PROCORE TECHNOLOGIES, INC. 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and notes thereto and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the prospectus dated May 19, 2021 that forms a part of our Registration Statement on Form S-1 (File No. 333-236789), as filed with the Securities and Exchange Commission (the “SEC”), pursuant to Rule 424(b) under the Securities Act of 1933, as amended, or the Securities Act, on May 21, 2021 ( the “Prospectus”). You should review the disclosure under “Part II, Item 1A - Risk Factors” in this Quarterly Report on Form 10-Q for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. These statements, like all statements in this report, speak only as of their date (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to the “Company”, “Procore,” “we,” “us” and “our” refer to Procore Technologies, Inc. and its consolidated subsidiaries. Overview Our mission is to connect everyone in construction on a global platform. We are a leading provider of cloud-based construction management software, and are helping transform one of the oldest, largest, and least digitized industries in the world. We focus exclusively on construction, connecting and empowering the industry’s key stakeholders, such as owners, general contractors, specialty contractors, architects, and engineers, to collaborate from any location, on any internet-connected device. Our platform is modernizing and digitizing construction management by enabling real-time access to critical project information, simplifying complex workflows, and facilitating seamless communication among key stakeholders, all of which we believe positions us to serve as the system of record for the construction industry. Adoption of our platform helps customers increase productivity and efficiency, reduce rework and costly delays, improve safety and compliance, and enhance financial transparency and accountability. In short, we build the software for the people that build the world. We serve customers ranging from small businesses managing a couple million dollars of annual construction volume to global enterprises managing billions of dollars of annual construction volume. Our core customers are owners, general contractors, and specialty contractors operating across the commercial, residential, industrial, and infrastructure segments of the construction industry. We primarily sell subscriptions to access our products through our direct sales team, which is specialized by stakeholder, region, size, and type. Our products are offered on our cloud-based platform and are designed to be easy to configure and deploy. Our users can access our products on computers, smartphones, and tablets through any web browser or from our mobile application available for both the iOS and Android platforms. We generate substantially all of our revenue from subscriptions to access our products and have an unlimited user model that is designed to facilitate adoption and maximize usage of our platform by all project stakeholders. We sell our products on a subscription basis for a fixed fee with pricing generally based on the number and mix of products and the annual construction volume contracted to run on our platform. As our customers subscribe to additional products, or increase the annual construction volume contracted to run on our platform, we generate more revenue. We do not provide refunds for unused construction volume, or charge customers based on consumption or on a per project basis. Subscriptions to access our products include customer support and allow for unlimited users as we do not charge a per-seat or per-user fee. Customers can invite all project participants to engage with our platform as part of a project team. This includes the customer’s employees and its collaborators, who are other project participants who engage with our platform but do not pay us for such use. Further, multiple stakeholders can be customers on the same project and retain access to project information for the duration of their subscription. Recent Developments On May 24, 2021, we completed our initial public offering, or IPO, in which we issued and sold 10,410,000 shares of our common stock at a price of $67.00 per share, including 940,000 shares of common stock pursuant to the exercise in full of the underwriters’ option to purchase additional shares. We received net proceeds of $665.1 million, after deducting underwriting discounts and commissions. In connection with the IPO, all outstanding shares of convertible preferred stock were automatically converted into an aggregate of 85,331,278 shares of our common stock on a one-for-one basis. 19 Certain Factors Affecting Our Performance Acquiring New Customers and Retaining and Expanding Existing Customers’ Use of Our Platform We are highly focused on continuing to acquire new customers to support our long-term growth. We intend to efficiently drive new customer acquisitions by continuing to invest across our sales and marketing engine to engage our prospective customers, increase brand awareness, and drive adoption of our products and platform. The number of customers on our platform has increased from 6,095 as of December 31, 2018, to 8,506 as of December 31, 2019, to 10,166 as of December 31, 2020, reflecting year-over-year growth rates of 40% in 2019 and 20% in 2020. The number of customers on our platform was 11,149 as of June 30, 2021. Our ability to continue to grow our business and serve the broader needs of the construction industry depends on acquiring new customers, customers purchasing new products, renewing and expanding their use of existing products, and maintaining or increasing the price of our existing products. Continued Technology Innovation and Expansion of Our Platform We plan to continue to invest in technology innovation and product development to enhance the capabilities of our platform. Additional features and products will also enable customers and collaborators to manage new workflows on our platform and allow us to attract a broader set of stakeholders. We have recently introduced new products developed in-house and through our acquisitions of BIManywhere, Honest Buildings, Construction BI, and Esticom. We intend to continue to invest in building additional products, features, and functionality that expand our capabilities and facilitate the extension of our platform. We also intend to continue to evaluate strategic acquisitions and investments in businesses and technologies to drive product and market expansion. Our future success is dependent on our ability to successfully develop or acquire, market, and sell existing and new products to both new and existing customers. International Growth We see international expansion as a major, and largely greenfield, opportunity for growth as we look to capture a larger part of the worldwide construction market. We have started to grow our presence internationally with the opening of offices in Sydney, Australia and Vancouver and Toronto, Canada in 2017, London, England in 2018 and Mexico City, Mexico in 2019. We have also developed focused sales and marketing efforts in Singapore and the United Arab Emirates in 2021, where we do not yet maintain office locations. As a result of our international efforts, we support multiple languages and currencies. Furthermore, we believe global demand for our products will continue to increase as we expand our international sales and marketing efforts, and the awareness of our products and platform grows. However, our ability to conduct our operations internationally will require considerable management attention and resources and is subject to the particular challenges of supporting a rapidly growing business in an environment of multiple languages, cultures, customs, legal, tax and regulatory systems, alternative dispute systems, and commercial markets. We have made, and plan to continue to make, significant investments in existing and select additional international markets. While these investments may adversely affect our operating results in the near term, we believe they will contribute to our long-term growth. COVID-19 Update As governments worldwide scrambled to control the spread of COVID-19, some local governments temporarily closed construction jobsites or imposed restrictions on construction activity, such as limiting the number of workers allowed on site, delaying progress on ongoing projects. The outbreak of COVID-19 negatively impacted the number of new customers added to our platform during 2020 and in the first six months of 2021. However, our customers’ reliance on our platform, coupled with the steady growth of our customer base throughout the pandemic, gives us confidence that the pandemic’s impact on our industry and business is short-term and will ultimately accelerate digital transformation in our industry, supporting our long-term growth. Notably, the pandemic has begun to change the way construction stakeholders operate by pushing them to adopt digital solutions that enable distanced, distributed workforces. Our customers’ reliance on our platform, coupled with the growth of our customer base throughout the pandemic, give us confidence that the impact of the COVID-19 pandemic on our industry and our business is short-term and will ultimately accelerate the digital transformation in the industry and support our growth in the long term. Notably, the pandemic has begun to change the way construction stakeholders operate by pushing them to adopt digital solutions that enable distanced, distributed workforces. Many have discovered how Procore’s platform can make their operations more efficient. In addition to our 13 products and our App Marketplace, within weeks of the initial shutdowns, we provided our customers with direct API-based integrations to Zoom, Microsoft Teams, and GoToMeeting in order to help maintain business continuity in a safe and 20 efficient manner, all without leaving the Procore platform. We also quickly integrated an embedded digital whiteboard app with our platform and added templates to our Inspections tool helping users to document COVID-19-related safety measures and comply with preventative health requirements. We believe the temporary slowdown in construction during the pandemic has increased the backlog of new construction and may also drive additional new construction in the future. We have developed a highly efficient and resilient business model that we expect to flourish from these industry tailwinds. Further, we believe we are uniquely positioned to continue to drive forward the digitization of global construction. The impact of the COVID-19 pandemic and its effects on the construction industry continue to evolve. Similarly, the pandemic’s impact on our financial condition and results of operations remains uncertain. Furthermore, as a result of our subscription-based business model, the effect of the COVID-19 pandemic may not be fully reflected in our results of operations and overall financial condition until future periods. See disclosure under Part II, Item 1A - Risk Factors in this Quarterly Report on Form 10-Q for further discussion of the possible impact of the COVID-19 pandemic on our business and financial results. Components of Results of Operations Revenue We generate substantially all of our revenue from subscriptions to access our products and related support. Subscriptions are sold for a fixed fee and revenue is recognized ratably over the term of the subscription. Our subscriptions generally have annual or multi-year terms, are typically subject to renewal at the end of the subscription term, and are non-cancellable. To the extent we invoice our customers in advance of revenue recognition, we record deferred revenue. Consequently, a portion of the revenue that we report each period is attributable to the recognition of revenue previously deferred related to subscriptions that we entered into during previous periods. Cost of Revenue Cost of revenue primarily consists of customer support personnel-related compensation expenses, including salaries, bonuses, benefits, payroll taxes, and stock-based compensation expense, third-party hosting costs, software license fees, amortization of capitalized software development costs, amortization of acquired technology intangible assets, and allocated overhead. We expect our cost of revenue to increase on an absolute dollar basis as our revenue increases. We intend to continue to invest additional resources in platform hosting, customer support, and software development as we grow our business and to ensure that our customers are realizing the full benefit of our products. The level and timing of investment in these areas could affect our cost of revenue in the future. Costs related to the development of internal-use software for new products and major platform enhancements are capitalized until the software is substantially complete and ready for its intended use. Capitalized software development costs are amortized on a straight-line basis over the developed software’s estimated useful life of two years and the amortization is recorded in cost of revenue. We incurred significant additional cost of revenue expenses during the three months ended June 30, 2021 as a result of the stock-based compensation expense associated with RSUs where the performance condition was satisfied upon the effective date of the registration statement for our IPO and employer payroll tax related to employee stock transactions. We anticipate additional stock-based compensation expense and employer payroll tax related to employee stock transactions going forward. Operating Expenses Our operating expenses consist of sales and marketing, research and development, and general and administrative expenses. For each of these categories of expense, personnel-related compensation expense is the most significant component, which include salaries, bonuses, commissions, benefits, payroll taxes, and stock-based compensation. We incurred significant additional operating expenses during the three months ended June 30, 2021 as a result from stock-based compensation expense associated with RSUs where the performance condition was satisfied upon the effective date of the registration statement for our IPO and employer payroll tax related to employee stock transactions. We anticipate additional stock-based compensation expense and employer payroll tax related to employee stock transactions going forward. Sales and Marketing Sales and marketing expenses primarily consist of personnel-related compensation expenses for our sales and 21 marketing organizations, advertising costs, marketing events, travel, trade shows and other marketing activities, contractor costs to supplement our staff levels, consulting services, amortization of acquired customer relationship intangible assets, and allocated overhead. We expense advertising and other promotional expenditures as incurred. We expect sales and marketing expenses to increase on an absolute dollar basis and vary from period to period as a percentage of revenue, as we increase our investment in sales and marketing efforts over the foreseeable future, primarily from increased headcount in sales and marketing as well as investment in marketing to drive customer growth. Research and Development Research and development expenses primarily consist of personnel-related compensation expenses for our engineering, product, and design teams, contractor costs to supplement our staff levels, consulting services, amortization of certain acquired intangible assets used in research and development activities, and allocated overhead. We expect research and development expenses to increase on an absolute dollar basis and vary from period to period as a percentage of revenue for the foreseeable future as we continue to invest in headcount to build, enhance, maintain, and scale our products and platform. General and Administrative General and administrative expenses primarily consist of personnel-related compensation expenses for our finance, human resources, IT, legal, and other administrative functions. Additionally, general and administrative expenses include non-personnel-related expenses, such as professional fees for audit, legal, tax, and other external consulting services, including acquisition-related costs, costs associated with operating as a public company, including insurance costs, professional services, investor relations, and other compliance costs applicable to companies listed on a national securities exchange, property and use taxes, licenses, travel and entertainment costs, and allocated overhead. We expect to increase the size of our general and administrative functions to support the growth of our business, including our international expansion. Interest Expense, Net Interest expense, net consists primarily of interest expense associated with our finance leases and undrawn fees associated with our Credit Facility, which is partially offset by interest income from money market funds. Change in Fair Value of Series I Redeemable Convertible Preferred Stock Warrant Liability Change in fair value of Series I redeemable convertible preferred stock warrant liability consisted of losses from the remeasurement of the Series I redeemable convertible preferred stock warrant to fair value from issuance in March 2020 to June 2020. Other Income (Expense), Net Other income (expense), net primarily consists of gain or loss on foreign currency transactions and miscellaneous other income. Provision for Income Taxes Provision for income taxes consists primarily of income taxes of U.S. state franchise taxes and certain foreign jurisdictions in which we conduct business, net of the release of valuation allowance as a result of deferred tax liabilities from acquisitions that are an available source of income to realize our deferred tax assets. As we expand our international operations, we expect to incur increased foreign tax expenses. We have a full valuation allowance for net U.S. and U.K. deferred tax assets. The U.S. valuation allowance includes net operating loss carryforwards, and tax credits related primarily to research and development for our operations in the United States. The U.K. valuation allowance is primarily comprised of net operating loss carryforwards. We expect to maintain this full valuation allowance for our net U.S. and U.K. deferred tax assets for the foreseeable future. 22 Results of Operations The following tables set forth our consolidated statements of operations data and such data as a percentage of revenue for each of the periods indicated. Certain percentages below may not sum due to rounding. Three Months Ended June 30, Six Months Ended June 30, 2020 2021 2020 2021 (in thousands) Revenue $ 96,553 $ 122,790 $ 188,890 $ 236,728 Cost of revenue (1)(2)(3) 17,069 25,493 34,526 45,852 Gross profit 79,484 97,297 154,364 190,876 Operating expenses: Sales and marketing (1)(2)(3) 42,638 99,905 90,700 153,870 Research and development (1)(2)(3) 26,518 88,627 54,751 123,172 General and administrative (1)(3) 13,467 57,827 29,450 75,754 Total operating expenses 82,623 246,359 174,901 352,796 Loss from operations (3,139 ) (149,062 ) (20,537 ) (161,920 ) Interest expense, net (538 ) (576 ) (920 ) (1,138 ) Change in fair value of Series I redeemable convertible preferred stock warrant liability (10,605 ) — (10,605 ) — Other income (expense), net 741 (44 ) (477 ) (227 ) Loss before provision for income taxes (13,541 ) (149,682 ) (32,539 ) (163,285 ) Provision for income taxes 208 37 244 166 Net loss $ (13,749 ) $ (149,719 ) $ (32,783 ) $ (163,451 ) Three Months Ended June 30, Six Months Ended June 30, 2020 2021 2020 2021 (as a percentage of revenue) Revenue 100 % 100 % 100 % 100 % Cost of revenue (1)(2)(3) 18 % 21 % 18 % 19 % Gross profit 82 % 79 % 82 % 81 % Operating expenses: Sales and marketing (1)(2)(3) 44 % 81 % 48 % 65 % Research and development (1)(2)(3) 27 % 72 % 29 % 52 % General and administrative (1)(3) 14 % 47 % 16 % 32 % Total operating expenses 86 % 201 % 93 % 149 % Loss from operations (3 %) (121 %) (11 %) (68 %) Interest expense, net (1 %) (0 %) (0 %) (0 %) Change in fair value of Series I redeemable convertible preferred stock warrant liability (11 %) 0 % (6 %) 0 % Other income (expense), net 1 % (0 %) (0 %) (0 %) Loss before provision for income taxes (14 %) (122 %) (17 %) (69 %) Provision for income taxes 0 % 0 % 0 % 0 % Net loss (14 %) (122 %) (17 %) (69 %) (1) Includes stock-based compensation expense as follows: Three Months Ended June 30, Six Months Ended June 30, 2020 2021 2020 2021 (in thousands) Cost of revenue $ 268 $ 4,918 $ 535 $ 6,079 Sales and marketing 3,115 42,855 5,234 46,107 Research and development 1,912 51,317 3,849 54,563 General and administrative 1,331 38,353 2,708 40,997 Total stock-based compensation expense $ 6,626 $ 137,443 $ 12,326 $ 147,746 23 (2) Includes amortization of acquired intangible assets as follows: Three Months Ended June 30, Six Months Ended June 30, 2020 2021 2020 2021 (in thousands) Cost of revenue $ 761 $ 1,086 $ 1,522 $ 2,172 Sales and marketing 404 466 808 945 Research and development 183 680 305 863 Total amortization of acquired intangible assets $ 1,348 $ 2,232 $ 2,635 $ 3,980 (3) Includes employer payroll tax on employee stock transactions as follows: Three Months Ended June 30, Six Months Ended June 30, 2020 2021 2020 2021 (in thousands) Cost of revenue $ — $ 330 $ — $ 334 Sales and marketing 7 1,215 76 1,357 Research and development 20 1,748 35 1,822 General and administrative 25 635 27 715 Total employer payroll tax on employee stock transactions $ 52 $ 3,928 $ 138 $ 4,228 Comparison of the Three Months Ended June 30, 2020 and 2021 Revenue Three Months Ended June 30, Change 2020 2021 Dollar Percent (dollars in thousands) Revenue $ 96,553 $ 122,790 $ 26,237 27 % During the three months ended June 30, 2021, our revenue increased $26.2 million, or 27%, compared to the three months ended June 30, 2020, which is primarily due to expansion with our existing customers and revenue from new customers added during the quarter. The increase in revenue from existing customers includes the net benefit of a full quarter of subscription revenue in the three months ended June 30, 2021 from customers that were newly acquired in the first quarter of 2021 and continued their subscriptions in the second quarter of 2021, as well as customers that expanded their subscriptions in 2020 and the first two quarters of 2021 through the purchase of additional construction volume or products, as well as price increases. Cost of Revenue, Gross Profit, and Gross Margin Three Months Ended June 30, Change 2020 2021 Dollar Percent (dollars in thousands) Cost of revenue $ 17,069 $ 25,493 $ 8,424 49 % Gross profit 79,484 97,297 17,813 22 % Gross margin 82 % 79 % The increase in cost of revenue during the three months ended June 30, 2021 was primarily attributable to an increase of $6.5 million in personnel-related expenses, including an increase of $4.7 million in stock-based compensation expense. Personnel-related expenses increased primarily due to stock-based compensation expense associated with RSUs where the performance condition was satisfied upon the effectiveness date of the registration statement for the IPO, annual merit increases approved during the third quarter of 2020 and the second quarter of 2021, and an increase in headcount of 9%. The increase in cost of revenue expense was also attributable to a $0.9 million increase in hosting and other direct costs. 24 Operating Expenses Three Months Ended June 30, Change 2020 2021 Dollar Percent (dollars in thousands) Sales and marketing $ 42,638 $ 99,905 $ 57,267 134 % The increase in sales and marketing expense during the three months ended June 30, 2021 was primarily attributable to an increase of $50.0 million in personnel-related expenses, including an increase of $39.7 million in stock-based compensation expense and a $1.2 million increase in employer payroll tax related to employee stock transactions. Personnel-related expenses increased primarily due to stock-based compensation expense associated with RSUs where the performance condition was satisfied upon the effectiveness date of the registration statement for the IPO, annual merit increases approved during the third quarter of 2020 and the second quarter of 2021, and an increase in headcount of 10%. The increase in sales and marketing expense was also attributable to a $2.7 million increase in marketing events and expenses and a $2.7 million increase in professional fees primarily towards contractors to supplement our staff levels. Three Months Ended June 30, Change 2020 2021 Dollar Percent (dollars in thousands) Research and development $ 26,518 $ 88,627 $ 62,109 234 % The increase in research and development expense during the three months ended June 30, 2021 was primarily attributable to an increase of $59.3 million in personnel-related expenses, including an increase of $49.4 million in stock-based compensation expense and a $1.7 million increase in employer payroll tax related to employee stock transactions. Personnel-related expenses increased primarily due to stock-based compensation expense associated with RSUs where the performance condition was satisfied upon the effectiveness date of the registration statement for the IPO, annual merit increases approved during the third quarter of 2020 and the second quarter of 2021, and an increase in headcount of 10%. The increase in research and development expense is also attributable to a $1.2 million increase in professional fees primarily towards contractors to supplement our staff levels. Three Months Ended June 30, Change 2020 2021 Dollar Percent (dollars in thousands) General and administrative $ 13,467 $ 57,827 $ 44,360 329 % The increase in general and administrative expense during t he three m onths ended June 30, 2021 was primarily due to an increase of $40.5 m illion in personnel-related expenses, including an increase of $37.1 m illion in s tock-based compensation expense. Personnel-related expenses increased primarily due to stock-based compensation expense associated with RSUs where the performance condition was satisfied upon the effectiveness date of the registration statement for the IPO and annual merit increases approved during t he third quarter of 2020 and the second quarter of 2021. The increase in general and administrative expense is also attributable to a $2.7 million increase in professional fees. Interest Expense, Net, Change in Fair Value of Series I Redeemable Convertible Preferred Stock Warrant Liability, Other Income ( Expense), Net, and Provision for Income Taxes Three Months Ended June 30, Change 2020 2021 Dollar Percent (dollars in thousands) Interest expense, net $ (538 ) $ (576 ) $ (38 ) 7 % Change in fair value of Series I redeemable convertible preferred stock warrant liability (10,605 ) - 10,605 (100 %) Other income (expense), net 741 (44 ) (785 ) (106 %) Provision for income taxes 208 37 (171 ) (82 %) The change in fair value of Series I redeemable convertible preferred stock warrant liability in the three months ended 25 June 30, 2020 was due to $10.6 million of loss recognized from the remeasurement to fair value of the Series I redeemable convertible preferred stock warrant liability, which was issued to a new investor in March 2020 and was exercised in December 2020. The loss recognized was primarily due to the increase in the fair value of the Series I redeemable convertible preferred stock from the issuance date through June 30, 2020 . Comparison of the Six Months Ended June 30, 2020 and 2021 Revenue Six Months Ended June 30, Change 2020 2021 Dollar Percent (dollars in thousands) Revenue $ 188,890 $ 236,728 $ 47,838 25 % During the six months ended June 30, 2021, our revenue increased $47.8 million, or 25%, compared to the six months ended June 30, 2020, which is primarily due to expansion with our existing customers and revenue from new customers added during the period . The increase in revenue from existing customers includes the net benefit of a full two quarters of subscription revenue in the six months ended June 30, 2021 from customers that were newly acquired in 2020 and continued their subscriptions in 2021, and customers that expanded their subscriptions in 2020 and the first two quarters of 2021 through the purchase of additional construction volume or products, as well as price increases. Cost of Revenue, Gross Profit, and Gross Margin Six Months Ended June 30, Change 2020 2021 Dollar Percent (dollars in thousands) Cost of revenue $ 34,526 $ 45,852 $ 11,326 33 % Gross profit 154,364 190,876 36,512 24 % Gross margin 82 % 81 % The increase in cost of revenue during the six months ended June 30, 2021 was primarily attributable to an increase of $8.6 million in personnel-related expenses, including an increase of $5.5 million in stock-based compensation expense. Personnel-related expenses increased primarily due to stock-based compensation expense associated with RSUs where the performance condition was satisfied upon the effectiveness date of the registration statement for the IPO, annual merit increases approved during the third quarter of 2020 and the second quarter of 2021, and an increase in average headcount of 9%. The increase in cost of revenue expense is also attributable to a $1.3 million increase in amortization of capitalized software and $0.9 million increase in hosting and other direct costs. Operating Expenses Six Months Ended June 30, Change 2020 2021 Dollar Percent (dollars in thousands) Sales and marketing $ 90,700 $ 153,870 $ 63,170 70 % The increase in sales and marketing expense during the six months ended June 30, 2021 was primarily attributable to an increase of $55.2 million in personnel-related expenses, including an increase of $40.9 million in stock-based compensation expense and a $1.3 million increase in employer payroll tax related to employee stock transactions. Personnel-related expenses increased primarily due to stock-based compensation expense associated with RSUs where the performance condition was satisfied upon the effectiveness date of the registration statement for the IPO, annual merit increases approved during the third quarter of 2020 and the second quarter of 2021, and an increase in average headcount of 6%. The increase in sales and marketing expense was also attributable to a $4.5 million increase in professional fees and a $4.0 million increase in marketing events and expenses, offset by a $1.2 million decrease in travel-related costs due to COVID-19 travel restrictions. 26 Six Months Ended June 30, Change 2020 2021 Dollar Percent (dollars in thousands) Research and development $ 54,751 $ 123,172 $ 68,421 125 % The increase in research and development expense during the six months ended June 30, 2021 was primarily attributable to an increase of $66.2 million in personnel-related expenses, including an increase of $50.7 million in stock-based compensation expense and a $1.8 million increase in employer payroll tax related to employee stock transactions. Personnel-related expenses increased primarily due to stock-based compensation expense associated with RSUs where the performance condition was satisfied upon the effectiveness date of the registration statement for the IPO, annual merit increases approved during the third quarter of 2020 and the second quarter of 2021, and an increase in average headcount of 3%. The increase in research and development expense is also attributable to a $1.9 million increase in professional fees. Six Months Ended June 30, Change 2020 2021 Dollar Percent (dollars in thousands) General and administrative $ 29,450 $ 75,754 $ 46,304 157 % The increase in general and administrative expense during t he six m onths ended June 30, 2021 was primarily due to an increase of $43.5 m illion in personnel-related expenses, including an increase of $38.3 m illion in s tock-based compensation expense. Personnel-related expenses increased primarily due to stock-based compensation expense associated with RSUs where the performance condition was satisfied upon the effectiveness date of the registration statement for the IPO and annual merit increases approved during the third quarter of 2020 and the second quarter of 2021. The increase in general and administrative expense is also attributable to a $2.6 million increase in professional fees. Interest Expense, Net, Change in Fair Value of Series I Redeemable Convertible Preferred Stock Warrant Liability, Other Expense, Net and Provision for Income Taxes Six Months Ended June 30, Change 2020 2021 Dollar Percent (dollars in thousands) Interest expense, net $ (920 ) $ (1,138 ) $ (218 ) 24 % Change in fair value of Series I redeemable convertible preferred stock warrant liability (10,605 ) — 10,605 (100 %) Other expense, net (477 ) (227 ) 250 (52 %) Provision for income taxes 244 166 (78 ) (32 %) The change in fair value of Series I redeemable convertible preferred stock warrant liability in the six months ended June 30, 2020 was due to $10.6 million of loss recognized from the remeasurement to fair value of the Series I redeemable convertible preferred stock warrant liability, which was issued to a new investor in March 2020 and was exercised in December 2020. The loss recognized is primarily due to the increase in the fair value of the Series I redeemable convertible preferred stock from the issuance date through June 30, 2020. Non-GAAP Financial Measures In addition to our results determined in accordance with GAAP, we believe non-GAAP gross profit, non-GAAP gross margin, non-GAAP income (loss) from operations, and non-GAAP operating margin are useful in evaluating our operating performance. We use this non-GAAP financial information, collectively, to evaluate our ongoing operations as well as for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, is helpful to investors because it provides consistency and comparability with past financial performance, and may assist in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their GAAP results. The non-GAAP financial information is presented for supplemental informational purposes only, and should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from similarly-titled non-GAAP measures used by other companies. A reconciliation is provided below for each non-GAAP financial measure 27 to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures. Non-GAAP Gross Profit and Non-GAAP Gross Margin We define non-GAAP gross profit and non-GAAP gross margin as gross profit and gross margin, respectively, excluding stock-based compensation expense and amortization of acquired technology intangible assets. In order to remain consistent with the treatment of other equity related expenses in our non-GAAP measurements, we also excluded the employer payroll tax related to employee stock transactions for the first time during the current reporting period. This adjustment was made retroactively to calculate the non-GAAP gross profit and non-GAAP gross margin for the comparative historical periods. The employer payroll tax related to employee stock transactions were immaterial historically prior to our initial public offering. The amount of employer payroll tax-related items on employee stock transactions is dependent on RSU settlements, option exercises, related stock price, and other factors that are beyond our control and that do not correlate to the operation of the business. When evaluating the performance of our business and making operating plans, we do not consider these items (for example, when considering the impact of equity award grants, we place a greater emphasis on overall stockholder dilution rather than the accounting charges associated with such grants). We believe it is useful to exclude these expenses in order to better understand the long-term performance of our core business and to facilitate comparison of our results period-over-period and to those of peer companies. The following table presents a reconciliation of our GAAP gross profit to our non-GAAP gross profit as of the periods presented: Three Months Ended June 30, Six Months Ended June 30, 2020 2021 2020 2021 (dollars in thousands) Revenue $ 96,553 $ 122,790 $ 188,890 $ 236,728 Gross profit 79,484 97,297 154,364 190,876 Stock-based compensation expense 268 4,918 535 6,079 Amortization of acquired technology intangible assets 761 1,086 1,522 2,172 Employer payroll tax on employee stock transactions — 330 — 334 Non-GAAP gross profit $ 80,513 $ 103,631 $ 156,421 $ 199,461 Gross margin 82 % 79 % 82 % 81 % Non-GAAP gross margin 83 % 84 % 83 % 84 % Non-GAAP Income ( Loss) from Operations and Non-GAAP Operating Margin We define non-GAAP income ( loss) from operations and non-GAAP operating margin as GAAP loss from operations and GAAP operating margin, respectively, excluding stock-based compensation expense and amortization of acquired intangible assets. In order to remain consistent with the treatment of other equity related expenses in our non-GAAP measurements, we also excluded the employer payroll tax related to employee stock transactions for the first time during the current reporting period. This adjustment was made retroactively to calculate the non-GAAP income (loss) from operations and non-GAAP operating margin for the comparative historical periods. The employer payroll tax related to employee stock transactions were immaterial historically prior to our initial public offering. The following table presents a reconciliation of our GAAP loss from operations to our non-GAAP income (loss) from operations and our GAAP operating margin to our non-GAAP operating margin as of the periods presented: 28 Three Months Ended June 30, Six Months Ended June 30, 2020 2021 2020 2021 (dollars in thousands) Revenue $ 96,553 $ 122,790 $ 188,890 $ 236,728 Loss from operations (3,139 ) (149,062 ) (20,537 ) (161,920 ) Stock-based compensation expense 6,626 137,443 12,326 147,746 Amortization of acquired intangible assets 1,348 2,232 2,635 3,980 Employer payroll tax on employee stock transactions 52 3,928 138 4,228 Non-GAAP income (loss) from operations $ 4,887 $ (5,459 ) $ (5,438 ) $ (5,966 ) Operating margin (3 %) (121 %) (11 %) (68 %) Non-GAAP operating margin 5 % (4 %) (3 %) (3 %) Liquidity and Capital Resources To date, we have financed our operations principally through private placements of our equity securities. As of June 30, 2021, our principal sources of liquidity are cash and cash equivalents of $1,060.5 million, which were held in checking accounts, savings accounts, and highly liquid money market funds. We also have our Credit Facility with Silicon Valley Bank that may be used for general corporate purposes. As of June 30, 2021, $75.0 million, less $6.9 million in outstanding letters of credit, was available to be drawn under the Credit Facility. We believe our existing cash and cash equivalents will be sufficient to meet our needs for at least the next 12 months. This assessment is a forward-looking statement and involves risks and uncertainties. Our future capital requirements will depend on many factors, including our revenue growth rate, new customer acquisition and subscription renewal activity, timing of billing activities, the timing and extent of spending to support further sales and marketing and research and development efforts, general and administrative expenses to support our growth, including international expansion, and the ongoing impact of the COVID-19 pandemic. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing to fund these activities. If we are unable to raise additional capital when desired, or on acceptable terms, our business, results of operations, and financial condition could be materially adversely affected. The following table summarizes our cash flows for the periods presented: Six Months Ended June 30, 2020 2021 (in thousands) Net cash (used in) provided by operating activities $ (960 ) $ 25,167 Net cash used in investing activities (15,566 ) (33,342 ) Net cash provided by financing activities 176,970 689,511 Operating Activities Our largest source of operating cash is collections from the sales of subscriptions to our customers. Our primary uses of cash from operating activities are for personnel expenses, marketing expenses, hosting and software license expenses, and overhead. Net cash provided by operating activities was $25.2 million during the six months ended June 30, 2021, which resulted from a net loss of $163.5 million, adjusted for non-cash charges of $167.8 million and net cash inflow of $20.9 million from changes in operating assets and liabilities. The $167.8 million of non-cash charges primarily reflected the following: • $147.8 million in stock-based compensation expense; • $15.1 million in depreciation and amortization; and • $3.7 million in non-cash lease expense relating to right-of-use operating lease assets. The $20.9 million of net cash inflows provided as a result of changes in our operating assets and liabilities primarily reflected the following: 29 • a $11.1 million decrease in accounts receivable primarily due to timing of billings and cash receipts from customers ; • a $14.5 million increase in accrued expenses and other liabilities primarily due to timing of payroll and cash payments to our vendors; and • a $10.8 million increase in deferred revenue primarily due to the growth of our business and timing of billings; These changes in our operating assets and liabilities were partially offset by the following: • a $5.7 million increase in prepaid expenses and other assets primarily due to timing of cash payments to our vendors; • a $5.1 million increase in deferred contract cost assets; and • a $2.9 million decrease in accounts payable primarily due to timing of cash payments to our vendors. Net cash used in operating activities was $1.0 million during the six months ended June 30, 2020, which resulted from a net loss of $32.8 million, adjusted for non-cash charges of $39.1 million and net cash outflow of $7.3 million from changes in operating assets and liabilities. The $39.1 million of non-cash charges primarily reflected the following: • $12.4 million in depreciation and amortization; • $12.3 million in stock-based compensation expense; • $10.6 million in change in fair value of redeemable convertible preferred stock warrant liability; and • $3.2 million in non-cash lease expense relating to right-of-use operating lease assets. The $7.3 million of net cash outflows provided as a result of changes in our operating assets and liabilities primarily reflected the following: • a $11.5 million decrease in accrued expenses and other liabilities primarily due to timing of payroll and cash payments to our vendors; and • a $2.0 million decrease in operating lease liabilities related to lease payments. These changes in our operating assets and liabilities were partially offset by the following: • a $6.5 million decrease in accounts receivable primarily due to timing of billings and cash receipts from customers. Investing Activities Net cash used in investing activities of $33.3 million during the six months ended June 30, 2021 consisted of the acquisition of Indus.ai Inc., net of cash acquired, of $20.0 million, capitalized software development costs of $5.7 million, purchases of property and equipment of $4.2 million primarily related to computer equipment purchases, and $3.5 million in strategic investments. Net cash used in investing activities of $15.6 million during the six months ended June 30, 2020 consisted of capitalized software development costs of $6.9 million, purchases of property and equipment of $5.3 million primarily related to improvements to our leased office spaces and computer equipment purchases, and the acquisition of Avata Intelligence, Inc., net of cash acquired, of $3.3 million. Financing Activities Net cash provided by financing activities of $689.5 million during the six months ended June 30, 2021 primarily consisted of proceeds from issuance of common stock in IPO, net of underwriting discounts and commissions, of $665.1 million, proceeds from stock option exercises of $29.1 million, partially offset by payments of deferred offering costs of $3.5 million. Net cash provided by financing activities of $177.0 million during the six months ended June 30, 2020 primarily consisted of the proceeds of $169.9 million from the issuance of our Series I redeemable convertible preferred stock and preferred stock warrant and proceeds from stock option exercises of $10.1 million, partially offset by payments of deferred offering costs of $2.2 million. Credit Facility 30 Our Credit Facility provides for debt financing of up to $75.0 million to be used for general corporate purposes, including the financing of working capital requirements, and is secured by a blanket lien on the Company’s assets. The Credit Facility has a maturity date of May 7, 2022, and carries a fee of 0.225% applied to unused balances and an interest rate equal to the Wall Street Journal prime rate plus 1.25% applied to all amounts outstanding, with a floor of 3.25%. The Credit Facility contains financial covenants that require us to maintain minimum annual recurring revenue, as defined in the loan and security agreement, and a liquidity ratio, if the Credit Facility is drawn, of at least 1.25 to 1.00. The Credit Facility also contains restrictions on our ability to dispose of our business or property, engage in changes in business, merge with or acquire another business, incur indebtedness, encumber the collateral securing the Credit Facility, pay dividends, make distributions or payments to stockholders or redeem, retire, or repurchase any capital stock, or make any restricted investments. As of June 30, 2021, no amounts had been drawn down under the Credit Facility, and we were in compliance with all covenants. The Credit Facility also provides us with the ability to issue standby letters of credit for up to $15.0 million, which if issued reduce the amount available for borrowing under the Credit Facility. As of June 30, 2021, we had issued letters of credit totaling $6.9 million to secure various U.S. leased office facilities. Remaining Performance Obligations Our subscriptions typically have a term of one to three years. The transaction price allocated to remaining performance obligations under our subscriptions represents the contracted transaction price that has not yet been recognized as revenue, which includes deferred revenue and amounts under non-cancellable subscriptions that will be invoiced and recognized as revenue in future periods. As of June 30, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was $478.4 million, 72 % of which is expected to be recognized as revenue in the next 12 months and substantially all of the remainder between 12 and 36 months thereafter. We expect remaining performance obligations to change from period to period primarily due to the size, timing and duration of new customer contracts and customer renewals. Commitments and Contractual Obligations There have been no material changes to our contractual obligations and commitments from those disclosed in our Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Prospectus. Off-Balance Sheet Arrangements As of June 30, 2021, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.