets and liabilities: Accounts receivable 17,969 ( 11,429 ) Contract assets 2,422 ( 3,890 ) Prepaid expenses and other current assets ( 12,890 ) ( 1,835 ) Deferred contract acquisition and fulfillment costs ( 147,946 ) ( 144,639 ) Other assets ( 13,712 ) ( 6,463 ) Accounts payable 6,703 3,655 Accrued expenses and other liabilities 11,886 21,952 Accrued compensation ( 22,781 ) 23,553 Contract liabilities 161,047 172,520 Operating lease liabilities ( 24,212 ) ( 14,394 ) Net cash provided by operating activities 418,675 234,721 Cash flows from investing activities: Cash paid for acquisition, net of acquired cash ( 6,388 ) ( 180,370 ) Purchases of marketable securities ( 302,762 ) ( 80,649 ) Sales of marketable securities 3,070 28,986 Maturities of marketable securities 193,071 404,782 Purchases of strategic and other investments ( 750 ) ( 8,541 ) Purchases of property and equipment ( 43,926 ) ( 64,144 ) Net cash (used in) provided by investing activities ( 157,685 ) 100,064 Cash flows from financing activities: Repayments of convertible senior notes ( 64,835 ) — Payment of tax withholding obligation on net share settlement of restricted stock units ( 323,109 ) ( 247,277 ) Proceeds from exercise of stock options 21,176 14,983 Proceeds from employee stock purchase plan 46,077 29,859 Net cash used in financing activities ( 320,691 ) ( 202,435 ) Effect of foreign exchange on cash, cash equivalents and restricted cash ( 2,472 ) 1,432 Net increase (decrease) in cash, cash equivalents and restricted cash ( 62,173 ) 133,782 Cash, cash equivalents and restricted cash at beginning of period (1) 566,337 241,483 Cash, cash equivalents and restricted cash at end of period (1) $ 504,164 $ 375,265 (1) $ 0.3 million of restricted cash was included in Prepaid expenses and other current assets at October 31, 2021, and in Other assets—noncurrent at January 31, 2021. The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. DocuSign, Inc. | 2022 Form 10Q | 9 DOCUSIGN, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued) Nine Months Ended October 31, (in thousands) 2021 2020 Supplemental disclosure: Cash paid for interest $ 349 $ 2,875 Cash paid for operating lease liabilities 30,178 24,740 Cash paid for income taxes 5,637 3,205 Non-cash investing and financing activities: Property and equipment in accounts payable and accrued expenses and other current liabilities $ 9,128 $ 7,256 Operating lease right-of-use assets exchanged for lease obligations — 27,447 Fair value of shares issued as part of the repayments of convertible senior notes 142,501 — Fair value of shares issued as consideration for acquisition — 48,361 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. DocuSign, Inc. | 2022 Form 10Q | 10 DOCUSIGN, INC. Index for Notes to the Condensed Consolidated Financial Statements Note 1 Summary of Significant Accounting Policies 12 Note 2 Revenue 13 Note 3 Fair Value Measurements 15 Note 4 Property and Equipment, Net 16 Note 5 Deferred Contract Acquisition and Fulfillment Costs 17 Note 6 Debt 17 Note 7 Commitments and Contingencies 19 Note 8 Stockholders' Equity 20 Note 9 Net Loss Per Share Attributable to Common Stockholders 21 Note 10 Income Taxes 21 DocuSign, Inc. | 2022 Form 10Q | 11 DOCUSIGN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 . Summary of Significant Accounting Policies Organization and Description of Business DocuSign, Inc. (“we,” “our” or “us”) was incorporated in the State of Washington in April 2003. We merged with and into DocuSign, Inc., a Delaware corporation, in March 2015. We provide a platform that enables businesses of all sizes to digitally prepare, sign, act on and manage agreements, thereby simplifying and accelerating the process of doing business. Basis of Presentation and Principles of Consolidation Our condensed consolidated financial statements include those of DocuSign, Inc. and our subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The accompanying condensed consolidated financial statements have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Therefore, these unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our fiscal 2021 Annual Report on Form 10-K. Our condensed consolidated financial statements are unaudited and have been prepared on a basis consistent with that used to prepare the audited annual consolidated financial statements and, in our opinion, include all adjustments of a normal recurring nature necessary for the fair statement of our financial position, results of operations and cash flows. Our condensed consolidated balance sheet as of January 31, 2021 was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. The results of operations for the three and nine months ended October 31, 2021 are not necessarily indicative of the results to be expected for the year ending January 31, 2022 . O ur fiscal year ends on January 3 1. References to fiscal 2022, for example, are to the fiscal year ending January 31, 2022 . Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in the condensed consolidated financial statements and notes thereto. Significant items subject to such estimates and assumptions made by management include, but are not limited to, the determination of: • the average period of benefit associated with deferred contract acquisition costs and fulfillment costs; • the valuation of strategic investments; • the fair value of certain stock awards issued; • the f air value of the liability and equity components of convertible notes; • the useful life and recoverability of long-lived assets; • the discount rate used for operating leases; and • the recognition, measurement and valuation of deferred income taxes. Since the emergence of the COVID-19 pandemic in March 2020, we have undertaken measures to protect our employees, partners and customers, including providing the majority of our employees the option to work remotely until at least January 10, 2022. However, there can be no assurance that these measures will be effective, that we will be able to adopt new measures as needed or that we will be able to discontinue these measures without adversely affecting our business operations. In addition, the COVID-19 pandemic and related recent developments (including vaccine deployments, national and regional outbreaks and the emergence of disease variants) have created and may continue to create significant uncertainty in global financial markets, which may decrease technology spending, depress demand for our products and harm our business and results of operations. As of the date of issuance of the financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates or judgments or revise the carrying value of our assets or liabilities, except for a sublease that resulted in an impairment of $ 3.9 million on operating lease right-of-use assets recorded during the three months ended July 31, 2021. These estimates may change as new events occur and additional information is obtained, which could be recognized in the DocuSign, Inc. | 2022 Form 10Q | 12 condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to our financial statements. Significant Accounting Policies Other than as described below, there have been no changes to our significant accounting policies described in our fiscal 2021 Annual Report on Form 10-K that have had a material impact on our condensed consolidated financial statements and related notes. Convertible Debt Effective February 1, 2021, we account for our convertible debt instruments as a single liability measured at its amortized cost. See “Recently Adopted Accounting Pronouncements” below. At issuance, the carrying amount is calculated as the proceeds, net of initial purchasers’ discounts and transaction costs. The difference between the principal amount and carrying value is amortized to interest expense over the term of the convertible debt instruments using the effective interest rate method. At settlement, the carrying amount of the liability is derecognized and the excess of the cash consideration, if any, over the carrying amount is recorded as a reduction to additional paid-in capital. Refer to Note 1 of our 2021 Annual Report on Form 10-K for our convertible debt policy prior to the adoption of ASU 2020-06. Recently Adopted Accounting Pronouncements On February 1, 2021, we early adopted ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) using the modified retrospective approach. This ASU removes separation models for convertible debt with a cash conversion feature and convertible instruments with a beneficial conversion feature. Such convertible debt is accounted for as a single liability measured at its amortized cost and convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost, as long as no other features require bifurcation and recognition as derivatives. The ASU also requires the if-converted method to be used for convertible instruments and the effect of potential share settlement be included in the diluted earnings per share calculation when an instrument may be settled in cash or shares. The adoption of the ASU using the modified retrospective method resulted in: • an increase of $ 77.3 million to the total carrying value of our convertible senior notes to reflect the full principal amount of the convertible notes outstanding net of issuance costs, • reductions of $ 86.1 million to additional paid-in capital and $ 3.4 million to mezzanine equity to remove the equity component separately recorded for the conversion features associated with the convertible notes, and • a cumulative-effect adjustment of $ 12.2 million to the beginning balance of accumulated deficit as of February 1, 2021. Note 2. Revenue Subscription revenue is recognized over time and accounted for approximately 97 % and 96 % of our revenue for the three months ended October 31, 2021 and 2020 and approximately 97 % and 95 % of our revenue for the nine months ended October 31, 2021 and 2020. Performance Obligations As of October 31, 2021, the amount of the transaction price allocated to remaining performance obligations for contracts greater than one year was $ 1.5 billion. We expect to recognize 52 % of the transaction price allocated to remaining performance obligations within the 12 months following October 31, 2021 in our condensed consolidated statement of operations and comprehensive loss. Contract Balances Contract assets represent amounts for which we have recognized revenue, pursuant to our revenue recognition policy, for contracts that have not yet been fully invoiced to our customers where there remains a performance obligation, typically for our multi-year arrangements. Total contract assets were $ 15.0 million and $ 17.5 million as of October 31, 2021 and January 31, 2021, of which $ 0.3 million and $ 0.6 million were noncurrent and included within “Other assets—noncurrent” on our condensed consolidated balance sheets. The change in contract assets reflects the difference in timing between the satisfaction of our remaining performance obligations and our contractual right to bill our customers. DocuSign, Inc. | 2022 Form 10Q | 13 Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract. Such amounts are generally recognized as revenue over the contractual period. For the nine months ended October 31, 2021 and 2020, we recognized revenue of $ 730.7 million and $ 463.1 million that was included in the corresponding contract liability balance at the beginning of the periods presented. We receive payments from customers based upon contractual billing schedules. We record accounts receivable when the right to consideration becomes unconditional. Payment terms on invoiced amounts are typically 30 days. Geographic Information Revenue by geography is based on the address of the customer as specified in our master subscription agreements with our customers. Revenue by geographic area was as follows: Three Months Ended October 31, Nine Months Ended October 31, (in thousands) 2021 2020 2021 2020 U.S. $ 417,296 $ 306,680 $ 1,183,601 $ 824,342 International 128,167 76,243 342,784 197,807 Total revenue $ 545,463 $ 382,923 $ 1,526,385 $ 1,022,149 DocuSign, Inc. | 2022 Form 10Q | 14 Note 3 . Fair Value Measurements The following table summarizes our financial assets that are measured at fair value on a recurring basis: October 31, 2021 (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Level 1: Cash equivalents (1) Money market funds $ 93,622 $ — $ — $ 93,622 Level 2: Available-for-sale securities Commercial paper (1) 169,417 3 ( 42 ) 169,378 Corporate notes and bonds 215,952 5 ( 366 ) 215,591 U.S. governmental securities 25,078 1 ( 22 ) 25,057 Level 2 total 410,447 9 ( 430 ) 410,026 Total $ 504,069 $ 9 $ ( 430 ) $ 503,648 January 31, 2021 (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Level 1: Cash equivalents (2) Money market funds $ 284,312 $ — $ — $ 284,312 Level 2: Available-for-sale securities Commercial paper 42,048 1 ( 23 ) 42,026 Corporate notes and bonds 199,277 375 ( 67 ) 199,585 U.S. governmental securities 58,050 12 ( 6 ) 58,056 Level 2 total 299,375 388 ( 96 ) 299,667 Level 3: Available-for-sale securities Corporate notes and bonds 500 — — 500 Total $ 584,187 $ 388 $ ( 96 ) $ 584,479 (1) Included in “cash and cash equivalents” in our consolidated balance sheets as of October 31, 2021, in addition to cash of $ 404.3 million and commercial paper of $ 6.0 million. (2) Included in “cash and cash equivalents” in our consolidated balance sheets as of January 31, 2021, in addition to cash of $ 281.7 million. We use quoted prices in active markets for identical assets to determine the fair value of our Level 1 investments. The fair value of our Level 2 investments is determined using pricing based on quoted market prices or alternative market observable inputs . The fair value of our Level 3 investments is determined based on an income approach using unobservable inputs. The fair value of our available-for-sale securities as of October 31, 2021, by remaining contractual maturities, were as follows (in thousands): Due in one year or less $ 320,571 Due in one to two years 89,455 $ 410,026 DocuSign, Inc. | 2022 Form 10Q | 15 As of October 31, 2021 and January 31, 2021, securities in an unrealized loss position were, individually and in aggregate, not material. An allowance for credit losses was deemed unnecessary for these securities, given the extent of the unrealized loss positions as well the issuers' high credit ratings and consistent payment history. Strategic Investments During the nine months ended October 31, 2021, investments in equity securities without readily determinable fair values increased by $ 4.8 million due to adjustments related to observable price changes that occurred primarily during the three months ended April 30, 2021. Such investments are recorded in “Other assets—noncurrent” on our condensed consolidated balance sheets. Convertible Senior Notes We estimated the fair value of the convertible senior notes based on the quoted market prices in an inactive market on the last trading day of the reporting period (Level 2). The Notes are recorded at face value less unamortized debt discount and transaction costs as “Convertible senior notes—current” and “Convertible senior notes, net—noncurrent” on our condensed consolidated balance sheets. Refer to Note 6 for further information. (in thousands) October 31, 2021 January 31, 2021 0.5 % Convertible Senior Notes due in 2023 Aggregate principal amount $ 50,169 $ 115,000 Fair value amount 191,746 373,928 0 % Convertible Senior Notes due in 2024 Aggregate principal amount $ 690,000 $ 690,000 Fair value amount 721,167 725,100 Note 4 . Property and Equipment, Net Property and equipment consisted of the following: (in thousands) October 31, 2021 January 31, 2021 Computer and network equipment $ 122,551 $ 102,163 Software, including capitalized software development costs 73,164 56,858 Furniture and office equipment 21,037 21,682 Leasehold improvements 80,071 79,892 296,823 260,595 Less: Accumulated depreciation ( 156,447 ) ( 121,029 ) 140,376 139,566 Work in progress 37,456 25,473 Total $ 177,832 $ 165,039 Depreciation and amortization expense associated with property and equipment was $ 14.2 million and $ 12.1 million for the three months ended October 31, 2021 and 2020, and $ 42.0 million and $ 32.4 million for the nine months ended October 31, 2021 and 2020. For the three months ended October 31, 2021 and 2020, we capitalized $ 9.5 million of internally developed software. F or the nine months ended October 31, 2021 and 2020, we capitalized $ 26.6 million and $ 20.5 million of internally developed software. DocuSign, Inc. | 2022 Form 10Q | 16 Note 5 . Deferred Contract Acquisition and Fulfillment Costs The following table represents a rollforward of our deferred contract acquisition and fulfillment costs: Nine Months Ended October 31, (in thousands) 2021 2020 Deferred Contract Acquisition Costs: Beginning balance $ 262,519 $ 155,697 Additions to deferred contract acquisition costs 124,688 129,555 Amortization of deferred contract acquisition costs ( 82,043 ) ( 57,549 ) Cumulative translation adjustment ( 2,312 ) ( 275 ) Ending balance $ 302,852 $ 227,428 Deferred Contract Fulfillment Costs: Beginning balance $ 12,506 $ 8,218 Additions to deferred contract fulfillment costs 23,258 15,084 Amortization of deferred contract fulfillment costs ( 18,695 ) ( 13,238 ) Ending balance $ 17,069 $ 10,064 Note 6. Debt Convertible Senior Notes In September 2018 we issued $ 575.0 million in aggregate principal amount of the 0.5 % Convertible Senior Notes due in 2023 (“2023 Notes”). The net proceeds from the issuance of the 2023 Notes were $ 560.8 million after deducting the initial purchasers’ discounts and transaction costs. Based upon the reported sales price of our common stock, the 2023 Notes became convertible on August 1, 2020 and continue to be convertible through October 31, 2021. In January 2021 we issued $ 690.0 million in aggregate principal amount of the 0 % Convertible Senior Notes due in 2024 (“2024 Notes,” and together with the 2023 Notes, the “Notes”). The net proceeds from the issuance of the 2024 Notes were $ 677.3 million after deducting the initial purchasers’ discounts and transaction costs. As of October 31, 2021, the conversion conditions for the 2024 Notes described in our 2021 Annual Report on Form 10-K were not met. Conversions of the 2023 Notes We accounted for early conversions and settlements of the 2023 Notes during the nine months ended October 31, 2021 under ASU 2020-06. Refer to Note 1 for further discussion of early adoption. During the nine months ended October 31, 2021, we settled $ 64.8 million aggregate amount of the principal of 2023 Notes, including $ 23.9 million elected for conversion as of January 31, 2021, for aggregate consideration of $ 207.3 million, consisting of $ 64.8 million in cash and 0.6 million shares of our common stock with a value of $ 142.5 million. The $ 0.8 million excess of the cash consideration over the corresponding carrying value was recorded as a reduction to additional paid-in capital. Additionally, as of October 31, 2021, we had received conversion notices on our 2023 Notes for $ 11.6 million in aggregate principal amount, the corresponding carrying value is reflected in Convertible senior notes—current on our condensed consolidated balance sheet. From November 1, 2021 through December 3, 2021, we received conversion notices on our 2023 Notes for $ 1.5 million in aggregate principal amount. We plan to settle the principal amount in cash during the three months ended January 31, 2022. DocuSign, Inc. | 2022 Form 10Q | 17 The net carrying amounts of the liability and equity components of the Notes were as follows: (in thousands) October 31, 2021 January 31, 2021 2023 Notes: Principal $ 50,169 $ 115,000 Less: unamortized debt discount (1) — ( 15,116 ) Less: unamortized transaction costs ( 477 ) ( 1,224 ) Net carrying value of current and noncurrent liability component $ 49,692 $ 98,660 Proceeds allocated to the conversion option (debt discount) (1) $ 134,667 Less: extinguishment or conversion ( 31,933 ) Less: transaction costs ( 3,336 ) Net carrying value of mezzanine and permanent equity component $ 99,398 2024 Notes: Principal $ 690,000 $ 690,000 Less: unamortized debt discount (1) — ( 63,619 ) Less: unamortized transaction costs ( 9,362 ) ( 11,353 ) Net carrying value of noncurrent liability component $ 680,638 $ 615,028 Proceeds allocated to the conversion option (debt discount) (1) $ 64,453 Less: transaction costs ( 1,185 ) Net carrying value of permanent equity component $ 63,268 (1) Not applicable under ASU 2020-06 The effective interest rate on the liability component of the 2023 Notes was 5.9 % prior to the adoption of ASU 2020-06 and 1.0 % after adoption. The effective interest rate on the liability component of the 2024 notes was 3.8 % prior to the adoption of ASU 2020-06 and 0.6 % after adoption. Interest expense recognized related to the Notes was as follows: Three Months Ended October 31, Nine Months Ended October 31, (in thousands) 2021 2020 2021 2020 Contractual interest expense $ 41 $ 719 $ 143 $ 2,157 Amortization of debt discount — 6,516 — 19,267 Amortization of transaction costs 1,116 528 3,432 1,561 Total $ 1,157 $ 7,763 $ 3,575 $ 22,985 Capped Calls To minimize the potential economic dilution to our common stock upon conversion of the Notes, we entered into privately-negotiated capped call transactions (“Capped Calls”) with certain counterparties. The material terms of the capped call transactions were as follows: (in thousands, except per share amounts) 2023 Notes 2024 Notes Aggregate cost of capped calls $ 67,563 $ 31,395 Initial strike price per share (1) $ 71.50 $ 420.24 Initial cap price per share (1) $ 110.00 $ 525.30 Shares of our common stock covered by the capped calls (1) 8,042 1,642 (1) Subject to adjustments for certain events, such as merger events and tender offers, and anti-dilution adjustments DocuSign, Inc. | 2022 Form 10Q | 18 Impact on Loss Per Share After February 1, 2021, upon adoption of ASU 2020-06, in periods when we have net income, the shares of our common stock subject to the Notes outstanding during the period are included in our diluted earnings per share under the if-converted method. As of the beginning of the fourth quarter of 2021, share settlement was presumed, and shares subject to the Notes would have been included under the if-converted method. In periods prior to that, cash settlement was presumed and shares subject to the Notes would have been included under the treasury stock method. Capped Calls are excluded from the calculation of diluted earnings per share, as they would be antidilutive. Upon conversion, there will be no economic dilution from the Notes unless the market price of our common stock exceeds the cap prices listed above in the Capped Calls section, as exercise of the Capped Calls offsets any dilution from the Notes from the conversion price up to the cap price. As of October 31, 2021, the market price of our common stock exceeded the $ 110.00 per share cap price associated with the 2023 Notes but not the $ 525.30 cap price associated with the 2024 Notes; therefore, the 2023 Notes would have caused economic dilution if converted. Revolving Credit Facility In January 2021, we entered into a credit agreement with a syndicate of banks. The credit agreement extended a senior secured revolving credit facility (the “Credit Facility”) to us in an aggregate principal amount of $ 500.0 million, which amount may be increased by an additional $ 250.0 million subject to the terms of the credit agreement. We may use the proceeds of future borrowings under the credit facility to finance working capital, for capital expenditures and for other general corporate purposes, including permitted acquisitions. The Credit Facility matures in January 2026 and requires us to comply with customary affirmative and negative covenants. We were in compliance with all covenants as of October 31, 2021. As of October 31, 2021, there were no outstanding borrowings under the Credit Facility. The Credit Facility is subject to customary fees for loan facilities of this type, including ongoing commitment fees at a rate between 0.25 % and 0.30 % per annum on the daily undrawn balance. Note 7 . Commitments and Contingencies As of October 31, 2021, we had outstanding unused letters of credit associated with our various operating leases totaling $ 7.3 million. We have entered into certain noncancellable contractual arrangements that require future purchases of goods and services. These arrangements primarily relate to cloud infrastructure support and sales and marketing activities. As of October 31, 2021, the future noncancellable minimum payments due under these contractual obligations with a remaining term of more than one year were as follows: Fiscal Period: Amount (in thousands) 2022, remainder $ 12,482 2023 65,763 2024 40,505 2025 16,403 2026 8,249 Thereafter 3,145 Total $ 146,547 DocuSign, Inc. | 2022 Form 10Q | 19 Indemnification We enter into indemnification provisions under our agreements with customers and other companies in the ordinary course of business, including business partners, contractors and parties performing our research and development. Pursuant to these arrangements, we agree to indemnify and defend the indemnified party for certain claims and related losses suffered or incurred by the indemnified party from actual or threatened third-party claims because of our activities. The duration of these indemnification agreements is generally perpetual. The maximum potential amount of future payments we could be required to make under these indemnification clauses or agreements is not determinable. Historically, we have not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the fair value of these indemnification agreements is not material as of October 31, 2021, and January 31, 2021. We maintain commercial general liability insurance and product liability insurance to offset certain of our potential liabilities under these indemnification agreements. We have entered into indemnification agreements with each of our directors, executive officers and certain other officers. These agreements require us to indemnify such individuals, to the fullest extent permitted by Delaware law, for certain liabilities to which they may become subject as a result of their affiliation with us. Claims and Litigation From time to time, we may be subject to legal proceedings, claims and litigation made against us in the ordinary course of business. We believe the final outcome of these matters will not have a material adverse effect on our business, consolidated financial position, results of operations or cash flows. Note 8. Stockholders' Equity Equity Incentive Plans We maintain three stock-based compensation plans: the 2018 Equity Incentive Plan (the “2018 Plan”), the Amended and Restated 2011 Equity Incentive Plan (the “2011 Plan”) and the Amended and Restated 2003 Stock Plan (the “2003 Plan”). As of October 31, 2021, 42.0 million shares of our common stock were available for issuance under the 2018 Plan. Restricted Stock Units Restricted stock unit (“RSU”) activity for the nine months ended October 31, 2021 was as follows: (in thousands, except per share data) Number of Units Weighted-Average Grant Date Fair Value Unvested at January 31, 2021 10,586 $ 83.98 Granted 2,916 234.09 Vested ( 3,774 ) 71.55 Canceled ( 989 ) $ 98.23 Unvested at October 31, 2021 8,739 $ 137.82 As of October 31, 2021, our total unrecognized compensation cost related to RSUs was $ 941.3 million. We expect to recognize this expense over the remaining weighted-average period of approximately 2.3 years. DocuSign, Inc. | 2022 Form 10Q | 20 Stock Options Option activity for the nine months ended October 31, 2021 was as follows: (in thousands, except years and per share data) Number of Options Weighted-Average Exercise Price Per Share Weighted-Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Outstanding at January 31, 2021 4,798 $ 15.55 5.0 $ 1,042,879 Exercised ( 1,468 ) 14.39 Outstanding at October 31, 2021, all vested and exercisable 3,330 $ 16.06 4.6 $ 873,198 As of October 31, 2021, there was no remaining unrecognized compensation cost related to stock option grants. 2018 Employee Stock Purchase Plan The Employee Stock Purchase Plan (“ESPP”) allows eligible employees to purchase shares of our common stock at a discounted price, normally through payroll deductions, subject to the terms of the ESPP and applicable law. As of October 31, 2021, 8.0 million shares of our common stock were reserved for issuance under the ESPP. Compensation expense related to the ESPP was $ 4.8 million and $ 3.4 million for the three months ended October 31, 2021 and 2020, and $ 13.9 million and $ 8.2 million for the nine months ended October 31, 2021 and 2020. Note 9 . Net Loss per Share Attributable to Common Stockholders The following table presents the calculation of basic and diluted net loss per share attributable to common stockholders for periods presented: Three Months Ended October 31, Nine Months Ended October 31, (in thousands, except per share data) 2021 2020 2021 2020 Numerator: Net loss attributable to common stockholders $ ( 5,676 ) $ ( 58,491 ) $ ( 39,531 ) $ ( 170,855 ) Denominator: Weighted-average common shares outstanding 197,597 186,423 195,996 184,767 Net loss per share attributable to common stockholders: Basic and diluted $ ( 0.03 ) $ ( 0.31 ) $ ( 0.20 ) $ ( 0.92 ) Outstanding potentially dilutive securities that were excluded from the diluted per share calculations because they would have been antidilutive are as follows: October 31, (in thousands) 2021 2020 RSUs 8,739 12,008 Stock options 3,330 5,399 ESPP 136 142 Convertible senior notes 2,344 5,199 Total antidilutive securities 14,549 22,748 Note 10 . Income Taxes Our tax provision or benefit from income taxes for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment. There were no material discrete items in the quarter. DocuSign, Inc. | 2022 Form 10Q | 21 Our income tax benefit was $ 0.1 million and income tax provision was $ 1.9 million for the three months ended October 31, 2021 and 2020. Our income tax provision was $ 2.0 million and $ 4.9 million for the nine months ended October 31, 2021 and 2020. We review the likelihood that we will realize the benefit of our deferred tax assets and, therefore, the need for valuation allowances, on a quarterly basis. We maintain a valuation allowance against certain deferred tax assets, including all U.S. consolidated group deferred tax assets and certain foreign deferred tax assets as a result of our history of losses in the United States and certain foreign jurisdictions, and the variability and uncertainty of our operating results. In the event we determine our deferred tax assets are realizable based on our assessment of relevant factors, an adjustment to the valuation allowance may increase income in the period such determination is made. As of October 31, 2021, our gross unrecognized tax benefits totaled $ 45.6 million, excluding related accrued interest and penalties, of which $ 15.1 million would impact the effective tax rate if recognized. Our policy is to account for interest and penalties related to uncertain tax positions as a component of income tax provision. We do not expect to have any significant changes to unrecognized tax benefits during the next twelve months. We are subject to taxation in the United States and various foreign jurisdictions. Our tax years from inception in 2003 through October 31, 2021 remain subject to examination by U.S. and California taxing authorities, as well as taxing authorities in various other state and foreign jurisdictions. We are under examination by the Israel Tax Authority for tax years 2016 through 2019. We are not under examination in any other material jurisdiction. We believe that adequate amounts have been reserved in all jurisdictions.