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Item 7. Management’s Discussion and Analysis

2023-03-29 compared with 2022-04-07 · 61 added, 135 removed, 254 unchanged (44% of the section changed)

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A discussion regarding our financial condition and results of operations for fiscal 2023 compared to fiscal 2022 is presented below.

A discussion regarding our financial condition and results of operations for fiscal 2021 compared to fiscal 2020 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the final prospectus for our IPO dated as of June 29, 2021 (Final Prospectus) and filed with the SEC pursuant to Rule 424(b)(4) on June 30, 2021.

A discussion regarding our financial condition and results of operations for fiscal 2022 compared to fiscal 2021 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Form 10-K for the fiscal year ended January 31, 2022 filed with the SEC on April 7, 2022.

We founded SentinelOne in 2013 with a dramatically new approach to cybersecurity.

We pioneered the world’s first purpose-built AI-powered XDR platform to make cybersecurity defense truly autonomous, from the endpoint and beyond.

We pioneered the world’s first purpose-built AI-powered Singularity Platform to make cybersecurity defense truly autonomous, from the endpoint and beyond.

Our Singularity Platform instantly defends against cyberattacks - performing at a faster speed, greater scale, and higher accuracy than otherwise possible from a human-powered approach.

Our XDR Platform ingests, correlates, and queries petabytes of structured and unstructured data from a myriad of ever-expanding disparate external and internal sources in real-time.

Our Singularity Platform ingests, correlates, and queries petabytes of structured and unstructured data from a myriad of ever-expanding disparate external and internal sources in real-time.

We build rich context and deliver greater visibility by constructing a dynamic representation of data across an organization.

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Additionally, our sales teams work closely with our customers, channel partners, and alliance partners to drive adoption of our platform, and our software solutions are fulfilled through our channel partners.

Our channel partners include some of the world’s largest resellers and distributors, MSPs, MSSPs, MDRs, OEMs, and IR

Our channel partners include some of the world’s largest resellers and distributors, MSPs, MSSPs, MDRs, OEMs, and IR firms.

Once customers experience the benefits of our platform, they often upgrade their subscriptions to benefit from the full range of our XDR and IT and security operations capabilities.

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We had 905 customers with ARR of $100,000 or more as of January 31, 2023, up from 520 customer with ARR of $100,000 or more as of January 31, 2022.

As of January 31, 2022 and 2021, no single end customer accounted for more than 3% of our ARR.

We define ARR as the annualized revenue run rate of our subscription contracts at the end of a reporting period, assuming contracts are renewed on their existing terms for customers that are under subscription contracts with us.

Our ARR outside of the United States represented 36% and 28% as of January 31, 2022 and 2021, respectively, illustrating the global nature of our solutions.

As of January 31, 2023 and 2022, no single end customer accounted for

more than 4% of our ARR.

We define ARR as the annualized revenue run rate of our subscription and capacity contracts at the end of a reporting period, assuming contracts are renewed on their existing terms for customers that are under contracts with us.

Our revenue outside of the United States represented 35% and 32% for fiscal 2023 and 2022, respectively, illustrating the global nature of our solutions.

We have grown rapidly since our inception.

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As a result, our net loss for fiscal 2023, 2022, and 2021 was $378.7 million, $271.1 million, and $117.6 million, respectively.

Initial Public Offering and Private Placement

In July 2021, we completed our IPO and a concurrent private placement, in which we issued and sold an aggregate of 41,678,568 shares of our Class A common stock at $35 per share, including 5,250,000 shares issued upon the exercise of the underwriters’ option to purchase additional shares and 1,428,568 shares issued pursuant to the concurrent private placement.

We received net proceeds of approximately $1.4 billion after deducting underwriting discounts and commissions.

Impact of COVID-19

Beginning in January 2020, the COVID-19 pandemic resulted in travel restrictions, prohibitions of non-essential activities, disruption and shutdown of certain businesses worldwide, as well as greater uncertainty in global financial markets.

The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, operating results, cash flows, and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted.

As a result of the COVID-19 pandemic, we have experienced, and may continue to experience, a modest adverse impact on certain parts of our business, including a lengthening of the sales cycle for some prospective customers and delays in the delivery of professional services and trainings to our customers.

We have also experienced, and may continue to experience, a positive impact as a result of the COVID-19 pandemic.

For example, in connection with the travel restrictions, shelter-in-place, and work-from-home policies resulting from the COVID-19 pandemic, we have seen an increase in usage and subscriptions from smaller customers, many of whom are small or medium sized businesses.

We have also seen slower growth in certain operating expenses due to reduced business travel and the virtualization or cancellation of customer and employee events.

While a reduction in operating expenses may have an immediate positive impact on our operating results, we do not yet have visibility into the full impact this will have on our business.

Moreover, as vaccines become widely available and people begin to return to offices and other workplaces, any positive impacts of the COVID-19 pandemic on our business may slow or decline once the impact of the pandemic tapers.

We cannot predict how long we will continue to experience the impact of the COVID-19 pandemic including any new variants, vaccine mandates, and further travel and office restrictions.

Our operating results, cash flows, and financial condition have not been adversely affected to date.

However, as certain of our customers or partners experience downturns or uncertainty in their own business operations or revenue resulting from the spread of COVID-19 our operating results, cash flows, and financial condition could be adversely affected.

In addition, in response to the spread of COVID-19, we previously required substantially all of our employees to work remotely to minimize the risk of the virus to our employees and the communities in which we operate.

Most of our employees continue to work remotely and we have slowly opened up our offices at minimal capacity, subject to local COVID-19 restrictions.

We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, and business partners.

The global impact of the COVID-19 pandemic continues to rapidly evolve, and we will continue to monitor the situation and the effects on our business and operations closely.

We do not yet know the full extent of potential impacts on our business or operations or on the global economy as a whole, particularly if the COVID-19 pandemic continues and persists for an extended period of time.

Given the uncertainty, we cannot reasonably estimate the impact on our future operating results, cash flows, or financial condition.

For additional information, see the section titled “Risk Factors.”

Key Business Metrics

We monitor the following key metrics to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions.

Annualized Recurring Revenue

We believe that ARR is a key operating metric to measure our business because it is driven by our ability to acquire new subscription customers and to maintain and expand our relationship with existing subscription customers.

ARR represents the annualized revenue run rate of our subscription contracts at the end of a reporting period, assuming contracts are renewed on their existing terms for customers that are under subscription contracts with us.

Annualized Recurring Revenue (ARR)

We believe that ARR is a key operating metric to measure our business because it is driven by our ability to acquire new subscription and capacity customers and to maintain and expand our relationship with existing customers.

ARR represents the annualized revenue run rate of our subscription and capacity contracts at the end of a reporting period, assuming contracts are renewed on their existing terms for customers that are under contracts with us.

ARR is not a forecast of future revenue, which can be impacted by contract start and end dates and renewal rates.

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(in thousands)

Annualized recurring revenue (ARR) $ 292,341 $ 130,825 $ 66,764

Annualized recurring revenue $ 548,652 $ 292,341 $ 130,825

ARR grew 88% year-over-year to $548.7 million for fiscal 2023, primarily due to high growth in the number of new customers purchasing our subscriptions and to additional purchases by existing customers.

ARR is an operational metric, and there is no comparable GAAP financial measure to which we can reconcile this particular key metric.

Customers with ARR of $100,000 or More

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We do not count our reseller or distributor channel partners as customers.

As of As of January 31,

As of January 31,

2023 2022 2021

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Customers with ARR of $100,000 or more grew 74% year-over-year to 905 for fiscal 2023, primarily due to growth in the ARR of existing customers from additional purchases and to growth in the average size of purchases by new customers.

Dollar-Based Net Retention Rate

Dollar-Based Net Retention Rate (NRR)

We believe that our ability to retain and expand our revenue generated from our existing customers is an indicator of the long-term value of our customer relationships and our potential future business opportunities.

NRR measures the percentage change in our ARR derived from our customer base at a point in time.

As of As of January 31,

As of January 31,

2023 2022 2021

(in thousands)

Dollar-based net retention rate 132 % 129 % 117 %

Our dollar-based net retention rate was 129% for fiscal 2022, driven by existing customers primarily from expansion of the number of endpoints, upgrades of subscription tiers, and purchases of additional modules.

Our dollar-based net retention rate was 132% as of January 31, 2023, driven by existing customers primarily from expansion of the number of endpoints and purchases of additional modules.

NRR is an operational metric, and there is no comparable GAAP financial measure to which we can reconcile this particular key metric.

Components of Our Results of Operations

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Sales and marketing expenses also include sales commissions paid to our sales force and referral fees paid to independent third parties that are incremental to obtain a subscription contract.

Such costs are capitalized and amortized over an estimated period of benefit of four years, and any such expenses paid for the renewal of a subscription are capitalized and amortized over the contractual term of the renewal.

We expect sales and marketing expenses to increase in absolute dollars as we continue to make significant investments in our sales and marketing organization to drive additional revenue, further penetrate the market, and expand our global customer base, but to decrease as a percentage of our revenue over time.

General and Administrative

General and administrative expenses consist primarily of salaries, benefits, bonuses, stock-based compensation, and other expenses for our executive, finance, legal, human resources, and facilities organizations.

General and administrative expenses consist primarily of salaries, benefits, bonuses, stock-based compensation, and other expenses for our executive, finance, legal, people team, and facilities organizations.

General and administrative expenses also include external legal, accounting, other consulting, and professional services fees, software and subscription services, and other corporate expenses.

We expect to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations, and increased expenses for insurance, investor relations, and professional services.

We expect to continue to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations, and increased expenses for insurance, investor relations, and professional services.

We expect that our general and administrative expenses will increase in absolute dollars as our business grows but will decrease as a percentage of our revenue over time.

Interest Income, Interest Expense, and Other Income (Expense), Net

Interest income consists primarily of interest earned on our cash equivalents and short-term investments.

Interest expense consisted primarily of interest on borrowings associated with our loan and security agreement.

Interest income consists primarily of interest earned on our cash equivalents and investments.

Interest expense consists primarily of the amortization of the discount related to Attivo indemnity escrow liability.

Other income (expense), net consists primarily of foreign currency transaction gains and losses.

Provision for (Benefit from) Income Taxes

Provision for (benefit from) income taxes consists primarily of income taxes in certain foreign and state jurisdictions in which we conduct business.

Provision for Income Taxes

Provision for (benefit from) income taxes consists primarily of income taxes in certain foreign and state jurisdictions in which we conduct business and a one-time benefit from the release of valuation allowance as a result of the Attivo business combination.

In connection with our global consolidated losses, we maintain a full valuation allowance against our U.S.

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Interest expense (1,830) (787) (1,401)

Other income (expense), net (2,280) (424) (217)

Loss before provision for income taxes (270,097) (117,113) (76,330)

Provision for income taxes 1,004 460 237

Other expense, net (1,293) (2,280) (424)

Loss before income taxes (384,291) (270,097) (117,113)

Provision (benefit) for income taxes (5,613) 1,004 460

Net loss $ (378,678) $ (271,101) $ (117,573)

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Interest expense — — (2)

Other income (expense), net (1) — —

Loss before provision for income taxes (132) (126) (164)

Provision for income taxes — — 1

Other expense, net — (1) —

Loss before income taxes (91) (132) (126)

Provision (benefit) for income taxes (1) — —

Net loss (90) % (132) % (126) %

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Revenue $ 422,179 $ 204,799 $ 217,380 106 %

Revenue increased by $111.7 million, or 120%, from $93.1 million for fiscal 2021 to $204.8 million for fiscal 2022, primarily due to the ongoing demand for our platform.

Approximately 42% of the increase was derived from new customers, approximately 40% of the increase was derived from existing customers and the remainder was derived from MSP, MSSP, and OEM channel partners.

Revenue increased by $217.4 million, or 106%, from $204.8 million for fiscal 2022 to $422.2 million for fiscal 2023, which was primarily driven by a combination of the addition of new customers and the sale of additional endpoints and modules to existing customers.

In addition, there was an increase of $28.6 million derived from revenue resulting from the Attivo acquisition.

Cost of Revenue, Gross Profit, and Gross Margin

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Gross margin 66 % 60 %

Cost of revenue increased by $42.3 million from $39.3 million for fiscal 2021 to $81.7 million for fiscal 2022, primarily due to higher third-party cloud infrastructure expenses from increased data usage of $20.1 million, an increase of $18.5 million in overhead costs due to increase in our personnel to support overall growth and an increase of $2.2 million from amortization of intangible assets.

Cost of revenue increased by $62.5 million from $81.7 million for fiscal 2022 to $144.2 million for fiscal 2023, primarily due to an increase of $26.4 million in overhead costs due to increase in our personnel to support overall growth, higher third-party cloud infrastructure expenses from increased data usage of $17.7 million, and an increase of $13.8 million from amortization of intangible assets.

Gross margin increased from 60% for fiscal 2022 to 66% for fiscal 2023, primarily due to revenue growth from existing and new customers outpacing growth in cost of revenue.

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Research and development expenses $ 207,008 $ 136,274 $ 70,734 52 %

Research and development expenses increased from $62.4 million in fiscal 2021 to $136.3 million in fiscal 2022, primarily due to an increase in personnel-related expenses of $53.7 million, including an increase of $28.8 million related to stock-based compensation expense as a result of increased headcount, an increase of $12.8 million in third-party cloud infrastructure expenses incurred in developing our platform and modules, an increase of $3.8 million related to allocated overhead costs, and an increase of $2.5 million in consulting and software subscription expenses.

Research and development expenses increased from $136.3 million in fiscal 2022 to $207.0 million in fiscal 2023, primarily due to an increase in personnel-related expenses of $45.7 million, including an increase of $15.7 million related to stock-based compensation expense as a result of increased headcount, an increase of $16.8 million in third-party cloud infrastructure expenses incurred in developing our platform and modules, and an increase of $6.1 million related to allocated overhead costs as a result of increased headcount.

Sales and Marketing

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Sales and marketing expenses increased from $160.6 million in fiscal 2022 to $310.8 million in fiscal 2023, primarily due to an increase in personnel-related expenses of $103.2 million, including an increase of $24.7 million in stock-based compensation expense as a result of increased headcount.

In addition, there was an increase of $10.8 million in marketing-related expenses, an increase of $6.1 million in travel and entertainment, software subscription and sales related expenses, and an increase of $5.3 million related to allocated overhead costs.

In addition, there was an increase of $17.4 million in marketing-related expenses, an increase of $9.6 million related to allocated overhead costs as a result of increased headcount, and the remaining increase is primarily a result of increased travel and entertainment expenses.

General and Administrative

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Other income (expense), net $ (1,293) $ (2,280) $ 987 (43) %

Interest income remained relatively flat.

Interest expense decreased due to the repayment and termination of the revolving line of credit in June 2021.

The decrease in other income (expense), net is primarily due to net foreign currency exchange losses.

Interest income increased $21.2 million as a result of interest earned on investments, which we did not have in fiscal year 2022.

Interest expense increased due to the amortization of the discount related to Attivo indemnity escrow liability.

The decrease in other expense, net is primarily due to net foreign currency exchange gains.

Provision for Income Taxes

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(dollars in thousands)

Provision for income taxes $ 1,004 $ 460 $ 544 118 %

The provision for income taxes increased primarily as a result of the increase in foreign taxes related to operations in international subsidiaries.

Provision (benefit) for income taxes $ (5,613) $ 1,004 $ (6,617) (659) %

The provision for income taxes decreased primarily as a result of the application of our deferred tax assets with a full valuation allowance to net deferred tax liability of Attivo acquired intangibles.

Liquidity and Capital Resources

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We did not pay any underwriting discounts or commissions with respect to shares that were sold in the private placement.

Prior to the IPO, we financed operations primarily through proceeds received from sales of equity securities, payments received from our customers, and borrowings under our loan and security agreement, and we have generated operating losses, as reflected in our accumulated deficit of $621.7 million and $350.6 million as of January 31, 2022 and 2021, respectively.

We have financed operations primarily through proceeds received from sales of equity securities, payments received from our customers, and borrowings under our loan and security agreement, and we have generated operating losses, as reflected in our accumulated deficit of $1,000.4 million and $621.7 million as of January 31, 2023 and 2022, respectively.

We expect these losses and operating losses to continue for the foreseeable future.

We also expect to incur significant research and development, sales and marketing, and general and administrative expenses over the next several years in connection with the continued development and expansion of our business.

As of January 31, 2022 and 2021, our principal source of liquidity was cash, cash equivalents, and short-term investments of $1.7 billion and $395.8 million, respectively.

In the short term, we believe that our existing cash, cash equivalents, and short-term investments will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months.

As of January 31, 2023 and 2022, our principal source of liquidity was cash, cash equivalents, and investments of $1.2 billion and $1.7 billion, respectively.

In the short term, we believe that our existing cash, cash equivalents, and investments will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months.

In the long term, our future capital requirements will depend on many factors, including our revenue growth rate, the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support research and development efforts, the price at which we are able to purchase third-party cloud infrastructure, expenses associated with our international expansion, the introduction of platform enhancements, and the continuing market adoption of our platform.

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If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, operating results, and financial condition.

On March 10, 2023, SVB was closed by the California Department of Financial Protection and Innovation, which also appointed the FDIC as receiver.

While some of our cash, cash equivalents and short-term investments were held at SVB prior to its closure, in light of the FDIC’s announcement that depositors of the institution will be made whole, we currently have full access to these funds.

We hold our cash, cash equivalents, and investments with a diverse group of banking partners and, as a result, we have not experienced a material impact to our business as a result of SVB’s closure.

However, any instability in the global banking system may impact liquidity both in the short term and long term and may result in adverse impacts to our or our customers’ business, including in our customers’ ability to pay for our platform.

The following table shows a summary of our cash flows for the periods presented:

Year Ended January 31,

Years Ended January 31,

2023 2022 2021

(in thousands)

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Cash used in operating activities primarily consists of our net loss adjusted for certain non-cash items, including stock-based compensation expense, depreciation and amortization, amortization of deferred contract acquisition costs, and changes in operating assets and liabilities during each period.

Cash used in operating activities during fiscal 2023 was $193.3 million, primarily consisting of our net loss of $378.7 million, and $35.4 million used in net changes to our operating assets and liabilities, partially offset by non-cash items of $220.8 million.

The main drivers of the changes in operating assets and liabilities were a $61.3 million increase in deferred contract acquisition costs, a $44.4 million increase in accounts receivable due to timing of cash received from customers, a $14.5 million increase in prepaid expenses and other assets primarily due to annual insurance renewal and prepaid sponsorship costs, and a $7.2 million decrease in accrued payroll and benefits.

These amounts were partially offset by a $92.5 million increase in deferred revenue resulting primarily from increased subscription contracts.

Cash used in operating activities during fiscal 2022 was $95.6 million, primarily consisting of our net loss of $271.1 million, adjusted for non-cash items of $119.9 million and net cash inflows of $55.6 million provided by changes in our operating assets and liabilities.

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These amounts were partially offset by a $59.1 million increase in accounts receivable due to an increase in sales, a $53.6 million increase in deferred contract acquisition costs, a $7.3 million increase in prepaid expenses and other assets, primarily due to annual insurance renewal and prepaid sponsorship costs and a $2.1 million decrease in accounts payable due to timing of payments.

Cash used in operating activities during fiscal 2021 was $66.6 million, primarily consisting of our net loss of $117.6 million, adjusted for non-cash items of $33.3 million and net cash inflows of $17.7 million provided by changes in our operating assets and liabilities.

The main drivers of the changes in operating assets and liabilities were a $49.1 million increase in deferred revenue, resulting primarily from increased subscription contracts, a $7.8 million increase in accrued payroll and benefits due to increased headcount, a $7.4 million increase in accounts payable, and a $1.4 million increase in accrued liabilities due to our growth and timing of payments.

These amounts were partially offset by a $26.9 million increase in deferred contract acquisition costs, a $9.4 million increase in prepaid expenses and other current assets, primarily due to an increase in prepaid hosting and sponsorship costs, and an $8.3 million increase in accounts receivable due to an increase in sales.

Investing Activities

Cash used in investing activities during fiscal 2023 was $1,312.7 million, consisting of $1,938.0 million of investment purchases, $281.0 million of net cash paid for the acquisition of Attivo, $13.5 million of capitalized

internal-use software costs, and $5.0 million of purchases of property and equipment to support additional office facilities, partially offset by $925.2 million of investment maturities.

Cash used in investing activities during fiscal 2022 was $19.7 million, consisting of $6.0 million of cash paid for purchases of strategic investments, $3.4 million of cash paid for the acquisition of Scalyr, $5.8 million of capitalized internal-use software costs, and $3.7 million of purchases of property and equipment to support additional office facilities.

Cash used in investing activities during fiscal 2021 was $6.3 million, consisting of $3.3 million of purchases of property and equipment to support additional office facilities, $2.8 million of capitalized internal-use software costs, and $0.2 million of purchases of intangible assets.

Financing Activities

discounts and commissions, $14.6 million of proceeds from the exercise of stock options, $11.4 million of proceeds from issuance of common stock under the ESPP, partially offset by a $20.0 million repayment of our revolving line of credit and $7.4 million of payments of deferred offering costs.

Cash provided by financing activities during fiscal 2021 was $424.0 million, consisting of $419.3 million of net proceeds from the issuances of our Series E redeemable convertible preferred stock and Series F redeemable convertible preferred stock, $19.9 million of net proceeds from our revolving line of credit, and $4.8 million of proceeds from the exercise of stock options and warrants, partially offset by a $20.0 million repayment of our term loan.

Debt Obligations

In May 2018, we entered into a loan and security agreement with a certain lender, which was restated in May 2020, or the Amended Loan and Security Agreement.

The Amended Loan and Security Agreement provided a revolving line of credit of up to $45.0 million, maturing in May 2023.

In June 2021, we repaid all outstanding indebtedness owed pursuant to the Amended Loan and Security Agreement, terminated the agreement, and closed our revolving line of credit.

Pursuant to our termination of the Amended Loan and Security Agreement, the related security interests have been removed and the covenants shall be of no further force and effect.

Cash provided by financing activities during fiscal 2023 was $36.3 million, consisting of $19.2 million of proceeds from the issuance of common stock under our 2021 Employee Stock Purchase Plan, $17.3 million of proceeds from the exercise of employee stock options, partially offset by $0.2 million of payments of deferred offering costs.

Cash provided by financing activities during fiscal 2022 was $1.4 billion, consisting of $1.4 billion of aggregate net proceeds from our IPO and the concurrent private placement completed in July 2021, net of underwriting discounts and commissions, $14.6 million of proceeds from the exercise of stock options, $11.4 million of proceeds from issuance of common stock under the ESPP, partially offset by a $20.0 million repayment of our revolving line of credit and $7.4 million of payments of deferred offering costs.

Contractual Obligations and Commitments

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Our operating leases are related to leased facilities under operating lease agreements expiring through fiscal 2029.

We have office facility operating leases in the United States, the Czech Republic, France, Israel, Japan, the Netherlands, and United Arab Emirates.

We have office facility operating leases in the United States, the Czech Republic, France, Israel, United Arab Emirates, and other countries.

See Note 7, Leases , to the consolidated financial statements included in Part II, Item 8, Financial Statements and Supplementary Data.

Our purchase obligations as of January 31, 2023 were approximately $871.5 million, with $81.9 million expected to be paid within 12 months and the remainder thereafter.

Our purchase obligations primarily relate to a non-cancelable purchase commitment entered in April 2021 with our cloud infrastructure vendor for a total value of $250.0 million over the next three years.

In June 2021, we repaid all outstanding indebtedness owed pursuant to the Amended Loan and Security Agreement, terminated the agreement, and closed our revolving line of credit.

Our purchase obligations primarily relate to a non-cancellable purchase commitment entered in February 2023 with our cloud infrastructure vendor for a total net value of $860.0 million over the next six years.

See Note 17 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information regarding this subsequent event.

Off-Balance Sheet Arrangements

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Certain sales arrangements may include variable consideration, which is recorded as part of the transaction price if, in our judgment, it is probable that no significant future reversal of cumulative revenue under the contract will occur.

Stock-Based Compensation

Stock-based compensation expense related to equity awards is recognized based on the fair value of the awards on the date of the grant.

The fair value of stock option awards granted and rights to purchase shares under our ESPP are generally estimated using the Black-Scholes option pricing model.

For awards with market-based vesting conditions, a Monte Carlo simulation model is used.

Stock-based compensation expense for awards with only service-based vesting conditions is recognized on a straight-line basis over the requisite service period of the awards.

We account for forfeitures related to these awards as they occur.

The use of the Black-Scholes option pricing model requires the input of highly subjective assumptions.

These assumptions involve inherent uncertainties and the application of management’s judgment.

These assumptions are estimated as follows:

• Fair value of common stock .

Prior to our IPO, our board of directors considered numerous objective and subjective factors to determine the fair value of our common stock at each meeting in which awards were approved.

After our IPO, the fair value of our Class A common stock is determined by the closing price of Class A common stock traded on the NYSE.

• Expected term.

We determine the expected term based on the average period the options are expected to remain outstanding using the simplified method, calculated as the midpoint of the options’ vesting term and contractual expiration period, until sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior becomes available.

• Expected volatility.

We analyze the average volatility of our representative peer group public companies with sufficient trading history over the expected term to develop an expected volatility assumption.

• Risk-free interest rate.

We use the U.S.

Treasury yield for our risk-free interest rate for a period that corresponds with the expected term of the award.

• Dividend yield.

We utilize a dividend yield of zero, as we do not currently issue dividends and do not expect to issue dividends on our common stock in the foreseeable future.

Common Stock Valuations

Prior to our IPO, the fair value of the common stock underlying our equity awards was determined by our board of directors, with input from management and contemporaneous third-party valuations.

Given the absence of a public trading market for our common stock and in accordance with the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, our board of directors exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our common stock at each grant date.

These factors include:

• contemporaneous third-party valuations of our common stock;

• the prices, rights, preferences, and privileges of our redeemable convertible preferred stock relative to those of our common stock;

• the prices paid for common or redeemable convertible preferred stock sold to third-party investors by us and prices paid in secondary transactions for shares purchased by third-party investors in arms-length transactions;

• the lack of marketability inherent in our common stock;

• our actual operating and financial performance;

• our current business conditions and projections;

• the hiring of key personnel and the experience of our management;

• the likelihood of achieving a liquidity event, such as an initial public offering, a merger, or acquisition of SentinelOne given prevailing market conditions;

• the operational and financial performance of comparable publicly traded companies;

and global capital market conditions and overall economic conditions.

Prior to the IPO, in determining the fair value of our common stock, we first estimated the fair value of our business using either the income approach, the market approach, or a combination of the income and market approaches.

The income approach estimates value based on expectations of future cash flows that we will generate.

Future cash flows are then discounted to their present values using a risk-adjusted discount rate.

The market approach estimates value based on a comparison of the company to a group of comparable public companies.

From the comparable companies, a representative market value multiple is determined and then applied to our financial results to estimate the fair value of our business.

The resulting estimated fair value of our business was then allocated to each class of stock using the Option Pricing Method (OPM), or a hybrid of the Probability Weighted Expected Return Method (PWERM), and OPM.

Prior to February 1, 2021, the OPM was selected as the principal equity allocation method.

Beginning February 1, 2021, we allocated the fair value of our business based on a hybrid of the OPM and the PWERM.

A discount for lack of marketability was applied to the resulting per share value to arrive at the fair value of our common stock on a non-marketable basis.

In addition, prior to the IPO, we also considered any secondary transactions involving our capital stock.

In our evaluation of those transactions, we considered the facts and circumstances of each transaction to determine the extent to which they represented a fair value exchange.

Factors considered include transaction volume, the number of participants, timing, whether the transactions occurred between willing and unrelated parties, and whether the transactions involved parties with access to our financial information.

Application of these approaches and methodologies involved the use of estimates, judgments, and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses, and future cash flows, discount rates, market multiples, the selection of comparable public companies, and the probability of and timing associated with possible future events.

As a public trading market for our Class A common stock has now been established, the fair value of our Class A common stock is determined based on the quoted market price of our Class A common stock.

Business Combinations

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When determining the fair value of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets.

Significant estimates in valuing certain identifiable assets include, but are not limited to, the selection of valuation methodologies, future expected cash flows, discount rates, and useful lives.

Significant estimates in valuing certain identifiable assets include, but are not limited to, the selection of valuation methodologies, forecasted revenue, discount rates, and useful lives.

Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

JOBS Act Accounting Election

We are an emerging growth company, as defined in the Jumpstart Our Business Startups (JOBS Act).

Under the JOBS Act, emerging growth companies may delay adopting new or revised accounting standards until such time as those standards become applicable to private companies.

To date, we have not elected to take advantage of the benefits of this extended transition period.

If we elect to delay adopting new or revised accounting standards, while we are still an “emerging growth company,” we will disclose the date on which adoption is required for non-emerging growth companies and the date on which we will adopt the recently issued accounting standard.

Recently Issued Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis