Gitlab Inc. (GTLB) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S 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 consolidated financial statements and the related notes included elsewhere in this Annual Report. You should review the section titled “Special Note Regarding Forward-Looking Statements” above in this Annual Report for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” in this Annual Report. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.
A discussion regarding our financial condition and results of operations for the year ended January 31, 2022 compared to the year ended January 31, 2021 is presented below. A discussion regarding our financial condition and results of operations for the year ended January 31, 2021 compared to the year ended January 31, 2020 can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our final prospectus dated October 13, 2021 and filed with the SEC pursuant to Rule 424(b)(4) on October 14, 2021.
Overview
We believe in an innovative world powered by software. To realize this vision, we pioneered The DevOps Platform, a fundamentally new approach to DevOps consisting of a single codebase and interface with a unified data model. The DevOps Platform allows everyone to contribute to build better software rapidly, efficiently, and securely.
Today, every industry, business, and function within a company is dependent on software. To remain competitive and survive, nearly all companies must digitally transform and become experts at building and delivering software.
GitLab is The DevOps Platform, a single application that brings together development, operations, IT, security, and business teams to deliver desired business outcomes. Having all teams on a single application with a single interface represents a step function change in how organizations plan, build, secure, and deliver software.
The DevOps Platform accelerates our customers’ ability to create business value and innovate by reducing their software development cycle times from weeks to minutes. It removes the need for point tools and delivers enhanced operational efficiency by eliminating manual work, increasing productivity, and creating a culture of innovation and velocity. The DevOps Platform also embeds security earlier into the development process, improving our customers’ software security, quality, and overall compliance.
The DevOps Platform is available to any company, regardless of the size, scope, and complexity of their deployment. As a result, we have a large number of customers on paid trials or with single-digit users. For purposes of determining the number of our active customers, we look at our customers with more than $5,000 of Annual Recurring Revenue, or ARR, in a given period, who we refer to as our Base Customers. For purposes of determining our Base Customers, a single organization with separate subsidiaries, segments, or divisions that use The DevOps Platform is considered a single customer for determining each organization’s ARR. Our company exists today in large part thanks to the vast and growing community of open source contributors around the world. We actively work to grow open source community engagement by operating with intentional transparency. We make our strategy, direction, and product roadmap available to the wider community, where we encourage and solicit their feedback. By making information public, we make it easier to solicit contributions and collaboration from our users and customers. See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Dollar-Based Net Retention Rate and ARR” below for additional information about how we define ARR.
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We make our plans available through our self-managed and software-as-a-service, or SaaS offerings. For our self-managed offering, the customer installs The DevOps Platform in its own private or hybrid cloud environment. For our SaaS offering, the platform is managed by GitLab and hosted in the public cloud.
Initial Public Offering
On October 18, 2021, we closed our IPO of 8,940,000 shares of our Class A common stock at an offering price of $77.00 per share, including 520,000 shares pursuant to the exercise of the underwriters’ option to purchase additional shares of our Class A common stock, resulting in net proceeds to us of $654.6 million, after deducting underwriting discounts of $33.8 million.
Acquisition
On December 3, 2021, we completed the acquisition of Opstrace, Inc., a technology company based in San Francisco, California. Refer to “Note 5. Business Combination” to our consolidated financial statements for further discussion of the transaction.
Impact of COVID-19
The World Health Organization declared in March 2020 that the recent outbreak of the coronavirus disease, or COVID-19, constituted a pandemic. The COVID-19 pandemic has caused general business disruption worldwide beginning in January 2020. While we have experienced and may continue to experience a modest adverse impact on certain parts of its business, including a lengthening in the sales cycle for some prospective customers and delays in the delivery of professional services and trainings to customers, our results of operations, cash flows, and financial condition have not been adversely impacted to date. However, as certain customers or partners experience downturns or uncertainty in their own business operations or revenue resulting from the spread of COVID-19, they may continue to decrease or delay their spending, request pricing discounts, or seek renegotiations of their contracts, any of which may result in decreased revenue and cash receipts for us. In addition, we may experience customer losses, including due to bankruptcy or customers ceasing operations, which may result in an inability to collect accounts receivable from these customers. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations, cash flows, and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted.
The global impact of COVID-19 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. See Part I, Item IA, “Risk Factors” in this Annual Report on Form 10-K for additional information. Given the uncertainty, we cannot reasonably estimate the impact on our future results of operations, cash flows, or financial condition.
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.
Dollar-Based Net Retention Rate and ARR
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. Dollar-Based Net Retention Rate measures the percentage change in our ARR derived from our customer base at a point in time. Our calculation of ARR and by extension Dollar-Based Net Retention Rate, includes both self-managed and SaaS license revenue. We report Dollar-Based Net
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Retention Rate on a threshold basis 130% each quarter, and provide a tighter threshold as of each fiscal year end.
We calculate ARR by taking the monthly recurring revenue, or MRR, and multiplying it by 12. MRR for each month is calculated by aggregating, for all customers during that month, monthly revenue from committed contractual amounts of subscriptions, including our self-managed and SaaS offerings but excluding professional services. We calculate Dollar-Based Net Retention Rate as of a period end by starting with our customers as of the 12 months prior to such period end, or the Prior Period ARR. We then calculate the ARR from these customers as of the current period end, or the Current Period ARR. The calculation of Current Period ARR includes any upsells, price adjustments, user growth within a customer, contraction, and attrition. We then divide the total Current Period ARR by the total Prior Period ARR to arrive at the Dollar-Based Net Retention Rate.
| As of January 31, | |||||
|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | |||
| Dollar-Based Net Retention Rate | 152% | 145% | 175% |
Customers with ARR of $100,000 or More
We believe that our ability to increase the number of $100,000 ARR customers is an indicator of our market penetration and strategic demand for The DevOps Platform. A single organization with separate subsidiaries, segments, or divisions that use The DevOps Platform is considered a single customer for determining each organization’s ARR. We do not count our reseller or distributor channel partners as customers. In cases where customers subscribe to The DevOps Platform through our channel partners, each end customer is counted separately.
| As of January 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | |||||
| $100,000 ARR customers | 492 | 283 | 173 |
Components of Our Results of Operations
Revenue
Subscription - self-managed and SaaS
Our self-managed and SaaS subscriptions consist of support, maintenance, upgrades and updates on a when-and-if-available basis. Revenue for support and maintenance is recognized ratably over the contract period based on the stand-ready nature of these subscription elements.
Our SaaS subscriptions provide access to our latest managed version of our product hosted in a public cloud. Revenue from our SaaS offering is recognized ratably over the contract period when the performance obligation is satisfied. The typical term of a subscription contract for self-managed or SaaS offering is one to three years.
License - self-managed and other
The license component of our self-managed subscriptions reflects the revenue recognized by providing customers with access to proprietary software features. License revenue is recognized up front when the software license is made available to our customer.
Other revenue consists of professional services revenue which is primarily derived from fixed fee offerings which are subject to customer acceptance. Given our limited history of providing professional services, uncertainty exists about customer acceptance and therefore, control is presumed to transfer upon confirmation from the customer, as defined in each professional services contract. Accordingly,
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revenue is recognized upon satisfaction of all requirements per the applicable contract. Revenue from professional services provided on a time and material basis is recognized over the periods services are delivered. Revenue from professional services accounted for 2%, 3% and 1% of our total revenue for the years ended January 31, 2022, 2021 and 2020, respectively.
Cost of Revenue
Subscription - self-managed and SaaS
Cost of revenue for self-managed and SaaS subscriptions consists primarily of allocated cloud-hosting costs paid to third-party service providers, personnel-related costs, including stock-based compensation expenses, associated with our customer support personnel, including contractors, and allocated overhead. We expect our cost of revenue for self-managed and SaaS subscriptions to increase in absolute dollars as our self-managed and SaaS subscription revenue increases. As our SaaS offering makes up an increasing percentage of our total revenue, we expect to see increased associated cloud-related costs, such as hosting and managing costs, which may adversely impact our gross margins.
License - self-managed and other
Cost of self-managed license sales includes personnel-related expenses, including stock-based compensation expenses. Other costs of sales include professional services, personnel-related costs associated with our customer support personnel, including contractors, and allocated overhead.
Operating Expenses
Our operating expenses consist of sales and marketing, research and development and general and administrative expenses. Personnel-related expenses are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation, and sales commissions. Operating expenses also include IT overhead costs.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel-related expenses associated with our sales and marketing personnel, advertising, travel and entertainment related expenses, including a portion of the costs for our gathering of staff and leaders at one site we call “Contribute” once a year, branding and marketing events, promotions, subscription services and our hosting expenses for our free tier. 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 three 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 total revenue over time, although our sales and marketing expenses may fluctuate as a percentage of our total revenue from period-to-period depending on the timing of these expenses.
Research and Development
Research and development expenses consist primarily of personnel-related expenses associated with our research and development personnel, including internal hosting, contractors and allocated overhead associated with developing new features or enhancing existing features as well as a portion of the costs for our gathering of staff and leaders at one site we call “Contribute” once a year. Costs related to research and development are expensed as incurred.
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We expect research and development expenses to increase in absolute dollars as we continue to increase investments in our existing products and services. However, we anticipate research and development expenses to decrease as a percentage of our total revenue over time, although our research and development expenses may fluctuate as a percentage of our total revenue from period-to-period depending on the timing of these expenses.
General and Administrative
General and administrative expenses consist primarily of personnel-related expenses for our executives, finance, legal, and human resources. General and administrative expenses also include external legal, accounting, director and officer insurance, a portion of the costs for our gathering of staff and leaders at one site we call “Contribute” once a year, 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 that our general and administrative expenses will increase in absolute dollars as our business grows but will decrease as a percentage of our total revenue over time, although our general and administrative expenses may fluctuate as a percentage of our total revenue from period-to-period depending on the timing of these expenses.
Interest Income, and Other Income (Expense), Net
Interest income consists primarily of interest earned on our cash equivalents and short-term investments.
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. We maintain a full valuation allowance in some jurisdictions against our deferred tax assets because we have concluded that it is more likely than not that the deferred tax assets will not be realized.
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Results of Operations
The following table sets forth our results of operations for the periods presented (in thousands):
| Fiscal Year Ended January 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||||
| Revenue: | ||||||||||||||
| Subscription—self-managed and SaaS | $ | 226,163 | $ | 132,763 | $ | 70,367 | ||||||||
| License—self-managed and other | 26,490 | 19,413 | 10,860 | |||||||||||
| Total revenue | 252,653 | 152,176 | 81,227 | |||||||||||
| Cost of revenue:(1) | ||||||||||||||
| Subscription—self-managed and SaaS | 23,668 | 14,453 | 6,467 | |||||||||||
| License—self-managed and other | 6,317 | 4,010 | 2,909 | |||||||||||
| Total cost of revenue | 29,985 | 18,463 | 9,376 | |||||||||||
| Gross profit | 222,668 | 133,713 | 71,851 | |||||||||||
| Operating expenses: | ||||||||||||||
| Sales and marketing(1) | 190,754 | 154,086 | 99,225 | |||||||||||
| Research and development(1) | 97,217 | 106,643 | 59,364 | |||||||||||
| General and administrative(1) | 63,654 | 86,868 | 41,629 | |||||||||||
| Total operating expenses | 351,625 | 347,597 | 200,218 | |||||||||||
| Loss from operations | (128,957) | (213,884) | (128,367) | |||||||||||
| Interest income | 736 | 1,070 | 3,626 | |||||||||||
| Other income (expense), net | (30,850) | 23,452 | (4,800) | |||||||||||
| Loss before income taxes | (159,071) | (189,362) | (129,541) | |||||||||||
| Provision for (benefit from) income taxes | (1,511) | 2,832 | 1,200 | |||||||||||
| Net loss | $ | (157,560) | $ | (192,194) | $ | (130,741) | ||||||||
| Net loss attributable to noncontrolling interest(2) | (2,422) | — | — | |||||||||||
| Net loss attributable to GitLab | $ | (155,138) | $ | (192,194) | $ | (130,741) |
(1)Includes stock-based compensation expense as follows:
| Fiscal Year Ended January 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||||
| (in thousands) | ||||||||||||||
| Cost of revenue | $ | 1,300 | $ | 1,185 | $ | 365 | ||||||||
| Research and development | 8,305 | 31,519 | 11,315 | |||||||||||
| Sales and marketing | 10,550 | 21,504 | 4,699 | |||||||||||
| General and administrative | 9,854 | 57,638 | 24,493 | |||||||||||
| Total stock-based compensation expense | $ | 30,009 | $ | 111,846 | $ | 40,872 |
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(2)Our consolidated financial statements include our variable interest entity, JiHu and majority owned subsidiary, Meltano Inc. The ownership interest of other investors is recorded as a noncontrolling interest. See “Note 10. Joint Venture and Majority Owned Subsidiary” to our consolidated financial statements for additional details.
The following table sets forth the components of our consolidated statements of operations as a percentage of total revenue for each of the periods presented:
| Fiscal Year Ended January 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| (as a percentage of total revenue) | ||||||||||||
| Revenue | 100 | % | 100 | % | 100 | % | ||||||
| Cost of revenue | 12 | 12 | 12 | |||||||||
| Gross profit | 88 | 88 | 88 | |||||||||
| Operating expenses: | ||||||||||||
| Sales and marketing | 76 | 101 | 122 | |||||||||
| Research and development | 38 | 70 | 73 | |||||||||
| General and administrative | 25 | 57 | 51 | |||||||||
| Total operating expenses | 139 | 228 | 246 | |||||||||
| Loss from operations | (51) | (141) | (158) | |||||||||
| Interest income | — | 1 | 4 | |||||||||
| Other income (expense), net | (12) | 15 | (6) | |||||||||
| Loss before income taxes | (63) | (124) | (159) | |||||||||
| Provision for (benefit from) income taxes | (1) | (2) | (1) | |||||||||
| Net loss | (62) | % | (126) | % | (161) | % | ||||||
| Net loss attributable to noncontrolling interest | (1) | % | — | % | — | % | ||||||
| Net loss attributable to GitLab | (61) | % | (126) | % | (161) | % |
Comparison of the Fiscal Year Ended January 31, 2022 and 2021
Revenue
| Fiscal Year Ended January 31, | Change | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | $ | % | |||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||
| Subscription—self-managed and SaaS | $ | 226,163 | $ | 132,763 | $ | 93,400 | 70 | % | ||||||||||||||
| License—self-managed and other | 26,490 | 19,413 | 7,077 | 36 | ||||||||||||||||||
| Total revenue | $ | 252,653 | $ | 152,176 | $ | 100,477 | 66 | % |
Revenue increased $100.5 million, or 66%, to $252.7 million for fiscal 2022 from $152.2 million for fiscal 2021, primarily due to the ongoing demand for The DevOps Platform: adding new customers, the expansion within our existing paid customers, as well as an increase in our number of $100,000 ARR customers. As of January 31, 2022 and 2021, our expansion is reflected by our Dollar-Based Net Retention Rate being above 152% and above 145%, respectively. We had 492 $100,000 ARR customers as of January 31, 2022, increasing from 283 as of January 31, 2021.
Revenue for fiscal 2022 includes $1.2 million attributable to our variable interest entity, JiHu. See “Note 10. Joint Venture and Majority Owned Subsidiary” to our consolidated financial statements for additional details.
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Cost of Revenue, Gross Profit, and Gross Margin
| Fiscal Year Ended January 31, | Change | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | $ | % | |||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||
| Cost of revenue | $ | 29,985 | $ | 18,463 | $ | 11,522 | 62 | % | ||||||||||||
| Gross profit | 222,668 | 133,713 | 88,955 | 67 | ||||||||||||||||
| Gross margin | 88 | % | 88 | % |
Cost of revenue increased by $11.5 million, to $30.0 million for fiscal 2022 from $18.5 million for fiscal 2021, primarily due to a $5.0 million increase in personnel-related expenses, which includes stock-based compensation expense, driven by a 26% increase in our average customer support and professional services headcount. The remaining change was primarily attributable to an increase in third-party hosting costs of $3.1 million and an increase in total Infrastructure and Customer Support expense allocated to paid users of $1.9 million. Gross margin was consistent at 88% for fiscal 2022 and 2021.
Cost of revenue for fiscal 2022 includes $0.9 million attributable to our variable interest entity, JiHu. See “Note 10. Joint Venture and Majority Owned Subsidiary” to our consolidated financial statements for additional details.
Sales and Marketing
| Fiscal Year Ended January 31, | Change | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | $ | % | ||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||
| Sales and marketing expenses | $ | 190,754 | $ | 154,086 | $ | 36,668 | 24 | % |
Sales and marketing expenses increased by $36.7 million, to $190.8 million for fiscal 2022 from $154.1 million for fiscal 2021, primarily due to an increase of $20.6 million in personnel-related expenses, driven by an increase of 21% in our average sales and marketing headcount, an increase of $5.6 million in marketing expenses, an increase of $3.3 million in hosting expenses, and an increase of $2.9 million in software and consulting expenses as a result of our investment activities to increase the effectiveness of our sales motions, increase our sales capacity and acquire more customers. The increase in personnel-related expenses was partially offset by a decrease in stock-based compensation of $11.0 million, primarily due to a fiscal 2021 tender offer as further discussed in “Note 13. Related Party Transactions.”
Sales and marketing expenses for fiscal 2022 includes $3.2 million attributable to our variable interest entity, JiHu. See “Note 10. Joint Venture and Majority Owned Subsidiary” to our consolidated financial statements for additional details.
Research and Development
| Fiscal Year Ended January 31, | Change | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | $ | % | ||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||
| Research and development expenses | $ | 97,217 | $ | 106,643 | $ | (9,426) | (9) | % |
Research and development expenses decreased by $9.4 million, to $97.2 million for fiscal 2022 from $106.6 million for fiscal 2021, primarily due to a decrease of $8.4 million in personnel-related expenses. This decrease in personnel-related expenses was mainly driven by a decrease in stock-based compensation expense of $23.2 million as a result of a tender offer further discussed in “Note 13. Related
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Party Transactions,” offset by a $14.8 million increase in other personnel-related expenses primarily attributable to a 11% average increase in research and development headcount.
Research and development expenses for fiscal 2022 includes $2.3 million attributable to our variable interest entity, JiHu. See “Note 10. Joint Venture and Majority Owned Subsidiary” to our consolidated financial statements for additional details.
General and Administrative
| Fiscal Year Ended January 31, | Change | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | $ | % | ||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||
| General and administrative expenses | $ | 63,654 | $ | 86,868 | $ | (23,214) | (27) | % |
General and administrative expenses decreased by $23.2 million, to $63.7 million for fiscal 2022 from $86.9 million for fiscal 2021, primarily due to a decrease in stock-based compensation expense of $47.8 million, mainly as a result of a tender offer further discussed in “Note 13. Related Party Transactions”. This decrease was partially offset by an increase of $12.2 million in other personnel-related expenses driven by 35% growth in our average finance, accounting, legal, and people success headcount, an increase of $3.2 million in legal expense, an increase of $4.9 million in audit, tax, and insurance, and an increase of $3.9 million in software subscriptions and consulting expenses to support our growth and due to becoming a publicly traded company.
General and administrative expenses for fiscal 2022 includes $3.6 million attributable to our variable interest entity, JiHu. See “Note 10. Joint Venture and Majority Owned Subsidiary” to our consolidated financial statements for additional details.
Interest Income, and Other Income (Expense), Net
| Fiscal Year Ended January 31, | Change | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | $ | % | ||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||
| Interest income | $ | 736 | $ | 1,070 | $ | (334) | (31) | % | |||||||||||
| Foreign exchange gains (losses), net | $ | (29,140) | $ | 23,423 | $ | (52,563) | (224) | % | |||||||||||
| Other income (expense), net | (1,710) | 29 | (1,739) | (5997) | |||||||||||||||
| Total other income (expense), net | $ | (30,850) | $ | 23,452 | $ | (54,302) | (232) |
For fiscal 2022 and 2021, interest income decreased primarily due to a decrease in the overall market interest rates.
The change in other income (expense), net is primarily due to net foreign currency exchange losses caused by the intercompany loans of short-term nature advanced to select subsidiaries whose functional currency is not the U.S. dollar, primarily our Euro functional subsidiaries.
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Provision for (Benefit from) Income Taxes
| Fiscal Year Ended January 31, | Change | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | $ | % | ||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||
| Provision for (benefit from) income taxes | $ | (1,511) | $ | 2,832 | $ | (4,343) | (153) | % | |||||||||||
| Effective tax rate | 0.9 | % | (1.5) | % |
Our effective tax rate increased by approximately 2.4% during the year ended January 31, 2022 as compared to the year ended January 31, 2021. The higher effective tax rate was primarily due to the tax benefits recognized during the year ended January 31, 2022 as a result of the stock-based compensation tax deduction offset by the change in the valuation allowance.
Our effective tax rate for the year ended January 31, 2022 was lower than the U.S. federal statutory tax rate of 21% primarily due to the change in valuation allowance associated with the net operating losses generated during the year.
Pursuant to the provisions of Accounting Standard Codification (ASC) 740, Income Taxes, the determination of our ability to recognize its deferred tax asset requires an assessment of both negative and positive evidence when determining our ability to recognize deferred tax assets. We determined that it was not more likely than not that we could recognize its deferred tax assets. Evidence evaluated by us included operating results during the most recent three-year period and future projections, with more weight given to historical results than expectations of future profitability, which are inherently uncertain. Certain entities’ net losses in recent periods represented sufficient negative evidence to require a valuation allowance against its net deferred tax assets. This valuation allowance will be evaluated periodically and could be reversed partially or totally if business results have sufficiently improved to support realization of deferred tax assets.
As of January 31, 2022, we recorded $0.4 million of deferred tax liabilities, net. We do not have any deferred tax assets for which subsequently recognized tax benefits will be credited directly to contributed capital.
We have not recorded a provision for deferred U.S. tax expense that could result from the remittance of foreign undistributed earnings since we intend to reinvest the earnings of the foreign subsidiaries indefinitely. Our share of the undistributed earnings of foreign corporations not included in our consolidated federal income tax returns that could be subject to additional U.S. income tax if remitted is immaterial. As of January 31, 2022, the amount of unrecognized U.S federal deferred income tax liability for undistributed earnings is immaterial.
As of January 31, 2022, our U.S. federal 2017 through 2020 tax years were open and subject to potential examination in one or more jurisdictions. In addition, in the U.S., any net operating losses or credits that were generated in prior years but not yet fully utilized in a year that is closed under the statute of limitations may also be subject to examination. We are currently under examination in the Netherlands for tax years 2015 and 2016. We are currently unable to estimate the financial outcome of this examination due to its preliminary status. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. We continue to monitor the progress of ongoing discussions with tax authorities and the effect, if any, of the expected expiration of the statute of limitations in various taxing jurisdictions.
As of January 31, 2022, unrecognized tax benefits approximated $5.6 million, of which $0.8 million would affect the effective tax rate if recognized. We do not anticipate any of the unrecognized tax benefits to reverse in the next 12 months.
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It is our policy to classify accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. For the years ended January 31, 2022, 2021, and 2020, we recognized interest and penalties of $0.1 million, zero, and zero, respectively.
Liquidity and Capital Resources
Since inception, we have financed operations primarily through proceeds received from issuances of equity securities and payments received from our customers. On October 18, 2021, we closed our IPO of 8,940,000 shares of our Class A common stock at an offering price of $77.00 per share, including 520,000 shares pursuant to the exercise of the underwriters’ option to purchase additional shares of our Class A common stock, resulting in net proceeds to us of $654.6 million, after deducting underwriting discounts of $33.8 million.
As of January 31, 2022 and 2021, our principal source of liquidity was cash, cash equivalents, and short-term investments of $934.7 million and $282.9 million, respectively, which were held for working capital purposes. Cash and cash equivalents consist of cash in banks and money market accounts, while short-term investments consist of certificates of deposit.
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. 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 procure third-party cloud infrastructure, expenses associated with our international expansion, the introduction of platform enhancements, and the continuing market adoption of The DevOps Platform. In the future, we may enter into arrangements to acquire or invest in complementary businesses, products, and technologies. We may be required to seek additional equity or debt financing. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. 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.
As of January 31, 2022, we had purchase commitments of approximately $73.0 million due in the next three years that are associated with agreements that are enforceable and legally binding.
The following table shows a summary of our cash flows for the periods presented:
| Fiscal Year Ended January 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||||
| (in thousands) | ||||||||||||||
| Net cash used in operating activities | $ | (49,814) | $ | (73,580) | $ | (60,166) | ||||||||
| Net cash used in investing activities | $ | (53,895) | $ | (842) | $ | — | ||||||||
| Net cash provided by financing activities | $ | 701,185 | $ | 12,945 | $ | 271,265 |
Operating Activities
Our largest source of operating cash is payments received from our customers. Our primary uses of cash from operating activities are for personnel-related expenses, sales and marketing expenses, third-party cloud infrastructure expenses, and overhead expenses. We have generated negative cash flows from operating activities and have supplemented working capital through net proceeds from the sale of equity securities.
Cash used in operating activities during fiscal 2022 was $49.8 million, primarily consisting of our net loss of $157.6 million, adjusted for non-cash items of $85.2 million (including amortization of deferred contract acquisition costs of $33.4 million, stock-based compensation of $30.0 million, unrealized foreign
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exchange loss of $20.4 million) and net cash inflows of $22.6 million provided by changes in our operating assets and liabilities. The main drivers of the changes in operating assets and liabilities were the increase in deferred revenue of $79.1 million and the increase in accrued compensation and related expenses of $19.8 million, partially offset by the increase in deferred contract acquisition costs of $42.6 million and the increase in accounts receivable of $38.2 million.
Cash used in operating activities during fiscal 2021 was $73.6 million, primarily consisting of our net loss of $192.2 million, adjusted for non-cash items of $106.7 million and net cash inflows of $11.9 million provided by changes in our operating assets and liabilities. The main drivers of the changes in operating assets and liabilities were the increase in deferred revenue of $52.4 million, partially offset by the increase in costs deferred related to contract acquisition of $34.1 million and the increase in accounts receivable of $14.7 million.
Investing Activities
Cash used in investing activities during fiscal 2022 was $53.9 million, primarily consisting of purchases of short-term investments, net of maturities of $50.0 million and purchases of property and equipment of $3.5 million.
Cash used in investing activities during fiscal 2021 was $0.8 million, primarily consisting of a payment for asset acquisition of $0.9 million, offset by other investing activities.
Financing Activities
Cash provided by financing activities during fiscal 2022 was $701.2 million, primarily attributable to $654.6 million in proceeds from the IPO, net of underwriting discounts, $26.5 million of contributions received from noncontrolling interests and $25.4 million of proceeds from issuance of common stock upon stock options exercises.
Cash provided by financing activities during fiscal 2021 was $12.9 million, consisting primarily of $13.8 million of proceeds from issuance of common stock upon stock options exercises.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles, or GAAP. The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. We base these estimates on historical and anticipated results, trends, and various other assumptions that it believes are reasonable under the circumstances, including assumptions as to future events. Actual results could differ from those estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, operating results, and cash flows will be affected.
Please see Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report for a summary of significant accounting policies and the effect on our financial statements.
We believe that the accounting policies described below involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations:
•Revenue Recognition
•Deferred Contract Acquisition Costs
•Income Taxes
•Business Combination
•Stock-Based Compensation
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•Common Stock Valuations
Revenue Recognition
We generate revenue primarily from offering self-managed (on-premise) and SaaS subscriptions. Revenue is also generated from professional services, including consulting and training.
In accordance with ASC 606, revenue is recognized when a customer obtains control of the promised products and services. The amount of revenue recognized reflects the consideration that we expect to be entitled to receive in exchange for these products and services. To achieve the core principle of this standard, we apply the following five-step model as a framework:
1)Identify the contract with a customer. We consider the terms and conditions of our arrangements with customers to identify contracts under ASC 606. We consider that we have a contract with a customer when the contract is approved, we can identify each party's rights regarding the products and services to be transferred, we can identify the payment terms for the products and services, we have determined the customer has the ability and intent to pay, and the contract has commercial substance. We apply judgment in determining the customer’s ability and intent to pay, which is based upon factors including the customer's historical payment experience or, for new customers, credit and financial information pertaining to the customers. At contract inception, we also evaluate whether two or more contracts should be combined and accounted for as a single contract. Further, contract modifications generally qualify as a separate contract.
The typical term of a subscription contract for a self-managed or SaaS offering is one to three years. Our contracts are non-cancelable over the contract term and we act as principal in all our customer contracts. Customers have the right to terminate their contracts generally only if we breach the contract and we fail to remedy the breach in accordance with the contractual terms.
2)Identify the performance obligations in the contract. Performance obligations in our contracts are identified based on the products and services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the product or service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the product or service is separately identifiable from other promises in the contract.
Our self-managed subscriptions include two performance obligations: (i) to provide access to proprietary features in our software, and (ii) to provide support and maintenance (including the combined obligation to provide software updates on an when and if available basis).
Our SaaS products provide access to hosted software as well as support, which is evaluated to be a single performance obligation.
Services-related performance obligations relate to the provision of consulting and training services. These services are distinct from subscriptions and do not result in significant customization of the software except in certain limited unique contracts.
Some of our customers have the option to purchase additional licenses or renew at a stated price. These options are evaluated on a case-by-case basis but generally do not provide a material right as they are either at the same price as the existing licenses or are within our range of standalone selling price and, as such, would not result in a separate performance obligation. Where material rights are identified in our contracts, they are treated as separate performance obligations.
3)Determine the transaction price. We determine transaction price based on the consideration to which we expect to be entitled in exchange for transferring products and services to the customer.
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Variable consideration is included in the transaction price only to the extent it is probable that a significant future reversal of cumulative revenue under the contract will not occur when the uncertainty associated with the variable consideration is resolved. Our contracts are non-refundable and non-cancellable. We do not offer refunds, rebates or credits to our customers in the normal course of business. The impact of variable considerations has not been material.
For contracts with a one year term, we applied a practical expedient available under ASC 606 and made no evaluation for the existence of a significant financing component. In these contracts, at contract inception, the period between when we expect to transfer a promised product or service to the customer and when the customer pays for that product or service will be one year or less. For contracts with terms of more than a year, we have applied judgment in determining that advance payments in such contracts are not collected with the primary intention of availing finance and therefore, do not represent a significant financing component. Revenue is recognized net of any taxes collected from customers which are subsequently remitted to governmental entities (e.g., sales tax and other indirect taxes). We do not offer the right of refund in our contracts.
4)Allocate the transaction price to the performance obligations in the contract. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. For contracts that contain multiple performance obligations, we allocate the transaction price for each contract to each performance obligation based on the relative standalone selling price, or SSP for each performance obligation. We use judgment in determining the SSP for our products and services. We typically assess the SSP for our products and services on an annual basis or when facts and circumstances change. To determine SSP, we maximize the use of observable standalone sales and observable data, where available. In instances where performance obligations do not have observable standalone sales, we utilize available information that may include other observable inputs or use the expected cost-plus margin approach to estimate the price we would charge if the products and services were sold separately. The expected cost-plus margin approach is currently used to determine SSP for each distinct performance obligation for self-managed subscriptions.
We have concluded that (i) the right to use the software and (ii) the right to receive technical support and software fixes and updates are two distinct performance obligations in our self-managed subscriptions. Since neither of these performance obligations are sold on a standalone basis, we estimate stand-alone selling price for each performance obligation using a model based on the “expected cost plus margin” approach and update the model on an annual basis or when facts and circumstances change. This model uses observable data points to develop the main inputs and assumptions, which include the estimated historical costs to develop the paid features in the software license and the estimated future costs to provide post-contract customer support.
5)Revenue is recognized when or as we satisfy a performance obligation. Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised products and services to a customer. We recognize revenue when we transfer control of the products and services to our customers for an amount that reflects the consideration that we expect to receive in exchange for those products and services. All revenue is generated from contracts with customers.
Subscription - self-managed and SaaS
Subscription -self-managed
Our self-managed and SaaS subscriptions consist of support, maintenance, upgrades and updates on a when-and-if-available basis. Revenue for support and maintenance is recognized ratably over the contract period based on the stand-ready nature of these subscription elements.
We offer three tiers of paid subscriptions as part of the self-managed model: Starter, Premium, and Ultimate. Subscriptions for self-managed licenses include both (i) a right to use the underlying software
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(License revenue - Self managed) and (ii) a right to receive post-contract customer support during the subscription term (Subscription revenue - Self managed). Post-contract customer support comprises maintenance services (including updates and upgrades to the software on a when and if available basis) and support services. We have concluded that the right to use the software, which is recognized upon delivery of the license, and the right to receive technical support and software fixes and updates, which is recognized ratably over the term of the arrangement, are two distinct performance obligations. Since neither of these performance obligations are sold on a standalone basis, we estimate the stand-alone selling price for each performance obligation using a model based on the “expected cost plus margin” approach and updates the model on an annual basis or when facts and circumstances change. This model uses observable data points to develop the main inputs and assumptions which include the estimated historical costs to develop the paid features in the software license and the estimated future costs to provide post-contract customer support. Based on this model, we allocated between 1 to 15% of the entire transaction price to the right to use the underlying software (License revenue - Self managed) and allocated the remaining value of the transaction to the right to receive post-contract customer support (Subscription revenue - Self managed) during the period covered by these consolidated financial statements.
Starter tier is now deprecated and available for a limited transitory period to our existing customers.
SaaS
We also offer three tiers of paid SaaS subscriptions: Starter (previously Bronze), Premium (previously Gold), and Ultimate (previously Platinum). These subscriptions provide access to our latest managed version of our product hosted in a public cloud. Revenue from our SaaS products (Subscription revenue - SaaS) is recognized ratably over the contract period when the performance obligation is satisfied.
The typical term of a subscription contract for self-managed or SaaS offering is one to three years.
Starter tier is now deprecated and available for a limited transitory period to our existing customers.
License - self-managed and other
The license component of our self-managed subscriptions reflects the revenue recognized by providing customers with rights to use proprietary software features. We allocate between 1 to 15% of the transaction value to License revenue, which is recognized upfront when the software license is made available to our customer.
Other revenue consists of professional services revenue which is primarily derived from fixed fee offerings which are subject to customer acceptance. Given our limited history of providing professional services, uncertainty exists about customer acceptance and therefore, control is presumed to transfer upon confirmation from the customer, as defined in each professional services contract. Accordingly, revenue is recognized upon satisfaction of all requirements per the applicable contract. Revenue from professional services provided on a time and material basis is recognized over the periods services are delivered.
Deferred Contract Acquisition Costs
Sales commissions and bonuses that are direct and incremental costs of the acquisition of contracts with customers are capitalized. These costs are recorded as deferred contract acquisition costs on the consolidated balance sheets. We determine whether costs should be deferred when the costs are direct and incremental and would not have occurred absent the customer contract. The deferred commission and bonus amounts are recoverable through the future revenue streams from our customer contracts all of which are non-cancelable.
Commissions and bonuses paid upon the acquisition of an initial contract are amortized over an estimated period of benefit which has been determined generally to be three years based on historical
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analysis of average customer life and useful life of our product offerings. Commissions paid for subsequent renewals are amortized over the renewal term. Amortization is recognized on a straight-line basis and included in sales and marketing expenses in the consolidated statements of operations. We periodically review these deferred costs to determine whether events or changes in circumstances have occurred that could impact the period of benefit of these deferred costs. We did not recognize any impairment of deferred contract acquisition costs during the periods presented.
Income Taxes
We are subject to income taxes in the United States and several foreign jurisdictions. We record a provision for income taxes for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and the tax basis of assets and liabilities, as well as for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled.
Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not expected to be realized. Management applies significant judgment in assessing the positive and negative evidence available in the determination of the amount of deferred tax assets that were more likely than not to be realized in the future. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the tax law. We regularly review the deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences, and tax planning strategies. Our judgments regarding future profitability may change due to many factors, including future market conditions and the ability to successfully execute its business plans and/or tax planning strategies. Should there be a change in the ability to recover deferred tax assets, the tax provision would increase or decrease in the period in which the assessment is changed.
Compliance with income tax regulations requires us to take certain tax positions. In assessing the exposure associated with various filing positions, we determine whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. We use a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of the available evidence indicates that it is more likely than not that the position will be sustained upon tax authority examination, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than fifty percent likely of being realized upon ultimate settlement. Interest and penalties related to unrecognized tax benefits, if any, are included within the provision for income taxes in the consolidated statement of operations.
Business Combination
On December 3, 2021, we completed the acquisition of Opstrace, Inc., a technology company based in San Francisco, California. We include the results of operations of the businesses that we acquire beginning from the respective dates of acquisition. We allocate the fair value of the purchase price of our acquisitions to the tangible and intangible assets acquired, and liabilities assumed, based on their estimated fair values. The excess of the fair value of purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill.
We amortize our acquired intangible assets in business combinations and asset acquisitions on a straight-line basis with definite lives over a period of three years.
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Stock-Based Compensation
In May 2021, we granted restricted stock units (“RSUs”) settleable for 3 million shares of our Class B common stock to Mr. Sijbrandij, our founder and CEO. The RSUs contain a service condition and a performance condition based on the achievement of eight separate stock price hurdles/tranches ranging from $95 to $500 per share. The fair value of the RSUs was determined utilizing a Monte Carlo valuation model. Any portion of these RSUs may only be earned upon a corporate transaction or after a liquidity event and only to the extent Mr. Sijbrandij continues to lead the company as our CEO. We will recognize total stock-based compensation expense over the derived service period of each tranche using the accelerated attribution method, regardless of whether the stock price hurdles are achieved. Refer to “Note 9. Equity” to our consolidated financial statements for further discussion.
In September 2021, our board of directors and our stockholders approved the 2021 Employee Stock Purchase Plan, or ESPP, to enable eligible team members to purchase shares of our Class A common stock with accumulated payroll deductions. We recognize stock-based expenses related to the shares to be issued under the ESPP on a straight-line basis over the offering period, using the Black-Scholes option-pricing model, and determine volatility over an expected term based on the historical volatility of our peer group, until we establish a sufficient public trading history of our own stock price. The ESPP provides for up to a 27-month offering period, and includes four purchase periods of approximately six months. The ESPP allows eligible team members to purchase shares of our common stock at a 15% discount on the lower price of either (i) the offering period begin date or (ii) the purchase date. The ESPP also includes a reset provision for the purchase price if the stock price on the purchase date is less than the stock price on the offering date.
Common Stock Valuations
Prior to our initial public offering in October 2021, the estimated fair value of the common stock underlying our equity awards has been approved 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.
In addition, 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.
Following our initial public offering in October 2021, a public trading market for our Class A common stock has been established and the fair value of our Class A common stock is determined based on the quoted market price of our Class A common stock.
Recently Issued Accounting Pronouncements
See “Note 2. Basis of Presentation and Summary of Significant Accounting Policies” to our consolidated financial statements included elsewhere in this Annual Report for more information regarding recently issued accounting pronouncements.
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JOBS Act Accounting Election
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act, or JOBS Act. The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected to use this extended transition period until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
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