10-Q
1
d158374d10q.htm
10-Q
10-Q
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File Number: 001-39540
Palantir Technologies Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware
68-0551851
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1555 Blake Street, Suite 250
Denver, Colorado
80202
(Address of principal executive offices)
(Zip Code)
Registrants telephone number, including area code: (720) 358-3679
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange
on which registered
Class A Common Stock, par value
$0.001 per share
PLTR
New York Stock Exchange
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files). Yes ☒ No ☐
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated
filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☒
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use
the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 7, 2021, there were 1,805,225,985 shares of the registrants Class A common stock outstanding, 70,515,320
shares of the registrants Class B common stock outstanding, and 1,005,000 shares of the registrants Class F common stock outstanding.
Table of Contents
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
3
Condensed Consolidated Balance Sheets
3
Condensed Consolidated Statements of Operations
4
Condensed Consolidated Statements of Comprehensive Loss
5
Condensed Consolidated Statements of Redeemable Convertible and Convertible Preferred Stock and Stockholders Equity (Deficit)
6
Condensed Consolidated Statements of Cash Flows
7
Notes to Unaudited Condensed Consolidated Financial Statements
8
Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
23
Item 3.
Qualitative and Quantitative Disclosures About Market Risk
37
Item 4.
Controls and Procedures
38
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
39
Item 1A.
Risk Factors
39
Item 2.
Unregistered Sales of Equity Securities
87
Item 3.
Defaults Upon Senior Securities
88
Item 4.
Mine Safety Disclosures
88
Item 5.
Other Information
88
Item 6.
Exhibits
88
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Palantir Technologies Inc.
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
(unaudited)
As of March 31,
As of December 31,
2021
2020
Assets
Current assets:
Cash and cash
equivalents
$
2,339,437
$
2,011,323
Restricted cash
37,106
37,285
Accounts receivable
151,400
156,932
Prepaid expenses and other
current assets
61,755
51,889
Total current assets
2,589,698
2,257,429
Property and equipment,
net
27,378
29,541
Restricted cash,
noncurrent
71,933
79,538
Operating lease right-of-use assets
213,331
217,075
Other assets
111,845
106,921
Total assets
$
3,014,185
$
2,690,504
Liabilities and
Stockholders Equity
Current liabilities:
Accounts payable
$
17,234
$
16,358
Accrued liabilities
181,603
158,546
Deferred revenue (1)
186,498
189,520
Customer deposits
250,181
210,320
Operating lease
liabilities
32,110
29,079
Total current
liabilities
667,626
603,823
Deferred revenue, noncurrent (1)
44,998
50,525
Customer deposits,
noncurrent
70,768
81,513
Debt, noncurrent, net
198,185
197,977
Operating lease liabilities,
noncurrent
222,429
229,800
Other noncurrent
liabilities
4,236
4,316
Total liabilities
1,208,242
1,167,954
Commitments and Contingencies
(Note 8)
Stockholders
equity:
Preferred stock, par value $0.001: 2,000,000 shares authorized and 0 issued and outstanding as of
March 31, 2021 and December 31, 2020
Common stock, $0.001 par value: 20,000,000 Class A shares authorized as of March 31, 2021
and December 31, 2020; 1,792,699 shares issued and outstanding as of March 31, 2021, and 1,542,058 shares issued and outstanding as of December 31, 2020; 2,700,000 Class B shares authorized as of March 31, 2021 and
December 31, 2020; 66,903 shares issued and outstanding as of March 31, 2021, and 249,077 shares issued and outstanding as of December 31, 2020; and 1,005 Class F shares authorized, issued, and outstanding as of March 31,
2021 and December 31, 2020
1,860
1,792
Additional paid-in capital
6,892,046
6,488,857
Accumulated other
comprehensive income (loss)
865
(2,745)
Accumulated deficit
(5,088,828)
(4,965,354)
Total stockholders
equity
1,805,943
1,522,550
Total liabilities and
stockholders equity
$
3,014,185
$
2,690,504
(1) Deferred revenue as of March 31, 2021 and
December 31, 2020 includes $61.1 million and $68.2 million, respectively, from Palantir Technologies Japan, K.K. See Note 6 . Equity Method Investments, for more information.
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
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Palantir Technologies Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
Three Months Ended March 31,
2021
2020
Revenue
$
341,234
$
229,327
Cost of
revenue
74,111
64,294
Gross
profit
267,123
165,033
Operating
expenses:
Sales and marketing
136,097
98,653
Research and
development
98,471
65,800
General and
administrative
146,569
70,765
Total operating
expenses
381,137
235,218
Loss from
operations
(114,014)
(70,185)
Interest income
376
3,267
Interest expense
(1,840)
(4,594)
Change in fair value of
warrants
13,695
Other income (expense),
net
(4,894)
6,100
Loss before
provision for income taxes
(120,372)
(51,717)
Provision for
income taxes
3,102
2,557
Net loss
$
(123,474)
$
(54,274)
Net loss per share
attributable to common stockholders, basic
$
(0.07)
$
(0.09)
Net loss per share
attributable to common stockholders, diluted
$
(0.07)
$
(0.10)
Weighted-average
shares of common stock outstanding used in computing net loss per share attributable to common stockholders, basic
1,821,158
591,850
Weighted-average
shares of common stock outstanding used in computing net loss per share attributable to common stockholders, diluted
1,821,158
594,363
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
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Palantir Technologies Inc.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)
Three Months Ended March 31,
2021
2020
Net loss
$
(123,474)
$
(54,274)
Other
comprehensive income:
Foreign
currency translation adjustments
3,610
1,026
Comprehensive
loss
$
(119,864)
$
(53,248)
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
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Palantir Technologies Inc.
Condensed Consolidated Statements of Redeemable Convertible and Convertible Preferred Stock and Stockholders
Equity (Deficit)
(in thousands)
(unaudited)
Common Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders
Equity
Shares
Amount
Balance as of
December 31, 2020
1,792,140
$
1,792
$
6,488,857
$
(2,745
)
$
(4,965,354
)
$
1,522,550
Issuance of common
stock from the exercise of stock options
55,300
55
208,805
208,860
Issuance of common
stock upon vesting of restricted stock units (RSUs)
10,960
11
(11
)
Issuance of common
stock upon vesting of growth units
1,471
1
(1
)
Issuance of common
stock upon net exercise of common stock warrants
736
1
(1
)
Stock-based
compensation
194,397
194,397
Other
comprehensive income
3,610
3,610
Net loss
(123,474
)
(123,474)
Balance as of
March 31, 2021
1,860,607
$
1,860
$
6,892,046
$
865
$
(5,088,828
)
$
1,805,943
Redeemable Convertible
Preferred Stock
Convertible Preferred
Stock
Common Stock
Additional
Paid-in
Capital
Treasury Stock
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders
Deficit
Shares
Amount
Shares
Amount
Shares
Amount
Shares
Amount
Balance as of
December 31, 2019
4,017
$
33,569
742,840
$
2,093,662
581,497
$
588
$
1,857,331
6,393
$
(38,895
)
$
(703
)
$
(3,798,963
)
$
(1,980,642)
Conversion of
Series H-1 convertible preferred stock to common stock
(28)
(100)
28
100
100
Repurchase of
common stock, held in treasury
(808)
808
(3,777)
(3,777)
Issuance of common
stock from the exercise of stock options
7,316
7
6,703
6,710
Stock-based
compensation
54,238
54,238
Other
comprehensive income
1,026
1,026
Net loss
(54,274)
(54,274)
Balance as of
March 31, 2020
4,017
$
33,569
742,812
$
2,093,562
588,033
$
595
$
1,918,372
7,201
$
(42,672)
$
323
$
(3,853,237)
$
(1,976,619)
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
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Palantir Technologies Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three Months Ended March 31,
2021
2020
Operating
activities
Net loss
$
(123,474)
$
(54,274)
Adjustments to
reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and
amortization
3,237
3,671
Stock-based
compensation
193,731
54,107
Change in fair value of
warrants
(13,695)
Non-cash operating lease expense
6,477
10,160
Other operating
activities
771
514
Changes in operating assets
and liabilities:
Accounts receivable
4,480
(51,403)
Prepaid expenses and other
current assets
(9,753)
(7,974)
Other assets
(4,865)
(8,403)
Accounts payable
51
(40,790)
Accrued liabilities
44,488
(39,368)
Deferred revenue, current and
noncurrent
(11,952)
8,599
Customer deposits, current and
noncurrent
20,825
(132,077)
Operating lease liabilities,
current and noncurrent
(7,132)
(16,251)
Other noncurrent
liabilities
(3)
Net cash provided
by (used in) operating activities
116,881
(287,184)
Investing
activities
Purchases of
property and equipment
(708)
(3,016)
Net cash used in
investing activities
(708)
(3,016)
Financing
activities
Proceeds from the
exercise of common stock options
208,860
6,710
Repurchase of
common stock
(3,777)
Other financing
activities
(2,506)
(439)
Net cash provided
by financing activities
206,354
2,494
Effect of foreign
exchange on cash, cash equivalents, and restricted cash
(2,197)
(1,627)
Net increase
(decrease) in cash, cash equivalents, and restricted cash
320,330
(289,333)
Cash, cash
equivalents, and restricted cash - beginning of period
2,128,146
1,401,962
Cash, cash
equivalents, and restricted cash - end of period
$
2,448,476
$
1,112,629
Supplemental
disclosures of cash flow information:
Cash paid for
income taxes
$
878
$
7,665
Cash paid for
interest
1,662
1,774
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
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Palantir Technologies Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Organization
Palantir Technologies Inc. (including its subsidiaries, Palantir, or the Company) was incorporated in Delaware on
May 6, 2003. The Company builds and deploys software platforms, Palantir Gotham and Palantir Foundry, that serve as the central operating systems for its customers.
2. Significant Accounting Policies
Basis of
Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles (GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. The accompanying condensed
consolidated financial statements include the accounts of Palantir Technologies Inc. and its consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Investments in entities where the
Company holds at least a 20% ownership interest and has the ability to exercise significant influence over the investee, but does not control, are accounted for using the equity method of accounting. For such investments, the share of the
investees results of operations is included as a component of other income (expense), net in the condensed consolidated statements of operations and the investment balance is included in other assets and classified as noncurrent in the
condensed consolidated balance sheets. The Companys fiscal year ends on December 31.
The unaudited condensed consolidated balance
sheet as of December 31, 2020 included herein was derived from the audited consolidated financial statements as of that date, but does not include all disclosures, including certain notes required by GAAP on an annual reporting basis. In
managements opinion, the unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the balance sheets and statements of operations, comprehensive loss, stockholders equity
(deficit), and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year or any future period.
The Company ceased to be an emerging growth company as of December 31, 2020, which accelerated its adoption of Accounting Standards
Update (ASU) 2016-02, Leases (Topic 842). As a result, certain components of cash flows used in operating activities within the Companys condensed consolidated statements of cash flows for
the three months ended March 31, 2020 have been presented to conform to the new standard. The impact to the presentation of the other statements was not material.
These unaudited condensed consolidated financial statements should be read in conjunction with the Companys audited consolidated
financial statements and notes included in its Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on February 26, 2021.
Use of Estimates
The preparation
of the condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods.
Significant estimates and assumptions made in the accompanying condensed consolidated financial statements include, but are not limited to,
identification of performance obligations in customer contracts, the valuation of deferred tax assets and uncertain tax positions, collectability of accounts receivable, useful lives of tangible assets, and the incremental borrowing rate for
operating leases. Estimates and judgments are based on historical experience, forecasted events, and various other assumptions that management believes to be reasonable under the circumstances. Actual results could differ from those estimates and
such differences could affect the Companys financial position and results of operations.
Summary of Significant Accounting Policies
The Companys significant accounting policies are discussed in Note 2. Significant Accounting Policies in the notes to
consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on February 26, 2021. There have been no significant changes to
these policies during the three months ended March 31, 2021.
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Palantir Technologies Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Cash, Cash Equivalents, and Restricted Cash
The Company considers all highly liquid investments purchased with an original maturity of three months or less at the time of purchase to be
cash equivalents. Cash equivalents consists of amounts invested in money market funds.
Restricted cash primarily consists of cash and
certificates of deposit that are held as collateral against letters of credit and guarantees that the Company is required to maintain for operating lease agreements, certain customer contracts, and other guarantees and financing arrangements.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated
balance sheets that sum to the total of the amounts shown in the condensed consolidated statements of cash flows (in thousands):
As of March 31,
2021
2020
Cash and cash
equivalents
$
2,339,437
$
809,530
Restricted
cash
37,106
65,795
Restricted cash,
noncurrent
71,933
237,304
Total cash, cash
equivalents, and restricted cash
$
2,448,476
$
1,112,629
Accounts Receivable and Allowance for Credit Losses
Accounts receivable are recorded at the invoiced amount, net of an allowance for credit losses, if any. The Company generally grants non-collateralized credit terms to its customers. Allowance for credit losses is based on the Companys best estimate of probable losses inherent in its accounts receivable portfolio and is determined based on
expectations of the customers ability to pay by considering factors such as customer type (commercial or government), historical experience, financial position of the customer, age of the accounts receivable, current economic conditions,
including the ongoing COVID-19 pandemic, and reasonable and supportable forward-looking factors about its portfolio and future economic conditions. Accounts receivable are
written-off and charged against an allowance for credit losses when the Company has exhausted collection efforts without success. Based upon the Companys assessment as of March 31, 2021 and
December 31, 2020, it did not record an allowance for credit losses as probable losses are not expected to be material.
Concentrations of
Credit Risk and Other Concentrations
Financial instruments that potentially subject the Company to significant concentrations of
credit risk consist primarily of cash, cash equivalents, restricted cash, and accounts receivable. Cash equivalents consist of money market funds with original maturities of three months or less, which are invested primarily with U.S. financial
institutions. Cash deposits with financial institutions, including restricted cash, generally exceed federally insured limits. Management believes minimal credit risk exists with respect to these financial institutions and the Company has not
experienced any losses on such amounts.
The Company is exposed to concentrations of credit risk with respect to accounts receivable
presented on the condensed consolidated balance sheets. The Companys accounts receivable balances as of March 31, 2021 and December 31, 2020 were $151.4 million and $156.9 million, respectively. Customer G represented 14%
and 13% of total accounts receivable as of March 31, 2021 and December 31, 2020, respectively. No other customer represented more than 10% of total accounts receivable as of March 31, 2021 and December 31, 2020. The Company
seeks to mitigate its credit risk with respect to accounts receivable by contracting with large commercial customers and government agencies and regularly monitoring the aging of accounts receivable balances. As of March 31, 2021 and
December 31, 2020, the Company had not experienced any significant losses on its accounts receivable.
For the three months ended
March 31, 2021, no customer represented more than 10% of total revenue. For the three months ended March 31, 2020, Customer F, which is in the government operating segment, represented 12% of total revenue and Customer A, which is in the
commercial operating segment, represented 11% of total revenue. No other customer represented more than 10% of total revenue for the three months ended March 31, 2020.
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Palantir Technologies Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The Company relies on the technology, infrastructure, and software applications, including software-as-a-service offerings, of third parties in order to host or operate certain key products and functions of its business.
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic
740) as part of its simplification initiative to reduce the cost and complexity in accounting for income taxes. ASU 2019-12 removes certain exceptions related to the approach for intraperiod tax
allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also amends other aspects of the
guidance to help simplify and promote consistent application of GAAP. The Company adopted ASU 2019-12 as of January 1, 2021 using transition methods allowed under each aspect of the guidance. The adoption
of the standard did not have a material impact on the Companys condensed consolidated financial statements.
3. Contract Liabilities and
Remaining Performance Obligations
Contract Liabilities
The Companys contract liabilities consist of deferred revenue and customer deposits. As March 31, 2021 and December 31, 2020
the Companys contract liability balances were $552.4 million and $531.9 million, respectively. Revenue of $169.5 million and $181.2 million was recognized during the three months ended March 31, 2021 and 2020, respectively,
that was included in the contract liability balances as of December 31, 2020 and 2019, respectively.
Remaining
Performance Obligations
The Companys arrangements with its customers often have terms that span over multiple years.
However, the Company generally allows its customers to terminate contracts for convenience prior to the end of the stated term with less than twelve months notice. Revenue allocated to remaining performance obligations represents noncancelable
contracted revenue that has not yet been recognized, which includes deferred revenue and, in certain instances, amounts that will be invoiced. The Company has elected the practical expedient allowing the Company to not disclose remaining performance
obligations for contracts with original terms of twelve months or less. Cancelable contracted revenue, which includes customer deposits, is not considered a remaining performance obligation.
The Companys remaining performance obligations were $625.9 million as of March 31, 2021, of which the Company expects to
recognize approximately 50% as revenue over the next twelve months.
Disaggregation of Revenue
See Note 13. Segment and Geographic Information , for disaggregated revenue by customer segment and geographic region.
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Palantir Technologies Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
4. Fair Value Measurements
Financial instruments consist of cash equivalents, restricted cash, accounts receivable, other assets accounted for at fair value, accounts
payable, and accrued liabilities. Cash equivalents and restricted cash are stated at fair value on a recurring basis. Accounts receivable, accounts payable, and accrued liabilities are stated at their carrying value, which approximates fair value
due to the short time to the expected receipt or payment date. The carrying amount of the Companys outstanding debt approximates the fair value as the debt bears a floating rate that approximates the market interest rate.
The following table presents the Companys assets and liabilities that are measured at fair value on a recurring and nonrecurring basis
and indicates the fair value hierarchy of the valuation (in thousands):
As of March 31, 2021
Total
Level 1
Level 2
Level 3
Assets:
Cash
equivalents:
Money market funds
$
1,163,796
$
1,163,796
$
$
Restricted
cash:
Certificates of
deposit
66,116
66,116
Total
$
1,229,912
$
1,163,796
$
66,116
$
As of December 31, 2020
Total
Level 1
Level 2
Level 3
Assets:
Cash
equivalents:
Money market funds
$
1,075,783
$
1,075,783
$
$
Restricted
cash:
Certificates of
deposit
74,097
74,097
Total
$
1,149,880
$
1,075,783
$
74,097
$
Certificates of Deposit
The Companys Level 2 instruments consist of restricted cash invested in certificates of deposit. The fair value of such instruments
is estimated based on valuations obtained from third-party pricing services that utilize industry standard valuation models, including both income-based and market-based approaches, for which all significant inputs are observable either directly or
indirectly. These inputs include interest rate curves, foreign exchange rates, and credit ratings.
Gross unrealized gains or losses for
cash equivalents as of March 31, 2021 and December 31, 2020 were not material.
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Palantir Technologies Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
5. Balance Sheet Components
Property and Equipment, Net
Property and
equipment, net consisted of the following (in thousands):
As of March 31,
2021
As of December 31,
2020
Leasehold
improvements
$
85,303
$
85,196
Computer
equipment, software, and other
22,978
22,275
Furniture and
fixtures
9,957
9,976
Construction in
progress
710
493
Total property and equipment,
gross
118,948
117,940
Less: accumulated
depreciation and amortization
(91,570)
(88,399)
Total property and equipment,
net
$
27,378
$
29,541
Depreciation and amortization expense related to property and equipment, net was $3.2 million and
$3.7 million for the three months ended March 31, 2021 and 2020, respectively.
Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
As of March 31,
2021
As of December 31,
2020
Accrued payroll
and related expenses
$
113,513
$
85,466
Accrued other
liabilities
68,090
73,080
Total accrued
liabilities
$
181,603
$
158,546
6. Equity Method Investments
Palantir Technologies Japan, K.K.
During
November 2019, the Company and SOMPO Holdings, Inc. (SOMPO) created a Japanese Kabushiki Kaisha (K.K.), Palantir Technologies Japan, K.K. (Palantir Japan), to distribute Palantir platforms to the Japanese market.
Upon closing of the transaction with SOMPO, the Company purchased a total of 100,000 shares of Palantir Japan common stock for $25.0 million. The shares the Company received in exchange represent a 50% voting interest in Palantir Japan. The
remaining 50% of the voting interest is held by SOMPO. The Companys investment in Palantir Japan is accounted for as an equity method investment as the Company is able to exercise significant influence over, but does not control, the investee.
Concurrently with the formation of Palantir Japan, the Company entered into a ten-year license
and services agreement with Palantir Japan for a limited non-transferable right to resell the Companys platforms and use certain of the Companys trademarks in exchange for $25.0 million and
future quarterly royalty payments to be paid based on Palantir Japans net revenue. In connection with the license rights sold to Palantir Japan, the Company recorded the receipt of the $25.0 million in deferred revenue, which will be
recognized over the term of the agreement. In addition, the Company received a prepayment of $50.0 million to be used toward future products and services provided by the Company to support the business operations and future deployments of the
Companys platforms by Palantir Japan (service credit). The Company recorded the $50.0 million service credit in deferred revenue, which will be utilized on an as-needed basis and expires
after five years. For the three months ended March 31, 2021 and 2020, Palantir Japan utilized $6.7 million and $0.3 million, respectively, of the service credit.
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Palantir Technologies Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
7. Debt
2014 Credit Facility
In October
2014, the Company entered into an unsecured revolving credit facility which has been subsequently amended (the 2014 Credit Facility). The 2014 Credit Facility bears interest at the London Interbank Offered Rate (LIBOR) plus a
margin of 2.75% per annum, subject to certain adjustments, and incurs a commitment fee of 0.375% assessed on the daily average undrawn portion of revolving commitments. Interest and commitment fees are payable at the end of an interest period or at
each three-month interval if the interest period is longer than three months. The 2014 Credit Facility, as amended, matures on June 4, 2023.
As of March 31, 2021, the Company had $200.0 million of term loans outstanding under the 2014 Credit Facility and an additional
$200.0 million undrawn revolving credit facility available. The 2014 Credit Facility is secured with substantially all of the Companys assets.
The 2014 Credit Facility contains customary representations and warranties, and certain financial and nonfinancial covenants, including but
not limited to maintaining minimum liquidity of $50.0 million, and certain limitations on liens and indebtedness. The Company was in compliance with all covenants associated with the 2014 Credit Facility as of March 31, 2021.
The Companys outstanding debt consisted of the following as of March 31, 2021 and December 31, 2020 (in thousands):
As of March 31,
2021
As of December 31,
2020
Principal
amount
$
200,000
$
200,000
Unamortized
discount
(1,815)
(2,023)
Carrying value of
debt
$
198,185
$
197,977
8. Commitments and Contingencies
Letters of Credit and Guarantees
The Company had irrevocable standby letters of credit and guarantees, including bank guarantees, outstanding in the amounts of
$109.0 million and $116.8 million as of March 31, 2021 and December 31, 2020, respectively, which were fully collateralized. The Company is required to maintain these letters of credit and guarantees primarily for operating lease
agreements, certain customer contracts, and other guarantees and financing arrangements. As of March 31, 2021, these letters of credit and guarantees had expiration dates through August 2028.
Purchase Commitments
In December
2019, the Company entered into, and subsequently amended during December 2020, a minimum annual commitment to purchase cloud hosting services of at least $1.49 billion over six contract years, with an optional carryover period through
June 30, 2029, in exchange for various discounts on such services. If the spend does not meet the minimum annual commitment each year or at the end of the term, the Company is obligated to make a return payment. If the difference is greater
than $30.0 million for each of the first three contract years or $50.0 million for each of the contract years thereafter (relief amounts), the Company has the option to pay the respective relief amount for that year for
services to be utilized in the future and the excess amount of the difference above the relief amount would be added to the minimum annual commitment of the following year through the end of the contract. As of March 31, 2021, the Company had
satisfied $111.2 million of its $126.0 million commitment for the contract year ending June 30, 2021.
In June 2020, the
Company entered into an additional commitment to purchase at least $45.0 million of cloud hosting services over a period of five years commencing on June 1, 2020 and ending on May 31, 2025. If the spend commitment is not met at the
end of the term, the Company is obligated to pay the full amount of the outstanding balance (shortfall payment). The shortfall payment may be applied as a prepayment against consumption during an additional twelve-month coverage period
expiring on May 31, 2026, at which time any unused amount would be forfeited. As of March 31, 2021, the Company had satisfied $4.4 million of its commitment.
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Palantir Technologies Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Investment Commitment
On March 30, 2021, the Company entered into a subscription agreement with Qell Acquisition Corp (Qell) and Qell DutchCo B.V
(Lilium HoldCo) to purchase 4.1 million Class A ordinary shares of Lilium HoldCo in a private placement for a total purchase price of $41.0 million. The closing of the private placement is contingent upon the completion of
the proposed business combination between Qell, Lilium HoldCo, and Lilium GmbH (Lilium). Additionally, concurrent with signing the subscription agreement, Lilium and the Company entered into a five-year enterprise subscription contract
to access the Companys products and services.
Litigation and Legal Proceedings
From time to time, third parties may assert patent infringement claims against the Company. In addition, from time to time, the Company may be
subject to other legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks, copyrights, and other intellectual property rights; employment claims; securities claims; investor claims;
corporate claims; class action claims; and general contract, tort, or other claims. The Company may from time to time also be subject to various legal or government claims, disputes, or investigations. Such matters may include, but not be limited
to, claims, disputes, allegations, or investigations related to warranty; refund; breach of contract; breach, leak, or misuse of personal data or confidential information; employment; government procurement; intellectual property; government
regulation or compliance (including but not limited to anti-corruption requirements, export or other trade controls, data privacy or data protection, cybersecurity requirements, or antitrust/competition law requirements); securities; investor;
corporate; or other matters. The Company is unable to predict whether or when any such matters may arise, the outcome of these matters, or the ultimate legal and financial liability, and cannot reasonably estimate the possible loss or range of loss
at this time and accordingly has not accrued a related liability.
On December 14, 2017, members of KT4 Partners LLC (Managing Member
Marc Abramowitz) and Sandra Martin Clark, as trustee for the Marc Abramowitz Irrevocable Trust Number 7 (together, KT4 Plaintiffs), filed an action in the Delaware Superior Court against the Company and Disruptive Technology Advisers
LLC. The complaint alleges tortious interference with prospective economic advantage and civil conspiracy in connection with a potential sale of stock by the KT4 Plaintiffs to a third party. The KT4 Plaintiffs seek compensatory and punitive damages,
interest, fees, and costs.
The Company believes this lawsuit is without merit and is vigorously defending itself against it. Given the
uncertainty of litigation, it may be reasonably possible that the Company will incur a loss with regards to the matter; however, it cannot currently estimate a range of possible losses. Accordingly, the Company is unable at this time to estimate the
overall effects that may result from the case on its financial condition, results of operations, or cash flows.
As of March 31,
2021, the Company was not aware of any currently pending legal matters or claims, individually or in the aggregate, that were expected to have a material adverse impact on its condensed consolidated financial statements.
Warranties and Indemnification
The Company generally provides a warranty for its software products and services and a service level agreement (SLA) for the
Companys performance of software operations via its operations and maintenance (O&M) services to its customers. The Companys products are generally warranted to perform substantially as described in the associated product
documentation during the subscription term or for a period of up to 90 days where the software is hosted by the customer; and the Company includes O&M services as part of its subscription and license agreements to support this warranty and
maintain the operability of the software. The Companys services are generally warranted to be performed in a professional manner and by an adequate staff with knowledge about the products. In the event there is a failure of such warranties,
the Company generally is obligated to correct the product or service to conform to the warranty provision, as set forth in the applicable SLA, or, if the Company is unable to do so, the customer is entitled to seek a refund of the purchase price of
the product and service (generally prorated over the contract term). Due to the absence of historical warranty claims, the Companys expectations of future claims related to products under warranty continue to be insignificant. The Company has
not recorded warranty expense or related accruals as of March 31, 2021 and December 31, 2020.
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Palantir Technologies Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The Company generally agrees to indemnify its customers against legal claims that the
Companys software products infringe certain third-party intellectual property rights and accounts for its indemnification obligations. In the event of such a claim, the Company is generally obligated to defend its customer against the claim
and to either settle the claim at the Companys expense or pay damages that the customer is legally required to pay to the third-party claimant. In addition, in the event of an infringement, the Company generally agrees to secure the right for
the customer to continue using the infringing product; to modify or replace the infringing product; or, if those options are not commercially practicable, to refund the cost of the software, as prorated over the period. To date, the Company has not
been required to make any payment resulting from infringement claims asserted against its customers and does not believe that the Company will be liable for such claims in the foreseeable future. As such, the Company has not recorded a liability for
infringement costs as of March 31, 2021 and December 31, 2020.
The Company has obligations under certain circumstances to
indemnify each of the defendant directors and certain officers against judgments, fines, settlements, and expenses related to claims against such directors and certain officers and otherwise to the fullest extent permitted under the law and the
Companys bylaws and Amended and Restated Certificate of Incorporation.
9. Stockholders Equity
The Companys Class A, Class B, and Class F common stock (collectively, the common stock) all have the same rights, except
with respect to voting and conversion rights. Class A and Class B common stock have voting rights of 1 and 10 votes per share, respectively. The Class F common stock has the voting rights generally described below and each share of Class F common
stock is convertible at any time, at the option of the holder thereof, into one share of Class B common stock. All shares of Class F common stock are held in a voting trust established by Stephen Cohen, Alexander Karp, and Peter Thiel (our
Founders). The Class F common stock generally gives the Founders the ability to control up to 49.999999% of the total voting power of the Companys capital stock, so long as the Founders and certain of their affiliates collectively
meet a minimum ownership threshold, which was 100.0 million of the Companys equity securities as of March 31, 2021.
Holders of
common stock are entitled to dividends when, as and if declared by the Companys Board of Directors, subject to the rights of the holders of all classes of stock outstanding having priority rights to dividends. No dividends have been declared
as of March 31, 2021.
In connection with the Companys direct listing of its Class A common stock on the New York Stock
Exchange (Direct Listing) in September 2020, all outstanding shares of redeemable convertible preferred stock and convertible preferred stock were converted into 4,017,378 and 793,725,807 shares of Class B common stock,
respectively, and 1,005,000 shares of Class B common stock held by the Founders were exchanged for an equal number of shares of Class F common stock.
The following represented the total authorized, issued, and outstanding shares for each class of common stock (in thousands):
As of March 31, 2021
As of December 31, 2020
Authorized
Issued and
Outstanding
Authorized
Issued and
Outstanding
Common
stock:
Class A
20,000,000
1,792,699
20,000,000
1,542,058
Class B
2,700,000
66,903
2,700,000
249,077
Class F
1,005
1,005
1,005
1,005
Total
22,701,005
1,860,607
22,701,005
1,792,140
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Palantir Technologies Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
10. Stock-Based Compensation
Stock Options
The following table
summarizes stock option activity for the three months ended March 31, 2021 (in thousands, except per share amounts):
Options
Outstanding
Weighted-
Average
Exercise Price
Per Share
Weighted-
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic Value
Balance as of
December 31, 2020
535,767
$
6.12
7.99
$
9,340,245
Options
exercised
(55,301)
3.78
Options canceled and forfeited
(2,889)
5.16
Balance as of
March 31, 2021
477,577
$
6.39
8.08
$
8,069,476
Options vested and exercisable as of March 31, 2021
259,517
$
3.67
5.85
$
5,093,003
As of March 31, 2021, the unrecognized expense related to options outstanding was $1.1 billion,
which is expected to be recognized over a weighted-average service period of 8.09 years.
RSUs
The following table summarizes the RSU activity for the three months ended March 31, 2021 (in thousands, except per share amounts):
RSUs
Outstanding
Weighted Average
Grant Date Fair
Value per Share
Unvested and
outstanding as of December 31, 2020
184,870
$
6.97
RSUs granted
3,225
38.12
RSUs vested
(10,960)
6.84
RSUs canceled
(2,612)
6.39
Unvested and
outstanding as of March 31, 2021
174,523
$
7.55
As of March 31, 2021, the total unrecognized stock-based compensation expense related to the RSUs
outstanding was $850.8 million, which the Company expects to recognize over 3.30 years.
Growth Units
In May 2019, the Company granted growth units which vest upon the satisfaction of both a performance-based vesting condition, which was
satisfied upon the Companys Direct Listing, and a service-based vesting condition, which was satisfied in March 2021. In March 2021, the 3.6 million outstanding growth units vested and, per the formula applicable to the awards, converted
into 1.5 million shares of common stock. During the three months ended March 31, 2021, the Company recognized the remaining stock-based compensation expense related to the growth units of $1.2 million.
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Palantir Technologies Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Stock-based Compensation Expense
Total stock-based compensation expense was as follows (in thousands):
Three Months Ended March 31,
2021
2020
Cost of
revenue
$
15,977
$
8,068
Sales and
marketing
57,286
18,463
Research and
development
37,874
15,032
General and
administrative
82,594
12,544
Total stock-based
compensation expense
$
193,731
$
54,107
Related Party Non-Recourse Note
In November 2016, the Company entered into a non-recourse promissory note to lend an employee director
$25.9 million, which was secured by 10.5 million shares of the Company common stock held by the employee director (pledged collateral). Such arrangement was accounted for as a stock option issued to the employee, and the
Company recorded the related stock-based compensation expense upon the issuance of the note. The promissory note accrued interest at a rate of 1.5% per annum, compounded semi-annually.
In August 2020, the Company received a payment of $26.6 million for a portion of the principal and accrued interest on the outstanding non-recourse promissory note in the form of 3.5 million shares of common stock based on the fair market value of the common stock on the date of repayment. The Company forgave the remaining $0.8 million
owed under the note, guaranteed the employee director a tax neutrality payment to cover his additional tax liability associated with the transaction, and terminated its security interest in the remaining shares of common stock that were originally
pledged as collateral. The forgiveness of the remaining debt and the provision of the tax neutrality payment was accounted for as a modification to the original stock option, and the Company recorded additional stock-based compensation expense of
$4.5 million during the year ended December 31, 2020 and satisfied the liability as of March 31, 2021.
11. Income Taxes
The Company recorded provision for income taxes of $3.1 million and $2.6 million for the three months ended March 31, 2021 and
2020, respectively. The Company is subject to income tax in the U.S. as well as other tax jurisdictions in which it conducts business. The Companys 2021 effective tax rate differs from the U.S. statutory rate primarily due to the valuation
allowance recorded on the Companys losses in the U.S. and other jurisdictions. The change was primarily due to increases in profits from the Companys international operations offset by decreases in foreign withholding taxes.
The realization of deferred tax assets is dependent upon the generation of sufficient taxable income of the appropriate character in future
periods. The Company assesses its ability to realize the deferred tax assets on a quarterly basis, and it establishes a valuation allowance if it is more-likely-than-not that some portion of the deferred tax
assets will not be realized. The Company weighs all available positive and negative evidence, including its earnings history and results of recent operations, scheduled reversals of deferred tax liabilities, projected future taxable income, and tax
planning strategies. For example, due to the weight of objectively verifiable negative evidence, including its history of losses in certain jurisdictions, the Company believes that it is more likely than not that its U.S. federal and state deferred
tax assets will not be fully realized. Accordingly, the Company has maintained a valuation allowance on its U.S. federal and state deferred tax assets. The Companys effective rate differs from the U.S. statutory rate primarily due to the
valuation allowance recorded on its losses from the U.S. and other jurisdictions, foreign income taxed at different rates, non-deductible of stock-based compensation, and withholding tax expense.
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Palantir Technologies Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
12. 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 (in thousands, except
per share amounts):
Three Months Ended March 31,
2021
2020
Numerator
Net loss attributable to
common stockholders
$
(123,474)
$
(54,274)
Less: Change in fair value
attributable to participating securities
(7,773)
Net loss attributable to
common stockholders, for diluted net loss per share
$
(123,474)
$
(62,047)
Denominator
Weighted-average shares used
in computing net loss per share, basic
1,821,158
591,850
Weighted-average shares used
in computing net loss per share, diluted
1,821,158
594,363
Net loss per
share
Net loss per share
attributable to common stockholders, basic
$
(0.07)
$
(0.09)
Net loss per share
attributable to common stockholders, diluted
$
(0.07)
$
(0.10)
The following outstanding potentially dilutive common stock equivalents have been excluded from the
computation of diluted net loss per share attributable to common stockholders for the periods presented due to their anti-dilutive effect (in thousands):
As of March 31,
2021
2020
Redeemable
convertible preferred stock
4,017
Convertible
preferred stock
791,225
Warrants to
purchase redeemable convertible and convertible preferred stock
18,254
Warrants to
purchase common stock
18,253
993
Options and SARs
issued and outstanding
477,602
486,342
RSUs
outstanding
174,523
175,954
Growth units
outstanding
3,583
Total
670,378
1,480,368
13. Segment and Geographic Information
The following tables reflect the results of the Companys reportable operating segments consistent with the manner in which the chief
operating decision maker (CODM) evaluates the performance of each segment and allocates the Companys resources. The CODM does not evaluate the performance of the Companys assets on a segment basis for internal management
reporting and, therefore, such information is not presented.
Contribution is used, in part, to evaluate the performance of, and allocate
resources to, each of the segments. A segments contribution is calculated as segment revenue less the related costs of revenue and sales and marketing expenses. It excludes certain operating expenses that are not allocated to segments because
they are separately managed at the consolidated corporate level. These unallocated costs include stock-based compensation expense, research and development expenses, and general and administrative expenses.
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Palantir Technologies Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Financial information for each reportable segment was as follows (in thousands):
Three Months Ended March 31,
2021
2020
Revenue:
Government
$
208,420
$
118,127
Commercial
132,814
111,200
Total revenue
$
341,234
$
229,327
Three Months Ended March 31,
2021
2020
Contribution:
Government
$
131,746
$
51,897
Commercial
72,543
41,014
Total contribution
$
204,289
$
92,911
The reconciliation of contribution to loss from operations is as follows (in thousands):
Three Months Ended March 31,
2021
2020
Loss from
operations
$
(114,014)
$
(70,185)
Research and
development expenses (1)
60,597
50,768
General and
administrative expenses (1)
63,975
58,221
Stock-based
compensation expense
193,731
54,107
Total contribution
$
204,289
$
92,911
(1) Excludes stock-based compensation expense.
Geographic Information
Revenue by
geography is based on the customers headquarters or agency location at the time of sale. Revenue is as follows (in thousands, except percentages):
Three Months Ended March 31,
2021
2020
Amount
%
Amount
%
Revenue:
United
States
$
198,447
58%
$
109,777
48%
United
Kingdom
34,385
10%
28,975
13%
France
21,090
6%
25,730
11%
Rest of world (1)
87,312
26%
64,845
28%
Total revenue
$
341,234
100%
$
229,327
100%
(1) No other country represents 10% or more of total revenue for the three months
ended March 31, 2021 or 2020.
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Palantir Technologies Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
14. Subsequent Events
Amendment of the 2014 Credit Facility and Repayment of the Outstanding Revolving Term Loan
On April 1, 2021, the Company entered into an amendment to the 2014 Credit Facility, which provides for an increase of $200.0 million
to the revolving commitments of the existing lenders under the 2014 Credit Facility, for total revolving commitments of $400.0 million, and which also provides for an incremental loan facility of additional term loans or revolving loans in an
aggregate principal amount of up to $100.0 million with one or more existing or new lenders upon mutual agreement between the Company and such lenders. Upon entering into the amendment, the Company repaid its outstanding term loans of
$200.0 million and no amounts were outstanding under the 2014 Credit Facility.
Investments
On April 5, 2021, the Company entered into a subscription agreement with Rotor Acquisition Corp. (Rotor) to purchase
2.1 million shares of Class A common stock of Rotor in a private placement for a total purchase price of $21.0 million. The closing of the private placement is contingent upon the completion of the proposed business combination
between Rotor, Rotor Merger Sub Corp. (a wholly owned subsidiary of Rotor), and Sarcos Corp. (Sarcos). Additionally, concurrent with signing the subscription agreement, Sarcos and the Company entered into a
six-year enterprise subscription contract to access the Companys products and services.
On
May 1, 2021, the Company entered into a subscription agreement with Montes Archimedes Acquisition Corp. (Montes) and Roivant Sciences Ltd. (Roivant) to purchase 3.0 million shares of Class A common stock of
Montes in a private placement for a total purchase price of $30.0 million. The closing of the private placement is contingent upon the completion of the proposed business combination between Montes, Roivant, and other applicable parties.
Additionally, concurrent with signing the subscription agreement, Roivant and the Company entered into a five-year enterprise subscription contract to access the Companys products and services.
On May 5, 2021, the Company entered into a subscription agreement with GX Acquisition Corp. (GX) to purchase 2.0 million
shares of Class A common stock of GX in a private placement for a total purchase price of $20.0 million. The closing of the private placement is contingent upon the completion of the proposed business combination between GX, Celularity
Inc. (Celularity), and other applicable parties. Additionally, concurrent with signing the subscription agreement, Celularity and the Company entered into a five-year enterprise subscription contract to access the Companys products
and services.
On May 11, 2021, the Company entered into a subscription agreement with a special purpose acquisition company to purchase
2.0 million shares of its Class A common stock in a private placement for a total purchase price of $20.0 million. The closing of the private placement is contingent upon the completion of the proposed business combination between the special
purpose acquisition company and a mobility company, and other applicable parties. Additionally, concurrent with signing the subscription agreement, the mobility company and the Company entered into a five-year enterprise subscription contract to
access the Companys products and services.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the
federal securities laws, which statements involve substantial risks and uncertainties. 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, expect, plan, anticipate, could, would, intend, target,
goal, outlook, project, contemplate, believe, estimate, predict, 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 expectations regarding financial performance and liquidity, including but not limited to our expectations
regarding revenue, cost of revenue, operating expenses, stock-based compensation, our ability to achieve and maintain future profitability, and cash flows;
our ability to successfully execute our business and growth strategy;
the sufficiency of our cash and cash equivalents to meet our liquidity needs;
the demand for our platforms in general;
our ability to increase our number of customers and revenue generated from customers;
our expectations regarding the future contribution margin of our existing and future customers;
our expectations regarding our ability to quickly and effectively integrate our platforms for our existing and
future customers;
our ability to develop new platforms, and enhancements to existing platforms, and bring them to market in a
timely manner;
our market share, category positions, and market trends, including our ability to grow our business in large
government and commercial organizations, including our expectations regarding the impact of Federal Acquisition Streamlining Act of 1994 (FASA);
our ability to compete with existing and new competitors in existing and new markets and products;
our expectations regarding anticipated technology needs and developments and our ability to address those
needs and developments with our platforms;
our expectations regarding litigation and legal and regulatory matters;
our expectations regarding our ability to meet existing performance obligations and maintain the operability
of our products;
our expectations regarding the effects of existing and developing laws and regulations, including with respect
to taxation, privacy and data protection;
our expectations regarding new and evolving markets;
our ability to develop and protect our brand;
our ability to maintain the security and availability of our platforms;
our expectations and management of future growth;
our expectations concerning relationships with third parties, including our customers, equity method
investment partners, and vendors;
our ability to maintain, protect, and enhance our intellectual property;
our expectations regarding our multi-class stock and governance structure and the benefits thereof;
the impact of the ongoing COVID-19 pandemic, including on our and our
customers, vendors, and partners respective businesses and the markets in which we and our customers, vendors, and partners operate; and
the increased expenses associated with being a public company.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.
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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, including those 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 and it is not possible for us to predict all risks and uncertainties that could have an impact on any 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 such forward-looking statements.
Neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. Moreover,
the forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking
statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new
information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our
forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, restructurings, joint ventures, partnerships, channel sales relationships, or investments we may make.
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.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains
forward-looking statements based upon current plans, expectations, and beliefs, involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements. You should review the section
titled Special Note Regarding Forward-Looking Statements for a discussion of forward-looking statements and the section titled Risk Factors for a discussion of 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 and elsewhere in this Quarterly Report on Form 10-Q. Our historical results are not
necessarily indicative of the results that may be expected for any period in the future.
Overview
We founded the Company in 2003 to build software for use in counterterrorism operations.
In 2008, we released our first platform, Palantir Gotham (Gotham), for customers in the intelligence sector. Gotham enables users
to identify patterns hidden deep within datasets, ranging from signals intelligence sources to reports from confidential informants.
Defense agencies in the United States then began using Gotham to investigate potential threats and to help protect soldiers from improvised
explosive devices. Today, the platform is widely used by government agencies in the United States and its allies. Our software is on the front lines, sometimes literally, and that means so are we.
We later began working with leading companies across industries, including companies in the energy, transportation, financial services, and
healthcare sectors. In 2016, we released our second software platform, Palantir Foundry (Foundry), to address a common set of challenges that we saw at large companies.
Foundry is becoming a central operating system not only for individual institutions but also for entire industries.
In 2017, for example, our partnership with Airbus expanded into a platform for the aviation industry, and today connects data from more than
one hundred airlines and 9,000 aircraft around the world.
We believe that every large institution faces challenges that our platforms
were designed to address. Our focus in the near term is to build partnerships with institutions that have the leadership necessary to effect structural change within their organizations to reconstitute their operations around data. Over the
long term, we believe that every large institution in the markets we serve is a potential partner.
Our Business
For the three months ended March 31, 2021, we generated $341.2 million in revenue, reflecting a 49% growth rate from the three months
ended March 31, 2020, when we generated $229.3 million in revenue.
Our operating results continued to improve when excluding
stock-based compensation. In the three months ended March 31, 2021, we incurred losses from operations of $114.0 million, or income from operations of $116.6 million when excluding stock-based compensation and related employer payroll
taxes. In the three months ended March 31, 2020, our losses from operations were $70.2 million, or $16.1 million when excluding stock-based compensation.
In the three months ended March 31, 2021, our gross profit was $267.1 million, reflecting a gross margin of 78%, or 83% when
excluding stock-based compensation. In the three months ended March 31, 2020, our gross profit was $165.0 million, reflecting a gross margin of 72%, or 75% when excluding stock-based compensation.
For more information about our income or loss from operations, when excluding stock-based compensation and related employer payroll taxes; and
gross profit and gross margin, when excluding stock-based compensation, as well as reconciliations from loss from operations and gross profit, see the section titled Non-GAAP Reconciliations
below.
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Our Customers
We have updated our definition of a customer to be an organization from which we have recognized revenue during the trailing twelve month
period to provide more meaningful period over period comparisons. During the period ended March 31, 2021, we had 149 customers, including leading companies in various commercial sectors as well as government agencies around the world. During
the period ended March 31, 2020, we had 131 customers.
For large government agencies, where a single institution has multiple
divisions, units, or subsidiary agencies, each such division, unit, or subsidiary agency that enters into a separate contract with us and is invoiced as a separate entity is treated as a separate customer. For example, while the U.S. Food and Drug
Administration, Centers for Disease Control and Prevention, and National Institutes of Health are subsidiary agencies of the U.S. Department of Health and Human Services, we treat each of those agencies as a separate customer given that the
governing structures and procurement processes of each agency are independent.
We have built lasting and significant customer
relationships with some of the worlds leading government institutions and companies. Our average revenue per customer during the trailing twelve months ended March 31, 2021 was $8.1 million, which grew 29% from $6.3 million per
customer during the trailing twelve months ended March 31, 2020. Our average revenue for the top twenty customers during the during the trailing twelve months ended March 31, 2021 was $36.1 million, which grew 34% from an average of
$27.0 million from the top twenty customers during the trailing twelve months ended March 31, 2020.
Large organizations in the
commercial and government sectors face similar challenges when it comes to managing data, and we intend to expand our reach in both markets moving forward. In the three months ended March 31, 2021, commercial customers accounted for 39% of our
revenue while government agencies accounted for 61%. In the three months ended March 31, 2021, we generated 58% of our revenue from customers in the United States and the remaining 42% from customers abroad.
Coronavirus (COVID-19) Impact
As a result of COVID-19, we have taken precautionary measures in order to minimize the risk of the
virus to our employees, our customers, and the communities in which we operate, including the suspension of all non-essential business travel of employees and the temporary closure of all of our major offices.
Although the majority of our workforce currently works remotely, there has been minimal disruption in our ability to ensure the effective operation of our software platforms. We expect to begin to open certain of our offices in a limited capacity
over the remainder of the year, while closely monitoring the pandemic.
The economic consequences of the
COVID-19 pandemic have been challenging for certain of our customers and prospective customers. While the broader implications of the COVID-19 pandemic on our results of
operations and overall financial performance remain uncertain, the COVID-19 pandemic has, to date, not had a material adverse impact on our results of operations. The economic effects of the pandemic and
resulting societal changes are currently not predictable.
The pandemic has made clear to many of our customers that accommodating the
extended timelines ordinarily required to realize results from implementing new software solutions is not an option during a crisis. As a result, customers are increasingly adopting our software, which can be ready in days, over internal software
development efforts, which may take months or years.
We have seen a decrease in our travel and office-related expenditures, including
temporary closures of our offices globally and reductions in related operating expenses, related to the ongoing pandemic. However, improvement of our contribution metric has also been driven by the expansion of existing customer accounts, improved
sales efficiency, and the increasing deployment of centralized hosting and other software deployment infrastructure. While we expect our travel and office-related expenditures to increase moving forward, especially as we begin to open certain of our
offices, we do not expect such expenditures to return to their pre-pandemic levels, given that we have made significant investments in enabling employees to work with customers remotely.
See the section titled Risk Factors included elsewhere in this Quarterly Report on Form
10-Q, and Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on February 26, 2021, for further discussion of the
possible impact of the COVID-19 pandemic on our business.
Our Business Model
Our customers pay us to use the software platforms we have built.
Our business model with respect to acquiring and growing our accounts has three phases: (1) Acquire, (2) Expand, and (3) Scale. We
categorize all customers into cohorts on December 31st each year.
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Our decisions about which customer relationships require further investment may change over
time, based on our assessment of the potential long-term value that our software can generate for them.
As a result, customers may move
back and forth through phases, as relationship needs and our assessment of the merits of further investment change. We enter into initial pilots with customers, generally at our own expense and without a guarantee of future returns, in order to
access a unique set of opportunities that others may pass over for lack of resources and shorter investment horizons.
Some customers may
have a rapid Acquire phase followed by a long Expand phase. Others may skip the Expand phase altogether and move immediately into the Scale phase. We manage customers at the account level, not by industry or sector, so that we can optimize on the
specific growth opportunities for each.
In 2020, we generated a total of $1,092.7 million in revenue. Acquire phase customers
cohorted as of December 31, 2020 generated $0.3 million in revenue in 2020. Expand phase customers cohorted as of December 31, 2020 generated $20.3 million in revenue in 2020. Scale phase customers cohorted as of
December 31, 2020 generated $1,072.1 million in revenue in 2020.
In the three months ended March 31, 2021, customers
cohorted as of December 31, 2020 generated a total of $340.8 million in revenue.
New customers acquired during the three months
ended March 31, 2021 generated an additional $0.4 million in revenue and will be assigned a cohort as of December 31, 2021. A more detailed discussion of the three phases, for purposes of illustration of how we manage accounts across
the business, follows below.
Acquire
We actively pursue discussions with existing and prospective customers in order to identify ways in which our software platforms can provide
long-term value.
In the first phase, we typically acquire new opportunities with minimal risk to our customers through short-term pilot
deployments of our software platforms at no or low cost to them. We believe in proving the value of our platforms to our customers. During these short-term pilots, we operate the accounts at a loss. We believe that our investments during this phase
will drive future revenue growth.
We define a customer or potential customer as being in the Acquire phase if, as of the end of a
calendar year, we have recognized less than $100,000 in revenue from the customer that respective year. Customers may make nominal payments in connection with the evaluation of our software that we do not consider material in evaluating the
performance of our accounts.
We evaluate the success of customer accounts in the Acquire phase based on the revenue such accounts
generate in the following year. In 2020, we generated $0.3 million in revenue from customers in the Acquire phase, which yielded a contribution loss of $36.8 million. In the three months ended March 31, 2021, those same customers
generated $3.6 million in revenue, which yielded a contribution loss of $4.3 million.
Expand
Our investment in this second phase is often significant as we seek to understand the principal challenges faced by our customers and ensure
that our software delivers value and results.
We define a customer in the Expand phase as any customer from which we have recognized more
than $100,000 in revenue in a calendar year and whose account had a negative contribution margin during the year at issue, as determined as of the end of the year. In this phase, we operate at a loss, as measured by contribution margin, in order to
drive future revenue growth and margin expansion.
In 2020, we generated $20.3 million in revenue from customers that were in the
Expand phase as of the end of that year, with a contribution margin of (159)%. In the three months ended March 31, 2021, those same customers generated $12.4 million in revenue with a contribution margin of 4%.
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Scale
As customer accounts mature, our investment costs relative to revenue generally decrease, while the value our software provides to our customer
increases, often significantly, as usage of the platform increases across the customers operations. In this third phase, after having installed and configured the software across an entire enterprise, customers become more self-sufficient in
their use of our platforms, including developing software and applications that run on top of our platforms, while still continuing to benefit from the support of our operations and maintenance (O&M) services.
We define a customer in the Scale phase as any customer from which we recognized more than $100,000 in revenue in a calendar year and whose
account had a positive contribution margin during the year at issue, as determined as of the end of the year.
It is in the Scale phase of
our partnerships with customers that we generally see contribution margin on particular accounts improve. In 2020, we generated $1,072.1 million in revenue from customers in the Scale phase, with a contribution margin of 63%. In the three
months ended March 31, 2021, those same customers generated $324.8 million in revenue with a contribution margin of 66%.
We
believe that our customers will move into the Scale phase over the long term. We also believe that contribution margin for Scale phase accounts will increase further as we become more efficient at deploying our software platforms across the entirety
of our customers operations and at managing and operating our software.
Key Business Measure
In addition to the measures presented in our condensed consolidated financial statements, we use the following key non-GAAP business measure to help us evaluate our business, identify trends affecting our business, formulate business plans and financial projections, and make strategic decisions.
Contribution Margin
We believe
that the revenue we generate relative to the costs we incur in order to generate such revenue is an important measure of the efficiency of our business. We define contribution margin as revenue less our cost of revenue and sales and marketing
expenses, excluding stock-based compensation, divided by revenue. At the end of each year, we categorize each customer account into one of the three phases based on its revenue and contribution margin for that year.
Revenue is allocated to each customer account directly. The cost of revenue and sales and marketing costs include both the costs associated
with the deployment and operation of our software as well as expenses associated with identifying new customers and expanding partnerships with existing ones. Our software engineers working with existing customers often manage the deployment and
operation of our platforms as well as identify new ways that those platforms can be used. To calculate the contribution by customer, we allocate cost of revenue and sales and marketing expenses, excluding stock-based compensation, to an account pro
rata based on headcount and time spent on the account during the period. To the extent certain costs or personnel are not directly assigned to a specific account, they are allocated pro rata based on total headcount staffed during such period.
Direct costs, such as third-party cloud hosting services, are directly allocated to the account to which they relate.
Contribution
margin, both across our business and on specific customer accounts, is intended to capture how much we have earned from customers after accounting for the costs associated with deploying and operating our software, as well as any sales and marketing
expenses involved in acquiring and expanding our partnerships with those customers, including allocated overhead. We exclude stock-based compensation as it is a non-cash expense.
We believe that our contribution margin across the business and on specific customer accounts provides an important measure of the efficiency
of our operations over time. We have included contribution margin because it is a key measure used by our management to evaluate our performance, and we believe that it also provides useful information to investors and others in understanding and
evaluating our operating results in the same manner as our management team. Our calculation of contribution margin may differ from similarly titled measures, if any, reported by other companies. Contribution margin should not be considered in
isolation from, or as a substitute for, financial information prepared in accordance with GAAP.
For more information about contribution
margin, including the limitations of this measure, and a reconciliation to loss from operations, see the section titled Non-GAAP Reconciliations below.
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Non-GAAP Reconciliations
We use the non-GAAP measures contribution margin; gross profit and gross margin, excluding stock-based
compensation; and income (loss) from operations, excluding stock-based compensation and related employer payroll taxes to help us evaluate our business, identify trends affecting our business, formulate business plans and financial projections, and
make strategic decisions. We exclude stock-based compensation, which is a non-cash expense, from these non-GAAP financial measures because we believe that excluding this
item provides meaningful supplemental information regarding operational performance and provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management team.
Additionally, we exclude employer payroll taxes related to stock-based compensation as it is difficult to predict and outside of our control.
Our definitions may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other
companies may not publish these or similar metrics. Further, these metrics have certain limitations, as they do not include the impact of certain expenses that are reflected in our condensed consolidated statement of operations. Thus, our non-GAAP contribution margin; gross profit and gross margin, excluding stock-based compensation; and income (loss) from operations, excluding stock-based compensation and related employer payroll taxes should be
considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP.
We compensate for
these limitations by providing reconciliations of these non-GAAP measures to the most comparable GAAP measures. We encourage investors and others to review our business, results of operations, and financial
information in its entirety, not to rely on any single financial measure, and to view these non-GAAP measures in conjunction with the most directly comparable GAAP financial measures.
Contribution Margin
The following
table provides a reconciliation of contribution margin for the three months ended March 31, 2021 and 2020 (in thousands, except percentages):
Three Months Ended March 31,
2021
2020
Loss from operations
$
(114,014)
$
(70,185)
Add:
Research and development expenses
(1)
60,597
50,768
General and administrative expenses
(1)
63,975
58,221
Stock-based compensation
193,731
54,107
Contribution
$
204,289
$
92,911
Contribution margin
60%
41%
(1) Excludes stock-based compensation.
Gross Profit and Gross Margin, Excluding Stock-Based
Compensation
The following table provides a reconciliation of gross profit and gross margin, excluding stock-based compensation
for the three months ended March 31, 2021 and 2020 (in thousands, except percentages):
Three Months Ended March 31,
2021
2020
Gross profit
$
267,123
$
165,033
Add: stock-based compensation
15,977
8,068
Gross profit, excluding stock-based compensation
$
283,100
$
173,101
Gross margin, excluding stock-based compensation
83%
75%
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Income (Loss) from Operations, Excluding Stock-Based Compensation and Related Employer Payroll Taxes
The following table provides a reconciliation of income (loss) from operations, excluding stock-based compensation and related
employer payroll taxes for the three months ended March 31, 2021 and 2020 (in thousands):
Three Months Ended March 31,
2021
2020
Loss from operations
$
(114,014)
$
(70,185)
Add: stock-based compensation
193,731
54,107
Add: employer payroll taxes related to stock-based compensation
36,866
Income (loss) from operations, excluding stock-based compensation and related employer payroll taxes
$
116,583
$
(16,078)
Components of Results of Operations
Revenue
We generate revenue from
the sale of subscriptions to access our software in our hosted environment with O&M services (Palantir Cloud), software subscriptions in our customers environments with ongoing O&M services
(On-Premises Software), and professional services.
Palantir Cloud
Our Palantir Cloud subscriptions grant customers the right to access the software functionality in a hosted environment controlled by Palantir
and are sold together with stand-ready O&M services, as further described below. We promise to provide continuous access to the hosted software throughout the contract term. Revenue associated with Palantir Cloud subscriptions is recognized over
the contract term on a ratable basis, which is consistent with the transfer of control of the Palantir services to the customer.
On-Premises Software
Sales of our software subscriptions grant customers the right to use functional
intellectual property, either on their internal hardware infrastructure or on their own cloud instance, over the contractual term and are also sold together with stand-ready O&M services. O&M services include critical updates and support and
maintenance services required to operate the software and, as such, are necessary for the software to maintain its intended utility over the contractual term. Because of this requirement, we have concluded that the software subscriptions and O&M
services, which together we refer to as our On-Premises Software, are highly interdependent and interrelated and represent a single distinct performance obligation within the context of the contract. Revenue
is generally recognized over the contract term on a ratable basis.
Professional Services
Our professional services support the customers use of the software and include, as needed,
on-demand user support, user-interface configuration, training, and ongoing ontology and data modeling support. Professional services contracts typically include the provision of
on-demand professional services for the duration of the contractual term. These services are typically coterminous with a Palantir Cloud or On-Premises Software
subscriptions. Professional services are on-demand, whereby we perform services throughout the contract period; therefore, the revenue is recognized over the contractual term.
Cost of Revenue
Cost of revenue
primarily includes salaries, stock-based compensation expense, and benefits for personnel involved in performing O&M and professional services, as well as third-party cloud hosting services, allocated overhead, and other direct costs.
We expect that cost of revenue will increase in absolute dollars as our revenue grows and will vary from period-to-period as a percentage of revenue.
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Sales and Marketing
Our sales and marketing efforts span all stages of our sales cycle, including personnel engaging with or executing pilots at new or existing
customers. Sales and marketing costs primarily include salaries, stock-based compensation expense, and benefits for our sales force and personnel involved in executing on pilots and customer growth activities, as well as third-party cloud hosting
services for our pilots, marketing and sales event-related costs, and allocated overhead. Sales and marketing costs are generally expensed as incurred.
We expect that sales and marketing expenses will increase in absolute dollars as we continue to invest in our potential and current customers,
in growing our business, sales force, and enhancing our brand awareness.
Research and Development
Our research and development efforts are aimed at continuing to develop and refine our platforms, including adding new features and modules,
increasing their functionality, and enhancing the usability of our platforms. Research and development costs primarily include salaries, stock-based compensation expense, and benefits for personnel involved in performing the activities to develop
and refine our platforms, internal use third-party cloud hosting services and other IT-related costs, and allocated overhead. Research and development costs are expensed as incurred.
We plan to continue to invest in personnel to support our research and development efforts. As a result, we expect that research and
development expenses will increase in absolute dollars for the foreseeable future as we continue to invest to support these activities.
General and
Administrative
General and administrative costs include salaries, stock-based compensation expense, and benefits for personnel
involved in our executive, finance, legal, human resources, and administrative functions, as well as third-party professional services and fees, and allocated overhead.
We expect that general and administrative expenses will increase in absolute dollars as we hire additional personnel and enhance our systems,
processes, and controls to support the growth in our business as well as our increased compliance and reporting requirements as a public company.
Interest Income
Interest income
consists primarily of interest income earned on our cash, cash equivalents, and restricted cash balances.
Interest Expense
Interest expense consists primarily of interest expense and commitment fees incurred under our credit facilities.
Other Income (Expense), Net
Other
income (expense), net consists primarily of foreign currency exchange gains and losses and our share of income and losses from our equity method investments.
Change in Fair Value of Warrants
The change in the fair value of warrants consists of the net changes in the fair value of our liability classified warrants to purchase
redeemable convertible and convertible preferred stock that were remeasured at the end of each reporting period. During September 2020, in connection with the direct listing of our Class A common stock on the New York Stock Exchange
(NYSE) (Direct Listing), all of the Companys outstanding preferred stock warrants were converted into common stock warrants, which resulted in the reclassification of the warrants liability to additional paid-in capital. As such, we do not expect additional charges related to the fair value of these warrants.
Provision for Income Taxes
Provision for income taxes consists of income taxes related to foreign and state jurisdictions in which we conduct business and withholding
taxes.
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Segments
We have two operating segments, commercial and government, which were determined based on the manner in which the chief operating decision
maker (CODM), who is our chief executive officer, manages our operations for purposes of allocating resources and evaluating performance. Various factors, including our organizational and management reporting structure and customer type,
were considered in determining these operating segments.
Our operating segments are described below:
Commercial : This segment primarily serves customers working in
non-government industries.
Government : This segment primarily serves customers that are agencies in the U.S. federal government
and non-U.S. governments.
Segment profitability is evaluated based on
contribution and contribution margin. Contribution is segment revenue less the related costs of revenue and sales and marketing expenses, excluding stock-based compensation expense. Contribution margin is contribution divided by revenue. To the
extent costs of revenue or sales and marketing expenses are not directly attributable to a particular segment, they are allocated based upon headcount at each operating segment during the period. We use it, in part, to evaluate the performance of,
and allocate resources to, each of our operating segments, which excludes certain operating expenses that are not allocated to operating segments because they are separately managed at the consolidated corporate level. These unallocated costs
include stock-based compensation expense, research and development costs, and general and administrative costs, such as legal and accounting.
Results
of Operations
The following table summarizes our condensed consolidated statements of operations data (in thousands):
Three Months Ended March 31,
2021
2020
Revenue
$
341,234
$
229,327
Cost of revenue (1)
74,111
64,294
Gross profit
267,123
165,033
Operating expenses:
Sales and marketing (1)
136,097
98,653
Research and development (1)
98,471
65,800
General and administrative (1)
146,569
70,765
Total operating expenses
381,137
235,218
Loss from operations
(114,014)
(70,185)
Interest income
376
3,267
Interest expense
(1,840)
(4,594)
Change in fair value of warrants
13,695
Other income (expense), net
(4,894)
6,100
Loss before provision for income taxes
(120,372)
(51,717)
Provision for income taxes
3,102
2,557
Net loss
$
(123,474)
$
(54,274)
(1) Includes stock-based compensation expense as follows (in thousands):
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Three Months Ended March 31,
2021
2020
Cost of revenue
$
15,977
$
8,068
Sales and marketing
57,286
18,463
Research and development
37,874
15,032
General and administrative
82,594
12,544
Total stock-based compensation expense
$
193,731
$
54,107
The following table sets forth the components of our condensed consolidated statements of operations data as a percentage of
revenue:
Three Months Ended March 31,
2021
2020
Revenue
100%
100%
Cost of revenue
22
28
Gross profit
78
72
Operating expenses:
Sales and marketing
40
43
Research and development
28
29
General and administrative
43
31
Total operating expenses
111
103
Loss from operations
(33)
(31)
Interest income
1
Interest expense
(1)
(2)
Change in fair value of warrants
6
Other income (expense), net
(1)
3
Loss before provision for income taxes
(35)
(23)
Provision for income taxes
1
1
Net loss
(36)%
(24)%
Comparison of the Three Months Ended March 31, 2021 and 2020
Revenue
Three Months Ended March 31,
Change
2021
2020
Amount
%
Revenue:
Government
$
208,420
$
118,127
$
90,293
76%
Commercial
132,814
111,200
21,614
19%
Total revenue
$
341,234
$
229,327
$
111,907
49%
Revenue increased by $111.9 million, or 49%, for the three months ended March 31, 2021 compared to
the three months ended March 31, 2020. Revenue from government customers increased by $90.3 million, or 76%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily from customers in
the United States. Of the increase, $90.1 million was from government customers existing as of December 31, 2020. Revenue from commercial customers increased by $21.6 million, or 19%, for the three months ended March 31, 2021
compared to the three months ended March 31, 2020. The increase is primarily due to an increase of $19.2 million from customers existing as of December 31, 2020. Generally, increases in revenue from our existing customers are related
to increased adoption of our products and services within their organizations.
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Cost of Revenue and Gross Profit
Three Months Ended March 31,
Change
2021
2020
Amount
%
Cost of revenue
$
74,111
$
64,294
$
9,817
15%
Gross profit
267,123
165,033
102,090
62%
Gross margin
78%
72%
6%
Cost of revenue for the three months ended March 31, 2021 increased by $9.8 million, or 15%,
compared to the three months ended March 31, 2020. The increase was primarily due to increases in personnel costs of $6.0 million, which included an increase of $7.9 million in stock-based compensation expense primarily due to the
recognition of stock-based compensation expense related to the Companys RSUs, which vested in connection with the Companys Direct Listing; and $3.2 million in employer payroll taxes primarily related to income from share-based
payments. These increases in personnel costs were partially offset by decreases in travel-related expenses and other personnel costs of $3.3 million as a result of COVID-related travel restrictions and company-wide initiatives to decrease
overall travel, and $1.8 million in payroll and payroll-related costs driven by a decrease of headcount attributable to cost of revenue functions. Additionally, there were increases of $6.5 million related to third-party cloud hosting
services, and $2.7 million related to other direct deployment costs and increased usage of field service representatives. These increases to cost of revenue were offset by decreases of $3.7 million from office related expenses and other
allocated costs, and $1.7 million related to reductions in hardware costs.
Our gross margin for the three months ended
March 31, 2021 increased by 6% compared to the three months ended March 31, 2020. Gross margin increased primarily as a result of increased efficiencies in supporting revenue growth at our customer deployments, including investments in our
platforms as well as reductions in hardware costs for customers. This was partly offset by increases in stock-based compensation expense and third-party cloud hosting services. For the three months ended March 31, 2021 and 2020, gross margin,
excluding stock-based compensation, would have increased by 8% to 83%.
Operating Expenses
Three Months Ended March 31,
Change
2021
2020
Amount
%
Sales and marketing
$
136,097
$
98,653
$
37,444
38%
Research and development
98,471
65,800
32,671
50%
General and administrative
146,569
70,765
75,804
107%
Total operating expenses
$
381,137
$
235,218
$
145,919
62%
Sales and Marketing
Sales and marketing expenses increased by $37.4 million, or 38%, for the three months ended March 31, 2021 compared to the three
months ended March 31, 2020. The increase was primarily driven by increases in personnel costs of $44.7 million, which included an increase of $38.8 million in stock-based compensation expense primarily due to the recognition of
stock-based compensation expense related to the Companys RSUs and growth units, which vested in connection with the Companys Direct Listing; $11.9 million in employer payroll taxes primarily related to income from share-based
payments; and $2.8 million in payroll due to an increase in headcount attributable to our sales and marketing functions. These increases in personnel costs were partially offset by a decrease of $7.2 million in travel-related expenses and
other personnel costs as a result of COVID-related travel restrictions and company-wide initiatives to decrease overall travel, and $1.6 million from other payroll-related costs. Additionally, there was an increase of $1.3 million in
third-party cloud based hosting services; offset by decreases of $6.3 million from office related expenses and other allocated costs, and $2.3 million in marketing costs.
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Research and Development
Research and development expenses increased by $32.7 million, or 50%, for the three months ended March 31, 2021 compared to the three
months ended March 31, 2020. The increase was primarily driven by increases in personnel costs of $34.6 million, which included an increase of $22.8 million in stock-based compensation expense primarily due to the recognition of
stock-based compensation expense related to the Companys RSUs, which vested in connection with the Companys Direct Listing; $11.2 million related to increase in payroll taxes primarily related to income from share-based payments;
and $3.9 million in payroll related to an increase in headcount attributable to our research and development functions. These increases in personnel costs were partially offset by a decrease of $2.2 million in travel-related expenses and
other personnel costs as a result of COVID-related travel restrictions and company-wide initiatives to decrease overall travel, and $1.2 million from other payroll-related costs. Additionally, there was an increase of $2.3 million in
third-party cloud hosting services and other IT; offset by decreases of $4.2 million from office related expenses and other allocated costs.
General and Administrative
General and
administrative expenses increased by $75.8 million, or 107%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The increase was primarily driven by increases in personnel costs of
$79.1 million, which included an increase of $70.1 million in stock-based compensation expense primarily due to the recognition of stock-based compensation expense related to the Companys RSUs and growth units, which vested in
connection with the Companys Direct Listing; $9.3 million related to increase in payroll taxes primarily related to income from share-based payments; and $1.7 million in other payroll-related costs. These increases in personnel costs
were partially offset by a decrease of $1.9 million in travel-related expenses and other personnel costs as a result of COVID-related travel restrictions and company-wide initiatives to decrease overall travel, payroll related to a decrease in
headcount attributable to our general and administrative functions. Additionally, there was a decrease of $3.3 million from office related expenses and other allocated costs.
Interest Income
Three Months Ended March 31,
Change
2021
2020
Amount
Interest income
$
376
$
3,267
$
(2,891)
Interest income decreased by $2.9 million for the three months ended March 31, 2021 compared to the
three months ended March 31, 2020 primarily due to a reduction in U.S. interest rates on interest earned from our cash, cash equivalents, and restricted cash.
Interest Expense
Three Months Ended March 31,
Change
2021
2020
Amount
Interest expense
$
(1,840)
$
(4,594)
$
2,754
Interest expense decreased by $2.8 million for the three months ended March 31, 2021 compared to the
three months ended March 31, 2020. The decrease was primarily due to a lower debt balance during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.
Change in Fair Value of Warrants
Three Months Ended March 31,
Change
2021
2020
Amount
Change in fair value of warrants
$
$
13,695
$
(13,695)
During the three months ended March 31, 2020, the $13.7 million gain from the change in fair value
of warrants was primarily driven by the decrease in the fair value of our stock during the period. During the three months ended March 31, 2021, there were no outstanding liability classified warrants.
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Other Income (Expense), Net
Three Months Ended March 31,
Change
2021
2020
Amount
Other income (expense), net
$
(4,894)
$
6,100
$
(10,994)
Other income (expense), net changed by $11.0 million for the three months ended March 31, 2021
compared to the three months ended March 31, 2020 primarily due to changes in net realized and unrealized gains from foreign exchange transactions.
Provision for Income Taxes
Three Months Ended March 31,
Change
2021
2020
Amount
Provision for income taxes
$
3,102
$
2,557
$
545
Provision for income tax increased by $0.5 million for the three months ended March 31, 2021
compared to the three months ended March 31, 2020. The change was primarily due to increases in profits from the Companys international operations partially offset by decreases in foreign withholding taxes.
Liquidity and Capital Resources
Since
our inception, we have primarily generated negative cash flows from operations and have financed our operations primarily through the sale of our equity securities, including proceeds from option exercises, and payments received from our customers.
We believe our existing cash and cash equivalents will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months, as well as our short-term and long-term contractual obligations and commitments
primarily consisting of operating lease commitments and non-cancelable purchase commitments related to third-party cloud hosting services.
As of March 31, 2021, our accumulated deficit balance was $5.1 billion, and our principal sources of liquidity were
$2.3 billion of cash and cash equivalents, exclusive of additional restricted cash of $109.0 million. Cash and cash equivalents consist primarily of cash on deposit with banks as well as institutional money market funds. Restricted cash
primarily consists of cash and certificates of deposit that are held as collateral against letters of credit and guarantees we are required to maintain for various purposes.
As of March 31, 2021, we had $200.0 million of term loans outstanding under the 2014 Credit Facility and had additional
$200.0 million revolving credit facility available and undrawn. For more information, see the section titled Managements Discussion and Analysis of Financial Condition and Results of Operations Credit
Facilities.
Our future capital requirements will depend on many factors, including, but not limited to the rate of our growth,
our ability to attract and retain customers and their willingness and ability to pay for our products and services, and the timing and extent of spending to support our efforts to market and develop our products. Further, we may enter into future
arrangements to acquire or invest in businesses, products, services, strategic partnerships, and technologies. As such, we may be required to seek additional equity or debt financing. In the event that additional financing is required from outside
sources, we may not be able to raise it on terms acceptable to us or at all. If additional funds are not available to us on acceptable terms, or at all, our business, financial condition, and results of operations could be adversely affected.
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The following table summarizes our cash flows for the periods indicated (in thousands):
Three Months Ended March 31,
2021
2020
Net cash provided by (used in):
Operating activities
$
116,881
$
(287,184
)
Investing activities
(708
)
(3,016
)
Financing activities
206,354
2,494
Effect of foreign exchange on cash, cash equivalents, and restricted cash
(2,197
)
(1,627
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
$
320,330
$
(289,333
)
Operating Activities
Net cash provided by operating activities was $116.9 million for the three months ended March 31, 2021. The factors affecting our
operating cash flows during this period were our net loss of $123.5 million, offset by non-cash charges of $204.2 million and changes in net operating assets and liabilities of $36.1 million.
The non-cash charges primarily consisted of $193.7 million in stock-based compensation expense, $6.5 million in operating lease expense, and $3.2 million of depreciation and amortization. The
net change in operating assets and liabilities were due to an increase in accounts payable and accrued liabilities of $44.5 million due to timing of expense payments, and a net increase of $8.9 million in deferred revenue and customer
deposits due to increases in customer billings, partially offset by a net increase in assets of $10.1 million.
Net cash used in
operating activities was $287.2 million for the three months ended March 31, 2020. The factors affecting our operating cash flows during this period were our net loss of $54.3 million, offset by
non-cash charges of $54.8 million and changes in net operating assets and liabilities of $287.7 million. The non-cash charges primarily consisted of
$54.1 million in stock-based compensation expense, $10.2 million in operating lease expense, and $3.7 million of depreciation and amortization, partially offset by a $13.7 million reduction in the fair value of warrant
liabilities. The net change in operating assets and liabilities were due to a net decrease of $123.5 million in deferred revenue and customer deposits due to increases in revenue recognized from amounts billed and collected in prior periods, a
decrease in accounts payable and accrued liabilities of $80.2 million, and an increase in assets of $67.8 million primarily due to an increase in accounts receivable.
Investing Activities
Net cash
used in investing activities was $0.7 million and $3.0 million for the three months ended March 31, 2021 and 2020, which consisted of purchases of property and equipment.
Financing Activities
Net cash
provided by financing activities was $206.4 million for the three months ended March 31, 2021, which primarily consisted of $208.9 million of proceeds from the exercise of common stock options.
Net cash provided by financing activities was $2.5 million for the three months ended March 31, 2020, which primarily consisted of
$6.7 million of proceeds from exercise of common stock options, offset by $3.8 million net cash used for repurchases of common stock.
Credit
Facilities
2014 Credit Facility
In October 2014, we entered into an unsecured revolving credit facility which has been subsequently amended (the 2014 Credit
Facility). The 2014 Credit Facility bears interest at the London Interbank Offered Rate (LIBOR) plus a margin of 2.75% per annum, subject to certain adjustments, and incurs a commitment fee of 0.375% assessed on the daily average
undrawn portion of revolving commitments. The 2014 Credit Facility is secured with substantially all of our assets.
As of March 31,
2021, we had $200.0 million of term loans outstanding under the 2014 Credit Facility and an additional $200.0 million undrawn revolving credit facility available. During April 2021, we amended the credit facility to increase the total
undrawn revolving credit facility to be $400.0 million and which also provides for an incremental loan facility of additional term loans or revolving loans in an aggregate principal amount of up to $100.0 million with one or more existing
or new lenders upon mutual agreement between the Company and such lenders. Upon amending the facility, we repaid the outstanding $200.0 million term loan.
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Contractual Obligations and Commitments
Our contractual obligations and commitments primarily consist of operating lease commitments for our facilities and non-cancelable purchase commitments related to third-party cloud hosting services. For additional information, refer to Note 8. Commitments and Contingencies to our condensed consolidated financial statements
included elsewhere in this Quarterly Report on Form 10-Q. There has been no material change in our contractual obligations and commitments other than in the ordinary course of business since our fiscal year
ended December 31, 2020. See our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on February 26, 2021, for additional information regarding the
Companys contractual obligations.
Off-Balance Sheet Arrangements
We did not have, during the periods presented, any off-balance sheet financing arrangements or any
relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies
and Estimates
Our condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly
Report on Form 10-Q are prepared in accordance with GAAP. The preparation of condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ
significantly from our estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and
estimates discussed in the Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on February 26, 2021.
Recent Accounting Pronouncements
For
information on recently issued accounting pronouncements, refer to Note 2. Significant Accounting Policies in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
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ITEM 3.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks in the ordinary course of our business, which primarily relate to fluctuations in interest rates, foreign exchange, and
inflation.
Interest Rate Risk
Our cash, cash equivalents, and restricted cash consist of cash, certificates of deposit, and money market funds. Our investment policy and
strategy are focused on the preservation of capital and supporting our liquidity requirements. We have not entered into investments for trading or speculative purposes.
Due to the short-term nature of the financial instruments, we have not been exposed to, nor do we anticipate being exposed to, material risks
due to changes in interest rates. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our condensed consolidated financial statements.
As of March 31, 2021, we had $200.0 million in variable rate term loans outstanding that were repaid during April 2021. An immediate
10% change in LIBOR would not have a material impact on our debt-related obligations, financial position, or results of operations.
Foreign
Currency Exchange Risk
Our contracts with customers are primarily denominated in U.S. dollars, with a small amount denominated in
foreign currencies. Our expenses are generally denominated in the currencies of the jurisdictions in which we conduct our operations, which are primarily in the United States, United Kingdom, and other European countries. Our results of current and
future operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro and GBP. Additionally, fluctuations in foreign currency exchange rates may cause us to
recognize transaction gains and losses in our statement of operations. To date, foreign currency transaction gains and losses have not been material to our condensed consolidated financial statements, and we have not engaged in any foreign currency
hedging transactions.
Inflation Risk
We do
not believe that inflation has had a material effect on our business, results of operations, or financial condition.
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ITEM 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to ensure that information we are required to disclose in reports that we file or submit
under the Securities Exchange Act of 1934, as amended (the Exchange Act) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation and supervision of our Chief Executive Officer and our Chief Financial Officer, have evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this
Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were, in design and
operation, effective at a reasonable assurance level.
Changes in Internal Controls Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on the
Effectiveness of Controls
The effectiveness of any system of internal control over financial reporting, including ours, is subject to
inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, in designing and evaluating the disclosure
controls and procedures, management recognizes that any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute, assurance of achieving the desired
control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and
procedures relative to their costs. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business but cannot assure you that such improvements will be sufficient to provide us with effective
internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
From time to time, we are subject to legal proceedings and claims arising in the ordinary course of business. Based on our current knowledge,
we believe that the amount or range of reasonably possible losses will not, either individually or in the aggregate, have a material adverse effect on our business, results of operations, or financial condition.
The results of any litigation cannot be predicted with certainty, and an unfavorable resolution in any legal proceedings could materially
affect our future business, results of operations, or financial condition. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.
For information on legal proceedings, refer to Note 8 . Commitments and ContingenciesLitigation and Legal Proceedings
in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
ITEM 1A.
RISK FACTORS
Investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks and uncertainties
described below, together with all of the other information in this Quarterly Report on Form 10-Q, including the section titled Managements Discussion and Analysis of Financial Condition and
Results of Operations and our condensed consolidated financial statements and accompanying notes, before making a decision to invest in our Class A common stock. Our business, financial condition, results of operations, or prospects could
also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material. If any of the risks actually occur, our business, financial condition, results of operations, and prospects could be adversely
affected. In that event, the trading price of our Class A common stock could decline, and you could lose part or all of your investment.
Risk
Factor Summary
Our business is subject to numerous risks and uncertainties that you should consider before investing in our
Class A common stock. These risks are described more fully below and include, but are not limited to, risks relating to the following:
we have incurred losses each year and we may not become profitable in the future;
we may not be able to sustain our revenue growth rate;
our sales efforts involve considerable time and expense and our sales cycle is often long and unpredictable;
a limited number of customers account for a substantial portion of our revenue;
our results of operations and our key business measures are likely to fluctuate significantly on a quarterly
basis;
seasonality may cause fluctuations in our results of operations and position;
our platforms are complex and may have a lengthy implementation process;
we may not successfully develop and deploy new technologies to address the needs of our customers;
our platforms must operate with third-party products and services;
we may be unable to hire, retain, train, and motivate qualified personnel and senior management and deploy our
personnel and resources to meet customer demand;
we may be unable to successfully build, expand, and deploy our marketing and sales organization;
we may not able to maintain and enhance our brand and reputation;
unfavorable news or social media coverage may harm our reputation and business;
exclusive arrangements or unique terms with customers or partners may result in significant risks or liabilities
to us;
we face intense competition in our markets;
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we may be unable to maintain or properly manage our culture as we grow;
we may not enter into relationships with potential customers if we consider their activities to be inconsistent
with our organizational mission or values;
joint ventures, channel sales relationships, platform partners and strategic alliances may be unsuccessful;
we may not be successful in executing our strategy to increase our sales to larger customers;
breach of the systems of any third parties upon which we rely, our customers cloud or on-premises environments, or our internal systems or unauthorized access to data;
the COVID-19 pandemic may continue to significantly affect our business
and operations;
the market for our platforms and services may develop more slowly than we expect;
we may make strategic investments to support key business initiatives, including in private and public growth
stage companies, and we may not realize a return on these investments;
issues raised by the use of artificial intelligence in our platforms may result in reputational harm or
liability;
we depend on computing infrastructure of third parties and they may experience errors, disruption, performance
problems, or failure;
we may fail to adequately obtain, maintain, protect and enforce our intellectual property and other proprietary
rights;
we may be subject to intellectual property rights claims;
there may be real or perceived errors, failures, defects or bugs in our platforms;
we rely on the availability of third-party technology that may be difficult to replace or that may cause errors;
our business is subject to complex and evolving U.S. and non-U.S. laws
and regulations regarding privacy, data protection and security, technology protection, and other matters;
our non-U.S. sales and operations subject us to additional risks and
regulations;
we may encounter unfavorable outcomes in legal, regulatory, and administrative inquiries and proceedings;
we may fail to receive and maintain government contracts or there may be changes in the contracting or fiscal
policies of the public sector;
the majority of our customer contracts may be terminated by the customer at any time for convenience and may
contain other provisions permitting the customer to discontinue contract performance;
we may not realize the full value of our customer contracts;
there may be a decline in the U.S. and other government budgets, changes in spending or budgetary priorities, or
delays in contracts awards; and
the multi-class structure of our common stock, the Founder Voting Trust Agreement and the Founder Voting
Agreement concentrate voting power with certain stockholders, in particular, our Founders and their affiliates.
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Risks Related to Our Business and Industry
We have incurred losses each year since our inception, we expect our operating expenses to increase, and we may not become profitable in the future.
We have incurred losses each year since our inception as reflected in our condensed consolidated statements of operations
included elsewhere in this filing, and we may never achieve or maintain profitability. In addition, our operating expenses have increased over time. As we continue to expand our business, industry verticals, and the breadth of our operations,
upgrade our infrastructure, hire additional employees, expand into new markets, invest in research and development, invest in sales and marketing, including expanding our sales organization and related sales-based payments that may come with such
expansion, lease more real estate to accommodate our anticipated future growth, and incur costs associated with general administration, including expenses related to being a public company, we expect that our costs of revenue and operating expenses
will continue to increase. To the extent we are successful in increasing our customer base, we may also incur increased losses because the costs associated with acquiring and growing our customers via our Acquire, Expand, and Scale business model
and with research and development are generally incurred upfront, while our revenue from customer contracts is generally recognized over the contract term. Furthermore, our sales model often requires us to spend months and invest significant
resources working with customers on pilot deployments at no or low cost to them, which may result in no or minimal future revenue. We may not be able to increase our revenue at a rate sufficient to offset increases in our costs of revenue and
operating expenses in the near term or at all, which would prevent us from achieving or maintaining profitability in the future. Any failure by us to achieve, and then sustain or increase, profitability on a consistent basis could adversely affect
our business, financial condition, and results of operations.
We may not be able to sustain our revenue growth rate in the future.
Although our revenue has increased in recent periods, there can be no assurances that revenue will continue to grow or do so at
current rates, and you should not rely on the revenue of any prior quarterly or annual period as an indication of our future performance. Our revenue growth rate may decline in future periods. Many factors may contribute to declines in our revenue
growth rate, including increased competition, slowing demand for our platforms from existing and new customers, a failure by us to continue capitalizing on growth opportunities, terminations of existing contracts or failure to exercise existing
options by our customers, and the maturation of our business, among others. If our revenue growth rate declines, our business, financial condition, and results of operations could be adversely affected.
Our sales efforts involve considerable time and expense and our sales cycle is often long and unpredictable.
Our results of operations may fluctuate, in part, because of the intensive nature of our sales efforts and the length and unpredictability of
our sales cycle. As part of our sales efforts, we invest considerable time and expense evaluating the specific organizational needs of our potential customers and educating these potential customers about the technical capabilities and value of our
platforms and services. We often also provide our platforms to potential customers at no or low cost initially to them for evaluation purposes through short-term pilot deployments of our platforms in the Acquire phase of our business model, and
there is no guarantee that we will be able to move customers from the Acquire phase into later phases. In addition, we currently have a limited direct sales force, and our sales efforts have historically depended on the significant involvement of
our senior management team. The length of our sales cycle, from initial demonstration of our platforms to sale of our platforms and services, tends to be long and varies substantially from customer to customer. Our sales cycle often lasts six to
nine months but can extend to a year or more for some customers. Because decisions to purchase our platforms involve significant financial commitments, potential customers generally evaluate our platforms at multiple levels within their
organization, each of which often have specific requirements, and typically involve their senior management.
Our results of operations
depend on sales to enterprise customers, which make product purchasing decisions based in part or entirely on factors, or perceived factors, not directly related to the features of the platforms, including, among others, that customers
projections of business growth, uncertainty about economic conditions (including as a result of the ongoing COVID-19 pandemic), capital budgets, anticipated cost savings from the implementation of our
platforms, potential preference for such customers internally-developed software solutions, perceptions about our business and platforms, more favorable terms offered by potential competitors, and previous technology investments. In addition,
certain decision makers and other stakeholders within our potential customers tend to have vested interests in the continued use of internally developed or existing software, which may make it more difficult for us to sell our platforms and
services. As a result of these and other factors, our sales efforts typically require an extensive effort throughout a customers organization, a significant investment of human resources, expense and time, including by our senior management,
and there can be no assurances that we will be successful in making a sale to a potential customer. If our sales efforts to a potential customer do not result in sufficient revenue to justify our investments, our business, financial condition, and
results of operations could be adversely affected.
Historically, existing customers have expanded their relationships with us,
which has resulted in a limited number of customers accounting for a substantial portion of our revenue. If existing customers do not make subsequent purchases from us or renew their contracts with us, or if our relationships with our largest
customers are impaired or terminated, our revenue could decline, and our results of operations would be adversely impacted.
We
derive a significant portion of our revenue from existing customers that expand their relationships with us. Increasing the size and number of the deployments of our existing customers is a major part of our growth strategy. We may not be effective
in executing this or any other aspect of our growth strategy.
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Our top three customers together accounted for 25% and 28% of our revenue for the years
ended December 31, 2020 and 2019, respectively, and 20% and 31% of our revenue for the three months ended March 31, 2021 and 2020, respectively. Our top three customers by revenue, for the three months ended March 31, 2021, have been
with us for an average of 4 years as of March 31, 2021. Certain of our customers, including customers that represent a significant portion of our business, have in the past reduced their spend with us or terminated their agreements with us,
which has reduced our anticipated future payments or revenue from these customers, and which has required us to refund some previously paid amounts to these customers. It is not possible for us to predict the future level of demand from our larger
customers for our platforms and applications.
While we generally offer contract terms up to five years in length, our customers sometimes
enter into shorter-term contracts, such as one-year subscriptions, which may not provide for automatic renewal and may require the customer to opt-in to extend the term.
Our customers have no obligation to renew, upgrade, or expand their agreements with us after the terms of their existing agreements have expired. In addition, many of our customer contracts permit the customer to terminate their contracts with us
with notice periods of varying lengths, generally three to six months. If one or more of our customers terminate their contracts with us, whether for convenience, for default in the event of a breach by us, or for other reasons specified in our
contracts, as applicable; if our customers elect not to renew their contracts with us; if our customers renew their contractual arrangements with us for shorter contract lengths or for a reduced scope; or if our customers otherwise seek to
renegotiate terms of their existing agreements on terms less favorable to us, our business and results of operations could be adversely affected. This adverse impact would be even more pronounced for customers that represent a material portion of
our revenue or business operations.
Our ability to renew or expand our customer relationships may decrease or vary as a result of a
number of factors, including our customers satisfaction or dissatisfaction with our platforms and services, the frequency and severity of software and implementation errors, our platforms reliability, our pricing, the effects of general
economic conditions, competitive offerings or alternatives, or reductions in our customers spending levels. If our customers do not renew or expand their agreements with us or if they renew their contracts for shorter lengths or on other terms
less favorable to us, our revenue may grow more slowly than expected or decline, and our business could suffer. Our business, financial condition, and results of operations would also be adversely affected if we face difficulty collecting our
accounts receivable from our customers or if we are required to refund customer deposits.
Achieving renewal or expansion of deployments
may require us to increasingly engage in sophisticated and costly sales efforts that may not result in additional sales. In addition, our customers decisions to expand the deployment of our platforms depends on a number of factors, including
general economic conditions, the functioning of our platforms, the ability of our forward-deployed engineers to assist our customers in identifying new use cases, modernizing their data architectures, and achieving success with data-driven
initiatives, and our customers satisfaction with our services. If our efforts to expand within our existing customer base are not successful, our business may suffer.
We may not realize the full deal value of our customer contracts, which may result in lower than expected revenue.
As of December 31, 2020, the total remaining deal value of the contracts that we had been awarded by, or entered into with, commercial
and government customers, including existing contractual obligations and contractual options available to those customers, was $2.8 billion. Of our total remaining deal value, as of December 31, 2020, $1.5 billion was the remaining
deal value of our contracts with commercial customers and $1.3 billion was the remaining deal value of our contracts with government customers.
The majority of these contracts are subject to termination for convenience provisions. Additionally, the U.S. federal government is prohibited
from exercising contract options more than one year in advance. As a result, there can be no guarantee that our customer contracts will not be terminated or that contract options will be exercised.
We historically have not realized all of the revenue from the full deal value of our customer contracts, and we may not do so in the future.
This is because the actual timing and amount of revenue under contracts included are subject to various contingencies, including exercise of contractual options, customers not terminating their contracts, and renegotiation of contracts. In addition,
delays in the completion of the U.S. governments budgeting process, the use of continuing resolutions, and a potential lapse in appropriations, or similar events in other jurisdictions, could adversely affect our ability to timely recognize
revenue under certain government contracts.
Our results of operations and our key business measures are likely to fluctuate
significantly on a quarterly basis in future periods and may not fully reflect the underlying performance of our business, which makes our future results difficult to predict and could cause our results of operations to fall below expectations.
Our quarterly results of operations, including cash flows, have fluctuated significantly in the past and are likely to continue
to do so in the future. Accordingly, the results of any one quarter should not be relied upon as an indication of future performance.
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Our quarterly results, financial position, and operations are likely to fluctuate as a result of a variety of factors, many of which are outside of our control, and as a result, may not fully
reflect the underlying performance of our business. Fluctuation in quarterly results may negatively impact the value of our Class A common stock.
We typically close a large portion of our sales in the last several weeks of a quarter, which impacts our ability to plan and manage margins
and cash flows. Our sales cycle is often long, and it is difficult to predict exactly when, or if, we will actually make a sale with a potential customer or when we will be able to move them to the Expand or Scale phases. As a result, large
individual sales have, in some cases, occurred in quarters subsequent to those we anticipated, or have not occurred at all. The loss or delay of one or more large sales transactions in a quarter would impact our results of operations and cash flow
for that quarter and any future quarters in which revenue from that transaction is lost or delayed. In addition, downturns in new sales may not be immediately reflected in our revenue because we generally recognize revenue over the term of our
contracts. The timing of customer billing and payment varies from contract to contract. A delay in the timing of receipt of such collections, or a default on a large contract, may negatively impact our liquidity for the period and in the future.
Because a substantial portion of our expenses are relatively fixed in the short-term and require time to adjust, our results of operations and liquidity would suffer if revenue falls below our expectations in a particular period.
Other factors that may cause fluctuations in our quarterly results of operations and financial position include, without limitation, those
listed below:
The success of our sales and marketing efforts, including the success of our pilot deployments;
Our ability to increase our contribution margins and move our customers into the Expand or Scale phases;
The timing of expenses and revenue recognition;
The timing and amount of payments received from our customers;
Termination of one or more large contracts by customers, including for convenience;
The time and cost-intensive nature of our sales efforts and the length and variability of sales cycles;
The amount and timing of operating expenses related to the maintenance and expansion of our business and
operations;
The timing and effectiveness of new sales and marketing initiatives;
Changes in our pricing policies or those of our competitors;
The timing and success of new products, features, and functionality introduced by us or our competitors;
Interruptions or delays in our operations and maintenance (O&M) services;
Cyberattacks and other actual or perceived data or security breaches;
Our ability to hire and retain employees, in particular, those responsible for operations and maintenance of
and the selling or marketing of our platforms, and develop and retain talented sales personnel who are able to achieve desired productivity levels in a reasonable period of time and provide sales leadership in areas in which we are expanding our
sales and marketing efforts;
The amount and timing of our stock-based compensation expenses;
Changes in the way we organize and compensate our sales teams;
Changes in the way we operate and maintain our platforms;
Unforeseen negative results in operations from our partnerships, including those accounted for under the
equity method;
Changes in the competitive dynamics of our industry;
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The cost of and potential outcomes of existing and future claims or litigation, which could have a material
adverse effect on our business;
Changes in laws and regulations that impact our business, such as the Federal Acquisition Streamlining Act of
1994 (FASA);
Indemnification payments to our customers or other third parties;
Ability to scale our business with increasing demands;
The timing of expenses related to any future acquisitions; and
General economic, regulatory, and market conditions, including the impact of the COVID-19 pandemic.
In addition, our contracts generally contain termination for
convenience provisions, and we may be obligated to repay prepaid amounts or otherwise not realize anticipated future revenue should we fail to provide future services as anticipated. These factors make it difficult for us to accurately predict
financial metrics for any particular period.
The variability and unpredictability of our quarterly results of operations, cash flows, or
other operating metrics could result in our failure to meet our expectations or those of analysts that cover us or investors with respect to revenue or other key metrics for a particular period. If we fail to meet or exceed such expectations for
these or any other reasons, the trading price of our Class A common stock could fall, and we could face costly lawsuits, including securities class action suits.
Seasonality may cause fluctuations in our results of operations and position.
Historically, the first quarter of our year generally has relatively lower sales, and sales generally increase in each subsequent quarter with
substantial increases during our third and fourth quarters ending September 30 and December 31, respectively. We believe that this seasonality results from a number of factors, including:
The fiscal year end procurement cycle of our government customers, and in particular U.S. government customers
which have a fiscal year end of September 30;
The fiscal year budgeting process for our commercial customers, many of which have a fiscal year end of
December 31;
Seasonal reductions in business activity during the summer months in the United States, Europe, and certain
other regions; and
Timing of projects and our customers evaluation of our work progress.
This seasonality has historically impacted and may in the future continue to impact the timing of collections and recognized revenue. Because
a significant portion of our customer contracts are typically finalized near the end of the year, and we typically invoice customers shortly after entering into a contract, we receive a significant portion of our customer payments near the end of
the year and record an increase in contract liabilities, while the revenue from our customer contracts is generally recognized over the contract term. While we have historically billed and collected payments for multiple contract years from certain
customers in advance, we have and may continue to shift to collecting payments on an annual or other basis.
While this has been the
historical seasonal pattern of our quarterly sales, we believe that our customers required timing for certain new government or commercial programs requiring new software may outweigh the nature or magnitude of seasonal factors that might have
influenced our business to date. As a result, we may experience future growth from additional government or commercial mandates that do not follow the seasonal purchasing and evaluation decisions by our customers that we have historically observed.
For example, increased government spending on technology aimed at national defense, financial or policy regulation, cybersecurity, or
healthcare mandates may drive customer demand at different times throughout our year, the timing of which we may not be able to anticipate and may cause fluctuations in our results of operations. The timing of our fiscal quarters and the U.S.
federal governments September 30 fiscal year end also may impact sales to governmental agencies in the third quarter of our year, offsetting, at least in part, the otherwise seasonal downturn we have historically observed in later summer
months.
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Our rapid growth in recent years may obscure the extent to which seasonality trends have
affected our business and may continue to affect our business. We expect that seasonality will continue to materially impact our business in the future and may become more pronounced over time. The seasonality of our business may cause continued or
increased fluctuations in our results of operations and cash flows, which may prevent us from achieving our quarterly or annual forecasts or meeting or exceeding the expectations of research analysts or investors, which in turn may cause a decline
in the trading price of our Class A common stock.
Our platforms are complex and may have a lengthy implementation process, and
any failure of our platforms to satisfy our customers or perform as desired could harm our business, results of operations, and financial condition.
Our platforms and services are complex and are deployed in a wide variety of network environments. Implementing our platforms can be a complex
and lengthy process since we often configure our existing platforms for a customers unique environment. Inability to meet the unique needs of our customers may result in customer dissatisfaction and/or damage to our reputation, which could
materially harm our business. Further, the proper use of our platforms may require training of the customer and the initial or ongoing services of our technical personnel as well as O&M services over the contract term. If training and/or ongoing
services require more of our expenditures than we originally estimated, our margins will be lower than projected.
In addition, if our
customers do not use our platforms correctly or as intended, inadequate performance or outcomes may result. It is possible that our platforms may also be intentionally misused or abused by customers or their employees or third parties who obtain
access and use of our platforms. Similarly, our platforms sometimes used by customers with smaller or less sophisticated IT departments, potentially resulting in sub-optimal performance at a level lower than
anticipated by the customer. Because our customers rely on our platforms and services to address important business goals and challenges, the incorrect or improper use or configuration of our platforms and O&M services, failure to properly train
customers on how to efficiently and effectively use our platforms, or failure to properly provide implementation or analytical or maintenance services to our customers may result in contract terminations or
non-renewals, reduced customer payments, negative publicity, or legal claims against us. For example, as we continue to expand our customer base, any failure by us to properly provide these services may result
in lost opportunities for follow-on expansion sales of our platforms and services.
Furthermore,
if customer personnel are not well trained in the use of our platforms, customers may defer the deployment of our platforms and services, may deploy them in a more limited manner than originally anticipated, or may not deploy them at all. If there
is substantial turnover of the Company or customer personnel responsible for procurement and use of our platforms, our platforms may go unused or be adopted less broadly, and our ability to make additional sales may be substantially limited, which
could negatively impact our business, results of operations, and growth prospects.
If we do not successfully develop and deploy new
technologies to address the needs of our customers, our business and results of operations could suffer.
Our success has been
based on our ability to design software and products that enable the integration of data into a common operating environment to facilitate advanced data analysis, knowledge management, and collaboration. We spend substantial amounts of time and
money researching and developing new technologies and enhanced versions of existing features to meet our customers and potential customers rapidly evolving needs. There is no assurance that our enhancements to our platforms or our new
product features, capabilities, or offerings, including new product modules, will be compelling to our customers or gain market acceptance. If our research and development investments do not accurately anticipate customer demand or if we fail to
develop our platforms in a manner that satisfies customer preferences in a timely and cost-effective manner, we may fail to retain our existing customers or increase demand for our platforms.
The introduction of new products and services by competitors or the development of entirely new technologies to replace existing offerings
could make our platforms obsolete or adversely affect our business, financial condition, and results of operations. We may experience difficulties with software development, design, or marketing that delay or prevent our development, introduction,
or implementation of new platforms, features, or capabilities. We have in the past experienced delays in our internally planned release dates of new features and capabilities, and there can be no assurance that new platforms, features, or
capabilities will be released according to schedule. Any delays could result in adverse publicity, loss of revenue or market acceptance, or claims by customers brought against us, any of which could harm our business. Moreover, the design and
development of new platforms or new features and capabilities to our existing platforms may require substantial investment, and we have no assurance that such investments will be successful. If customers do not widely adopt our new platforms,
experiences, features, and capabilities, we may not be able to realize a return on our investment and our business, financial condition, and results of operations may be adversely affected.
Our new and existing platforms and changes to our existing platforms could fail to attain sufficient market acceptance for many reasons,
including:
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Our failure to predict market demand accurately in terms of product functionality and to supply offerings that
meet this demand in a timely fashion;
Product defects, errors, or failures or our inability to satisfy customer service level requirements;
Negative publicity or negative private statements about the security, performance, or effectiveness of our
platforms or product enhancements;
Delays in releasing to the market our new offerings or enhancements to our existing offerings, including new
product modules;
Introduction or anticipated introduction of competing platforms or functionalities by our competitors;
Inability of our platforms or product enhancements to scale and perform to meet customer demands;
Receiving qualified or adverse opinions in connection with security or penetration testing, certifications or
audits, such as those related to IT controls and security standards and frameworks or compliance;
Poor business conditions for our customers, causing them to delay software purchases;
Reluctance of customers to purchase proprietary software products;
Reluctance of our customers to purchase products hosted by our vendors and/or service interruption from such
providers; and
Reluctance of customers to purchase products incorporating open source software.
If we are not able to continue to identify challenges faced by our customers and develop, license, or acquire new features and capabilities to
our platforms in a timely and cost-effective manner, or if such enhancements do not achieve market acceptance, our business, financial condition, results of operations, and prospects may suffer and our anticipated revenue growth may not be achieved.
Because we derive, and expect to continue to derive, substantially all of our revenue from customers purchasing our two platforms Gotham
and Foundry, market acceptance of these platforms, and any enhancements or changes thereto, is critical to our success.
The
competitive position of our platforms depends in part on their ability to operate with third-party products and services, and if we are not successful in maintaining and expanding the compatibility of our platforms with such third-party products and
services, our business, financial condition, and results of operations could be adversely impacted.
The competitive position of
our platforms depends in part on their ability to operate with products and services of third parties, software services, and infrastructure, including but not limited to, in connection with our joint ventures, channel sales relationships, platform
partnerships, strategic alliances, and other similar arrangements where applicable. As such, we must continuously modify and enhance our platforms to adapt to changes in, or to be integrated or otherwise compatible with, hardware, software,
networking, browser, and database technologies. In the future, one or more technology companies may choose not to support the operation of their hardware, software, or infrastructure, or our platforms may not support the capabilities needed to
operate with such hardware, software, or infrastructure. In addition, to the extent that a third-party were to develop software or services that compete with ours, that provider may choose not to support one or more of our platforms. We intend to
facilitate the compatibility of our platforms with various third-party hardware, software, and infrastructure by maintaining and expanding our business and technical relationships. If we are not successful in achieving this goal, our business,
financial condition, and results of operations could be adversely impacted.
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If we fail to manage future growth effectively, our business could be harmed.
Since our founding in 2003, we have experienced rapid growth. We operate in a growing market and have experienced, and may
continue to experience, significant expansion of our operations. This growth has placed, and may continue to place, a strain on our employees, management systems, operational, financial, and other resources. As we have grown, we have increasingly
managed larger and more complex deployments of our platforms and services with a broader base of government and commercial customers. As we continue to grow, we face challenges of integrating, developing, retaining, and motivating a rapidly growing
employee base in various countries around the world. For example, our headcount has grown from 313 full- time employees as of December 31, 2010 to 2,492 full-time employees as of March 31, 2021, with employees located both in the United
States and outside the United States. In the event of continued growth of our operations, our operational resources, including our information technology systems, our employee base, or our internal controls and procedures may not be adequate to
support our operations and deployments. Managing our growth may require significant expenditures and allocation of valuable management resources, improving our operational, financial, and management processes and systems, and effectively expanding,
training, and managing our employee base. If we fail to achieve the necessary level of efficiency in our organization as it grows, our business, financial condition, and results of operations would be harmed. As our organization continues to grow,
we may find it increasingly difficult to maintain the benefits of our traditional company culture, including our ability to quickly respond to customers, and avoid unnecessary delays that may be associated with a formal corporate structure. This
could negatively affect our business performance or ability to hire or retain personnel in the near- or long-term.
In addition, our rapid
growth may make it difficult to evaluate our future prospects. Our ability to forecast our future results of operations is subject to a number of uncertainties, including our ability to effectively plan for and model future growth. We have
encountered in the past, and may encounter in the future, risks and uncertainties frequently experienced by growing companies with global operations in rapidly changing industries. If we fail to achieve the necessary level of efficiency in our
organization as it grows, or if we are not able to accurately forecast future growth, our business, financial condition, and results of operations would be harmed.
If we are unable to hire, retain, train, and motivate qualified personnel and senior management, including Alexander Karp, one of our
founders and our Chief Executive Officer, and deploy our personnel and resources to meet customer demand around the world, our business could suffer.
Our ability to compete in the highly competitive technology industry depends upon our ability to attract, motivate, and retain qualified
personnel. We are highly dependent on the continued contributions and customer relationships of our management and particularly on the services of Alexander Karp, our Chief Executive Officer. Mr. Karp was part of our founding team and has been
integral to our growth since our founding. We believe that Mr. Karps management experience would be difficult to replace. All of our executive officers and key personnel are at-will employees and
may terminate their employment relationship with us at any time. The loss of the services of our key personnel and any of our other executive officers, and our inability to find suitable replacements, could result in a decline in sales, delays in
product development, and harm to our business and operations.
At times, we have experienced, and we may continue to experience,
difficulty in hiring and retaining personnel with appropriate qualifications, and we may not be able to fill positions in a timely manner or at all. Potential candidates may not perceive our compensation package, including our equity awards, as
favorably as personnel hired prior to our listing. In addition, our recruiting personnel, methodology, and approach may need to be altered to address a changing candidate pool and profile. We may not be able to identify or implement such changes in
a timely manner. In addition, we may incur significant costs to attract and recruit skilled personnel, and we may lose new personnel to our competitors or other technology companies before we realize the benefit of our investment in recruiting and
training them. As we move into new geographies, we will need to attract and recruit skilled personnel in those geographic areas, but it may be challenging for us to compete with traditional local employers in these regions for talent. If we fail to
attract new personnel or fail to retain and motivate our current personnel who are capable of meeting our growing technical, operational, and managerial requirements on a timely basis or at all, our business may be harmed.
In addition, certain personnel may be required to receive various security clearances and substantial training in order to work on certain
customer engagements or to perform certain tasks. Necessary security clearances may be delayed or unsuccessful, which may negatively impact our ability to perform on our U.S. and non-U.S. government contracts
in a timely manner or at all.
Our success depends on our ability to effectively source and staff people with the right mix of skills and
experience to perform services for our customers, including our ability to transition personnel to new assignments on a timely basis. If we are unable to effectively utilize our personnel on a timely basis to fulfill the needs of our customers, our
business could suffer. Further, if we are not able to utilize the talent we need because of increased regulation of immigration or work visas, including limitations placed on the number of visas granted, limitations on the type of work performed or
location in which the work can be performed, and new or higher minimum salary requirements, it could be more difficult to staff our personnel on customer engagements and could increase our costs.
We face intense competition for qualified personnel, especially engineering personnel, in major U.S. markets, where a large portion of our
personnel are based, as well as in other non-U.S. markets where we expect to expand our non-U.S. operations. We incur costs related to attracting, relocating, and
retaining qualified personnel in these highly competitive markets, including leasing real estate in prime areas in these locations. Further, many of the companies with which we compete for qualified personnel have greater resources than we have. If
the perceived value of our equity awards declines, or if the mix of equity and cash compensation that we offer is less attractive than that of our competitors, it may adversely affect our ability to recruit and retain highly skilled personnel.
Additionally, laws and regulations, such as restrictive immigration laws, may limit our ability to recruit outside of the United States. We seek to retain and motivate existing personnel through our compensation practices, company culture, and
career development opportunities. If we fail to attract new personnel or to retain our current personnel, our business and operations could be harmed.
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Volatility or lack of appreciation in the trading price of our Class A common stock may
also affect our ability to attract and retain qualified personnel. Many of our senior personnel and other key personnel hold equity awards that vested or became exercisable in connection with our listing, which could adversely affect our ability to
retain these personnel. Personnel may be more likely to leave us if the shares they own or the shares underlying their vested options or RSUs have significantly appreciated in value relative to the original purchase price of the shares or the
exercise price of the options, or conversely, if the exercise price of the options that they hold are significantly above the trading price of our Class A common stock. In addition, many of our personnel may be able to receive significant
proceeds from sales of our equity in the public markets, which may reduce their motivation to continue to work for us. Any of these factors could harm our business, financial condition, and results of operations.
If we are unable to successfully build, expand, and deploy our marketing and sales organization in a timely manner, or at all, or to
successfully hire, retain, train, and motivate our sales personnel, our growth and long-term success could be adversely impacted.
We have a growing but limited direct sales force and our sales efforts have historically depended on the significant direct involvement of our
senior management team, including Mr. Karp. The successful execution of our strategy to increase our sales to existing customers, identify and engage new customers, and enter new U.S. and non-U.S. markets
will depend, among other things, on our ability to successfully build and expand our sales organization and operations. Identifying, recruiting, training, and managing sales personnel requires significant time, expense, and attention, including from
our senior management and other key personnel, which could adversely impact our business, financial condition, and results of operations in the short and long term.
In order to successfully scale our unique sales model, we must, and we intend to continue to, increase the size of our direct sales force,
both in the United States and outside of the United States, to generate additional revenue from new and existing customers while preserving the cultural and mission-oriented elements of our company. If we do not hire a sufficient number of qualified
sales personnel, our future revenue growth and business could be adversely impacted. It may take a significant period of time before our sales personnel are fully trained and productive, particularly in light of our unique sales model, and there is
no guarantee we will be successful in adequately training and effectively deploying our sales personnel. In addition, we have invested, and may need to continue investing, significant resources in our sales operations to enable our sales
organization to run effectively and efficiently, including supporting sales strategy planning, sales process optimization, data analytics and reporting, and administering incentive compensation arrangements. Furthermore, hiring personnel in new
countries requires additional setup and upfront costs that we may not recover if those personnel fail to achieve full productivity in a timely manner. Our business would be adversely affected if our efforts to build, expand, train, and manage our
sales organization are not successful. We periodically change and make adjustments to our sales organization in response to market opportunities, competitive threats, management changes, product introductions or enhancements, acquisitions, sales
performance, increases in sales headcount, cost levels, and other internal and external considerations. Any future sales organization changes may result in a temporary reduction of productivity, which could negatively affect our rate of growth. In
addition, any significant change to the way we structure and implement the compensation of our sales organization may be disruptive or may not be effective and may affect our revenue growth. If we are unable to attract, hire, develop, retain, and
motivate qualified sales personnel, if our new sales personnel are unable to achieve sufficient sales productivity levels in a reasonable period of time or at all, if our marketing programs are not effective or if we are unable to effectively build,
expand, and manage our sales organization and operations, our sales and revenue may grow more slowly than expected or materially decline, and our business may be significantly harmed.
Our ability to sell our platforms and satisfy our customers is dependent on the quality of our services, and our failure to offer high
quality services could have a material adverse effect on our sales and results of operations.
Once our platforms are deployed and
integrated with our customers existing information technology investments and data, our customers depend on our O&M services to resolve any issues relating to our platforms. Increasingly, our platforms have been deployed in large-scale,
complex technology environments, and we believe our future success will depend on our ability to increase sales of our platforms for use in such deployments. Further, our ability to provide effective ongoing services, or to provide such services in
a timely, efficient, or scalable manner, may depend in part on our customers environments and their upgrading to the latest versions of our platforms and participating in our centralized platform management and services.
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In addition, our ability to provide effective services is largely dependent on our ability
to attract, train, and retain qualified personnel with experience in supporting customers on platforms such as ours. The number of our customers has grown significantly, and that growth has and may continue to put additional pressure on our services
teams. We may be unable to respond quickly enough to accommodate short-term increases in customer demand for our O&M services. We also may be unable to modify the future scope and delivery of our O&M services to compete with changes in the
services provided by our competitors. Increased customer demand for support, without corresponding revenue, could increase costs and negatively affect our business and results of operations. In addition, as we continue to grow our operations and
expand outside of the United States, we need to be able to provide efficient services that meet our customers needs globally at scale, and our services teams may face additional challenges, including those associated with operating the
platforms and delivering support, training, and documentation in languages other than English and providing services across expanded time-zones. If we are unable to provide efficient O&M services globally at scale, our ability to grow our
operations may be harmed, and we may need to hire additional services personnel, which could negatively impact our business, financial condition, and results of operations.
Our customers typically need training in the proper use of and the variety of benefits that can be derived from our platforms to maximize the
potential of our platforms. If we do not effectively deploy, update, or upgrade our platforms, succeed in helping our customers quickly resolve post-deployment issues, and provide effective ongoing services, our ability to sell additional products
and services to existing customers could be adversely affected, we may face negative publicity, and our reputation with potential customers could be damaged. Many enterprise and government customers require higher levels of services than smaller
customers. If we fail to meet the requirements of the larger customers, it may be more difficult to execute on our strategy to increase our penetration with larger customers. As a result, our failure to maintain high quality services may have a
material adverse effect on our business, financial condition, results of operations, and growth prospects.
If we are not able to
maintain and enhance our brand and reputation, our relationships with our customers, partners, and employees may be harmed, and our business and results of operations may be adversely affected.
We believe that maintaining and enhancing our brand identity and reputation is important to our relationships with, and to our ability to
attract and retain customers, partners, investors, and employees. The successful promotion of our brand depends upon our ability to continue to offer high-quality software, maintain strong relationships with our customers, the community, and others,
while successfully differentiating our platforms from those of our competitors. Unfavorable media coverage may adversely affect our brand and reputation. We anticipate that as our market becomes increasingly competitive, maintaining and enhancing
our brand may become increasingly difficult and expensive. If we do not successfully maintain and enhance our brand identity and reputation, we may fail to attract and retain employees, customers, investors, or partners, grow our business, or
sustain pricing power, all of which could adversely impact our business, financial condition, results of operations, and growth prospects. Additionally, despite our internal safeguards and efforts to the contrary, we cannot guarantee that our
customers will not ultimately use our platforms for purposes inconsistent with our company values, and such uses may harm our brand and reputation.
Our reputation and business may be harmed by news or social media coverage of Palantir, including but not limited to coverage that
presents, or relies on, inaccurate, misleading, incomplete, or otherwise damaging information.
Publicly available information
regarding Palantir has historically been limited, in part due to the sensitivity of our work with customers or contractual requirements limiting or preventing public disclosure of certain aspects of our work or relationships with certain customers.
As our business has grown and as interest in Palantir and the technology industry overall has increased, we have attracted, and may continue to attract, significant attention from news and social media outlets, including unfavorable coverage and
coverage that is not directly attributable to statements authorized by our leadership, that incorrectly reports on statements made by our leadership or employees and the nature of our work, perpetuates unfounded speculation about company
involvements, or that is otherwise misleading. If such news or social media coverage presents, or relies on, inaccurate, misleading, incomplete, or otherwise damaging information regarding Palantir, such coverage could damage our reputation in the
industry and with current and potential customers, employees, and investors, and our business, financial condition, results of operations, and growth prospects could be adversely affected. Due to the sensitive nature of our work and our
confidentiality obligations and despite our ongoing efforts to provide increased transparency into our business, operations, and product capabilities, we may be unable to or limited in our ability to respond to such harmful coverage, which could
have a negative impact on our business.
Our relationships with government customers and customers that are engaged in certain sensitive
industries, including organizations whose products or activities are or are perceived to be harmful, has resulted in public criticism, including from political and social activists, and unfavorable coverage in the media. Activists have also engaged
in public protests at our properties. Activist criticism of our relationships with customers could potentially engender dissatisfaction among potential and existing customers, investors, and employees with how we address political and social
concerns in our business activities. Conversely, being perceived as yielding to activism targeted at certain customers could damage our relationships with certain customers, including governments and government agencies with which we do business,
whose views may or may not be aligned with those of political and social activists. Actions we take in response to the activities of our customers, up to and including terminating our contracts or refusing a particular product use case could harm
our brand and reputation. In either case, the resulting harm to our reputation could:
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cause certain customers to cease doing business with us;
impair our ability to attract new customers, or to expand our relationships with existing customers;
diminish our ability to hire or retain employees;
undermine our standing in professional communities to which we contribute and from which we receive expert
knowledge; or
prompt us to cease doing business with certain customers.
Any of these factors could adversely impact our business, financial condition, and results of operations.
Because we recognize a substantial portion of our revenue from our platforms and O&M services over the contractual term, downturns
or upturns in new sales and renewals may not be immediately reflected in our results of operations.
We generally recognize
revenue from our platforms and O&M services over the contractual term. As a result, a portion of the revenue we recognize in each quarter is derived from customer contracts generally entered into during previous periods. Consequently, a decline
in new or renewed contracts in any single quarter may have an immaterial impact on the revenue that we recognize for that quarter. However, such a decline would negatively affect our revenue in future quarters. Accordingly, the effect of significant
downturns in sales or renewals, significant customer terminations, and potential changes in our contracting terms and pricing policies would not be fully reflected in our results of operations until future periods. The timing of our revenue
recognition model also makes it difficult for us to rapidly increase our revenue through additional sales in any given period, as revenue is generally recognized over the applicable contractual term.
Our pricing structures for our platforms and services may change from time to time.
We expect that we may change our pricing model from time to time, including as a result of competition, global economic conditions, general
reductions in our customers spending levels, pricing studies, or changes in how our platforms are broadly consumed. Similarly, as we introduce new products and services, or as a result of the evolution of our existing platforms and services,
we may have difficulty determining the appropriate price structure for our products and services. In addition, as new and existing competitors introduce new products or services that compete with ours, or revise their pricing structures, we may be
unable to attract new customers at the same price or based on the same pricing model as we have used historically. Moreover, as we continue to target selling our platforms and services to larger organizations, these larger organizations may demand
substantial price concessions. In addition, we may need to change pricing policies to accommodate government pricing guidelines for our contracts with federal, state, local, and foreign governments and government agencies. If we are unable to modify
or develop pricing models and strategies that are attractive to existing and prospective customers, while enabling us to significantly grow our sales and revenue relative to our associated costs and expenses in a reasonable period of time, our
business, financial condition, and results of operations may be adversely impacted.
If our customers are not able or willing to
accept our product-based business model, instead of a labor-based business model, our business and results of operations could be negatively impacted.
Our platforms are generally offered on a productized basis to minimize our customers overall cost of acquisition, maintenance, and
deployment time of our platforms. Many of our customers and potential customers are instead generally familiar with the practice of purchasing or licensing software through labor contracts, where custom software is written for specific applications,
the intellectual property in such software is often owned by the customer, and the software typically requires additional labor contracts for modifications, updates, and services during the life of that specific software. Customers may be unable or
unwilling to accept our model of commercial software procurement. Should our customers be unable or unwilling to accept this model of commercial software procurement, our growth could be materially diminished, which could adversely impact our
business, financial condition, results of operations, and growth prospects.
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We have entered into, and expect in the future to enter into, agreements with our
customers that include exclusivity arrangements or unique contractual or pricing terms, which may result in significant risks or liabilities to us.
Our contracts with our customers are typically non-exclusive, but we have historically entered into
arrangements with our customers and our partners that include exclusivity provisions, and we expect to continue to do so in the future. These exclusivity provisions limit our ability to license our platforms and provide services to specific
customers, or to compete in certain geographic markets and industries, which may limit our growth and negatively impact our results. In addition, we have entered into joint ventures and strategic alliances with our customers, as described below,
which also limit our ability to compete in certain geographic markets or industry verticals.
Historically, we have in limited
circumstances entered into unique contractual and pricing arrangements with our customers, including some that may be outside of our typical scope of business, including arrangements relating to non-cash
items.
We face intense competition in our markets, and we may lack sufficient financial or other resources to maintain or improve
our competitive position.
The markets for our platforms are very competitive, and we expect such competition to continue or
increase in the future. A significant number of companies are developing products that currently, or in the future may, compete with some or all aspects of our proprietary platforms. We may not be successful in convincing the management teams of our
potential customers to deploy our platforms in lieu of existing software solutions or in-house software development projects often favored by internal IT departments or other competitive products and services.
In addition, our competitors include large enterprise software companies, government contractors, and system integrators, and we may face competition from emerging companies as well as established companies who have not previously entered this
market. Additionally, we may be required to make substantial additional investments in our research, development, services, marketing, and sales functions in order to respond to competition, and there can be no assurance that we will be able to
compete successfully in the future.
Many of our existing competitors have, and some of our potential competitors could have, substantial
competitive advantages such as:
Greater name recognition, longer operating histories, and larger customer bases;
Larger sales and marketing budgets and resources and the capacity to leverage their sales efforts and
marketing expenditures across a broader portfolio of products;
Broader, deeper, or otherwise more established relationships with technology, channel and distribution
partners, and customers;
Wider geographic presence or greater access to larger potential customer bases;
Greater focus in specific geographies;
Lower labor and research and development costs;
Larger and more mature intellectual property portfolios; and
Substantially greater financial, technical, and other resources to provide services, to make acquisitions, and
to develop and introduce new products and capabilities.
In addition, some of our larger competitors have substantially
broader and more diverse product and service offerings and may be able to leverage their relationships with distribution partners and customers based on other products or incorporate functionality into existing products to gain business in a manner
that discourages customers from purchasing our platforms, including by selling at zero or negative margins, product bundling, or offering closed technology platforms. Potential customers may also prefer to purchase from their existing provider
rather than a new provider regardless of platform performance or features. As a result, even if the features of our platforms offer advantages that others do not, customers may not purchase our platforms. These larger competitors often have broader
product lines and market focus or greater resources and may therefore not be as susceptible to economic downturns or other significant reductions in capital spending by customers. If we are unable to sufficiently differentiate our platforms from the
integrated or bundled products of our competitors, such as by offering enhanced functionality, performance, or value, we may see a decrease in demand for those platforms, which could adversely affect our business, financial condition, and results of
operations.
In addition, new, innovative start-up companies and larger companies that are making
significant investments in research and development may introduce products that have greater performance or functionality, are easier to implement or use, incorporate technological advances that we have not yet developed, or implemented or may
invent similar or superior platforms and technologies that compete with our platforms. Our current and potential competitors may also establish cooperative relationships among themselves or with third parties that may further enhance their
resources.
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Some of our competitors have made or could make acquisitions of businesses that allow them
to offer more competitive and comprehensive solutions. As a result of such acquisitions, our current or potential competitors may be able to accelerate the adoption of new technologies that better address customer needs, devote greater resources to
bring these products and services to market, initiate or withstand substantial price competition, or develop and expand their product and service offerings more quickly than we do. These competitive pressures in our market, or our failure to compete
effectively, may result in fewer orders, reduced revenue and margins, and loss of market share. In addition, it is possible that industry consolidation may impact customers perceptions of the viability of smaller or even mid-size software firms and consequently customers willingness to purchase from such firms.
We
may not compete successfully against our current or potential competitors. If we are unable to compete successfully, or if competing successfully requires us to take costly actions in response to the actions of our competitors, our business,
financial condition and results of operations could be adversely affected. In addition, companies competing with us may have an entirely different pricing or distribution model. Increased competition could result in fewer customer orders, price
reductions, reduced margins, and loss of market share, any of which could harm our business and results of operations.
Our culture
emphasizes rapid innovation and advancement of successful hires who may in some cases have limited prior industry expertise and prioritizes customer outcomes over short-term financial results, and if we cannot maintain or properly manage our culture
as we grow, our business may be harmed.
We have a culture that encourages employees to quickly develop and launch key
technologies and platforms intended to solve our customers most important problems and prioritizes the advancement of employees to positions of significant responsibility based on merit despite, in some cases, limited prior work or industry
experience. Much of our hiring into technical roles comes through our internship program or from candidates joining us directly from undergraduate or graduate engineering programs rather than industry hires. Successful entry-level hires are often
quickly advanced and rewarded with significant responsibilities, including in important customer-facing roles as project managers, development leads, and product managers. Larger competitors, such as defense contractors, system integrators, and
large software and service companies that traditionally target large enterprises typically have more sizeable direct sales forces staffed by individuals with significantly more industry experience than our customer-facing personnel, which may
negatively impact our ability to compete with these larger competitors. We have historically operated with a relatively flat reporting and organization structure and have few formal promotions. As our business grows and becomes more complex, the
staffing of customer-facing personnel, some of whom may have limited industry experience, may result in unintended outcomes or in decisions that are poorly received by customers or other stakeholders. For example, in many cases we launch, at our
expense, pilot deployments with customers without a long-term contract in place, and some of those deployments have not resulted in the customers adoption or expansion of its use of our platforms and services, or the generation of significant,
or any, revenue or payments. In addition, as we continue to grow, including geographically, we may find it difficult to maintain our culture.
Our culture also prioritizes customer outcomes over short-term financial results, and we frequently make service and product decisions that
may reduce our short-term revenue or cash flow if we believe that the decisions are consistent with our mission and responsive to our customers goals and thereby have the potential to improve our financial performance over the long term. These
decisions may not produce the long-term benefits and results that we expect or may be poorly received in the short term by the public markets, in which case our customer growth and our business, financial condition, and results of operations may be
harmed.
We may not enter into relationships with potential customers if we consider their activities to be inconsistent with our
organizational mission or values.
We generally do not enter into business with customers or governments whose positions or
actions we consider inconsistent with our mission to support Western liberal democracy and its strategic allies. Our decisions to not enter into these relationships may not produce the long-term financial benefits and results that we expect, in
which case our growth prospects, business, and results of operations could be harmed. Although we endeavor to do business with customers and governments that are aligned with our mission and values, we cannot predict how the activities and values of
our government and private sector customers will evolve over time, and they may evolve in a manner inconsistent with our mission.
We do not work with the Chinese communist party and have chosen not to host our platforms in China, which may limit our growth
prospects.
Our leadership believes that working with the Chinese communist party is inconsistent with our culture and mission. We
do not consider any sales opportunities with the Chinese communist party, do not host our platforms in China, and impose limitations on access to our platforms in China in order to protect our intellectual property, to promote respect for and defend
privacy and civil liberties protections, and to promote data security. Our decision to avoid this large potential market may limit our growth prospects and could adversely impact our business, results of operations, and financial condition, and we
may not compete successfully against our current or potential competitors who choose to work in China.
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Joint ventures, channel sales relationships, platform partnerships, and strategic
alliances may have a material adverse effect on our business, results of operations and prospects.
We expect to continue to enter
into joint ventures, channel sales relationships (including original equipment manufacturer (OEM) and reseller relationships), platform partnerships, and strategic alliances as part of our long-term business strategy. Joint ventures,
channel sales relationships, platform partnerships, strategic alliances, and other similar arrangements involve significant investments of both time and resources, and there can be no assurances that they will be successful. They may present
significant challenges and risks, including that they may not advance our business strategy, we may get an unsatisfactory return on our investment or lose some or all of our investment, they may distract management and divert resources from our core
business, including our business development and product development efforts, they may expose us to unexpected liabilities, they may conflict with our increased sales hiring and direct sales strategy, or we may choose a partner that does not
cooperate as we expect them to and that fails to meet its obligations or that has economic, business, or legal interests or goals that are inconsistent with ours. For example, in January 2021, we entered into a channel sales relationship with
International Business Machines Corporation (IBM), pursuant to which we expect IBM to supply a new product leveraging certain components of Foundry integrated with IBMs Cloud Pak for Data. In addition, in November 2019, we created
a jointly controlled entity in Japan with SOMPO. We believe this arrangement offers our business strategic operational advantages within the Japanese market, but it also limits our ability to independently sell our platforms, provide certain
services, engage certain customers, or compete in Japanese markets or industry verticals, which limits our opportunities for growth in Japan and, depending on the success of the entity, may negatively impact our results. Additionally, in 2016, we
entered into a partnership with Airbus S.A.S. (Airbus) that, over time, developed into the Skywise platform partnership, which provides our business strategic advantages but also limits our ability to independently provide our platforms
to certain airlines and companies that compete with Airbus.
Entry into certain joint ventures, channel sales relationships, platform
partnerships, or strategic alliances now or in the future may be subject to government regulation, including review by U.S. or foreign government entities related to foreign direct investment. If a joint venture or similar arrangement were subject
to regulatory review, such regulatory review might limit our ability to enter into the desired strategic alliance and thus our ability to carry out our long-term business strategy.
As our joint ventures, channel sales relationships, platform partnerships, and strategic alliances come to an end or terminate, we may be
unable to renew or replace them on comparable terms, or at all. When we enter into joint ventures, channel sales relationships, platform partnerships, and strategic alliances, our partners may be required to undertake some portion of sales,
marketing, implementation services, engineering services, or software configuration that we would otherwise provide. In such cases, our partner may be less successful than we would have otherwise been absent the arrangement and our ability to
influence, or have visibility into, the sales, marketing, and related efforts of our partners may be limited. In the event we enter into an arrangement with a particular partner, we may be less likely (or unable) to work with one or more direct
competitors of our partner with which we would have worked absent the arrangement. We may have interests that are different from our joint venture partners and/or which may affect our ability to successfully collaborate with a given partner.
Similarly, one or more of our partners in a joint venture, channel sales relationship, platform partnership, or strategic alliance may independently suffer a bankruptcy or other economic hardship that negatively affects its ability to continue as a
going concern or successfully perform on its obligation under the arrangement. In addition, customer satisfaction with our products provided in connection with these arrangements may be less favorable than anticipated, negatively impacting
anticipated revenue growth and results of operations of arrangements in question. Further, some of our strategic partners offer competing products and services or work with our competitors. As a result of these and other factors, many of the
companies with which we have or are seeking joint ventures, channel sales relationships, platform partnerships, or strategic alliances may choose to pursue alternative technologies and develop alternative products and services in addition to or in
lieu of our platforms, either on their own or in collaboration with others, including our competitors. If we are unsuccessful in establishing or maintaining our relationships with these partners, our ability to compete in a given marketplace or to
grow our revenue would be impaired, and our results of operations may suffer. Even if we are successful in establishing and maintaining these relationships with our partners, we cannot assure you that these relationships will result in increased
customer usage of our platforms or increased revenue. Additionally, if our partners brand, reputation, or products are negatively impacted in any way, that could impact our expected outcomes in those markets.
Further, winding down joint ventures, channel sales relationships, platform partnerships, or other strategic alliances can result in
additional costs, litigation, and negative publicity. Any of these events could adversely affect our business, financial condition, results of operations, and growth prospects.
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If we are not successful in executing our strategy to increase our sales to larger
customers, our results of operations may suffer.
An important part of our growth strategy is to increase sales of our platforms
to large enterprises and government entities. Sales to large enterprises and government entities involve risks that may not be present (or that are present to a lesser extent) with sales to small-to-mid-sized entities. These risks include:
Increased leverage held by large customers in negotiating contractual arrangements with us;
Changes in key decision makers within these organizations that may negatively impact our ability to negotiate
in the future;
Customer IT departments may perceive that our platforms and services pose a threat to their internal control
and advocate for legacy or internally developed solutions over our platforms;
Resources may be spent on a potential customer that ultimately elects not to purchase our platforms and
services;
More stringent requirements in our service contracts, including stricter service response times, and increased
penalties for any failure to meet service requirements;
Increased competition from larger competitors, such as defense contractors, system integrators, or large
software and service companies that traditionally target large enterprises and government entities and that may already have purchase commitments from those customers; and
Less predictability in completing some of our sales than we do with smaller customers.
Large enterprises and government entities often undertake a significant evaluation process that results in a lengthy sales cycle, in some
cases over twelve months, requiring approvals of multiple management personnel and more technical personnel than would be typical of a smaller organization. Due to the length, size, scope, and stringent requirements of these evaluations, we
typically provide short-term pilot deployments of our platforms at no or low cost in the Acquire phase. We sometimes spend substantial time, effort, and money in our sales efforts without producing any sales. The success of the investments that we
make in the Acquire phase depends on factors such as our ability to identify potential customers for which our platforms have an opportunity to add significant value to the customers organization, our ability to identify and agree with the
potential customer on an appropriate pilot deployment to demonstrate the value of our platforms, and whether we successfully execute on such pilot deployment. Even if the pilot deployment is successful, we or the customer could choose not to enter
into a larger contract for a variety of reasons. For example, product purchases by large enterprises and government entities are frequently subject to budget constraints, leadership changes, multiple approvals, and unplanned administrative,
processing, and other delays, any of which could significantly delay or entirely prevent our realization of sales. Finally, large enterprises and government entities typically (i) have longer implementation cycles, (ii) require greater
product functionality and scalability and a broader range of services, including design services, (iii) demand that vendors take on a larger share of risks, (iv) sometimes require acceptance provisions that can lead to a delay in revenue
recognition, (v) typically have more complex IT and data environments, and (vi) expect greater payment flexibility from vendors. Customers, and sometimes we, may also engage third parties to be the users of our platforms, which may result
in contractual complexities and risks, require additional investment of time and human resources to train the third parties and allow third parties (who may be building competitive projects or engaging in other competitive activities) to influence
our customers perception of our platforms. All these factors can add further risk to business conducted with these customers. If sales expected from a large customer for a particular quarter are not realized in that quarter or at all, our
business, financial condition, results of operations, and growth prospects could be materially and adversely affected.
The ongoing
global COVID-19 pandemic has significantly affected our business and operations.
In light
of the uncertain and rapidly evolving situation relating to the spread of COVID-19, we have taken precautionary measures intended to minimize the risk of the virus to our employees, our customers, and the
communities in which we operate, including temporarily closing our offices worldwide and virtualizing, postponing, or canceling customer, employee, or industry events, which may negatively impact our business. While the COVID-19 pandemic has provided certain new opportunities for our business to expand, it has also created many negative headwinds that present risks to our business and results of operations. For example, the COVID-19 pandemic has generally disrupted the operations of our customers and prospective customers, and may continue to disrupt their operations, including as a result of travel restrictions and/or business
shutdowns, uncertainty in the financial markets or other harm to their business and financial results, which could result in a reduction to information technology budgets, delayed purchasing decisions, longer sales cycles, extended payment terms,
the timing of payments, and postponed or canceled projects, all of which would negatively impact our business and operating results, including sales and cash flows. We do not yet know the net impact of the
COVID-19 pandemic on our business and cannot guarantee that it will not be materially negative. Although we continue to monitor the situation and may adjust our current policies as more information and public
health guidance become available, the ongoing effects of the COVID-19 pandemic and/or the precautionary measures that we have adopted may create operational and other challenges, any of which could harm our
business and results of operations.
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Historically, a significant portion of our field sales, operations and maintenance, and
professional services have been conducted in person. Currently, as a result of the work and travel restrictions related to the COVID-19 pandemic, and the precautionary measures that we have adopted,
substantially all of our field sales and professional services activities are being conducted remotely, which has resulted in a decrease in our travel and office expenditures. However, we expect our travel expenditures to increase in the future,
which could negatively impact our financial condition and results of operations. As of the date of this Quarterly Report on Form 10-Q, we do not yet know the extent of the negative impact of such restrictions
and precautionary measures on our ability to attract new customers or retain and expand our relationships with existing customers.
In
addition, COVID-19 may disrupt the operations of our customers and partners for an indefinite period of time, including as a result of travel restrictions and/or business shutdowns, all of which could
negatively impact our business, financial condition, and results of operations.
Furthermore, as a result of the COVID-19 pandemic, we are not requiring employees who are able to work remotely to come into the office through at least June 2021. It is possible that widespread remote work arrangements may have a negative impact
on our operations; the execution of our business plans; our ability to recruit, train, manage, and retain employees; the productivity and availability of key personnel and other employees necessary to conduct our business; and on third-party service
providers who perform critical services for us, or otherwise cause operational failures due to changes in our normal business practices necessitated by the pandemic and related governmental actions. If a natural disaster, power outage, connectivity
issue, or other event occurred that impacted our employees ability to work remotely, it may be difficult or, in certain cases, impossible, for us to continue our business for a substantial period of time. The increase in remote working may
also result in increased consumer privacy, data security, and fraud risks, and our understanding of applicable legal and regulatory requirements, as well as the latest guidance from regulatory authorities in connection with the COVID-19 pandemic, may be subject to legal or regulatory challenge, particularly as regulatory guidance evolves in response to future developments.
More generally, the COVID-19 pandemic has and is expected to continue to adversely affect economies
and financial markets globally, leading to a continued economic downturn, which is expected to decrease technology spending generally and could adversely affect demand for our platforms and services. It is not possible at this time to estimate the
full impact that COVID-19 will have on our business, as the impact will depend on future developments, which are highly uncertain and cannot be predicted.
Moreover, to the extent the COVID-19 pandemic adversely affects our business, financial condition, and
results of operations, it may also have the effect of heightening many of the other risks described in this Risk Factors section, including but not limited to, those related to our ability to increase sales to existing and new customers,
continue to perform on existing contracts, develop and deploy new technologies, expand our marketing capabilities and sales organization, generate sufficient cash flow to service our indebtedness, and comply with the covenants in the agreements that
govern our indebtedness.
If the market for our platforms and services develops more slowly than we expect, our growth may slow or
stall, and our business, financial condition, and results of operations could be harmed.
The market for our platforms is rapidly
evolving. Our future success will depend in large part on the growth and expansion of this market, which is difficult to predict and relies on a number of factors, including customer adoption, customer demand, changing customer needs, the entry of
competitive products, the success of existing competitive products, potential customers willingness to adopt an alternative approach to data collection, storage, and processing and their willingness to invest in new software after significant
prior investments in legacy data collection, storage, and processing software. The estimates and assumptions that are used to calculate our market opportunity are subject to change over time, and there is no guarantee that any particular number or
percentage of the organizations covered by our market opportunity estimates will pay for our platforms and services at all or generate any particular level of revenue for us. Even if the market in which we compete meets the size estimates and growth
forecasts, our business could fail to grow at the levels we expect or at all for a variety of reasons outside our control, including competition in our industry. Further, if we or other data management and analytics providers experience security
incidents, loss of or unauthorized access to customer data, disruptions in delivery, or other problems, this market as a whole, including our platforms, may be negatively affected. If software for the challenges that we address does not achieve
widespread adoption, or there is a reduction in demand caused by a lack of customer acceptance, technological challenges, weakening economic conditions (including due to the COVID-19 pandemic), security or
privacy concerns, competing technologies and products, decreases in corporate spending, or otherwise, or, alternatively, if the market develops but we are unable to continue to penetrate it due to the cost, performance, and perceived value
associated with our platforms, or other factors, it could result in decreased revenue and our business, financial condition, and results of operations could be adversely affected.
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We will face risks associated with the growth of our business in new commercial
markets and with new customer verticals, and we may neither be able to continue our organic growth nor have the necessary resources to dedicate to the overall growth of our business.
We plan to expand our operations in new commercial markets, including those where we may have limited operating experience, and may be subject
to increased business, technology and economic risks that could affect our financial results. In recent periods, we have increased our focus on commercial customers. In the future, we may increasingly focus on such customers, including in the
banking, financial services, healthcare, pharmaceutical, manufacturing, telecommunication, automotive, airlines and aerospace, consumer packaged goods, insurance, retail, transportation, shipping and logistics, and energy industries. Entering new
verticals and expanding in the verticals in which we are already operating will continue to require significant resources and there is no guarantee that such efforts will be successful or beneficial to us. Historically, sales to new customers have
often led to additional sales to the same customers or similarly situated customers. As we expand into and within new and emerging markets and heavily regulated industry verticals, we will likely face additional regulatory scrutiny, risks, and
burdens from the governments and agencies which regulate those markets and industries. While this approach to expansion within new commercial markets and verticals has proven successful in the past, it is uncertain we will achieve the same
penetration and organic growth in the future and our reputation, business, financial condition, and results of operations could be negatively impacted.
In the future, we may not be able to secure the financing necessary to operate and grow our business as planned, or to make
acquisitions.
In the future, we may seek to raise or borrow additional funds to expand our product or business development
efforts, make acquisitions or otherwise fund or grow our business and operations As of March 31, 2021, we had $200.0 million of term loans outstanding and an additional $200.0 million of undrawn revolving commitments available under
our secured credit facility. As of April 1, 2021, we repaid the outstanding term loans in an aggregate principal amount of $200.0 million and mutually agreed with the lenders and other applicable parties under our secured credit facility
to amend our credit facility to, among other things, increase the revolving commitments under the credit facility by $200.0 million, for total undrawn revolving commitments of $400.0 million. Any principal amounts outstanding under our
secured credit facility will be due and payable in June 2023, and any interest payments are due and payable quarterly or more or less frequently in certain circumstances. Additional equity or debt financing may not be available on favorable terms,
or at all.
Historically, we have funded our operations and capital expenditures primarily through equity issuances, debt, and cash
received from our customers. Although we currently anticipate that our existing cash and cash equivalents will be sufficient to meet our cash needs for the next twelve months, we may require additional financing, and we may not be able to obtain
debt or equity financing on favorable terms, if at all. If we raise equity financing to fund operations or on an opportunistic basis, our stockholders may experience significant dilution of their ownership interests. If adequate funds are not
available on acceptable terms, or at all, we may be unable to, among other things:
Develop new products, features, capabilities, and enhancements;
Continue to expand our product development, sales, and marketing organizations;
Hire, train, and retain employees;
Respond to competitive pressures or unanticipated working capital requirements; or
Pursue acquisition or other growth opportunities.
Our inability to take any of these actions because adequate funds are not available on acceptable terms could have an adverse impact on our
business, financial condition, results of operations, and growth prospects.
Our ability to generate the amount of cash needed to
pay interest and principal on our secured credit facility and our ability to refinance all or a portion of our indebtedness or obtain additional financing depends on many factors beyond our control.
Our ability to make scheduled payments on, or to refinance our obligations under, our secured credit facility depends on our financial and
operating performance and prevailing economic and competitive conditions. Certain of these financial and business factors, many of which may be beyond our control, are described above.
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If our cash flows and capital resources are insufficient to fund our debt service
obligations, we may be forced to reduce or delay capital expenditures, sell assets, raise additional equity capital, or restructure our debt. However, there is no assurance that such alternative measures may be successful or permitted under the
agreements governing our indebtedness and, as a result, we may not be able to meet our scheduled debt service obligations. Even if successful, actions taken to improve short-term liquidity in order to meet our debt service and other obligations
could harm our long-term business prospects, financial condition, and results of operations.
Our outstanding debt matures in June 2023.
We cannot guarantee that we will be able to refinance our indebtedness or obtain additional financing on satisfactory terms or at all, including due to existing guarantees on our assets or our level of indebtedness and the debt incurrence
restrictions imposed by the agreements governing our indebtedness. Further, the cost and availability of credit are subject to changes in the economic and business environment. If conditions in major credit markets deteriorate, our ability to
refinance our indebtedness or obtain additional financing on satisfactory terms, or at all, may be negatively affected.
Our debt
agreements contain restrictions that may limit our flexibility in operating our business.
Our credit agreement and related
documents, including our pledge and security agreements, contain, and instruments governing any future indebtedness of ours would likely contain, a number of covenants that will impose significant operating and financial restrictions on us,
including restrictions on our ability to, among other things:
Create liens on certain assets;
Incur additional debt;
Consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
Sell certain assets;
Pay dividends on or make distributions in respect of our capital stock;
Place restrictions on certain activities of subsidiaries;
Transact with our affiliates; and
Use a portion of our cash resources.
Any of these restrictions could limit our ability to plan for or react to market conditions and could otherwise restrict corporate activities.
Any failure to comply with these covenants could result in a default under our secured credit facility or instruments governing any future indebtedness of ours. Additionally, our credit facility is secured by substantially all of our assets. Upon a
default, unless waived, the lenders under our secured credit facility could elect to terminate their commitments, cease making further loans, foreclose on our assets pledged to such lenders to secure our obligations under our credit agreement and
force us into bankruptcy or liquidation. In addition, a default under our secured credit facility could trigger a cross default under agreements governing any future indebtedness. Our results of operations may not be sufficient to service our
indebtedness and to fund our other expenditures, and we may not be able to obtain financing to meet these requirements. If we experience a default under our secured credit facility or instruments governing our future indebtedness, our business,
financial condition, and results of operations may be adversely impacted.
In addition, a portion of our cash is pledged as cash
collateral for letters of credit and bank guarantees which support certain of our real estate leases, customer contracts, and other obligations. While these obligations remain outstanding and are cash collateralized, we do not have access to and
cannot use the pledged cash for our operations or to repay our other indebtedness. As of March 31, 2021, we were in compliance with all covenants and restrictions associated with our secured credit facility.
Variable rate indebtedness that we may incur under our secured credit facility will subject us to interest rate risk, which could cause
our debt service obligations to increase significantly.
As of April 1, 2021, no borrowings were outstanding under our
secured credit facility. Any borrowings under the secured credit facility bear interest at variable rates, which exposes us to interest rate risk. Our loans under our secured credit facility bear interest at LIBOR (or any successor rate) plus 2.75%
or a base rate plus 1.75% and are payable quarterly or more or less frequently in certain circumstances.
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We may acquire or invest in companies and technologies, which may divert our
managements attention, and result in additional dilution to our stockholders. We may be unable to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions or investments. In particular,
we are subject to risks associated with our investments, including a partial or complete loss of invested capital.
As part of our
business strategy, we have engaged in strategic transactions in the past and expect to evaluate and consider potential strategic transactions, including acquisitions of, or investments in, businesses, technologies, services, products and other
assets in the future. We also may enter into relationships with other businesses to expand our products or our ability to provide services. An acquisition, investment or business relationship may result in unforeseen risks, operating difficulties
and expenditures, including the following:
An acquisition may negatively affect our financial results because it may require us to incur charges or
assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, may expose us to claims and disputes by third parties, including intellectual property claims and disputes, or may not generate
sufficient financial return to offset additional costs and expenses related to the acquisition;
Costs and potential difficulties associated with the requirement to test and assimilate the internal control
processes of the acquired business;
We may encounter difficulties or unforeseen expenditures assimilating or integrating the businesses,
technologies, infrastructure, products, personnel, or operations of the acquired companies, particularly if the key personnel of the acquired company choose not to work for us or if we are unable to retain key personnel, if their technology is not
easily adapted to work with ours, or if we have difficulty retaining the customers of any acquired business due to changes in ownership, management, or otherwise;
We may not realize the expected benefits of the acquisition;
An acquisition may disrupt our ongoing business, divert resources, increase our expenses, and distract our
management;
An acquisition may result in a delay or reduction of customer purchases for both us and the company acquired
due to customer uncertainty about continuity and effectiveness of service from either company;
The potential impact on relationships with existing customers, vendors, and distributors as business partners
as a result of acquiring another company or business that competes with or otherwise is incompatible with those existing relationships;
The potential that our due diligence of the acquired company or business does not identify significant
problems or liabilities, or that we underestimate the costs and effects of identified liabilities;
Exposure to litigation or other claims in connection with, or inheritance of claims or litigation risk as a
result of, an acquisition, including but not limited to claims from former employees, customers, or other third parties, which may differ from or be more significant than the risks our business faces;
Potential goodwill impairment charges related to acquisitions;
We may encounter difficulties in, or may be unable to, successfully sell any acquired products;
An acquisition may involve the entry into geographic or business markets in which we have little or no prior
experience or where competitors have stronger market positions;
An acquisition may require us to comply with additional laws and regulations, or to engage in substantial
remediation efforts to cause the acquired company to comply with applicable laws or regulations, or result in liabilities resulting from the acquired companys failure to comply with applicable laws or regulations;
Our use of cash to pay for an acquisition would limit other potential uses for our cash;
If we incur debt to fund such acquisition, such debt may subject us to material restrictions on our ability to
conduct our business as well as financial maintenance covenants; and
To the extent that we issue a significant amount of equity securities in connection with future acquisitions,
existing stockholders may be diluted and earnings per share may decrease.
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In addition, from time to time we may make strategic investments to support key business
initiatives, including in private and public growth stage companies, and we may not realize a return on these investments. These transactions may be entered into pursuant to private placement or other transactions with publicly-traded or
privately-held companies, including with special purpose acquisition companies in connection with business combination transactions with growth-stage companies. Our ability to sell or transfer, or realize value from these investments may be limited
by applicable securities laws and regulations, including the requirement that offers or sales of securities must be registered with the Securities and Exchange Commission (SEC) pursuant to applicable laws or qualify for an exemption from
such registration, and our ability to liquidate and realize value from our investments may be negatively and materially impacted by any delays or limitations on our ability to offer, sell, or transfer our investments. In addition, our investments
may decline in value or be entirely lost.
In addition to these investments, we have and may continue to enter into commercial agreements
with these companies or other related entities. If such companies were unable to generate sufficient revenues or profitability or to access financing or funding in a timely manner or on favorable terms to them, our commercial agreement and expected
revenue and collections would also be negatively impacted. Our portfolio companies may be engaged in businesses that involve novel and unproven technologies, products, and services and such companies may be unable to perform their obligations under
any commercial agreements that we enter into with them, in a timely manner or at all.
The occurrence of any of these risks could have a
material adverse effect on our business, results of operations, and financial condition. Moreover, we cannot assure you that we would not be exposed to unknown liabilities.
Risks Related to Intellectual Property, Information Technology, Data Privacy, and Security
If any of the systems of any third parties upon which we rely, our customers cloud or
on-premises environments, or our internal systems, are breached or if unauthorized access to customer or third-party data is otherwise obtained, public perception of our platforms and O&M services may be
harmed, and we may lose business and incur losses or liabilities.
Our success depends in part on our ability to provide effective
data security protection in connection with our technology platforms and services, and we rely on information technology networks and systems to securely store, transmit, index, and otherwise process electronic information. Because our platforms and
services are used by our customers to store, transmit, index, or otherwise process and analyze large data sets that often contain proprietary, confidential, and/or sensitive information (including in some instances personal or identifying
information and personal health information), our software is perceived as an attractive target for attacks by computer hackers or others seeking unauthorized access, and our software faces threats of unintended exposure, exfiltration, alteration,
deletion, or loss of data. Additionally, because many of our customers use our platforms to store, transmit, and otherwise process proprietary, confidential, or sensitive information, and complete mission critical tasks, they have a lower risk
tolerance for security vulnerabilities in our platforms and services than for vulnerabilities in other, less critical, software products and services.
Our platforms and services operate in conjunction with, and we are dependent upon, third-party products and components across a broad
ecosystem. There have been and may continue to be significant attacks on certain third-party providers, and we cannot guarantee that our or our third-party providers systems and networks have not been breached or that they do not contain
exploitable defects or bugs that could result in a breach of or disruption to our systems and networks or the systems and networks of third parties that support us and our platforms and services. If there is a security vulnerability, error, or other
bug in one of these third-party products or components and if there is a security exploit targeting them, we could face increased costs, claims, liability, reduced revenue, and harm to our reputation or competitive position. The natural sunsetting
of third-party products and operating systems that we use requires that our infrastructure teams reallocate time and attention to migration and updates, during which period potential security vulnerabilities could be exploited.
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We, and the third-party vendors upon which we rely, have experienced, and may in the future
experience, cybersecurity threats, including threats or attempts to disrupt our information technology infrastructure and unauthorized attempts to gain access to sensitive or confidential information. Our and our third-party vendors technology
systems may be damaged or compromised by malicious events, such as cyberattacks (including computer viruses, malicious and destructive code, phishing attacks, and denial of service attacks), physical or electronic security breaches, natural
disasters, fire, power loss, telecommunications failures, personnel misconduct, and human error. Such attacks or security breaches may be perpetrated by internal bad actors, such as employees or contractors, or by third parties (including
traditional computer hackers, persons involved with organized crime, or foreign state or foreign state-supported actors). Cybersecurity threats can employ a wide variety of methods and techniques, which may include the use of social engineering
techniques or supply-chain attacks, are constantly evolving, and have become increasingly complex and sophisticated; all of which increase the difficulty of detecting and successfully defending against them. Furthermore, because the techniques used
to obtain unauthorized access or sabotage systems change frequently and generally are not identified until after they are launched against a target, we and our third-party vendors may be unable to anticipate these techniques or implement adequate
preventative measures. Although prior known cyberattacks directed at us have not had a material impact on our financial results, and we are continuing to bolster our threat detection and mitigation processes and procedures, we cannot guarantee that
past, future, or ongoing cyberattacks against us or a third party, if successful, will not have a material impact on our business or financial results, whether directly or indirectly. While we have security measures in place to protect our
information and our customers information and to prevent data loss and other security breaches, we have not always been able to do so and there can be no assurance that in the future we will be able to anticipate or prevent security breaches
or unauthorized access of our information technology systems or the information technology systems of the third-party vendors upon which we rely. Despite our implementation of network security measures and internal information security policies,
data stored on personnel computer systems is also vulnerable to similar security breaches, unauthorized tampering or human error.
Many
governments have enacted laws requiring companies to provide notice of data security incidents involving certain types of data, including personal data. In addition, most of our customers, including U.S. government customers, contractually require
us to notify them of data security breaches. If an actual or perceived breach of security measures, unauthorized access to our system or the systems of the third-party vendors that we rely upon, or any other cybersecurity threat occurs, we may face
direct or indirect liability, costs, or damages, contract termination, our reputation in the industry and with current and potential customers may be compromised, our ability to attract new customers could be negatively affected, and our business,
financial condition, and results of operations could be materially and adversely affected.
Further, unauthorized access to our or our
third-party vendors information technology systems or data or other security breaches could result in the loss of information; significant remediation costs; litigation, disputes, regulatory action, or investigations that could result in
damages, material fines, and penalties; indemnity obligations; interruptions in the operation of our business, including our ability to provide new product features, new platforms, or services to our customers; damage to our operation technology
networks and information technology systems; and other liabilities. Moreover, our remediation efforts may not be successful. Any or all of these issues, or the perception that any of them have occurred, could negatively affect our ability to attract
new customers, cause existing customers to terminate or not renew their agreements, hinder our ability to obtain and maintain required or desirable cybersecurity certifications, and result in reputational damage, any of which could materially
adversely affect our results of operations, financial condition, and future prospects. There can be no assurance that any limitations of liability provisions in our license arrangements with customers or in our agreements with vendors, partners, or
others would be enforceable, applicable, or adequate or would otherwise protect us from any such liabilities or damages with respect to any particular claim.
We maintain cybersecurity insurance and other types of insurance, subject to applicable deductibles and policy limits, but our insurance may
not be sufficient to cover all costs associated with a potential data security incident. We also cannot be sure that our existing general liability insurance coverage and coverage for cyber liability or errors or omissions will continue to be
available on acceptable terms or will be available in sufficient amounts to cover one or more large claims or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed
available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could harm our financial
condition.
Issues raised by the use of artificial intelligence (AI) (including machine learning) in our platforms may
result in reputational harm or liability.
AI is enabled by or integrated into some of our technology platforms and is a
significant and potentially growing element of our business. As with many developing technologies, AI presents risks and challenges that could affect its further development, adoption, and use, and therefore our business. AI algorithms may be
flawed. Datasets may be insufficient, of poor quality, or contain biased information. Inappropriate or controversial data practices by, or practices reflecting inherent biases of, data scientists, engineers, and
end-users of our systems could impair the acceptance of AI solutions. If the recommendations, forecasts, or analyses that AI applications assist in producing are deficient or inaccurate, we could be subjected
to competitive harm, potential legal liability, and brand or reputational harm. Some AI scenarios present ethical issues. Though our technologies and business practices are designed to mitigate many of these risks, if we enable or offer AI solutions
that are controversial because of their purported or real impact on human rights, privacy, employment, or other social issues, we may experience brand or reputational harm.
We depend on computing infrastructure operated by Amazon Web Services (AWS), Microsoft, and other third parties to support
some of our customers and any errors, disruption, performance problems, or failure in their or our operational infrastructure could adversely affect our business, financial condition, and results of operations.
We rely on the technology, infrastructure, and software applications, including software-as-a-service offerings, of certain third parties, such as AWS and Microsoft Azure, in order to host or operate some or all of certain key technology platform
features or functions of our business, including our cloud-based services (including Palantir Cloud), customer relationship management activities, billing and order management, and financial accounting services. Additionally, we rely on computer
hardware purchased in order to deliver our platforms and services. We do not have control over the operations of the facilities of the third parties that we use. If any of these third-party services experience errors, disruptions, security issues,
or other performance deficiencies, if they are updated such that our platforms become incompatible, if these services, software, or hardware fail or become unavailable due to extended outages, interruptions, defects, or otherwise, or if they are no
longer available on commercially reasonable terms or prices (or at all), these issues could result in errors or defects in our platforms, cause our platforms to fail, our revenue and margins could decline, or our reputation and brand to be damaged,
we could be exposed to legal or contractual liability, our expenses could increase, our ability to manage our operations could be interrupted, and our processes for managing our sales and servicing our customers could be impaired until equivalent
services or technology, if available, are identified, procured, and implemented, all of which may take significant time and resources, increase our costs, and could adversely affect our business. Many of these third-party providers attempt to impose
limitations on their liability for such errors, disruptions, defects, performance deficiencies, or failures, and if enforceable, we may have additional liability to our customers which may not be compensated by our third-party providers which are
responsible for the liability.
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We have experienced, and may in the future experience, disruptions, failures, data loss,
outages, and other performance problems with our infrastructure and cloud-based offerings due to a variety of factors, including infrastructure changes, introductions of new functionality, human or software errors, employee misconduct, capacity
constraints, denial of service attacks, phishing attacks, computer viruses, malicious or destructive code, or other security-related incidents, and our disaster recovery planning may not be sufficient for all situations. If we experience
disruptions, failures, data loss, outages, or other performance problems, our business, financial condition, and results of operations could be adversely affected.
Our systems and the third-party systems upon which we and our customers rely are also vulnerable to damage or interruption from catastrophic
occurrences such as earthquakes, floods, fires, power loss, telecommunication failures, cybersecurity threats, terrorist attacks, natural disasters, public health crises such as the COVID-19 pandemic,
geopolitical and similar events, or acts of misconduct. Moreover, we have business operations in the San Francisco Bay Area, which is a seismically active region. Despite any precautions we may take, the occurrence of a catastrophic disaster or
other unanticipated problems at our or our third-party vendors hosting facilities, or within our systems or the systems of third parties upon which we rely, could result in interruptions, performance problems, or failure of our infrastructure,
technology, or platforms, which may adversely impact our business. In addition, our ability to conduct normal business operations could be severely affected. In the event of significant physical damage to one of these facilities, it may take a
significant period of time to achieve full resumption of our services, and our disaster recovery planning may not account for all eventualities. In addition, any negative publicity arising from these disruptions could harm our reputation and brand
and adversely affect our business.
Furthermore, our platforms are in many cases important or essential to our customers operations,
including in some cases, their cybersecurity or oversight and compliance programs, and subject to service level agreements (SLAs). Any interruption in our service, whether as a result of an internal or third-party issue, could damage our
brand and reputation, cause our customers to terminate or not renew their contracts with us or decrease use of our platforms and services, require us to indemnify our customers against certain losses, result in our issuing credit or paying penalties
or fines, subject us to other losses or liabilities, cause our platforms to be perceived as unreliable or unsecure, and prevent us from gaining new or additional business from current or future customers, any of which could harm our business,
financial condition, and results of operations.
Moreover, to the extent that we do not effectively address capacity constraints, upgrade
our systems as needed, and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business, financial condition, and results of operations could be adversely affected. The
provisioning of additional cloud hosting capacity requires lead time. AWS, Microsoft Azure, and other third parties have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If AWS, Microsoft Azure, or other
third parties increase pricing terms, terminate or seek to terminate our contractual relationship, establish more favorable relationships with our competitors, or change or interpret their terms of service or policies in a manner that is unfavorable
with respect to us, we may be required to transfer to other cloud providers or invest in a private cloud. If we are required to transfer to other cloud providers or invest in a private cloud, we could incur significant costs and experience possible
service interruption in connection with doing so, or risk loss of customer contracts if they are unwilling to accept such a change.
A
failure to maintain our relationships with our third-party providers (or obtain adequate replacements), and to receive services from such providers that do not contain any material errors or defects, could adversely affect our ability to deliver
effective products and solutions to our customers and adversely affect our business and results of operations.
Our policies
regarding customer confidential information and support for individual privacy and civil liberties could cause us to experience adverse business and reputational consequences.
We strive to protect our customers confidential information and individuals privacy consistent with applicable laws, directives,
and regulations. Consequently, we do not provide information about our customers to third parties without legal process. From time to time, government entities may seek our assistance with obtaining information about our customers or could request
that we modify our technology platforms in a manner to permit access or monitoring. In light of our confidentiality and privacy commitments, we may legally challenge law enforcement or other government requests to provide information, to obtain
encryption keys, or to modify or weaken encryption. To the extent that we do not provide assistance to or comply with requests from government entities, or if we challenge those requests publicly or in court, we may experience adverse political,
business, and reputational consequences among certain customers or portions of the public. Conversely, to the extent that we do provide such assistance, or do not challenge those requests publicly in court, we may experience adverse political,
business, and reputational consequences from other customers or portions of the public arising from concerns over privacy or the governments activities.
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Failure to adequately obtain, maintain, protect and enforce our intellectual property
and other proprietary rights could adversely affect our business.
Our success and ability to compete depends in part on our
ability to protect proprietary methods and technologies that we develop under a combination of patent and other intellectual property and proprietary rights in the United States and other jurisdictions outside the United States so that we can
prevent others from using our inventions and proprietary information and technology. Despite our efforts, third parties may attempt to disclose, obtain, copy, or use our intellectual property or other proprietary information or technology without
our authorization, and our efforts to protect our intellectual property and other proprietary rights may not prevent such unauthorized disclosure or use, misappropriation, infringement, reverse engineering or other violation of our intellectual
property or other proprietary rights. Effective protection of our rights may not be available to us in every country in which our technology platforms or services are available. The laws of some countries may not be as protective of intellectual
property and other proprietary rights as those in the United States, and mechanisms for enforcement of intellectual property and other proprietary rights may be inadequate. Also, our involvement in standard setting activity or the need to obtain
licenses from others may require us to license our intellectual property. Accordingly, despite our efforts, we may be unable to prevent third parties from using our intellectual property or other proprietary information or technology.
In addition, we may be the subject of intellectual property infringement or misappropriation claims, which could be very time-consuming and
expensive to settle or litigate and could divert our managements attention and other resources. These claims could also subject us to significant liability for damages if we are found to have infringed patents, copyrights, trademarks, or other
intellectual property rights, or breached trademark co-existence agreements or other intellectual property licenses and could require us to cease using or to rebrand all or portions of our platforms. Any of
our patents, copyrights, trademarks, or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation.
While we have issued patents and patent applications pending, we may be unable to obtain patent protection for the technology covered in our
patent applications or such patent protection may not be obtained quickly enough to meet our business needs. Furthermore, the patent prosecution process is expensive, time-consuming, and complex, and we may not be able to prepare, file, prosecute,
maintain, and enforce all necessary or desirable patent applications at a reasonable cost or in a timely manner. The scope of patent protection also can be reinterpreted after issuance and issued patents may be invalidated. Even if our patent
applications do issue as patents, they may not issue in a form that is sufficiently broad to protect our technology, prevent competitors or other third parties form competing with us or otherwise provide us with any competitive advantage. Even if
our patents issue in a form that covers our technology, enforcing patents against suspected infringers is time-consuming, expensive and involves risks associated with litigation, including the risk the suspected infringers file counterclaims against
us.
In addition, any of our patents, copyrights, trademarks, or other intellectual property or proprietary rights may be challenged,
narrowed, invalidated, held unenforceable, or circumvented in litigation or other proceedings, including, where applicable, opposition, re-examination, inter partes review, post-grant review, interference,
nullification and derivation proceedings, and equivalent proceedings in foreign jurisdictions, and such intellectual property or other proprietary rights may be lost or no longer provide us meaningful competitive advantages. Such proceedings may
result in substantial cost and require significant time from our management, even if the eventual outcome is favorable to us. Third parties also may legitimately and independently develop products, services, and technology similar to or duplicative
of our platforms. In addition to protection under intellectual property laws, we rely on confidentiality or license agreements that we generally enter into with our corporate partners, employees, consultants, advisors, vendors, and customers, and
generally limit access to and distribution of our proprietary information. However, we cannot be certain that we have entered into such agreements with all parties who may have or have had access to our confidential information or that the
agreements we have entered into will not be breached or challenged, or that such breaches will be detected. Furthermore, non-disclosure provisions can be difficult to enforce, and even if successfully
enforced, may not be entirely effective. We cannot guarantee that any of the measures we have taken will prevent infringement, misappropriation, or other violation of our technology or other intellectual property or proprietary rights. Because we
may be an attractive target for cyberattacks, we also may have a heightened risk of unauthorized access to, and misappropriation of, our proprietary and competitively sensitive information. We may be required to spend significant resources to
monitor and protect our intellectual property and other proprietary rights, and we may conclude that in at least some instances the benefits of protecting our intellectual property or other proprietary rights may be outweighed by the expense or
distraction to our management. We may initiate claims or litigation against third parties for infringement, misappropriation, or other violation of our intellectual property or other proprietary rights or to establish the validity of our
intellectual property or other proprietary rights. Any such litigation, whether or not it is resolved in our favor, could be time-consuming, result in significant expense to us and divert the efforts of our technical and management personnel.
Furthermore, attempts to enforce our intellectual property rights against third parties could also provoke these third parties to assert their own intellectual property or other rights against us, or result in a holding that invalidates or narrows
the scope of our rights, in whole or in part.
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We have been, and may in the future be, subject to intellectual property rights
claims, which are extremely costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies.
Our success and ability to compete also depends in part on our ability to operate without infringing, misappropriating or otherwise violating
the intellectual property or other proprietary rights of third parties. Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks and trade
secrets and frequently pursue litigation based on allegations of infringement, misappropriation or other violations of intellectual property rights. In addition, many of these companies have the capability to dedicate substantial resources to
enforce their intellectual property rights and to defend claims that may be brought against them. Such litigation also may involve non-practicing patent assertion entities or companies who use their patents as
a means to extract license fees by threatening costly litigation or that have minimal operations or relevant product revenue and against whom our patents may provide little or no deterrence or protection. We have received notices, and may continue
to receive notices in the future, that claim we have infringed, misappropriated, misused or otherwise violated other parties intellectual property rights, and, to the extent we become exposed to greater visibility, we face a higher risk of
being the subject of intellectual property infringement, misappropriation or other violation claims, which is not uncommon with respect to software technologies in particular. There may be third-party intellectual property rights, including issued
patents or pending patent applications, that cover significant aspects of our technologies, or business methods. There may also be third-party intellectual property rights, including trademark registrations and pending applications, that cover the
goods and services that we offer in certain regions. We may also be exposed to increased risk of being the subject of intellectual property infringement, misappropriation, or other violation claims as a result of acquisitions and our incorporation
of open source and other third-party software into, or new branding for, our technology platforms, as, among other things, we have a lower level of visibility into the development process with respect to such technology or the care taken to
safeguard against infringement, misappropriation, or other violation risks. In addition, former employers of our current, former, or future employees may assert claims that such employees have improperly disclosed to us confidential or proprietary
information of these former employers. Any intellectual property claims, with or without merit, are difficult to predict, could be very time-consuming and expensive to settle or litigate, could divert our managements attention and other
resources, and may not be covered by the insurance that we carry. These claims could subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed a third partys intellectual
property rights. These claims could also result in our having to stop using technology, branding or marks found to be in violation of a third partys rights and any necessary rebranding could result in the loss of goodwill. We could be required
to seek a license for the intellectual property, which may not be available on commercially reasonable terms or at all. Even if a license were available, we could be required to pay significant royalties, which would increase our expenses. As a
result, we could be required to develop alternative non-infringing technology, branding or marks, which could require significant effort and expense. If we cannot license rights or develop technology for any
infringing aspect of our business, we would be forced to limit or stop sales of one or more of our platforms or features, we could lose existing customers, and we may be unable to compete effectively. Any of these results would harm our business,
financial condition, and results of operations.
Further, our agreements with customers and other third parties may include
indemnification provisions under which we agree to indemnify them for losses suffered or incurred as a result of third-party claims of intellectual property infringement, misappropriation, or other violations of intellectual property rights, damages
caused by us to property or persons, or other liabilities relating to or arising from our platforms, services, or other contractual obligations. Large indemnity payments could harm our business, financial condition, and results of operations. Any
dispute with a customer with respect to such obligations could have adverse effects on our relationship with that customer and other existing customers and new customers and harm our business and results of operations.
Real or perceived errors, failures, defects or bugs in our platforms could adversely affect our results of operations and growth
prospects.
Because we offer very complex technology platforms, undetected errors, defects, failures or bugs may occur, especially
when platforms or capabilities are first introduced or when new versions or other product or infrastructure updates are released. Our platforms are often installed and used in large-scale computing environments with different operating systems,
software products and equipment, and data source and network configurations, which may cause errors or failures in our platforms or may expose undetected errors, failures, or bugs in our platforms. Despite testing by us, errors, failures, or bugs
may not be found in new software or releases until after commencement of commercial shipments. In the past, errors have affected the performance of our platforms and can also delay the development or release of new platforms or capabilities or new
versions of platforms, adversely affect our reputation and our customers willingness to buy platforms from us, and adversely affect market acceptance or perception of our platforms. Many of our customers use our platforms in applications that
are critical to their businesses or missions and may have a lower risk tolerance to defects in our platforms than to defects in other, less critical, software products. Any errors or delays in releasing new software or new versions of platforms or
allegations of unsatisfactory performance or errors, defects or failures in released software could cause us to lose revenue or market share, increase our service costs, cause us to incur substantial costs in redesigning the software, cause us to
lose significant customers, subject us to liability for damages and divert our resources from other tasks, any one of which could materially and adversely affect our business, results of operations and financial condition. In addition, our platforms
could be perceived to be ineffective for a variety of reasons outside of our control. Hackers or other malicious parties could circumvent our or our customers security measures, and customers may misuse our platforms resulting in a security
breach or perceived product failure.
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Real or perceived errors, failures, or bugs in our platforms and services, or
dissatisfaction with our services and outcomes, could result in customer terminations and/or claims by customers for losses sustained by them. In such an event, we may be required, or we may choose, for customer relations or other reasons, to expend
additional resources in order to help correct any such errors, failures, or bugs. Although we have limitation of liability provisions in our standard software licensing and service agreement terms and conditions, these provisions may not be
enforceable in some circumstances, may vary in levels of protection across our agreements, or may not fully or effectively protect us from such claims and related liabilities and costs. We generally provide a warranty for our software products and
services and an SLA for our performance of software operations via our O&M services to customers. In the event that there is a failure of warranties in such agreements, we are generally obligated to correct the product or service to conform to
the warranty provision as set forth in the applicable SLA, or, if we are unable to do so, the customer is entitled to seek a refund of the purchase price of the product and service (generally prorated over the contract term). The sale and support of
our products also entail the risk of product liability claims. We maintain insurance to protect against certain claims associated with the use of our products, but our insurance coverage may not adequately cover any claim asserted against us. In
addition, even claims that ultimately are unsuccessful could result in our expenditure of funds in litigation and divert managements time and other resources.
In addition, our platforms integrate a wide variety of other elements, and our platforms must successfully interoperate with products from
other vendors and our customers internally developed software. As a result, when problems occur for a customer using our platforms, it may be difficult to identify the sources of these problems, and we may receive blame for a security, access
control, or other compliance breach that was the result of the failure of one of other elements in a customers or another vendors IT, security, or compliance infrastructure. The occurrence of software or errors in data, whether or not
caused by our platforms, could delay or reduce market acceptance of our platforms and have an adverse effect on our business and financial performance, and any necessary revisions may cause us to incur significant expenses. The occurrence of any
such problems could harm our business, financial condition, and results of operations. If an actual or perceived breach of information correctness, auditability, integrity, or availability occurs in one of our customers systems, regardless of
whether the breach is attributable to our platforms, the market perception of the effectiveness of our platforms could be harmed. Alleviating any of these problems could require additional significant expenditures of our capital and other resources
and could cause interruptions, delays, or cessation of our product licensing, which could cause us to lose existing or potential customers and could adversely affect our business, financial condition, results of operations, and growth prospects.
We rely on the availability of licenses to third-party technology that may be difficult to replace or that may cause errors or
delay implementation of our platforms and services should we not be able to continue or obtain a commercially reasonable license to such technology.
Our technology platforms include software or other intellectual property licensed from third parties. It may be necessary in the future to
renew licenses relating to various aspects of these platforms or to seek new licenses for existing or new platforms or other products. There can be no assurance that the necessary licenses would be available on commercially acceptable terms, if at
all. Third parties may terminate their licenses with us for a variety of reasons, including actual or perceived failures or breaches of security or privacy, or reputational concerns, or they may choose not to renew their licenses with us. In
addition, we may be subject to liability if third-party software that we license is found to infringe, misappropriate, or otherwise violate intellectual property or privacy rights of others. The loss of, or inability to obtain, certain third-party
licenses or other rights or to obtain such licenses or rights on favorable terms, or the need to engage in litigation regarding these matters, could result in product roll-backs, delays in product releases until equivalent technology can be
identified, licensed or developed, if at all, and integrated into our platforms, and may have a material adverse effect on our business, financial condition, and results of operations. Moreover, the inclusion in our platforms of software or other
intellectual property licensed from third parties on a nonexclusive basis could limit our ability to differentiate our platforms from products of our competitors and could inhibit our ability to provide the current level of service to existing
customers.
In addition, any data that we license from third parties for potential use in our platforms may contain errors or defects,
which could negatively impact the analytics that our customers perform on or with such data. This may have a negative impact on how our platforms are perceived by our current and potential customers and could materially damage our reputation and
brand.
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Changes in or the loss of third-party licenses could lead to our platforms becoming
inoperable or the performance of our platforms being materially reduced resulting in our potentially needing to incur additional research and development costs to ensure continued performance of our platforms or a material increase in the costs of
licensing, and we may experience decreased demand for our platforms.
Our platforms contain open source software, and
any failure to comply with the terms of one or more of these open source licenses could negatively affect our business.
Our
technology platforms are distributed with software licensed by its authors or other third parties under open source licenses. Some of these licenses contain requirements that we make available source code for modifications or derivative
works we create based upon the open source software, and that we license these modifications or derivative works under the terms of a particular open source license or other license granting third-parties certain rights of further use. If we combine
our proprietary software with open source software in a certain manner, we could, under certain provisions of the open source licenses, be required to release the source code of our proprietary software. In addition to risks related to license
requirements, usage of open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide updates, warranties, support, indemnities, assurances of title, or controls on
origin of the software, and are provided on an as-is basis. Likewise, some open source projects have known security and other vulnerabilities and architectural instabilities, or are otherwise
subject to security attacks due to their wide availability, and are provided on an as-is basis. We have established processes to help alleviate these risks, including a review process for screening
requests from our development organization for the use of open source software, and the use of software tools to review our source code for open source software, but we cannot be sure that all open source software is submitted for approval prior to
use in our platforms or that such software tools will be effective. In addition, open source license terms may be ambiguous and many of the risks associated with usage of open source software cannot be eliminated, and could, if not properly
addressed, negatively affect our business. If we were found to have inappropriately used open source software, we may be required to re-engineer our platforms, to release proprietary source code, to
discontinue the sale of our platforms in the event re-engineering could not be accomplished on a timely basis, or to take other remedial action that may divert resources away from our development efforts, any
of which could adversely affect our business, results of operations, financial condition, and growth prospects. In addition, if the open source software we use is no longer maintained by the relevant open source community, then it may be more
difficult to make the necessary revisions to our software, including modifications to address security vulnerabilities, which could impact our ability to mitigate cybersecurity risks or fulfill our contractual obligations to our customers. We may
also face claims from copyright owners seeking to enforce the terms of an open source license governing the software, including by demanding release of the open source software, derivative works or our proprietary source code that was developed
using such software. Such claims, with or without merit, could result in litigation, could be time-consuming and expensive to settle or litigation, including copyright infringement claims, could divert our managements attention and other
resources, could require us to lease some of our proprietary code, or could require us to devote additional research and development resources to change our software, any of which could adversely affect our business.
Additionally, we have intentionally made certain proprietary software available on an open source basis, both by contributing modifications
back to existing open source projects, and by making certain internally developed tools available pursuant to open source licenses, and we plan to continue to do so in the future. While we have established procedures, including a review process for
any such contributions, which is designed to protect any code that may be competitively sensitive, we cannot guarantee that this process has always been applied consistently. Even when applied, because any software source code we contribute to open
source projects is publicly available, our ability to protect our intellectual property rights with respect to such software source code may be limited or lost entirely, and we may be unable to prevent our competitors or others from using such
contributed software source code for competitive purposes, or for commercial or other purposes beyond what we intended.
Many of these
risks associated with usage of open source software could be difficult to eliminate or manage, and could, if not properly addressed, negatively affect the performance of our offerings and our business.
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Risks Related to Legal, Regulatory and Accounting
Our business is subject to complex and evolving U.S. and non-U.S. laws and regulations regarding
privacy, data protection and security, technology protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, monetary
penalties, increased cost of operations, or otherwise harm our business.
We are subject to a variety of local, state, national,
and international laws and directives and regulations in the United States and abroad that involve matters central to our business, including privacy and data protection, data security, data storage, retention, transfer and deletion, technology
protection, and personal information. Foreign data protection, data security, privacy, and other laws and regulations can impose different obligations or be more restrictive than those in the United States. These U.S. federal and state and foreign
laws and regulations, which, depending on the regime, may be enforced by private parties or government entities, are constantly evolving and can be subject to significant change, and they are likely to remain uncertain for the foreseeable future. In
addition, the application, interpretation, and enforcement of these laws and regulations are often uncertain, particularly in the new and rapidly evolving software and technology industry in which we operate, and may be interpreted and applied
inconsistently from country to country and inconsistently with our current policies and practices. A number of proposals are pending before U.S. federal, state, and foreign legislative and regulatory bodies that could significantly affect our
business. For example, ongoing legal challenges in Europe to the mechanisms allowing companies to transfer personal data from the European Economic Area to certain other jurisdictions, including the United States, could result in further limitations
on the ability to transfer data across borders, particularly if governments are unable or unwilling to reach new or maintain existing agreements that permit cross-border data transfers. The California state legislature passed the California Consumer
Privacy Act (CCPA) in 2018 and California voters approved a ballot measure subsequently establishing the California Privacy Rights Act (CPRA) in 2020, which will jointly regulate the processing of personal information of
California residents and increase the privacy and security obligations of entities handling certain personal information of California residents, including requiring covered companies to provide new disclosures to California consumers, and affords
such consumers new abilities to opt-out of certain sales of personal information. The CCPA came into effect on January 1, 2020, and the California Attorney General may bring enforcement actions, with
penalties for violations of the CCPA. The CPRA will go into effect on January 1, 2023 instilling enforcement authority in a new dedicated regulatory body, the California Privacy Protection Agency, which will begin carrying out enforcement
actions as soon as six months after the enactment date. While aspects of both the CCPA and CPRA and their interpretations remain to be determined in practice, we are committed to complying with their applicable obligations. More generally, some
observers have noted the CCPA could mark the beginning of a trend toward more stringent privacy legislation in the United States, as observed with the recent Virginia Consumer Data Protection Act (CDPA), enacted in March 2021 and
scheduled to become effective on January 1, 2023. The CDPA is a comprehensive privacy law that shares similarities with the CCPA, the CPRA, and legislation proposed in other states. We cannot yet fully predict the impact of the CCPA,CPRA, CDPA
and other new laws or regulations on our business or operations, but developments regarding these and all privacy and data protection laws and regulations around the world may require us to modify our data processing practices and policies and to
incur substantial costs and expenses in an effort to maintain compliance on an ongoing basis. Outside of the United States, virtually every jurisdiction in which we operate has established its own legal framework relating to privacy, data
protection, and information security matters with which we and/or our customers must comply. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, retention, disclosure, security, transfer, and other processing
of data that identifies or may be used to identify or locate an individual. Some countries and regions, including the European Union, are considering or have passed legislation that imposes significant obligations in connection with privacy, data
protection, and information security that could increase the cost and complexity of delivering our platforms and services, including the European General Data Protection Regulation (GDPR) which took effect in May 2018. Complying with the
GDPR or other data protection laws and regulations as they emerge may cause us to incur substantial operational costs or require us to modify our data handling practices on an ongoing basis. Non-compliance
with the GDPR specifically may result in administrative fines or monetary penalties of up to 4% of worldwide annual revenue in the preceding financial year or 20 million (whichever is higher) for the most serious infringements, and could
result in proceedings against us by governmental entities or other related parties and may otherwise adversely impact our business, financial condition, and results of operations.
The overarching complexity of privacy and data protection laws and regulations around the world pose a compliance challenge that could
manifest in costs, damages, or liability in other forms as a result of failure to implement proper programmatic controls, failure to adhere to those controls, or the malicious or inadvertent breach of applicable privacy and data protection
requirements by us, our employees, our business partners, or our customers.
In addition to government regulation, self-regulatory
standards and other industry standards may legally or contractually apply to us, be argued to apply to us, or we may elect to comply with such standards or to facilitate our customers compliance with such standards. Because privacy, data
protection, and information security are critical competitive factors in our industry, we may make statements on our website, in marketing materials, or in other settings about our data security measures and our compliance with, or our ability to
facilitate our customers compliance with, these standards. We also expect that there will continue to be new proposed laws and regulations concerning privacy, data protection, and information security, and we cannot yet determine the impact
such future laws, regulations and standards, or amendments to or re-interpretations of existing laws and regulations, industry standards, or other obligations may have on our business. New laws, amendments to
or re-interpretations of existing laws and regulations, industry standards, and contractual and other obligations may require us to incur additional costs and restrict our business operations. As these legal
regimes relating to privacy, data protection, and information security continue to evolve, they may result in ever-increasing public scrutiny and escalating levels of enforcement and sanctions. Furthermore, because the interpretation and application
of laws, standards, contractual obligations and other obligations relating to privacy, data protection, and information security are uncertain, these laws, standards, and contractual and other obligations may be interpreted and applied in a manner
that is, or is alleged to be, inconsistent with our data management practices, our policies or procedures, or the features of our platforms, or we may simply fail to properly develop or implement our practices, policies, procedures, or features in
compliance with such obligations. If so, in addition to the possibility of fines, lawsuits, and other claims, we could be required to fundamentally change our business activities and practices or modify our platforms, which could have an adverse
effect on our business. We may be unable to make such changes and modifications in a commercially reasonable manner or at all, and our ability to fulfill existing obligations, make enhancements, or develop new platforms and features could be
limited. Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations, and policies that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our
platforms.
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These existing and proposed laws and regulations can be costly to comply with and can make
our platforms and services less effective or valuable, delay or impede the development of new products, result in negative publicity, increase our operating costs, require us to modify our data handling practices, limit our operations, impose
substantial fines and penalties, require significant management time and attention, or put our data or technology at risk. Any failure or perceived failure by us or our platforms to comply with the laws, regulations, directives, policies, industry
standards, or legal obligations of the U.S., European Union, or other governmental or non-governmental bodies at the regional, national, or supra-national level relating to privacy, data protection, or
information security, or any security incident that results in actual or suspected loss of or the unauthorized access to, or acquisition, use, release, or transfer of, personal information, personal data, or other customer or sensitive data
sensitive data or information may result in governmental investigations, inquiries, enforcement actions and prosecutions, private claims and litigation, indemnification or other contractual obligations, other remedies, including fines or demands
that we modify or cease existing business practices, or adverse publicity, and related costs and liabilities, which could significantly and adversely affect our business and results of operations.
Our non-U.S. sales and operations subject us to additional risks and regulations that can
adversely affect our results of operations.
Our successes to date have primarily come from customers in relatively stable and
developed countries, but we are in the process of entering new and emerging markets in non-U.S. countries, including with COVID-19 response efforts and defense, law
enforcement, national security, and other government agencies, as part of our growth strategy. These new and emerging markets may involve uncertain business, technology, and economic risks and may be difficult or impossible for us to penetrate, even
if we were to commit significant resources to do so.
We currently have sales personnel and sales and services operations in the United
States and certain countries around the world. To the extent that we experience difficulties in recruiting, training, managing, or retaining non-U.S. staff, and specifically sales management and sales
personnel staff, we may experience difficulties in sales productivity in, or market penetration of, non-U.S. markets. Our ability to convince customers to expand their use of our platforms or renew their
subscription, license, or maintenance and service agreements with us is correlated to, among other things, our direct engagement with the customer. To the extent we are restricted or unable to engage with
non-U.S. customers effectively with our limited sales force and services capacity, we may be unable to grow sales to existing customers to the same degree we have experienced in the United States.
Our non-U.S. operations subject us to a variety of risks and challenges, including:
Increased management, travel, infrastructure, and legal and financial compliance costs and time associated
with having multiple non-U.S. operations, including but not limited to compliance with local employment laws and other applicable laws and regulations;
Longer payment cycles, greater difficulty in enforcing contracts, difficulties in collecting accounts
receivable, especially in emerging markets, and the likelihood that revenue from non-U.S. system integrators, government contractors, and customers may need to be recognized when cash is received, at least
until satisfactory payment history has been established, or upon confirmation of certain acceptance criteria or milestones;
The need to adapt our platforms for non-U.S. customers whether to
accommodate customer preferences or local law;
Differing regulatory and legal requirements and possible enactment of additional regulations or restrictions
on the use, import, or re-export of our platforms or the provision of services, which could delay, restrict, or prevent the sale or use of our platforms and services in some jurisdictions;
Compliance with multiple and changing foreign laws and regulations, including those governing employment,
privacy, data protection, information security, data transfer, and the risks and costs of non-compliance with such laws and regulations;
New and different sources of competition not present in the United States;
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Heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent
sales arrangements that may cause us to withdraw from particular markets, or impact financial results and result in restatements of financial statements and irregularities in financial statements;
Volatility in non-U.S. political and economic environments, including
by way of examples, the potential effects of COVID-19 and the United Kingdoms departure from the European Union;
Weaker protection of intellectual property rights in some countries and the risk of potential theft, copying,
or other compromises of our technology, data, or intellectual property in connection with our non-U.S. operations, whether by state-sponsored malfeasance or other foreign entities or individuals;
Volatility and fluctuations in currency exchange rates, including that, because many of our non-U.S. contracts are denominated in U.S. dollars, an increase in the strength of the U.S. dollar may make doing business with us less appealing to a non-U.S. dollar
denominated customer;
Management and employee communication and integration problems resulting from language differences, cultural
differences, and geographic dispersion;
Difficulties in repatriating or transferring funds from, or converting currencies in, certain countries;
Potentially adverse tax consequences, including multiple and possibly overlapping tax regimes, the
complexities of foreign value-added tax systems, and changes in tax laws;
Lack of familiarity with local laws, customs, and practices, and laws and business practices favoring local
competitors or partners; and
Interruptions to our business operations and our customers business operations subject to events such as
war, incidents of terrorism, natural disasters, public health concerns or epidemics (such as the COVID-19 pandemic), shortages or failures of power, internet, telecommunications, or hosting service providers,
cyberattacks or malicious acts, or responses to these events.
In addition to the factors above, foreign governments may
take administrative, legislative, or regulatory action that could materially interfere with our ability to sell our platforms in certain countries. For example, foreign governments may require a percentage of prime contracts be fulfilled by local
contractors or provide special incentives to government-backed local customers to buy from local competitors, even if their products are inferior to ours. Moreover, both the U.S. government and foreign governments may regulate the acquisition of or
import of our technologies or our entry into certain foreign markets or partnership with foreign third parties through investment screening or other regulations. Such regulations may apply to certain non-U.S.
joint ventures, platform partnerships and strategic alliances that may be integral to our long-term business strategy.
Compliance with
laws and regulations applicable to our non-U.S. operations increases our cost of doing business in foreign jurisdictions. We may be unable to keep current with changes in foreign government requirements and
laws as they change from time to time. Failure to comply with these regulations could subject us to investigations, sanctions, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties, injunctions, or other
collateral consequences. In many foreign countries, it is common for others to engage in business practices that are prohibited by our internal policies and procedures or U.S. regulations applicable to us. In addition, although we have implemented
policies and procedures designed to ensure compliance with these laws and policies, there can be no assurance that all of our employees, contractors, partners, and agents will comply with these laws and policies. Violations of laws or key control
policies by our employees, contractors, partners, or agents could result in delays in revenue recognition, financial reporting misstatements, governmental sanctions, fines, penalties, or the prohibition of the importation or exportation of our
platforms. In addition, responding to any action may result in a significant diversion of managements attention and resources and an increase in professional fees. Enforcement actions and sanctions or failure to prevail in any possible civil
or criminal litigation could harm our business, reputation, financial condition, and results of operations.
Also, we are expanding
operations, including our work with existing commercial customers, into countries in Asia, Europe, the Middle East, and elsewhere, which may place restrictions on the transfer of data and potentially the import and use of foreign encryption
technology. Any of these risks could harm our non-U.S. operations and reduce our non-U.S. sales, adversely affecting our business, results of operations, financial
condition, and growth prospects.
Some of our business partners also have non-U.S. operations and
are subject to the risks described above. Even if we are able to successfully manage the risks of our own non-U.S. operations, our business may be adversely affected if our business partners are not able to
successfully manage these risks.
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Failure to comply with governmental laws and regulations could harm our business, and
we have been, and expect to be, the subject of legal and regulatory inquiries, which may result in monetary payments or may otherwise negatively impact our reputation, business, and results of operations.
Our business is subject to regulation by various federal, state, local, and foreign governments in which we operate. In certain jurisdictions,
the regulatory requirements imposed by foreign governments may be more stringent than those in the United States. Noncompliance with applicable regulations or requirements could subject us to investigations, administrative proceedings, sanctions,
enforcement actions, disgorgement of profits, fines, damages, litigation, civil and criminal penalties, termination of contracts, exclusion from sales channels or sales opportunities, injunctions, or other consequences. Such matters may include, but
are not limited to, claims, disputes, allegations, or investigations related to alleged violations of laws or regulations relating to anti-corruption requirements, lobbying or
conflict-of-interest requirements, export or other trade controls, data privacy or data protection requirements, or laws or regulations relating to employment,
procurement, cybersecurity, securities, or antitrust/competition requirements. The effects of recently imposed and proposed actions are uncertain because of the dynamic nature of governmental action and responses. We may be subject to government
inquiries that drain our time and resources, tarnish our brand among customers and potential customers, prevent us from doing business with certain customers or markets, including government customers, affect our ability to hire, attract and
maintain qualified employees, or require us to take remedial action or pay penalties. From time to time, we receive formal and informal inquiries from governmental agencies and regulators regarding our compliance with laws and regulations or
otherwise relating to our business or transactions. Any negative outcome from such inquiries or investigations or failure to prevail in any possible civil or criminal litigation could adversely affect our business, reputation, financial condition,
results of operations, and growth prospects.
We are currently, and may in the future become, involved in a number of legal,
regulatory, and administrative inquiries and proceedings, and unfavorable outcomes in litigation or other of these matters could negatively impact our business, financial conditions, and results of operations.
We are currently, and may, from time to time, be involved in and subject to litigation or proceedings for a variety of claims or disputes, and
we may have in the past, and may in the future, be subject to regulatory inquiries. These claims, lawsuits, and proceedings could involve labor and employment, discrimination and harassment, commercial disputes, intellectual property rights
(including patent, trademark, copyright, trade secret, and other proprietary rights), class actions, general contract, tort, defamation, data privacy rights, antitrust, common law fraud, government regulation, or compliance, alleged federal and
state securities and blue sky law violations or other investor claims, and other matters. Derivative claims, lawsuits, and proceedings, which may, from time to time, be asserted against our directors by our stockholders, could involve
breach of fiduciary duty, failure of oversight, corporate waste claims, and other matters. One of our stockholders with respect to whom we are currently engaged in litigation as described in the notes to our condensed consolidated financial
statements has threatened to bring various of these claims. In addition, our business and results may be adversely affected by the outcome of currently pending and any future legal, regulatory, and/or administrative claims or proceedings, including
through monetary damages or injunctive relief.
The number and significance of our legal disputes and inquiries may increase as we
continue to grow larger, as our business has expanded in employee headcount, scope, and geographic reach, and as our platforms and services have become more complex. Additionally, if customers fail to pay us under the terms of our agreements, we may
be adversely affected due to the cost of enforcing the terms of our contracts through litigation. Litigation or other proceedings can be expensive and time-consuming and can divert our resources and leaderships attention from our primary
business operations. The results of our litigation also cannot be predicted with certainty. If we are unable to prevail in litigation, we could incur payments of substantial monetary damages or fines, or undesirable changes to our platforms or
business practices, and accordingly, our business, financial condition, or results of operations could be materially and adversely affected. Furthermore, if we accrue a loss contingency for pending litigation and determine that it is probable, any
disclosures, estimates, and reserves we reflect in our financial statements with regard to these matters may not reflect the ultimate disposition or financial impact of litigation or other such matters. These proceedings could also result in
negative publicity, which could harm customer and public perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. Additional information regarding certain of the lawsuits we are involved
in is described further in Note 8. Commitments and Contingencies in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Failure to comply with anti-bribery and anti-corruption laws could subject us to penalties and other adverse consequences.
As we operate and sell our platforms and services around the world, we are subject to the United States Foreign Corrupt Practices Act
(FCPA), the UK Bribery Act, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the United States Travel Act, and other anti-corruption and anti-bribery laws and regulations in the jurisdictions in which we do business,
both domestic and abroad. These laws and regulations generally prohibit improper payments or offers of improper payments to government officials, political parties, or commercial partners for the purpose of obtaining or retaining business or
securing an improper business advantage.
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We have operations, deal with and make sales to governmental or quasi-governmental entities
in the United States and in non-U.S. countries, including those known to experience corruption, particularly certain emerging countries in East Asia, Eastern Europe, Africa, South America, and the Middle East,
and further expansion of our non-U.S. sales efforts may involve additional regions.
Corruption
issues pose a risk in every country and jurisdiction, but in many countries, particularly in countries with developing economies, it may be more common for businesses to engage in practices that are prohibited by the FCPA or other applicable laws
and regulations, and our activities in these countries pose a heightened risk of unauthorized payments or offers of payments by one of our employees or third-party business partners, representatives, and agents that could be in violation of various
laws including the FCPA. The FCPA, U.K. Bribery Act and other applicable anti-bribery and anti-corruption laws also may hold us liable for acts of corruption and bribery committed by our third-party business partners, representatives, and agents. We
and our third-party business partners, representatives, and agents may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and we may be held liable for the corrupt or other
illegal activities of our employees or such third parties even if we do not explicitly authorize such activities. The FCPA or other applicable laws and regulations laws also require that we keep accurate books and records and maintain internal
controls and compliance procedures designed to prevent any such actions. While we have implemented policies and procedures to address compliance with such laws, we cannot assure you that our employees or other third parties working on our behalf
will not engage in conduct in violation of our policies or applicable law for which we might ultimately be held responsible. Violations of the FCPA, the UK Bribery act, and other laws may result in whistleblower complaints, adverse media coverage,
investigations, imposition of significant legal fees, loss of export privileges, as well as severe criminal or civil sanctions, including suspension or debarment from U.S. government contracting, and we may be subject to other liabilities and
adverse effects on our reputation, which could negatively affect our business, results of operations, financial condition, and growth prospects. In addition, responding to any enforcement action may result in a significant diversion of
managements attention and resources and significant defense costs and other professional fees. Our exposure for violating these laws increases as our non-U.S. presence expands and as we increase sales
and operations in foreign jurisdictions.
Governmental trade controls, including export and import controls, sanctions, customs
requirements, and related regimes, could subject us to liability or loss of contracting privileges or limit our ability to compete in certain markets.
Our offerings are subject to U.S. export controls, and we incorporate encryption technology into certain of our offerings. Our controlled
software offerings and the underlying technology may be exported outside of the United States only with the required export authorizations, which may include license requirements in some circumstances. Additionally, our current or future products
may be classified under the Commerce Department Export Administration Regulations (EAR) or as defense articles subject to the United States International Traffic in Arms Regulations (ITAR). Most of our products, including our
core software platforms, have been classified under the EAR and are generally exportable without needing a specific license, under an EAR exception for encrypted software. If a product, or component of a product, is classified under the ITAR, or is
ineligible for the EAR encryption exception, then those products could be exported outside the United States only if we obtain the applicable export license or qualify for a different license exception. In certain contexts, the services we provide
might be classified as defense services subject to the ITAR separately from the products we provide. Compliance with the EAR, ITAR, and other applicable regulatory requirements regarding the export of our products, including new releases of our
products and/or the performance of services, may create delays in the introduction of our products in non-U.S. markets, prevent our customers with non-U.S. operations
from deploying our products throughout their global systems or, in some cases, prevent the export of our products to some countries altogether.
Furthermore, our activities are subject to the economic sanctions, laws and regulations of the United States and other jurisdictions. Such
controls prohibit the shipment or transfer of certain products and services without the required export authorizations or export to countries, governments, and persons targeted by applicable sanctions. We take precautions to prevent our offerings
from being exported in violation of these laws, including: (i) seeking to proactively classify our platforms and obtain authorizations for the export and/or import of our platforms where appropriate, (ii) implementing certain technical
controls and screening practices to reduce the risk of violations, and (iii) requiring compliance with U.S. export control and sanctions obligations in customer and vendor contracts. However, we cannot guarantee the precautions we take will
prevent violations of export control and sanctions laws.
As discussed above, if we misclassify a product or service, export or provide
access to a product or service in violation of applicable restrictions, or otherwise fail to comply with export regulations, we may be denied export privileges or subjected to significant per violation fines or other penalties, and our platforms may
be denied entry into other countries. Any decreased use of our platforms or limitation on our ability to export or sell our platforms would likely adversely affect our business, results of operations and financial condition. Violations of U.S.
sanctions or export control laws can result in fines or penalties, including civil penalties of over $300,000 or twice the value of the transaction, whichever is greater, per EAR violation and a civil penalty of over $1,000,000 for ITAR violations.
In the event of criminal knowing and willful violations of these laws, fines of up to $1,000,000 per violation and possible incarceration for responsible employees and managers could be imposed.
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We also note that if we or our business partners or counterparties, including licensors and
licensees, prime contractors, subcontractors, sublicensors, vendors, customers, shipping partners, or contractors, fail to obtain appropriate import, export, or re-export licenses or permits, notwithstanding
regulatory requirements or contractual commitments to do so, or if we fail to secure such contractual commitments where necessary, we may also be adversely affected, through reputational harm as well as other negative consequences, including
government investigations and penalties. For instance, violations of U.S. sanctions or export control laws can result in fines or penalties, including significant civil and criminal penalties per violation, depending on the circumstances of the
violation or violations.
Negative consequences for violations or apparent violations of trade control requirements may include the
absolute loss of the right to sell our platforms or services to the government of the United States, or to other public bodies, or a reduction in our ability to compete for such sales opportunities. Further, complying with export control and
sanctions regulations for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities.
Also,
various countries, in addition to the United States, regulate the import and export of certain encryption and other technology, including import and export permitting and licensing requirements, and have enacted laws that could limit our ability to
distribute our platforms or could limit our customers abilities to implement our platforms in those countries. Any new export restrictions, new legislation, changes in economic sanctions, or shifting approaches in the enforcement or scope of
existing regulations, or in the countries, persons, or technologies targeted by such regulations, could result in decreased use of our platforms by existing customers with non-U.S. operations, declining
adoption of our platforms by new customers with non-U.S. operations, limitation of our expansion into new markets, and decreased revenue.
Changes in accounting principles or their application to us could result in unfavorable accounting charges or effects, which could
adversely affect our results of operations and growth prospects.
We prepare our condensed consolidated financial statements in
accordance with U.S. generally accepted accounting principles (GAAP). In particular, we make certain estimates and assumptions related to the adoption and interpretation of these principles including the recognition of our revenue and
the accounting of our stock-based compensation expense with respect to our financial statements. If these assumptions turn out to be incorrect, our financial results and position could materially differ from our expectations and could be materially
adversely affected. A change in any of these principles or guidance, or in their interpretations or application to us, may have a significant effect on our reported results, as well as our processes and related controls, and may retroactively affect
previously reported results or our forecasts, which may negatively impact our financial statements.
If our judgments or estimates
relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our results of operations could fall below expectations of securities analysts and investors, resulting in a decline in our stock price.
The preparation of our financial statements in conformity with GAAP requires management to make judgments, estimates, and
assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the
circumstances, as provided in the section titled Managements Discussion and Analysis of Financial Condition and Results of Operations the results of which form the basis for making judgments about the carrying values of assets,
liabilities, and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our
assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our Class A common stock. Significant judgments, estimates, and
assumptions used in preparing our condensed consolidated financial statements include, or may in the future include, those related to revenue recognition, stock-based compensation, and income taxes.
We could be subject to additional tax liabilities.
We are subject to federal, state, and local income taxes in the U.S. and numerous foreign jurisdictions. Determining our provision for income
taxes requires significant management judgment, and the ultimate tax outcome may be uncertain. In addition, our provision for income taxes is subject to volatility and could be adversely affected by many factors, including, among other things,
changes to our operating or holding structure, changes in the amounts of earnings in jurisdictions with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, and changes in U.S. and foreign tax laws. Tax
authorities in the United States and various foreign jurisdictions may disagree with our calculation of research and development tax credits, cross-jurisdictional transfer pricing, or other matters and assess additional taxes, interest or penalties.
While we regularly assess the likely outcomes of these examinations to determine the adequacy of our provision for income taxes and we believe that our financial statements reflect adequate reserves to cover any such contingencies, there can be no
assurance that the outcomes of such examinations will not have a material impact on our results of operations and cash flows. If U.S. or other foreign tax authorities change applicable tax laws, our overall taxes could increase, and our financial
condition or results of operations may be adversely impacted.
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We may not be able to utilize a significant portion of our net operating loss
carry-forwards and tax credits, which could adversely affect our results of operations.
We record an asset for the future tax
benefits from unused U.S. federal and state net operating losses (NOLs) and tax credits subject to a full valuation allowance. Federal, state and foreign taxing bodies often place limitations on NOLs and tax credit carryforward benefits.
As a result, we may not be able to utilize the net operating and tax credit assets reflected on our balance sheet. In general, under Section 382 of the United States Internal Revenue Code of 1986 (the Code), a corporation that
undergoes an ownership change is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. Future changes in our stock ownership, some of which are outside of our
control, could result in an ownership change under Section 382 of the Code. If our existing NOLs are subject to limitations arising from an ownership change, our ability to utilize NOLs could be limited by Section 382 of the Code, and a
certain amount of our prior year NOLs could expire without benefit. Changes in the law may also impact our ability to use our net operating loss and tax credit carryforwards.
There is also a risk that the expiration of our existing net operating losses or tax credits or a limitation on their use to offset future
income tax liabilities could result from statutory or regulatory changes, especially in reaction to the COVID-19 pandemic.
Our results of operations may be harmed if we are required to collect sales or other related taxes for our license arrangements in
jurisdictions where we have not historically done so.
States and some local taxing jurisdictions have differing rules and
regulations governing sales and use taxes, and these rules and regulations are subject to varying interpretations that may change over time. We collect and remit U.S. sales and use tax, value-added tax (VAT), and goods and services tax
(GST) in a number of jurisdictions. It is possible, however, that we could face sales tax, VAT, or GST audits and that our liability for these taxes could exceed our estimates as state tax authorities could still assert that we are
obligated to collect additional tax amounts from our customers and remit those taxes to those authorities. We could also be subject to audits in states and non-U.S. jurisdictions for which we have not accrued
tax liabilities. One or more states or countries may seek to impose incremental or new sales, use, or other tax collection obligations on us or may determine that such taxes should have, but have not been, paid by us.
Risks Related to Relationships and Business with the Public Sector
A significant portion of our business depends on sales to the public sector, and our failure to receive and maintain government
contracts or changes in the contracting or fiscal policies of the public sector could have a material adverse effect on our business.
We derive a significant portion of our revenue from contracts with federal, state, local, and foreign governments and government agencies, and
we believe that the success and growth of our business will continue to depend on our successful procurement of government contracts. For example, we have historically derived, and expect to continue to derive, a significant portion of our revenue
from sales to agencies of the U.S. federal government, either directly by us or through other government contractors. Our perceived relationship with the U.S. government could adversely affect our business prospects in certain non-U.S. geographies or with certain non-U.S. governments.
Sales to such government agencies are subject to a number of challenges and risks. Selling to government agencies can be highly competitive,
expensive, and time-consuming, often requiring significant upfront time and expense without any assurance that these efforts will generate a sale. We also must comply with laws and regulations relating to the formation, administration, and
performance of contracts, which provide public sector customers rights, many of which are not typically found in commercial contracts.
Accordingly, our business, financial condition, results of operations, and growth prospects may be adversely affected by certain events or
activities, including, but not limited to:
Changes in fiscal or contracting policies or decreases in available government funding;
Changes in government programs or applicable requirements;
Restrictions in the grant of personnel security clearances to our employees;
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Ability to maintain facility clearances required to perform on classified contracts for U.S. federal
government agencies;
Changes in the political environment, including before or after a change to the leadership within the
government administration, and any resulting uncertainty or changes in policy or priorities and resultant funding;
Changes in the governments attitude towards the capabilities that we offer, especially in the areas of
national defense, cybersecurity, and critical infrastructure, including the financial, energy, telecommunications, and healthcare sectors;
Changes in the governments attitude towards us as a company or our platforms as viable or acceptable
software solutions;
Appeals, disputes, or litigation relating to government procurement, including but not limited to bid protests
by unsuccessful bidders on potential or actual awards of contracts to us or our partners by the government;
The adoption of new laws or regulations or changes to existing laws or regulations;
Budgetary constraints, including automatic reductions as a result of sequestration or similar
measures and constraints imposed by any lapses in appropriations for the federal government or certain of its departments and agencies;
Influence by, or competition from, third parties with respect to pending, new, or existing contracts with
government customers;
Changes in political or social attitudes with respect to security or data privacy issues;
Potential delays or changes in the government appropriations or procurement processes, including as a result
of events such as war, incidents of terrorism, natural disasters, and public health concerns or epidemics, such as the coronavirus pandemic; and
Increased or unexpected costs or unanticipated delays caused by other factors outside of our control, such as
performance failures of our subcontractors.
Any such event or activity, among others, could cause governments and
governmental agencies to delay or refrain from purchasing our platforms and services in the future, reduce the size or payment amounts of purchases from existing or new government customers, or otherwise have an adverse effect on our business,
results of operations, financial condition, and growth prospects.
We have contracts with governments that involve classified
programs, which may limit investor insight into portions of our business.
We derive a portion of our revenue from programs with
governments and government agencies that are subject to security restrictions (e.g., contracts involving classified information, classified contracts, and classified programs), which preclude the dissemination of information and technology that is
classified for national security purposes under applicable law and regulation. In general, access to classified information, technology, facilities, or programs requires appropriate personnel security clearances, is subject to additional contract
oversight and potential liability, and may also require appropriate facility clearances and other specialized infrastructure. In the event of a security incident involving classified information, technology, facilities, or programs or personnel
holding clearances, we may be subject to legal, financial, operational, and reputational harm. We are limited in our ability to provide specific information about these classified programs, their risks, or any disputes or claims relating to such
programs. As a result, investors have less insight into our classified programs than our other businesses and therefore less ability to fully evaluate the risks related to our classified business or our business overall. However, historically the
business risks associated with our work on classified programs have not differed materially from those of our other government contracts.
Our business could be adversely affected if our employees cannot obtain and maintain required personnel security clearances or we cannot
establish and maintain a required facility security clearance.
Certain government contracts may require our employees to maintain
various levels of security clearances and may require us to maintain a facility security clearance to comply with U.S. and international government agency requirements. Many governments have strict security clearance requirements for personnel who
perform work in support of classified programs.
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Obtaining and maintaining security clearances for employees typically involves a lengthy process, and it can be difficult to identify, recruit, and retain employees who already hold security
clearances. If our employees are unable to obtain security clearances in a timely manner, or at all, or if our employees who hold security clearances are unable to maintain their clearances or terminate employment with us, then we may be unable to
comply with relevant U.S. and international government agency requirements, or our customers requiring classified work could choose to terminate or decide not to renew one or more contracts requiring employees to obtain or maintain security
clearances upon expiration. To the extent we are not able to obtain or maintain a facility security clearance, we may not be able to bid on or win new classified contracts, and existing contracts requiring a facility security clearance could be
terminated, either of which would have an adverse impact on our business, financial condition, and results of operations.
The
majority of our customer contracts may be terminated by the customer at any time for convenience and may contain other provisions permitting the customer to discontinue contract performance, and if terminated contracts are not replaced, our results
of operations may differ materially and adversely from those anticipated. In addition, our contracts with government customers often contain provisions with additional rights and remedies favorable to such customers that are not typically found in
commercial contracts.
The majority of our contracts, including our government contracts, contain termination for convenience
provisions. Customers that terminate such contracts may also be entitled to a pro rata refund of the amount of the customer deposit for the period of time remaining in the contract term after the applicable termination notice period expires.
Government contracts often contain provisions and are subject to laws and regulations that provide government customers with additional rights and remedies not typically found in commercial contracts. These rights and remedies allow government
customers, among other things, to:
Terminate existing contracts for convenience with short notice;
Reduce orders under or otherwise modify contracts;
For contracts subject to the Truth in Negotiations Act, reduce the contract price or cost where it was
increased because a contractor or subcontractor furnished cost or pricing data during negotiations that was not complete, accurate, and current;
For some contracts, (i) demand a refund, make a forward price adjustment, or terminate a contract for
default if a contractor provided inaccurate or incomplete data during the contract negotiation process and (ii) reduce the contract price under triggering circumstances, including the revision of price lists or other documents upon which the
contract award was predicated;
Cancel multi-year contracts and related orders if funds for contract performance for any subsequent year
become unavailable;
Decline to exercise an option to renew a multi-year contract or issue task orders in connection with
indefinite delivery/indefinite quantity (IDIQ) contracts;
Claim rights in solutions, systems, or technology produced by us, appropriate such work-product for their
continued use without continuing to contract for our services, and disclose such work-product to third parties, including other government agencies and our competitors, which could harm our competitive position;
Prohibit future procurement awards with a particular agency due to a finding of organizational conflicts of
interest based upon prior related work performed for the agency that would give a contractor an unfair advantage over competing contractors, or the existence of conflicting roles that might bias a contractors judgment;
Subject the award of contracts to protest by competitors, which may require the contracting federal agency or
department to suspend our performance pending the outcome of the protest and may also result in a requirement to resubmit offers for the contract or in the termination, reduction, or modification of the awarded contract;
Suspend or debar us from doing business with the applicable government; and
Control or prohibit the export of our services.
If a customer were to unexpectedly terminate, cancel, or decline to exercise an option to renew with respect to one or more of our significant
contracts, or if a government were to suspend or debar us from doing business with such government, our business, financial condition, and results of operations would be materially harmed.
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Failure to comply with laws, regulations, or contractual provisions applicable to our
business could cause us to lose government customers or our ability to contract with the U.S. and other governments.
As a
government contractor, we must comply with laws, regulations, and contractual provisions relating to the formation, administration, and performance of government contracts and inclusion on government contract vehicles, which affect how we and our
partners do business with government agencies. As a result of actual or perceived noncompliance with government contracting laws, regulations, or contractual provisions, we may be subject to audits and internal investigations which may prove costly
to our business financially, divert management time, or limit our ability to continue selling our platforms and services to our government customers. These laws and regulations may impose other added costs on our business, and failure to comply with
these or other applicable regulations and requirements, including non-compliance in the past, could lead to claims for damages from our channel partners, penalties, and termination of contracts and suspension
or debarment from government contracting for a period of time with government agencies. Any such damages, penalties, disruption, or limitation in our ability to do business with a government could adversely impact, and could have a material adverse
effect on, our business, results of operations, financial condition, public perception, and growth prospects.
Evolving government
procurement policies and increased emphasis on cost over performance could adversely affect our business.
Federal, state, local,
and foreign governments and government agencies could implement procurement policies that negatively impact our profitability. Changes in procurement policy favoring more non-commercial purchases, different
pricing, or evaluation criteria or government contract negotiation offers based upon the customers view of what our pricing should be may affect the predictability of our margins on such contracts or make it more difficult to compete on
certain types of programs.
Governments and government agencies are continually evaluating their contract pricing and financing practices,
and we have no assurance regarding the full scope and recurrence of any study and what changes will be proposed, if any, and their impact on our financial position, cash flows, or results of operations.
Increased competition and bid protests in a budget-constrained environment may make it more difficult to maintain our financial
performance and customer relationships.
A substantial portion of our business is awarded through competitive bidding. Even if we
are successful in obtaining an award, we may encounter bid protests from unsuccessful bidders on any specific award. Bid protests could result, among other things, in significant expenses to us, contract modifications, or even loss of the contract
award. Even where a bid protest does not result in the loss of a contract award, the resolution can extend the time until contract activity can begin and, as a result, delay the recognition of revenue. We also may not be successful in our efforts to
protest or challenge any bids for contracts that were not awarded to us, and we would be required to incur significant time and expense in such efforts.
In addition, governments and agencies increasingly have relied on competitive contract award types, including IDIQ and other multi-award
contracts, which have the potential to create pricing pressure and to increase our costs by requiring us to submit multiple bids and proposals. Multi-award contracts require us to make sustained efforts to obtain orders under the contract. The
competitive bidding process entails substantial costs and managerial time to prepare bids and proposals for contracts that may not be awarded to us or may be split among competitors.
We are experiencing increased competition while, at the same time, many of our customers are facing budget pressures, cutting costs,
identifying more affordable solutions, performing certain work internally rather than hiring contractors, and reducing product development cycles. To remain competitive, we must maintain consistently strong customer relationships, seek to understand
customer priorities, and provide superior performance, advanced technology solutions, and service at an affordable cost with the agility that our customers require to satisfy their objectives in an increasingly price competitive environment. Failure
to do so could have an adverse impact on our business, financial condition, and results of operations.
The U.S. government may
procure non-commercial developmental services rather than commercial products, which could materially impact our future U.S. government business and revenue.
U.S. government agencies, including our customers, often award large developmental item and service contracts to build custom software rather
than firm fixed-price contracts for commercial products. We sell commercial items and services and do not contract for non-commercial developmental services. The U.S. government is required to procure
commercial items and services to the maximum extent practicable in accordance with FASA, 10 U.S.C. § 2377; 41 U.S.C. § 3307, and the U.S. government may instead decide to procure non-commercial
developmental items and services if commercial items and services are not practicable. In order to challenge a government decision to procure developmental items and services instead of commercial items and services, we would be required to file a
bid protest at the agency level and/or with the Government Accountability Office. This can result in contentious communications with government agency legal and contracting offices, and may escalate to litigation in federal court. The results of any
future challenges or potential litigation cannot be predicted with certainty, however, and any dispute or litigation with the U.S. government may not be resolved in our favor; moreover, whether or not it is resolved in our favor, such disputes or
litigation could result in significant expense and divert the efforts of our technical and management personnel. These proceedings could adversely affect our reputation and relationship with government customers and could also result in negative
publicity, which could harm customer and public perception of our business. The enforcement of FASA has resulted in a significant increase in our business with the U.S. federal government. Any change in or repeal of FASA, or a contrary
interpretation of FASA by a court of competent jurisdiction, would adversely affect our competitive position for U.S. federal government contracts.
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A decline in the U.S. and other government budgets, changes in spending or budgetary
priorities, or delays in contract awards may significantly and adversely affect our future revenue and limit our growth prospects.
Because we generate a substantial portion of our revenue from contracts with governments and government agencies, and in particular from
contracts with the U.S. government and government agencies, our results of operations could be adversely affected by government spending caps or changes in government budgetary priorities, as well as by delays in the government budget process,
program starts, or the award of contracts or orders under existing contract vehicles, including as a result of a new U.S. administration. Current U.S. government spending levels for defense-related and other programs may not be sustained beyond
government fiscal year 2021. Future spending and program authorizations may not increase or may decrease or shift to programs in areas in which we do not provide services or are less likely to be awarded contracts. Such changes in spending
authorizations and budgetary priorities may occur as a result of shifts in spending priorities from defense-related and other programs as a result of competing demands for federal funds and the number and intensity of military conflicts or other
factors.
The U.S. government also conducts periodic reviews of U.S. defense strategies and priorities which may shift Department of
Defense budgetary priorities, reduce overall spending, or delay contract or task order awards for defense-related programs from which we would otherwise expect to derive a significant portion of our future revenue. A significant decline in overall
U.S. government spending, a significant shift in spending priorities, the substantial reduction or elimination of particular defense-related programs, or significant budget-related delays in contract or task order awards for large programs could
adversely affect our future revenue and limit our growth prospects.
Risks Related to Ownership of Our Class A Common Stock
The public trading price of our Class A common stock may be volatile and may decline regardless of our operating
performance.
Prior to the listing of our Class A common stock, there was no public market for shares of our Class A
common stock. The market prices of the securities of other newly public companies have historically been highly volatile. The public trading price of our Class A common stock could be subject to fluctuations in response to various factors,
including those listed in this Quarterly Report on Form 10-Q, some of which are beyond our control. These fluctuations could cause you to lose all or part of your investment in our Class A common stock
since you might be unable to sell your shares at or above the price you paid. Factors that could cause fluctuations in the public trading price of our Class A common stock include the following:
The number of shares of our Class A common stock publicly owned and available for trading;
Price and volume fluctuations in the overall stock market from time to time;
Volatility in the trading prices and trading volumes of technology stocks;
Changes in operating performance and stock market valuations of other technology companies generally, or those
in our industry in particular;
Sales or expected sales of shares of our Class A common stock by us or our stockholders;
Short-selling of our Class A common stock or related derivative securities;
Failure of securities analysts to maintain coverage of us, changes in financial estimates by securities
analysts who follow our company or our failure to meet these estimates or the expectations of investors;
Any financial projections we may provide to the public, any changes in those projections or our failure to
meet those projections;
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Announcements by us or our competitors of new services or platform features;
The publics reaction to our press releases, other public announcements, and filings with the SEC;
Rumors and market speculation involving us or other companies in our industry;
Actual or anticipated changes in our results of operations or fluctuations in our results of operations;
Actual or anticipated developments in our business, our competitors businesses, or the competitive
landscape generally;
Litigation involving us, our industry or both, or investigations by regulators into our operations or those of
our competitors;
Actual or perceived privacy or security breaches or other incidents;
Developments or disputes concerning our intellectual property or other proprietary rights;
Announced or completed acquisitions of businesses, services or technologies by us or our competitors;
Changes in our management, including any departures of one of our Founders;
New laws or regulations, public expectations regarding new laws or regulations or new interpretations of
existing laws or regulations applicable to our business;
Changes in accounting standards, policies, guidelines, interpretations, or principles;
Any significant change in our management;
Other events or factors, including those resulting from war, incidents of terrorism, pandemics, including the COVID-19 pandemic, or responses to these events; and
General economic conditions and slow or negative growth of our markets.
In addition, stock markets, and the market for technology companies in particular, have experienced price and volume fluctuations that have
affected and continue to affect the trading prices of equity securities of many companies. Stock prices of many companies, including technology companies, have fluctuated in a manner often unrelated to the operating performance of those companies.
In the past, following periods of volatility in the overall market and the trading price of a particular companys securities, securities class action litigation has often been instituted against these companies. Such litigation, if instituted
against us, could result in substantial costs and a diversion of our managements attention and resources and harm our business, financial condition, and results of operations.
Our amended and restated bylaws designate a state or federal court located within the State of Delaware as the exclusive forum for
substantially all disputes between us and our stockholders, and also provide that the federal district courts will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act of 1933, as amended,
each of which could limit our stockholders ability to choose the judicial forum for disputes with us or our directors, officers, stockholders, or employees.
Our amended and restated bylaws provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive
forum for (a) any derivative action or proceeding brought on our behalf, (b) any action asserting a claim of breach of a fiduciary duty owed by any of our current or former directors, stockholders, officers, or other employees to us or our
stockholders, (c) any action or proceeding asserting a claim arising pursuant to, or seeking to enforce any right, obligation or remedy under, any provision of the Delaware General Corporation Law, our amended and restated certificate of
incorporation, or our amended and restated bylaws, (d) any action or proceeding as to which the Delaware General Corporation Law confers jurisdiction on the Court of Chancery of the State of Delaware, or (e) any action or proceeding
asserting a claim that is governed by the internal affairs doctrine shall be the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, another state court in Delaware or, if no state court in Delaware
has jurisdiction, the federal district court for the District of Delaware) and any appellate court therefrom, in all cases subject to the court having jurisdiction over the claims at issue and the indispensable parties; provided that the exclusive
forum provision will not apply to suits brought to enforce any liability or duty created by the Exchange Act.
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Section 22 of the Securities Act of 1933, as amended (the Securities Act),
creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions
and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated bylaws also provide that the federal district courts of the United States of America will be the exclusive forum for
resolving any complaint asserting a cause of action arising under the Securities Act.
Any person or entity purchasing or otherwise
acquiring or holding or owning (or continuing to hold or own) any interest in any of our securities shall be deemed to have notice of and consented to the foregoing bylaw provisions. Although we believe these exclusive forum provisions benefit us by
providing increased consistency in the application of Delaware law and federal securities laws in the types of lawsuits to which each applies, the exclusive forum provisions may limit a stockholders ability to bring a claim in a judicial forum
of its choosing for disputes with us or any of our directors, officers, stockholders, or other employees, which may discourage lawsuits with respect to such claims against us and our current and former directors, officers, stockholders, or other
employees. Our stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder as a result of our exclusive forum provisions. Further, in the event a court finds either
exclusive forum provision contained in our amended and restated bylaws to be unenforceable or inapplicable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our results of
operations.
Sales of substantial amounts of our Class A common stock in the public markets or the perception that sales might
occur, including sales by our Founders and their affiliates, could cause the trading price of our Class A common stock to decline.
Sales of substantial amounts of our Class A common stock in the public markets or the perception that sales might occur, could cause the
trading price of our Class A common stock to decline.
In addition to the supply and demand and volatility risk factors discussed above,
sales of a substantial number of shares of our Class A common stock into the public market, particularly sales by our directors, executive officers, and principal stockholders, or the perception that these sales might occur in large quantities,
could cause the trading price of our Class A common stock to decline. As of March 31, 2021, approximately 103.7 million options will expire through December 2022 (including approximately 61.3 million options held by Mr. Karp which will expire in
December 2021) if not exercised prior to their respective expiration dates, and we expect many holders will elect to exercise such options prior to expiration. Upon exercise, the holders will receive shares of our Class A or Class B common
stock, which may subsequently be sold.
As of March 31, 2021, there were 1,792,698,305 shares of our Class A common stock outstanding,
66,903,453 shares of our Class B common stock outstanding and 1,005,000 shares of our Class F common stock outstanding. Substantially all of these shares may be immediately sold, although sales by our affiliates remain subject to compliance
with the limitations of Rule 144.
Further, as of March 31, 2021, there were outstanding options to purchase an aggregate of
212,348,406 shares of our Class A common stock and 265,228,659 shares of our Class B common stock, and 114,522,729 shares of our Class A common stock and 60,000,000 shares of Class B common stock subject to RSUs. All shares of
our common stock reserved for future issuance under our equity compensation plans have been registered for sale under the Securities Act. Subject to compliance with Rule 144 or the availability of an alternative exemption, the shares issued
upon exercise of stock options or upon settlement of RSUs will be available for immediate resale in the United States in the open market.
While the registration rights of our non-affiliates pursuant to our Amended and Restated Investors Rights Agreement dated
August 24, 2020 requiring us to register shares owned by them for public sale in the United States have expired under the terms of that agreement, our affiliates who are party to the Amended and Restated Investors Rights Agreement,
including our Founders and certain of the entities affiliated with Peter Thiel, will retain the right to cause us to register shares held by them for resale until such rights terminate in accordance with our Amended and Restated Investors
Rights Agreement. Any registration statement we file to register additional shares, whether as a result of registration rights or otherwise and whether in connection with the exercise of stock options, the settlement of RSUs, or the exercise or
settlement of other awards or otherwise, could cause the trading price of our Class A common stock to decline or be volatile.
We also may
issue our capital stock or securities convertible into our capital stock from time to time in connection with a financing, acquisition, investments or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and
cause the trading price of our Class A common stock to decline.
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Provisions in our amended and restated certificate of incorporation and amended and
restated bylaws may discourage certain types of transactions that may involve an actual or threatened acquisition of the Company, which will likely depress the trading price of our Class A common stock.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may make the acquisition of our
company more difficult, including the following:
Our multi-class common stock structure, which provides our Founders and their affiliates with the ability to
effectively control the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the shares of our outstanding common stock;
Prior to the Final Class F Conversion Date (as defined in our amended and restated certificate of
incorporation), the holders of our common stock will only be able to take action by written consent if the action also receives the affirmative consent of a majority of the outstanding shares of our Class F common stock, and after such point the
holders of our common stock will only be able to take action at a meeting of the stockholders and will not be able to take action by written consent for any matter;
From and after the Final Class F Conversion Date, our Board of Directors will be classified into three classes
of directors with staggered three-year terms;
Our amended and restated certificate of incorporation does not provide for cumulative voting;
Vacancies on our Board of Directors will be able to be filled only by our Board of Directors and not by
stockholders;
Our directors may only be removed as provided in the Delaware General Corporation Law;
A special meeting of our stockholders may only be called by the chairperson of our Board of Directors, our
Chief Executive Officer, our President, or our Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directorships, whether or not there exist any vacancies or other unfilled seats in previously
authorized directorships;
Our amended and restated certificate of incorporation authorizes undesignated preferred stock, the terms of
which may be established and shares of which may be issued without further action by our stockholders, except that any designation and issuance of preferred stock must receive the affirmative vote of a majority of the outstanding shares of our Class
F common stock; and
Advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring
matters before an annual meeting of stockholders.
These provisions, alone or together, could discourage, delay or
prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and to cause us to take other corporate
actions they desire, any of which, under certain circumstances, could limit the opportunity for our stockholders to receive a premium for their shares of our Class A common stock, and could also affect the price that some investors are willing to
pay for our Class A common stock.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable
research about us, our business or our market, or if they change their recommendation regarding our Class A common stock adversely, the trading price and trading volume of our Class A common stock could decline.
The trading market for our Class A common stock will depend in part on the research and reports that securities or industry analysts publish
about us, our business, our market or our competitors. If one or more of the analysts who cover us downgrade our ordinary shares or publish inaccurate or unfavorable research about us, the trading price of our Class A common stock would likely
decline. If these analysts publish target prices for our Class A common stock that are below the then-current public price of our Class A common stock, it could cause the trading price of our Class A common stock to decline significantly. Further,
if one or more of these analysts cease coverage of Palantir or fail to publish reports on us regularly, demand for our Class A common stock could decrease, which might cause our Class A common stock trading price and trading volume to decline.
Although we currently are not considered to be a controlled company under the NYSE corporate governance rules, we may in the
future become a controlled company due to the concentration of voting power among our Founders and their affiliates.
Although we
currently are not considered to be a controlled company under the NYSE corporate governance rules, we may in the future become a controlled company due to the concentration of voting power among our Founders and their affiliates
resulting from the issuance of our Class F common stock. See Risks Related to the Multiple Class Structure of our Common Stock, the Founder Voting Trust Agreement, and the Founder Voting Agreement below. A controlled company
pursuant to the NYSE corporate governance rules is a company of which more than 50% of the voting power is held by an individual, group, or another company. In the event that our Founders and their affiliates or other stockholders acquire more than
50% of the voting power of the Company, we may in the future be able to rely on the controlled company exemptions under the NYSE corporate governance rules due to this concentration of voting power and the ability of our Founders and
their affiliates to act as a group. If we were a controlled company, we would be eligible, and could elect, not to comply with certain of the NYSE corporate governance standards. Such standards include the requirement that a majority of directors on
our board of directors are independent directors, subject to certain phase-in periods, and the requirement that our compensation, nominating and governance committee consist entirely of independent directors. In such a case, if the interests of our
stockholders differ from the group of stockholders holding a majority of the voting power, our stockholders would not have the same protection afforded to stockholders of companies that are subject to all of the NYSE corporate governance standards,
and the ability of our independent directors to influence our business policies and corporate matters may be reduced.
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We do not expect to pay dividends in the foreseeable future.
We have never declared nor paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the
operation and expansion of our business, and we do not anticipate declaring or paying any dividends to holders of our capital stock in the foreseeable future. In addition, our credit facility contains restrictions on our ability to pay dividends.
Any determination to pay dividends in the future will be at the discretion of our Board of Directors. Consequently, stockholders must rely on sales of their Class A common stock after price appreciation, which may never occur, as the only way
to realize any future gains on their investment.
Risks Related to the Multiple Class Structure of our Common Stock, the Founder
Voting Trust Agreement, and the Founder Voting Agreement
The multiple class structure of our common stock has the effect of
concentrating voting power with certain stockholders, in particular, our Founders and their affiliates, which will effectively eliminate your ability to influence the outcome of important transactions, including a change in control.
Our Class A common stock has one (1) vote per share, and our Class B common stock has ten (10) votes per share with respect to each matter
submitted to our stockholders. Assuming that the Founders and certain of their affiliates collectively meet the Ownership Threshold (as defined below) on the applicable record date for a vote of the stockholders (except as provided in our amended
and restated certificate of incorporation), shares of Class F common stock will generally have a number of votes per share in respect of a matter submitted to our stockholders that would cause the total votes of all shares of Class F common stock,
together with the votes attributable to shares of Class A common stock and Class B common stock held by our Founders and their affiliates that are subject to the voting agreement among our Founders and Wilmington Trust, National Association
(the Founder Voting Agreement) and the votes attributable to shares of Class A common stock and Class B common stock held by our Founders and their affiliates that are designated as Designated Founders Excluded Shares (as defined
in our amended and restated certificate of incorporation), in each case entitled to vote on such matter, to equal, with respect to such matter, 49.999999% of the voting power of (i) all of the outstanding shares of capital stock of the Company
entitled to vote on such matter (including in the case of the election of directors); or (ii) the shares present in person or represented by proxy and entitled to vote on such matter only if a majority of the shares present in person or
represented by proxy and entitled to vote on such matter is the applicable voting standard (as applicable, 49.999999% of the Voting Power). Accordingly, such Founders will effectively control all matters submitted to the stockholders for
the foreseeable future, including the election of directors, amendments of our organizational documents, compensation matters, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction
requiring stockholder approval. Our Founders and their affiliates also hold the substantial majority of our outstanding Class B common stock. Because of the ten-to-one voting ratio between our Class B and Class A common stock, even without regard to
the voting power of the Class F common stock, our Founders and their affiliates collectively control a significant portion of the voting power of our capital stock based on their current ownership and may significantly increase their ownership of
Class B common stock in the future due to the exercise of currently outstanding warrants and stock options or the settlement of RSUs.
The
Founders may have interests that differ from yours and may vote in a way with which you disagree, and which may be adverse to your interests. This concentration of voting power is likely to have the effect of limiting the likelihood of an
unsolicited merger proposal, unsolicited tender offer, or proxy contest for the removal of directors. As a result, our governance structure, including the provisions of our amended and restated certificate of incorporation, may have the effect of
depriving our stockholders of an opportunity to sell their shares at a premium over prevailing market prices and make it more difficult to replace our directors and management.
The Founder Voting Trust Agreement and the Founder Voting Agreement also have the effect of concentrating voting power with our Founders
and their affiliates, which will effectively eliminate your ability to influence the outcome of important transactions, including a change in control.
All shares of our Class F common stock are held in a voting trust (the Founder Voting Trust), established by our Founders
pursuant to a voting trust agreement (the Founder Voting Trust Agreement) with Wilmington Trust, National Association as trustee (the Trustee). Our Founders are also currently party to the Founder Voting Agreement. Our
Founders have agreed through the Founder Voting Trust Agreement and Founder Voting Agreement that all of the shares of Class F common stock and all of the shares of our capital stock over which they and their affiliates have granted a proxy under
the Founder Voting Agreement will be voted in the manner instructed by a majority of our Founders who are then party to the Founder Voting Agreement. Accordingly, together with the multiple class structure of our common stock, such Founders will
effectively control all matters submitted to the stockholders for the foreseeable future, including the election of directors, amendments of our organizational documents, compensation matters, and any merger, consolidation, sale of all or
substantially all of our assets, or other major corporate transaction requiring stockholder approval.
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Upon the withdrawal or removal of any of our Founders from the Founder Voting Agreement,
including upon their death or disability, the remaining Founders or Founder, as the case may be, will determine the manner in which the shares of our Class F common stock as well as the shares subject to the Founder Voting Agreement are voted. In
such cases, the voting power of our outstanding capital stock will be further concentrated among the remaining Founders, which may be as few as one. Further, if there are only two Founders who are party to the Founder Voting Agreement, one Founder
will be able to effectively defeat any stockholder action, except for the election of directors or other matters that are decided by a plurality of votes, if his instruction to vote the shares of Class F common stock differs from the other Founder.
The Founders who are then party to the Founder Voting Agreement will retain the right to direct the voting of the Class F common stock without regard to their employment status with us.
All shares of our Class F common stock are held in the Founder Voting Trust and voted pursuant to the Founder Voting Trust Agreement.
Accordingly, our Founders who are then party to the Founder Voting Agreement will control any vote that requires the affirmative vote of the holders of a majority of our Class F common stock, including action of our stockholders by written consent,
the designation or issuance by us of shares of preferred stock, and certain amendments to our amended and restated certificate of incorporation relating to our preferred stock.
Although we are a third-party beneficiary of the Founder Voting Agreement and the Founder Voting Trust Agreement, we do not have a general
consent right with respect to amendments thereto, and either agreement may be amended or modified in the future in a manner that is adverse to our stockholders, which may include increasing the ability of one or more of our Founders to exercise
control over matters submitted to a vote of our stockholders.
In certain circumstances in the future, the Founders and their
affiliates could have voting power that exceeds 49.999999% of the Voting Power.
If the voting power of shares of Class A common
stock and Class B common stock held by the Founders or their affiliates that are subject to the Founder Voting Agreement or are Designated Founders Excluded Shares collectively equals greater than 49.999999% of the Voting Power with
respect to a matter submitted to our stockholders, then the Class F common stock will have zero votes with respect to such matter. In this case, although the shares of our Class F common stock would generally be entitled to zero votes per share on
that matter, all of the shares that are then subject to the Founder Voting Agreement would continue to be voted in accordance with the decision of a majority in number of the Founders who are then party to the Founder Voting Agreement.
For example, if the Founders and their affiliates hold shares other than the Class F common stock, such as Class B common stock, that, in the
aggregate, have voting power that exceeds 49.999999% of the Voting Power with respect to a matter submitted to our stockholders, then the total voting power of the Founders and their affiliates would exceed 49.999999% of the Voting Power with
respect to such matter. Our Founders and their affiliates may acquire additional shares of our Class A common stock or Class B common stock. Shares of our Class B common stock may be transferred (without converting into shares of Class A common
stock) to, among others, our Founders or their affiliates, and such transfers to our Founders or their affiliates could increase the total voting power of the Founders and their affiliates above 49.999999% of the Voting Power with respect to such
matter. Excluding the voting power of the Class F common stock, our Founders and their affiliates owned shares entitled to approximately 21.4% of the voting power of our outstanding capital stock in the aggregate as of April 16, 2021.
In addition, if one or two Founders withdraw from the Founder Voting Agreement, the total voting power of the Founders and their affiliates in
the aggregate could exceed 49.999999% of the Voting Power. For instance, if one Founder has withdrawn from the Founder Voting Agreement and such withdrawing Founder votes his shares in the same manner as the shares of Class F common stock are voted
pursuant to the Founder Voting Trust Agreement, then our Founders and their affiliates, in the aggregate, could exercise 49.999999% of the Voting Power of our capital stock plus the voting power of shares held by the withdrawing Founder (which would
no longer represent a subset of the 49.999999% of the Voting Power of our capital stock voted by those Founders that remain party to the Founder Voting Agreement.
As a result of future issuances of our common stock or the disposal of shares of our common stock by our Founders and their affiliates,
our Founders and their affiliates could have voting power that is substantially greater than, and outsized in comparison to, their economic interests and the percentage of our common stock that they hold.
In certain circumstances, our Founders and their affiliates could have voting power that is substantially greater than, and outsized in
comparison to, their economic interests and the percentage of our common stock that they hold. This separation between voting power and economic interests could cause conflicts of interest between our Founders and our other stockholders, which may
result in our Founders undertaking, or causing us to undertake, actions that would be desirable for the Founders or their affiliates but would not be desirable for our other stockholders.
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In the event that our Founders and their affiliates have less than 49.999999% of the Voting
Power prior to giving effect to the voting power of the Class F common stock, the issuance of additional shares by us in the future to stockholders other than our Founders who are then party to the Founder Voting Agreement or their affiliates
will dilute the economic interests of our Founders but will generally not result in further dilution of the voting power of such Founders and their affiliates. Because of the voting rights of the Class F common stock, such issuances will instead
correspondingly increase the voting power of the Class F common stock. Any future issuances of additional shares of Class A common stock and Class B common stock will not be subject to approval by our stockholders except as required
by the listing standards of the NYSE.
In addition, our Founders and their affiliates are free to transfer or otherwise dispose of their
shares of Class A common stock and Class B common stock without diminishing their voting power so long as our Founders and certain of their affiliates continue to collectively hold 100,000,000 Corporation Equity Securities (as defined in our amended
and restated certificate of incorporation) on the applicable record date (subject to equitable adjustments as provided in our amended and restated certificate of incorporation) (the Ownership Threshold). Shares of our Class F common
stock will not convert into shares of our Class B common stock, and our multi-class structure will not terminate, solely because our Founders and certain of their affiliates do not satisfy this Ownership Threshold on the applicable record date. Upon
the withdrawal, or removal, of one or more of our Founders from the Founder Voting Agreement (including as a result of death or disability), the Ownership Threshold that must be met on the applicable record date will be reduced on a pro rata basis
based on the ownership of Corporation Equity Securities (which excludes Designated Founders Excluded Shares) of the Founders and certain of their affiliates as of August 10, 2020, which could substantially decrease the Ownership Threshold
without reducing the effective voting power of the Class F common stock. Accordingly, our Founders who are then party to the Founder Voting Agreement will be able to achieve substantial liquidity in their holdings, and substantially diminish their
economic interest in us, without diminishing their voting power.
Furthermore, meeting the Ownership Threshold on the applicable record
date will not ensure that the Founders and their affiliates do not or will not have differing economic interests from the interests of holders of the Class A common stock. For example, the Founder Voting Agreement does not prohibit a Founder from
hedging his economic exposure to our common stock; however, we have implemented a policy that will prohibit hedging by our directors, officers and employees, which currently includes the Founders. In addition, the trustee will vote shares of Class F
common stock in accordance with the decision of a majority in number of the Founders who are then party to the Founder Voting Agreement, regardless of such Founders relative ownership of any class of our common stock.
In August 2020, we granted two of our Founders, Mr. Karp, our Chief Executive Officer and a member of our Board of Directors, and
Mr. Cohen, our President and a member of our Board of Directors, options and RSUs for an aggregate of 207.0 million shares of our Class B common stock (collectively, the Founder Grants), which will become vested, exercisable
and/or settle upon the future satisfaction of service conditions and certain other conditions. These awards are expected to contribute to the Founders ability to meet the Ownership Threshold on the applicable record date at least until the
sale of such shares by Mr. Karp and Mr. Cohen.
Shares of our common stock designated by one or more of our Founders
pursuant to our amended and restated certificate of incorporation may be voted or not voted by such Founders or their affiliates in their discretion and will reduce the voting power exercised in accordance with the decision of a majority in number
of the Founders who are then party to the Founder Voting Agreement.
Mr. Thiel has identified a portion of the shares of Class B
common stock and Class A common stock beneficially owned by him and his affiliates as Designated Founders Excluded Shares, which will not be subject to the Founder Voting Agreement. Such Designated Founders Excluded Shares would reduce
the total voting power that will be exercised in accordance with the decision of a majority in number of the Founders who are then party to the Founder Voting Agreement. Mr. Thiel or his affiliates would vote or not vote such Designated
Founders Excluded Shares in their discretion, which may include in a manner different than the voting power exercised in accordance with the decision of a majority in number of the Founders who are then party to the Founder Voting Agreement.
Depending on certain circumstances, including the extent to which other holders of Class B common stock convert or sell such shares of Class B common stock, such Designated Founders Excluded Shares may have significant voting power and
increase Mr. Thiel or his affiliates relative voting power compared to the other Founders. The shares identified by Mr. Thiel as Designated Founders Excluded Shares represented less than 5% of the voting power of our
outstanding capital stock as of April 16, 2021. In the future, Mr. Thiel or our other Founders could designate additional shares as Designated Founders Excluded Shares.
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The Ownership Threshold that must be met on any applicable record date is a small
minority of our outstanding Corporation Equity Securities, and future issuances of Corporation Equity Securities may decrease this percentage.
The Ownership Threshold that must be met on any applicable record date is currently 100,000,000 Corporation Equity Securities, which is a
small minority of our outstanding Corporation Equity Securities. While the number of outstanding Corporation Equity Securities may exceed the number of shares of our outstanding capital stock, as a comparison, there were 1,860,606,758 shares of
our common stock outstanding as of March 31, 2021. Except for certain equitable adjustments as provided in our amended and restated certificate of incorporation, future issuances of Corporation Equity Securities by us will not increase the
Ownership Threshold that must be met on any applicable record date and, accordingly, will decrease the percentage of outstanding Corporation Equity Securities represented by the Ownership Threshold.
Upon the withdrawal, or removal, of one or more of our Founders from the Founder Voting Agreement (including as a result of death or
disability), the Ownership Threshold that must be met on the applicable record date will be reduced on a pro rata basis based on the ownership of Corporation Equity Securities of the Founders and certain of their affiliates as of August 10, 2020. We
expect that the Ownership Threshold will be reduced by approximately 57 million Corporation Equity Securities upon the withdrawal or removal from the Founder Voting Agreement of Alexander Karp, approximately 12 million Corporation Equity
Securities upon the withdrawal or removal of Stephen Cohen, and approximately 31 million Corporation Equity Securities upon the withdrawal or removal of Peter Thiel if such withdrawals or removals were to happen.
In addition, in the future we could create a new class of equity securities with different economic or voting rights than existing classes. If
we were to create a new class of equity security, because of the broad definition of Corporation Equity Securities, such security could qualify as Corporation Equity Securities and therefore count towards the Ownership Threshold if held
by our Founders who are then party to the Founder Voting Agreement or certain of their affiliates. If such security has lesser or no economic rights, it could have the effect of further increasing the divergence between the economic interests of our
Founders who are then party to the Founder Voting Agreement and their affiliates, on the one hand, and the voting power of such Founders and their affiliates, on the other. Further, Corporation Equity Securities includes, among other things, any
warrants, calls, options or other right, whether vested or unvested, to acquire from the Company certain voting or equity securities from the Company. Accordingly, the Board of Directors could issue additional equity securities, or additional
options, RSUs, warrants or other rights to acquire equity securities (whether vested or unvested), to our Founders or certain of their affiliates, which would increase the number of Corporation Equity Securities they hold and enable them to meet the
Ownership Threshold notwithstanding sales of Corporation Equity Securities that they currently hold. As a result, any Founders who are then party to the Founder Voting Agreement or certain of their affiliates could hold a nominal equity interest
with little to no voting rights but meet the Ownership Threshold and therefore have voting power that provides effective control of our company.
The multiple class structure of our common stock features certain provisions that are novel or otherwise not common among other
corporations with multiple class structures.
A number of provisions relating to the multiple class structure of our common stock
are novel or otherwise not common among other corporations with multiple class structures. For instance, our Founders who are then party to the Founder Voting Agreement are free to transfer or otherwise dispose of their shares of Class A common
stock and Class B common stock without diminishing their voting control so long as our Founders who are then party to the Founder Voting Agreement and certain of their affiliates meet the Ownership Threshold on the applicable record date. Shares of
our Class B common stock, which have ten (10) votes per share, may remain outstanding in perpetuity. Additionally, shares of our Class B common stock may be transferred (without converting into shares of Class A common stock) to, among others, our
Founders or their affiliates, which could result in our Founders and their affiliates or other stockholders obtaining additional voting control.
Additionally, certain provisions of our amended and restated certificate of incorporation related to the calculation of the voting power of
the Class F common stock may have an adverse effect on our stockholders other than our Founders. Under our amended and restated certificate of incorporation, our Founders have the right to challenge our calculation of the voting power of the
Class F common stock. Such a challenge may cause delays in the certification of any vote of our stockholders or in the effectiveness of any action of our stockholders.
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The multi-class structure of our common stock, the Founder Voting Trust Agreement and
the Founder Voting Agreement by which our Founders exercise effective control over all matters submitted to a vote of our stockholders will exist for the foreseeable future.
Shares of our Class F common stock will convert automatically into shares of our Class B common stock only if the Founder Voting Trust
Agreement or the Founder Voting Agreement is terminated. Each of these agreements could remain in place until the death of our last living Founder. As of March 31, 2021, our Founders were 53, 53, and 38 years old. Further, upon a discretionary or
compulsory withdrawal of a Founder as a beneficiary of the Founder Voting Trust Agreement, the Trustee will instruct our transfer agent and us to convert the withdrawing Founders pro rata portion of the shares of Class F common stock held in
the Founder Voting Trust at the time of the withdrawal into shares of Class B common stock in accordance with our amended and restated certificate of incorporation.
Because of the ten-to-one voting ratio between our Class B and Class A common stock, even if the Class F common stock converts to Class B
common stock, our Founders will collectively control a significant portion of the voting power of our capital stock based on their current ownership. Future transfers by holders of shares of Class B common stock will generally result in those shares
converting to Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning purposes and transfers between related entities. The conversion of Class B common stock to Class A common stock will have the
effect, over time, of increasing the relative voting power of those individual holders of Class B common stock who retain their shares in the long term. If our Founders and their affiliates, individually or collectively, retain a significant portion
of their holdings of Class B common stock for an extended period of time, they could, in the future, individually or collectively, continue to control a significant portion of the combined voting power of our Class A common stock and Class B common
stock, even without the use of the Class F common stock, and such voting power could enable holders of Class B common stock to effectively control all matters subject to the stockholder approval. Shares of our Class B common stock may remain
outstanding in perpetuity.
Further, if all, or a large portion, of the Founder Grants should be exercised or vest and settle, our
Founders will increase their voting power of our Class B common stock. Although the terms of our amended and restated certificate of incorporation only provide for a separate vote of the holders of our Class B common stock on limited matters, under
Delaware law, certain actions may require the approval of the holders of the Class B common stock voting as a separate class. For example, if we amend our amended and restated certificate of incorporation to adversely affect the special rights,
powers, or preferences of our Class B common stock in a manner that does not so affect the Class A common stock or Class F common stock, Delaware law could require approval of the holders of our Class B common stock voting separately as single
class. For any vote of the Class B common stock voting as a separate class, our Founders will significantly influence such vote if all, or a large portion, of the Founder Grants should vest and settle and the Founders retain such shares.
Our governance structure may negatively affect the decision by certain institutional investors to purchase or hold shares of our
Class A common stock.
The holding of low-voting stock, such as our Class A
common stock, may not be permitted by the investment policies of certain institutional investors or may be less attractive to the portfolio managers of certain institutional investors. In addition, in July 2017, FTSE Russell and Standard &
Poors announced that they would cease to allow most newly public companies utilizing dual- or multi-class capital structures to be included in their indices. Affected indices include the Russell 2000 and the S&P 500, S&P MidCap 400,
and S&P SmallCap 600, which together make up the S&P Composite 1500. Our multi-class capital structure may make us ineligible for inclusion in any of these and certain other indices, and as a result, mutual funds, exchange-traded funds, and
other investment vehicles that attempt to passively track these indices would not invest in our stock. These policies may depress our valuation compared to those of other similar companies that are included.
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Future issuances of our Class A common stock will dilute the voting power of our Class
A common stockholders but may not result in further dilution of the voting power of our Founders who are then party to the Founder Voting Agreement.
Future issuances of our Class A common stock will dilute the voting power of our Class A common stockholders, and future issuances to
stockholders other than our Founders who are then party to the Founder Voting Agreement will dilute the economic interests of our Founders and their affiliates. However, because of the voting rights of the shares of Class F common stock, in the
event that our Founders and their affiliates have less than 49.999999% of the Voting Power prior to giving effect to the voting power of the Class F common stock, future issuances of Class A common stock to stockholders other than our Founders and
their affiliates will generally not result in dilution of the voting power of our Founders who are then party to the Founder Voting Agreement or their affiliates, but rather, will correspondingly increase the voting power of the Class F common
stock. Any future issuances of additional shares of Class A common stock will not be subject to approval by our stockholders except as required by the listing standards of the NYSE.
General Risk Factors
Adverse economic conditions or reduced technology spending may adversely impact our business.
Our business depends on the economic health of our current and prospective customers and overall demand for technology. In addition, the
purchase of our platforms and services is often discretionary and typically involves a significant commitment of capital and other resources. A further downturn in economic conditions, global political and economic uncertainty, a lack of
availability of credit, a reduction in business confidence and activity, the curtailment of government or corporate spending, public health concerns or emergencies, financial market volatility, and other factors have in the past and may in the
future affect the industries to which we sell our platforms and services. Our customers may suffer from reduced operating budgets, which could cause them to defer or forego purchases of our platforms or services. Moreover, competitors may respond to
market conditions by lowering prices and attempting to lure away our customers, and the increased pace of consolidation in certain industries may result in reduced overall spending on our offerings. Uncertainty about global and regional economic
conditions, a downturn in the technology sector or any sectors in which our customers operate, or a reduction in information technology spending even if economic conditions are stable, could adversely impact our business, financial condition, and
results of operations in a number of ways, including longer sales cycles, lower prices for our platforms and services, material default rates among our customers, reduced sales of our platforms or services, and lower or no growth.
We cannot predict the timing, strength, or duration of any crises, economic slowdown or any subsequent recovery generally, or for any industry
in particular. Although certain aspects of the effects of a crisis or an economic slowdown may provide potential new opportunities for our business, we cannot guarantee that the net impact of any such events will not be materially negative.
Accordingly, if the conditions in the general economy and the markets in which we operate worsen from present levels, our business, financial condition, and results of operations could be adversely affected.
If we fail to maintain an effective system of internal controls, our ability to produce timely and accurate financial statements or
comply with applicable regulations could be impaired.
We are subject to the reporting requirements of the Exchange Act, the
Sarbanes-Oxley Act, and the rules and regulations of the listing standards of the NYSE. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting, and financial compliance costs, make some
activities more difficult, time-consuming, and costly, and place significant strain on our personnel, systems, and resources.
The
Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We have developed and refined our financial reporting and other disclosure controls and
procedures, and we will continue to do so. For example, we recently reimplemented our enterprise resource planning (ERP) system. This may be disruptive to our business if the ERP system does not work as planned or if we experience issues
relating to the reimplementation, in which case we may be unable to timely or accurately prepare financial reports, make payments to our suppliers and employees, or invoice and collect from our customers. Our controls are designed to ensure that
information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and th
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.