EDGAR 10-K Filing

Company CIK: 1540184
Filing Year: 2021
Filename: 1540184_10-K_2021_0001540184-21-000004.json

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ITEM 1. BUSINESS
Item 1. Business.
Overview
Medallia, Inc. was founded in 2001 to help the world’s largest companies understand and improve customer experiences at scale. In doing so, we created a new category of enterprise software, experience management.
Our SaaS (software-as-a-service) platform, the Medallia Experience Cloud, is built on modern technology and open architecture, utilizing artificial intelligence (AI) and machine learning to analyze massive amounts of data. We capture experience data from the expanding signal fields emitted by customers and employees on their daily journeys so that our customers can understand, analyze, and act upon omni-channel experiences. Medallia is the only platform that makes all other applications customer and employee aware. We utilize our proprietary in-memory analytics, dynamic organizational hierarchy management, and AI technology to analyze the structured and unstructured data at great scale with enterprise grade security and privacy deriving themes and predictive insights that drive action in live time. Using our technology, enterprises reduce churn, turn detractors into promoters and buyers, and create in-the-moment cross-sell and up-sell opportunities, providing high returns on investment.
Our platform captures and analyzes over 7.5 billion experiences annually. Our products have high adoption rates and are used extensively from the front line to the C-Suite; over half of our customers have more than 1,000 employees using our platform. Our platform is deeply embedded in an enterprise’s tech stack, with enterprises integrating Medallia with more than 25 other business applications. We believe this is significantly higher adoption than other experience management solutions available in the market.
We offer our platform through a SaaS business model. We use a “land-and-expand” model, whereby once customers have deployed our platform, they often increase the number of end-users through expansion to additional business units and geographies, and they also purchase more modules. We focus our selling efforts on both business leaders who are often making a strategic purchase of our platform with the potential for broad use throughout their enterprises, as well as functional leaders purchasing for their teams. We price our subscriptions based on the functionality and capacity needs of our customers. Subscription periods for our customers generally range from one to three years and we customarily invoice customers in advance in annual installments.
Our Products
Our SaaS platform is a purpose-built early warning system for customer and employee retention, making systems and people across organizations customer-aware, enabling transformational business impact.
Medallia Experience Cloud
Our platform captures a myriad of signals, and by applying analytics and artificial intelligence on those signals allows our customers to separate the noise and identify key themes that impact their business. Through our dynamic organizational hierarchies, we route these insights to the right individuals to take action, so that our customers can improve customer, employee, patient and citizen experience throughout their organizations in live time. Key capabilities of our core platform include:
•Proprietary technology provides for dynamic management of multiple hierarchies ensuring that every employee gets an accurate up-to-date view of the data tailored to their role and relevant to the interactions for their area of responsibility, even in the most complex matrixed organizations.
•In addition to integrations with Adobe, Salesforce, ServiceNow, and many more, we have hundreds of connectors that make it easy to integrate signals and insights with external applications as well as application programming interfaces (APIs) and robust extract, transform, load (ETL) technology to ensure our customers can integrate any customer interaction signal data - including from legacy systems.
•Self-service administration provides teams with the agility needed to independently administer programs while ensuring proper governance, scalability and security for complex organizations utilizing sandbox and changesets capabilities.
•Enterprise grade platform based on modern architecture offering flexibility for both multi-tenancy and single-tenancy with automated deployments across both options as well as application security including single sign-on, multiple levels of encryption, fine grained authorization, privacy controls including data masking and field level encryption, and high levels of compliance including SOC 2 Type 2, ISO 27001, GDPR, FedRAMP, HIPPA, and more.
Signal Capture
Medallia has a broad set of native signal capture capabilities going beyond the survey to capture digital, messaging, voice, video, ideas, internet of things (IoT), behavioral and telemetry data. This enables Medallia customers to increase their understanding of the customer experience and drive business outcomes at key touchpoints and gain a true 360-degree view of the customer experience.
Messaging. Enables customers, employees and enterprises to engage customers and employees on popular messaging platforms (e.g., SMS, text and WeChat) as experiences are unfolding. It provides in-the-moment feedback and creates compelling and adaptive interactions that go beyond traditional survey-based feedback collection.
Ideas/Ideation. Robust crowdsourcing platform, Crowdicity, helps companies use real-time ideation and collaboration to surface, develop and evaluate potential improvements to customer and employee experiences.
Social. Captures and aggregates ratings and reviews across social networks and websites to manage social reputation, access competitor reviews and enables enterprises to monitor these channels and take action. Companies are also able to promote their brand in key review sites, including Google and Tripadvisor.
Analytics, Insights and Artificial Intelligence
Our SaaS platform uses artificial intelligence and machine learning to analyze all signals captured by customers to drive actions in live time. Our robust capture of experience signals provides data volume to feed our models for intelligence from both unstructured and structured data.
Theme Exploration. Native text analytics engine that utilizes Natural Language Processing and deep learning to analyze billions of touch points and unstructured text to uncover insights, trends, themes and actions without the need for manual tagging, providing high accuracy and precision across multiple verticals and languages, including automated theme detection, clustering and generation from data sets, AI and deep learning-based technologies.
Predictive and Prescriptive Analytics. Uses machine learning to create statistical algorithms to uncover real-time insights, predict future customer outcomes and prescribe actions.
Operationalize Customer Experience Reporting and Actions
Our SaaS platform is used broadly across enterprises of all sizes to provide personalized insights on customer experience to the right people within the organization to take action. High levels of adoption are enabled by easy-to-use web and mobile applications and built-in workflows for critical customer recovery actions, as well as cross enterprise views that enable unification and consolidation across the largest global enterprises.
Web Applications. With powerful role-based dashboards, live time insights, alerts and built-in workflow capabilities, these applications connect enterprises to customer and employee signals, allowing everyone from the front line to the C-suite to take targeted actions and improve experiences in live time.
Mobile Applications. Puts the power of Medallia in the palm of every employee, particularly important for employees on the go. With high adoption, our mobile app empowers frontline employees and managers to facilitate swift and direct action. In addition, our Voices app is tailored for executives to view the direct feedback of customers and employees and take immediate action to drive cultural change.
Product Suites
Our product portfolio includes solution suites that are targeted at key buyers and use cases and leverage the full power of Medallia Experience Cloud. These solution suites include integrated offerings that can be sold stand alone, including Crowdicity, Decibel, LivingLens, Sense360Stella Connect, Voci, and Zingle, providing additional go-to-market options, accelerating our ability to land-and-expand and grow our mid-market business.
Customer Engagement Suite
Medallia’s Customer Engagement Suite goes beyond insights and analysis to affect experiences in the moment through engagement messaging and rich experience profiles.
Engagement Messaging. Offers frictionless personalized service in real-time. Customers can request products and services in-the-moment as they experience a purchase, appointment, or trip. Zingle is integrated with key operational systems to provide seamless delivery and fulfillment of requests and uses AI to automate and route responses, improving time to delivery, increasing customer satisfaction, enabling upsell and cross opportunities, and reducing labor costs.
CX Profiles and Journeys. Creates a rich outside-in experience profile for all identified customers providing a 360-degree timeline view of their experiences offering deeper insights into customer engagement in order to identify attrition risk as well as opportunities for upsell and cross-sell. Our journey analytics uncovers the actual paths customers take with their business - including where they break down - providing actionable intelligence to create better experiences for customers.
Contact Center Suite
The Medallia Contact Center Suite Integrates speech insights with multi-channel feedback at scale to prioritize, address, and rapidly respond to customer pain points and emerging issues. By understanding the behaviors and specific language of successful outcomes, companies can increase agent performance resulting in
increased cross-sell/upsell and reduced cost to serve, particularly impactful given the increase in virtual contact center environments.
Speech Analytics. A real-time speech to text platform, that delivers a rich single view of the customer that powers an exceptional customer experience. Combines the power of Voci’s speech to text transcription technology with text analytics to capture and analyze contact center voice interactions in real time.
Coaching and Performance Management. Agent-forward customer feedback and coaching platform that helps customer support teams to analyze and improve performance in real time, including self-coaching capabilities.
Quality Assurance. Replace manual call evaluation to deliver advisor competency reports across all advisor call KPIs as individual agents, segmented into teams/competencies or across the entire agent workforce.
Digital Suite
The Medallia Digital Suite brings together customer feedback on their digital experiences with key behavioral, telemetry and contextual signals to solve key friction points in digital journeys.
Digital Experience. Optimizes engagement across all digital channels, such as web and mobile applications, internet of things (IoT) platforms, and Alexa. Medallia Digital is designed to help deliver the right experiences across numerous digital channels through integrations into our customers’ digital technology stacks, combining experience and behavioral data enabling them to understand the “why” behind the “what.”
Digital Analytics. Our digital session recording and analysis platform, Decibel, tracks and monitors all digital activity focused on optimizing the customer journey. Determines a Digital Experience Score (DXS) and identifies improvement opportunities to improve the customer journey, reduce drop-off and increase purchase conversion.
Employee Experience Suite
Our Employee Experience (EX) Suite captures structured and unstructured feedback in real time using voice, video, text, ideation and digital capabilities to provide a complete picture of workforce health along the entire employee journey, including sentiment around diversity and inclusion and effectiveness of tools and systems. Our platform enables companies to retain employees and become digitally resilient on a platform with scalability and security for organizations of all sizes included the most complex organizations.
Traditional employee engagement solutions often miss out on ways to collect feedback in the course of an employee’s daily life. Our robust EX Suite is designed to address the demanding requirements of human resource professionals, such as minimum sample sizes and anonymity thresholds, data security and privacy, accessibility while also providing live time dashboards, native text analytics, advanced workflows and integrations with human capital management (HCM) and Learning Management Systems. In addition, capturing feedback and signals on an ongoing basis in the tools and systems employees are using in their work, yields highly actionable live-time data that can improve employee engagement immediately.
Employee Pulse and Journeys. Our EX Suite understands and contextualizes experiences across the entire employee journey and uses employee feedback to identify opportunities and drive action to improve both the employee and customer experience.
Employee Ideation. Using Crowdicity, our customers can engage employees in sharing their ideas and observations about process, tools, and employee and customer experience improvements right in the context of existing workflows and collaboration tools. This feedback is a rich source of data for employee experience improvement ideas for all parts of the business. Our studies have repeatedly shown that when employees have the opportunity to provide ideas and see their ideas acted on, it leads to higher employee retention and engagement.
Digital Employee Experience. Understand in real-time employees’ perspectives, ideas, and suggestions on the technology they use day-to-day as well as their general experiences. Using Medallia Digital embedded on employee intranets and internal applications, organizations can proactively engage employees, especially around
key tasks or activities within these digital channels, to gain valuable insight into how effectively their technology stack is performing in providing employees with the information and resources they need to do their jobs well. This solution enables companies to effect internal digital transformation in an agile way informed by employee feedback.
Insights Suite
Medallia’s Insights Suite gives market researchers the power to incorporate rich signals into their research toolkit. In addition to robust self-service survey capabilities, we also offer unique capabilities such as:
Video. Using our native video platform, LivingLens, companies can capture video signals providing richer insight into customers and employees perceptions, wants and needs with capabilities that include automatic transcription, emotion, sentiment, object recognition and facial blurring. Our platform can also be used as a video asset management platform and easily produce show reels, providing a virtual research alternative to in-person focus groups.
Benchmarking. Offers multiple ways to benchmark performance across customer feedback, social and other signals including a unique always-on, consumer and competitive intelligence platform, Sense360, providing buyer and non-buyer signals on foot traffic, conversion and share of wallet.
Acquisitions
We acquire companies that enhance our ability to improve our existing platform and introduce new products, features and functionality to new and existing customers.
•On February 19, 2020 we acquired LivingLens Enterprise Ltd. (LivingLens), a privately-held company, that provides a video feedback platform to humanize feedback and bring the voice of the customer and employee to life for $26.8 million in cash.
•On May 1, 2020 we acquired Voci Technologies, Inc. (Voci), a privately-held company, that delivers a rich single view of the customer that can power an exceptional customer experience for $59.6 million in cash.
•On September 8, 2020 we acquired StellaServices Inc. (Stella Connect), a privately-held company, a customer feedback and quality management platform that helps customer support teams to analyze and improve performance in real time for $99.6 million in cash, subject to certain adjustments.
•On September 14, 2020 we acquired Sense360 Inc. (Sense360), a privately-held company that provides always-on, consumer and competitive intelligence from buyer and non-buyer segments and answers pressing questions such as what is driving traffic, what are the growth opportunities in a specific market and which competitors are gaining share for $45.7 million in cash.
•On March 12, 2021, we acquired Decibel Group London Ltd. (Decibel), a leader in digital experience analytics for approximately $162.5 million in cash.
Our Growth Strategy
We intend to capitalize on our massive and growing market opportunity by executing on the following growth strategy:
Extend our technological leadership. We have a strong history of innovation and offer a comprehensive platform that addresses customer and employee experiences for enterprises of all sizes across multiple industries. We intend to continue to invest in new products and features while extending our platform to bring the power of experience management to a broader range of enterprises, industries, geographies and use cases.
Drive cross selling and upselling. We see significant opportunity to deepen our relationships with our existing customers. The mission-critical nature of our platform, and enterprise wide applicability and engagement drives additional upsell and cross sell within enterprises. Our platform has natural network effects that drive expansion across teams and departments. As a result, enterprises often grow their usage
of our platform from their initial use cases to numerous business units and expand to use additional products. Our fifteen modules provide substantial cross sell opportunity as on average three modules are used by our customers today with 35% of our customers using 4 or more modules.
Drive sales to new customers. As we extend our technology leadership, we also plan to continue to invest in sales and marketing to grow the number of customers. We continue to expand our sales force to pursue large and mid-sized enterprises. In addition, we intend to continue to deepen our opportunity within existing verticals, and geographies. We plan to expand to other verticals and geographies.
Broaden and deepen our partner ecosystem. Our partner ecosystem accelerates the usage and adoption of our platform extends our geographic coverage and provides additional implementation resources. We believe our relationship with Integrated Software vendors such as Adobe, Microsoft, Oracle, Salesforce, ServiceNow and Workday provide our customers with the broadest ecosystem of enterprise systems that integrate and interact to provide excellent customer and employee experiences. We intend to augment and deepen our relationships with our go-to-market partners as well as global and regional services partners.
Continue international expansion. We intend to continue making investments in building our global sales and marketing, service delivery and customer support capabilities to grow our business outside of the United States while delivering the highest quality service to our customers around the world.
Competition
We pioneered and lead the experience management market and believe that we provide the only comprehensive offering for experience management. We built a platform that addresses the complex experience management needs of enterprise-scale organizations and continue to expand those capabilities to new verticals and enterprises of all sizes. There are other companies that actively compete with us in particular segments of the experience management market. In addition, other established technology companies not currently focused on experience management may expand their services to compete with us. As a result, the competitive landscape is fragmented, rapidly evolving and highly competitive. We expect significant competition to continue, both from current competitors as well as new entrants into the market, some of which may become significant competitors in the future.
Our competitors fall into the following categories:
•in-house solutions or custom-development efforts;
•survey tools, such as Qualtrics and SurveyMonkey;
•contact center technology companies, such as Nice and Verint Systems; and
•full-service consulting firms, such as MaritzCX and Towers Watson.
We believe that the principal competitive factors in our market are:
•breadth of platform capabilities, features, quality, functionality, scalability and design;
•scope of signal collection and use of AI to analyze product behavior;
•ability for customers to generate insights and easily act;
•security, privacy and compliance capabilities;
•business impact, including speed and scale of ROI;
•thought leadership, market vision and pace of product innovation;
•strength of artificial intelligence and deep learning capabilities and predictive analytics;
•size and relevance of dataset;
•third party integrations and accessibility across software applications, operating systems and platforms;
•size and sophistication of customer base across verticals and geographies;
•user adoption and engagement;
•quality of user experience, particularly in complex, changing and high-volume environments;
•brand awareness and reputation; and
•ease of implementation and flexible deployment options.
We believe we compete favorably across these factors. However, we realize that many of our current and potential competitors have competitive advantages over us, including:
•greater name and brand recognition;
•deeper product development expertise;
•greater market penetration;
•larger and more established customer bases and relationships;
•larger sales forces and more established partner networks;
•larger marketing budgets; and
•access to significantly greater financial, human, technical and other resources.
Our larger competitors could move quickly to grow their competitive solutions, either through organic development or acquisitions. At the same time, we believe smaller competitors will continue to develop new solutions that could prove more effective than those offered by us, especially in specific market segments and narrow use cases. In order to continue to lead the experience management market, we will focus on expanding our platform capabilities, investing in our sales and marketing, professional services and partner capabilities, and delivering transformative business impact.
Our Customers
We measure and track the number of customers because our ability to attract new customers, grow our customer base and retain existing customers helps drive our success and is an important contributor to our revenue growth. We have successfully demonstrated a history of growing our customer base. We define the number of customers at the end of any particular period as the number of customers with active annual subscription agreements that run through the current or future period. In situations where a customer has multiple subsidiaries or divisions, each entity that is invoiced as a separate entity is treated as a separate customer.
Sales and Marketing
As an award-winning SaaS platform that pioneered customer, employee, citizen and patient experience we invest substantially in our sales and marketing efforts. Our go-to-market approach is driven by the strength and innovation of our platform, as well as customer demand. We have purpose-built our platform to be equally effective for specific use cases and for holistic, enterprise-wide adoption of managing experiences. Our platform has natural network effects that drive expansion across teams and departments. As a result, enterprises often grow their usage of our platform from their initial use cases to numerous business units and expand to use additional products.
Our marketing efforts are focused on promoting our brand, generating awareness of our platform, supporting our community of customers and creating sales leads. The breadth of our platform allows us to market our products throughout an enterprise, and our marketing efforts seek to engage managers at every level. Our marketing initiatives include search marketing, programmatic display, video, emerging channels such as connected television and audio advertising, community, account based marketing, web personalisation, our city tours and our participation in industry and partner conferences, case studies and customer testimonials.
Our sales and marketing expenses were $225.4 million, $180.7 million, and $138.7 million for the years ended January 31, 2021, 2020 and 2019, respectively. For information about our sales and marketing expenses see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Sales and Marketing Expenses" of this Annual Report on Form 10-K.
Partners
We have a partner ecosystem that helps us market, deliver and extend our platform. We intend to grow this ecosystem to bring the benefits of our platform to more customers around the world. Our partner relationships include:
•Systems integrators and implementation partners. We have an emerging global network of systems integrators and implementation partners that help deliver our platform to various customers around the world. These include global system integrators as well as more specialized geographic and functional providers.
•Software and technology partners. We work with leading platforms, such as, Adobe, Microsoft, Oracle, Salesforce, ServiceNow and Workday, to expand our opportunities, extend the benefits of our platform and take advantage of innovations in complementary technologies. These partnerships enable us and third parties to create integrations between applications and technologies, delivering increased value to customers. We also partner with a range of leading technology companies to extend the use cases of our platform. These include social networks, ratings and review sites, contact center providers, communication platforms and web analytics providers, among others.
•Consulting partners. We collaborate with a range of consulting partners to help drive outcomes for our customers. These include global management consulting firms that act as strategic advisors to senior executives in corporate, functional and process matters related to experience management. In addition, we work with a broad range of specialized consulting partners that focus on specific domains within experience management.
Research and Development
We have a research and development culture that rapidly and consistently delivers high-quality enhancements to the functionality, performance and usability of our platform. Our research and development organization is primarily responsible for design, development, testing and delivery of our platform and products. We focus our efforts on developing core technologies, as well as further enhancing the usability, functionality, reliability, performance and flexibility of our platform.
We have a global workforce with research and development hubs in Argentina, California, Czech Republic, Israel and Virginia. We hire skilled engineers, data scientists and other talent from a variety of industries with expertise in developing mission-critical applications for global enterprises.
As a company, we invest substantial resources in research and development. We have a well-defined technology roadmap to introduce new features and functionality to our platform that we believe will enhance our ability to generate revenue by broadening the appeal of our platform to potential new customers as well as introducing new opportunities for existing customers. We are also investing to enhance machine learning and other forms of artificial intelligence, as well as additional predictive analytics and optimization tools, to address the most complex challenges in the experience management market.
Our research and development expenses were $117.8 million, $96.0 million and $86.3 million for the years ended January 31, 2021, 2020 and 2019, respectively. For information about our research and development expenses see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Research and Development Expenses" included elsewhere in this Annual Report on Form 10-K.
Regulatory Matters
We are subject to a variety of laws in the United States and internationally, including laws regarding privacy, data protection, data security, data retention and consumer protection, accessibility, sending and storing of electronic messages (and related traffic data where applicable), intellectual property, human resource services, employment and labor laws, workplace safety, consumer protection laws, anti-bribery and anti-corruption laws, import and export controls, immigration laws, federal securities laws and tax regulations, all of which are
continuously evolving and developing. The manner in which existing laws and regulations are applied to SaaS businesses, and how they will relate to our business in particular, both in the United States and internationally, often are unclear. For example, we sometimes cannot be certain which laws will be deemed applicable to us given the global nature of our business, including with respect to such topics as data privacy and security, pricing, advertising, taxation, content regulation and intellectual property ownership and infringement.
In addition, regulatory authorities around the world are considering a number of legislative and regulatory proposals concerning privacy, spam, data storage, data protection, data collection, data transfers, content regulation, cybersecurity, government access to personal information and private data, and other matters that may be applicable to our business. More countries are enacting and enforcing laws related to the appropriateness of content and enforcing those and other laws by blocking access to services that are found to be out of compliance. It is also likely that as our business grows and evolves, as an increasing portion of our business shifts to mobile, and as our solutions are used in a greater number of countries and by additional groups, we will become subject to laws and regulations in additional jurisdictions. For additional information, see the section titled “Risk Factors-Risks Related to Laws and Regulations-Our business is subject to a variety of U.S. and foreign laws, many of which are unsettled and still developing and which could subject us to claims or otherwise harm our business.”
Data Privacy and Security
We prioritize the trust of customers and place a strong emphasis on data privacy and security. Our security program is designed and implemented, throughout our company and our platform, to address the security and compliance requirements of our customers.
Our information systems and technical infrastructure are hosted within ISO27001, SSAE18 or SOC 2 accredited data centers and we have obtained third-party verification of our security programs across a number of industry standards, including SOC 2 Type 2, ISO 27001, ISO 27017, ISO 27018, and ISO 27701. Service Organization Controls (SOC), are standards established by the American Institute of Certified Public Accountants for reporting on internal control environments implemented within an organization. We have also achieved FedRAMP Moderate Authorization from the FedRAMP Joint Authorization Board to deliver services to U.S. federal government agencies.
We have a dedicated team of professionals that focus on application, network and system security, as well as security compliance, training and education and incident response. We build security into our Product Development Lifecycle (PDLC) at every stage of our development process. We maintain a documented vulnerability management program that includes periodic scans designed to identify security vulnerabilities on servers, workstations, network equipment and applications, and subsequent remediation of vulnerabilities. We also conduct regular internal and external penetration tests and remediate according to severity for any results found.
We encrypt customer data in transit using secure transport layer security cryptographic protocols and encrypt data at rest as well. We use multi-factor authentication and other security controls in order to control access to our resources containing personal data or other confidential information. We offer solutions that meet the accessibility standards of WCAG 2.0 AA and Section 508 of the Americans with Disabilities Act, as applicable.
We design our platform, solutions and policies to facilitate compliance with evolving privacy and data security laws and regulations. We post on our website our privacy policy, and we maintain certain other policies and practices relating to data security and concerning our processing, use and disclosure of personal information.
Our publication of our privacy policy and other statements regarding privacy and security may subject us to investigation or enforcement actions by state and federal regulators if they are found to be deficient, lacking transparency, deceptive or misrepresentative of our practices. We also may be bound from time to time by contractual obligations, including model contract provisions approved by the European Commission relating to any category of personal data and business associate agreements that impose certain obligations and restrictions upon us relating to our handling of protected health information regulated by HIPAA. The privacy and data security laws and regulations to which we are subject, as well as their interpretation, are evolving and we expect them to continue to change over time. For example, the EU has adopted the GDPR, a far-reaching regulation governing data privacy
that, became effective in May 2018. The GDPR contains stringent requirements applicable to the handling of personal data and imposes penalties for non-compliance of up to the greater of €20,000,000 or 4% of worldwide revenue. Additionally, California enacted legislation, the California Consumer Privacy Act (CCPA), which became effective on January 1, 2020. The CCPA requires covered companies to, among other things, provide disclosures to California consumers and afford such consumers abilities to opt out of certain sales of personal information. Additionally, a new privacy law, the California Privacy Rights Act (“CPRA”), was approved by California voters in the November 3, 2020 election. The CPRA creates obligations relating to consumer data beginning on January 1, 2022, with implementing regulations expected on or before July 1, 2022, and enforcement beginning July 1, 2023. Further, in June 2016, the United Kingdom voted to leave the European Union, commonly referred to as Brexit, which resulted in the United Kingdom existing the European Union on January 31, 2020, subject to a transition period covering certain matters that ended on December 31, 2020. While an adequacy bridging provision was agreed to with the European Union to mitigate against disruption of data flows in the short term, it remains to be seen whether the European Commission will ratify an adequacy bridging provision decision with regard to data flows to the United Kingdom thereafter. Brexit could lead to further legislative and regulatory changes. The United Kingdom has implemented legislation that substantially implements the GDPR with penalties for noncompliance of up to the greater of 17.5 million GBP or four percent of worldwide revenue. Many aspects of the United Kingdom data protection laws and regulations remain unclear, including how the data protection laws and regulations will develop in the medium to longer term and how data transfers to and from the United Kingdom will be regulated. Some countries also are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data, or similar requirements, which could increase the cost and complexity of delivering our services. More generally, the various privacy and data security legal obligations that apply to us may evolve in a manner that relates to our practices or the features of our applications or platform. We may need to take additional measures to comply with the changes in our legal obligations and to maintain and improve our information security posture in an effort to avoid security incidents or breaches affecting personal information or other sensitive or proprietary data.
Intellectual Property
We believe that our intellectual property rights are valuable and important to our business. We rely on trademarks, patents, copyrights, trade secrets, license agreements, intellectual property assignment agreements, confidentiality procedures, non-disclosure agreements and employee non-disclosure and invention assignment agreements to establish and protect our proprietary rights. Though we rely in part upon these legal and contractual protections, we believe that factors such as the skills and ingenuity of our employees and the functionality and frequent enhancements to our platform and solutions are larger contributors to our success in the marketplace.
As of January 31, 2021, we had 18 issued patents and 25 pending or provisional patent applications. These patents and patent applications seek to protect our proprietary inventions relevant to our business.
We have an ongoing trademark and service mark registration program pursuant to which we register our brand names and solution names, taglines and logos in the United States and other countries to the extent we determine appropriate and cost-effective. We also have common law rights in some unregistered trademarks that were established over years of use. In addition, we have registered domain names for websites that we use in our business, such as medallia.com, and similar variations.
Human Capital Management
We believe the strength of our workforce is one of the most significant contributors to our success. As of January 31, 2021, we had a total of 2,037 employees worldwide. Of our employees, 1,299 were in the United States and 738 were international employees.
We are committed to a respectful, rewarding, diverse and inclusive work environment that allows our team members to develop and grow with Medallia. To act on that commitment, we structure our human capital management objectives around four pillars: Hire, Retain, Invest and Experience.
Hire
One of our core values is cultivating a culture where everyone feels a sense of belonging. At Medallia, every experience matters. Everyone brings different life experiences to the table, and we embrace them all by seeking candidates from a wide range of backgrounds and experiences to join our team.
In addition, we believe that an equitable and inclusive environment composed of diverse teams produces more creative solutions, results in better and more innovative products, and is crucial to our efforts to attract and retain key talent. We are focused on building an inclusive culture and sustaining a diverse workforce through a variety of company initiatives, but it all starts with hiring and we believe representation matters. For example, in fiscal year 2021, our focus on inclusive hiring contributed to a 309% increase in Black and African American representation, a group that as of the end of the fiscal year made up 4.5% of our U.S. employee population. We are committed to further building our recruiting pipeline for Black talent.
Retain
To retain our workforce, we strive to offer competitive compensation and comprehensive benefits programs, utilizing compensation surveys and global benefits data to benchmark our packages in each of our locations. Our compensation program is designed to attract, reward and retain talented individuals who possess the skills necessary to support our business, contribute to our strategic goals and create long-term value for our stockholders. We provide our employees with competitive compensation packages that include base salary plus a bonus, commission or incentive plan, as well as regionally specific pension benefits, wellness benefits, access to our employee stock purchase plan where applicable, and equity awards to encourage performance and retention of our top talent. We offer volunteer time off and generous parental leave and family planning benefits.
In 2017, we publicly committed to pay equity, meaning no statistically significant differences by gender or race for those doing substantially similar work. In fiscal year 2021, we maintained our commitment to pay equity and partnered with an outside vendor to analyze pay equity, globally by gender, as well as by race within the United States.
We also recognize the vital importance of the well-being of our employees, especially in light of the new and evolving challenges of the COVID-19 pandemic. We support our employees’ health and safety in a number of ways, including by providing mental and physical wellness benefits, allowances to employees to cover certain remote work expenses, subsidized dependent care, and flexible working arrangements for our employees with caregiving obligations. Research has shown that the COVID-19 pandemic has had an outsized impact on women in the workforce, and we have provided new and additional support programs to assist. In tandem with these programs, Medallia offers fertility, pregnancy and postpartum care advocacy globally, supporting working parents and their mental health, and we partnered with experts to host exclusive webinars on balancing work and family during the pandemic. We are proud to report that our retention rate among female employees was 90% during fiscal year 2021, and in a recent internal survey, 89% of women reported feeling fully supported.
Medallia offers a comprehensive suite of global wellness benefits supporting mental and physical health as well as pathways to confidential counseling through our employee assistance program. These global programs are open to every employee, regardless of their location. We intend to increase our focus on our well-being benefits during fiscal year 2022 as we continue to grow our culture of health and wellness across Medallia.
Invest
We invest in our employees by providing education, training and feedback, and access to meaningful growth opportunities. To support the continued learning and professional development of our employees, we host regular town halls and an executive speaker series featuring experts on intersectional topics related to diversity, equity, leadership, inclusion and health. In addition to formal and informal on-the-job training, we offer a robust tuition assistance program for all eligible full-time employees that grants cash and/or equity reimbursement for professional certificate or degree programs related to an employee’s current or future job function. During fiscal year 2021, we also piloted a new quarterly check-in program facilitating the delivery of regular performance feedback,
which has now become part of our annual performance program. Career growth and development opportunities are available to all employees with internal promotions, transfers and stretch assignments.
Experience
We bolster our employee experience through a number of initiatives. We believe the employee experience belongs to everyone. By integrating Medallia’s Experience Platform across key moments in the employee lifecycle, every department is mobilized by getting the right insights to the right person so they can understand employee needs and launch new programs to support our employees based on that feedback.
Medallia founded its Diversity, Inclusion, and Belonging (DIBs) practice in March 2016. As a centralized resource serving all Medallians globally, the DIBs practice seeks to maximize workforce diversity, and promote a sense of inclusion and belonging among employees.
Medallia participates in the Human Rights Campaign Foundation’s Corporate Equality Index (CEI), a national benchmarking tool on corporate policies and practices pertinent to lesbian, gay, bisexual, transgender and queer employees. In 2018, 2019, 2020, and 2021 we earned a perfect score on the CEI and the honor of being named one of the Best Places to Work for LGBTQ Equality.
In fiscal year 2021, we also increased funding and support for our nine Employee Resource Groups (ERGs). ERGs are essential to Medallia’s diversity and inclusion initiatives and are woven into the fabric of our culture. ERGs drive impactful community and culture building programming that attracts top talent and enriches our environment for Medallians. We recognize these contributions as extremely valuable. Our Medallian-led ERGs have significant impact, both internally and externally, and they are encouraged to give back to causes that matter to them. In fiscal year 2021, our ERGs donated over $20,000 to vitally important causes as part of our ERG Gift Matching program. In addition, Medallia donated $200,000 focused on supporting the Black community with donations to Black Girls CODE, Code2040, Black Girl Ventures and the Equal Justice Initiative. We also provide resources and training, such as anti-racism and managing unconscious bias training to employees at all levels to ensure that we are hiring, promoting and retaining diverse teams.
Corporate Information
We were incorporated in California in July 2000. We incorporated a wholly-owned subsidiary of Medallia, Inc. in Delaware in December 2009. In October 2010, we merged our California and Delaware corporations and the surviving entity was Medallia, Inc., a Delaware corporation. Our principal executive offices are located at 575 Market Street, Suite 1850, San Francisco, California 94105, and our telephone number is (650) 321-3000. We completed our initial public offering in July 2019, and our common stock is listed on the New York Stock Exchange under the symbol “MDLA.”
Available Information
Our website address is http://www.medallia.com/, and our investor relations website is located at http://investor.medallia.com/. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our investor relations website as soon as reasonably practicable after we file such material with the Securities Exchange Commission (SEC).
Medallia investors and others should note that we announce material information to the public about our company, products and services and other issues through a variety of means, including our website, our investor relations website, press releases, SEC filings, and public conference calls, in order to achieve broad, non-exclusionary distribution of information to the public and for complying with our disclosure obligations under Regulation FD. We encourage our investors and others to review the information we make public in these locations as such information could be deemed to be material information. Please note that this information may be updated from time to time.
The contents of any website referred to in this Annual Report on Form 10-K are not intended to be incorporated into this filing. Further, the Company’s references to the URLs for these websites are intended to be inactive textual references only.

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ITEM 1A. RISK FACTORS
Item 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto, before making a decision to invest in our common stock. Our business, results of operations, financial condition or prospects could also be harmed by risks and uncertainties that are not presently known to us or that we currently believe are not material. If any of the risks actually occur, our business, results of operations, financial condition and prospects could be adversely affected. In that event, the market price of our common stock could decline, and you could lose all or part of your investment.
Summary of Risk Factors
The below is a summary of principal risks to our business and risks associated with ownership of our stock. It is only a summary. You should read the more detailed discussion of risks set forth below and elsewhere in this report for a more complete discussion of the risks listed below and other risks.
•The extent to which the COVID-19 pandemic, including the resulting global economic uncertainty, and measures taken in response to the pandemic could continue to impact our business and future results of operations and financial condition will depend on future developments, which are highly uncertain and difficult to predict.
•We have incurred significant net losses in recent years, we expect to incur losses in the future, and we may not be able to generate sufficient revenue to achieve and maintain profitability.
•We derive, have derived and expect to continue to derive, the substantial majority of our revenue from subscriptions to our platform. Any failure of our platform to satisfy customer demands, achieve increased market acceptance or adapt to changing market dynamics would adversely affect our business, results of operations, financial condition and growth prospects.
•If we fail to effectively manage our growth and organizational change, our business and results of operations could be harmed.
•The market for experience management solutions is new and rapidly evolving, and if this market develops more slowly than we expect or declines, or develops in a way that we do not expect, our business could be adversely affected.
•The majority of our customer base consists of large and mid-sized enterprises, and we currently generate a significant portion of our revenue from a relatively small number of enterprises, the loss of any of which could harm our business, results of operations and financial condition.
•We rely on our technology infrastructure, including third-party data centers, and any interruption or delay in service from these facilities could impair the delivery of our platform and harm our business.
•If we or any of the third parties we work with experience a security breach or other incident or unauthorized parties otherwise obtain access to our customers’ data, our data or our platform, our platform may be perceived as not being secure, our reputation may be harmed, demand for our platform may be reduced and we may incur significant liabilities.
•Privacy concerns and laws or other domestic or foreign regulations may reduce the effectiveness of our platform and adversely affect our business.
•Servicing our current and future debt may require a significant amount of cash, and we may not have sufficient cash flow from our business to pay our indebtedness. Our payment obligations under such indebtedness may limit the funds available to us, and the terms of our debt agreements may restrict our flexibility in operating our business or otherwise adversely affect our results of operations.
•Delaware law and provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make a merger, tender offer, or proxy contest difficult, thereby depressing the market price of our common stock and the Notes.
Risks Related to Our Business and Our Industry
The extent to which the COVID-19 pandemic, including the resulting global economic uncertainty, and measures taken in response to the pandemic could continue to impact our business and future results of operations and financial condition will depend on future developments, which are highly uncertain and difficult to predict.
The COVID-19 pandemic has disrupted the flow of the economy and put unprecedented strains on governments, health care systems, educational institutions, businesses and individuals around the world. The impact on the global population and the continued duration of the COVID-19 pandemic is difficult to assess or predict. It is even more difficult to predict the impact on the global economic market, which will be highly dependent upon the actions of governments, businesses and other organizations in response to the pandemic and the effectiveness of those actions. The pandemic has already caused, and is likely to result in further, significant disruption of global financial markets and economic uncertainty. A recession or other sustained adverse market events resulting from the spread of COVID-19 could adversely affect our business and the value of our common stock.
Our customers or potential customers, particularly in industries most impacted by the COVID-19 pandemic such as hospitality, transportation, retail, manufacturing, and insurance, have reduced or delayed their spending on customer experience, which could adversely impact our business. Certain of our customers have requested lengthened payment terms during the year ended January 31, 2021. We have experienced and may continue to experience curtailed customer demand for our platform, reduced customer spending or contract duration, delayed collections, increased allowances for doubtful accounts, lengthened payment terms and increased competition due to changes in terms, that could adversely affect our business, results of operations and overall financial performance in future periods.
In response to the COVID-19 pandemic, we have temporarily closed our offices (including our headquarters), required our employees to work remotely, implemented travel restrictions for all non-essential business, and shifted certain of our customer, industry, analyst, investor, and employee events, including our Medallia Experience 2020 conference, to virtual-only, and we may similarly alter, postpone or cancel events in the future. If the COVID-19 pandemic worsens, especially in regions in which we have material operations or sales, our business activities originating from affected areas, including sales-related activities, could be adversely affected. Disruptive activities could include business closures in impacted areas, further restrictions on our employees’ and other service providers’ ability to travel, impacts to productivity if our employees or their family members experience health issues and potential delays in the hiring and onboarding of new employees. Further, we may experience increased cyberattacks and security challenges as our employee base works remotely.
The extent and continued impact of the COVID-19 pandemic on our business will depend on certain developments including: the duration and continued spread of the outbreak; government responses to the pandemic; how quickly and to what extent normal economic and operating activities can resume; impact on our customers and our sales cycles; impact on our customer, industry or employee events; and effect on our partners and vendors, all of which are uncertain and cannot be predicted. The effect of the COVID-19 pandemic may not be fully reflected in our results of operations and overall financial performance until future periods.
We have incurred significant net losses in recent years, we expect to incur losses in the future, and we may not be able to generate sufficient revenue to achieve and maintain profitability.
We have incurred significant net losses in recent periods, including net losses of approximately $148.7 million, $112.3 million and $82.2 million for the fiscal years ended January 31, 2021, 2020 and 2019, respectively. We had an accumulated deficit of approximately $629.6 million as of January 31, 2021. We expect our costs will increase over time and our losses to continue as we expect to invest significant additional funds towards growing our business and operating as a public company. To date, we have financed our operations principally through subscription payments by customers for use of our platform, equity and debt financings, capital lease arrangements and loans for equipment. We have expended and expect to continue to expend substantial financial and other resources on:
•developing our Experience Management platform, including investing in our research and development team, developing or acquiring new products, features and functionality and improving the scalability, availability and security of our platform;
•our technology infrastructure, including expansion of our activities in third-party data centers in which we lease space and where we manage our own hosting and network equipment, enhancements to our network operations and infrastructure and hiring of additional employees for our operations team;
•sales and marketing, including expansion of our direct sales organization and marketing efforts; and
•additional international expansion in an effort to increase our customer base and sales.
These investments may be more costly than we expect and may not result in increased revenue or growth in our business. Any failure to increase our revenue sufficiently to keep pace with our investments and other expenses could prevent us from achieving and maintaining profitability or positive cash flow on a consistent basis. If we are unable to successfully address these risks and challenges as we encounter them, our business, results of operations and financial condition would be adversely affected. In the event that we fail to achieve or maintain profitability, this could negatively impact the value of our common stock.
We derive, have derived and expect to continue to derive, the substantial majority of our revenue from subscriptions to our platform. Any failure of our platform to satisfy customer demands, achieve increased market acceptance or adapt to changing market dynamics would adversely affect our business, results of operations, financial condition and growth prospects.
We derive, have derived, and expect to continue to derive the substantial majority of our revenue from subscriptions to our platform. As such, the market acceptance of our platform is critical to our success. Demand for our platform is affected by a number of factors, many of which are beyond our control, including the extension of our platform for new use cases, the timing of development and release of new products, features and functionality introduced by us or our competitors, technological change and the growth or contraction of the market in which we compete.
The COVID-19 pandemic has created significant additional uncertainty in the global economy. The COVID-19 pandemic and health measures taken by governments and private industry in response to the COVID-19 pandemic, including stay-at-home orders and travel restrictions, have had a significant effect on the economy. Continued uncertainty about the pandemic, associated economic consequences and potential relief measures may have a long-term adverse effect on the economy, our customers, the demand for our platform and our business.
In addition, we expect that an increasing focus on customer satisfaction and the growth of various communications channels and new technologies will profoundly impact the market for experience management solutions. We believe that enterprises are increasingly looking for flexible solutions that bridge across traditionally separate systems for experience management, marketing automation and customer relationship management. If we are unable to meet this demand to manage customer experiences through flexible solutions designed to address a broad range of needs, or if we otherwise fail to achieve more widespread market acceptance of our platform, our business, results of operations, financial condition and growth prospects may be adversely affected.
If we fail to effectively manage our growth and organizational change, our business and results of operations could be harmed.
We have experienced, and may continue to experience, rapid growth and organizational change, which has placed, and may continue to place, significant demands on our management, operational and financial resources. In addition, we operate globally, sell subscriptions in more than 80 countries and have established subsidiaries in Argentina, Australia, Brazil, Canada, Chile, Colombia, the Czech Republic, France, Germany, India, Israel, Japan, Mexico, the Netherlands, Norway, Singapore, Spain, the United Kingdom, and the United States. We plan to continue to expand our international operations into other countries in the future, which will place additional demands on our resources and operations. We have also experienced significant growth in the number of enterprises, end users, transactions, and amount of data that our platform and our associated hosting infrastructure support. For example, our number of enterprise customers has grown to 1,077 as of January 31, 2021 from 757 as of January 31, 2020, an increase of 42%. Using the methodology of counting as a single enterprise customer all
subsidiaries and divisions of a single parent, we had 787 as of January 31, 2021 from 513 as of January 31, 2020 parent enterprise customers, an increase of 53%.
Further, in order to successfully manage our growth, our organizational structure has become, and may continue to become, more complex. In addition, we may need to scale and adapt our operational, financial and management controls further, as well as our reporting systems and procedures to manage this complexity and our increased responsibilities as a public company. This will require us to invest in and commit significant financial, operational and management resources to grow and change in these areas without undermining the corporate culture that has been critical to our growth so far. These investments will require significant expenditures, and any investments we make will occur in advance of the benefits from such investments, making it difficult to determine in a timely manner if we are efficiently allocating our resources. If we do not achieve the benefits anticipated from these investments, if the achievement of these benefits is delayed, or if we are unable to achieve a high level of efficiency as our organization grows, in a manner that preserves the key aspects of our culture, our business, results of operations and financial condition may be adversely affected.
The market for experience management solutions is new and rapidly evolving, and if this market develops more slowly than we expect or declines, or develops in a way that we do not expect, our business could be adversely affected.
Because we generate, and expect to continue to generate, a large majority of our revenue from the sale of subscriptions to our platform, we believe our success and growth will depend to a substantial extent on the widespread acceptance and adoption of experience management solutions in general, and of our platform in particular. The market for experience management solutions is new and rapidly evolving, and if this market fails to grow or grows more slowly than we currently anticipate, demand for our platform could be adversely affected. The experience management market is also subject to rapidly changing user demand and trends and as a result it is difficult to predict enterprise adoption rates and demand for our platform, the future growth rate and size of our market or the impact of competitive solutions.
The expansion of the experience management market depends on a number of factors, including awareness of the experience management category generally, ease of adoption and use, cost, features, performance and overall platform experience, data security and privacy, interoperability and accessibility across devices, systems and platforms and perceived value. If experience management solutions do not continue to achieve market acceptance, or there is a reduction in demand for experience management solutions for any reason, including a lack of category or use case awareness, technological challenges, weakening economic conditions, including as a result of the COVID-19 pandemic, data security or privacy concerns, competing technologies and products or decreases in information technology spending, our business, results of operations and financial condition would be adversely affected. Some of our customers and potential customers are in industries most impacted by the COVID-19 pandemic, such as hospitality, transportation, retail, and insurance, which could adversely affect our business.
If we are unable to attract new customers in a manner that is cost-effective and assures customer success, then our business, results of operations and financial condition would be adversely affected.
In order to grow our business, we must continue to attract new customers in a cost-effective manner and enable such enterprises to realize the benefits associated with our platform. We may not be able to attract new enterprises to our platform for a variety of reasons, including as a result of their use of traditional approaches to experience management, their internal timing or budget or the pricing of our platform compared to products and services offered by our competitors. After a customer makes a purchasing decision, we often must also help them successfully implement our platform in their organization, a process that can last several months.
Even if we do attract enterprises, the cost of new customer acquisition or ongoing customer support may prove so high as to prevent us from achieving or sustaining profitability. We intend to continue to hire additional sales personnel on a global basis, increase our marketing activities to help educate the market about the benefits of our platform, grow our domestic and international operations and build brand awareness. If the costs of these sales and marketing efforts increase dramatically or if they do not result in the cost-effective acquisition of additional
customers or substantial increases in revenue, our business, results of operations and financial condition may be adversely affected.
Our business depends on our customers renewing their subscriptions and expanding their use of our platform. Any decline in our customer renewals or expansion would harm our business, results of operations and financial condition.
In order for us to maintain or improve our results of operations, it is important that we maintain and expand our relationships with our customers and that our customers renew their subscriptions when the initial or renewal subscription term expires or otherwise expand their subscription program with us. Our customers are not obligated to, and may elect not to, renew their subscriptions on the same or similar terms after their existing subscriptions expire. Some of our customers have in the past elected, and may in the future elect, not to renew their agreements with us or otherwise reduce the scope of their subscriptions, and we do not have sufficient operating history with our business model and pricing strategy to accurately predict long-term customer renewal rates. In addition, the growth of our business depends in part on our customers expanding their use of our platform, which can be difficult to predict.
Our customer renewal rates, as well as the rate at which our customers expand their use of our platform, may decline or fluctuate as a result of a number of factors, including the customers’ satisfaction with our platform, defects or performance issues, our customer and product support, our prices, mergers and acquisitions affecting our customer base, the effects of global economic conditions, including weakened economic conditions as a result of the COVID-19 pandemic, the entrance of new or competing technologies and the pricing of such competitive offerings or reductions in the enterprises’ spending levels for any reason. If our customers do not renew their subscriptions, renew on less favorable terms or reduce the scope of their subscriptions, our revenue may decline and we may not realize improved results of operations from our customer base, and as a result, our business and financial condition could be adversely affected.
The market in which we participate is new and rapidly evolving, and if we do not compete effectively, our results of operations and financial condition could be harmed.
The market for experience management solutions is fragmented, rapidly evolving and highly competitive. Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or enterprise requirements. With the introduction of new technologies, the evolution of our platform and new market entrants, we expect competition to intensify in the future. Pricing pressures and increased competition generally could result in reduced sales, reduced margins, losses or the failure of our platform to achieve or maintain more widespread market acceptance, any of which could harm our business.
Our competitors vary in size and in the breadth and scope of the products and services they offer. While we do not believe that any of our competitors currently offer a full suite of experience management solutions that competes across the breadth of our platform, certain features of our platform compete in particular segments of the overall experience management category. For example, we compete with a number of SaaS providers of survey tools, including Qualtrics and SurveyMonkey, many of which offer significantly lower prices for their products or services. We also compete with contact center technology companies, such as CloudCherry (acquired by Cisco), Nice Ltd. and Verint Systems Inc., which may have longer operating histories, have invested heavily in experience management and may aggressively expand their products and services in the near future. Additionally, we face competition from full-service consulting firms such as Maritz CX and Towers Watson, which bundle additional market research services with competing products and services. Further, other established SaaS providers and other technology companies not currently focused on experience management may expand their services to compete with us.
Many of our current and potential competitors benefit from competitive advantages over us, including:
•greater name and brand recognition;
•longer operating histories;
•deeper product development expertise;
•greater market penetration;
•larger and more established customer bases and relationships;
•larger sales forces and more established networks;
•larger marketing budgets; and
•access to significantly greater financial, human, technical and other resources.
Some of our competitors may be able to offer products or functionality similar to ours at a more attractive price than we can, including by integrating or bundling such products with their other product offerings. Additionally, some potential customers, particularly large organizations, have elected, and may in the future elect, to develop their own internal experience management solutions. Acquisitions, partnerships and consolidation in our industry may provide our competitors even more resources or may increase the likelihood of our competitors offering bundled or integrated products that we may not be able to effectively compete against. In particular, as we rely on the availability and accuracy of various forms of customer feedback and input data, the acquisition of any such data providers or sources by our competitors could affect our ability to continue accessing such data. Furthermore, we are also subject to the risk of future disruptive technologies. If new technologies emerge that are able to collect and process experience data, or otherwise develop experience management solutions at lower prices, more efficiently, more conveniently or with functionality and features enterprises prefer to ours, such technologies could adversely impact our ability to compete. If we are not able to compete successfully against our current and future competitors, our business, results of operations and financial condition may be adversely affected.
If we are not able to effectively develop platform enhancements, introduce new products or keep pace with technological developments, our business, results of operations and financial condition could be adversely affected.
Our future success, in part, will depend on our ability to adapt and innovate. To attract new customers and increase revenue from our existing customers, we will need to enhance and improve our existing platform and introduce new products, features and functionality. Enhancements and new products that we develop may not be introduced in a timely or cost-effective manner, may contain errors or defects and may have interoperability difficulties with our platform or other products. We have in the past experienced delays in our internally planned release dates of new products, features and functionality, and there can be no assurance that these developments will be released according to schedule. We have also invested, and may continue to invest, in the acquisition of complementary businesses and technologies that we believe will enhance our platform. For example, during the fiscal year ended January 31, 2021 we completed acquisitions of (i) LivingLens, a video feedback platform provider; (ii) Voci, a real-time speech to text platform, that delivers a rich single view of the customer that can power an exceptional customer experience; (iii) Stella Connect, a customer feedback and quality management platform that helps customer support teams analyze and improve performance in real time; and (iv) Sense360, a consumer insights platform that provides always-on, consumer and competitive intelligence from buyer and non-buyer segments and answers pressing questions such as what is driving traffic, what are the growth opportunities in a specific market and which competitors are gaining share and why. In addition, so far in fiscal year ending January 31, 2022, we completed the acquisition of Decibel, a leader in digital experience analytics.
However, if we are unable to integrate these acquisitions successfully or achieve the expected benefits of such acquisitions in a timely and effective manner, then our business, results of operations and financial condition could be adversely affected.
In addition, because our platform is designed to operate on a variety of networks, applications, systems and devices, we will need to continually modify and enhance our platform to keep pace with technological advancements in such networks, applications, systems and devices. If we are unable to respond in a timely, user-friendly and cost-effective manner to these rapid technological developments, our platform may become less marketable and less competitive or obsolete, and our business, results of operations and financial condition may be adversely affected.
Any failure by us or our partners to offer high-quality customer service and support may adversely affect our relationships with our existing and prospective customers, and in turn adversely affect our business reputation, results of operations and financial condition.
In implementing and using our platform, our customers depend on our customer service and support, including premium support offerings, which in some cases may be provided by third-party partners, to resolve
complex technical and operational issues in a timely manner. We, or our partners, may be unable to respond quickly enough to accommodate short-term increases in demand for customer or product support. We also may be unable to modify the nature, scope and delivery of our professional services or customer and product support to compete with changes in solutions provided by our competitors. Increased customer demand for support, without corresponding revenue, could increase costs and adversely affect our results of operations and financial condition. Our sales are highly dependent on our reputation and on positive recommendations from our existing customers. Any failure to maintain high-quality customer or product support, or a market perception that we do not maintain high-quality customer or product support, could adversely affect our reputation, our ability to sell our platform, and in turn our business, results of operations, and financial condition.
The majority of our customer base consists of large and mid-sized enterprises, and we currently generate a significant portion of our revenue from a relatively small number of enterprises, the loss of any of which could harm our business, results of operations and financial condition.
In the years ended January 31, 2021, 2020 and 2019 our top 10 customers accounted for 24%, 25% and 25% of our revenue, respectively. The majority of our customer base consists of large and mid-sized enterprises, many of which have high subscription amounts to our platform. For all periods presented, we have relied on sales of our platform to large enterprises for a significant majority of our revenue. Additionally, some of our customers and potential customers are in industries most impacted by the COVID-19 pandemic, such as hospitality, transportation, and retail. Accordingly, the loss of any one of our large customers, including because of the COVID-19 pandemic, could have a relatively higher impact on our business and results of operations than the loss of a client in businesses that have a broader client base where each client contributes to a smaller portion of revenue. While we expect that the revenue from our largest customers will decrease over time as a percentage of our total revenue as we generate more revenue from other customers, we also believe that revenue from our largest customers may continue to account for a significant portion of our revenue, at least in the near term. In the event that these large customers discontinue the use of our platform or use our platform in a more limited capacity, our business, results of operations and financial condition could be adversely affected.
If we or any of the third parties we work with experience a security breach or other incident or unauthorized parties otherwise obtain access to our customers’ data, our data or our platform, our platform may be perceived as not being secure, our reputation may be harmed, demand for our platform may be reduced and we may incur significant liabilities.
Use of our platform involves storing, transmitting and processing our customers’ proprietary data, including personal data regarding their customers or employees. We may become the target of cyber-attacks by third parties seeking unauthorized access to our data or our customers’ data or to disrupt our ability to provide our platform. While we have taken steps to protect the confidential information that we have access to, including confidential information we may obtain through our customer support services or enterprise usage of our platform, our security measures or those of our third-party service providers could be breached or we could suffer data loss or unauthorized access to our platform or the systems or networks used in our business.
We also process, store and transmit our own data as part of our business and operations. This data may include personally identifiable, confidential or proprietary information. There can be no assurance that any security measures that we or our third-party service providers have implemented will be effective against current or future security threats. While we utilize certain measures in an effort to protect the security of our platform and the availability, integrity, confidentiality and security of our data, our security measures or those of our third-party service providers could fail and result in unauthorized access to or use of our platform or unauthorized, accidental or unlawful access to, or disclosure, modification, misuse, loss or destruction of, our or our customers’ data.
In addition, computer malware, viruses and computer hacking, fraudulent use, social engineering (predominantly phishing attacks) and general hacking have become more prevalent, and such incidents or incident attempts have occurred on our platform in the past and may occur on our platform in the future. Though it is difficult to determine what, if any, harm may directly result from any specific interruption or attack, any failure to maintain performance, reliability, security and availability of our platform to the satisfaction of our customers may harm our reputation and our ability to retain existing customers and attract new customers. A substantial portion of our business is with large enterprises, which often have heightened sensitivity to data security and privacy issues, and
any actual or perceived security breach or other incident may have an especially large impact on the attractiveness of our platform to our customer base. Further, we may experience increased cyberattacks and security challenges as our employee base works remotely due to the COVID-19 pandemic.
Because there are many different security breach techniques and such techniques continue to evolve, we may be unable to anticipate attempted security breaches or implement adequate preventative measures. We may also experience security breaches or other incidents that may remain undetected for an extended period of time. Further, third parties may also conduct attacks designed to disrupt or deny access to our platform. Additionally, other third parties we work with may experience security breaches or other incidents that affect our platform or our data or our customers’ data. Actual or perceived security breaches or other security incidents could result in unauthorized use of or access to our platform, unauthorized, accidental or unlawful access to, or disclosure, modification, misuse, loss or destruction of, our or our customers’ data, litigation, indemnity obligations, regulatory investigations and other proceedings, severe reputational damage adversely affecting client or investor confidence and causing damage to our brand, disruption to our operations, damages for contract breach and other liabilities and may adversely affect our business, results of operations and financial condition.
Any actual or perceived security breach or other incident may lead to the expenditure of significant financial and other resources in efforts to investigate or correct a breach, address and eliminate vulnerabilities and prevent future security breaches or incidents, as well as the incurring of significant expenses for remediation that may include liability for stolen assets or information, repair of system damage that may have been caused, incentives offered to our customers or business partners in an effort to maintain business relationships after a breach and other liabilities. We have incurred and expect to incur significant expenses in an effort to prevent security breaches and other incidents, including deploying additional personnel and protection technologies, training personnel and engaging third-party experts and consultants.
We cannot be certain that our insurance coverage will be adequate for data security liabilities actually incurred or cover any indemnification claims against us relating to any security incident, that insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could adversely affect our business, reputation, results of operations and financial condition.
Furthermore, because data security is a critical competitive factor in our industry, we make numerous statements in our privacy policies and terms of service, through our certifications to certain industry standards and in our marketing materials providing assurances about the security of our platform, including detailed descriptions of security measures we employ. Should any of these statements be untrue or become untrue, even through circumstances beyond our reasonable control, we may face claims, investigations or other proceedings by the U.S. Federal Trade Commission, state and foreign regulators and private litigants.
Interruptions or suboptimal performance associated with our technology and infrastructure may adversely affect our business, results of operations and financial condition.
Our continued growth, brand, reputation and ability to attract and retain customers depend in part on the ability of our customers to access our platform at any time and within an acceptable amount of time. Our platform is proprietary, and we are dependent on the expertise and efforts of members of our engineering, operations and software development teams for their continued performance. We have experienced, and may in the future experience, service disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, introductions of new functionality, human or software errors, capacity constraints due to an overwhelming number of users accessing our platform concurrently and denial of service attacks or other security-related incidents. In some instances, we may not be able to rectify or even identify the cause or causes of these performance issues within an acceptable period of time. It may become increasingly difficult to maintain and improve our performance, especially during peak usage times, as our platform becomes more complex and our user traffic increases. If our platform is unavailable or if users are unable to access our platform within a reasonable amount of time, or at all, our business, results of operations and financial condition would be adversely affected. Moreover, some of our customer agreements include performance guarantees and service-level standards that
obligate us to provide credits or termination rights in the event of a significant disruption in the functioning of our platform.
To the extent that we do not effectively address capacity constraints, upgrade our systems and data centers as needed and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology or an increased user base, we may experience service interruptions and performance issues, and our business, results of operations and financial condition may be adversely affected.
Our business and growth depend in part on the success of our strategic relationships with third parties, as well as on the continued availability and quality of feedback data from third parties over whom we do not have control.
We depend on, and anticipate that we will continue to depend on, various third-party relationships in order to sustain and grow our business, including technology companies whose products integrate with ours. Failure of any of these technology companies to maintain, support or secure their technology platforms in general, and our integrations in particular, or errors or defects in their technologies or products, could adversely affect our relationships with our customers, damage our brand and reputation and result in delays or difficulties in our ability to provide our platform. We also rely on the availability and accuracy of various forms of client feedback and input data, including data solicited via survey or based on social media data sources, and any changes in the availability or accuracy of such data could adversely impact our business and results of operations and harm our reputation and brand.
Identifying, negotiating and documenting relationships with strategic third parties such as systems integrators, implementation, software and technology and consulting partners, servicing subcontractors and data providers requires significant time and resources. Furthermore, integrating third-party technology is complex, costly and time-consuming and increases the risk of defects or errors on our platform and our platform’s functionality. Our agreements with technology partners, implementation providers, servicing subcontractors and data providers are typically limited in duration, non-exclusive and do not prohibit our partners from working with our competitors or from offering competing services. Our competitors may be effective in providing incentives to third parties to favor their solutions or to prevent or reduce subscriptions to our platform.
We rely on our ecosystem of partners to support our cost structure. If we are unsuccessful in establishing or maintaining our relationships with these strategic third parties, our ability to compete in the marketplace or to grow our revenue could be impaired and our results of operations would suffer. Even if we are successful in establishing and maintaining these relationships, we cannot assure you that they will result in improved results of operations.
We rely on our infrastructure and third-party data centers, and any interruption or delay in service from these facilities could impair the delivery of our platform and harm our business.
We currently serve our customers from a combination of our own custom-built infrastructure that we lease and operate in co-location facilities, hosted by several different providers, and third-party data centers located primarily in the United States and Europe. Some of these facilities may be located in areas prone to natural disasters and may experience events such as earthquakes, floods, fires, power loss, telecommunication failures and similar events. They may also be subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. As we grow and continue to add new co-location facilities and third-party data centers and expand the capacity of our existing co-location facilities and third-party data centers, we may move or transfer our data and our customers’ data. Despite precautions taken during this process, any unsuccessful data transfers may impair the delivery of our platform. Any damage to, or failure of, our systems, or those of our third-party data centers, could result in interruptions on our platform or damage to, or loss or compromise of, our data and our customers’ data. Any impairment of our or our customers’ data or interruptions in the functioning of our platform, whether due to damage to, or failure of, our co-location facilities and third-party data centers or unsuccessful data transfers, may reduce our revenue, cause us to issue credits or pay penalties, subject us to claims for indemnification and litigation, cause our customers to terminate their subscriptions and adversely affect our reputation, renewal rates and our ability to attract new customers. Our business will also be harmed if our existing and potential customers believe our platform is unreliable.
Further, our leases and other agreements with data center providers expire at various times, and the owners of our data center facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If services are interrupted at any of these facilities, or we are unable to renew these agreements on commercially reasonable terms, or if one of our data center providers is acquired or encounters financial difficulties, including bankruptcy, we may be required to transfer our servers and other infrastructure to new data centers, and we may incur significant costs and possible service interruptions in connection with doing so. In addition, if we do not accurately plan for our data center capacity requirements, and we experience significant strains on our data center capacity, we may experience delays and additional expenses in arranging new data center arrangements, and our customers could experience service outages that may subject us to financial liabilities, result in customer losses and harm our business.
We depend and rely upon SaaS technologies from third parties to operate our business, and interruptions or performance problems with these technologies may adversely affect our business and results of operations.
We rely heavily on hosted SaaS applications from third parties in order to operate critical functions of our business, including billing and order management, financial accounting services, enterprise resource planning, customer relationship management, human resources management and customer support. If these services become unavailable or lose certain functionalities that we depend on, due to extended outages, interruptions, errors or defects, acquisitions or integration into other solutions or because they are no longer available on commercially reasonable terms, our expenses could increase, our ability to manage finances could be interrupted and our processes for managing sales of our platform and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and implemented, all of which could adversely affect our business.
Real or perceived defects or errors on our platform could harm our reputation, result in significant costs to us, and impair our ability to sell subscriptions to our platform and related services.
The software underlying our platform is complex and may contain material defects or errors, particularly when first introduced or when new features or capabilities are released. In addition, our solution depends on the ability of our software to store, retrieve, process and manage immense amounts of data. Any real or perceived defects, errors, failures, bugs or vulnerabilities on our platform could result in negative publicity, data security, access, retention or other performance issues and customer terminations and impair our ability to sell subscriptions to our platform and related services in the future. The costs incurred in correcting any defects in our platform may be substantial and could adversely affect our results of operations. Although we continually test our platform for defects and work with customers through our customer support organization to identify and correct errors, we have from time to time found defects or errors on our platform, and defects or errors on our platform are likely to occur again in the future. Any defects that cause interruptions to the availability of our platform or other performance issues could result in, among other things:
•lost revenue or delayed market acceptance and sales of our platform;
•early termination of customer agreements or loss of customers;
•credits or refunds to customers;
•product liability lawsuits and other claims against us;
•diversion of development resources;
•increased expenses associated with remedying any defect, including increased technical support costs;
•injury to our brand and reputation; and
•increased maintenance and warranty costs.
While our customer agreements typically contain limitations and disclaimers that purport to limit our liability for damages related to defects in our solution, such limitations and disclaimers may not be enforced by a court or other tribunal or otherwise effectively protect us from such claims.
We depend on our management team and key employees, and the loss of one or more of these employees or an inability to attract and retain highly skilled employees could adversely affect our business.
Our success depends substantially on the continued services of our management team and key employees, who are critical to our vision, strategic direction, culture, services and technology. From time to time, there may be additional changes in our management team resulting from the hiring or departure of executives, which could disrupt our business. New hires also require significant training and, in most cases, take significant time before they achieve full productivity. Furthermore, we do not have employment agreements with members of our management team or other key employees that require them to continue to work for us for any specified period and, therefore, they could terminate their employment with us at any time. The loss of one or more of our executives or key employees, or the failure by our executives to effectively work with our employees and lead our company, could have an adverse effect on our business.
In addition, to execute our growth plan, we must attract and retain highly qualified personnel globally. Competition for these individuals in the San Francisco Bay Area, where our headquarters is located, and in other global locations, including where we maintain offices, is intense, especially for hiring experienced software engineers and sales professionals. We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. If we hire employees from competitors or other companies, their former employers may attempt to assert that these employees or we have breached their legal obligations, resulting in a diversion of our time and resources. In addition, job candidates and existing employees often consider the value of the equity awards they receive in connection with their employment. If the perceived value of our equity awards declines, it may adversely affect our ability to recruit and retain highly skilled employees. Furthermore, we are limited in our ability to recruit internationally by restrictive domestic immigration laws. If we fail to attract new personnel or fail to identify, retain and motivate our current employees, our business and future growth prospects could be adversely affected.
Our revenue growth rate has fluctuated in prior periods and may decline again in the future.
Our revenue growth rate has fluctuated in prior periods. We have previously experienced periods of revenue growth rate decline and our revenue growth rate may decline again in future periods as the size of our customer base increases and as we achieve higher market penetration rates. In particular, we expect the growth rate of our subscription revenue to fluctuate from period to period, and in the near-term subscription revenue growth rates may be lower compared to comparable periods in the prior fiscal year. Many factors may also contribute to declines in our revenue growth rate, including slowing demand for our platform, increasing competition, a decrease in the growth of our overall market, weakened global economic conditions, including as a result of the COVID-19 pandemic, our failure to continue to capitalize on growth opportunities and the maturation of our business, among others. You should not rely on the revenue growth of any prior quarterly or annual period as an indication of our future performance. If our revenue growth rate declines, investors’ perceptions of our business and the trading price of our common stock could be adversely affected.
We invest significantly in research and development, and to the extent our research and development investments do not translate into new solutions or material enhancements to our current solutions, or if we do not use those investments efficiently, our business and results of operations would be harmed.
A key element of our strategy is to invest significantly in our research and development efforts to improve and develop new technologies, features and functionality for our platform. For the years ended January 31, 2021, 2020 and 2019 our research and development expenses were 25%, 24% and 28% of our revenue, respectively. If we do not spend our research and development budget efficiently or effectively, our business may be harmed and we may not realize the expected benefits of our strategy. Moreover, research and development projects can be technically challenging, time-consuming and expensive. The nature of these research and development cycles may cause us to experience delays between the time we incur expenses associated with research and development and the time we are able to offer compelling platform updates and generate revenue, if any, from such investment. Additionally, anticipated enterprise demand for a solution or solutions we are developing could decrease after the development cycle has commenced, and we would nonetheless be unable to avoid substantial costs associated with the development of any such solutions or solution. If we expend a significant amount of resources on research
and development and our efforts do not lead to the successful introduction or improvement of solutions that are competitive in our current or future markets, our business and results of operations would be adversely affected.
We may fail to accurately predict the optimal pricing strategies necessary to attract new customers, retain existing customers and respond to changing market conditions.
We have in the past, and may in the future, need to change our pricing model from time to time. As the market for our platform matures, or as competitors introduce new solutions that compete with ours, we may be unable to attract new customers at the same prices or based on the same pricing models that we have used historically. While we do and will attempt to set prices based on our prior experiences and customer feedback, our assessments may not be accurate, and we could be underpricing or overpricing our platform and professional services. In addition, if the offerings on our platform or our professional services change, then we may need to revise our pricing strategies. Any such changes to our pricing strategies or our ability to efficiently price our offerings could adversely affect our business, results of operations and financial condition. In addition, as we expand internationally, we also must determine the appropriate pricing strategy to enable us to compete effectively internationally. Pricing pressures and decisions could result in reduced sales, reduced margins, losses or the failure of our platform to achieve or maintain more widespread market acceptance, any of which could negatively impact our overall business, results of operations and financial condition. Moreover, larger organizations may demand substantial price concessions. As a result, we may be required to price below our targets in the future, which could adversely affect our revenue, gross margin, profitability, cash flows and financial condition.
If our investments to increase adoption of our platform by small and medium-sized businesses are not successful, our business, results of operations and financial condition may be adversely affected.
Historically, we have relied on sales of our platform to large enterprises for a significant majority of our revenue. We currently generate only a small portion of our revenue from enterprises that are mid-sized enterprises. Our ability to increase our customer base, especially among mid-sized enterprises, and achieve broader market acceptance of our platform will depend, in part, on our ability to effectively organize, focus and train our sales and marketing employees, develop efficient pricing and product strategies for mid-sized enterprise use cases and educate the mid-sized enterprise market about the benefits and features of our platform.
We have limited experience selling to mid-sized enterprises and only began hiring sales and marketing personnel with a mid-sized enterprise focus in 2018. Adapting our platform and marketing efforts to target the mid-sized enterprise market will require the diversion of significant resources that could otherwise be deployed to grow the business. If the costs of these sales and marketing efforts and investments do not result in corresponding increases in revenue, our business, results of operations, and financial condition may be adversely affected. In addition, small and mid-sized enterprises may have been disproportionately affected by the COVID-19 pandemic and the related measures taken to protect the public health such as stay-at-home orders. Many of these enterprises may be experiencing financial difficulties and may not be in a position to purchase our platform, which may adversely affect our revenue, business, results of operations and financial condition.
Failure to effectively expand our sales and marketing capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our platform.
Increasing our customer base and achieving broader market acceptance of our platform will depend, to a significant extent, on our ability to effectively expand and manage our sales and marketing operations and activities. We are substantially dependent on our direct sales force and on our marketing efforts to obtain new customers. We believe that there is significant competition for experienced sales professionals with the sales skills and technical knowledge that we currently or may in the future require. Our ability to achieve revenue growth in the future will depend, in part, on our success in recruiting, training and retaining enough qualified and experienced sales professionals. New hires require significant training and time before they achieve full productivity, particularly in new sales segments, such as with mid-sized enterprises, and new industries or geographies. Our recent hires and planned hires may not become as productive as quickly as we expect, or at all, and we may be unable to hire or retain enough qualified individuals in the future in the markets and segments where we do business. Because we do not have a long history of expanding our sales force or managing a sales force at the scale that we intend to operate, we cannot accurately predict whether, or to what extent, our sales will increase as we expand our sales
force or how long it will take for sales personnel to become productive. Furthermore, due to our limited experience selling direct to mid-sized enterprises through our sales force, the results of any such efforts are difficult to predict and may result in diverted financial and management resources without a corresponding increase in revenue. Our business will be harmed if our sales expansion efforts do not generate a significant increase in revenue.
Our sales cycle with enterprise, international and public sector clients can be long and unpredictable.
A substantial portion of our business is with large enterprises and, as we invest in other markets, we will increasingly do business with international enterprises and public sector entities. The timing of our sales with our enterprise, international, and public sector clients and related revenue recognition is difficult to predict because of the length and unpredictability of the sales cycle for these clients. We are often required to spend significant time and resources to educate and familiarize these potential clients with the value proposition of paying for our platform. The length of our sales cycle for these clients, from initial evaluation to payment for our platform is often around nine months or more and can vary substantially from client to client. As a result, it is difficult to predict whether and when a sale will be completed.
If we are unable to effectively operate on or capture data from mobile devices, our business could be adversely affected.
Our customers and users of our platform are increasingly accessing our platform or interacting via mobile devices. We are devoting valuable resources to solutions related to mobile usage and cannot assure you that these solutions will be successful. If the mobile solutions we have developed for our platform do not meet the needs of current or prospective customers, or if our solutions are difficult to access, customers or users may reduce their usage of our platform or cease using our platform altogether and our business could suffer. Additionally, we are dependent on the interoperability of our products with popular mobile networks and standards that we do not control, and any changes in such systems or terms of service that degrade our platform’s functionality or give preferential treatment to competitive products could adversely affect our business. As new mobile devices and products are continually being released, it is difficult to predict the challenges we may encounter in enhancing our platform for use on such devices. If we are unable to successfully implement elements of our platform on mobile devices, or if these strategies are not as successful as our offerings for personal computers or if we incur excessive expenses in this effort, our business, results of operations and financial condition would be negatively affected.
If we are unable to develop and maintain successful relationships with channel partners, our business, results of operations, and financial condition could be adversely affected.
To date, we have primarily relied on our direct sales force, online marketing and word-of-mouth to sell subscriptions to our platform. Although we have developed relationships with certain channel partners, such as referral partners, resellers and integration partners, these channels have resulted in limited revenue to date. We believe that continued growth in our business is dependent upon identifying, developing and maintaining strategic relationships with additional channel partners that can drive additional revenue. Our agreements with our existing channel partners are non-exclusive, meaning our channel partners may offer enterprises the products of several different companies, including products that compete with ours. They may also cease marketing our platform with limited notice and with little or no penalty. We expect that any additional channel partners we identify and develop will be similarly non-exclusive and not bound by any requirement to continue to market our platform. If we fail to identify additional channel partners in a timely and cost-effective manner, or at all, if we are unable to assist our current and future channel partners in independently selling and implementing our platform, or if our channel partners choose to use greater efforts to market their own products or those of our competitors, our business, results of operations and financial condition could be adversely affected. Furthermore, if our channel partners do not effectively market and sell our platform, or fail to meet the needs of our customers, our reputation and ability to grow our business may also be adversely affected.
Sales by channel partners are more likely than direct sales to involve collection issues, in particular sales by our channel partners into developing markets, and accordingly, variations in the mix between revenue attributable to sales by channel partners and revenue attributable to direct sales may result in fluctuations in our results of operations.
Disputes with our customers and other third parties could be costly, time-consuming and harm our business and reputation.
Our business requires us to enter into agreements with a large number of customers and other third parties in many different jurisdictions. Our subscription and other agreements contain a variety of terms, including service levels, data privacy and security obligations, indemnification, dispute resolution procedures and regulatory requirements. Agreement terms may not be standardized across our business and can be subject to differing interpretations and local law requirements, which could result in disputes with our customers and other third parties from time to time. If our customers and other third parties notify us of a breach of contract or otherwise dispute the terms of our agreements, the dispute resolution process can be expensive and time-consuming and result in the diversion of resources that could otherwise be deployed to grow our business. Even if these disputes are resolved in our favor, we may be unable to recoup the expenses and other diverted resources committed to resolving the dispute and, if we receive negative publicity in connection with the dispute, our reputation and brand may be harmed. Furthermore, the ultimate resolution of such disputes may be adverse to our interests and as a result could adversely affect not only our brand but also our results of operations and financial condition.
If we are not able to maintain and enhance our brand, our business, results of operations and financial condition may be adversely affected.
We believe that maintaining and enhancing our reputation as a differentiated and category-defining company in experience management is critical to our relationships with our existing customers and key employees and to our ability to attract new customers and talented personnel. The successful promotion of our brand will depend on a number of factors, including our marketing efforts, our ability to continue to develop a high-quality platform and our ability to successfully differentiate our platform from competitive solutions. We do not have sufficient operating history to know if our brand promotion activities will ultimately be successful or yield increased revenue and, if they are not successful, our business may be adversely affected. Any unfavorable publicity of our business or platform generally, for example, relating to our privacy practices, terms of service, service quality, litigation, regulatory activity, the actions of our employees, partners or customers or the actions of other companies that provide similar solutions to us, all of which can be difficult to predict, could adversely affect our reputation and brand. In addition, independent industry analysts often provide reviews of our platform, as well as solutions offered by our competitors, and our brand and perception of our platform in the marketplace may be significantly influenced by these reviews. If these reviews are negative, or less positive compared to those of our competitors’ solutions, our brand and market position may be adversely affected. It may also be difficult to maintain and enhance our brand as we expand our marketing and sales efforts through channel or strategic partners.
The promotion of our brand also requires us to make substantial expenditures. We anticipate that these expenditures will increase as our market becomes more competitive, as we expand into new markets and as more sales are generated through our channel partners. To the extent that these activities yield increased revenue, this revenue may not offset the increased expenses we incur. If we do not successfully maintain and enhance our brand or incur substantial expenses in unsuccessful attempts to promote and maintain our brand, our business may not grow, we may have reduced pricing power relative to competitors and we could lose customers and key employees or fail to attract potential customers or talented personnel, all of which would adversely affect our business, results of operations and financial condition.
Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity and teamwork fostered by our culture, which could harm our business.
We have worked to develop a strong culture around our team. We believe that our culture has been and will continue to be a key contributor to our success. We expect to hire aggressively as we expand but if we do not continue to maintain our corporate culture as we grow globally, we may be unable to foster the innovation, creativity and teamwork we believe we need to support our growth. Moreover, many of our employees may be able to receive significant proceeds from sales of our common stock in the public markets, which could lead to disparities of wealth among our employees that adversely affects relations among employees and our culture in general. Our substantial anticipated headcount growth and our ongoing transition from a private company to a public company may result in a change to our corporate culture, which could harm our business.
We recognize revenue over the term of our customers’ contracts. Consequently, increases or decreases in new sales may not be immediately reflected in our results of operations and may be difficult to discern.
We generally recognize subscription revenue from customers ratably over the terms of their contracts and a majority of our revenue is derived from subscriptions that have terms of one to three years. As a result, a portion of the revenue we report in each quarter is derived from the recognition of deferred revenue relating to subscriptions entered into during previous quarters. Consequently, a decline in new or renewed subscriptions, including any declines attributable to the COVID-19 pandemic, in any single quarter may have a small impact on our revenue results for that quarter. However, such a decline will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our platform and potential changes in our pricing policies or rate of expansion or retention may not be fully reflected in our results of operations until future periods. We may also be unable to reduce our cost structure in line with a significant deterioration in sales. In addition, a significant majority of our costs are expensed as incurred, while revenue is recognized over the term of the agreements with our customers. As a result, increased growth in the number of our customers could continue to result in our recognition of more costs than revenue in the earlier periods of the terms of our agreements. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.
Our customers may fail to pay us in accordance with the terms of their agreements, at times necessitating action by us to attempt to compel payment.
We typically enter into annual or multiple year arrangements with our customers. If our customers fail to pay us in accordance with the terms of our agreements, we may be adversely affected both from the inability to collect amounts due and the cost of enforcing the terms of our agreements, including litigation and arbitration costs. The risk of these issues increases with the term length of our customer arrangements. Furthermore, some of our customers may seek bankruptcy protection or other similar relief and fail to pay amounts due to us, or pay those amounts more slowly, either of which could adversely affect our results of operations, financial condition and cash flow.
Certain of our results of operations, key metrics and other financial metrics may be difficult to predict.
Our results of operations, key metrics and other financial metrics, including the levels of our revenue, gross margin, profitability, cash flow and deferred revenue, have fluctuated in the past and may vary significantly in the future. As a result, period-to-period comparisons of our results of operations, including key metrics, may not be meaningful and the results of any one period should not be relied upon as an indication of future performance. Our results of operations and other key metrics may fluctuate as a result of a variety of factors, many of which are outside of our control, and as a result, may not fully reflect the underlying performance of our business. Fluctuation in results of operations and key metrics may negatively impact the value of our common stock.Factors that may cause fluctuations in our results of operations and key metrics include, without limitation, those listed below:
•fluctuations in the demand for our platform and the market for platforms like ours;
•our ability to attract new customers or retain existing customers;
•variability in our sales cycle, including as a result of the budgeting cycles and internal purchasing priorities of our customers or prospective customers;
•the payment terms and subscription term length associated with sales of our platform and their effect on our billings and cash flows;
•the addition or loss of large customers, including through acquisitions or consolidations;
•the timing of sales and recognition of revenue, which may vary as a result of changes in accounting rules and interpretations, such as the adoption of Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (ASC 606);
•the amount and timing of operating expenses related to the maintenance and expansion of our business, operations and infrastructure;
•network outages or actual or perceived security breaches or other incidents;
•general economic, market and political conditions;
•public health crises and related measures to protect the public health (such as the COVID-19 pandemic);
•customer renewal rates;
•increases or decreases in the number of elements of our services or pricing changes upon any renewals of customer agreements;
•changes in our pricing policies or those of our competitors;
•the mix of services sold during a period;
•the timing of our recognition of stock-based compensation expense for our equity awards, particularly in cases where awards covering a large number of our shares are tied to a specific event or date; and
•the timing and success of introductions of new platform features and services by us or our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, customers or strategic partners.
The cumulative effects of the factors discussed above could result in large fluctuations and unpredictability in our quarterly and annual results of operations. This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue or results of operations fall below the expectations of analysts or investors or below any guidance we may provide, or if the guidance we provide is below the expectations of analysts or investors, the price of our common stock could decline substantially. Such a stock price decline could occur even if we have met any previously publicly stated guidance we may provide.
Our results of operations may be difficult to predict as a result of seasonality.
Our results of operations may also fluctuate as a result of seasonality. We have seen seasonality in our sales cycle as a large percentage of our customers make their purchases in the fourth quarter of a given fiscal year and pay us in the first quarter of the subsequent year. We may also be affected by seasonal trends in the future, particularly as our business matures. Such seasonality may result from a number of factors, including a slowdown in our customers’ procurement process during certain times of the year, both domestically and internationally, and customers choosing to spend remaining budgets shortly before the end of their fiscal years. Additionally, this seasonality may be reflected to a much lesser extent, and sometimes may not be immediately apparent, in our revenue, due to the fact that we recognize subscription revenue over the term of the applicable subscription agreement. To the extent we experience this seasonality, it may cause fluctuations in our results of operations and financial metrics and make forecasting our future results of operations and financial metrics more difficult.
Our estimates of market opportunity and forecasts of market growth may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, our business may not grow at similar rates, or at all.
Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates which may not prove to be accurate. Our estimates and forecasts relating to size and expected growth of our target market may prove to be inaccurate. Even if the markets in which we compete meet our size estimates and growth forecasts, our business may not grow at similar rates, or at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties.
Risks Related to Our Intellectual Property
We may be sued by third parties for alleged infringement of their proprietary rights.
There is considerable patent and other intellectual property development activity in our industry. Our future success depends in part on not infringing upon the intellectual property rights of others. From time to time, we have received and may receive claims from third parties, including our competitors, that our platform and underlying technology infringe or violate a third party’s intellectual property rights, including patent rights, and we may be found to be infringing upon such rights. In a patent infringement claim against us, we may assert, as a defense, that we do not infringe the relevant patent claims, that the patent is invalid or both. The strength of our defenses will depend on the patents asserted, the interpretation of these patents, and our ability to invalidate the asserted patents. However, we could be unsuccessful in advancing non-infringement or invalidity arguments in our defense. In the United
States, issued patents enjoy a presumption of validity, and the party challenging the validity of a patent claim must present clear and convincing evidence of invalidity, which is a high burden of proof. Conversely, the patent owner need only prove infringement by a preponderance of the evidence, which is a lower burden of proof. We may also be unaware of the intellectual property rights of others that may cover some or all of our technology. Because patent applications can take years to issue and are often afforded confidentiality for some period of time, there may currently be pending applications, unknown to us, that later result in issued patents that could cover one or more of our products. Any claims or litigation, regardless of their merit, could cause us to incur significant expenses, pay substantial amounts in damages, ongoing royalty or license fees, or other payments, or could prevent us from offering all or portions of our platform or from using certain technologies, require us to re-engineer all or a portion of our platform or require that we comply with other unfavorable terms. We may also be obligated to indemnify our customers or business partners in connection with any such litigation and to obtain licenses or refund subscription fees, which could further exhaust our resources. Even if we were to prevail in the event of claims or litigation against us, any claim or litigation regarding our technology or intellectual property could be costly and time-consuming and divert the attention of our management and other employees from our business operations. Such disputes could also disrupt our platform and products, which would adversely impact our client satisfaction and ability to attract customers. In the case of infringement or misappropriation caused by technology that we obtain from third parties, any indemnification or other contractual protections we obtain from such third parties, if any, may be insufficient to cover the liabilities we incur as a result of such infringement or misappropriation.
Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and other losses.
Our agreements with customers and other third parties may include indemnification or other provisions under which we agree to indemnify or otherwise be liable to them for losses suffered or incurred as a result of claims of intellectual property infringement, damages caused by us to property or persons or other liabilities relating to or arising from our platform or our acts or omissions. In addition, customers typically require us to indemnify or otherwise be liable to them for breach of confidentiality or failure to implement adequate security measures with respect to their data stored, transmitted or processed by our platform. The terms of these contractual provisions often survive termination or expiration of the applicable agreement. Large indemnity payments or damage claims from contractual breach could harm our business, results of operations and financial condition. Although we generally attempt to contractually limit the scope of our liability with respect to such obligations, we are not always successful, and we may incur substantial liability related to them. Any dispute with a customer with respect to such obligations could have adverse effects on our relationship with that customer and other current and prospective customers, reduce demand for our platform and harm our business, financial condition and results of operations.
Our platform utilizes open source software, which may subject us to litigation, require us to re-engineer our platform or otherwise divert resources away from our development efforts.
We use open source software in connection with our platform and products and operations. We could be subject to suits by parties claiming ownership of what we believe to be open source software, noncompliance with open source licensing terms or that our use of such software infringes a third party’s intellectual property rights. Some open source software licenses require users who distribute open source software as part of their software to publicly disclose all or part of the source code to such software and/or make available any derivative works of the open source code (which may include our modifications and/or product code into which such open source software has been integrated) on terms allowing further modification and redistribution and at no or nominal cost. The terms of many open source licenses have not been interpreted by U.S. or foreign courts, and these licenses could be construed in a way that could impose other unanticipated conditions or restrictions on our ability to commercialize our products. While we monitor our use of open source software and try to ensure that none is used in a manner that would require us to disclose source code that we have decided to maintain as proprietary or that would otherwise breach the terms or fail to meet the conditions of an open source license or third-party contract, such use could inadvertently occur and we may as a result be subject to claims for breach of contract, infringement of intellectual property rights, or indemnity, required to release our proprietary source code, pay damages, royalties, or license fees or other amounts, seek licenses, re-engineer our applications, discontinue sales in the event re-engineering cannot be accomplished on a timely basis or take other remedial action that may divert resources away from our development efforts, any of which could adversely affect our business.
Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.
Our success and ability to compete depend in part upon our ability to secure, protect, maintain, assert and enforce our intellectual property. As of January 31, 2021 we had 18 issued patents and 25 pending non-provisional or provisional patent applications filed. We rely on a combination of patent, copyright, trade secret and trademark laws, trade secret protection, and confidentiality or license agreements with our employees, customers, partners, and others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may be inadequate, and our intellectual property may still be challenged or invalidated. We cannot guarantee that any of our pending applications will be approved or that our existing and future intellectual property rights will be sufficiently broad to protect our proprietary technology. Effective patent, copyright, trade secret and trademark protection may not even be available in every country in which we conduct business. Failure to comply with applicable procedural, documentary, fee payment and other similar requirements with the United States Patent and Trademark Office (USPTO), and various similar foreign governmental agencies could result in abandonment or lapse of the affected patent, copyright, or trademark application. If this occurs, our competitors might be more successful in their efforts to compete with us. Furthermore, we may not always detect infringement of our intellectual property rights, and any infringement of our intellectual property rights, even if successfully detected, prosecuted and enjoined, could be costly to deal with and could harm our business. In addition, other parties, including our competitors, may independently develop similar technology, duplicate our services or design around our intellectual property and, in such cases, we may not be able to assert our intellectual property rights against such parties. Further, our contractual arrangements may not effectively prevent disclosure of our confidential information or provide an adequate remedy in the event of unauthorized disclosure of our confidential information, and we may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. In the event that any of the foregoing occur, this could adversely affect our business, results of operations and financial condition.
In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management, and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and counter suits attacking the validity and enforceability of our intellectual property rights, which could result in the impairment or loss of portions of our intellectual property portfolio. An adverse determination of any litigation proceedings could put our intellectual property at risk of being invalidated or interpreted narrowly and could put our related pending patent applications at risk of not issuing. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential or sensitive information could be compromised by disclosure in the event of litigation. In addition, during the course of litigation there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Our failure to secure, protect, maintain, assert and enforce our intellectual property rights could adversely affect our brand and business.
If we fail to integrate our platform with a variety of software applications, operating systems, platforms, and hardware that are developed by others, our platform may become less marketable, less competitive or obsolete and our business and results of operations would be harmed.
Our platform must integrate with a variety of network, hardware and software systems, including human resource information and customer relationship management systems, and we need to continuously modify and enhance our platform to adapt to changes in hardware, software, networking, browser and database technologies. In particular, we have developed our platform to be able to easily integrate with certain third-party SaaS applications, through the interaction of application programming interfaces (APIs). In general, we rely on the fact that the providers of such software systems continue to allow us access to their APIs to enable these customer integrations. To date, we have not relied on a long-term written contract to govern our relationship with these providers. Instead, we are subject to the standard terms and conditions for application developers of such providers, which govern the distribution, operation and fees of such software systems, and which are subject to change by such providers from time to time.
We may acquire or invest in companies, which may divert our management’s attention and result in additional dilution to our stockholders. We may be unable to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions.
Our success will depend, in part, on our ability to expand our platform and grow our business in response to changing technologies, customer demands and competitive pressures. We have in the past, and we may in the future, attempt to do so through strategic transactions, including acquisitions of, or investments in, businesses, technologies, services, products and other assets that we believe could complement, expand or enhance our platform or otherwise offer growth opportunities. We made many acquisitions during fiscal year ended January 31, 2020, including Zingle, a multi-channel mobile messaging and customer engagement solution, and in fiscal year ended January 31, 2021 we completed acquisitions of (i) LivingLens, a video feedback platform provider; (ii) Voci, a real-time speech to text platform; (iii) Stella Connect, a customer feedback and quality management platform that helps customer support teams analyze and improve performance in real time; and (iv) Sense360, a consumer insights platform that provides always-on, consumer and competitive intelligence from buyer and non-buyer segments and answers pressing questions such as what is driving traffic, what are the growth opportunities in a specific market and which competitors are gaining share and why. We may also enter into relationships with other businesses to expand our platform, which could involve preferred or exclusive licenses, additional channels of distribution, discount pricing or investments in other companies.
Any acquisition, investment or business relationship may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel or operations of the acquired companies, particularly if the key personnel of the acquired company choose not to work for us, their software is not easily adapted to work with our platform or we have difficulty retaining the customers of any acquired business due to changes in ownership, management or otherwise. Acquisitions, investments or other business relationships may also disrupt our business, divert our resources and require significant management attention that would otherwise be available for development of our existing business. Moreover, the anticipated benefits of any acquisition, investment or business relationship may not be realized or we may be exposed to unknown risks or liabilities. For example, acquired technologies, services and products that we believe are complementary and enhance our platform may not be construed that way by existing and prospective customers.
Identifying and negotiating these transactions can be time-consuming, difficult and expensive, and our ability to complete these transactions may often be subject to approvals that are beyond our control. We cannot predict the number, timing or size of these transactions. Our prior acquisitions have been relatively small, and we are relatively inexperienced in effectively integrating another business with our own. Consequently, these transactions, even if announced, may not be completed. The risks we face in connection with these transactions include:
•the issuance of additional equity securities that would dilute our existing stockholders and adversely affects the value of our common stock;
•the use of substantial portions of our available cash and other resources that we may need in the future to operate our business;
•issuance of large charges or substantial liabilities;
•diversion of management’s attention from other business concerns;
•issuance of debt on terms unfavorable to us or that we are unable to repay;
•harm to our existing relationships with customers and partners as a result of the transaction;
•claims and disputes from stockholders and third parties, including intellectual property claims and disputes;
•difficulties retaining key employees or customers of the acquired business or integrating diverse software codes or business cultures; and
•adverse tax consequences, substantial depreciation deferred compensation charges or other unfavorable accounting treatment.
The occurrence of any of these risks could have an adverse effect on our business, results of operations and financial condition.
In addition, our entry into any future acquisition, investment or business relationship may be prohibited. In September 2020 we entered into the Wells Fargo Credit Facility with Wells Fargo Bank, National Association (Wells Fargo). The Wells Fargo Credit Facility restricts our ability to pursue certain mergers, acquisitions, amalgamations or consolidations that we may believe to be in our best interest.
Risks Related to Our International Operations
Our international sales and operations subject us to additional risks and challenges that can adversely affect our business, results of operations and financial condition.
As part of our growth strategy, we expect to continue to expand our international operations, which may include opening additional offices in new jurisdictions and providing our platform in additional languages. Any new markets or countries into which we attempt to sell subscriptions to our platform may not be receptive. We currently have sales personnel and sales and customer and product support operations in the United States and certain countries across Europe, the Asia Pacific region and the Americas. Our sales organization outside the United States is smaller than our sales organization in the United States and to date a limited portion of our sales has been driven by resellers or other channel partners. We believe our ability to attract new customers to our platform and to convince existing customers to renew or expand their use of our platform is directly correlated to the level of engagement we achieve with our customers. To the extent we are unable to effectively engage with non-U.S. customers due to our limited sales force capacity and limited channel partners, we may be unable to effectively grow in international markets.
Our international operations also subject us to a variety of additional risks and challenges, including:
•increased exposure to public health issues, such as the COVID-19 pandemic;
•increased management, travel, infrastructure and legal compliance costs associated with having operations in multiple jurisdictions;
•providing our platform and operating our business across a significant distance, in different languages, among different cultures and time zones, including the potential need to modify our platform and products to ensure that they are culturally appropriate and relevant in different countries;
•compliance with foreign privacy and security laws and regulations, including data localization requirements, and the risks and costs of non-compliance;
•longer payment cycles and difficulties enforcing agreements, collecting trade and other receivables or satisfying revenue recognition criteria, especially in emerging markets;
•hiring, training, motivating and retaining highly-qualified personnel, while maintaining our unique corporate culture;
•increased financial accounting and reporting burdens and complexities;
•longer sales cycle and more time required to educate enterprises on the benefits of our platform outside of the United States;
•requirements or preferences for domestic products;
•limitations on our ability to sell our platform and for our solution to be effective in foreign markets that have different cultural norms and related business practices that de-emphasize the importance of positive customer and employee experiences;
•differing technical standards, existing or future regulatory and certification requirements and required features and functionality;
•political and economic conditions and uncertainty in each country or region in which we operate and general economic and political conditions and uncertainty around the world;
•compliance with laws and regulations for foreign operations, including anti-bribery laws, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell our platform in certain foreign markets, and the risks and costs of non-compliance;
•heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact our financial condition and result in restatements of our consolidated financial statements;
•fluctuations in currency exchange rates and related effects on our results of operations;
•difficulties in repatriating or transferring funds from or converting currencies in certain countries, including due to foreign exchange currency controls put in place by foreign governments;
•communication and integration problems related to entering new markets with different languages, cultures and political systems;
•new and different sources of competition;
•differing labor standards, including restrictions related to, and the increased cost of, terminating employees in some countries;
•the need for localized subscription agreements;
•the need for localized language support and difficulties associated with delivering support, training and documentation in languages other than English;
•increased reliance on channel partners;
•reduced protection for intellectual property rights in some countries and practical difficulties of enforcing such rights abroad; and
•compliance with the laws of numerous foreign taxing jurisdictions, including withholding tax obligations, and overlapping of different tax regimes.
Any of these risks and challenges could adversely affect our operations, reduce our revenue or increase our operating costs, each of which could adversely affect our business, results of operations, financial condition and growth prospects. Some of our business partners also have international operations and are subject to the risks described above. Even if we are able to successfully manage the risks of international operations, our business may be adversely affected if our business partners are not able to successfully manage these risks.
Compliance with laws and regulations applicable to our international operations substantially increases our cost of doing business. We may be unable to keep current with changes in government requirements as they change from time to time. Failure to comply with these regulations could have adverse effects on our business. In many foreign countries it is common for others to engage in business practices that are prohibited by our internal policies and procedures or U.S. or other regulations applicable to us. Although we have implemented policies and procedures designed to ensure compliance with these laws and policies, there can be no assurance that our employees, contractors, partners and agents will comply with these laws and policies. Violations of laws or our policies by our employees, contractors, partners or agents could result in delays in revenue recognition, financial reporting misstatements, enforcement actions, disgorgement of profits, fines, civil and criminal penalties, damages, injunctions, other collateral consequences and increased costs, including the costs associated with defending against such actions, or the prohibition of the importation or exportation of our platform and related services, each of which could adversely affect our business, results of operations and financial condition.
Further, risks associated with operating in Israel may adversely affect our business. We have operations in Israel through our wholly-owned subsidiary, Medallia Digital Ltd. and Cooladata Ltd. As of January 31, 2021 we had a total of 65 employees located in Israel, of which 58 were engaged in research and development and SaaS operations activities. Given our employee headcount in Israel, our business, results of operations and financial condition could be adversely affected by political, economic and military instability in Israel. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and neighboring countries. Any hostilities involving Israel or a full or partial mobilization of the reserve forces of the Israeli armed forces could adversely affect our operations in Israel. In addition, some of our employees in Israel are obligated to perform up to 40 days, depending on rank and position, of military reserve duty annually and are subject to being called for active duty under emergency circumstances. Increased military activity could also result in a reduction of qualified prospective employees available to grow our business or to replace employees on active military duty. As a result, our business could be disrupted by the absence of our employees for a significant period of time as a result of military service. Additionally, the interruption or curtailment of trade between Israel and its present trading partners or a significant downturn in the economic or financial conditions in Israel could adversely affect our operations. In the past, the State of Israel and Israeli companies have been subjected to an economic boycott and several countries still restrict business and trade activity with the State of Israel and with Israeli companies. These restrictive laws and policies could also have an adverse impact on our business and results of operations.
We believe our success depends on continuing to invest in the growth of our worldwide operations by entering new geographic markets. If our investments in these markets are greater than anticipated, or if our customer growth or sales in these markets do not meet our expectations, our results of operations and financial condition may be adversely affected.
We believe our success depends on expanding our business into new geographic markets and attracting customers in countries other than the United States. We anticipate continuing to expand our operations worldwide and have made, and will continue to make, substantial investments and incur substantial costs as we enter new geographic markets. This includes investments in data centers, cloud-based infrastructure and applications and other information technology investments, sales, marketing and administrative personnel and facilities. Often we must make these investments when it is still unclear whether future sales in the new market will justify the costs of these investments. In addition, these investments may be more expensive than we initially anticipate. If our investments are greater than we initially anticipate or if our customer growth or sales in these markets do not meet our expectations or justify the cost of the initial investments, our results of operations and financial condition may be adversely affected.
Risks associated with operating in Argentina could have an impact on our results of operations.
A significant number of our research and development employees are located in Argentina, and therefore, a portion of our operating expenses are denominated in Argentine pesos. As of January 31, 2021, we had a total of 257 employees located in Argentina, of which 233 were engaged in research and development and SaaS operations activities. If the peso strengthens against the U.S. dollar, it could have a negative impact on our results of operations as it would increase our operating expenses. Our business activities in Argentina also subject us to risks associated with changes in and interpretations of Argentine law, including laws related to employment, the protection and ownership of intellectual property and U.S. ownership of Argentine operations. Furthermore, if we had to scale down or close our Argentine operations, there would be significant time and cost required to relocate those operations elsewhere, which could have an adverse impact on our overall cost structure.
The Argentine government has historically exercised significant influence over the country’s economy. For example, on September 1, 2019, the Argentine government enacted foreign exchange currency controls. These controls include restrictions on Argentine citizens and Argentinian companies’ abilities to purchase U.S. dollars, transfer money to foreign accounts, and make payments of dividends or payments for services by related parties without permission from the Argentine government. These controls, and other restrictions that may be enacted in the future, could adversely affect our business by making it more difficult to fund our operations in Argentina, including cash compensation programs for our employees based there. Additionally, such controls and other restrictions that may be enacted in the future, and any interpretations thereof, could materially hinder our ability to administer, and our Argentine employees’ ability to participate in, our equity compensation programs. An interruption to our Argentine business operations due to currency controls, or any adverse impact to our compensation programs for our employees, could lead to a drop in productivity and employee morale and lead to an adverse effect on our business.
Additionally, the country’s legal and regulatory frameworks have at times suffered radical changes due to political influence and significant political uncertainties. In the past, government policies in Argentina included expropriation, nationalization, forced renegotiation or modification of existing contracts, suspension of the enforcement of creditors’ rights, new taxation policies, including royalty and tax increases and retroactive tax claims and changes in laws and policies affecting foreign trade and investment. Such policies could destabilize the country and adversely affect our business and operating expenses.
In addition, Argentina has experienced labor unrest over wages and benefits paid to workers. In the past, the Argentine government has passed laws, regulations and decrees requiring companies in the private sector to maintain minimum wage levels and provide specified benefits to employees and may do so again in the future. Employers have also experienced significant pressure from their employees and labor organizations to increase wages and to provide additional employee benefits. In addition, inflation levels in Argentina have been elevated for several years. In the first half of 2018, Argentina's reported inflation rates began to increase dramatically and the Argentine central bank significantly increased interest rates in an effort to combat inflation. Based on Argentina's reported inflation rates and trends, we designated Argentina as a highly inflationary economy for accounting
purposes as of the beginning of the third quarter of the fiscal year ended January 31, 2019. Any disruptions, labor unrest or increased personnel-related expenses in Argentina, including due to inflation, could have a material and adverse effect on our business and operating expenses.
We face exposure to foreign currency exchange rate fluctuations, and if foreign currency exchange rates fluctuate substantially in the future, our results of operations and financial condition, which are reported in U.S. dollars, could be adversely affected.
We conduct our business in countries around the world and a portion of our transactions outside the United States are denominated in currencies other than the U.S. dollar. While we have primarily transacted with customers and vendors in U.S. dollars to date, we have from time to time transacted in foreign currencies for subscriptions to our platform and may significantly expand the number of transactions with customers that are denominated in foreign currencies in the future. The majority of our international costs are also denominated in local currencies. In addition, our international subsidiaries maintain net assets or liabilities that are denominated in currencies other than the functional operating currencies of these entities. Accordingly, changes in the value of foreign currencies relative to the U.S. dollar can affect our revenue and results of operations due to transactional and translational remeasurements that are reflected in our results of operations. As a result of such foreign currency exchange rate fluctuations, it could be more difficult to detect underlying trends in our business and results of operations.
We currently maintain a program to hedge transactional exposures in foreign currencies. We use derivative instruments, such as foreign currency forward contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments. There can be no assurance that we will be successful in managing our exposure to currency exchange rate risks, which may adversely affect our business, results of operations and financial condition.
Risks Related to Laws and Regulations
Our business is subject to a variety of U.S. and foreign laws, many of which are unsettled and still developing and which could subject us to claims or otherwise harm our business.
We are subject to a variety of laws in the United States and internationally, including laws regarding privacy, data protection, data security, data retention and consumer protection, accessibility, sending and storing of electronic messages (and related traffic data where applicable), intellectual property, human resource services, employment and labor laws, workplace safety, consumer protection laws, anti-bribery and anti-corruption laws, import and export controls, immigration laws, securities laws and tax regulations, all of which are continuously evolving and developing. The scope and interpretation of these laws, regulations and other obligations that are or may be applicable to us, our customers or partners are often uncertain and may be conflicting, particularly laws and other obligations outside of the United States.
In addition, regulatory authorities around the world are considering a number of legislative and regulatory proposals concerning privacy, spam, data storage, data protection, data collection, content regulation, cybersecurity, government access to personal information and private data and other matters that may be applicable to our business. Compliance with these laws may require substantial investments or may provide technical challenges for our business. More countries are enacting and enforcing laws related to the appropriateness of content and enforcing those and other laws by blocking access to services that are found to be out of compliance. It is also likely that as our business grows and evolves, as an increasing portion of our business shifts to mobile, and as our solutions are used in a greater number of countries and by additional groups, we will become subject to laws and regulations in additional jurisdictions. Our customers could also abuse or misuse our platform in ways that violate laws or cause damage to our business. It is difficult to predict how existing laws will be applied to our business and whether we will become subject to new laws or legal obligations that will impact our business.
If we are not able to comply with these laws, regulations or other legal obligations, or if we, our customers or partners become liable under these laws or legal obligations, or if the use of our platform is suspended or
blocked, even in part, we could be directly harmed and we may be forced to implement new measures to reduce exposure to this liability. This may require us to expend substantial resources or to discontinue certain solutions, which would negatively affect our business, results of operations and financial condition. We could also be subject to investigations, enforcement actions and sanctions, mandatory changes to our platform, disgorgement of profits, fines and damages, civil and criminal penalties or injunctions, claims for damages, termination of contracts and loss of intellectual property rights. In addition, the increased attention focused upon liability issues as a result of lawsuits and legislative proposals could harm our reputation or brand or otherwise impact the growth of our business. Any costs incurred as a result of this potential liability could harm our business, results of operations and financial condition.
Privacy concerns and laws or other domestic or foreign regulations may reduce the effectiveness of our platform and adversely affect our business.
Our customers can use our platform to collect, use and store personal data regarding their employees, customers and partners. We also collect, use and receive such information in the course of our operations. We and our customers may be subject to privacy-and data protection-related laws and regulations that impose obligations in connection with the collection, processing and use of financial data, health-related data and other types of personal data. The U.S. federal and various state and foreign governments have adopted or proposed limitations on, or requirements regarding, the collection, distribution, use, security and storage of data, including personal data, of individuals. For example, the Health Insurance Portability and Accountability Act of 1996 (HIPAA), establishes privacy and security standards that limit the use and disclosure of individually identifiable health information and requires the implementation of administrative, physical and technical safeguards to protect the privacy of protected health information and ensure the confidentiality, integrity and availability of electronic protected health information by certain institutions. We act as a “business associate” through our relationships with certain customers and are thus directly subject to certain provisions of HIPAA. The U.S. Federal Trade Commission and numerous state attorneys general also are applying federal and state consumer protection laws to impose standards on the online collection, use and dissemination of data, and to the security measures applied to such data.
Laws and regulations relating to data processing and data protection are particularly stringent in Europe and Asia, and in the financial services and health care industries, among others. Numerous foreign countries and governmental bodies, including the European Union (EU), and its member states, have laws and regulations concerning the collection and processing of personal data obtained from individuals located in their jurisdictions, which often are more restrictive than those in the United States. Laws and regulations in these jurisdictions apply broadly to the collection, use, security and other processing of data that identifies or may be used to identify an individual, such as names, telephone numbers, email addresses and, in some jurisdictions, data such as IP addresses and other online identifiers.
For example, the EU has adopted a General Data Protection Regulation (GDPR), which took full effect on May 25, 2018. The GDPR enhances data protection obligations for businesses and requires service providers processing personal data on behalf of customers to cooperate with European data protection authorities, implement security measures and keep records of personal data processing activities. Noncompliance with the GDPR can trigger fines equal to or greater of €20 million or 4% of global annual revenue. Our efforts to meet GDPR requirements have required significant time and resources, including a review of our technology and systems against its requirements.
Further, following a referendum in June 2016 in which voters in the United Kingdom approved an exit from the EU, the United Kingdom has initiated a process to leave the EU, generally referred to as Brexit. Brexit resulted in the United Kingdom exiting from the EU on January 31, 2020 subject to a transition period covering certain matters that ended on December 31, 2020. The United Kingdom has implemented legislation that substantially implements the GDPR, with penalties for noncompliance of up to the greater of £17.5 million or four percent of worldwide revenue. Aspects of United Kingdom data protection laws and regulations remain unclear, however, including how they will develop in the medium to longer term and how data transfers to and from the United Kingdom will be regulated.
Additionally, although we participate in and have certified our compliance with the European Union (EU)-
U.S. and Swiss-U.S. Privacy Shield Framework with respect to personal data that we collect, which is subject to the
investigatory and enforcement powers of the U.S. Federal Trade Commission, and have historically relied upon the U.S.-EU and U.S.-Swiss Privacy Shield Frameworks, and certain standard contractual clauses approved by the EU Commission (the SCCs), with regard to our transfer of certain personal data from the EU and Switzerland to the United States, both the EU-U.S. Privacy Shield Framework and the SCCs have been subject to legal challenge, and on July 16, 2020, the CJEU, Europe's highest court, held in the Schrems II case that the EU-U.S. Privacy Shield Framework was invalid, and imposed additional obligations in connection with use of the SCCs. The Swiss Federal Data Protection and Information Commissioner also has stated that it no longer considers the Swiss-U.S. Privacy Shield Framework adequate for the purposes of personal data transfers from Switzerland to the U.S. We are assessing the impacts of the Schrems II decision in light of current and anticipated guidance from regulators. We and many other companies may need to implement different or additional measures to establish or maintain legitimate means for the transfer and receipt of personal data from the EU and Switzerland to the U.S., and we may, in addition to other impacts, experience additional costs associated with increased compliance burdens, and we and our customers face the potential for regulators to apply different standards to cross-border data transfers and to block, or require ad hoc verification of measures taken with respect to, certain data flows. We and our customers may face a risk of enforcement actions relating to personal data transfers, and we may experience hesitancy, reluctance or refusal by European or multinational enterprises to use our services due to potential risk exposure to such enterprises relating to cross-border data transfer.
Furthermore, outside of the EU, we continue to see increased regulation of data privacy and security, including the adoption of more stringent laws in the United States. For example, in June 2018 California enacted the California Consumer Privacy Act (CCPA). The CCPA gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA went into effect on January 1, 2020. Additionally, a new privacy law, the California Privacy Rights Act (CPRA), was approved by California voters in the November 3, 2020 election. The CPRA will significantly modify the CCPA, creating obligations beginning on January 1, 2022, with implementing regulations expected on or before July 1, 2022, and enforcement commencing July 1, 2023. Aspects of the CCPA, the CPRA, and their interpretation and enforcement remain unclear, and these laws may increase our compliance costs and potential liability.
Some countries also are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data, or similar requirements, which could increase the cost and complexity of delivering our services. In addition to government activity, privacy advocacy groups and certain industries have imposed or are considering various new, additional or different industry standards that may place additional burdens on us, and we may be contractually obligated to comply with these standards or we may be otherwise considered subject to them. We also are subject to other contractual obligations relating to privacy, data protection and information security.
With laws, regulations and other obligations relating to privacy, data protection, and information security imposing new and relatively burdensome obligations, and with substantial uncertainty over the interpretation and application of these and other obligations, we may face challenges in addressing their requirements and making necessary changes to our policies and practices, and may incur significant costs and expenses in an effort to do so. Additionally, if third parties we work with, such as vendors or service providers, violate applicable laws or regulations or our policies, such violations may also put our or our customers’ data at risk and could in turn have an adverse effect on our business. Any failure or perceived failure by us or our service providers to comply with our applicable policies or notices relating to privacy or data protection, our contractual or other obligations to customers or other third parties, or any of our other legal obligations relating to privacy, data protection or information security, may result in governmental investigations or enforcement actions, litigation, claims or public statements against us by privacy advocacy groups or others, and could result in significant liability or cause our customers to lose trust in us, which could have an adverse effect on our reputation and business.
The costs of compliance with, and other burdens imposed by, laws, regulations and other obligations relating to privacy, data protection and information security applicable to the businesses of our customers may adversely affect our customers’ ability and willingness to process, handle, store, use and transmit information from their employees, customers and partners, which could limit the use, effectiveness and adoption of our platform and reduce overall demand. Even the perception of privacy concerns, whether or not valid, may inhibit market adoption,
effectiveness or use of our applications. The rapid development of laws, regulations and other obligations relating to privacy, data protection and information security throughout the world, and the dynamic nature of their interpretation and enforcement, make it difficult to predict compliance requirements.
We are subject to governmental export and import controls and economic sanctions laws and regulations that could impair our ability to compete in international markets and subject us to liability if we are not in full compliance with applicable laws.
Our business activities are subject to various restrictions under U.S. export and similar laws and regulations, including the United States Department of Commerce’s Export Administration Regulations (EAR), and various economic and trade sanctions regulations administered by the United States Treasury Department’s Office of Foreign Assets Controls (OFAC). The U.S. export control laws and economic sanctions laws include restrictions or prohibitions on the sale or supply of certain products and services to certain embargoed or sanctioned countries, governments, persons and entities. In addition, we may incorporate encryption technology into certain of our offerings, and encryption offerings and the underlying technology may be exported outside of the United States only with the required export authorizations, including by license, and we cannot guarantee that any required authorization will be obtained. If we are found to be in violation of U.S. economic sanctions or export control laws, it could result in substantial fines and penalties for us and for the individuals working for us. We may also experience other adverse effects, including reputational harm and loss of access to certain markets.
In addition, various countries regulate the import of certain technology and have enacted or could enact laws that could limit our ability to provide our customers access to our platform or could limit our customers’ ability to access or use our platform in those countries. Changes in our platform or future changes in export and import regulations may prevent our customers with international operations from utilizing our platform globally or, in some cases, prevent the export or import of our platform to certain countries, governments or persons altogether. Any decreased use of our platform or limitation on our ability to export or sell our platform could adversely affect our business, results of operations and financial condition.
Failure to comply with anti-bribery, anti-corruption and anti-money laundering laws could subject us to penalties and other adverse consequences.
We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended (the FCPA), the U.K. Bribery Act and other anticorruption, anti-bribery and anti-money laundering laws in the jurisdictions in which we do business, both domestic and abroad. These laws generally prohibit us and our employees from improperly influencing government officials or commercial parties in order to obtain or retain business, direct business to any person or gain any advantage. The FCPA, U.K. Bribery Act and other applicable anti-bribery and anti-corruption laws also may hold us liable for acts of corruption and bribery committed by our third-party business partners, representatives and agents. In addition to our own sales force, we leverage third parties to sell our products and conduct our business abroad. We and our third-party business partners, representatives and agents may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and we may be held liable for the corrupt or other illegal activities of these third-party business partners and intermediaries, our employees, representatives, contractors, channel partners and agents, even if we do not explicitly authorize such activities. These laws also require that we keep accurate books and records and maintain internal controls and compliance procedures designed to prevent any such actions. While we have policies and procedures to address compliance with such laws, we cannot assure you that our employees and agents will not take actions in violation of our policies or applicable law, for which we may be ultimately held responsible and our exposure for violating these laws increases as our international presence expands and as we increase sales and operations in foreign jurisdictions. Any violation of the FCPA, U.K. Bribery Act or other applicable anti-bribery, anti-corruption laws and anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, imposition of significant legal fees, loss of export privileges, severe criminal or civil sanctions or suspension or debarment from U.S. government contracts, substantial diversion of management’s attention, a decline in the market price of our common stock or overall adverse consequences to our reputation and business, all of which may have an adverse effect on our results of operations and financial condition.
Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value added or similar taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our results of operations.
Sales and use, value added and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future. Such tax assessments, penalties, and interest, or future requirements may adversely affect our results of operations.
Our international operations subject us to potentially adverse tax consequences.
We generally conduct our international operations through subsidiaries and are subject to income taxes as well as non-income-based taxes, such as payroll, value-added, goods and services and other local taxes. Our domestic and international tax liabilities are subject to various jurisdictional rules regarding the calculation of taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. Our intercompany relationships are subject to complex transfer pricing regulations administered by taxing authorities in various jurisdictions. The relevant taxing authorities may disagree with our determinations as to the value of assets sold or acquired or income and expenses attributable to specific jurisdictions. If such a disagreement were to occur, and our position were not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations.
Changes in, or interpretations of, tax rules and regulations may adversely affect our effective tax rates.
Unanticipated changes in our tax rates could affect our future results of operations. Our tax expense could also be impacted by changes in, or interpretations of, tax rules and regulations regarding non-deductible expenses, excess tax benefits of equity-based compensation, the applicability of withholding taxes and the impact of changes in the evaluation of tax positions we have taken in prior tax periods. Our future effective tax rates could be unfavorably affected by changes in tax laws or the interpretation of tax laws, or by changes in the valuation of our deferred tax assets and liabilities. Additionally, the Organization for Economic Co-Operation and Development (OECD), has released guidance covering various topics, including transfer pricing, country-by-country reporting and definitional changes to permanent establishment that could ultimately impact our tax liabilities as countries adopt the OECD’s guidance.
We are subject to potential tax examinations of our tax returns by the Internal Revenue Service (the IRS), and other domestic and foreign tax authorities. An adverse outcome of any such audit or examination by the IRS or other tax authority could have a material adverse effect on our results of operations and financial condition.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a variety of jurisdictions. There can be no assurance that our tax positions and methodologies or calculation of our tax liabilities are accurate or that the outcomes from future tax examinations will not have an adverse effect on our results of operations and financial condition. A difference in the ultimate resolution of tax uncertainties from what is currently estimated could have an adverse effect on our results of operations and financial condition.
Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.
As of January 31, 2021 we had federal and state net operating loss (NOL) carryforwards of approximately $822.5 million and $404.3 million, respectively. The federal NOL will begin to expire in 2031 and state NOL will begin to expire in 2022. As of January 31, 2021 we had federal and state research and development (R&D) tax credit carryforwards of approximately $20.6 million and $16.8 million, respectively. The federal R&D credit will begin to expire in 2029 and state R&D credit does not expire. In general, under Sections 382 and 383 of the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs and other tax attributes including R&D tax credits to offset future taxable income. Similar rules apply under state tax laws.
Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Sections 382 and 383 of the Code (or applicable state tax laws). Furthermore, our ability to utilize NOLs and other tax attributes of companies that we may acquire in the future may be subject to limitations. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs and R&D tax credits by certain jurisdictions, including in order to raise additional revenue to help counter the fiscal impact from the COVID-19 pandemic, possibly with retroactive effect, or other unforeseen reasons, our existing NOLs and R&D tax credits could expire or otherwise be unavailable to offset future income tax liabilities. A temporary suspension of the use of certain NOLs and tax credits has been enacted in California, and other states may enact legislation as well. For these reasons, we may not be able to realize a tax benefit from the use of our NOLs and R&D tax credits, whether or not we attain profitability.
Our business could be adversely impacted by changes in laws and regulations related to the Internet or changes in access to the Internet generally.
The future success of our business depends upon the continued use of the Internet as a primary medium for communication, business applications and commerce. Federal or state government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium. Legislators, regulators or government bodies or agencies may also make legal or regulatory changes or interpret or apply existing laws or regulations that relate to the use of the Internet in new and materially different ways. Changes in these laws, regulations or interpretations could require us to modify our platform in order to comply with these changes, to incur substantial additional costs or divert resources that could otherwise be deployed to grow our business, or expose us to unanticipated civil or criminal liability, among other things.
In addition, government agencies and private organizations have imposed, and may in the future impose, additional taxes, fees or other charges for accessing the Internet or commerce conducted via the Internet. Internet access is frequently provided by companies that have significant market power and could take actions that degrade, disrupt or increase the cost of our customers’ use of our platform, which could negatively impact our business. In December 2017 the Federal Communications Commission (FCC), voted to repeal its “net neutrality” Open Internet rules, effective June 2018. The rules were designed to ensure that all online content is treated the same by internet service providers and other companies that provide broadband services. The FCC’s new rules, which took effect on June 11, 2018 repealed the neutrality obligations imposed by the Open Internet rules and granted providers of broadband internet access services greater freedom to make changes to their services, including, potentially, changes that may discriminate against or harm our business. A number of parties have appealed this order, which is currently being reviewed by the United States Court of Appeals for the Federal Circuit. Should the net neutrality rules be relaxed or eliminated, we could incur greater operating expenses or our customers’ use of our platform could be adversely affected, either of which could harm our business and results of operations.
These developments could limit the growth of Internet-related commerce or communications generally or result in reductions in the demand for Internet-based platforms and services such as ours, increased costs to us or the disruption of our business. In addition, as the Internet continues to experience growth in the numbers of users, frequency of use and amount of data transmitted, the use of the Internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of Internet activity, security, reliability, cost, ease-of-use, accessibility and quality of service. The performance of the Internet and its acceptance as a business tool has been adversely affected by “viruses,” “worms” and similar malicious programs and the Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If the use of the Internet generally, or our platform specifically, is adversely affected by these or other issues, we could be forced to incur substantial costs, demand for our platform could decline and our results of operations and financial condition could be harmed.
Servicing our current and future debt may require a significant amount of cash, and we may not have sufficient cash flow from our business to pay our indebtedness. Our payment obligations under such indebtedness may limit the funds available to us, and the terms of our debt agreements may restrict our flexibility in operating our business or otherwise adversely affect our results of operations.
In September 2020, we issued a $575.0 million aggregate principal amount of convertible senior notes (the Notes) in a private placement to qualified institutional buyers. See "Note 9: Debt" to our consolidated financial
statements included elsewhere in this Annual Report on Form 10-K, for further information on our outstanding debt obligations. As of January 31, 2021, we had $575.0 million of indebtedness for borrowed money outstanding.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional debt financing or equity capital on terms that may be onerous or highly dilutive. Our ability to refinance any future indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. In addition, any of our future debt agreements may contain restrictive covenants that may prohibit us from adopting any of these alternatives. Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of our debt.
In addition, our indebtedness, combined with our other financial obligations and contractual commitments, could have other important consequences. For example, it could:
•make us more vulnerable to adverse changes in general U.S. and worldwide economic, industry and competitive conditions and adverse changes in government regulation;
•limit our flexibility in planning for, or reacting to, changes in our business and our industry;
•place us at a disadvantage compared to our competitors who have less debt;
•limit our ability to borrow additional amounts to fund acquisitions, for working capital and for other general corporate purposes; and
•make an acquisition of our company less attractive or more difficult.
Further, the LIBOR is expected to be phased out as a benchmark by the end of 2021. If new methods of calculating LIBOR are established or if other benchmark rates used to price indebtedness or investments are established, the terms of any existing or future indebtedness or investments may be negatively impacted, resulting in increased interest expense or lower than expected interest income.
In addition, under certain of our existing debt instruments, we are subject to customary affirmative and negative covenants regarding our business and operations, including limitations on our ability to enter into certain acquisitions or consolidations or engage in certain asset dispositions. Any debt financing secured by us in the future could involve additional restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital to pursue business opportunities, including potential acquisitions or divestitures. Any default under our debt arrangements could require that we repay our loans immediately, and may limit our ability to obtain additional financing, which in turn may have an adverse effect on our cash flows and liquidity.
Any of these factors could harm our business, results of operations and financial condition. In addition, if we incur additional indebtedness, the risks related to our business and our ability to service or repay our indebtedness would increase.
We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs.
We have funded our operations since inception primarily through subscription payments by our customers for use of our platform, equity and debt financings, capital lease arrangements and loans for equipment. For example, in September 2020, we issued $575.0 million aggregate principal amount of convertible senior notes. We do not know when or if our operations will generate sufficient cash to fund our ongoing operations. In the future, we may require additional capital to respond to business opportunities, challenges, acquisitions, a decline in the level of subscriptions for our platform or unforeseen circumstances.
We evaluate financing opportunities from time to time, and our ability to obtain financing will depend, among other things, on our operating performance and the condition of the capital markets at the time we seek financing.
We may not be able to timely secure additional equity or debt financing on favorable terms, or at all. If we engage in any debt financing, such as the issuance of the Notes, the holders of debt would have priority over the holders of common stock. The holders of debt could impose restrictions on our business during the time the loan is outstanding, including restrictive covenants relating to financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. The holders of debt may also obtain security interests on our assets enabling the debt holders to seize and take ownership or dispose of the property, whether tangible or intangible, in which they have a security interest if we default on repayment of the loan or any of the conditions associated with the loan. We may also be required to take other actions that would be in the interests of the debt holders and force us to maintain specified liquidity or other ratios, any of which could harm our business, results of operations and financial condition. The Wells Fargo Credit Facility prohibits us from incurring additional indebtedness without Wells Fargo's prior written consent. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited, and our business, results of operations and financial condition could be adversely affected.
The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results.
The Notes are convertible prior to June 15, 2025 under certain conditions. In the event the conditional conversion feature of the Notes is triggered, holders of such Notes will be entitled under the Indenture governing such Notes to convert their Notes at any time during specified periods at their option. If one or more holders of Notes elect to convert such Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock, we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, in certain circumstances, such as conversion by holders or redemption, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
We are subject to counterparty risk with respect to the capped call transactions.
In connection with the issuance of the Notes, we entered into the Capped Calls. The option counterparties are financial institutions, and we will be subject to the risk that any or all of them might default under the Capped Calls. Our exposure to the credit risk of the option counterparties will not be secured by any collateral. Past global economic conditions have resulted in the actual or perceived failure or financial difficulties of many financial institutions. If an option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under the Capped Calls with such option counterparty. Our exposure will depend on many factors but, generally, an increase in our exposure will be correlated to an increase in the market price and in the volatility of our common stock. In addition, upon a default by an option counterparty, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to our common stock. We can provide no assurance as to the financial stability or viability of the option counterparties.
The terms of the Wells Fargo Credit Facility require us to meet certain operating and financial covenants and place restrictions on our operating and financial flexibility. If we raise additional capital through debt financing, the terms of any new debt could further restrict our ability to operate our business.
The Wells Fargo Credit Facility contains customary affirmative and negative covenants that either limit our ability to, or, if we make future draws, require a mandatory prepayment in the event we, incur additional indebtedness and liens, merge with other companies or consummate certain changes of control, acquire other companies, engage in new lines of business, make certain investments, pay dividends, transfer or dispose of assets, amend certain material agreements and enter into various specified transactions. As a result, we may not be able to engage in any of the foregoing transactions unless we obtain the consent of our lender or prepay any outstanding amount under the Wells Fargo Credit Facility. The Wells Fargo Credit Facility also contains certain
financial covenants, including minimum liquidity and maximum consolidated senior secured leverage ratio requirements, and financial reporting requirements. Our obligations under the Wells Fargo Credit Facility are secured by substantially all of our property, with limited exceptions, including our intellectual property. We may not be able to generate sufficient cash flow or sales to meet our financial covenants or, if we make future draws, pay the principal and interest under the Wells Fargo Credit Facility. Furthermore, if we made a subsequent draw, our future working capital, borrowings or equity financings could be unavailable to repay or refinance the amounts outstanding under the Wells Fargo Credit Facility. In the event of a liquidation, our lender would be repaid all outstanding principal and interest prior to distribution of assets to unsecured creditors, and the holders of our common stock would receive a portion of any liquidation proceeds only if all of our creditors, including our lenders, were first repaid in full. Any declaration by our lender of an event of default could significantly harm our business and prospects and could cause the price of our common stock to decline. If we raise any additional debt financing, the terms of such additional debt could further restrict our operating and financial flexibility.
If we draw on the Wells Fargo Credit Facility, our ability to make scheduled payments or to refinance such debt obligations depends on numerous factors, including the amount of our cash balances and our actual and projected financial and operating performance. We may be unable to maintain a level of cash balances or cash flows sufficient to permit us to pay the principal, premium, if any, and interest on our existing or future indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We may not be able to take any of these actions, and even if we are, these actions may be insufficient to permit us to meet our scheduled debt service obligations. In addition, in the event of our breach of the Wells Fargo Credit Facility, we may be required to repay any outstanding amounts earlier than anticipated. If for any reason we become unable to service our debt obligations under the Wells Fargo Credit Facility, or any new debt obligations that we may enter into from time to time, holders of our common stock would be exposed to the risk that their holdings could be lost in an event of a default under such debt obligations and a foreclosure and sale of our assets for an amount that is less than the outstanding debt.
The nature of our business requires the application of complex accounting rules, and any significant changes in current rules could affect our financial statements and results of operations.
The accounting rules and regulations that we must comply with are complex and are subject to interpretation by the FASB, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. Recent actions and public comments from the FASB and SEC have focused on the integrity of financial reporting and internal controls over financial reporting. In addition, many companies’ accounting policies and practices are subject to heightened scrutiny by regulators and the public. A change in these principles or interpretations could have a significant effect on our reported results of operations and may even affect the reporting of transactions completed before the announcement or effectiveness of a change. It is difficult to predict the impact of future changes to accounting principles or our accounting policies, any of which could negatively affect our results of operations.
If our judgments or estimates relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our results of operations could fall below expectations of securities analysts and investors, resulting in a decline in the market price of our common stock.
The preparation of our financial statements in conformity with United States generally accepted accounting principles (GAAP) requires management to make judgments, estimates and assumptions that affect the amounts reported in our consolidated financial statements and related notes thereto. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the results of which form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our common stock. Significant judgments, estimates and assumptions used in preparing our consolidated financial statements include, or may in the future include, those
related to revenue recognition, stock-based compensation expense including the estimation of grant date fair value of common stock, allowance for doubtful accounts, income taxes, goodwill and intangible assets.
If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act), and the listing standards of the New York Stock Exchange (the NYSE). The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. We have expended, and anticipate that we will continue to expend, significant resources in order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting.
Our current controls and any new controls that we develop may become inadequate because of changes in the conditions in our business, including increased complexity resulting from our international expansion. Further, weaknesses in our disclosure controls or our internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting could also adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we are required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely adversely affect the market price of our common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NYSE. We are required to comply with the SEC rules that implement Section 404 of the Sarbanes-Oxley Act and are therefore required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. As a public company, we are required to provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second annual report on Form 10-K.
Additionally, commencing with this annual report on Form 10-K, our independent registered public accounting firm is required to formally attest to the effectiveness of our internal control over financial reporting and may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed or operating. Any failure to maintain effective disclosure controls and internal control over financial reporting could have an adverse effect on our business, results of operations and financial condition and could cause a decline in the market price of our common stock.
The accounting method for convertible debt securities that may be settled in cash, such as the Notes, could have a material effect on our reported financial results.
In May 2008, the FASB issued FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement), which has subsequently been codified as Accounting Standards Codification 470-20, Debt with Conversion and Other Options, which we refer to as ASC 470-20. Under ASC 470-20, an entity must separately account for the liability and equity components of convertible debt instruments, such as the Notes, that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Notes is that the equity components are required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheets, and the value of the equity components are treated as original issue discounts for purposes of accounting for the debt components of the Notes. As a result, we
are required to record a greater amount of non-cash interest expense in current periods presented as a result of the amortization of the discounted carrying values of the Notes to their face amounts over the terms of the Notes. This adversely affects our reported financial results and could adversely affect the trading price of our common stock and the trading price of the Notes.
In addition, under certain circumstances, convertible debt instruments, such as the Notes, that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the Notes exceeds their principal amounts. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued.
In August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU will eliminate the requirement described above to separate convertible notes into debt and equity components, instead allowing for these instruments to be accounted for as a single liability measured at its amortized cost. Furthermore, this ASU will require the use of the if-converted method when determined diluted earnings per share. These changes, once adopted, will reduce our reported interest expense and increase our reported net income when compared to our results calculated under existing accounting guidance. This standard may adversely impact our reported diluted shares outstanding and our diluted earnings per share in certain periods because of the required use of the if-converted method. ASU No. 2020-06 will be effective for fiscal years beginning after December 15, 2021, with early adoption permitted for interim and annual reporting periods beginning after December 15, 2020. We are in the process of evaluating the impact of this accounting standard.
Risks Related to Ownership of Our Common Stock
The market price of our common stock could be volatile, and you could lose all or part of your investment.
Technology stocks have historically experienced high levels of volatility. The market price of our common stock may fluctuate substantially depending on a number of factors, including those described in this “Risk Factors” section, many of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock. Factors that could cause fluctuations in the trading price of our common stock include the following:
•price and volume fluctuations in the overall stock market from time to time;
•announcements of new products, solutions or technologies, commercial relationships, acquisitions or other events by us or our competitors;
•changes in how enterprises perceive the benefits of our platform and products;
•departures of key personnel;
•the public’s reaction to our press releases, other public announcements and filings with the SEC;
•fluctuations in the trading volume of our shares or the size of our public float, including in connection with an acquisition or upon conversion of some or all of our outstanding Notes;
•sales of large blocks of our common stock;
•actual or anticipated changes or fluctuations in our results of operations;
•whether our results of operations meet the expectations of securities analysts or investors;
•changes in actual or future expectations of investors or securities analysts;
•actual or perceived significant data breach involving our platform;
•litigation involving us, our industry or both;
•governmental or regulatory actions or audits;
•regulatory developments in the United States, foreign countries or both;
•general economic conditions and trends;
•public health crises and related measures to protect the public health (such as the COVID-19
pandemic);
•major catastrophic events in our domestic and foreign markets; and
•“flash crashes,” “freeze flashes” or other glitches that disrupt trading on the securities exchange on which we are listed.
In addition, if the market for technology stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, results of operations or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following periods of volatility in the trading price of a company’s securities, securities class action litigation has often been brought against that company. If the market price of our common stock is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business. This could have an adverse effect on our business, results of operations and financial condition.
Our directors, executive officers and holders of 5% or more of our common stock beneficially own approximately 42% of our common stock and are able to exert significant control over us, which limits your ability to influence the outcome of important transactions, including a change of control.
Our directors, executive officers and holders of 5% or more of our outstanding common stock, and their respective affiliates, beneficially own, in the aggregate, approximately 42% of the shares of our outstanding common stock, based on the number of shares outstanding as of January 31, 2021. Further, entities affiliated with Sequoia Capital, collectively, are currently our largest stockholder and hold approximately 29% of the total voting power of our capital stock based on the number of shares outstanding as of January 31, 2021. As a result, our directors, executive officers and holders of 5% or more of our outstanding capital stock, and their respective affiliates, if acting together, will be able to determine or significantly influence all matters requiring stockholder approval, including the elections of directors, amendments of our organizational documents and approval of any merger, sale of assets or other major corporate transaction. These stockholders may have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. This concentration of ownership may delay, prevent or discourage acquisition proposals or other offers for our common stock that you may feel are in your best interest as a stockholder and ultimately could deprive you of an opportunity to receive a premium for your common stock as part of a sale of our company, which in turn might adversely affect the market price of our common stock.
Conversion of the Notes may dilute the ownership interest of our stockholders or may otherwise depress the price of our common stock.
The conversion of some or all of the Notes may dilute the ownership interests of our stockholders. Upon conversion of the Notes, we have the option to pay or deliver, as the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock. If we elect to settle our conversion obligation in shares of our common stock or a combination of cash and shares of our common stock, any sales in the public market of our common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. Holders of the Notes may hedge their positions in the Notes by entering into short positions with respect to the underlying common stock. In addition, any anticipated conversion of the Notes into shares of our common stock could depress the price of our common stock.
The capped call transactions may affect the value of the Notes and our common stock.
Concurrent with the issuance of the Notes, we entered into the Capped Calls with certain financial institutions, the option counterparties. The Capped Calls are generally expected to reduce the potential dilution upon any conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal amount converted with respect to the Notes, as the case may be.
The option counterparties or their respective affiliates may modify their initial hedge positions by entering into or unwinding various derivatives contracts with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of Notes (and are likely to do so during any applicable observation period related to a conversion of the Notes, or following any repurchase of the Notes, as applicable, by us). This activity could cause or avoid an increase or a decrease in the market price of our common stock or the Notes.
In addition, if any such Capped Calls fails to become effective, the option counterparties or their respective affiliates may unwind their hedge positions with respect to our common stock, which could adversely affect the value of our common stock.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about us, our business or our market, or if they change their recommendations regarding our common stock adversely, the market price and trading volume of our common stock could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us, our business, our market or our competitors. The analysts’ estimates are based upon their own opinions and are often different from our estimates or expectations. If any of the analysts who cover us change their recommendation regarding our common stock adversely, provide more favorable relative recommendations about our competitors or publish inaccurate or unfavorable research about our business, the price of our securities could decline. If few securities analysts commence coverage of us, or if one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets and demand for our securities could decrease, which could cause the price and trading volume of our common stock to decline.
Substantial future sales could depress the market price of our common stock.
The market price of our common stock could decline as a result of a large number of sales of shares of such stock in the market, and the perception that these sales could occur may also depress the market price of our common stock. Under our Amended and Restated Investor Rights Agreement dated as of February 25, 2019, as amended, certain stockholders can require us to register shares owned by them for public sale in the United States. In addition, we filed a registration statement to register shares reserved for future issuance under our equity compensation plans. As a result, subject to the satisfaction of applicable exercise periods, the shares issued upon exercise of outstanding stock options or upon settlement of outstanding restricted stock units (RSU) awards are available for immediate resale in the United States in the open market.
Sales of our common stock may make it more difficult for us to sell equity and convertible securities in the future at a time and at a price that we deem appropriate. These sales also could cause the trading price of our common stock and the Notes to fall and make it more difficult for you to sell shares of our common stock or Notes.
We incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could adversely affect our business, results of operations and financial condition.
As a public company, and particularly now that we are no longer an “emerging growth company,” we incur greater legal, accounting and other expenses than we incurred as a private company. For example, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act), and the rules and regulations of the SEC and the listing standards of the NYSE. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and results of operations. Compliance with these requirements has increased and will continue to increase our legal, accounting and financial compliance costs and increase demand on our systems, making some activities more time-consuming and costly. These rules and regulations make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to maintain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers. We have incurred, and expect to incur in the future, significant expenses and devote substantial management effort toward ensuring compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. In that regard, we will need to continue to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. In addition, as a public company, we may be subject to activism, including shareholder activism, which can lead to substantial costs, distract management and impact the manner in which we operate our business in ways we cannot currently anticipate. As a result of disclosure of information in filings required of a public company, our business and financial condition has become more visible, which may result in threatened or actual litigation, including by competitors. These increased
costs and demands upon management could adversely affect our business, results of operations and financial condition.
Delaware law and provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make a merger, tender offer or proxy contest difficult, thereby depressing the market price of our common stock and the Notes.
Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may make the acquisition of our company more difficult, including the following:
•vacancies on our board of directors can only be filled by our board of directors and not by stockholders;
•our board of directors is classified into three classes of directors with staggered three-year terms;
•our stockholders can only take action at a meeting of stockholders and will not be able to take action by written consent for any matter;
•a special meeting of our stockholders may only be called by a majority of our board of directors, the chairperson of our board of directors, our Chief Executive Officer or our President;
•advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders;
•our amended and restated certificate of incorporation does not provide for cumulative voting;
•our amended and restated certificate of incorporation allows stockholders to remove directors only for cause;
•certain provisions of our amended and restated certificate of incorporation require the approval of the holders of at least 66% of our then-outstanding common stock;
•authorize undesignated preferred stock, the terms of which may be established and shares of which may be issued by our board of directors, without further action by our stockholders; and
•certain litigation against us can only be brought in Delaware.
These provisions, alone or together, could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and to cause us to take other corporate actions they desire, any of which, under certain circumstances, could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock or the Notes.
Our amended and restated bylaws designate a state or federal court located within the State of Delaware as the exclusive forum for substantially all disputes between us and our stockholders and also provide that the federal district courts will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act, each of which could limit our stockholders’ ability to choose the judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated bylaws provide that, unless we consent in writing to the selection of an alternative forum, to the fullest extent permitted by law, the sole and exclusive forum for the following types of actions and proceedings under Delaware statutory or common law: (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws or (iv) any other action asserting a claim that is governed by the internal affairs doctrine shall be the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware), in all cases subject to the court having jurisdiction over indispensable parties named as defendants. Our amended and restated bylaws also provide that the federal district courts of the United States are the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act.
Any person or entity purchasing or otherwise acquiring any interest in any of our securities shall be deemed to have notice of and consented to this provision. This exclusive-forum provision may limit a stockholder’s ability to bring a claim in a judicial forum of its choosing for disputes with us or our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and other employees. If a court were to find the exclusive-forum provisions in our amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could harm our results of operations.
Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.
You should not rely on an investment in our common stock to provide dividend income. We have never declared or paid cash dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to fund the development and growth of our business. In addition, the Wells Fargo Credit Facility contains, and any future credit facility or financing we obtain may contain, terms limiting the amount of dividends that may be declared or paid on our common stock. Any future determination to pay dividends will be at the discretion of our board of directors and will be dependent upon our results of operations, financial condition, capital requirements, applicable contractual restrictions and such other factors as we may deem relevant. As a result, stockholders must rely on sales of their common stock after price appreciation as the only way to realize any future gains on their investment.
We could be subject to securities class action litigation.
In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us, because technology companies have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.
General Risk Factors
Unfavorable conditions in our industry or the economy more generally or reductions in information technology spending could limit our ability to grow our business and adversely affect our results of operations and financial condition.
Our results of operations may vary based on the impact of changes in our industry or the economy more generally on us or our customers. Our business and results of operations depend on demand for information technology generally and for experience management solutions in particular, which in turn is influenced by the scale of business that our customers are conducting. Weak economic conditions, either in the U.S. or internationally, including as a result of changes in gross domestic product growth, financial and credit market fluctuations, interest rates, political turmoil or civil unrest, natural catastrophes or conflicts, or wars, and public health crises, such as the COVID-19 pandemic, and related public health measures, could cause a decrease in business investments, including spending on information technology generally. To the extent that weak economic conditions cause our existing customers or potential customers to reduce their budget for experience management solutions or to perceive spending on such systems as discretionary, demand for our platform may be adversely affected. Moreover, customers and potential customers may require extended billing terms and other financial concessions, which would limit our ability to grow our business and adversely affect our business, results of operations and financial condition.
Our business is subject to the risks of earthquakes, fire, floods, public health crises and other natural catastrophes and to interruption by man-made problems such as power disruptions, computer viruses, data security breaches or other incidents or terrorism.
Our corporate headquarters are located in the San Francisco Bay Area and we operate or utilize data centers that are located in North America and Europe. Additionally, we rely on our network and third-party infrastructure, enterprise applications, internal technology systems and our website for our development, marketing, operational support, hosted services and sales activities. The west coast of the United States, where our corporate headquarters and many of our key operations are located, contains active earthquake zones and have been subject
to numerous devastating wildfires and associated electrical blackouts. In the event of a catastrophic event, including a natural disaster such as an earthquake, hurricane, fire, flood, tsunami or tornado, or other catastrophic event such as power loss, telecommunications failure, software or hardware malfunction, cyber-attack, war, terrorist attack or incident of mass violence in the San Francisco Bay Area or elsewhere where our operations or data centers are located or where certain other systems and applications that we rely on are hosted, we may be unable to continue our operations and may endure significant system interruptions, reputational harm, delays in our application development, lengthy interruptions in our platform, breaches of data security and loss of critical data, all of which could have an adverse effect on our future results of operations. In addition, natural disasters, cyber-attacks, acts of terrorism, public health crises, such as pandemics and epidemics, or other catastrophic events could cause disruptions in our or our customers’ businesses, national economies or the world economy as a whole.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
Our corporate headquarters is located in San Francisco, California, pursuant to a lease expiring in April 2026. We employ a distributed workforce with offices in San Francisco, San Mateo and Pleasanton, California and we also have other employee hubs around the world, including Argentina, United Kingdom, New York, Israel and Virginia. All offices are leased and we do not own any real property.
We plan to sublease certain of our office spaces in San Francisco, San Mateo and Pleasanton, California and others in the United Kingdom because when employees return to physical work spaces, they will have more flexibility.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are party to litigation and subject to claims incident to the ordinary course of business. As our growth continues, we may become party to an increasing number of litigation matters and claims. The outcome of litigation and claims cannot be predicted with certainty, and the resolution of these matters could materially affect our future results of operations, cash flows, or financial position. We are not presently party to any legal proceedings that, in the opinion of management, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition, or cash flows.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
None.

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information for Common Stock
Our common stock has been traded on the New York Stock Exchange under the symbol "MDLA" since July 19, 2019. Prior to that date, there was no public trading market for our common stock.
Holders of Record
As of February 26, 2021, there were 75 registered stockholders of record of our common stock. We believe a substantially greater number of beneficial owners hold shares through brokers, banks and other nominees.
Dividend Policy
We have never declared or paid, any cash dividends on our common stock. We currently intend to retain all of our future earnings, if any, to finance our operations and do not anticipate paying any cash dividends on our common stock in the foreseeable future. In addition, the Wells Fargo Credit Facility contains, and any future credit facility or financing we obtain may contain, terms limiting the amount of dividends that may be declared or paid on our common stock. Any future determination to pay dividends will be at the discretion of our board of directors and will be dependent upon our results of operations, financial condition, capital requirements, applicable contractual restrictions and such other factors as we may deem relevant.
Stock Performance Graph
The following shall not be deemed “soliciting material” or to be "filed" with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any of our filings under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended.
The performance graph below shows the cumulative total stockholder return on our common stock for the period from July 19, 2019 to January 31, 2021. This is compared to the cumulative total return of the NASDAQ Computer & Data Processing Index and the S&P 500 Stock Index, over the same period. The graph assumes that on July 19, 2019, our initial trading day, $100 was invested, at the closing market price, in our common stock and in each of the other two indices, with dividends reinvested on the date of payment without payment of any commissions. Dollar amounts in the graph are rounded to the nearest whole dollar. The performance shown in the graph represents past performance and should not be considered an indication of future performance.
Recent Sale of Unregistered Securities and Use of Proceeds
None.
Issuer Purchases of Equity Securities
None.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. The consolidated statements of operations data for each of the years ended January 31, 2021, 2020, 2019 and 2018 and the consolidated balance sheet data as of January 31, 2021, 2020 and 2019 are derived from our audited consolidated financial statements that are included elsewhere in this Annual Report on Form 10-K. The consolidated balance sheet data as of January 31, 2018 are derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of our results of operations to be expected for any future period and are not necessarily indicative of the results to be expected for the full year or any future period. The selected consolidated financial data in this section are not intended to replace our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K and are qualified in their entirety by our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K.
Year Ended January 31,
2021 2020 2019 2018
(in thousands except per share data)
Consolidated Statements of Operations Data:
Revenue:
Subscription $ 382,573 $ 312,168 $ 246,797 $ 201,801
Professional services 94,648 90,295 66,845 59,394
Total revenue 477,221 402,463 313,642 261,195
Cost of revenue:
Subscription (1)
80,376 61,369 47,948 36,397
Professional services (1)
90,308 83,820 67,953 59,380
Total cost of revenue 170,684 145,189 115,901 95,777
Gross profit 306,537 257,274 197,741 165,418
Operating expenses:
Research and development (1)
117,800 95,978 86,272 86,368
Sales and marketing (1)
225,414 180,711 138,674 110,002
General and administrative (1)
101,351 95,515 53,239 40,183
Total operating expenses 444,565 372,204 278,185 236,553
Loss from operations (138,028) (114,930) (80,444) (71,135)
Interest income and other income (expense), net (10,550) 3,129 (11) 2,412
Loss before provision for income taxes (148,578) (111,801) (80,455) (68,723)
Provision for income taxes 78 532 1,779 1,638
Net loss $ (148,656) $ (112,333) $ (82,234) $ (70,361)
Net loss per share attributable to common stockholders, basic and diluted $ (1.03) $ (1.35) $ (3.07) $ (3.12)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted 144,563 83,269 26,770 22,571
(1) Includes stock-based compensation expense as follows:
Year Ended January 31,
2021 2020 2019 2018
(in thousands)
Cost of subscription revenue $ 3,650 $ 3,058 $ 1,143 $ 423
Cost of professional services revenue 10,266 8,824 2,379 2,256
Research and development expense 25,469 18,176 7,563 5,182
Sales and marketing expense 37,625 28,519 6,813 4,882
General and administrative expense 27,795 50,879 9,960 5,505
Total stock-based compensation $ 104,805 $ 109,456 $ 27,858 $ 18,248
January 31,
2021 2020 2019 2018
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable securities $ 682,389 $ 343,699 $ 44,876 $ 60,087
Total assets (1)
1,401,649 731,649 280,184 265,182
Total deferred revenue (2)
294,627 264,522 211,817 168,937
Convertible senior notes, net 448,064 - - -
Accumulated deficit (629,629) (480,973) (368,640) (286,219)
Total stockholders' equity (deficit) 1,401,649 397,796 (6,558) 35,057
(1) The amounts as of January 31, 2021 reflect the impact of the adoption of Accounting Standards Update (ASU) 2016-02, “Leases” (Topic 842). The amounts as of January 31, 2020, 2019, and 2018 do not reflect the adoption of Topic 842 . Refer to Note 1 in the notes to our consolidated financial statements.
(2) Includes $254.5 million, $222.9 million, $175.4 million, and $136.3 million in subscription deferred revenue as of January 31, 2021, 2020, 2019, and 2018 respectively.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
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 related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties as discussed in “Special Note Regarding Forward-Looking Statements” included in this Annual Report on Form 10-K. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in “Risk Factors” under Part II, Item 1A in this Annual Report on Form 10-K. Our fiscal year ends January 31.
Overview
Medallia, Inc. was founded in 2001 to help the world’s largest companies understand and improve customer experiences at scale. In doing so, we created a new category of enterprise software, experience management.
Our SaaS (software-as-a-service) platform, the Medallia Experience Cloud, is built on modern technology and open architecture, utilizing AI (artificial intelligence) and machine learning to analyze massive amounts of data. We capture experience data from the expanding signal fields emitted by customers, employees, citizens, and patients on their daily journeys so that our customers can understand and manage omni-channel experiences. We utilize our proprietary in-memory analytics, dynamic organizational hierarchy management, and AI technology to
analyze the structured and unstructured data at great scale with enterprise grade security and privacy deriving themes and predictive insights that drive action in live time. Using our technology, enterprises reduce churn, turn detractors into promoters and buyers, create in-the-moment cross-sell and up-sell opportunities, and drive revenue-impacting business decisions, providing clear and potent returns on investment.
Our platform captures and analyzes over 7.5 billion experiences annually. Our products have high adoption rates and are used extensively from the front line to the C-Suite; approximately 50% of our customers have more than 1,000 employees using our platform. Our platform is deeply embedded in an enterprise’s tech stack, with enterprises integrating Medallia with an average of 25 other business applications, and our platform is becoming the experience system of record that makes all other applications customer and employee aware. We believe this is significantly higher adoption than other experience management solutions available in the market.
We offer our platform through a SaaS business model. We use a “land and expand” model, whereby once customers have deployed our platform, they often increase the number of end-users through expansion to additional business units and geographies, and they also purchase more modules. We focus our selling efforts on both business leaders who are often making a strategic purchase of our platform with the potential for broad use throughout their enterprises, as well as functional leaders purchasing for their teams. We price our subscriptions based on the functionality and capacity needs of our customers. Subscription periods for our customers generally range from one to three years and we customarily invoice customers in advance in annual installments.
In December 2019 a novel strain of Coronavirus disease (COVID-19) was reported and in January 2020 the World Health Organization (WHO) declared the outbreak a “Public Health Emergency of International Concern.” In February 2020 the WHO raised the COVID-19 threat level from high to very high at a global level and in March 2020 the WHO characterized the COVID-19 as a pandemic. The COVID-19 pandemic has impacted our business, and its full impact is still uncertain and may negatively affect our subscription bookings and results of operations in future periods. The extent to which the COVID-19 pandemic may impact our future financial condition or results of operations remains uncertain. Also, we may experience curtailed customer demand for our platform, reduced customer spending or contract duration or lengthened payment terms that could materially adversely impact our business, results of operations and overall financial performance in future periods. While our subscription revenue is relatively predictable, the effect of the COVID-19 pandemic, along with the seasonality we historically experience, may not be fully reflected in our results of operations and overall financial performance until future periods.
The extent and continued impact of the COVID-19 pandemic on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak; government responses to the pandemic; impact on our customers' and our sales cycles; impact on our customer, industry or employee events; extent of delays in hiring and onboarding new employees; how quickly and to what extent normal economic and operating activities can resume; and effect on our partners and vendors, all of which are uncertain and difficult to predict. In response to the COVID-19 pandemic, we have temporarily closed most of our offices (including our headquarters), mandated our employees to work remotely, implemented travel restrictions for all non-essential business, and shifted certain of our customer, industry, analyst, investor, and employee events, including our Medallia Experience conference, to virtual-only, and we may similarly alter, postpone or cancel events in the future. These changes remained in effect in the fourth quarter of fiscal 2021 and could extend into future quarters. The impact, if any, of these and any additional operational changes we may implement is uncertain but changes we have implemented have not affected and are not expected to affect our ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures. See the section “Risk Factors” for further discussion of the impact and possible continued impact of the COVID-19 pandemic on our business.
Key Business Metrics
We review a number of operating and financial metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions.
Customers
We measure and track the number of customers, and we believe the number of customers is useful information to investors, because our ability to attract new customers, grow our customer base and retain existing customers helps drive our success and is an important contributor to our revenue growth. We have successfully demonstrated a history of growing our customer base. We define the number of customers at the end of any particular period as the number of customers with active annual subscription agreements that run through the current or future period. In situations where a customer has multiple subsidiaries or divisions, each entity that is invoiced as a separate entity is treated as a separate customer. As of January 31, 2021, 2020 and 2019 we had 1,077, 757 and 543 enterprise customers, respectively. If we count as a single enterprise customer, all subsidiaries and divisions of a single parent, then as of January 31, 2021, 2020 and 2019 we had 787, 513 and 350 enterprise customers, respectively.
We also serve a variety of small and mid-size businesses that prove our products applicability across all levels of the market. We serve approximately 700 customers with active annual contract subscription agreements.
Our use of customer count may have certain limitations as an analytical tool and should not be considered in isolation or as a substitute for revenue or an analysis of our results as reported under GAAP. For example, other companies, including companies in our industry, may calculate number of customers differently, which could reduce its usefulness as a comparative measure.
Subscription Billings
Subscription billings on a trailing 12-month basis also helps investors better understand our subscription sales activity for a particular period, which is not necessarily reflected in our subscription revenue given that we recognize subscription revenue ratably over the subscription term.
We define subscription billings, a non-GAAP financial measure, as total subscription revenue plus the change in subscription deferred revenue and contract assets, excluding contract assets acquired. We measure subscription billings on a trailing 12-month basis because subscription billings vary from quarter to quarter due to invoice timing. Subscription billings in any particular period reflects amounts invoiced for subscriptions to access our platform. We typically invoice our customers annually in advance for subscriptions to our platform.
The following table sets forth our subscription billings and growth rate, and provides a reconciliation of subscription revenue to subscription billings, for the periods presented:
Trailing Twelve Months Ended January 31,
2021 2020 2019
(in thousands, except percentages)
Subscription revenue $ 382,573 $ 312,168 $ 246,797
Increase in subscription deferred revenue 31,597 47,549 39,095
(Increase) decrease in contract assets (2,646) 1,052 3,575
Subscription billings $ 411,524 $ 360,769 $ 289,467
Subscription billings growth rate 14% 25% 24%
Our use of subscription billings has certain limitations as an analytical tool and should not be considered in isolation or as a substitute for revenue or an analysis of our results as reported under GAAP. Subscription billings are recognized when invoiced, while the related subscription revenue is recognized ratably over the subscription term. For fiscal 2021, our trailing 12-month subscription billings growth rate was 14%. There are a wide variety of factors that influence this metric. For example, due to the COVID-19 pandemic, we have modified subscription terms, flexible payment or invoicing terms in exchange for extensions of existing contracts for certain customers hardest hit by the pandemic. Therefore, fluctuations in billings should not be taken as an indication of
changes in future revenue. Also, other companies, including companies in our industry, may not use subscription billings, may calculate subscription billings differently, may have different billing frequencies, or may use other financial measures to evaluate their performance, all of which could reduce the usefulness of subscription billings as a comparative measure.
Also, other companies, including companies in our industry, may not use subscription billings, may calculate subscription billings differently, may have different billing frequencies, or may use other financial measures to evaluate their performance, all of which could reduce the usefulness of subscription billings as a comparative measure.
Dollar-based Net Revenue Retention
We use a dollar-based net revenue retention rate to measure our ability to retain and expand business generated from our existing customers. Our dollar-based net revenue retention rate compares our subscription revenue from the same set of customers across comparable periods, calculated on a trailing twelve-month basis. We focus on a dollar-based net revenue retention rate metric, and we believe it is useful information to investors, because it captures the full impact on revenue of customers expanding, decreasing or ending their subscriptions. Our dollar-based net revenue retention rate as of January 31, 2021, 2020 and 2019 was 115%, 119% and 116%, respectively, on a trailing twelve-month basis.
We calculate our dollar-based net revenue retention rate by dividing (i) subscription revenue in the trailing 12-month period from those customers who were on our platform during the prior 12-month period by (ii) subscription revenue from the same customers in the prior trailing 12-month period. For the purposes of calculating our dollar-based net revenue retention rate, we count as customers all parent companies of each billing entity enterprise. We believe that our ability to retain customers and expand their use of our platform over time is an indicator of the stability of our revenue base and the long-term value of our relationships with customers. If our dollar-based net revenue retention rate for a period exceeds 100%, this means that the subscription revenue retained during the period, which includes up-sells and cross-sells, more than offset the subscription revenue lost from customers that did not renew all or a portion of their contracts with us during that period.
Our use of dollar-based net revenue retention rate may have certain limitations as an analytical tool and should not be considered in isolation or as a substitute for revenue or an analysis of our results as reported under GAAP. For example, other companies, including companies in our industry, may calculate dollar-based net revenue retention rate differently, which could reduce its usefulness as a comparative measure.
Components of Results of Operations
Revenue
We generate revenue from sales of subscriptions and related professional services. Professional services include managed services and implementation and other services. For all periods presented, we have relied on sales of our platform to large enterprises for a significant majority of our revenue.
Subscription revenue is recognized ratably over the related contractual term, generally beginning on the date that our platform is made available to a customer. In general, our agreements are non-cancellable and we primarily bill in advance annually for our multi-year contracts. Amounts that have been billed are initially recorded as deferred revenue until the revenue is recognized. Subscription revenue as a percentage of total revenue may vary from period to period.
Professional services revenue includes fees associated with managed services and one-time implementation and other services. Managed services support our customers by providing a range of ongoing services, including program design, launch, enhancements, expansion and analytics. Managed services are typically sold on a fixed-fee recurring basis. Managed services are a stand-ready obligation to perform these services over the term of the arrangement and as a result, revenue is recognized ratably over the term of the arrangement.
Implementation and other services are sold on a fixed-fee or time-and-materials basis and consist primarily of initial design, integration and configuration services. In addition, we provide advisory services that enable customers to gain insightful business information through data analysis and our institute training programs. Implementation and other services revenue are recognized as services are performed.
As we continue to increase the number of partners that provide implementation and advisory services, we generally expect professional services revenue to decrease as a percentage of total revenue in the long term, although this percentage may vary from period to period.
Cost of Revenue, Gross Profit and Gross Margin
Cost of Subscription Revenue
Cost of subscription revenue primarily consists of software, hardware and hosting costs, personnel-related expenses including stock-based compensation expense, travel expense and allocated overhead costs for our subscription operations, third-party costs and security and customer support departments including outside services.
Cost of Professional Services Revenue
Cost of professional services revenue primarily consists of personnel-related expenses including stock-based compensation expense, travel expense and allocated overhead costs associated with the delivery of managed services, implementation and other service offerings, facility costs, sub-contractor costs and outside services.
We expect our cost of revenue will increase in absolute dollars in future periods as we continue to invest in our business and may vary from period to period as a percentage of revenue.
Gross Profit and Gross Margin
Gross profit is total revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of revenue. Our gross margin may vary from period to period as our mix or cost of revenue fluctuates. Our gross margin on subscription revenue is significantly higher than our gross margin on professional services revenue, which is close to break-even. In addition, we may experience changes in our professional services gross margin due to the timing of delivery of implementation and other services. We expect our gross margin may vary from period to period and increase modestly in the long term.
Operating Expenses
Research and Development
Research and development expenses primarily consists of personnel-related expenses including stock-based compensation expense, travel expense and allocated overhead costs, facility costs, software and hardware costs and depreciation. Our research and development efforts focus on maintaining and enhancing functionality of existing services and adding new products and features. We believe that continued investment in our platform is important for our growth. Although we expect our research and development expenses will increase in absolute dollars in future periods and may vary from period to period as a percentage of revenue in the near term, we expect that research and development expenses will decline as a percentage of revenue in the long term.
Sales and Marketing
Sales and marketing expenses primarily consists of personnel-related expenses including stock-based compensation expense, travel expense and allocated overhead expenses and marketing and promotional activities expenses including our annual Experience conference, advertising, facility and training costs. Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer and are deferred and amortized on a straight-line basis over the expected period of benefit. We intend to continue to
invest in sales and marketing to help drive the growth of our business. During the short term we expect to see a decline in travel expenses as well as certain of our marketing costs such as the Experience conference due to the COVID-19 pandemic as we focus our marketing and sales events on virtual platforms. However, we expect our sales and marketing expenses will increase in future periods as we ramp up our sales efforts.
General and Administrative
General and administrative expenses primarily consist of personnel-related expenses including stock-based compensation expense, travel expense and overhead costs, and facility costs and outside services. General and administrative expenses also include restructuring costs from subleasing of certain of our office spaces. We expect to incur additional general and administrative expenses to support the growth of the Company as well as our transition to being a publicly traded company. We expect that general and administrative expenses will increase in absolute dollars in future periods and vary from period to period as a percentage of revenue.
Other Income (Expense), net
Other income (expense), net consists primarily of interest expense, accretion of the debt discount and amortization of the issuance costs on the convertible senior notes, interest expense on the revolving line of credit and net foreign currency exchange gains (losses). In addition, interest income includes interest on our cash and marketable securities balances.
Provision For Income Taxes
Provision for income taxes consists of U.S. federal and state income taxes and income taxes on foreign jurisdictions in which we conduct business and foreign withholding taxes. We maintain a full valuation allowance on our federal and state deferred tax assets that we have determined are not realizable on a more likely than not basis. For additional information regarding our income taxes, see "Note 12: Income Taxes," included in this Annual Report on Form 10-K, in our notes to the consolidated financial statements.
Results of Operations
The following table sets forth our consolidated statements of operations data for the periods indicated (in thousands):
Year Ended January 31,
2021 2020 2019
Revenue:
Subscription $ 382,573 $ 312,168 $ 246,797
Professional services 94,648 90,295 66,845
Total revenue 477,221 402,463 313,642
Cost of revenue:
Subscription(1)
80,376 61,369 47,948
Professional services(1)
90,308 83,820 67,953
Total cost of revenue 170,684 145,189 115,901
Gross profit 306,537 257,274 197,741
Operating expenses:
Research and development(1)
117,800 95,978 86,272
Sales and marketing(1)
225,414 180,711 138,674
General and administrative(1)
101,351 95,515 53,239
Total operating expenses 444,565 372,204 278,185
Loss from operations (138,028) (114,930) (80,444)
Other income (expense), net (10,550) 3,129 (11)
Loss before provision for income taxes (148,578) (111,801) (80,455)
Provision for income taxes 78 532 1,779
Net loss $ (148,656) $ (112,333) $ (82,234)
(1) Includes stock-based compensation expense as follows (in thousands):
Year Ended January 31,
2021 2020 2019
Cost of subscription revenue $ 3,650 $ 3,058 $ 1,143
Cost of professional services revenue 10,266 8,824 2,379
Research and development expense 25,469 18,176 7,563
Sales and marketing expense 37,625 28,519 6,813
General and administrative expense 27,795 50,879 9,960
Total stock-based compensation $ 104,805 $ 109,456 $ 27,858
The following table sets forth our consolidated statements of operations data expressed as a percentage of total revenue for the periods indicated:
Year Ended January 31,
2021 2020 2019
Revenue:
Subscription 80 % 78 % 79 %
Professional services 20 % 22 % 21 %
Total revenue 100 % 100 % 100 %
Cost of revenue:
Subscription 17 % 15 % 15 %
Professional services 19 % 21 % 22 %
Total cost of revenue 36 % 36 % 37 %
Gross profit 64 % 64 % 63 %
Operating expenses:
Research and development 25 % 24 % 28 %
Sales and marketing 47 % 45 % 44 %
General and administrative 21 % 24 % 17 %
Total operating expenses 93 % 92 % 89 %
Loss from operations (29) % (29) % (26) %
Other income (expense), net (2) % 1 % - %
Loss before provision for income taxes (31) % (28) % (26) %
Provision for income taxes - % - % 1 %
Net loss (31) % (28) % (26) %
Fiscal Years Ended January 31, 2021, 2020 and 2019
Revenue
Year Ended January 31, Year Ended January 31,
2021 2020 $ Change % Change 2020 2019 $ Change % Change
(in thousands, except percentages)
Subscription $ 382,573 $ 312,168 $ 70,405 23% $ 312,168 $ 246,797 $ 65,371 26%
Professional services 94,648 90,295 4,353 5% 90,295 66,845 23,450 35%
Total revenue $ 477,221 $ 402,463 $ 74,758 19% $ 402,463 $ 313,642 $ 88,821 28%
Total revenue was $477.2 million for the year ended January 31, 2021 compared to $402.5 million for the year ended January 31, 2020, which is an increase of $74.8 million, or 19%.
Subscription revenue accounted for 80% of total revenue the year ended January 31, 2021 and 78% of total revenue for the year ended January 31, 2020, respectively. Subscription revenue increased by $70.4 million, or 23%, for the year ended January 31, 2021 compared to the year ended January 31, 2020. The increases were primarily due to cross-sell with existing customers and expansions as reflected in our dollar-based net revenue retention rate of 115% for the year ended January 31, 2021. The increases were also driven by revenue from new customers, as the number of enterprise customers increased to 1,077 as of January 31, 2021 from 757 as of January 31, 2020, representing a 42% increase. The expansions and cross-sell with existing customers and revenue from new customers, including our 700 small and mid-market customers, also helped drive growth in our subscription billings, which increased to $411.5 million for the year ended January 31, 2021 from $360.8 million for the year ended January 31, 2020, representing a 14% increase.
Professional services revenue increased by $4.4 million, or 5%, for the year ended January 31, 2021 compared to the year ended January 31, 2020. The increases were driven by higher managed and implementation services.
Total revenue was $402.5 million for the year ended January 31, 2020, compared to $313.6 million for the year ended January 31, 2019, which is an increase of $88.8 million, or 28%.
Subscription revenue accounted for 78% and 79% of our revenue for the years ended January 31, 2020 and 2019, respectively. Subscription revenue increased by $65.4 million, or 26%, for the year ended January 31, 2020, compared to the year ended January 31, 2019. The increase was primarily due to expansions and cross-sell with existing customers, as reflected in our dollar-based net revenue retention rate of 119% for the year ended January 31, 2020. The increase was also driven by revenue from new customers, as the number of enterprise customers increased to 757 at the end of January 31, 2020 from 543 at the end of January 31, 2019, representing a 39% increase. The expansions and cross-sell with existing customers and revenue from new customers also helped drive growth in our subscription billings, which increased to $360.8 million for the year ended January 31, 2020 from $289.5 million for the year ended January 31, 2019, representing a 25% increase.
Professional services revenue increased by $23.5 million, or 35%, for the year ended January 31, 2020, compared to the year ended January 31, 2019. The increase was driven by higher managed and implementation services.
Cost of Revenue, Gross Profit and Gross Margin
Year Ended January 31, Year Ended January 31,
2021 2020 $ Change % Change 2020 2019 $ Change % Change
(in thousands, except percentages)
Cost of revenue:
Subscription $ 80,376 $ 61,369 $ 19,007 31% $ 61,369 $ 47,948 $ 13,421 28%
Professional services 90,308 83,820 6,488 8% 83,820 67,953 15,867 23%
Total cost of revenue $ 170,684 $ 145,189 $ 25,495 18% $ 145,189 $ 115,901 $ 29,288 25%
Gross profit $ 306,537 $ 257,274 $ 49,263 19% $ 257,274 $ 197,743 $ 59,531 30%
Gross margin:
Subscription 79 % 80 % 80 % 81 %
Professional services 5 % 7 % 7 % (2) %
Total gross margin 64 % 64 % 64 % 63 %
Total cost of revenue was $170.7 million for the year ended January 31, 2021, compared to $145.2 million for the year ended January 31, 2020, an increase of $25.5 million, or 18%.
Cost of subscription revenue increased by $19.0 million, or 31%, for the year ended January 31, 2021 compared to the year ended January 31, 2020. The increase was primarily due to an increase of $14.1 million in hosting, software and hardware related to infrastructure necessary to meet our customer demand, higher personnel-related expenses of $3.3 million, including stock-based compensation expense and $1.3 million in outside services.
Cost of professional services revenue increased by $6.5 million, or 8%, for the year ended January 31, 2021 compared to the year ended January 31, 2020 primarily due to an increase of $8.9 million in personnel-related expenses, including stock-based compensation expense of $1.4 million, partially offset by a decrease of $1.9 million in outside services and facility costs.
Gross profit increased proportionate to the increase in revenue for the year ended January 31, 2021 compared to the year ended January 31, 2020. Gross margin did not materially change during those periods.
Total cost of revenue was $145.2 million for the year ended January 31, 2020, compared to $115.9 million for the year ended January 31, 2019, an increase of $29.3 million, or 25%.
Cost of subscription revenue increased by $13.4 million, or 28%, for the year ended January 31, 2020, compared to the year ended January 31, 2019. The increase was primarily due to an increase of $6.7 million in hosting, software and hardware related to infrastructure necessary to meet our customer demand and higher personnel-related expenses of $5.7 million primarily due to increase in stock-based compensation expense.
Cost of professional services revenue increased by $15.9 million, or 23%, for the year ended January 31, 2020, compared to the year ended January 31, 2019, primarily due to an increase of $12.3 million in personnel related expenses, including stock-based compensation expense, and an increase of $4.0 million in outside services. This increase was partially offset by a decrease of $1.5 million in facility costs.
Gross profit increased proportionate to the increase in revenue for the year ended January 31, 2020, compared to the year ended January 31, 2019. Gross margin did not materially change during those periods.
Research and Development
Year Ended January 31, Year Ended January 31,
2021 2020 $ Change % Change 2020 2019 $ Change % Change
(in thousands, except percentages)
Research and development $ 117,800 $ 95,978 $ 21,822 23% $ 95,978 $ 86,272 $ 9,706 11%
Percentage of revenue 25 % 24 % 24 % 28 %
Research and development expenses increased by $21.8 million, or 23%, for the year ended January 31, 2021 compared to the year ended January 31, 2020. The increase was primarily due to an increase of $16.8 million in personnel-related expenses, of which $7.3 million related to stock-based compensation expense, and $4.8 million in outside services.
Research and development expenses increased by $9.7 million, or 11% for the year ended January 31, 2020 compared to the year ended January 31, 2019. Personnel-related expenses increased by $11.4 million during the year ended January 31, 2020, primarily due to increases in stock-based compensation expense of $10.6 million, partially offset by a decrease in facility costs of $2.2 million.
Sales and Marketing
Year Ended January 31, Year Ended January 31,
2021 2020 $ Change % Change 2020 2019 $ Change % Change
(in thousands, except percentages)
Sales and marketing $ 225,414 $ 180,711 $ 44,703 25% $ 180,711 $ 138,674 $ 42,037 30%
Percentage of revenue 47 % 45 % 45 % 44 %
Sales and marketing expenses increased by $44.7 million, or 25%, for the year ended January 31, 2021 compared to the year ended January 31, 2020. The increase was primarily due to higher personnel-related expenses of $38.1 million, of which $9.1 million related to stock-based compensation expense, as we continued to expand our quota bearing sales force along with non-quota bearing sales support positions and $7.4 million in software costs, partially offset by a decrease of $1.3 million in marketing and promotional expenses.
Sales and marketing expenses increased by $42.0 million, or 30%, for the year ended January 31, 2020 compared to the year ended January 31, 2019. The increase was primarily due to higher personnel-related expenses of $30.6 million as we expanded our quota bearing sales force along with non-quota bearing positions, and an increase in marketing and promotional expenses of $11.5 million, partially offset by $1.3 million in facilities costs.
General and Administrative
Year Ended January 31, Year Ended January 31,
2021 2020 $ Change % Change 2020 2019 $ Change % Change
(in thousands, except percentages)
General and administrative $ 101,351 $ 95,515 $ 5,836 6% $ 95,515 $ 53,239 $ 42,276 79%
Percentage of revenue 21 % 24 % 24 % 17 %
General and administrative expenses increased by $5.8 million, or 6%, for the year ended January 31, 2021 compared to the year ended January 31, 2020. The increase was primarily due to higher restructuring costs of $22.8 million because we incurred $18.8 million of expenses primarily related to exiting certain of our office spaces and writing-off related leasehold improvements, whereas during the year ended January 31, 2020 we recorded a benefit of $4.0 million of restructuring charges. In addition, for the year ended January 31, 2021, we recorded increased costs of $6.0 million due to higher acquisition fees, compliance activities and other, partially offset by lower stock-based compensation expense of $23.1 million because during the year ended January 31, 2020 we recorded a non-recurring stock-based compensation expense related to RSUs that vested upon the satisfaction of a service and liquidity event-related performance vesting condition,
General and administrative expenses increased by $42.3 million, or 79%, for the year ended January 31, 2020 compared to the year ended January 31, 2019. The increase was primarily due to overall increase in expenses associated with being a public company, higher stock-based compensation expense associated with RSU’s being recognized upon the IPO and the termination of certain executives and other employees, for which we accelerated the vesting of certain unvested stock options and RSUs. As a result of the acceleration, we recognized additional stock-based compensation expense of $8.7 million.
Other Income (Expense), net and Provision for Income Taxes
Year Ended January 31, Year Ended January 31,
2021 2020 $ Change % Change 2020 2019 $ Change % Change
(in thousands, except percentages)
Interest expense and other $ (11,958) $ (1,455) $ (10,503) 722% $ (1,455) $ (751) $ (704) nm
Interest income 1,408 4,584 (3,176) (69)% 4,584 740 3,844 nm
Other income (expense), net $ (10,550) $ 3,129 $ (13,679) (437)% $ 3,129 $ (11) $ 3,140 nm
Provision for income taxes $ 78 $ 532 $ (454) (85)% $ 532 $ 1,779 $ (1,247) (70)%
Interest expense and other increased during the year ended January 31, 2021 compared to the year ended January 31, 2020 primarily due to an increase in interest expense related to the debt discount and issuance costs incurred on our convertible senior notes, revolving line of credit and capital leases.
Interest income decreased during the year ended January 31, 2021 compared to the year ended January 31, 2020 primarily due to lower interest rates on our cash, cash equivalent and marketable securities.
Income tax expense decreased by $0.5 million during the year ended January 31, 2021 compared to the year ended January 31, 2020. This was primarily attributed to the deferred tax benefit of $1.8 million resulting from the LivingLens, Voci, Stella and Sense360 acquisitions, which is higher than the $1.4 million deferred tax benefits recognized during the year ended January 31, 2020.
Interest expense and other increased during the year ended January 31, 2020 compared to the year ended January 31, 2019 primarily due to an increase in interest expense from capital leases and foreign exchange losses.
Interest income increased during the year ended January 31, 2020 compared to the year ended January 31, 2019 primarily due to higher cash and cash equivalents and marketable securities balances from proceeds of
our IPO and the Series F convertible preferred stock during the year ended January 31, 2020 as compared to the year ended January 31, 2019.
Income tax expense decreased by $1.2 million during the year ended January 31, 2020 compared to the year ended January 31, 2019. This was primarily attributed to the deferred tax benefit of $1.4 million resulting from the Strikedeck, Zingle and Crowdicity acquisitions, partially offset by an increase in withholding taxes and an increase in foreign income taxes.
Quarterly Financial Data
The following tables set forth selected unaudited quarterly consolidated statements of operations data for each of the eight quarters in fiscal 2021 and 2020. The information for each of these eight quarters has been prepared on the same basis as the audited annual consolidated financial statements included elsewhere in this Annual Report on Form 10-K and, in the opinion of management, includes all adjustments, which consist only of normal recurring adjustments necessary for the fair presentation of the results of operations for these periods in accordance with generally accepted accounting principles, or GAAP.
The data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. These quarterly operating results are not necessarily indicative of our operating results for the full year or any future periods.
Year Ended January 31, 2021 Year Ended January 31, 2020
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
(in thousands except per share data)
Revenue
Subscription $ 103,814 $ 96,936 $ 92,831 $ 88,992 $ 86,160 $ 79,749 $ 74,547 $ 71,712
Professional services 24,233 24,022 22,694 23,699 23,940 23,325 21,123 21,907
Total revenue 128,047 120,958 115,525 112,691 110,100 103,074 95,670 93,619
Cost of revenue
Subscription (1)
22,837 21,065 19,130 17,344 16,913 16,296 14,699 13,461
Professional services (1)
23,264 22,783 22,042 22,219 22,203 22,299 20,184 19,134
Total cost of revenue 46,101 43,848 41,172 39,563 39,116 38,595 34,883 32,595
Gross profit 81,946 77,110 74,353 73,128 70,984 64,479 60,787 61,024
Research and development (1)
29,597 28,034 27,790 32,379 27,348 26,321 22,693 19,616
Sales and marketing (1)
63,124 58,333 51,942 52,015 53,559 47,067 46,470 33,615
General and administration (1)
30,428 20,288 29,137 21,498 22,843 32,758 30,076 9,838
Total operating expenses 123,149 106,655 108,869 105,892 103,750 106,146 99,239 63,069
Loss from operations (41,203) (29,545) (34,516) (32,764) (32,766) (41,667) (38,452) (2,045)
Interest income and other income (expense), net (7,030) (3,247) (448) 175 555 2,001 431 142
Loss before provision for (benefits from) income taxes (48,233) (32,792) (34,964) (32,589) (32,211) (39,666) (38,021) (1,903)
Provision for (benefits from) income taxes 537 (633) 234 (60) (341) (46) 263 656
Net loss $ (48,770) $ (32,159) $ (35,198) $ (32,529) $ (31,870) $ (39,620) $ (38,284) $ (2,559)
Net loss per share attributable to to common stockholders, basic and diluted $ (0.32) $ (0.22) $ (0.25) $ (0.24) $ (0.25) $ (0.31) $ (0.87) $ (0.08)
Weighted average shares used in computing net loss per share attributable to common stockholders, basic and diluted 151,663 147,930 142,479 135,993 129,365 127,715 43,986 30,430
(1) Includes stock-based compensation expense as follows (in thousands):
Year Ended January 31, 2021 Year Ended January 31, 2020
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
(in thousands except per share data)
Cost of subscription revenue $ 925 $ 870 $ 946 $ 909 $ 954 $ 948 $ 869 $ 287
Cost of professional services revenue 2,312 2,552 2,719 2,684 2,869 2,708 2,690 557
Research and development expense 4,641 4,610 4,746 11,473 6,643 6,292 3,658 1,583
Sales and marketing expense 9,193 10,350 8,745 9,335 9,603 8,948 8,475 1,493
General and administrative expense 6,281 6,633 7,478 7,403 9,091 18,259 19,487 4,042
Total stock-based compensation $ 23,352 $ 25,015 $ 24,634 $ 31,804 $ 29,160 $ 37,155 $ 35,179 $ 7,962
The following table sets forth our consolidated statements of operations data expressed as a percentage of total revenue for the periods indicated:
Year Ended January 31, 2021 Year Ended January 31, 2020
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
Revenue
Subscription 81 % 80 % 80 % 79 % 78 % 77 % 78 % 77 %
Professional services 19 % 20 % 20 % 21 % 22 % 23 % 22 % 23 %
Total revenue 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %
Cost of revenue
Subscription 18 % 17 % 17 % 15 % 15 % 16 % 15 % 14 %
Professional services 18 % 19 % 19 % 20 % 20 % 22 % 21 % 20 %
Total cost of revenue 36 % 36 % 36 % 35 % 36 % 37 % 36 % 35 %
Gross profit 64 % 64 % 64 % 65 % 64 % 63 % 64 % 65 %
Research and development 23 % 23 % 24 % 29 % 25 % 26 % 24 % 21 %
Sales and marketing 49 % 48 % 45 % 46 % 49 % 46 % 49 % 36 %
General and administration 24 % 17 % 25 % 19 % 21 % 32 % 31 % 11 %
Total operating expenses 96 % 88 % 94 % 94 % 94 % 103 % 104 % 67 %
Loss from operations (32) % (24) % (30) % (29) % (30) % (40) % (40) % (2) %
Interest income and other income (expense), net (5) % (3) % - % - % 1 % 2 % - % - %
Loss before provision for (benefits from) income taxes (38) % (27) % (30) % (29) % (29) % (38) % (40) % (2) %
Provision for (benefits from) income taxes - % (1) % - % - % - % - % - % 1 %
Net loss (38) % (27) % (30) % (29) % (29) % (38) % (40) % (3) %
Quarterly Revenue Trends
Our total revenue increased sequentially in each of the quarters presented due to expansion and cross-sell with existing customers and sales to new customers. We generally experience seasonality in subscription billings and we typically record a higher percentage of subscription billings in our fourth quarter. However, because we recognize subscription revenue ratably over the terms of our subscription agreements, a substantial portion of the subscription revenue that we report in each period is attributable to the recognition of deferred revenue relating to
agreements that we entered into during previous periods. Consequently, increases or decreases in new or renewal billings in any one period may not be immediately reflected as subscription revenue for that period. Our professional services revenue may fluctuate from period to period due to the timing or volume of the delivery of our implementation and other services.
Quarterly Cost of Revenue and Gross Margin Trends
Our total cost of revenue generally increased over the quarters presented. The increase was due to sales and delivery of subscriptions and professional services required to support new and existing customers. Our cost of subscription revenue may vary based on the timing of investments that we make in our infrastructure as well as the hiring of personnel. Our cost of professional services revenue increased due to the strong sales and delivery to our customers. Overall, our gross margins ranged between 63% and 65% and subscription gross margins ranged between 78% and 81% for the periods presented.
Quarterly Operating Expenses Trends
Our quarterly operating expenses fluctuated in the quarters presented primarily due to changes in personnel costs, the timing and cost of our product development cycles, marketing programs and the impact of our restructuring plans.
•Research and development expenses fluctuated in the quarters presented primarily due to the variation in our product development cycles.
•Sales and marketing expense fluctuated in the quarters presented primarily due to the timing of our marketing events. The increase in sales and marketing expense during the second quarter of 2020 related to our Experience conference. The increase in sales and marketing expenses in the third and fourth quarter of 2021 was due to the increase in headcount as we expand our sales force.
•General and administrative expenses fluctuated in the quarters presented primarily due to increases in lease exit costs during the second and fourth quarters of 2021.
•Stock-based compensation expenses included within our respective operating expense line items has increased in the second, third and fourth quarter of 2020 and the first quarter of 2021 upon the effectiveness of our IPO. Stock-based compensation expense remained consistent over the remaining three quarters of 2021.
•The variations in other income (expense), net is generally due to higher interest expense from our convertible debt during the third and fourth quarter of 2021. In addition, interest expense from finance leases and fluctuations in foreign currency gains and losses also contributed to the variations.
•The fluctuations in income taxes is from the benefit related to the reduction of the valuation allowance from our acquisitions.
Liquidity and Capital Resources
As of January 31, 2021 and January 31, 2020, we had cash, cash equivalents and current and noncurrent marketable securities of $682.4 million and $343.7 million, respectively. On May 1, 2020 we used $59.6 million to acquire Voci, a privately-held company, that delivers a rich single view of the customer that can power an exceptional customer experience. On September 8, 2020 we acquired Stella Connect, a privately-held company, for $99.6 million in cash, subject to certain adjustments. Stella Connect is a customer feedback and quality management platform that helps customer support teams to analyze and improve performance in real time. On September 14, 2020 we used $45.7 million to acquire Sense360, a privately-held company that provides always-on, consumer and competitive intelligence from buyer and non-buyer segments and answers pressing questions such as what is driving traffic, what are the growth opportunities in a specific market and which competitors are gaining share and why. On March 12, 2021, we acquired Decibel, a leader in digital experience analytics for approximately $162.5 million in cash. We experience seasonality related to our operating cash flows. Our quarterly operating cash flows are generally positive in the first and fourth quarters and are generally negative in the second and third quarters. The seasonality is primarily attributable to higher billings in the fourth quarter of each year. We primarily bill in advance annually for our multi-year contracts, resulting in higher cash collections of trade and other receivables
in the first and fourth quarters of each year. This seasonality has not impacted, nor do we expect it to impact in the future, our ability to fund our near-term working capital, capital lease payments or capital expenditure requirements. While we may experience delays in collections which we attribute to the COVID-19 pandemic, we believe that our existing cash, cash equivalents and marketable securities and trade and other receivables will be sufficient to support working capital, finance lease payments and capital expenditure requirements for at least the next 12 months. Since inception, we have financed operations primarily through subscription payments by customers for use of our platform, equity and debt financings, finance lease arrangements and loans for equipment.
From time to time, we may seek additional equity or debt financing to fund capital expenditures, strategic initiatives or investments and our ongoing operations. In the event that we decide, or are required, to seek additional financing from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, financial condition and results of operations could be adversely affected.
Convertible Senior Notes
In September 2020, we issued $575.0 million aggregate principal amount of convertible senior notes. The net proceeds from this offering were approximately $558.2 million, after deducting the Initial Purchasers’ discounts and commissions and issuance costs.
Capped Call Transactions
In connection with the offering of the Notes, we entered into privately negotiated capped call transactions with respect to our common stock at a cost of approximately $61.9 million.
Wells Fargo Bank Credit Facility
On September 4, 2020 we entered into the Wells Fargo Bank Credit Facility (Wells Fargo Credit Facility) to provide for a revolving line of credit of up to $50.0 million with the right (subject to certain conditions) to add incremental revolving commitments of up to $50.0 million in the aggregate. The revolving line of credit provides a sublimit of up to $40.0 million to be available for the issuance of letters of credit. The outstanding balance, if any, is due at the maturity date in September 2023. Loans bear interest, at our option, at an annual rate based on LIBOR or a base rate. Loans based on LIBOR shall bear interest at a rate of LIBOR plus 1.75%. Loans based on the base rate shall bear interest at a rate of the base rate plus 0.75%. We are required to pay a commitment fee equal to 0.25% per annum on the undrawn portion available under the revolving line of credit. As of January 31, 2021, no amounts were outstanding on this credit facility.
Silicon Valley Bank Credit Facility
On September 4, 2020 we paid all outstanding amounts owing under the Silicon Valley Bank revolving line of credit and terminated the credit facility. We continue to have unsecured letters of credit issued by Silicon Valley Bank in the face amount of $4.6 million outstanding as of January 31, 2021.
Cash Flow Hedging
We conduct business on a global basis in multiple foreign currencies, which subjects us to foreign currency fluctuations resulting from customer contracts and operating expenses denominated in foreign currencies. To protect our margin, we have instituted a cash flow hedging program to help mitigate the variability in cash flows due to certain foreign currency fluctuations. For revenues, we enter into foreign currency forward contracts to sell foreign currencies to hedge the non-U.S. dollar denominated revenue related to year two and year three of our multi-year customer contracts. For expenses, we enter into foreign currency forward contracts to purchase foreign currencies to hedge a percentage of certain non-U.S. dollar denominated operating expenses over the next 12 months.
Cash Flows
The following table shows a summary of our cash flows for the periods presented (in thousands):
Year Ended January 31,
2021 2020 2019
Net cash provided by (used in) operating activities $ 1,652 $ (1,594) $ (15,197)
Net cash (used in) provided by investing activities (381,910) (216,066) 6,193
Net cash provided by financing activities 581,408 399,685 11,385
Effect of exchange rate changes on cash and cash equivalents 312 (35) (204)
Net increase in cash and cash equivalents $ 201,462 $ 181,990 $ 2,177
Operating Activities
Our largest source of operating cash is cash collections from our customers for subscriptions and professional services fees. Our primary uses of cash from operating activities are for personnel-related expenses, facilities costs and rent, marketing expenses and hosting fees. We typically experience relatively higher billings in the fourth quarter compared to other quarters and experience higher collections of trade and other receivables in the first and fourth quarter of the year, which results in a decrease in trade and other receivables.
Cash provided by operating activities for the year ended January 31, 2021 of $1.7 million primarily related to our net loss of $148.7 million, adjusted for non-cash charges of $199.9 million and net cash outflows of $49.5 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation, depreciation and amortization of property and equipment and intangible assets, non-cash lease expenses, lease exit costs, the amortization of debt discount and issuance costs and amortization of deferred commissions. The primary drivers of the changes in our operating assets and liabilities related to a $52.8 million increase in deferred commissions and $30.4 million increase in trade and other receivables, partially offset by a $24.7 million increase in deferred revenue, $9.2 million increase in accounts payable and accrued expenses, other current and noncurrent liabilities.
Cash used in operating activities for the year ended January 31, 2020 of $1.6 million primarily related to our net loss of $112.3 million, adjusted for non-cash charges of $129.6 million and net cash outflows of $18.9 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation, depreciation and amortization of property and equipment and amortization of our deferred commissions. The primary drivers of the changes in our operating assets and liabilities related to a $43.3 million increase in accounts receivable, $41.4 million increase in deferred commissions and $6.5 million increase in prepaid expense and other assets, partially offset by $49.7 million increase in deferred revenue and $22.5 million increase in accounts payable, accrued expenses and noncurrent liabilities.
Cash used in operating activities for the year ended January 31, 2019 of $15.2 million primarily related to our net loss of $82.2 million, adjusted for non-cash charges of $57.9 million and net cash inflows of $9.1 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of stock-based compensation expense, depreciation and amortization of property and equipment and amortization of our deferred commissions. The primary drivers of the changes in operating assets and liabilities related to an increase in deferred revenue of $42.9 million and an increase in accounts payable and accrued expenses of $7.7 million, as well as an overall decrease in prepaid expenses and other current assets of $2.2 million. These amounts were partially offset by an increase in deferred commissions of $27.2 million and an increase in accounts receivable of $16.4 million.
Investing Activities
Cash used in investing activities for the year ended January 31, 2021 of $381.9 million was due to acquisitions, net of cash acquired of LivingLens, Voci, Stella Connect and Sense360 for $223.6 million, net purchases of marketable securities of $137.4 million, and the purchases of property, equipment and other of $20.8 million.
Cash used in investing activities for the year ended January 31, 2020 of $216.1 million was due to the net purchases of marketable securities of $116.0 million, the acquisitions, net of cash acquired of Strikedeck Inc. Cooladata Ltd., Promoter.io Inc., Zingle Inc. and Crowdicity Ltd. for $76.5 million, the purchases of property, equipment and other of $22.0 million as well as other investing activities of $1.5 million.
Cash provided by investing activities for the year ended January 31, 2019 of $6.2 million was the result of sales and maturities, net of purchases of our marketable securities of $17.5 million. This increase in cash was partially offset by our investment in data center equipment and leasehold improvements at our Argentina and U.K. offices of $11.3 million.
Financing Activities
Cash provided by financing activities for the year ended January 31, 2021 of $581.4 million consisted of $575.0 million in proceeds from issuance of the Notes, net of issuance costs of $16.8 million, $78.6 million in proceeds from the exercise of stock options and $17.8 million in proceeds from the Employee Stock Purchase Plan, partially offset by the purchase of the Capped Calls for $61.9 million, repayments on finance lease obligations of $4.9 million and repayment of debt assumed in acquisitions of $6.4 million. In addition, we drew $43.0 million from our revolving line of credit in the second quarter of 2020 and repaid $43.0 million in the third quarter of 2020.
Cash provided by financing activities for the year ended January 31, 2020 of $399.7 million consisted of $319.6 million in proceeds from the IPO, net of issuance costs and underwriters discounts and concurrent private placement, $69.8 million from our series F convertible preferred stock financing, $34.0 million in proceeds from the exercise of stock options, net of repurchases of unvested early exercises, partially offset by $17.9 million in shares repurchased for tax withholding for release of restricted share units, $3.5 million of capital lease payments and $2.3 million repayment of debt assumed in acquisition.
Cash provided by financing activities for the year ended January 31, 2019 of $11.4 million consisted primarily of $12.1 million in proceeds from the exercise of stock options, net of repurchases of unvested early exercises, partially offset by repayments on capital lease obligations of $0.7 million.
Contractual Obligations
Our principal commitments consist of minimum payment obligations for convertible debt and the related semi-annual interest payments, operating leases for office space, finance leases for equipment purchases and purchase obligations.
As of January 31, 2021, the future non-cancelable minimum payments under these commitments were as follows:
Payments due by period
Total <1 year 2-3 years 4-5 years > 5 years
Convertible senior notes (1)
$ 575,000 $ - $ - $ 575,000 $ -
Interest obligations (2)
3,587 713 1,437 1,437 -
Operating leases, including imputed interest (3)
67,299 12,122 23,640 19,793 11,744
Finance leases, including imputed interest (4)
11,077 5,772 4,231 1,074 -
Purchase obligations (5)
14,106 7,729 6,377 - -
$ 671,069 $ 26,336 $ 35,685 $ 597,304 $ 11,744
(1) Represents the convertible senior note without discount.
(2) Represents the interest obligation on the convertible senior debt.
(3) Represent the lease payments on the operating leases for office space. For further details see "Note 10, Leases," of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
(4) Represents the finance lease payments on the equipment purchases. For further details see "Note 10, Leases," of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
(5) Represents the purchase obligations primarily related to software license fees and marketing services.
Convertible Senior Notes
In September 2020 we issued 0.125% convertible senior notes due September 15, 2025 for an aggregate principal amount of $575.0 million. We are not required to make principal payments under the Notes prior to maturity. If the Notes are not converted to our common stock prior to their maturity dates, we are required to repay $575.0 million in principal on September 15, 2025. We are also required to make interest payments on a semi-annual basis at the interest rates described in "Note 9: Debt," of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes, except for the letters of credit described in "Note 11: Commitments and Contingencies" of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with GAAP. See Note 1 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a description of our other significant accounting policies and estimates. The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and judgments that affect the amounts reported in those financial statements and related notes. Although we believe that the estimates we use are reasonable, due to the inherent uncertainty involved in making those estimates, actual results reported in future periods could differ from those estimates.
Revenue Recognition
Revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services.
We determine revenue recognition through the following steps:
•identification of the contract, or contracts, with a customer;
•identification of the performance obligations in the contract;
•determination of the transaction price;
•allocation of the transaction price to the performance obligations in the contract; and
•recognition of revenue when, or as, we satisfy a performance obligation.
Subscription Revenue
Subscription revenue is derived from customers accessing our proprietary hosted cloud application. Our customers do not have the ability to take possession of the software operating the cloud application. The contracted subscription terms are typically one year to three years.
We recognize subscription revenue ratably over the subscription term, commencing on the date the service is provisioned.
Professional Services Revenue
Professional services revenue consists of managed services and implementation and other services. These services are distinct from subscription revenue.
Managed services support our customers by providing a range of ongoing services including program design, launch, enhancement, expansion and analytics. Managed services are a stand-ready obligation to perform these services over the term of the arrangement and as a result, revenues are recognized ratably over the term of the arrangement.
Implementation services consist primarily of initial design, integration and configuration services. Other professional services include projects that enable customers to gain insightful business information through data analysis, and our institute training programs.
Implementation and other services revenue are recognized as services are performed.
Contracts with Multiple Performance Obligations
Most of the our contracts with customers contain multiple performance obligations. Our subscription services are sold for a broad range of amounts (the selling price is highly variable) and a representative standalone selling price (SSP) is not discernible from past transactions or other observable evidence. Standalone selling prices for professional services are estimated based upon observable transactions when those services are sold on a standalone basis. As a result, the SSP for subscription services included in a contract with multiple performance obligations is determined by applying a residual approach whereby performance obligations related to professional services within a contract are first allocated a portion of the transaction price based upon their respective SSPs, with the residual amount of transaction price allocated to subscription services.
Deferred Commissions
Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial contracts are deferred and then amortized on a straight-line basis over a period of benefit, determined to be five years. We determined the period of benefit by taking into consideration our customer contracts, technology and other factors. Sales commissions for renewal contracts (which are not considered commensurate with sales commission for new revenue contracts) are deferred and amortized on a straight-line basis over the related contractual renewal period. Amortization expense is included in sales and marketing expenses in the consolidated statements of operations.
Income Taxes
We use the asset-and-liability method for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the consolidated financial statement carrying amounts and tax bases of assets and liabilities and operating loss and tax credit carryforwards. These are measured using the enacted tax rates that are expected to be in effect when the differences reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to an amount that, in the opinion of management, is more likely than not to be realized.
The calculation of our income tax expense involves the use of estimates, assumptions and judgments while taking into account current tax laws and our interpretation of current and possible outcomes of future tax audits. In addition, our policy for accounting for uncertainty in income taxes requires the evaluation of tax positions taken or expected to be taken in the course of the preparation of tax returns to determine whether the tax positions are "more-likely-than-not" of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax expense in the current year. Reevaluation of tax positions considers factors such as changes in facts or circumstances, changes in or interpretations of tax law, effectively settled issues under audit or expiration of statute of limitation and new audit activity.
We recognized interest accrued and penalties related to unrecognized tax benefits in our income tax expense.
Business Combinations
We include the results of operations of the businesses that we acquire from the date of acquisition. We determine the fair value of the assets acquired and liabilities assumed based on their estimated fair values as of the respective date of acquisition. The excess purchase price over the fair values of identifiable assets and liabilities is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates, and selection of comparable companies. Our estimates of fair value are based on assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, not to exceed one year from the date of acquisition, we may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill. At the conclusion of the measurement period, any subsequent adjustments are reflected in the consolidated statements of operations. When we grant equity to selling stockholders in connection with an acquisition, we evaluate whether the awards are compensatory. This evaluation includes whether stock award vesting is contingent on the continued employment of the selling stockholder beyond the acquisition date. If continued employment is required for stock awards to vest, the award is treated as compensation for post-acquisition services and is recognized as compensation expense.
Transaction costs associated with business combinations are expensed as incurred and are included in general and administrative expenses in our consolidated statements of operations.
Convertible Senior Notes
In September 2020 we issued $575.0 million aggregate principal amount of convertible senior notes. We account for these Notes as separate components of liability and equity. The carrying amount of the liability component was included in convertible senior notes, net in the consolidated balance sheets and was calculated by measuring the fair value of similar liabilities that do not have associated convertible features. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Notes.This difference represents the debt discount that is amortized to interest expense over the term of the Notes using the effective interest rate method.The gross carrying amount of the equity component was included in additional paid-in capital in the consolidated balance sheets and is not remeasured as long as it continues to meet the conditions for equity classification.
Recent Accounting Pronouncements
See "Note 1- Description of Business and Summary of Significant Accounting Policies "of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information regarding recently issued accounting pronouncements.
Emerging Growth Company Status
In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an "emerging growth company" may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Therefore, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company at the end of the fiscal year ending January 31, 2021 or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. Effective January 31, 2021, we no longer met the definition of an EGC and we are complying with the effective accounting standards as described in "Note 1: Description of Business and Summary of
Significant Accounting Policies," of our consolidated financial statements included in the Annual Report on Form 10-K.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and foreign currency exchange rates.
Interest Rate Risk
Our exposure to changes in interest rates relates primarily to our investment portfolio. As of January 31, 2021 we had cash, cash equivalents and marketable securities of $682.4 million. Changes in interest rates affect the interest earned on our cash, cash equivalents and investments and the fair value of the investments.
In September 2020, we issued $575.0 million aggregate principal amount of convertible senior notes. We carry the Notes at par value less the unamortized debt discount and issuance costs on our consolidated balance sheets. The Notes have a fixed annual interest rate of 0.125% and therefore we do not have economic interest rate exposure. However, the value of the Notes is exposed to interest rate risk. Generally, the fair value of the Notes will increase as interest rates fall and decrease as interest rates rise. In addition, the fair value of the Notes is affected by our stock price.
A hypothetical 10% change in interest rates would not result in a material impact on our consolidated results of operations.
Foreign Currency Exchange Risk
We conduct business on a global basis in multiple currencies, including the U.S. dollar, Euro, British pound, Argentine peso, Canadian dollar and Australian dollar. This subjects us to foreign currency fluctuations resulting from customer contracts and operating expenses denominated in foreign currencies. To protect our margin, we instituted a cash flow hedging program to help mitigate the variability in cash flows due to certain foreign currency fluctuations. For revenues, we enter into foreign currency forward contracts to sell foreign currencies to hedge the non-U.S. dollar denominated revenue related to year two and year three of our multi-year customer contracts. For expenses, we enter into foreign currency forward contracts to purchase foreign currencies to hedge a percentage of certain non-U.S. dollar denominated operating expenses over the next 12 months.
In addition, we initiated a balance sheet hedging program to limit the exposure of foreign currency risk resulting from the revaluation of foreign denominated assets and liabilities through the use of forward exchange contracts. See "Note 5: Derivative Instruments" of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information regarding our hedging program.
We operate in Argentina and the inflation levels in Argentina have been elevated for several years. In the first half of 2018 Argentina's reported inflation rates began to increase dramatically and the Argentine central bank significantly increased interest rates in an effort to combat inflation. Based on Argentina's reported inflation rates and trends, we designated Argentina as a highly inflationary economy for accounting purposes as of the beginning of the third quarter of the fiscal year ended January 31, 2019. The change to highly inflationary accounting did not have a material impact on our consolidated financial statements for the year ended January 31, 2021.
A hypothetical 10% change in foreign currency exchange rates would not result in a material impact on our consolidated results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Medallia, Inc.
Index to Consolidated Financial Statements
Report on Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Medallia, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Medallia, Inc. (the Company) as of January 31, 2021, and 2020, the related consolidated statements of operations, comprehensive loss, stockholders’ equity (deficit) and cash flows for each of the three years in the period ended January 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of January 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 22, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition
Description of the Matter As described in Note 1 to the consolidated financial statements, the Company recognizes revenue primarily from subscription services and professional services contracts. Most of the Company’s contracts contain multiple performance obligations. For these contracts, the Company assesses the performance obligations and accounts for those obligations separately if they are distinct. The transaction price is allocated to separate performance obligations on a relative standalone selling price basis. The standalone selling prices of subscription services are typically estimated using the residual approach. Standalone selling prices of professional services are typically estimated based on observable transactions when those services are sold on a standalone basis.
Auditing the identification of performance obligations in revenue contracts requires significant judgment as it relates to the evaluation of the contractual terms of the arrangement. Auditing the allocation of the transaction price to performance obligations requires significant judgment in determining whether the use of the residual approach to estimate the standalone selling prices of subscription services is appropriate.
How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s revenue recognition process, including the evaluation of the contractual terms of the revenue arrangements and the Company’s assessment of the appropriateness of the residual method for estimating the standalone selling prices of subscription services.
To test the amount of revenue recognized, we performed audit procedures that included, among others, testing a sample of revenue transactions during the year and evaluating the identification of performance obligations based on analysis of the contractual terms of the arrangement. Our testing of the application of the residual method to estimate standalone selling prices of subscription services included inquiries with management and analysis of the variability of actual subscription pricing during the year by customer class.
Business Combinations
Description of the Matter As described in Note 6 to the consolidated financial statements, the Company completed multiple acquisitions for net purchase consideration of $225.3 million in the year ended January 31, 2021. The Company accounted for these acquisitions as business combinations.
Auditing the accounting for the Company’s fiscal year 2021 acquisitions was complex due to the significant estimation uncertainty in determining the fair value of intangible assets acquired of $49.6 million which primarily consisted of developed technology and customer relationships. In particular, the fair value estimates were sensitive to significant assumptions such as the Company’s estimated weighted average cost of capital, royalty rates, estimated revenue growth rates, gross margins and operating expenses. These significant assumptions were forward-looking and could be affected by expectations about future market or economic conditions.
How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls over its accounting for the acquisitions. This included testing controls over the estimation process supporting the recognition and measurement of identified intangible assets, and management’s judgment and evaluation of underlying assumptions and estimates with regards to the fair values of the identified intangible assets.
To test the estimated fair value of the identified intangible assets, our audit procedures included, among others, evaluating the Company's projected financial information and testing the significant assumptions used, as stated above, including the completeness and accuracy of the underlying data. For example, we compared the significant assumptions to current industry, market, and economic trends and assumptions used to value similar assets in other acquisitions. In addition, we involved our valuation specialists to assist in our evaluation of the significant assumptions used by the Company.
Convertible Senior Notes
Description of the Matter As described in Note 9 to the consolidated financial statements, in September 2020 the Company issued $575.0 million Convertible Senior Notes due in September 2025, which permits the Company to settle in cash or stock at its option. Concurrent with the issuance of the Convertible Senior Notes, the Company entered into Capped Call Transactions to reduce potential dilution upon conversion of the Convertible Senior Notes. The Capped Call Transactions are exercisable upon conversion of the Convertible Senior Notes (collectively with the Convertible Senior Notes referred to as the Convertible Senior Notes Transactions). The accounting for the Convertible Senior Notes Transactions was complex as it required assessment as to whether features in the Convertible Senior Notes Transactions required bifurcation and an evaluation of the appropriate classification of those features in the financial statements. Additionally, the Convertible Senior Notes Transactions were complex as the valuation of the conversion feature in the Convertible Senior Notes involved estimation of the fair value of the liability component of the Convertible Senior Notes on a stand-alone basis.
Auditing management’s evaluation of the Convertible Senior Notes Transactions involved addressing the complexity in assessing the components for separability and assessing the valuation of the liability component on a stand-alone basis. The Company estimated the fair value of the liability component of the Convertible Senior Notes using a discounted cash flow model with a discount rate determined using observable yields for stand-alone debt instruments with a comparable credit rating and term. The fair value of the liability component is sensitive to changes in the discount rate. Furthermore, there was complexity in assessing the Company’s analysis of the terms of the Convertible Senior Notes Transactions to identify whether there were any embedded derivatives that required separate identification and valuation under applicable accounting guidance.
How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting for the Convertible Senior Notes Transactions, including its controls over estimating the fair value of the stand-alone liability component and evaluating the existence and valuation of embedded derivatives.
Our testing of the Company’s initial accounting for the Convertible Senior Notes Transactions, among other procedures, included inspecting the underlying agreements and evaluating the Company’s accounting analysis of the initial accounting for the Convertible Senior Notes Transactions, including the determination of the balance sheet classification of each transaction and identification of any derivatives included in the arrangements.
Our testing of the fair value of the liability component, included, among other procedures, evaluating the Company’s selection of the valuation methodology and significant assumptions used by the Company, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. In addition, we involved our valuation specialists to assist in our evaluation of the Company’s determination of the fair value of the liability component on a stand-alone basis, including testing the appropriateness of the methodology and the discount rate.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2011.
San Francisco, California
March 22, 2021
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Medallia, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Medallia, Inc.’s internal control over financial reporting as of January 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Medallia, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of January 31, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of January 31, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, stockholders' equity (deficit) and cash flows for each of the three years in the period ended January 31, 2021, and the related notes and our report dated March 22, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Francisco, California
March 22, 2021
Item 1. FINANCIAL STATEMENTS
Medallia, Inc.
Consolidated Balance Sheets
(in thousands, except share and par value data)
January 31, 2021 January 31, 2020
Assets
Current assets:
Cash and cash equivalents $ 428,328 $ 226,866
Marketable securities 254,061 116,833
Trade and other receivables, net 181,431 150,661
Deferred commissions, current 31,107 22,455
Prepaid expenses and other current assets 23,835 22,492
Total current assets 918,762 539,307
Property and equipment, net 40,668 34,879
Operating lease right-of-use assets 39,050 -
Deferred commissions, noncurrent 68,929 51,540
Goodwill 262,942 79,324
Intangible assets, net 60,623 21,306
Other noncurrent assets 10,675 5,293
Total assets $ 1,401,649 $ 731,649
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 11,904 $ 3,608
Accrued expenses and other current liabilities 39,756 20,268
Accrued compensation 42,292 37,160
Deferred revenue, current 293,231 263,115
Total current liabilities 387,183 324,151
Convertible senior notes, net 448,064 -
Deferred revenue, noncurrent 1,396 1,407
Lease liability, noncurrent 47,631 -
Other liabilities 9,134 8,295
Total liabilities 893,408 333,853
Commitments and contingencies (Note 10)
Stockholders' equity:
Common stock, $0.001 par value: 1,000,000,000 shares authorized as of January 31, 2021 and 2020; 154,995,819 shares and 132,346,402 shares issued and outstanding as of January 31, 2021 and 2020, respectively
150 132
Additional paid-in capital 1,136,534 878,843
Accumulated other comprehensive loss 1,186 (206)
Accumulated deficit (629,629) (480,973)
Total stockholders' equity 508,241 397,796
Total liabilities and stockholders' equity $ 1,401,649 $ 731,649
The accompanying notes are an integral part of these consolidated financial statements.
Medallia, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
Year Ended January 31,
2021 2020 2019
Revenue:
Subscription $ 382,573 $ 312,168 $ 246,797
Professional services 94,648 90,295 66,845
Total revenue 477,221 402,463 313,642
Cost of revenue:
Subscription 80,376 61,369 47,948
Professional services 90,308 83,820 67,953
Total cost of revenue 170,684 145,189 115,901
Gross profit 306,537 257,274 197,741
Operating expenses:
Research and development 117,800 95,978 86,272
Sales and marketing 225,414 180,711 138,674
General and administrative 101,351 95,515 53,239
Total operating expenses 444,565 372,204 278,185
Loss from operations (138,028) (114,930) (80,444)
Other income (expense), net (10,550) 3,129 (11)
Loss before provision for income taxes (148,578) (111,801) (80,455)
Provision for income taxes 78 532 1,779
Net loss $ (148,656) $ (112,333) $ (82,234)
Net loss per share attributable to common stockholders, basic and diluted $ (1.03) $ (1.35) $ (3.07)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted 144,563 83,269 26,770
The accompanying notes are an integral part of these consolidated financial statements.
Medallia, Inc.
Consolidated Statements of Comprehensive Loss
(in thousands)
Year Ended January 31,
2021 2020 2019
Net loss $ (148,656) $ (112,333) $ (82,234)
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustment 2,825 792 (912)
Change in unrealized gain on marketable securities 3 22 12
Change in unrealized gain on cash flow hedges (1,436) 76 924
Other comprehensive income 1,392 890 24
Comprehensive loss $ (147,264) $ (111,443) $ (82,210)
The accompanying notes are an integral part of these consolidated financial statements.
Medallia, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended January 31,
2021 2020 2019
Operating activities
Net loss $ (148,656) $ (112,333) $ (82,234)
Adjustments to reconcile net loss to net cash (provided by) used in operating activities:
Depreciation and amortization 29,047 15,611 13,856
Amortization of deferred commissions 26,761 19,030 13,201
Non-cash lease expense 11,827 - -
Stock-based compensation expense 104,805 109,456 27,858
Gain on property and equipment, and lease termination - (13,783) 3,398
Lease exit costs 16,838 - -
Amortization of debt discount and issuance costs 8,742 - -
Other 1,832 (698) (417)
Changes in assets and liabilities:
Trade and other receivables (30,391) (43,268) (16,383)
Deferred commissions (52,802) (41,424) (27,218)
Prepaid expenses and other current assets 1,666 (6,198) 2,176
Other noncurrent assets (1,864) (252) (218)
Accounts payable 5,579 2,097 877
Deferred revenue 24,665 49,749 42,935
Accrued expenses and other current liabilities 6,973 20,282 6,809
Other noncurrent liabilities (3,370) 137 163
Net cash provided by (used in) operating activities 1,652 (1,594) (15,197)
Investing activities
Purchases of property, equipment and other (20,822) (22,009) (11,259)
Purchase of marketable securities (394,774) (182,389) (18,684)
Maturities of marketable securities 256,233 65,853 34,840
Proceeds from sale of marketable securities 1,100 511 1,296
Acquisitions, net of cash acquired (223,647) (76,532) -
Other - (1,500) -
Net cash (used in) provided by investing activities (381,910) (216,066) 6,193
Financing activities
Proceeds from issuance of convertible senior notes, net of issuance costs 558,237 - -
Purchase of capped calls related to convertible senior notes (61,870) - -
Proceeds from initial public offering net of issuance costs, underwriters discounts and commissions, and concurrent private placement - 319,572 -
Proceeds from Series F convertible preferred stock, net of issuance costs - 69,848 -
Proceeds from revolving line of credit 43,000 - -
Repayment of revolving line of credit (43,000) - -
Proceeds from exercise of stock options 78,595 34,009 12,093
Payments for employee taxes withheld upon vesting of restricted stock units - (17,907) -
Proceeds from share purchase plan 17,828 - -
Principal payments on financing leases (4,937) (3,540) (708)
Repayment of debt assumed in acquisitions and other (6,445) (2,297) -
Net cash provided by financing activities 581,408 399,685 11,385
Effect of exchange rate changes on cash and cash equivalents 312 (35) (204)
Net increase in cash and cash equivalents 201,462 181,990 2,177
Cash and cash equivalents at beginning of period 226,866 44,876 42,699
Cash and cash equivalents at end of period $ 428,328 $ 226,866 $ 44,876
Supplemental disclosures of cash flow information
Cash paid for interest $ 1,217 $ 637 $ 134
Cash paid for income taxes $ 1,485 $ 1,563 $ 2,352
Noncash investing and financing activities
Other receivables related to stock option exercises $ 338 $ 331 $ -
Vesting of early exercised stock options $ - $ 487 $ 840
Accrued unpaid capital expenditures $ 6,106 $ 6,078 $ 6,455
The accompanying notes are an integral part of these consolidated financial statements.
Medallia, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
(in thousands, except share data)
Convertible
Preferred Stock Class A
Common Stock Class B
Common Stock Common Stock Additional
Paid-In
Capital Accumulated
Other
Comprehensive
Loss Accumulated
Deficit Total
Stockholders'
Equity (Deficit)
Shares Amount Shares Amount Shares Amount Shares Amount
Balance at January 31, 2018 72,394,601 $ 72 24,637,801 $ 24 3,000 $ - - $ - $ 322,300 $ (1,120) $ (286,219) $ 35,057
Cumulative effect of the adoption of ASU 2016-09 - - - - - - - - 187 - (187) -
Exercise of employee stock options - - 5,067,450 6 - - - - 11,891 - 11,897
Repurchase of early exercised stock options - - (30,801) - - - - - - - -
Vesting of early exercised stock options - - - - - - - - 840 - 840
Issuance of shares at end of escrow period in connection with prior period acquisitions 88,008 - 81,433 - - - - - - - -
Stock-based compensation - - - - - - - - 27,858 - 27,858
Other comprehensive loss - - - - - - - - - 24 24
Net loss - - - - - - - - - - (82,234) (82,234)
Balance at January 31, 2019 72,482,609 $ 72 29,755,883 $ 30 3,000 $ - - $ - $ 363,076 $ (1,096) $ (368,640) $ (6,558)
Issuance of Series F Preferred shares, net of issuance costs 4,666,666 5 - - - - - - 69,843 - - 69,848
Conversion of common stock - - (31,126,701) (31) (3,000) - 31,129,701 31 - - - -
Conversion of preferred stock (77,149,275) (77) - - - - 77,149,275 77 - - - -
Proceeds from Initial Public Offering, net of issuance and underwriter's discounts and commissions and concurrent private placement - - - - - - 16,680,000 17 319,555 - - 319,572
Warrant exercises - - - - - - 121,915 - - - - -
Exercise of employee stock options - - 1,370,818 1 - - 6,601,952 7 34,332 - - 34,340
Repurchase of early exercised stock options - - - - - - (823) - - - - -
Vesting of early exercised stock options - - - - - - - - 487 - - 487
Release of restricted stock units - - - - - - 1,170,861 - - - - -
Shares repurchased of tax withholdings on release of restricted stock units - - - - - - (506,479) - (17,906) - - (17,906)
Stock-based compensation - - - - - - - - 109,456 - - 109,456
Other comprehensive loss - - - - - - - - - 890 - 890
Net loss - - - - - - - - - (112,333) (112,333)
Balance at January 31, 2020 - $ - - $ - - $ - 132,346,402 $ 132 $ 878,843 $ (206) $ (480,973) $ 397,796
Exercise of employee stock options - - - - - - 16,782,477 17 78,268 - - 78,285
Release of restricted stock units - - - - - - 4,826,720 - - - - -
Issuance of shares from share purchase plan - - - - - - 1,040,220 1 17,826 - - 17,827
Stock-based compensation - - - - - - - - 104,805 - - 104,805
Equity component of convertible senior notes, net of issuance costs - - - - - - - - 118,662 - - 118,662
Purchase of capped calls related to convertible senior notes - - - - - - - - (61,870) - - (61,870)
Other comprehensive loss - - - - - - - - - 1,392 - 1,392
Net loss - - - - - - - - - - (148,656) (148,656)
Balance at January 31, 2021 - $ - - $ - - $ - 154,995,819 $ 150 $ 1,136,534 $ 1,186 $ (629,629) $ 508,241
The accompanying notes are an integral part of these consolidated financial statements.
Medallia, Inc.
Notes to Consolidated Financial Statements
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Medallia, Inc. (the Company or Medallia) provides an enterprise Software-as-a-Service (SaaS) platform that utilizes deep learning-based artificial intelligence (AI) technology to analyze structured and unstructured data from signal fields across human, digital and Internet of Things (IoT) interactions at great scale to derive personalized and predictive insights. Medallia's customers include companies in various industries such as retail, technology, manufacturing, financial services, insurance and hospitality. Medallia is headquartered in San Francisco, California.
Basis of Presentation and Consolidation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The Company has made certain reclassifications of prior year balances to conform to the current fiscal year presentation.
The Company's fiscal year ends on January 31. References to fiscal 2021, for example, refer to the fiscal year ending January 31, 2021.
Use of Estimates
The preparation of these consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the periods covered by the consolidated financial statements and accompanying notes. Such estimates include, but are not limited to revenue recognition, stock-based compensation expense, including estimation of the grant date fair value of the common stock, allowance for credit losses, the fair value of the liability and equity components of the convertible senior notes, the assessment of the recoverability of identified intangible assets, impairment of right-of-use assets and contingencies. The Company bases its estimates on historical experience and on assumptions that it believes are reasonable. The Company assesses these estimates on a regular basis; however, actual results could materially differ from these estimates.
JOBS Act Accounting Election
Effective January 31, 2021, the Company is no longer an emerging growth company (EGC) and has transitioned to a large accelerated filer status. As a result, the Company will adopt new or revised accounting pronouncements at dates applicable to public companies as further described in the section, "Impact of Recently Adopted Accounting Pronouncements."
Segment Information
Operating segments are defined as components of an enterprise where separate financial information is evaluated regularly by the chief operating decision maker, which the Company has identified as being the chief executive officer, in deciding how to allocate resources and assessing performance. The Company operates in one operating segment. The Company's chief operating decision maker allocates resources and assesses performance at the consolidated level.
Medallia, Inc.
Notes to Consolidated Financial Statements
Revenue Recognition
Revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.
The Company determines revenue recognition through the following steps:
•identification of the contract, or contracts, with a customer;
•identification of the performance obligations in the contract;
•determination of the transaction price;
•allocation of the transaction price to the performance obligations in the contract; and
•recognition of revenue when, or as, the Company satisfies a performance obligation.
Subscription Revenue
Subscription revenue is derived from customers accessing the Company's proprietary hosted cloud application. The Company's customers do not have the ability to take possession of the software operating the cloud application. The contracted subscription terms are typically one year to three years.
The Company recognizes subscription revenue ratably over the subscription term, commencing on the date the service is provisioned.
Professional Services Revenue
Professional services revenue consists of managed services and implementation and other services. These services are distinct from subscription revenue.
Managed services support our customers by providing a range of ongoing services including program design, launch, enhancement, expansion and analytics. Managed services are a stand-ready obligation to perform these services over the term of the arrangement and as a result, revenues are recognized ratably over the term of the arrangement.
Implementation services consist primarily of initial design, integration and configuration services. Other professional services include projects that enable customers to gain insightful business information through data analysis, and the Company's institute training programs.
Implementation and other services revenue are recognized as services are performed.
Contracts with Multiple Performance Obligations
Most of the Company's contracts with customers contain multiple performance obligations. The Company's subscription services are sold for a broad range of amounts (the selling price is highly variable) and a representative standalone selling price (SSP) is not discernible from past transactions or other observable evidence. Standalone selling prices for professional services are estimated based upon observable transactions when those services are sold on a standalone basis. As a result, the SSP for subscription services included in a contract with multiple performance obligations is determined by applying a residual approach whereby performance obligations related to professional services within a contract are first allocated a portion of the transaction price based upon their respective SSPs, with the residual amount of transaction price allocated to subscription services.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. The Company's cash equivalents generally consist of money market funds. Cash and cash equivalents are recorded at cost, which approximates fair value.
Medallia, Inc.
Notes to Consolidated Financial Statements
Marketable Securities
The Company's investments consist primarily of commercial paper, corporate bonds, municipal bonds, U.S. agency obligations and U.S. treasury securities. The Company typically invests in highly-rated securities, and its investment policy generally limits the amount of credit exposure to any one issuer. The Company's policy generally requires investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss. The Company classifies investments as available-for-sale at the time of purchase and re-evaluates such classification as of each balance sheet date. Available-for-sale debt securities with an amortized cost basis in excess of the estimated fair value are assessed to determine what amount of that difference, if any, is caused by expected credit losses. Allowance for credit losses on available-for-debt securities are recognized as a charge in other income (expense), net on the Company's consolidated statements of operations and any remaining unrealized losses, net of taxes, are included in accumulated other comprehensive loss in accumulated deficit on the consolidated balance sheets. There were no impairment charges for any unrealized losses during the year ended January 31, 2021, 2020 and 2019.
The Company determines gains or losses related to marketable securities on a specific identification method and records such gains or losses in other income (expense), net, in the consolidated statements of operations.
Fair Value Measurements
The Company applies fair value accounting for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability.
Derivative Financial Instruments and Hedging Activities
The Company uses derivative financial instruments to manage foreign currency risks. Derivative instruments are carried at fair value. Derivative assets are included in prepaid expenses and other current assets in the consolidated balance sheets. Derivative liabilities are included in accrued expenses and other current liabilities in the consolidated balance sheets. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting. For foreign currency forward contracts not designated as hedging instruments, which the Company uses to hedge a portion of its net outstanding monetary assets and liabilities, the gains or losses are recorded in other income (expense), net in the consolidated statements of operations in the period of change. For derivative instruments designated as a cash flow hedge, which the Company hedges certain customer contracts and certain operating expenses denominated in foreign currencies, the gains or losses are recorded in accumulated other comprehensive loss on the consolidated balance sheets and subsequently reclassified to the related revenue or operating expense line item in the consolidated statements of operations in the same period that the underlying revenue is earned or expenses are incurred.
The Company is subject to netting agreements with certain counterparties of the foreign exchange contracts, under which it is permitted to net settle transactions of the same currency with a single net amount payable by one party to the other. It is the Company's policy to present the derivatives gross in the consolidated balance sheets. The Company's foreign currency forward contracts are not subject to any credit contingent features or collateral requirements and the Company does not believe it is subject to significant counterparty concentration risk given the short-term nature, volume, and size of the derivative contracts outstanding.
Trade and Other Receivables and Allowance for Credit Losses
Trade and other receivables are primarily comprised of trade receivables that are recorded at the invoice amount, net of an allowance for credit losses. We assess the allowance for credit losses on trade receivables by
Medallia, Inc.
Notes to Consolidated Financial Statements
taking into consideration forecasts of future economic conditions, information about past events, such as our historical trend of write-offs, and customer-specific circumstances, such as bankruptcies and disputes. The allowance for credit losses on trade receivables is recorded in general and administrative expenses on the Company's consolidated statements of operations. Other receivables represent unbilled receivables related to subscription and professional services contracts.
As of January 31, 2021 and 2020, the allowance for credit losses was $4.0 million and $1.0 million, respectively.
Concentrations of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, marketable securities and trade and other receivables. For cash, cash equivalents and marketable securities, the Company is exposed to credit risk in the event of default to the extent of the amounts recorded on the consolidated balance sheets. A majority of the cash balances are with U.S. banks and are insured to the extent defined by the Federal Deposit Insurance Corporation.
The Company does not require collateral for trade receivables. No customer accounted for 10% or more of total revenues for the year ended January 31, 2021 and 2020. No customer accounted for 10% or more of trade and other receivables, net as of January 31, 2021 and 2020.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of three years for computer equipment and software and five years for all other asset categories except leasehold improvements, which are amortized over the shorter of the lease term or the expected useful life of the leasehold improvements. Equipment leased under finance leases is amortized over the shorter of the lease term or the asset's estimated useful life.
Leases
The Company determines if an arrangement is a lease at inception. The Company's lease agreements generally contain lease and non-lease components. Payments under its lease arrangements are primarily fixed. Non-lease components primarily include payments for maintenance and utilities. The Company combines fixed payments for non-lease components with lease payments and accounts for them together as a single lease component which increases the amount of the Company’s right-of-use (“ROU”) assets and lease liabilities.
Certain lease agreements contain variable payments, which are expensed as incurred and not included in the ROU assets and lease liabilities.
ROU assets and lease liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value of the future lease payments is the Company's incremental borrowing rate, because the interest rate implicit in its leases is not readily determinable. The Company's incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located. The Company's lease terms include periods under options to extend or terminate the lease when it is reasonably certain that it will exercise that option. The Company generally uses the base, non-cancelable, lease term when determining the ROU assets and lease liabilities. ROU assets are adjusted for any prepaid lease payments and lease incentives.
As of January 31, 2021, the current portion of the Company's operating lease liabilities is included in accrued expenses and other current liabilities and the long term portion is included in operating lease liabilities. Finance lease ROU assets are included in property and equipment, net. Finance lease liabilities are included in accrued expenses and other current liabilities or other long term liabilities.
Lease expense is recognized on a straight-line basis over the lease term.
Medallia, Inc.
Notes to Consolidated Financial Statements
The ROU assets are assessed for impairment in accordance with the Company’s accounting policy for long-lived assets.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets. Goodwill amounts are not amortized, but rather tested for impairment at least annually, and more frequently when changes in circumstances indicate that the carrying value may not be recoverable. The Company has determined that it operates its business as one reporting unit and the Company completes its annual impairment test in the fourth quarter. In the event that the Company determines that the fair value of the reporting unit is less than the reporting unit's carrying value, goodwill impairment charge will be incurred for the amount of the difference during the quarter in which the determination is made. The Company did not record any goodwill impairment charges in the years ended January 31, 2021, 2020 and 2019.
Intangible assets with a finite life are amortized over their useful life.
The Company evaluates intangible assets and long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate. In the event that the Company determines that the fair value of an intangible asset is less than the carrying value, the Company will incur an impairment charge.
Software Development Costs
Software development costs include costs to develop software to be used to meet internal needs and applications used to deliver our services. The Company capitalizes development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the function intended. For the years ended January 31, 2021 and 2020, the Company capitalized software development costs of $1.8 million and $1.7 million, respectively, included in the consolidated balance sheets. Depreciation and amortization is computed using the straight-line method over an estimated useful life of five years.
Costs related to preliminary project activities, including training and maintenance are expensed as incurred and recorded to research and development expenses.
Research and Development
Research and development expenditures are expensed as incurred.
Business Combinations
The Company includes the results of operations of the businesses that it acquires from the date of acquisition. The Company determines the fair value of the assets acquired and liabilities assumed based on its estimated fair values as of the respective date of acquisition. The excess purchase price over the fair values of identifiable assets and liabilities is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates, and selection of comparable companies. The Company estimates the fair value are based on assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, not to exceed one year from the date of acquisition, the Company may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill. At the conclusion of the measurement period, any subsequent adjustments are reflected in the Company's consolidated statements of operations.
Medallia, Inc.
Notes to Consolidated Financial Statements
When the Company grants equity to selling stockholders in connection with an acquisition, it evaluates whether the awards are compensatory. This evaluation includes whether stock award vesting is contingent on the continued employment of the selling stockholder beyond the acquisition date. If continued employment is required for stock awards to vest, the award is treated as compensation for post-acquisition services and is recognized as compensation expense.
Transaction costs associated with business combinations are expensed as incurred and are included in general and administrative expenses in the Company's consolidated statements of operations.
Convertible Senior Notes
In September 2020 the Company issued 0.125% convertible senior notes due September 15, 2025 (the Notes), for an aggregate principal amount of $575.0 million to qualified institutional buyers. The Company accounts for these Notes as separate components of liability and equity. The carrying amount of the liability component was included in convertible senior notes, net in the consolidated balance sheets and was calculated by measuring the fair value of similar liabilities that do not have associated convertible features. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Notes. This difference represents the debt discount that is amortized to interest expense over the term of the Notes using the effective interest rate method. The gross carrying amount of the equity component was included in additional paid-in capital in the consolidated balance sheets and is not remeasured as long as it continues to meet the conditions for equity classification.
Stock- Based Compensation
The Company measures equity instruments, including stock options, restricted stock units (RSUs), and shares of common stock to be issued under the 2019 Employee Stock Purchase Plan (ESPP) based on the estimated grant-date fair value of the award. The Company estimates the fair values of its stock options and shares issuable under its ESPP using the Black-Scholes-Merton option-pricing model. The Company estimates fair value of its restricted stock awards (RSU) based on the fair value of the underlying common stock. Forfeitures are accounted for as they occur.
Determining the grant date fair value of stock options and ESPP using the Black-Scholes-Merton option-pricing model requires management to make assumptions and judgments, mostly related to the determination of the expected term, volatility, risk free interest rate and the expected dividend rate. If any of the assumptions used in the valuation models change significantly, stock-based compensation expense for future awards may differ materially compared with the awards granted previously.
The Company uses the publicly quoted price as reported on the New York Stock Exchange as the fair value of its common stock.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the tax bases of assets and liabilities and their financial statement carrying amounts, and consideration is given to operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company determines current tax expense, together with assessing temporary differences resulting from differences for financial reporting purposes and tax purposes for certain items, such as accruals and allowances not currently deductible for tax purposes. These temporary differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheets. Accordingly, realization of the Company's deferred tax assets is dependent on future taxable income against which these deductions, losses, and credits can be utilized.
The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income, and to the extent the Company believes that recovery is not likely, the Company establishes a valuation allowance. Given the Company's history of operating losses, the realization of its deferred tax assets is uncertain,
Medallia, Inc.
Notes to Consolidated Financial Statements
and therefore, the Company has a full valuation allowance on its deferred tax assets. The Company recognizes and measures uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. Significant judgment is required to evaluate uncertain tax positions. The Company's evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law and the Company's interpretation of the tax laws, correspondence with tax authorities during the course of audits, and effective settlement of audit issues. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in the income tax provision.
Contingencies
From time to time, the Company has become involved in claims and other legal matters arising in the ordinary course of business. The Company investigates these claims as they arise. The Company records a loss contingency when it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. The Company also discloses material contingencies when it is believed a loss is not probable but reasonably possible. Accounting for contingencies requires the Company to use judgment related to both the likelihood of a loss and the estimate of the amount or range of loss.
Foreign Currency
The functional currency of the Company's foreign subsidiaries is predominately the respective local currency. Foreign currency-denominated assets and liabilities of foreign subsidiaries, where the local currency is the functional currency, are translated into U.S. dollars using the exchange rates in effect at the balance sheet dates, and income and expenses are translated at the average exchange rate during the period. The resulting foreign currency translation adjustments are recorded in accumulated other comprehensive loss, a component of stockholders' equity (deficit). Gains and losses from foreign currency transactions are included in other income (expense) net, in the consolidated statements of operations.
Advertising Expense
Advertising costs are expensed as incurred and are included in sales and marketing expense in the consolidated statements of operations. Advertising expense was $10.3 million, $6.7 million and $2.5 million for the years ended January 31, 2021, 2020 and 2019, respectively.
Net Loss Per Share Attributable to Common Stockholders
The Company computes basic and diluted net loss per share attributable to common stockholders using the two-class method required for companies with participating securities. The Company's basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, less the weighted-average unvested common stock subject to repurchase. The diluted net income per share attributable to common stockholders is computed by giving effect to all potentially dilutive common shares equivalents outstanding during the period. The effects of options to purchase common stock, convertible debt, convertible preferred stock, RSUs, the common stock warrant and the preferred stock warrant are excluded from the computation of diluted net loss per share attributable to common stockholders for all periods presented because the effect is antidilutive.
Impact of Recently Adopted Accounting Pronouncements
In February 2016 the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), as amended, which requires lessees to put most leases on their balance sheets, whether operating or financing, while continuing to recognize the expenses on their income statements in a similar manner to current practice.
Medallia, Inc.
Notes to Consolidated Financial Statements
The Company adopted ASU No. 2016-02 in the fourth quarter of fiscal year 2021 with an effective date as of February 1, 2020, using the effective date transition method, which applies the provisions of the new guidance at the effective date without adjusting the comparative periods presented. The Company has elected certain practical expedients, which allows the Company not to reassess (i) whether any expired or existing contracts as of the adoption date are or contain a lease, (ii) lease classification for any expired or existing leases as of the adoption date and (iii) initial direct costs for any existing leases as of the adoption date. The Company has elected to account for lease and non-lease components as a single lease component. In addition, the Company has elected not to recognize ROU assets and lease liabilities for short-term leases with terms of twelve months or less.
The adoption of ASU No. 2016-02 effective February 1, 2020, resulted in the recognition of 1) ROU assets of $41.3 million adjusted for deferred rent and lease incentives as of the adoption date, and 2) lease liabilities for operating leases of $42.5 million on its consolidated balance sheets, with no material impact to its consolidated statements of operations and cash flows.
In June 2016 the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which requires the measurement and recognition of expected credit losses for financial assets not held at fair value. ASU No. 2016-13 replaces the existing incurred loss impairment model with a forward-looking expected credit loss model which will result in earlier recognition of credit losses. The Company adopted ASU No. 2016-13 in the fourth quarter of fiscal year 2021 with an effective date as of February 1, 2020 and the impact of the adoption was not material to the Company’s consolidated financial statements and related disclosures.
In August 2017 the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, as amended. The ASU is intended to better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The Company adopted ASU No. 2017-12 in the fourth quarter of fiscal year 2021 with an effective date as of February 1, 2020 and the impact of the adoption was not material to the Company’s consolidated financial statements and related disclosures.
Recently Issued Accounting Pronouncements But Not Yet Adopted
In August 2020 the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for certain convertible instruments, amends the guidance on derivative scope exceptions for contracts in an entity's own equity, and modifies the guidance on diluted earnings per share calculations as a result of these changes.This new standard is effective for the Company for fiscal year ending January 31, 2023 and interim periods within that fiscal year. The amendment is to be adopted through either a fully retrospective or modified retrospective method of transition. Early adoption is permitted.The Company is in the process of evaluating the impact of this accounting standard.
2. Revenue
Contract Balances and Remaining Performance Obligations
Contract assets represent revenue recognized for contracts that have not yet been invoiced to customers, typically for multi-year arrangements.Total contract assets were $3.5 million and $2.1 million as of January 31, 2021 and January 31, 2020, respectively. These balances are included within trade and other receivables, net, on the consolidated balance sheets.
Contract liabilities consist of deferred revenue. Revenue is deferred when the Company has the right to invoice in advance of services being provided. The Company recognized revenue of $263.1 million and $210.7 million for the years ended January 31, 2021 and 2020, respectively, that were included in the deferred revenue balances at the beginning of the respective periods.
Medallia, Inc.
Notes to Consolidated Financial Statements
The Company applied a practicable expedient allowing it not to disclose the amount of the transaction price allocated to the remaining performance obligations for contracts with an original expected duration of one year or less, which includes certain professional service contracts.
Remaining performance obligations represent contracted revenue that has not yet been recognized, and include deferred revenue, and amounts that will be invoiced and recognized as revenue in future periods. As of January 31, 2021 the Company's remaining performance obligations were $800.1 million, approximately 49% of which it expects to recognize as revenue over the next 12 months and the remaining balance will be recognized thereafter. As of January 31, 2020 the Company's remaining performance obligations were $679.0 million, approximately 51% of which it expects to recognize as revenue over the next 12 months and the remaining balance will be recognized thereafter.
Disaggregation of Revenue by Geographic Region
The following table sets forth revenue by geographic region based on the billing address of the customers' parent for the periods presented (in thousands):
Year Ended January 31,
2021 2020 2019
North America $ 368,114 $ 305,600 $ 232,175
EMEA 69,639 65,681 57,851
Other 39,468 31,182 23,616
Total $ 477,221 $ 402,463 $ 313,642
The United States comprised 73%, 72% and 70% of the Company's revenue during the year ended January 31, 2021, 2020 and 2019, respectively. No other country comprised 10% or greater of the Company's revenue during each of the years ended January 31, 2021, 2020 and 2019.
3. Fair Value of Assets and Liabilities
The Company estimates the fair value of cash equivalents, marketable securities and foreign currency derivative contracts by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Observable inputs such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets and liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data or other means.
Level 3: Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. The inputs require significant management judgment or estimation.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
All of the Company's cash equivalents, marketable securities and foreign currency derivative contracts are classified within Level 1 or Level 2 because the Company's cash equivalents, marketable securities and foreign
Medallia, Inc.
Notes to Consolidated Financial Statements
currency derivative contracts are valued using quoted market prices or alternative pricing sources and models utilizing observable market inputs.
The following tables represents the fair value of assets and liabilities measured at fair value on a recurring basis using the above hierarchy (in thousands):
January 31, 2021 January 31, 2020
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Assets:
Cash equivalents:
Money market funds $ 265,945 $ - $ - $ 265,945 $ 92,272 $ - $ - $ 92,272
Commercial paper - 18,997 - 18,997 - 17,667 - 17,667
U.S. government and agency securities - 24,999 - 24,999 - 17,978 - 17,978
Total cash equivalents 265,945 43,996 - 309,941 92,272 35,645 - 127,917
Marketable securities:
Corporate notes and bonds - 45,057 - 45,057 - 5,675 - 5,675
Commercial paper - 42,472 - 42,472 - 13,712 - 13,712
U.S. government and agency securities - 166,532 - 166,532 - 97,446 - 97,446
Total marketable securities - 254,061 - 254,061 - 116,833 - 116,833
Derivative assets - 1,027 - 1,027 - 683 - 683
Total assets measured at fair value $ 265,945 $ 299,084 $ - $ 565,029 $ 92,272 $ 153,161 $ - $ 245,433
Liabilities:
Derivative liabilities $ - $ 1,965 $ - $ 1,965 $ - $ 342 $ - $ 342
Total liabilities measured at fair value $ - $ 1,965 $ - $ 1,965 $ - $ 342 $ - $ 342
Convertible Senior Notes
In September 2020 the Company issued $575.0 million aggregate principal amount 0.125% convertible senior notes due 2025 as described in Note 9, Debt. As of January 31, 2021 the fair value of these Notes was approximately $758.6 million. The fair value was determined based on the quoted price for the Notes in an over-the-counter market on the last trading day of the reporting period and is considered as Level 2 in the fair value hierarchy.
4. Cash Equivalents and Marketable Securities
As of January 31, 2021 cash equivalents and marketable securities consisted of the following (in thousands):
Amortized Cost Unrealized Gains Unrealized Losses Aggregate Fair Value
Money market funds $ 265,945 $ - $ - $ 265,945
Corporate notes and bonds 45,059 - (2) 45,057
Commercial paper 61,469 - - 61,469
U.S. government and agency securities 191,504 27 - 191,531
Total $ 563,977 $ 27 $ (2) $ 564,002
Included in cash and cash equivalents $ 309,941 $ - $ - $ 309,941
Included in marketable securities $ 254,036 $ 25 $ - $ 254,061
Medallia, Inc.
Notes to Consolidated Financial Statements
As of January 31, 2020 cash equivalents and marketable securities consisted of the following (in thousands):
Amortized Cost Unrealized Gains Unrealized Losses Aggregate Fair Value
Money market funds $ 92,272 $ - $ - $ 92,272
Corporate notes and bonds 5,665 9 - 5,674
Commercial paper 31,379 - - 31,379
U.S. government and agency securities 115,412 13 - 115,425
Total $ 244,728 $ 22 $ - $ 244,750
Included in cash and cash equivalents $ 127,917 $ - $ - $ 127,917
Included in marketable securities $ 116,811 $ 22 $ - $ 116,833
As of January 31, 2021 and 2020, all marketable securities had a stated maturity date of less than one year.
5. Derivative Instruments
Cash Flow Hedges
As of January 31, 2021 and January 31, 2020 the Company had outstanding foreign currency forward contracts designated as cash flow hedges with total notional values of $13.7 million and $5.8 million, respectively. All contracts have maturities not greater than 13 months.The notional value represents the amount that will be bought or sold upon maturity of the forward contract.
During the years ended January 31, 2021, 2020 and 2019 all cash flow hedges were considered effective.
Foreign Currency Forward Contracts Not Designated as Hedges
As of January 31, 2021 and January 31, 2020 the Company had outstanding forward contracts not designated as hedges with total notional values of $45.4 million and $23.5 million, respectively. All contracts have maturities not greater than 13 months.
The fair values of outstanding derivative instruments were as follows (in thousands):
January 31, 2021 January 31, 2020
Derivative assets (recorded in prepaid expenses and other current assets):
Foreign currency forward contracts designated as cash flow hedges $ 713 $ 384
Foreign currency forward contracts not designated as hedges 314 299
Derivative liabilities (recorded in accrued expenses and other current liabilities):
Foreign currency forward contracts designated as cash flow hedges $ 919 $ 76
Foreign currency forward contracts not designated as hedges 1,046 266
Medallia, Inc.
Notes to Consolidated Financial Statements
Gains (losses) associated with foreign currency forward contracts designated as cash flow hedges were as follows (in thousands):
Consolidated Statements of Operations and Statements of Comprehensive Loss (OCI) Locations Year Ended January 31,
2021 2020 2019
Gains (losses) recognized in OCI (effective portion) Change in unrealized gains (losses) on cash flow hedges, net of tax $ (747) $ (15) $ 248
Gains reclassified from OCI into income (effective portion) Revenues 586 458 (1)
Gains (losses) reclassified from OCI into income (effective portion) General and administrative 102 (549) (675)
Losses recognized in income (amount excluded from effectiveness testing and ineffective portion) Other income (expense), net (63) (121) 19
Prior to the adoption of ASU No. 2017-12, Derivatives and Hedging (Topic 815), the changes in value of these foreign currency forward contracts resulting from changes in forward points were excluded from the assessment of hedge effectiveness and were recorded as incurred in other income (expense), net on the consolidated statements of operations. Upon adoption of ASU No. 2017-12, in the fourth quarter of fiscal year 2021 with an effective date as of February 1, 2020 the Company elected to prospectively include changes in the value of these contracts resulting from changes in forward points in the assessment of hedge effectiveness. These immaterial changes are recorded in OCI on the consolidated balance sheets and will subsequently be reclassified to the related revenue or expense line item on the consolidated statements of operations in the same period that the underlying revenues are earned or expenses are incurred.
Of the gains (losses) recognized in OCI for the foreign currency forward contracts designated as cash flow hedges as of January 31, 2021, $0.3 million is expected to be reclassified out of OCI within the next 12 months.
Gains (losses) associated with foreign currency forward contracts not designated as cash flow hedges were as follows (in thousands):
Consolidated Statements of Operations Location Year Ended January 31,
Derivative Type 2021 2020 2019
Foreign currency forward contracts not designated as hedges Other income (expense), net $ (2,338) $ 368 625
Medallia, Inc.
Notes to Consolidated Financial Statements
As of January 31, 2021 information related to offsetting arrangements was as follows (in thousands):
Gross Amounts of Recognized Assets Gross Amounts Offset in the Consolidated Balance Sheets Net Amounts of Assets in the Consolidated Balance Sheets Gross Amounts Not Offset in the Consolidated Balance Sheets Net Assets Exposed
Financial Instruments Cash Collateral Received
Derivative assets:
Counterparty A $ - $ - $ - $ - $ - $ -
Counterparty B 1,027 - 1,027 (1,027) - -
Total $ 1,027 $ - $ 1,027 $ (1,027) $ - $ -
Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Consolidated Balance Sheets Net Amounts of Liabilities in the Consolidated Balance Sheets Gross Amounts Not Offset in the Consolidated Balance Sheets Net Liabilities Exposed
Financial Instruments Cash Collateral Pledged
Derivative liabilities:
Counterparty A $ - $ - $ - $ - $ - $ -
Counterparty B 1,965 - 1,965 (1,027) - 938
Total $ 1,965 $ - $ 1,965 $ (1,027) $ - $ 938
As of January 31, 2020 information related to offsetting arrangements was as follows (in thousands):
Gross Amounts of Recognized Assets Gross Amounts Offset in the Consolidated Balance Sheets Net Amounts of Assets in the Consolidated Balance Sheets Gross Amounts Not Offset in the Consolidated Balance Sheets Net Assets Exposed
Financial Instruments Cash Collateral Received
Derivative assets:
Counterparty A $ 102 $ - $ 102 $ (5) $ - $ 97
Counterparty B 581 - 581 (337) - 244
Total $ 683 $ - $ 683 $ (342) $ - $ 341
Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Consolidated Balance Sheets Net Amounts of Liabilities in the Consolidated Balance Sheets Gross Amounts Not Offset in the Consolidated Balance Sheets Net Liabilities Exposed
Financial Instruments Cash Collateral Pledged
Derivative liabilities:
Counterparty A $ 5 $ - $ 5 $ (5) $ - $ -
Counterparty B 337 - 337 (337) - -
Total $ 342 $ - $ 342 $ (342) $ - $ -
6. Business Combinations
On September 14, 2020 the Company acquired Sense360 Inc. (Sense360), a privately-held company, for a purchase price of $45.7 million in cash. Sense360 provides always-on, consumer and competitive intelligence from buyer and non-buyer segments and answers pressing questions such as what is driving traffic, what are the growth opportunities in a specific market and which competitors are gaining share and why.
Medallia, Inc.
Notes to Consolidated Financial Statements
On September 8, 2020 the Company acquired StellaServices Inc. (Stella Connect), a privately-held company, for a purchase price of $99.6 million in cash. Stella Connect is a customer feedback and quality management platform that helps customer support teams to analyze and improve performance in real time.
On May 1, 2020 the Company acquired Voci Technologies, Inc. (Voci), a privately-held company, for a purchase price of $59.6 million in cash. Voci is a real-time speech to text platform, that delivers a rich single view of the customer that can power an exceptional customer experience. Voci offers subscription on-premise software licenses which provide the customer with a right to use the software when made available.
On February 19, 2020 the Company acquired LivingLens Enterprise Ltd. (LivingLens), a privately-held company, for a purchase price of $26.8 million in cash. LivingLens provides a video feedback platform to humanize feedback and bring the voice of the customer and employee to life.
On October 3, 2019 the Company acquired Crowdicity Limited (Crowdicity), a privately-held company, for a purchase price of $16.6 million in cash. Crowdicity is an idea and innovation management platform.
On September 23, 2019 the Company acquired Zingle Inc. (Zingle), a privately-held company, for a purchase price of $47.3 million in cash. Zingle is a leading multi-channel mobile messaging and customer engagement solution.
On July 15, 2019 the Company acquired Promoter.io Inc. (Promoter.io), a privately-held company, for a purchase price of $2.3 million in cash. Promoter.io is a Net Promoter Score (NPS) platform for small and medium sized businesses that can measure loyalty and customer sentiment using the NPS.
On June 17, 2019 the Company acquired Cooladata Ltd. (Cooladata), a privately-held company, for a purchase price of $7.6 million in cash. Cooladata is a cloud-based behavioral analytics platform that can derive and predict customer sentiment.
On May 16, 2019 the Company acquired Strikedeck Inc. (Strikedeck), a privately-held company, for a purchase price of $11.0 million in cash. Strikedeck is a customer success platform for business-to-business customers.
The above transactions were each accounted for as business combinations. Accordingly, assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date when control was obtained. The Company expensed all transaction costs in the period in which they were incurred. The fair value of developed technologies was determined using either the Multiple Period Excess Earnings Method or the Royalty Relief Method, the fair value of customer relationships was determined by using the Multiple Period Excess Earnings Method, the fair value of trademarks was determined using the Royalty Relief Method, and the fair value of backlog was determined using the Multiple Period Excess Earnings Method. The excess of the consideration paid over the fair value of the net tangible assets and liabilities and identifiable intangible assets acquired is recorded as goodwill. The goodwill resulting from the acquisitions are largely attributable to the synergies expected to be realized. None of the goodwill recorded from the acquisitions will be deductible for income tax purposes.
The Company is in the process of settling working capital adjustments for Sense360, Stella Connect and Voci, and therefore the provisional measurements of identifiable assets and liabilities, and the resulting goodwill related to these acquisitions are subject to change and the final purchase price accounting could be different from the amounts presented herein.
Medallia, Inc.
Notes to Consolidated Financial Statements
The following table summarizes the purchase consideration, net of cash acquired, and the related fair values of the assets acquired and liabilities assumed (in thousands):
Purchase Consideration, Net of Cash Acquired Net Liabilities Assumed Identifiable Intangible Assets Goodwill
Sense360 $ 45,273 $ (351) $ 10,500 $ 35,124
Stella Connect
98,822 (3,478) 20,800 81,500
Voci 55,285 (1,385) 12,600 44,070
LivingLens 25,894 (715) 5,700 20,909
Crowdicity 15,865 (2,350) 4,811 13,404
Zingle 42,702 (665) 8,715 34,652
Promoter.io 1,694 (431) 900 1,225
Cooladata 7,346 (2,784) 4,600 5,530
Strikedeck 10,498 (439) 4,000 6,937
The following table sets forth each component of identifiable intangible assets acquired in connection with the acquisitions (in thousands):
Developed Technology Customer Relationships Other(1)
Sense360 $ 5,000 $ 5,200 $ 300
Stella Connect
9,400 10,000 1,400
Voci 7,700 4,600 300
LivingLens 3,100 2,200 400
Crowdicity 2,406 2,105 300
Zingle 4,915 3,000 800
Promoter.io 700 - 200
Cooladata 4,600 - -
Strikedeck 4,000 - -
(1) Other includes trademarks and backlog.
The useful lives of developed technology, customer relationships and other are five years, five years and one to five years, respectively.
The financial results for the above acquisitions are included in the Company's consolidated financial statements from the date of acquisition through January 31, 2021.
The pro forma impact of these acquisitions on consolidated revenue, income (loss) from operations and net loss was not material.
Medallia, Inc.
Notes to Consolidated Financial Statements
7. Goodwill and Intangible Assets, Net
Goodwill represents the excess of the purchase price in a business combination of the fair value of net assets acquired. Goodwill amounts are not amortized, but rather tested for impairment at least annually during the fourth quarter. The changes in goodwill are as follows (in thousands):
Balance as of January 31, 2019 $ 16,745
Acquisitions 61,748
Foreign currency exchange 831
Balance as of January 31, 2020 79,324
Acquisitions 181,603
Foreign currency exchange 2,015
Balance as of January 31, 2021 $ 262,942
The changes in intangible assets for fiscal 2021 and the net book value of intangible assets as of January 31, 2021 and January 31, 2020 were as follows (in thousands, except years):
Intangible Assets, Gross Accumulated Amortization Intangible Assets, Net
January 31, 2020 Identifiable Intangible Assets Acquired(1)
January 31, 2021 January 31, 2020 Amortization Expense January 31, 2021 January 31, 2020 January 31, 2021 Weighted Average Remaining Useful Life (years)
Developed technology $ 18,670 $ 25,521 $ 44,191 $ (3,473) $ (6,433) $ (9,906) $ 15,197 $ 34,285 4.2
Customer relationships 5,237 22,248 27,485 (351) (3,396) (3,747) 4,886 23,738 4.3
Other(2)
1,320 2,441 3,761 (97) (1064) (1,161) 1,223 2,600 2.6
$ 25,227 $ 50,210 $ 75,437 $ (3,921) $ (10,893) $ (14,814) $ 21,306 $ 60,623 4.2
(1) Amounts also include any changes in intangible asset balances for the periods presented that resulted from foreign currency translation.
(2) Other includes trademarks and backlog.
The changes in intangible assets for fiscal 2020 and the net book value of intangible assets as of January 31, 2020 and January 31, 2019 were as follows (in thousands, except years):
Intangible Assets, Gross Accumulated Amortization Intangible Assets, Net
January 31, 2019 Identifiable Intangible Assets Acquired(1)
January 31, 2020 January 31, 2019 Amortization Expense January 31, 2020 January 31, 2019 January 31, 2020 Weighted Average Remaining Useful Life (years)
Developed technology $ 1,900 $ 16,770 $ 18,670 $ (1,594) $ (1,879) $ (3,473) $ 306 $ 15,197 4.5
Customer relationships - 5,237 5,237 - (351) (351) - 4,886 4.7
Other(2)
- 1,320 1,320 - (97) (97) - 1,223 4.6
$ 1,900 $ 23,327 $ 25,227 $ (1,594) $ (2,327) $ (3,921) $ 306 $ 21,306 4.6
(1) Amounts also include any changes in intangible asset balances for the periods presented that resulted from foreign currency translation.
(2) Other includes trademarks.
The total amortization expense for intangible assets was $10.9 million, $2.3 million and $0.4 million for the year ended January 31, 2021, 2020, and 2019 respectively.
Medallia, Inc.
Notes to Consolidated Financial Statements
Amortization expense related to the intangible assets is as follows (in thousands):
Year Ending January 31:
2022 $ 15,240
2023 14,210
2024 14,210
2025 12,312
2026 4,651
Thereafter -
Total $ 60,623
8. Balance Sheet Components
Deferred Commissions
Sales commissions earned by the sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial contracts are deferred and then amortized on a straight-line basis over a period of benefit that the Company has determined to be five years. The Company determined the period of benefit by taking into consideration its customer contracts, technology and other factors. Sales commissions for renewal contracts (which are not considered commensurate with sales commissions for new revenue contracts) are deferred and amortized on a straight-line basis over the related contractual renewal period. Amortization expense is included in sales and marketing expenses in the consolidated statements of operations.
Commissions earned and capitalized during the years ended January 31, 2021 and 2020 and 2019 were $52.8 million, $41.4 million and $27.2 million respectively. Amortization expense for deferred commissions during the years ended January 31, 2021, 2020 and 2019 were $26.8 million, $19.0 million, and $13.2 million, respectively.
Property and Equipment, Net
The table below summarizes property and equipment which consists of the following (in thousands):
January 31, 2021 January 31, 2020
Computer equipment and software $ 77,257 $ 56,758
Furniture, fixtures and equipment 1,018 1,028
Leasehold improvements 5,651 6,941
Finance leases, right- of-use assets 17,750 11,687
Construction-in-progress 2,538 3,113
Total property and equipment, gross 104,214 79,527
Less accumulated depreciation and amortization (63,546) (44,648)
Property and equipment, net $ 40,668 $ 34,879
Depreciation and amortization expense during the years ended January 31, 2021, 2020 and 2019 totaled $18.1 million, $13.2 million, and $13.5 million respectively, which includes amortization of assets recorded under finance leases of $4.7 million, $3.6 million, and $0.9 million for the years ended January 31, 2021, 2020 and 2019 respectively.
Property and equipment located outside the U.S. was $15.7 million and $13.4 million as of January 31, 2021 and 2020, respectively.
During the fiscal year ended January 31, 2020 the Company recorded a net gain of approximately $4.0 million as a result of the termination of its lease for its former corporate headquarters which included the gain on the reversal of deferred rent of $34.5 million, partially offset by the impairment of property and equipment of $20.7 million and cash payments associated with the termination and other fees of $9.8 million.
Medallia, Inc.
Notes to Consolidated Financial Statements
Accrued Expenses and Other Current Liabilities
The table below summarizes accrued expenses and other current liabilities which consists of the following (in thousands):
January 31, 2021 January 31, 2020
Finance lease liability, current $ 5,349 $ 4,316
Operating lease liability, current 10,628 -
Federal, state and local taxes 6,801 3,932
Indemnity holdback related to acquisitions 1,748 1,573
Other 15,230 10,447
Accrued expenses and other current liabilities $ 39,756 $ 20,268
Accrued Compensation
The table below summarizes accrued compensation which consists of the following (in thousands):
January 31, 2021 January 31, 2020
Accrued salaries and bonus $ 7,856 $ 8,312
Accrued commissions 14,125 11,280
Accrued vacation 4,425 3,906
Employee stock purchase plan 6,389 8,693
Payroll taxes 9,497 4,969
Accrued compensation $ 42,292 $ 37,160
9. Debt
Convertible Senior Notes
In September 2020 the Company issued 0.125% convertible senior notes due September 15, 2025, for an aggregate principal amount of $575.0 million in a private placement to qualified institutional buyers. The Notes are senior unsecured obligations and interest is payable in cash in arrears at a fixed rate of 0.125% on March 15 and September 15 of each year, beginning on March 15, 2021. The Notes will mature on September 15, 2025, unless repurchased, redeemed, or converted pursuant to the terms of the Notes.
The terms of the Notes are governed by an Indenture (the Indenture) by and between the Company and U.S. Bank National Association, as trustee.
The initial conversion rate of the Notes is 25.4113 shares of common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $39.35 per share of common stock. The conversion rate is subject to adjustment upon the occurrence of certain specified events in accordance with the Indenture. As of January 31, 2021, the if-converted value of the Notes exceeded the principal amount by $31.4 million.
Medallia, Inc.
Notes to Consolidated Financial Statements
The Company may redeem for cash all or any portion of the Notes, at its option, on or after September 20, 2023 and prior to the 41st scheduled trading day immediately preceding the maturity date, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest thereto, but excluding, the redemption date, if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides written notice of redemption. No sinking fund is provided for the Notes.
Holders of the Notes may convert all or a portion of their Notes prior to the close of business on the business day immediately preceding June 15, 2025 in multiples of $1,000 principal amount, only under the following circumstances (the conditional conversion feature):
•during any fiscal quarter commencing after January 31, 2021 and only during such fiscal quarter, if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price of the Notes on each applicable trading day;
•during the five business day period after any five consecutive trading day period in which, for each trading day of that period, the trading price per $1,000 principal amount of the Notes for such trading day was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate of the Notes on each such trading day;
•upon the Company’s notice that it is redeeming any Notes, the Notes the Company calls for redemption (or, at the Company’s election, all outstanding Notes) may be converted at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or
•upon the occurrence of specified corporate events, as described in the Indenture.
On or after June 15, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date of the Notes, holders of the Notes may convert all or any portion of their Notes regardless of the foregoing conditions, and such conversions will settle upon maturity. Upon conversion, the Company will pay or deliver, as the case may be, either cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election. The Company intends to settle the principal amount of the Notes using cash.
Holders of the Notes who convert their Notes in connection with such make-whole fundamental change or during the relevant redemption period (each as defined in the Indenture) are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, upon the occurrence of a fundamental change (as defined in the Indenture) prior to the maturity date, subject to certain conditions, holders of the Notes may require the Company to repurchase all or a portion of the Notes for cash at a price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
As of January 31, 2021 the Notes are classified as noncurrent in the consolidated balance sheets since the criteria for conversion was not met.
The Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of similar liabilities that do not have associated convertible features. The carrying amount of the equity component of $122.5 million, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the Notes. This difference represents the debt discount that is amortized to interest expense over the term of the Notes at an effective interest rate of 5.00%.
Medallia, Inc.
Notes to Consolidated Financial Statements
The Company allocated the total amount of issuance costs incurred to the liability and equity components based on the respective values of the liability and equity components of the Notes. Issuance costs attributable to the liability component were recorded as a reduction to the convertible senior notes, net in the consolidated balance sheets and are being amortized to interest expense over the term of the Notes using the effective interest rate method. The issuance costs attributable to the equity component were recorded as a reduction to additional paid-in capital in the consolidated balance sheets. Upon issuance of the Notes, the Company recorded liability issuance costs of $13.2 million and equity issuance costs of $3.6 million.
The net carrying amount of the liability component of the Notes recorded in convertible senior notes, net in the consolidated balance sheets was as follows (in thousands):
January 31, 2021
Principal $ 575,000
Unamortized debt discount (114,480)
Unamortized issuance costs (12,456)
Net carrying amount of the liability component $ 448,064
The net carrying amount of the equity component of the Notes recorded in additional paid-in capital in the consolidated balance sheets was $118.7 million, net of issuance costs of $3.6 million as of January 31, 2021.
The following table sets forth the interest expense related to the Notes recognized in other income (expense), net on the consolidated statements of operations (in thousands):
Year Ended January 31,
Contractual interest expense $ 264
Amortization of debt discount 8,006
Amortization of issuance costs 736
Total interest expense related to the Notes $ 9,006
Capped Call Transactions
In connection with the offering of the Notes, the Company entered into privately negotiated capped call transactions (the Capped Calls) with respect to its common stock at a cost of approximately $61.9 million. The Capped Calls each have an initial strike price of approximately $39.35 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The Capped Calls cover, subject to anti-dilution adjustments, approximately 14.6 million shares of the Company’s common stock. The Capped Calls were purchased in order to reduce or offset the potential dilution to the Company’s common stock upon any conversion of the Notes, subject to a cap of $58.30 per share and certain adjustments. The Capped Calls settle in components with the last component scheduled to expire on September 11, 2025 and are subject to either adjustment or termination upon the occurrence of specified extraordinary events affecting the Company, including a merger event; a tender offer; and a nationalization, insolvency or delisting involving the Company. In addition, the Capped Calls are subject to certain specified additional disruption events that may give rise to a termination of the Capped Calls, including changes in law, failures to deliver, insolvency filings, and hedging disruptions.
The Capped Calls are separate transactions and are not part of the terms of the Notes. The $61.9 million paid for the Capped Calls was included as a reduction to additional paid-in capital on the consolidated balance sheets because they are not designated as separate derivative financial instruments.
Medallia, Inc.
Notes to Consolidated Financial Statements
Wells Fargo Bank Credit Facility
On September 4, 2020 the Company entered into the Wells Fargo Bank, National Association (Wells Fargo) credit facility to provide for a senior secured revolving line of credit of up to $50.0 million with the right (subject to certain conditions) to add incremental revolving commitments of up to $50.0 million in the aggregate. The revolving line of credit provides a sublimit of up to $40.0 million to be available for the issuance of letters of credit. The outstanding balance, if any, is due at the maturity date in September 2023. Loans bear interest, at the Company’s option, at an annual rate based on LIBOR or a base rate. Loans based on LIBOR shall bear interest at a rate of LIBOR plus 1.75%. Loans based on the base rate shall bear interest at a rate of the base rate plus 0.75%. The Company is required to pay a commitment fee equal to 0.25% per annum on the undrawn portion available under the revolving line of credit. As of January 31, 2021, no amounts were outstanding on this credit facility.
As of January 31, 2021 $50.0 million was available for borrowing under the revolving line of credit. As of January 31, 2021 the Company was in compliance with the financial covenants contained in the revolving line of credit and no amounts were outstanding under the revolving line of credit.
Silicon Valley Bank Credit Facility
The Company maintained a revolving line of credit that matured in September 2020 and provided for aggregate borrowings of up to $50.0 million. On September 4, 2020 the Company paid all outstanding amounts owing under the Silicon Valley Bank revolving line of credit and terminated the credit facility. The Company continues to have unsecured letters of credit issued by Silicon Valley Bank in the face amount of $4.6 million outstanding as of January 31, 2021.
10. Leases
The Company has entered into operating leases primarily for office facilities and finance leases primarily for equipment purchases. These leases have terms which typically range from 1 year to 10 years.
During the year ended January 31, 2021, the Company recorded aggregate impairment charges of $16.8 million, of which $13.5 million relates to the impairment of ROU assets related to certain vacant office leases and $3.3 million related to the impairment of leasehold improvements. The Company has the intent and ability to sub-lease these vacant office facilities which it has ceased using and as such, has considered estimated future sub-lease income including the consideration of the local real estate market conditions, in measuring the amount of the ROU assets impairment. The Company also factored into its estimate the time to identify a tenant and to enter into an agreement. Impairment charges were recorded to general and administrative expenses within the consolidated statement of operations.
Medallia, Inc.
Notes to Consolidated Financial Statements
The components of lease expense were as follows (in thousands):
Year Ended January 31, 2021
Operating lease costs $ 11,732
Finance lease costs:
Amortization of assets $ 4,667
Interest on lease liabilities 587
$ 5,254
Supplemental cash flow information related to operating and finance leases were as follows (in thousands):
Year Ended January 31, 2021
Operating leases:
Cash paid for operating lease liabilities $ 10,278
Right-of-use assets obtained in exchange for lease obligations $ 22,679
Finance leases:
Finance leases obtained for equipment $ 6,158
Supplemental balance sheet information related to operating leases was as follows (in thousands, except lease term and discount rate):
January 31, 2021
Operating lease liabilities reported as:
Accrued expenses and current liabilities $ 10,628
Lease liability, non current 47,631
Total operating lease liabilities $ 58,259
Weighted average remaining lease term (in years) 5.5
Weighted average discount rate 4.8 %
Supplemental balance sheet information related to finance leases was as follows (in thousands, except lease term and discount rate):
January 31, 2021
Finance lease liabilities reported as:
Accrued expenses and current liabilities $ 5,349
Other liabilities 5,004
Total finance lease liabilities $ 10,353
Weighted average remaining lease term (in years) 2.3
Weighted average discount rate 5.5 %
Medallia, Inc.
Notes to Consolidated Financial Statements
Future minimum lease payments under operating leases and finance leases as of January 31, 2021 are presented in the table below (in thousands):
January 31, 2021
Operating leases Finance leases
Year Ending January 31,
2022 $ 12,122 $ 5,772
2023 11,920 2,472
2024 11,720 1,759
2025 10,849 1,051
2026 8,944 23
Thereafter 11,744 -
Total future lease payments 67,299 11,077
Less interest payments (9,040) (724)
Total present value of minimum lease payments $ 58,259 $ 10,353
Future minimum lease payments under operating leases and finance leases as of January 31, 2020, prior to the Company’s adoption of the new lease standard, were as follows:
January 31, 2020
Operating Leases Finance Leases
Year Ending January 31:
2021 $ 9,505 $ 4,765
2022 9,989 3,891
2023 7,382 690
2024 6,564 -
2025 5,571 -
Thereafter 11,471 -
Total minimum payments 50,482 9,346
Less interest payments - (628)
Total present value of minimum lease payments $ 50,482 $ 8,718
Under ASC 840, the previous lease standard, total rent expense under operating leases during the years ended January 31, 2020 and 2019 was $14.9 million and $16.5 million, respectively.
11. Commitments and Contingencies
Purchase obligations
The Company has unconditional purchase commitments, primarily related to distribution fees, software license fees and marketing services, of $14.1 million as of January 31, 2021, of which $7.7 million and $6.4 million will be settled during fiscal year 2022 and fiscal year 2023, respectively.
Warranties, Indemnification, and Contingent Obligations
The Company's arrangements generally include provisions indemnifying customers against liabilities if their customer data is compromised due to a breach of information security, or if the Company's applications or services
Medallia, Inc.
Notes to Consolidated Financial Statements
infringe a third-party's intellectual property rights. To date, the Company has not incurred any costs as a result of such indemnification and has not accrued any liabilities related to such obligations in the consolidated financial statements.
The Company enters into service level agreements with customers which warrant defined levels of uptime and support response times and permit those customers to receive credits for prepaid amounts in the event that those performance and response levels are not met. To date, the Company has not experienced any significant failures to meet defined levels of performance and response. In connection with the service level agreements, the Company has not incurred any significant costs and has not accrued any liabilities in the consolidated financial statements. The Company's subscription services agreements also generally include a warranty that the service performs in accordance with the applicable specifications document. The Company's professional services are generally warranted to be performed in a professional manner and in a manner that will comply with the terms of the customer agreements. To date, the Company has not incurred any material costs associated with these warranties.
12. Income Taxes
The components of loss before provision for income taxes are as follows (in thousands):
Year Ended January 31,
2021 2020 2019
Domestic $ (150,064) $ (112,376) $ (69,464)
Foreign 1,486 575 (10,991)
Loss before provision for income taxes $ (148,578) $ (111,801) $ (80,455)
The provision for (benefit from) income taxes are as follows (in thousands):
Year Ended January 31,
2021 2020 2019
Current:
Federal $ 1,378 $ 1,024 $ 202
State 103 88 43
Foreign 539 821 1,594
Total 2,020 1,933 1,839
Deferred:
Federal (1,003) (658) -
State (762) (173) -
Foreign (177) (570) (60)
Total (1,942) (1,401) (60)
Provision for income taxes $ 78 $ 532 $ 1,779
Due to the Company's history of net operating losses and the full valuation allowance against the Company's deferred tax assets, the provision for income taxes primarily relates to foreign income and withholding taxes for the periods presented. In addition, the Company recognized deferred tax benefits for the years ended January 31, 2021 and January 31, 2020 as a result of its acquisitions.
Medallia, Inc.
Notes to Consolidated Financial Statements
The reconciliation between effective statutory tax rate and the Company's tax rate is as follows ( in percentages):
Year Ended January 31,
2021 2020 2019
Federal statutory rate 21.0 % 21.0 % 21.0 %
Effect of:
Foreign tax rate differences (1.0) % (1.0) % (4.0) %
Research tax credits 3.1 % 1.0 % 1.4 %
State tax, net of federal benefit 0.5 % 0.1 % 3.2 %
Stock-based compensation 45.1 % 12.7 % (3.8) %
Change in valuation allowance (68.4) % (34.3) % (24.2) %
Other (0.4) % 0.1 % 4.3 %
(0.1) % (0.4) % (2.1) %
For the year ended January 31, 2021, the Company recorded an expense for income taxes of $0.1 million, resulting in an effective tax rate of (0.1)%. The effective tax rate is different than the statutory United States federal tax rate primarily due to the full valuation allowance on the Company’s United States, Israel, United Kingdom, and Argentina deferred tax assets, the mix of income and losses among the Company’s foreign jurisdictions, and withholding taxes.
The components of deferred tax assets and liabilities for federal and state income taxes consists of the following (in thousands):
January 31,
2021 2020
Net operating loss carryforwards $ 208,340 $ 118,318
Federal and state credit carryforwards 16,829 9,478
Deferred revenue 2,928 382
Stock-based compensation 17,732 24,113
Deferred lease incentive - 153
Accrued liabilities and allowances not currently deductible 2,346 1,858
Depreciation 2,167 2,226
Lease liability 13,704 -
Capitalized R&D 41,660 -
Other 2,284 -
Total deferred tax assets 307,990 156,528
Deferred commissions expense (23,978) (17,970)
Amortization (10,385) (1,216)
Convertible debt (27,136) -
ROU asset (9,204) -
Other - (211)
Total deferred tax liabilities (70,703) (19,397)
Valuation allowance (237,635) (137,368)
Net deferred tax liabilities $ (348) $ (237)
Medallia, Inc.
Notes to Consolidated Financial Statements
The Company accounts for deferred taxes, which involves weighing positive and negative evidence concerning the realizability of the Company’s deferred tax assets in each jurisdiction. The Company evaluated its ability to realize the benefit of its deferred tax assets, net of deferred tax liabilities, and weighted all available positive and negative evidence both objective and subjective in nature. In determining the need for a valuation allowance, the weight given to positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. Based on the weight of the available evidence, which includes the Company's historical operating losses, lack of taxable income, and accumulated deficit, as of January 31, 2021 and 2020, the Company provided a full valuation allowance against the federal, state and foreign deferred tax assets.
As of January 31, 2021, 2020, and 2019, $16.2 million, $12.8 million, and $7.5 million respectively, of undistributed earnings from non-U.S. operations held by the Company's foreign subsidiaries which are designated as permanently reinvested outside the United States. Accordingly, no additional U.S. income taxes or additional foreign withholding taxes have been provided thereon. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable.
Operating losses by jurisdiction which begin to expire consists of the following (in thousands):
2021 2020 Expiration Year
United States Federal $ 822,490 $ 450,262 2031
United States - California 125,521 58,858 2031
United States - Other states 278,739 136,528 2022
Israel 37,734 36,851 Indefinite
United Kingdom 10,755 830 Indefinite
Research and development credits by jurisdiction which begin to expire consists of the following (in thousands):
2021 2020 Expiration Year
United States Federal $ 20,600 $ 10,875 2029
United States - California 16,750 10,450 Indefinite
The following table summarizes the activity related to unrecognized tax benefits (in thousands):
Year Ended January 31,
2021 2020 2019
Beginning balance $ 12,531 $ 9,200 $ 7,000
Increases related to tax positions taken during a prior year 326 1,142 400
Decreases related to tax positions taken during the prior year - (78) -
Increases related to tax positions taken during the current year 7,716 2,267 1,800
Ending balance $ 20,573 $ 12,531 $ 9,200
As of January 31, 2021, the Company had unrecognized tax benefits of $20.6 million, of which $0.2 million of unrecognized benefits, if recognized would reduce the effective tax rate.The Company does not reasonably believe that the total amounts of unrecognized tax benefits will significantly increase or decrease within the following 12 months.
The Company is subject to taxation in the United States and various other state and foreign jurisdictions. The material jurisdictions in which the Company is subject to potential examination include the United States, Israel,
Medallia, Inc.
Notes to Consolidated Financial Statements
Argentina, and the United Kingdom. The Company is currently not under examination by the Internal Revenue Service (IRS) or by any local taxing authority for any tax years. All tax years remain open to examination by the IRS and local taxing authorities.
13. Equity Incentive Plans
Equity Incentive Plans
In June 2019, the Company’s board of directors adopted, and the stockholders approved, the 2019 Equity Incentive Plan (the 2019 Plan), with an initial share reserve of 19,000,000, plus any reserved but unissued shares under the 2017 Plan. The 2019 Plan became effective July 17, 2019 and is the successor to and continuation of the 2008 and 2017 Plans. The reserve is automatically increased at the beginning of the fiscal year by the lesser of (a) 19 million shares, or (b) up to 5% of the Company's outstanding common, subject to the Company's board approval. Stock options and RSU’s granted generally vest between three to four years.
In June 2019, the Company’s board of directors adopted, and the stockholders approved, the Employee Stock Purchase Plan (ESPP), which qualifies as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code, and pursuant to which 4,000,000 shares of common stock were reserved for future issuance with an annual automatic increase at the beginning of each fiscal year of up to 1% of the Company's outstanding common, subject to the Company's board approval. The ESPP became effective on July 17, 2019. The ESPP is designed to enable eligible employees to purchase shares of the Company's common stock at a discount on a periodic basis through payroll deductions. Each offering period under the ESPP covers six months and consists generally of one six-month purchase period, except for the first purchase period post-IPO which consists of eight months. The purchase price for shares of common stock purchased under the ESPP is 85% of the lesser of the fair market value of the Company's common stock on the first day of the applicable offering period and the fair market value of the Company's common stock on the last day of each purchase period.
The Plan activity is as follows:
Year Ended January 31,
2021 2020 2019
Opening balance 23,050,732 4,023,140 3,725,180
Shares authorized(1)
6,617,320 24,000,000 22,000,000
Options and RSUs granted (4,615,733) (8,827,186) (28,118,877)
Cancelled shares 1,648,394 3,854,778 6,386,036
Repurchase of early exercise of options - - 30,801
Ending balance 26,700,713 23,050,732 4,023,140
(1) Reflects an automatic increase to the number of shares of common stock reserved for issuance pursuant to future awards under the 2019 Plan, which annual increase is provided for in the 2019 Plan.
Medallia, Inc.
Notes to Consolidated Financial Statements
The stock-based compensation expense by line item in the consolidated statements of operations is summarized as follows (in thousands):
Year Ended January 31,
2021 2020 2019
Cost of subscription revenue $ 3,650 $ 3,058 $ 1,143
Cost of professional services revenue 10,266 8,824 2,379
Research and development expense 25,469 18,176 7,563
Sales and marketing expense 37,625 28,519 6,813
General and administrative expense 27,795 50,879 9,960
Total stock-based compensation $ 104,805 $ 109,456 $ 27,858
Restricted Stock Units Activity
The following table summarizes restricted stock unit activities:
Restricted Stock Units Performance Based Restricted Stock Units
Number of Shares Weighted Average Grant Date Fair Value Number of Shares Weighted Average Grant Date Fair Value
Balance as of January 31, 2019 3,155,197 $ 6.29 - $ -
Stock units granted 7,448,329 18.78 900,579 13.91
Stock units vested (1,170,861) 6.98
Stock units cancelled and expired (412,984) 16.10 (74,246) 13.41
Balance as of January 31, 2020 9,019,681 16.07 826,333 13.95
Stock units granted 4,265,788 25.37 349,945 22.30
Stock units vested (4,826,720) 16.30 - -
Stock units cancelled and expired (705,401) 20.89 (127,825) 14.27
Balance as of January 31, 2021 7,753,348 $ 20.61 1,048,453 $ 19.79
The total unrecognized compensation expense related to the RSUs was $123.6 million, $98.5 million and $19.9 million as of January 31, 2021, 2020 and 2019 and will be recognized over a weighted-average remaining period of 2.1 years, 2.4 years, and 3.5 years, respectively. Certain RSUs, in addition to the satisfaction of the service-based performance vesting conditions, also require the fulfillment of performance vesting conditions which include subscription revenue growth targets and a combination of subscription revenue growth and operating margin targets.
Medallia, Inc.
Notes to Consolidated Financial Statements
Option Activity
The fair value of each stock option granted to employees was estimated at the date of grant using the Black-Scholes-Merton option-pricing model with the following assumptions. Options were not granted during fiscal year 2021.
Year Ended January 31,
2020 2019
Risk free interest rate 2.5 % 2.50% - 3.00%
Expected volatility 41 % 40% - 44%
Expected term (years) 5.85 5.50 - 6.69
Expected dividend rate - -
The following table summarizes the stock option activity:
Options Outstanding
Number of Shares Average Exercise Price per Share Weighted Average Remaining Contractual Term (years) Aggregate Intrinsic Value (in thousands)
Balance as of Balance as of January 31, 2019 52,797,213 $ 5.27 8.12 $ 388,531
Options granted 478,278 12.63
Options exercised (7,972,770) 4.31 $ 339,899
Options cancelled or expired (3,367,548) 6.14
Balance as of January 31, 2020 41,935,173 $ 5.47 7.29 $ 954,124
Options exercised (16,782,477) 4.67 618,160
Options cancelled or expired (815,168) 6.65
Balance as of January 31, 2021 24,337,528 $ 5.98 6.85 $ 864,527
Exercisable as of January 31, 2021 16,399,672 $ 5.69 6.50 $ 587,313
The weighted-average grant-date fair value of stock options granted during the years ended January 31, 2021, 2020 and 2019 was nil, $5.38, $2.88 per share, respectively. The grant date fair value of stock options vested during the years ended January 31, 2021, 2020 and 2019 was $21.7 million, $35.2 million and $23.3 million respectively. Total unrecognized compensation expense related to stock options was $22.3 million, $45.6 million and $82.5 million as of January 31, 2021, 2020 and 2019, which are expected to be recognized over a weighted-average remaining recognition period of 1.3 years, 2.5 years and 3.0 years respectively.
Employee Stock Purchase Plan
The fair value of each Employee Stock Purchase Plan (ESPP) share is estimated on the enrollment date of the offering period using the Black-Scholes-Merton option-pricing model and the assumptions noted in the following table:
January 31, 2021
Risk-free interest rate 0.1%
Expected volatility 67%
Expected term (in years) 0.5
Expected dividend rate -
Medallia, Inc.
Notes to Consolidated Financial Statements
The fair value of stock purchase rights to be granted under the ESPP during the six-month period from September 15, 2021 was $9.25 per share. As of January 31, 2021 the Company had $0.7 million of unrecognized compensation expense related to ESPP subscriptions that will be recognized over 0.1 years.
14. Employee Benefit Plans
The Company has a 401(k) retirement plan that covers substantially all of its U.S. employees. The 401(k) retirement plan provides for voluntary salary contributions of eligible participants' annual compensation, subject to the maximum allowed by law. During the year ended January 31, 2021 the Company provided a matching contribution equal to 50% of eligible participants' contributions, up to a maximum of $4,000 per participant during the plan year. During the year ended January 31, 2020 the Company provided a matching contribution equal to 50% of eligible participants' contributions, up to a maximum of $2,000 per participant during the plan year. The Company recognized approximately $4.0 million and $2.5 million in expense related to the 401(k) match for the year ended January 31, 2021 and 2020, respectively. During the year ended January 31, 2019 the Company did not provide matching contributions.
15. Net Loss Per Share Attributable to Common Stockholders
The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders (in thousands, except per share data):
Year Ended January 31,
2021 2020 2019
Net loss attributable to common stockholders $ (148,656) $ (112,333) $ (82,234)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted 144,563 83,269 26,770
Net loss per share attributable to common stockholders, basic and diluted $ (1.03) $ (1.35) $ (3.07)
The potential shares of common stock that were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented because including them would have been antidilutive are as follows (in thousands):
Year Ended January 31,
2021 2020 2019
Convertible preferred stock - - 72,483
Stock options 24,337 41,935 52,797
Restricted stock units 8,802 9,846 3,155
ESPP 377 683 -
Unvested early exercises subject to repurchase - - 147
Convertible preferred stock warrant - - 56
Convertible stock warrant - - 75
Convertible senior notes (if-converted) 14,611 - -
Total 48,127 52,464 128,713
Medallia, Inc.
Notes to Consolidated Financial Statements
16.Selected Quarterly Financial Information (unaudited)
Selected summarized quarterly financial information for fiscal years ended January 31, 2021 and 2020 is as follows (in thousands):
Year Ended January 31, 2021 Year Ended January 31, 2020
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
(stated in thousands, except per share amounts)
Total revenue $ 128,047 $ 120,958 $ 115,525 $ 112,691 $ 110,100 $ 103,074 $ 95,670 $ 93,619
Total cost of revenue 46,101 43,848 41,172 39,563 39,116 38,595 34,883 32,595
Gross profit 81,946 77,110 74,353 73,128 70,984 64,479 60,787 61,024
Operating expense 123,149 106,655 108,869 105,892 103,750 106,146 99,239 63,069
Loss from operations (41,203) (29,545) (34,516) (32,764) (32,766) (41,667) (38,452) (2,045)
Net loss $ (48,770) $ (32,159) $ (35,198) $ (32,529) $ (31,870) $ (39,620) $ (38,284) $ (2,559)
Weighted average shares used in computing net loss per share attributable to common stockholders, basic and diluted 151,663 147,930 142,479 135,993 129,365 127,715 43,986 30,430
Net loss per share attributable to common stockholders, basic and diluted $ (0.32) $ (0.22) $ (0.25) $ (0.24) $ (0.25) $ (0.31) $ (0.87) $ (0.08)
17. Subsequent Event
On March 12, 2021, the Company acquired Decibel Group London Ltd. (Decibel), a privately-held company, for approximately $162.5 million in cash. Decibel is a leader in digital experience analytics. With this acquisition, the Company's leading customer experience and engagement platform will seamlessly include always-on, unsolicited digital feedback, providing a single view of all customers and prospective customers at every point of the customers journey across all channels.
PART II-OTHER INFORMATION
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of January 31, 2021, the last day of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were effective at a reasonable assurance level.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles.
Our management, under the supervision of our Chief Financial Officer and Chief Accounting Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of January 31, 2021 based on the framework in Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of January 31, 2021.
The effectiveness of our internal control over financial reporting as of January 31, 2021 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report, which is included in Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(d) and 15d-15(d) under the Exchange Act) that occurred during the three months ended January 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our principal executive officer and principal financial officer, do not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
ITEM 9B. OTHER INFORMATION
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference to our Proxy Statement relating to our 2021 Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended January 31, 2021.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to our Proxy Statement relating to our 2021 Meeting of Stockholders.The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended January 31, 2021.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference to our Proxy Statement relating to our 2021 Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended January 31, 2021.
Securities Authorized for Issuance under Equity Compensation Plans
The information concerning our equity compensation plans is incorporated by reference herein to our Proxy Statement relating to our 2021 Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended January 31, 2021.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference to our Proxy Statement relating to our 2021 Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended January 31, 2021.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated herein by reference to our Proxy Statement relating to our 2021 Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended January 31, 2021.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
We have filed the following documents as part of this Form 10-K:
(a) Financial Statements
Page
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheet
Consolidated Statement of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Stockholders' Deficit
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
(b) Financial Statement Schedules. All financial statement schedules are omitted because the information called for is not required or is shown either in the consolidated financial statements or in the notes thereto.
(c) Exhibits. The following exhibits, as required by Item 601 of Regulation S-K are attached and incorporated by reference as stated below.
EXHIBIT INDEX
Incorporation by Reference
Exhibit
Number Description Form File No. Exhibit Number Filing Date with SEC Filed or Furnished Herewith
2.1
Agreement and Plan of Merger, by and among Medallia, Inc., Steely Merger Sub, Inc., StellaService Inc. and Shareholder Representative Services LLC, dated September 1, 2020.
8-K 001-38982 3.1 September 8, 2020
3.1
Amended and Restated Certificate of Incorporation of the registrant.
10-Q 001-38982 3.1 September 12, 2019
3.2
Amended and Restated Bylaws of the registrant.
8-K 001-38982 3.1 May 29, 2020
4.1
Form of common stock certificate of the registrant.
S-1/A 333-232271 4.1 June 28, 2019
4.2
Description of Company’s Securities.
X
4.3
Amended and Restated Investor Rights Agreement by and among the registrant and certain holders of its capital stock, dated as of February 25, 2019, as amended.
S-1/A 333-232271 4.2 July 8, 2019
4.4
Indenture, dated September 18, 2020, between the registrant and U.S. Bank National Association., dated September 18, 2020, between the registrant and U.S. Bank National Association.
8-K 001-38982 4.1 September 18, 2020
4.5
Form of 0.125% Convertible Senior Note due 2025 (included in Exhibit 4.4) convertible Senior Note due 2025 (included in Exhibit 4.4).
8-K 001-38982 4.2 September 18, 2020
10.1+
Form of Indemnification Agreement between the registrant and each of its directors and executive officers.
S-1 333-232271 10.1 June 21, 2019
10.2+
2019 Equity Incentive Plan and related form agreements.
S-1/A 333-232271 10.2 June 28, 2019
10.3+
Amended and Restated 2019 Employee Stock Purchase Plan and related form agreements.
S-1/A 333-232271 10.3 July 8, 2019
10.4+
2017 Equity Incentive Plan, as amended, and related form agreements.
S-1 333-232271 10.4 June 21, 2019
10.5+
2008 Equity Incentive Plan, as amended, and related form agreements.
S-1 333-232271 10.5 June 21, 2019
Incorporation by Reference
Exhibit
Number Description Form File No. Exhibit Number Filing Date with SEC Filed or Furnished Herewith
10.6+
Outside Director Compensation Policy.
S-1/A 333-232271 10.6 June 28, 2019
10.7+
Change in Control and Severance Policy and related form agreements.
S-1/A 333-232271 10.7 June 28, 2019
10.8
Office Lease between the registrant and BRE Market Street Property Owner LLC, dated as of March 21, 2019.
S-1 333-232271 10.8 June 21, 2019
10.9+
Letter Agreement between the registrant and Elizabeth Carducci, dated December 20, 2020.
X
10.10+
Executive Incentive Compensation Plan.
S-1/A 333-232271 10.10 June 28, 2019
10.11+
Letter Agreement between the registrant and Leslie Stretch, dated June 27, 2019.
S-1/A 333-232271 10.12 July 8, 2019
10.12+
Letter Agreement between the registrant and Roxanne Oulman, dated June 27, 2019.
S-1/A 333-232271 10.13 July 8, 2019
10.13+
Letter Agreement between the registrant and Borge Hald, dated June 27, 2019.
S-1/A 333-232271 10.14 July 8, 2019
10.14+
Letter Agreement between the registrant and Mikael Ottosson, dated June 27, 2019.
S-1/A 333-232271 10.15 July 8, 2019
10.15
Purchase Agreement, dated September 15, 2020, by and among the registrant and BofA Securities, Inc., Citigroup Global Markets Inc., Wells Fargo Securities, LLC and KeyBanc Capital Markets, Inc. as representatives of the initial purchasers named therein.
8-K 001-38982 10.1 September 18, 2020
10.16
Form of Capped Call Confirmation.
8-K 001-38982 10.2 September 18, 2020
10.17
First Amendment by and between Market Center Owner, LP and the registrant, dated as of February 10, 2020.
10-Q 001-38982 10.1 June 9, 2020
10.18
Credit Agreement, dated as of September 4, 2020, by and among the registrant, as borrower, the lenders from time to time party thereto, and Wells Fargo Bank, National Association, as administrative agent, swingline lender and issuing lender.
10-Q 001-38982 10.1 September 9, 2020
21.1
Subsidiaries of Medallia Inc.
X
23.1
Consent of Independent Registered Public Accounting Firm.
X
24.1
Power of Attorney (included in signature pages hereto (included in signature pages hereto)
X
31.1
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
X
31.2
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
X
32.1†
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
X
32.2†
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
X
101.INS XBRL. Instance Document X
101.SCH XBRL. Taxonomy Extension Schema Document X
101.CAL XBRL. Taxonomy Extension Calculation Linkbase Document X
101.DEF XBRL. Taxonomy Extension Definition Linkbase Document X
101.LAB XBRL. Taxonomy Extension Label Linkbase Document X
101.PRE XBRL.Extension Presentation Linkbase Database X
104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
____________
+ Indicates management contract or compensatory plan.
† The certifications attached as Exhibits 32.1 and 32.2 that accompany this Annual Report on Form 10-K are deemed furnished and not filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Medallia, Inc. under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing.
ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in San Francisco, California, on March 22, 2021.
MEDALLIA, INC.
By: /s/ Leslie J. Stretch
Leslie J. Stretch
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Leslie J. Stretch and Roxanne M. Oulman, and each of them, as his or her true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for such individual in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or the individual’s substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of the Company and in the capacities and on the dates indicated.
Signature Title Date
/s/ Leslie J. Stretch President, Chief Executive March 22, 2021
Leslie J. Stretch Officer and Director
(Principal Executive Officer)
/s/ Roxanne M. Oulman Chief Financial Officer March 22, 2021
Roxanne M. Oulman (Principal Financial and Accounting Officer)
/s/ Borge Hald Chief Strategy Officer and Executive Chairman March 22, 2021
Borge Hald
/s/ Robert Bernshteyn Director March 22, 2021
Robert Bernshteyn
/s/ Mitchell K. Dauerman Director March 22, 2021
Mitchell K. Dauerman
/s/ Leslie J. Kilgore Director March 22, 2021
Leslie J. Kilgore
/s/ Douglas M. Leone Director March 22, 2021
Douglas M. Leone
/s/ Stanley J. Meresman Director March 22, 2021
Stanley J. Meresman
/s/ Amy Pressman Director March 22, 2021
Amy Pressman
/s/ Steven C. Walske Director March 22, 2021
Steven C. Walske
/s/James White Director March 22, 2021
James White

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Medallia, Inc.
Index to Consolidated Financial Statements
Report on Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Medallia, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Medallia, Inc. (the Company) as of January 31, 2021, and 2020, the related consolidated statements of operations, comprehensive loss, stockholders’ equity (deficit) and cash flows for each of the three years in the period ended January 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of January 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 22, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition
Description of the Matter As described in Note 1 to the consolidated financial statements, the Company recognizes revenue primarily from subscription services and professional services contracts. Most of the Company’s contracts contain multiple performance obligations. For these contracts, the Company assesses the performance obligations and accounts for those obligations separately if they are distinct. The transaction price is allocated to separate performance obligations on a relative standalone selling price basis. The standalone selling prices of subscription services are typically estimated using the residual approach. Standalone selling prices of professional services are typically estimated based on observable transactions when those services are sold on a standalone basis.
Auditing the identification of performance obligations in revenue contracts requires significant judgment as it relates to the evaluation of the contractual terms of the arrangement. Auditing the allocation of the transaction price to performance obligations requires significant judgment in determining whether the use of the residual approach to estimate the standalone selling prices of subscription services is appropriate.
How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s revenue recognition process, including the evaluation of the contractual terms of the revenue arrangements and the Company’s assessment of the appropriateness of the residual method for estimating the standalone selling prices of subscription services.
To test the amount of revenue recognized, we performed audit procedures that included, among others, testing a sample of revenue transactions during the year and evaluating the identification of performance obligations based on analysis of the contractual terms of the arrangement. Our testing of the application of the residual method to estimate standalone selling prices of subscription services included inquiries with management and analysis of the variability of actual subscription pricing during the year by customer class.
Business Combinations
Description of the Matter As described in Note 6 to the consolidated financial statements, the Company completed multiple acquisitions for net purchase consideration of $225.3 million in the year ended January 31, 2021. The Company accounted for these acquisitions as business combinations.
Auditing the accounting for the Company’s fiscal year 2021 acquisitions was complex due to the significant estimation uncertainty in determining the fair value of intangible assets acquired of $49.6 million which primarily consisted of developed technology and customer relationships. In particular, the fair value estimates were sensitive to significant assumptions such as the Company’s estimated weighted average cost of capital, royalty rates, estimated revenue growth rates, gross margins and operating expenses. These significant assumptions were forward-looking and could be affected by expectations about future market or economic conditions.
How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls over its accounting for the acquisitions. This included testing controls over the estimation process supporting the recognition and measurement of identified intangible assets, and management’s judgment and evaluation of underlying assumptions and estimates with regards to the fair values of the identified intangible assets.
To test the estimated fair value of the identified intangible assets, our audit procedures included, among others, evaluating the Company's projected financial information and testing the significant assumptions used, as stated above, including the completeness and accuracy of the underlying data. For example, we compared the significant assumptions to current industry, market, and economic trends and assumptions used to value similar assets in other acquisitions. In addition, we involved our valuation specialists to assist in our evaluation of the significant assumptions used by the Company.
Convertible Senior Notes
Description of the Matter As described in Note 9 to the consolidated financial statements, in September 2020 the Company issued $575.0 million Convertible Senior Notes due in September 2025, which permits the Company to settle in cash or stock at its option. Concurrent with the issuance of the Convertible Senior Notes, the Company entered into Capped Call Transactions to reduce potential dilution upon conversion of the Convertible Senior Notes. The Capped Call Transactions are exercisable upon conversion of the Convertible Senior Notes (collectively with the Convertible Senior Notes referred to as the Convertible Senior Notes Transactions). The accounting for the Convertible Senior Notes Transactions was complex as it required assessment as to whether features in the Convertible Senior Notes Transactions required bifurcation and an evaluation of the appropriate classification of those features in the financial statements. Additionally, the Convertible Senior Notes Transactions were complex as the valuation of the conversion feature in the Convertible Senior Notes involved estimation of the fair value of the liability component of the Convertible Senior Notes on a stand-alone basis.
Auditing management’s evaluation of the Convertible Senior Notes Transactions involved addressing the complexity in assessing the components for separability and assessing the valuation of the liability component on a stand-alone basis. The Company estimated the fair value of the liability component of the Convertible Senior Notes using a discounted cash flow model with a discount rate determined using observable yields for stand-alone debt instruments with a comparable credit rating and term. The fair value of the liability component is sensitive to changes in the discount rate. Furthermore, there was complexity in assessing the Company’s analysis of the terms of the Convertible Senior Notes Transactions to identify whether there were any embedded derivatives that required separate identification and valuation under applicable accounting guidance.
How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting for the Convertible Senior Notes Transactions, including its controls over estimating the fair value of the stand-alone liability component and evaluating the existence and valuation of embedded derivatives.
Our testing of the Company’s initial accounting for the Convertible Senior Notes Transactions, among other procedures, included inspecting the underlying agreements and evaluating the Company’s accounting analysis of the initial accounting for the Convertible Senior Notes Transactions, including the determination of the balance sheet classification of each transaction and identification of any derivatives included in the arrangements.
Our testing of the fair value of the liability component, included, among other procedures, evaluating the Company’s selection of the valuation methodology and significant assumptions used by the Company, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. In addition, we involved our valuation specialists to assist in our evaluation of the Company’s determination of the fair value of the liability component on a stand-alone basis, including testing the appropriateness of the methodology and the discount rate.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2011.
San Francisco, California
March 22, 2021
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Medallia, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Medallia, Inc.’s internal control over financial reporting as of January 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Medallia, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of January 31, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of January 31, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, stockholders' equity (deficit) and cash flows for each of the three years in the period ended January 31, 2021, and the related notes and our report dated March 22, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Francisco, California
March 22, 2021
Item 1. FINANCIAL STATEMENTS
Medallia, Inc.
Consolidated Balance Sheets
(in thousands, except share and par value data)
January 31, 2021 January 31, 2020
Assets
Current assets:
Cash and cash equivalents $ 428,328 $ 226,866
Marketable securities 254,061 116,833
Trade and other receivables, net 181,431 150,661
Deferred commissions, current 31,107 22,455
Prepaid expenses and other current assets 23,835 22,492
Total current assets 918,762 539,307
Property and equipment, net 40,668 34,879
Operating lease right-of-use assets 39,050 -
Deferred commissions, noncurrent 68,929 51,540
Goodwill 262,942 79,324
Intangible assets, net 60,623 21,306
Other noncurrent assets 10,675 5,293
Total assets $ 1,401,649 $ 731,649
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 11,904 $ 3,608
Accrued expenses and other current liabilities 39,756 20,268
Accrued compensation 42,292 37,160
Deferred revenue, current 293,231 263,115
Total current liabilities 387,183 324,151
Convertible senior notes, net 448,064 -
Deferred revenue, noncurrent 1,396 1,407
Lease liability, noncurrent 47,631 -
Other liabilities 9,134 8,295
Total liabilities 893,408 333,853
Commitments and contingencies (Note 10)
Stockholders' equity:
Common stock, $0.001 par value: 1,000,000,000 shares authorized as of January 31, 2021 and 2020; 154,995,819 shares and 132,346,402 shares issued and outstanding as of January 31, 2021 and 2020, respectively
150 132
Additional paid-in capital 1,136,534 878,843
Accumulated other comprehensive loss 1,186 (206)
Accumulated deficit (629,629) (480,973)
Total stockholders' equity 508,241 397,796
Total liabilities and stockholders' equity $ 1,401,649 $ 731,649
The accompanying notes are an integral part of these consolidated financial statements.
Medallia, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
Year Ended January 31,
2021 2020 2019
Revenue:
Subscription $ 382,573 $ 312,168 $ 246,797
Professional services 94,648 90,295 66,845
Total revenue 477,221 402,463 313,642
Cost of revenue:
Subscription 80,376 61,369 47,948
Professional services 90,308 83,820 67,953
Total cost of revenue 170,684 145,189 115,901
Gross profit 306,537 257,274 197,741
Operating expenses:
Research and development 117,800 95,978 86,272
Sales and marketing 225,414 180,711 138,674
General and administrative 101,351 95,515 53,239
Total operating expenses 444,565 372,204 278,185
Loss from operations (138,028) (114,930) (80,444)
Other income (expense), net (10,550) 3,129 (11)
Loss before provision for income taxes (148,578) (111,801) (80,455)
Provision for income taxes 78 532 1,779
Net loss $ (148,656) $ (112,333) $ (82,234)
Net loss per share attributable to common stockholders, basic and diluted $ (1.03) $ (1.35) $ (3.07)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted 144,563 83,269 26,770
The accompanying notes are an integral part of these consolidated financial statements.
Medallia, Inc.
Consolidated Statements of Comprehensive Loss
(in thousands)
Year Ended January 31,
2021 2020 2019
Net loss $ (148,656) $ (112,333) $ (82,234)
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustment 2,825 792 (912)
Change in unrealized gain on marketable securities 3 22 12
Change in unrealized gain on cash flow hedges (1,436) 76 924
Other comprehensive income 1,392 890 24
Comprehensive loss $ (147,264) $ (111,443) $ (82,210)
The accompanying notes are an integral part of these consolidated financial statements.
Medallia, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended January 31,
2021 2020 2019
Operating activities
Net loss $ (148,656) $ (112,333) $ (82,234)
Adjustments to reconcile net loss to net cash (provided by) used in operating activities:
Depreciation and amortization 29,047 15,611 13,856
Amortization of deferred commissions 26,761 19,030 13,201
Non-cash lease expense 11,827 - -
Stock-based compensation expense 104,805 109,456 27,858
Gain on property and equipment, and lease termination - (13,783) 3,398
Lease exit costs 16,838 - -
Amortization of debt discount and issuance costs 8,742 - -
Other 1,832 (698) (417)
Changes in assets and liabilities:
Trade and other receivables (30,391) (43,268) (16,383)
Deferred commissions (52,802) (41,424) (27,218)
Prepaid expenses and other current assets 1,666 (6,198) 2,176
Other noncurrent assets (1,864) (252) (218)
Accounts payable 5,579 2,097 877
Deferred revenue 24,665 49,749 42,935
Accrued expenses and other current liabilities 6,973 20,282 6,809
Other noncurrent liabilities (3,370) 137 163
Net cash provided by (used in) operating activities 1,652 (1,594) (15,197)
Investing activities
Purchases of property, equipment and other (20,822) (22,009) (11,259)
Purchase of marketable securities (394,774) (182,389) (18,684)
Maturities of marketable securities 256,233 65,853 34,840
Proceeds from sale of marketable securities 1,100 511 1,296
Acquisitions, net of cash acquired (223,647) (76,532) -
Other - (1,500) -
Net cash (used in) provided by investing activities (381,910) (216,066) 6,193
Financing activities
Proceeds from issuance of convertible senior notes, net of issuance costs 558,237 - -
Purchase of capped calls related to convertible senior notes (61,870) - -
Proceeds from initial public offering net of issuance costs, underwriters discounts and commissions, and concurrent private placement - 319,572 -
Proceeds from Series F convertible preferred stock, net of issuance costs - 69,848 -
Proceeds from revolving line of credit 43,000 - -
Repayment of revolving line of credit (43,000) - -
Proceeds from exercise of stock options 78,595 34,009 12,093
Payments for employee taxes withheld upon vesting of restricted stock units - (17,907) -
Proceeds from share purchase plan 17,828 - -
Principal payments on financing leases (4,937) (3,540) (708)
Repayment of debt assumed in acquisitions and other (6,445) (2,297) -
Net cash provided by financing activities 581,408 399,685 11,385
Effect of exchange rate changes on cash and cash equivalents 312 (35) (204)
Net increase in cash and cash equivalents 201,462 181,990 2,177
Cash and cash equivalents at beginning of period 226,866 44,876 42,699
Cash and cash equivalents at end of period $ 428,328 $ 226,866 $ 44,876
Supplemental disclosures of cash flow information
Cash paid for interest $ 1,217 $ 637 $ 134
Cash paid for income taxes $ 1,485 $ 1,563 $ 2,352
Noncash investing and financing activities
Other receivables related to stock option exercises $ 338 $ 331 $ -
Vesting of early exercised stock options $ - $ 487 $ 840
Accrued unpaid capital expenditures $ 6,106 $ 6,078 $ 6,455
The accompanying notes are an integral part of these consolidated financial statements.
Medallia, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
(in thousands, except share data)
Convertible
Preferred Stock Class A
Common Stock Class B
Common Stock Common Stock Additional
Paid-In
Capital Accumulated
Other
Comprehensive
Loss Accumulated
Deficit Total
Stockholders'
Equity (Deficit)
Shares Amount Shares Amount Shares Amount Shares Amount
Balance at January 31, 2018 72,394,601 $ 72 24,637,801 $ 24 3,000 $ - - $ - $ 322,300 $ (1,120) $ (286,219) $ 35,057
Cumulative effect of the adoption of ASU 2016-09 - - - - - - - - 187 - (187) -
Exercise of employee stock options - - 5,067,450 6 - - - - 11,891 - 11,897
Repurchase of early exercised stock options - - (30,801) - - - - - - - -
Vesting of early exercised stock options - - - - - - - - 840 - 840
Issuance of shares at end of escrow period in connection with prior period acquisitions 88,008 - 81,433 - - - - - - - -
Stock-based compensation - - - - - - - - 27,858 - 27,858
Other comprehensive loss - - - - - - - - - 24 24
Net loss - - - - - - - - - - (82,234) (82,234)
Balance at January 31, 2019 72,482,609 $ 72 29,755,883 $ 30 3,000 $ - - $ - $ 363,076 $ (1,096) $ (368,640) $ (6,558)
Issuance of Series F Preferred shares, net of issuance costs 4,666,666 5 - - - - - - 69,843 - - 69,848
Conversion of common stock - - (31,126,701) (31) (3,000) - 31,129,701 31 - - - -
Conversion of preferred stock (77,149,275) (77) - - - - 77,149,275 77 - - - -
Proceeds from Initial Public Offering, net of issuance and underwriter's discounts and commissions and concurrent private placement - - - - - - 16,680,000 17 319,555 - - 319,572
Warrant exercises - - - - - - 121,915 - - - - -
Exercise of employee stock options - - 1,370,818 1 - - 6,601,952 7 34,332 - - 34,340
Repurchase of early exercised stock options - - - - - - (823) - - - - -
Vesting of early exercised stock options - - - - - - - - 487 - - 487
Release of restricted stock units - - - - - - 1,170,861 - - - - -
Shares repurchased of tax withholdings on release of restricted stock units - - - - - - (506,479) - (17,906) - - (17,906)
Stock-based compensation - - - - - - - - 109,456 - - 109,456
Other comprehensive loss - - - - - - - - - 890 - 890
Net loss - - - - - - - - - (112,333) (112,333)
Balance at January 31, 2020 - $ - - $ - - $ - 132,346,402 $ 132 $ 878,843 $ (206) $ (480,973) $ 397,796
Exercise of employee stock options - - - - - - 16,782,477 17 78,268 - - 78,285
Release of restricted stock units - - - - - - 4,826,720 - - - - -
Issuance of shares from share purchase plan - - - - - - 1,040,220 1 17,826 - - 17,827
Stock-based compensation - - - - - - - - 104,805 - - 104,805
Equity component of convertible senior notes, net of issuance costs - - - - - - - - 118,662 - - 118,662
Purchase of capped calls related to convertible senior notes - - - - - - - - (61,870) - - (61,870)
Other comprehensive loss - - - - - - - - - 1,392 - 1,392
Net loss - - - - - - - - - - (148,656) (148,656)
Balance at January 31, 2021 - $ - - $ - - $ - 154,995,819 $ 150 $ 1,136,534 $ 1,186 $ (629,629) $ 508,241
The accompanying notes are an integral part of these consolidated financial statements.
Medallia, Inc.
Notes to Consolidated Financial Statements
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Medallia, Inc. (the Company or Medallia) provides an enterprise Software-as-a-Service (SaaS) platform that utilizes deep learning-based artificial intelligence (AI) technology to analyze structured and unstructured data from signal fields across human, digital and Internet of Things (IoT) interactions at great scale to derive personalized and predictive insights. Medallia's customers include companies in various industries such as retail, technology, manufacturing, financial services, insurance and hospitality. Medallia is headquartered in San Francisco, California.
Basis of Presentation and Consolidation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The Company has made certain reclassifications of prior year balances to conform to the current fiscal year presentation.
The Company's fiscal year ends on January 31. References to fiscal 2021, for example, refer to the fiscal year ending January 31, 2021.
Use of Estimates
The preparation of these consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the periods covered by the consolidated financial statements and accompanying notes. Such estimates include, but are not limited to revenue recognition, stock-based compensation expense, including estimation of the grant date fair value of the common stock, allowance for credit losses, the fair value of the liability and equity components of the convertible senior notes, the assessment of the recoverability of identified intangible assets, impairment of right-of-use assets and contingencies. The Company bases its estimates on historical experience and on assumptions that it believes are reasonable. The Company assesses these estimates on a regular basis; however, actual results could materially differ from these estimates.
JOBS Act Accounting Election
Effective January 31, 2021, the Company is no longer an emerging growth company (EGC) and has transitioned to a large accelerated filer status. As a result, the Company will adopt new or revised accounting pronouncements at dates applicable to public companies as further described in the section, "Impact of Recently Adopted Accounting Pronouncements."
Segment Information
Operating segments are defined as components of an enterprise where separate financial information is evaluated regularly by the chief operating decision maker, which the Company has identified as being the chief executive officer, in deciding how to allocate resources and assessing performance. The Company operates in one operating segment. The Company's chief operating decision maker allocates resources and assesses performance at the consolidated level.
Medallia, Inc.
Notes to Consolidated Financial Statements
Revenue Recognition
Revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.
The Company determines revenue recognition through the following steps:
•identification of the contract, or contracts, with a customer;
•identification of the performance obligations in the contract;
•determination of the transaction price;
•allocation of the transaction price to the performance obligations in the contract; and
•recognition of revenue when, or as, the Company satisfies a performance obligation.
Subscription Revenue
Subscription revenue is derived from customers accessing the Company's proprietary hosted cloud application. The Company's customers do not have the ability to take possession of the software operating the cloud application. The contracted subscription terms are typically one year to three years.
The Company recognizes subscription revenue ratably over the subscription term, commencing on the date the service is provisioned.
Professional Services Revenue
Professional services revenue consists of managed services and implementation and other services. These services are distinct from subscription revenue.
Managed services support our customers by providing a range of ongoing services including program design, launch, enhancement, expansion and analytics. Managed services are a stand-ready obligation to perform these services over the term of the arrangement and as a result, revenues are recognized ratably over the term of the arrangement.
Implementation services consist primarily of initial design, integration and configuration services. Other professional services include projects that enable customers to gain insightful business information through data analysis, and the Company's institute training programs.
Implementation and other services revenue are recognized as services are performed.
Contracts with Multiple Performance Obligations
Most of the Company's contracts with customers contain multiple performance obligations. The Company's subscription services are sold for a broad range of amounts (the selling price is highly variable) and a representative standalone selling price (SSP) is not discernible from past transactions or other observable evidence. Standalone selling prices for professional services are estimated based upon observable transactions when those services are sold on a standalone basis. As a result, the SSP for subscription services included in a contract with multiple performance obligations is determined by applying a residual approach whereby performance obligations related to professional services within a contract are first allocated a portion of the transaction price based upon their respective SSPs, with the residual amount of transaction price allocated to subscription services.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. The Company's cash equivalents generally consist of money market funds. Cash and cash equivalents are recorded at cost, which approximates fair value.
Medallia, Inc.
Notes to Consolidated Financial Statements
Marketable Securities
The Company's investments consist primarily of commercial paper, corporate bonds, municipal bonds, U.S. agency obligations and U.S. treasury securities. The Company typically invests in highly-rated securities, and its investment policy generally limits the amount of credit exposure to any one issuer. The Company's policy generally requires investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss. The Company classifies investments as available-for-sale at the time of purchase and re-evaluates such classification as of each balance sheet date. Available-for-sale debt securities with an amortized cost basis in excess of the estimated fair value are assessed to determine what amount of that difference, if any, is caused by expected credit losses. Allowance for credit losses on available-for-debt securities are recognized as a charge in other income (expense), net on the Company's consolidated statements of operations and any remaining unrealized losses, net of taxes, are included in accumulated other comprehensive loss in accumulated deficit on the consolidated balance sheets. There were no impairment charges for any unrealized losses during the year ended January 31, 2021, 2020 and 2019.
The Company determines gains or losses related to marketable securities on a specific identification method and records such gains or losses in other income (expense), net, in the consolidated statements of operations.
Fair Value Measurements
The Company applies fair value accounting for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability.
Derivative Financial Instruments and Hedging Activities
The Company uses derivative financial instruments to manage foreign currency risks. Derivative instruments are carried at fair value. Derivative assets are included in prepaid expenses and other current assets in the consolidated balance sheets. Derivative liabilities are included in accrued expenses and other current liabilities in the consolidated balance sheets. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting. For foreign currency forward contracts not designated as hedging instruments, which the Company uses to hedge a portion of its net outstanding monetary assets and liabilities, the gains or losses are recorded in other income (expense), net in the consolidated statements of operations in the period of change. For derivative instruments designated as a cash flow hedge, which the Company hedges certain customer contracts and certain operating expenses denominated in foreign currencies, the gains or losses are recorded in accumulated other comprehensive loss on the consolidated balance sheets and subsequently reclassified to the related revenue or operating expense line item in the consolidated statements of operations in the same period that the underlying revenue is earned or expenses are incurred.
The Company is subject to netting agreements with certain counterparties of the foreign exchange contracts, under which it is permitted to net settle transactions of the same currency with a single net amount payable by one party to the other. It is the Company's policy to present the derivatives gross in the consolidated balance sheets. The Company's foreign currency forward contracts are not subject to any credit contingent features or collateral requirements and the Company does not believe it is subject to significant counterparty concentration risk given the short-term nature, volume, and size of the derivative contracts outstanding.
Trade and Other Receivables and Allowance for Credit Losses
Trade and other receivables are primarily comprised of trade receivables that are recorded at the invoice amount, net of an allowance for credit losses. We assess the allowance for credit losses on trade receivables by
Medallia, Inc.
Notes to Consolidated Financial Statements
taking into consideration forecasts of future economic conditions, information about past events, such as our historical trend of write-offs, and customer-specific circumstances, such as bankruptcies and disputes. The allowance for credit losses on trade receivables is recorded in general and administrative expenses on the Company's consolidated statements of operations. Other receivables represent unbilled receivables related to subscription and professional services contracts.
As of January 31, 2021 and 2020, the allowance for credit losses was $4.0 million and $1.0 million, respectively.
Concentrations of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, marketable securities and trade and other receivables. For cash, cash equivalents and marketable securities, the Company is exposed to credit risk in the event of default to the extent of the amounts recorded on the consolidated balance sheets. A majority of the cash balances are with U.S. banks and are insured to the extent defined by the Federal Deposit Insurance Corporation.
The Company does not require collateral for trade receivables. No customer accounted for 10% or more of total revenues for the year ended January 31, 2021 and 2020. No customer accounted for 10% or more of trade and other receivables, net as of January 31, 2021 and 2020.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of three years for computer equipment and software and five years for all other asset categories except leasehold improvements, which are amortized over the shorter of the lease term or the expected useful life of the leasehold improvements. Equipment leased under finance leases is amortized over the shorter of the lease term or the asset's estimated useful life.
Leases
The Company determines if an arrangement is a lease at inception. The Company's lease agreements generally contain lease and non-lease components. Payments under its lease arrangements are primarily fixed. Non-lease components primarily include payments for maintenance and utilities. The Company combines fixed payments for non-lease components with lease payments and accounts for them together as a single lease component which increases the amount of the Company’s right-of-use (“ROU”) assets and lease liabilities.
Certain lease agreements contain variable payments, which are expensed as incurred and not included in the ROU assets and lease liabilities.
ROU assets and lease liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value of the future lease payments is the Company's incremental borrowing rate, because the interest rate implicit in its leases is not readily determinable. The Company's incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located. The Company's lease terms include periods under options to extend or terminate the lease when it is reasonably certain that it will exercise that option. The Company generally uses the base, non-cancelable, lease term when determining the ROU assets and lease liabilities. ROU assets are adjusted for any prepaid lease payments and lease incentives.
As of January 31, 2021, the current portion of the Company's operating lease liabilities is included in accrued expenses and other current liabilities and the long term portion is included in operating lease liabilities. Finance lease ROU assets are included in property and equipment, net. Finance lease liabilities are included in accrued expenses and other current liabilities or other long term liabilities.
Lease expense is recognized on a straight-line basis over the lease term.
Medallia, Inc.
Notes to Consolidated Financial Statements
The ROU assets are assessed for impairment in accordance with the Company’s accounting policy for long-lived assets.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets. Goodwill amounts are not amortized, but rather tested for impairment at least annually, and more frequently when changes in circumstances indicate that the carrying value may not be recoverable. The Company has determined that it operates its business as one reporting unit and the Company completes its annual impairment test in the fourth quarter. In the event that the Company determines that the fair value of the reporting unit is less than the reporting unit's carrying value, goodwill impairment charge will be incurred for the amount of the difference during the quarter in which the determination is made. The Company did not record any goodwill impairment charges in the years ended January 31, 2021, 2020 and 2019.
Intangible assets with a finite life are amortized over their useful life.
The Company evaluates intangible assets and long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate. In the event that the Company determines that the fair value of an intangible asset is less than the carrying value, the Company will incur an impairment charge.
Software Development Costs
Software development costs include costs to develop software to be used to meet internal needs and applications used to deliver our services. The Company capitalizes development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the function intended. For the years ended January 31, 2021 and 2020, the Company capitalized software development costs of $1.8 million and $1.7 million, respectively, included in the consolidated balance sheets. Depreciation and amortization is computed using the straight-line method over an estimated useful life of five years.
Costs related to preliminary project activities, including training and maintenance are expensed as incurred and recorded to research and development expenses.
Research and Development
Research and development expenditures are expensed as incurred.
Business Combinations
The Company includes the results of operations of the businesses that it acquires from the date of acquisition. The Company determines the fair value of the assets acquired and liabilities assumed based on its estimated fair values as of the respective date of acquisition. The excess purchase price over the fair values of identifiable assets and liabilities is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates, and selection of comparable companies. The Company estimates the fair value are based on assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, not to exceed one year from the date of acquisition, the Company may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill. At the conclusion of the measurement period, any subsequent adjustments are reflected in the Company's consolidated statements of operations.
Medallia, Inc.
Notes to Consolidated Financial Statements
When the Company grants equity to selling stockholders in connection with an acquisition, it evaluates whether the awards are compensatory. This evaluation includes whether stock award vesting is contingent on the continued employment of the selling stockholder beyond the acquisition date. If continued employment is required for stock awards to vest, the award is treated as compensation for post-acquisition services and is recognized as compensation expense.
Transaction costs associated with business combinations are expensed as incurred and are included in general and administrative expenses in the Company's consolidated statements of operations.
Convertible Senior Notes
In September 2020 the Company issued 0.125% convertible senior notes due September 15, 2025 (the Notes), for an aggregate principal amount of $575.0 million to qualified institutional buyers. The Company accounts for these Notes as separate components of liability and equity. The carrying amount of the liability component was included in convertible senior notes, net in the consolidated balance sheets and was calculated by measuring the fair value of similar liabilities that do not have associated convertible features. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Notes. This difference represents the debt discount that is amortized to interest expense over the term of the Notes using the effective interest rate method. The gross carrying amount of the equity component was included in additional paid-in capital in the consolidated balance sheets and is not remeasured as long as it continues to meet the conditions for equity classification.
Stock- Based Compensation
The Company measures equity instruments, including stock options, restricted stock units (RSUs), and shares of common stock to be issued under the 2019 Employee Stock Purchase Plan (ESPP) based on the estimated grant-date fair value of the award. The Company estimates the fair values of its stock options and shares issuable under its ESPP using the Black-Scholes-Merton option-pricing model. The Company estimates fair value of its restricted stock awards (RSU) based on the fair value of the underlying common stock. Forfeitures are accounted for as they occur.
Determining the grant date fair value of stock options and ESPP using the Black-Scholes-Merton option-pricing model requires management to make assumptions and judgments, mostly related to the determination of the expected term, volatility, risk free interest rate and the expected dividend rate. If any of the assumptions used in the valuation models change significantly, stock-based compensation expense for future awards may differ materially compared with the awards granted previously.
The Company uses the publicly quoted price as reported on the New York Stock Exchange as the fair value of its common stock.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the tax bases of assets and liabilities and their financial statement carrying amounts, and consideration is given to operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company determines current tax expense, together with assessing temporary differences resulting from differences for financial reporting purposes and tax purposes for certain items, such as accruals and allowances not currently deductible for tax purposes. These temporary differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheets. Accordingly, realization of the Company's deferred tax assets is dependent on future taxable income against which these deductions, losses, and credits can be utilized.
The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income, and to the extent the Company believes that recovery is not likely, the Company establishes a valuation allowance. Given the Company's history of operating losses, the realization of its deferred tax assets is uncertain,
Medallia, Inc.
Notes to Consolidated Financial Statements
and therefore, the Company has a full valuation allowance on its deferred tax assets. The Company recognizes and measures uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. Significant judgment is required to evaluate uncertain tax positions. The Company's evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law and the Company's interpretation of the tax laws, correspondence with tax authorities during the course of audits, and effective settlement of audit issues. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in the income tax provision.
Contingencies
From time to time, the Company has become involved in claims and other legal matters arising in the ordinary course of business. The Company investigates these claims as they arise. The Company records a loss contingency when it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. The Company also discloses material contingencies when it is believed a loss is not probable but reasonably possible. Accounting for contingencies requires the Company to use judgment related to both the likelihood of a loss and the estimate of the amount or range of loss.
Foreign Currency
The functional currency of the Company's foreign subsidiaries is predominately the respective local currency. Foreign currency-denominated assets and liabilities of foreign subsidiaries, where the local currency is the functional currency, are translated into U.S. dollars using the exchange rates in effect at the balance sheet dates, and income and expenses are translated at the average exchange rate during the period. The resulting foreign currency translation adjustments are recorded in accumulated other comprehensive loss, a component of stockholders' equity (deficit). Gains and losses from foreign currency transactions are included in other income (expense) net, in the consolidated statements of operations.
Advertising Expense
Advertising costs are expensed as incurred and are included in sales and marketing expense in the consolidated statements of operations. Advertising expense was $10.3 million, $6.7 million and $2.5 million for the years ended January 31, 2021, 2020 and 2019, respectively.
Net Loss Per Share Attributable to Common Stockholders
The Company computes basic and diluted net loss per share attributable to common stockholders using the two-class method required for companies with participating securities. The Company's basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, less the weighted-average unvested common stock subject to repurchase. The diluted net income per share attributable to common stockholders is computed by giving effect to all potentially dilutive common shares equivalents outstanding during the period. The effects of options to purchase common stock, convertible debt, convertible preferred stock, RSUs, the common stock warrant and the preferred stock warrant are excluded from the computation of diluted net loss per share attributable to common stockholders for all periods presented because the effect is antidilutive.
Impact of Recently Adopted Accounting Pronouncements
In February 2016 the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), as amended, which requires lessees to put most leases on their balance sheets, whether operating or financing, while continuing to recognize the expenses on their income statements in a similar manner to current practice.
Medallia, Inc.
Notes to Consolidated Financial Statements
The Company adopted ASU No. 2016-02 in the fourth quarter of fiscal year 2021 with an effective date as of February 1, 2020, using the effective date transition method, which applies the provisions of the new guidance at the effective date without adjusting the comparative periods presented. The Company has elected certain practical expedients, which allows the Company not to reassess (i) whether any expired or existing contracts as of the adoption date are or contain a lease, (ii) lease classification for any expired or existing leases as of the adoption date and (iii) initial direct costs for any existing leases as of the adoption date. The Company has elected to account for lease and non-lease components as a single lease component. In addition, the Company has elected not to recognize ROU assets and lease liabilities for short-term leases with terms of twelve months or less.
The adoption of ASU No. 2016-02 effective February 1, 2020, resulted in the recognition of 1) ROU assets of $41.3 million adjusted for deferred rent and lease incentives as of the adoption date, and 2) lease liabilities for operating leases of $42.5 million on its consolidated balance sheets, with no material impact to its consolidated statements of operations and cash flows.
In June 2016 the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which requires the measurement and recognition of expected credit losses for financial assets not held at fair value. ASU No. 2016-13 replaces the existing incurred loss impairment model with a forward-looking expected credit loss model which will result in earlier recognition of credit losses. The Company adopted ASU No. 2016-13 in the fourth quarter of fiscal year 2021 with an effective date as of February 1, 2020 and the impact of the adoption was not material to the Company’s consolidated financial statements and related disclosures.
In August 2017 the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, as amended. The ASU is intended to better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The Company adopted ASU No. 2017-12 in the fourth quarter of fiscal year 2021 with an effective date as of February 1, 2020 and the impact of the adoption was not material to the Company’s consolidated financial statements and related disclosures.
Recently Issued Accounting Pronouncements But Not Yet Adopted
In August 2020 the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for certain convertible instruments, amends the guidance on derivative scope exceptions for contracts in an entity's own equity, and modifies the guidance on diluted earnings per share calculations as a result of these changes.This new standard is effective for the Company for fiscal year ending January 31, 2023 and interim periods within that fiscal year. The amendment is to be adopted through either a fully retrospective or modified retrospective method of transition. Early adoption is permitted.The Company is in the process of evaluating the impact of this accounting standard.
2. Revenue
Contract Balances and Remaining Performance Obligations
Contract assets represent revenue recognized for contracts that have not yet been invoiced to customers, typically for multi-year arrangements.Total contract assets were $3.5 million and $2.1 million as of January 31, 2021 and January 31, 2020, respectively. These balances are included within trade and other receivables, net, on the consolidated balance sheets.
Contract liabilities consist of deferred revenue. Revenue is deferred when the Company has the right to invoice in advance of services being provided. The Company recognized revenue of $263.1 million and $210.7 million for the years ended January 31, 2021 and 2020, respectively, that were included in the deferred revenue balances at the beginning of the respective periods.
Medallia, Inc.
Notes to Consolidated Financial Statements
The Company applied a practicable expedient allowing it not to disclose the amount of the transaction price allocated to the remaining performance obligations for contracts with an original expected duration of one year or less, which includes certain professional service contracts.
Remaining performance obligations represent contracted revenue that has not yet been recognized, and include deferred revenue, and amounts that will be invoiced and recognized as revenue in future periods. As of January 31, 2021 the Company's remaining performance obligations were $800.1 million, approximately 49% of which it expects to recognize as revenue over the next 12 months and the remaining balance will be recognized thereafter. As of January 31, 2020 the Company's remaining performance obligations were $679.0 million, approximately 51% of which it expects to recognize as revenue over the next 12 months and the remaining balance will be recognized thereafter.
Disaggregation of Revenue by Geographic Region
The following table sets forth revenue by geographic region based on the billing address of the customers' parent for the periods presented (in thousands):
Year Ended January 31,
2021 2020 2019
North America $ 368,114 $ 305,600 $ 232,175
EMEA 69,639 65,681 57,851
Other 39,468 31,182 23,616
Total $ 477,221 $ 402,463 $ 313,642
The United States comprised 73%, 72% and 70% of the Company's revenue during the year ended January 31, 2021, 2020 and 2019, respectively. No other country comprised 10% or greater of the Company's revenue during each of the years ended January 31, 2021, 2020 and 2019.
3. Fair Value of Assets and Liabilities
The Company estimates the fair value of cash equivalents, marketable securities and foreign currency derivative contracts by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Observable inputs such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets and liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data or other means.
Level 3: Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. The inputs require significant management judgment or estimation.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
All of the Company's cash equivalents, marketable securities and foreign currency derivative contracts are classified within Level 1 or Level 2 because the Company's cash equivalents, marketable securities and foreign
Medallia, Inc.
Notes to Consolidated Financial Statements
currency derivative contracts are valued using quoted market prices or alternative pricing sources and models utilizing observable market inputs.
The following tables represents the fair value of assets and liabilities measured at fair value on a recurring basis using the above hierarchy (in thousands):
January 31, 2021 January 31, 2020
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Assets:
Cash equivalents:
Money market funds $ 265,945 $ - $ - $ 265,945 $ 92,272 $ - $ - $ 92,272
Commercial paper - 18,997 - 18,997 - 17,667 - 17,667
U.S. government and agency securities - 24,999 - 24,999 - 17,978 - 17,978
Total cash equivalents 265,945 43,996 - 309,941 92,272 35,645 - 127,917
Marketable securities:
Corporate notes and bonds - 45,057 - 45,057 - 5,675 - 5,675
Commercial paper - 42,472 - 42,472 - 13,712 - 13,712
U.S. government and agency securities - 166,532 - 166,532 - 97,446 - 97,446
Total marketable securities - 254,061 - 254,061 - 116,833 - 116,833
Derivative assets - 1,027 - 1,027 - 683 - 683
Total assets measured at fair value $ 265,945 $ 299,084 $ - $ 565,029 $ 92,272 $ 153,161 $ - $ 245,433
Liabilities:
Derivative liabilities $ - $ 1,965 $ - $ 1,965 $ - $ 342 $ - $ 342
Total liabilities measured at fair value $ - $ 1,965 $ - $ 1,965 $ - $ 342 $ - $ 342
Convertible Senior Notes
In September 2020 the Company issued $575.0 million aggregate principal amount 0.125% convertible senior notes due 2025 as described in Note 9, Debt. As of January 31, 2021 the fair value of these Notes was approximately $758.6 million. The fair value was determined based on the quoted price for the Notes in an over-the-counter market on the last trading day of the reporting period and is considered as Level 2 in the fair value hierarchy.
4. Cash Equivalents and Marketable Securities
As of January 31, 2021 cash equivalents and marketable securities consisted of the following (in thousands):
Amortized Cost Unrealized Gains Unrealized Losses Aggregate Fair Value
Money market funds $ 265,945 $ - $ - $ 265,945
Corporate notes and bonds 45,059 - (2) 45,057
Commercial paper 61,469 - - 61,469
U.S. government and agency securities 191,504 27 - 191,531
Total $ 563,977 $ 27 $ (2) $ 564,002
Included in cash and cash equivalents $ 309,941 $ - $ - $ 309,941
Included in marketable securities $ 254,036 $ 25 $ - $ 254,061
Medallia, Inc.
Notes to Consolidated Financial Statements
As of January 31, 2020 cash equivalents and marketable securities consisted of the following (in thousands):
Amortized Cost Unrealized Gains Unrealized Losses Aggregate Fair Value
Money market funds $ 92,272 $ - $ - $ 92,272
Corporate notes and bonds 5,665 9 - 5,674
Commercial paper 31,379 - - 31,379
U.S. government and agency securities 115,412 13 - 115,425
Total $ 244,728 $ 22 $ - $ 244,750
Included in cash and cash equivalents $ 127,917 $ - $ - $ 127,917
Included in marketable securities $ 116,811 $ 22 $ - $ 116,833
As of January 31, 2021 and 2020, all marketable securities had a stated maturity date of less than one year.
5. Derivative Instruments
Cash Flow Hedges
As of January 31, 2021 and January 31, 2020 the Company had outstanding foreign currency forward contracts designated as cash flow hedges with total notional values of $13.7 million and $5.8 million, respectively. All contracts have maturities not greater than 13 months.The notional value represents the amount that will be bought or sold upon maturity of the forward contract.
During the years ended January 31, 2021, 2020 and 2019 all cash flow hedges were considered effective.
Foreign Currency Forward Contracts Not Designated as Hedges
As of January 31, 2021 and January 31, 2020 the Company had outstanding forward contracts not designated as hedges with total notional values of $45.4 million and $23.5 million, respectively. All contracts have maturities not greater than 13 months.
The fair values of outstanding derivative instruments were as follows (in thousands):
January 31, 2021 January 31, 2020
Derivative assets (recorded in prepaid expenses and other current assets):
Foreign currency forward contracts designated as cash flow hedges $ 713 $ 384
Foreign currency forward contracts not designated as hedges 314 299
Derivative liabilities (recorded in accrued expenses and other current liabilities):
Foreign currency forward contracts designated as cash flow hedges $ 919 $ 76
Foreign currency forward contracts not designated as hedges 1,046 266
Medallia, Inc.
Notes to Consolidated Financial Statements
Gains (losses) associated with foreign currency forward contracts designated as cash flow hedges were as follows (in thousands):
Consolidated Statements of Operations and Statements of Comprehensive Loss (OCI) Locations Year Ended January 31,
2021 2020 2019
Gains (losses) recognized in OCI (effective portion) Change in unrealized gains (losses) on cash flow hedges, net of tax $ (747) $ (15) $ 248
Gains reclassified from OCI into income (effective portion) Revenues 586 458 (1)
Gains (losses) reclassified from OCI into income (effective portion) General and administrative 102 (549) (675)
Losses recognized in income (amount excluded from effectiveness testing and ineffective portion) Other income (expense), net (63) (121) 19
Prior to the adoption of ASU No. 2017-12, Derivatives and Hedging (Topic 815), the changes in value of these foreign currency forward contracts resulting from changes in forward points were excluded from the assessment of hedge effectiveness and were recorded as incurred in other income (expense), net on the consolidated statements of operations. Upon adoption of ASU No. 2017-12, in the fourth quarter of fiscal year 2021 with an effective date as of February 1, 2020 the Company elected to prospectively include changes in the value of these contracts resulting from changes in forward points in the assessment of hedge effectiveness. These immaterial changes are recorded in OCI on the consolidated balance sheets and will subsequently be reclassified to the related revenue or expense line item on the consolidated statements of operations in the same period that the underlying revenues are earned or expenses are incurred.
Of the gains (losses) recognized in OCI for the foreign currency forward contracts designated as cash flow hedges as of January 31, 2021, $0.3 million is expected to be reclassified out of OCI within the next 12 months.
Gains (losses) associated with foreign currency forward contracts not designated as cash flow hedges were as follows (in thousands):
Consolidated Statements of Operations Location Year Ended January 31,
Derivative Type 2021 2020 2019
Foreign currency forward contracts not designated as hedges Other income (expense), net $ (2,338) $ 368 625
Medallia, Inc.
Notes to Consolidated Financial Statements
As of January 31, 2021 information related to offsetting arrangements was as follows (in thousands):
Gross Amounts of Recognized Assets Gross Amounts Offset in the Consolidated Balance Sheets Net Amounts of Assets in the Consolidated Balance Sheets Gross Amounts Not Offset in the Consolidated Balance Sheets Net Assets Exposed
Financial Instruments Cash Collateral Received
Derivative assets:
Counterparty A $ - $ - $ - $ - $ - $ -
Counterparty B 1,027 - 1,027 (1,027) - -
Total $ 1,027 $ - $ 1,027 $ (1,027) $ - $ -
Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Consolidated Balance Sheets Net Amounts of Liabilities in the Consolidated Balance Sheets Gross Amounts Not Offset in the Consolidated Balance Sheets Net Liabilities Exposed
Financial Instruments Cash Collateral Pledged
Derivative liabilities:
Counterparty A $ - $ - $ - $ - $ - $ -
Counterparty B 1,965 - 1,965 (1,027) - 938
Total $ 1,965 $ - $ 1,965 $ (1,027) $ - $ 938
As of January 31, 2020 information related to offsetting arrangements was as follows (in thousands):
Gross Amounts of Recognized Assets Gross Amounts Offset in the Consolidated Balance Sheets Net Amounts of Assets in the Consolidated Balance Sheets Gross Amounts Not Offset in the Consolidated Balance Sheets Net Assets Exposed
Financial Instruments Cash Collateral Received
Derivative assets:
Counterparty A $ 102 $ - $ 102 $ (5) $ - $ 97
Counterparty B 581 - 581 (337) - 244
Total $ 683 $ - $ 683 $ (342) $ - $ 341
Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Consolidated Balance Sheets Net Amounts of Liabilities in the Consolidated Balance Sheets Gross Amounts Not Offset in the Consolidated Balance Sheets Net Liabilities Exposed
Financial Instruments Cash Collateral Pledged
Derivative liabilities:
Counterparty A $ 5 $ - $ 5 $ (5) $ - $ -
Counterparty B 337 - 337 (337) - -
Total $ 342 $ - $ 342 $ (342) $ - $ -
6. Business Combinations
On September 14, 2020 the Company acquired Sense360 Inc. (Sense360), a privately-held company, for a purchase price of $45.7 million in cash. Sense360 provides always-on, consumer and competitive intelligence from buyer and non-buyer segments and answers pressing questions such as what is driving traffic, what are the growth opportunities in a specific market and which competitors are gaining share and why.
Medallia, Inc.
Notes to Consolidated Financial Statements
On September 8, 2020 the Company acquired StellaServices Inc. (Stella Connect), a privately-held company, for a purchase price of $99.6 million in cash. Stella Connect is a customer feedback and quality management platform that helps customer support teams to analyze and improve performance in real time.
On May 1, 2020 the Company acquired Voci Technologies, Inc. (Voci), a privately-held company, for a purchase price of $59.6 million in cash. Voci is a real-time speech to text platform, that delivers a rich single view of the customer that can power an exceptional customer experience. Voci offers subscription on-premise software licenses which provide the customer with a right to use the software when made available.
On February 19, 2020 the Company acquired LivingLens Enterprise Ltd. (LivingLens), a privately-held company, for a purchase price of $26.8 million in cash. LivingLens provides a video feedback platform to humanize feedback and bring the voice of the customer and employee to life.
On October 3, 2019 the Company acquired Crowdicity Limited (Crowdicity), a privately-held company, for a purchase price of $16.6 million in cash. Crowdicity is an idea and innovation management platform.
On September 23, 2019 the Company acquired Zingle Inc. (Zingle), a privately-held company, for a purchase price of $47.3 million in cash. Zingle is a leading multi-channel mobile messaging and customer engagement solution.
On July 15, 2019 the Company acquired Promoter.io Inc. (Promoter.io), a privately-held company, for a purchase price of $2.3 million in cash. Promoter.io is a Net Promoter Score (NPS) platform for small and medium sized businesses that can measure loyalty and customer sentiment using the NPS.
On June 17, 2019 the Company acquired Cooladata Ltd. (Cooladata), a privately-held company, for a purchase price of $7.6 million in cash. Cooladata is a cloud-based behavioral analytics platform that can derive and predict customer sentiment.
On May 16, 2019 the Company acquired Strikedeck Inc. (Strikedeck), a privately-held company, for a purchase price of $11.0 million in cash. Strikedeck is a customer success platform for business-to-business customers.
The above transactions were each accounted for as business combinations. Accordingly, assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date when control was obtained. The Company expensed all transaction costs in the period in which they were incurred. The fair value of developed technologies was determined using either the Multiple Period Excess Earnings Method or the Royalty Relief Method, the fair value of customer relationships was determined by using the Multiple Period Excess Earnings Method, the fair value of trademarks was determined using the Royalty Relief Method, and the fair value of backlog was determined using the Multiple Period Excess Earnings Method. The excess of the consideration paid over the fair value of the net tangible assets and liabilities and identifiable intangible assets acquired is recorded as goodwill. The goodwill resulting from the acquisitions are largely attributable to the synergies expected to be realized. None of the goodwill recorded from the acquisitions will be deductible for income tax purposes.
The Company is in the process of settling working capital adjustments for Sense360, Stella Connect and Voci, and therefore the provisional measurements of identifiable assets and liabilities, and the resulting goodwill related to these acquisitions are subject to change and the final purchase price accounting could be different from the amounts presented herein.
Medallia, Inc.
Notes to Consolidated Financial Statements
The following table summarizes the purchase consideration, net of cash acquired, and the related fair values of the assets acquired and liabilities assumed (in thousands):
Purchase Consideration, Net of Cash Acquired Net Liabilities Assumed Identifiable Intangible Assets Goodwill
Sense360 $ 45,273 $ (351) $ 10,500 $ 35,124
Stella Connect
98,822 (3,478) 20,800 81,500
Voci 55,285 (1,385) 12,600 44,070
LivingLens 25,894 (715) 5,700 20,909
Crowdicity 15,865 (2,350) 4,811 13,404
Zingle 42,702 (665) 8,715 34,652
Promoter.io 1,694 (431) 900 1,225
Cooladata 7,346 (2,784) 4,600 5,530
Strikedeck 10,498 (439) 4,000 6,937
The following table sets forth each component of identifiable intangible assets acquired in connection with the acquisitions (in thousands):
Developed Technology Customer Relationships Other(1)
Sense360 $ 5,000 $ 5,200 $ 300
Stella Connect
9,400 10,000 1,400
Voci 7,700 4,600 300
LivingLens 3,100 2,200 400
Crowdicity 2,406 2,105 300
Zingle 4,915 3,000 800
Promoter.io 700 - 200
Cooladata 4,600 - -
Strikedeck 4,000 - -
(1) Other includes trademarks and backlog.
The useful lives of developed technology, customer relationships and other are five years, five years and one to five years, respectively.
The financial results for the above acquisitions are included in the Company's consolidated financial statements from the date of acquisition through January 31, 2021.
The pro forma impact of these acquisitions on consolidated revenue, income (loss) from operations and net loss was not material.
Medallia, Inc.
Notes to Consolidated Financial Statements
7. Goodwill and Intangible Assets, Net
Goodwill represents the excess of the purchase price in a business combination of the fair value of net assets acquired. Goodwill amounts are not amortized, but rather tested for impairment at least annually during the fourth quarter. The changes in goodwill are as follows (in thousands):
Balance as of January 31, 2019 $ 16,745
Acquisitions 61,748
Foreign currency exchange 831
Balance as of January 31, 2020 79,324
Acquisitions 181,603
Foreign currency exchange 2,015
Balance as of January 31, 2021 $ 262,942
The changes in intangible assets for fiscal 2021 and the net book value of intangible assets as of January 31, 2021 and January 31, 2020 were as follows (in thousands, except years):
Intangible Assets, Gross Accumulated Amortization Intangible Assets, Net
January 31, 2020 Identifiable Intangible Assets Acquired(1)
January 31, 2021 January 31, 2020 Amortization Expense January 31, 2021 January 31, 2020 January 31, 2021 Weighted Average Remaining Useful Life (years)
Developed technology $ 18,670 $ 25,521 $ 44,191 $ (3,473) $ (6,433) $ (9,906) $ 15,197 $ 34,285 4.2
Customer relationships 5,237 22,248 27,485 (351) (3,396) (3,747) 4,886 23,738 4.3
Other(2)
1,320 2,441 3,761 (97) (1064) (1,161) 1,223 2,600 2.6
$ 25,227 $ 50,210 $ 75,437 $ (3,921) $ (10,893) $ (14,814) $ 21,306 $ 60,623 4.2
(1) Amounts also include any changes in intangible asset balances for the periods presented that resulted from foreign currency translation.
(2) Other includes trademarks and backlog.
The changes in intangible assets for fiscal 2020 and the net book value of intangible assets as of January 31, 2020 and January 31, 2019 were as follows (in thousands, except years):
Intangible Assets, Gross Accumulated Amortization Intangible Assets, Net
January 31, 2019 Identifiable Intangible Assets Acquired(1)
January 31, 2020 January 31, 2019 Amortization Expense January 31, 2020 January 31, 2019 January 31, 2020 Weighted Average Remaining Useful Life (years)
Developed technology $ 1,900 $ 16,770 $ 18,670 $ (1,594) $ (1,879) $ (3,473) $ 306 $ 15,197 4.5
Customer relationships - 5,237 5,237 - (351) (351) - 4,886 4.7
Other(2)
- 1,320 1,320 - (97) (97) - 1,223 4.6
$ 1,900 $ 23,327 $ 25,227 $ (1,594) $ (2,327) $ (3,921) $ 306 $ 21,306 4.6
(1) Amounts also include any changes in intangible asset balances for the periods presented that resulted from foreign currency translation.
(2) Other includes trademarks.
The total amortization expense for intangible assets was $10.9 million, $2.3 million and $0.4 million for the year ended January 31, 2021, 2020, and 2019 respectively.
Medallia, Inc.
Notes to Consolidated Financial Statements
Amortization expense related to the intangible assets is as follows (in thousands):
Year Ending January 31:
2022 $ 15,240
2023 14,210
2024 14,210
2025 12,312
2026 4,651
Thereafter -
Total $ 60,623
8. Balance Sheet Components
Deferred Commissions
Sales commissions earned by the sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial contracts are deferred and then amortized on a straight-line basis over a period of benefit that the Company has determined to be five years. The Company determined the period of benefit by taking into consideration its customer contracts, technology and other factors. Sales commissions for renewal contracts (which are not considered commensurate with sales commissions for new revenue contracts) are deferred and amortized on a straight-line basis over the related contractual renewal period. Amortization expense is included in sales and marketing expenses in the consolidated statements of operations.
Commissions earned and capitalized during the years ended January 31, 2021 and 2020 and 2019 were $52.8 million, $41.4 million and $27.2 million respectively. Amortization expense for deferred commissions during the years ended January 31, 2021, 2020 and 2019 were $26.8 million, $19.0 million, and $13.2 million, respectively.
Property and Equipment, Net
The table below summarizes property and equipment which consists of the following (in thousands):
January 31, 2021 January 31, 2020
Computer equipment and software $ 77,257 $ 56,758
Furniture, fixtures and equipment 1,018 1,028
Leasehold improvements 5,651 6,941
Finance leases, right- of-use assets 17,750 11,687
Construction-in-progress 2,538 3,113
Total property and equipment, gross 104,214 79,527
Less accumulated depreciation and amortization (63,546) (44,648)
Property and equipment, net $ 40,668 $ 34,879
Depreciation and amortization expense during the years ended January 31, 2021, 2020 and 2019 totaled $18.1 million, $13.2 million, and $13.5 million respectively, which includes amortization of assets recorded under finance leases of $4.7 million, $3.6 million, and $0.9 million for the years ended January 31, 2021, 2020 and 2019 respectively.
Property and equipment located outside the U.S. was $15.7 million and $13.4 million as of January 31, 2021 and 2020, respectively.
During the fiscal year ended January 31, 2020 the Company recorded a net gain of approximately $4.0 million as a result of the termination of its lease for its former corporate headquarters which included the gain on the reversal of deferred rent of $34.5 million, partially offset by the impairment of property and equipment of $20.7 million and cash payments associated with the termination and other fees of $9.8 million.
Medallia, Inc.
Notes to Consolidated Financial Statements
Accrued Expenses and Other Current Liabilities
The table below summarizes accrued expenses and other current liabilities which consists of the following (in thousands):
January 31, 2021 January 31, 2020
Finance lease liability, current $ 5,349 $ 4,316
Operating lease liability, current 10,628 -
Federal, state and local taxes 6,801 3,932
Indemnity holdback related to acquisitions 1,748 1,573
Other 15,230 10,447
Accrued expenses and other current liabilities $ 39,756 $ 20,268
Accrued Compensation
The table below summarizes accrued compensation which consists of the following (in thousands):
January 31, 2021 January 31, 2020
Accrued salaries and bonus $ 7,856 $ 8,312
Accrued commissions 14,125 11,280
Accrued vacation 4,425 3,906
Employee stock purchase plan 6,389 8,693
Payroll taxes 9,497 4,969
Accrued compensation $ 42,292 $ 37,160
9. Debt
Convertible Senior Notes
In September 2020 the Company issued 0.125% convertible senior notes due September 15, 2025, for an aggregate principal amount of $575.0 million in a private placement to qualified institutional buyers. The Notes are senior unsecured obligations and interest is payable in cash in arrears at a fixed rate of 0.125% on March 15 and September 15 of each year, beginning on March 15, 2021. The Notes will mature on September 15, 2025, unless repurchased, redeemed, or converted pursuant to the terms of the Notes.
The terms of the Notes are governed by an Indenture (the Indenture) by and between the Company and U.S. Bank National Association, as trustee.
The initial conversion rate of the Notes is 25.4113 shares of common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $39.35 per share of common stock. The conversion rate is subject to adjustment upon the occurrence of certain specified events in accordance with the Indenture. As of January 31, 2021, the if-converted value of the Notes exceeded the principal amount by $31.4 million.
Medallia, Inc.
Notes to Consolidated Financial Statements
The Company may redeem for cash all or any portion of the Notes, at its option, on or after September 20, 2023 and prior to the 41st scheduled trading day immediately preceding the maturity date, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest thereto, but excluding, the redemption date, if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides written notice of redemption. No sinking fund is provided for the Notes.
Holders of the Notes may convert all or a portion of their Notes prior to the close of business on the business day immediately preceding June 15, 2025 in multiples of $1,000 principal amount, only under the following circumstances (the conditional conversion feature):
•during any fiscal quarter commencing after January 31, 2021 and only during such fiscal quarter, if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price of the Notes on each applicable trading day;
•during the five business day period after any five consecutive trading day period in which, for each trading day of that period, the trading price per $1,000 principal amount of the Notes for such trading day was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate of the Notes on each such trading day;
•upon the Company’s notice that it is redeeming any Notes, the Notes the Company calls for redemption (or, at the Company’s election, all outstanding Notes) may be converted at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or
•upon the occurrence of specified corporate events, as described in the Indenture.
On or after June 15, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date of the Notes, holders of the Notes may convert all or any portion of their Notes regardless of the foregoing conditions, and such conversions will settle upon maturity. Upon conversion, the Company will pay or deliver, as the case may be, either cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election. The Company intends to settle the principal amount of the Notes using cash.
Holders of the Notes who convert their Notes in connection with such make-whole fundamental change or during the relevant redemption period (each as defined in the Indenture) are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, upon the occurrence of a fundamental change (as defined in the Indenture) prior to the maturity date, subject to certain conditions, holders of the Notes may require the Company to repurchase all or a portion of the Notes for cash at a price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
As of January 31, 2021 the Notes are classified as noncurrent in the consolidated balance sheets since the criteria for conversion was not met.
The Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of similar liabilities that do not have associated convertible features. The carrying amount of the equity component of $122.5 million, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the Notes. This difference represents the debt discount that is amortized to interest expense over the term of the Notes at an effective interest rate of 5.00%.
Medallia, Inc.
Notes to Consolidated Financial Statements
The Company allocated the total amount of issuance costs incurred to the liability and equity components based on the respective values of the liability and equity components of the Notes. Issuance costs attributable to the liability component were recorded as a reduction to the convertible senior notes, net in the consolidated balance sheets and are being amortized to interest expense over the term of the Notes using the effective interest rate method. The issuance costs attributable to the equity component were recorded as a reduction to additional paid-in capital in the consolidated balance sheets. Upon issuance of the Notes, the Company recorded liability issuance costs of $13.2 million and equity issuance costs of $3.6 million.
The net carrying amount of the liability component of the Notes recorded in convertible senior notes, net in the consolidated balance sheets was as follows (in thousands):
January 31, 2021
Principal $ 575,000
Unamortized debt discount (114,480)
Unamortized issuance costs (12,456)
Net carrying amount of the liability component $ 448,064
The net carrying amount of the equity component of the Notes recorded in additional paid-in capital in the consolidated balance sheets was $118.7 million, net of issuance costs of $3.6 million as of January 31, 2021.
The following table sets forth the interest expense related to the Notes recognized in other income (expense), net on the consolidated statements of operations (in thousands):
Year Ended January 31,
Contractual interest expense $ 264
Amortization of debt discount 8,006
Amortization of issuance costs 736
Total interest expense related to the Notes $ 9,006
Capped Call Transactions
In connection with the offering of the Notes, the Company entered into privately negotiated capped call transactions (the Capped Calls) with respect to its common stock at a cost of approximately $61.9 million. The Capped Calls each have an initial strike price of approximately $39.35 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The Capped Calls cover, subject to anti-dilution adjustments, approximately 14.6 million shares of the Company’s common stock. The Capped Calls were purchased in order to reduce or offset the potential dilution to the Company’s common stock upon any conversion of the Notes, subject to a cap of $58.30 per share and certain adjustments. The Capped Calls settle in components with the last component scheduled to expire on September 11, 2025 and are subject to either adjustment or termination upon the occurrence of specified extraordinary events affecting the Company, including a merger event; a tender offer; and a nationalization, insolvency or delisting involving the Company. In addition, the Capped Calls are subject to certain specified additional disruption events that may give rise to a termination of the Capped Calls, including changes in law, failures to deliver, insolvency filings, and hedging disruptions.
The Capped Calls are separate transactions and are not part of the terms of the Notes. The $61.9 million paid for the Capped Calls was included as a reduction to additional paid-in capital on the consolidated balance sheets because they are not designated as separate derivative financial instruments.
Medallia, Inc.
Notes to Consolidated Financial Statements
Wells Fargo Bank Credit Facility
On September 4, 2020 the Company entered into the Wells Fargo Bank, National Association (Wells Fargo) credit facility to provide for a senior secured revolving line of credit of up to $50.0 million with the right (subject to certain conditions) to add incremental revolving commitments of up to $50.0 million in the aggregate. The revolving line of credit provides a sublimit of up to $40.0 million to be available for the issuance of letters of credit. The outstanding balance, if any, is due at the maturity date in September 2023. Loans bear interest, at the Company’s option, at an annual rate based on LIBOR or a base rate. Loans based on LIBOR shall bear interest at a rate of LIBOR plus 1.75%. Loans based on the base rate shall bear interest at a rate of the base rate plus 0.75%. The Company is required to pay a commitment fee equal to 0.25% per annum on the undrawn portion available under the revolving line of credit. As of January 31, 2021, no amounts were outstanding on this credit facility.
As of January 31, 2021 $50.0 million was available for borrowing under the revolving line of credit. As of January 31, 2021 the Company was in compliance with the financial covenants contained in the revolving line of credit and no amounts were outstanding under the revolving line of credit.
Silicon Valley Bank Credit Facility
The Company maintained a revolving line of credit that matured in September 2020 and provided for aggregate borrowings of up to $50.0 million. On September 4, 2020 the Company paid all outstanding amounts owing under the Silicon Valley Bank revolving line of credit and terminated the credit facility. The Company continues to have unsecured letters of credit issued by Silicon Valley Bank in the face amount of $4.6 million outstanding as of January 31, 2021.
10. Leases
The Company has entered into operating leases primarily for office facilities and finance leases primarily for equipment purchases. These leases have terms which typically range from 1 year to 10 years.
During the year ended January 31, 2021, the Company recorded aggregate impairment charges of $16.8 million, of which $13.5 million relates to the impairment of ROU assets related to certain vacant office leases and $3.3 million related to the impairment of leasehold improvements. The Company has the intent and ability to sub-lease these vacant office facilities which it has ceased using and as such, has considered estimated future sub-lease income including the consideration of the local real estate market conditions, in measuring the amount of the ROU assets impairment. The Company also factored into its estimate the time to identify a tenant and to enter into an agreement. Impairment charges were recorded to general and administrative expenses within the consolidated statement of operations.
Medallia, Inc.
Notes to Consolidated Financial Statements
The components of lease expense were as follows (in thousands):
Year Ended January 31, 2021
Operating lease costs $ 11,732
Finance lease costs:
Amortization of assets $ 4,667
Interest on lease liabilities 587
$ 5,254
Supplemental cash flow information related to operating and finance leases were as follows (in thousands):
Year Ended January 31, 2021
Operating leases:
Cash paid for operating lease liabilities $ 10,278
Right-of-use assets obtained in exchange for lease obligations $ 22,679
Finance leases:
Finance leases obtained for equipment $ 6,158
Supplemental balance sheet information related to operating leases was as follows (in thousands, except lease term and discount rate):
January 31, 2021
Operating lease liabilities reported as:
Accrued expenses and current liabilities $ 10,628
Lease liability, non current 47,631
Total operating lease liabilities $ 58,259
Weighted average remaining lease term (in years) 5.5
Weighted average discount rate 4.8 %
Supplemental balance sheet information related to finance leases was as follows (in thousands, except lease term and discount rate):
January 31, 2021
Finance lease liabilities reported as:
Accrued expenses and current liabilities $ 5,349
Other liabilities 5,004
Total finance lease liabilities $ 10,353
Weighted average remaining lease term (in years) 2.3
Weighted average discount rate 5.5 %
Medallia, Inc.
Notes to Consolidated Financial Statements
Future minimum lease payments under operating leases and finance leases as of January 31, 2021 are presented in the table below (in thousands):
January 31, 2021
Operating leases Finance leases
Year Ending January 31,
2022 $ 12,122 $ 5,772
2023 11,920 2,472
2024 11,720 1,759
2025 10,849 1,051
2026 8,944 23
Thereafter 11,744 -
Total future lease payments 67,299 11,077
Less interest payments (9,040) (724)
Total present value of minimum lease payments $ 58,259 $ 10,353
Future minimum lease payments under operating leases and finance leases as of January 31, 2020, prior to the Company’s adoption of the new lease standard, were as follows:
January 31, 2020
Operating Leases Finance Leases
Year Ending January 31:
2021 $ 9,505 $ 4,765
2022 9,989 3,891
2023 7,382 690
2024 6,564 -
2025 5,571 -
Thereafter 11,471 -
Total minimum payments 50,482 9,346
Less interest payments - (628)
Total present value of minimum lease payments $ 50,482 $ 8,718
Under ASC 840, the previous lease standard, total rent expense under operating leases during the years ended January 31, 2020 and 2019 was $14.9 million and $16.5 million, respectively.
11. Commitments and Contingencies
Purchase obligations
The Company has unconditional purchase commitments, primarily related to distribution fees, software license fees and marketing services, of $14.1 million as of January 31, 2021, of which $7.7 million and $6.4 million will be settled during fiscal year 2022 and fiscal year 2023, respectively.
Warranties, Indemnification, and Contingent Obligations
The Company's arrangements generally include provisions indemnifying customers against liabilities if their customer data is compromised due to a breach of information security, or if the Company's applications or services
Medallia, Inc.
Notes to Consolidated Financial Statements
infringe a third-party's intellectual property rights. To date, the Company has not incurred any costs as a result of such indemnification and has not accrued any liabilities related to such obligations in the consolidated financial statements.
The Company enters into service level agreements with customers which warrant defined levels of uptime and support response times and permit those customers to receive credits for prepaid amounts in the event that those performance and response levels are not met. To date, the Company has not experienced any significant failures to meet defined levels of performance and response. In connection with the service level agreements, the Company has not incurred any significant costs and has not accrued any liabilities in the consolidated financial statements. The Company's subscription services agreements also generally include a warranty that the service performs in accordance with the applicable specifications document. The Company's professional services are generally warranted to be performed in a professional manner and in a manner that will comply with the terms of the customer agreements. To date, the Company has not incurred any material costs associated with these warranties.
12. Income Taxes
The components of loss before provision for income taxes are as follows (in thousands):
Year Ended January 31,
2021 2020 2019
Domestic $ (150,064) $ (112,376) $ (69,464)
Foreign 1,486 575 (10,991)
Loss before provision for income taxes $ (148,578) $ (111,801) $ (80,455)
The provision for (benefit from) income taxes are as follows (in thousands):
Year Ended January 31,
2021 2020 2019
Current:
Federal $ 1,378 $ 1,024 $ 202
State 103 88 43
Foreign 539 821 1,594
Total 2,020 1,933 1,839
Deferred:
Federal (1,003) (658) -
State (762) (173) -
Foreign (177) (570) (60)
Total (1,942) (1,401) (60)
Provision for income taxes $ 78 $ 532 $ 1,779
Due to the Company's history of net operating losses and the full valuation allowance against the Company's deferred tax assets, the provision for income taxes primarily relates to foreign income and withholding taxes for the periods presented. In addition, the Company recognized deferred tax benefits for the years ended January 31, 2021 and January 31, 2020 as a result of its acquisitions.
Medallia, Inc.
Notes to Consolidated Financial Statements
The reconciliation between effective statutory tax rate and the Company's tax rate is as follows ( in percentages):
Year Ended January 31,
2021 2020 2019
Federal statutory rate 21.0 % 21.0 % 21.0 %
Effect of:
Foreign tax rate differences (1.0) % (1.0) % (4.0) %
Research tax credits 3.1 % 1.0 % 1.4 %
State tax, net of federal benefit 0.5 % 0.1 % 3.2 %
Stock-based compensation 45.1 % 12.7 % (3.8) %
Change in valuation allowance (68.4) % (34.3) % (24.2) %
Other (0.4) % 0.1 % 4.3 %
(0.1) % (0.4) % (2.1) %
For the year ended January 31, 2021, the Company recorded an expense for income taxes of $0.1 million, resulting in an effective tax rate of (0.1)%. The effective tax rate is different than the statutory United States federal tax rate primarily due to the full valuation allowance on the Company’s United States, Israel, United Kingdom, and Argentina deferred tax assets, the mix of income and losses among the Company’s foreign jurisdictions, and withholding taxes.
The components of deferred tax assets and liabilities for federal and state income taxes consists of the following (in thousands):
January 31,
2021 2020
Net operating loss carryforwards $ 208,340 $ 118,318
Federal and state credit carryforwards 16,829 9,478
Deferred revenue 2,928 382
Stock-based compensation 17,732 24,113
Deferred lease incentive - 153
Accrued liabilities and allowances not currently deductible 2,346 1,858
Depreciation 2,167 2,226
Lease liability 13,704 -
Capitalized R&D 41,660 -
Other 2,284 -
Total deferred tax assets 307,990 156,528
Deferred commissions expense (23,978) (17,970)
Amortization (10,385) (1,216)
Convertible debt (27,136) -
ROU asset (9,204) -
Other - (211)
Total deferred tax liabilities (70,703) (19,397)
Valuation allowance (237,635) (137,368)
Net deferred tax liabilities $ (348) $ (237)
Medallia, Inc.
Notes to Consolidated Financial Statements
The Company accounts for deferred taxes, which involves weighing positive and negative evidence concerning the realizability of the Company’s deferred tax assets in each jurisdiction. The Company evaluated its ability to realize the benefit of its deferred tax assets, net of deferred tax liabilities, and weighted all available positive and negative evidence both objective and subjective in nature. In determining the need for a valuation allowance, the weight given to positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. Based on the weight of the available evidence, which includes the Company's historical operating losses, lack of taxable income, and accumulated deficit, as of January 31, 2021 and 2020, the Company provided a full valuation allowance against the federal, state and foreign deferred tax assets.
As of January 31, 2021, 2020, and 2019, $16.2 million, $12.8 million, and $7.5 million respectively, of undistributed earnings from non-U.S. operations held by the Company's foreign subsidiaries which are designated as permanently reinvested outside the United States. Accordingly, no additional U.S. income taxes or additional foreign withholding taxes have been provided thereon. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable.
Operating losses by jurisdiction which begin to expire consists of the following (in thousands):
2021 2020 Expiration Year
United States Federal $ 822,490 $ 450,262 2031
United States - California 125,521 58,858 2031
United States - Other states 278,739 136,528 2022
Israel 37,734 36,851 Indefinite
United Kingdom 10,755 830 Indefinite
Research and development credits by jurisdiction which begin to expire consists of the following (in thousands):
2021 2020 Expiration Year
United States Federal $ 20,600 $ 10,875 2029
United States - California 16,750 10,450 Indefinite
The following table summarizes the activity related to unrecognized tax benefits (in thousands):
Year Ended January 31,
2021 2020 2019
Beginning balance $ 12,531 $ 9,200 $ 7,000
Increases related to tax positions taken during a prior year 326 1,142 400
Decreases related to tax positions taken during the prior year - (78) -
Increases related to tax positions taken during the current year 7,716 2,267 1,800
Ending balance $ 20,573 $ 12,531 $ 9,200
As of January 31, 2021, the Company had unrecognized tax benefits of $20.6 million, of which $0.2 million of unrecognized benefits, if recognized would reduce the effective tax rate.The Company does not reasonably believe that the total amounts of unrecognized tax benefits will significantly increase or decrease within the following 12 months.
The Company is subject to taxation in the United States and various other state and foreign jurisdictions. The material jurisdictions in which the Company is subject to potential examination include the United States, Israel,
Medallia, Inc.
Notes to Consolidated Financial Statements
Argentina, and the United Kingdom. The Company is currently not under examination by the Internal Revenue Service (IRS) or by any local taxing authority for any tax years. All tax years remain open to examination by the IRS and local taxing authorities.
13. Equity Incentive Plans
Equity Incentive Plans
In June 2019, the Company’s board of directors adopted, and the stockholders approved, the 2019 Equity Incentive Plan (the 2019 Plan), with an initial share reserve of 19,000,000, plus any reserved but unissued shares under the 2017 Plan. The 2019 Plan became effective July 17, 2019 and is the successor to and continuation of the 2008 and 2017 Plans. The reserve is automatically increased at the beginning of the fiscal year by the lesser of (a) 19 million shares, or (b) up to 5% of the Company's outstanding common, subject to the Company's board approval. Stock options and RSU’s granted generally vest between three to four years.
In June 2019, the Company’s board of directors adopted, and the stockholders approved, the Employee Stock Purchase Plan (ESPP), which qualifies as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code, and pursuant to which 4,000,000 shares of common stock were reserved for future issuance with an annual automatic increase at the beginning of each fiscal year of up to 1% of the Company's outstanding common, subject to the Company's board approval. The ESPP became effective on July 17, 2019. The ESPP is designed to enable eligible employees to purchase shares of the Company's common stock at a discount on a periodic basis through payroll deductions. Each offering period under the ESPP covers six months and consists generally of one six-month purchase period, except for the first purchase period post-IPO which consists of eight months. The purchase price for shares of common stock purchased under the ESPP is 85% of the lesser of the fair market value of the Company's common stock on the first day of the applicable offering period and the fair market value of the Company's common stock on the last day of each purchase period.
The Plan activity is as follows:
Year Ended January 31,
2021 2020 2019
Opening balance 23,050,732 4,023,140 3,725,180
Shares authorized(1)
6,617,320 24,000,000 22,000,000
Options and RSUs granted (4,615,733) (8,827,186) (28,118,877)
Cancelled shares 1,648,394 3,854,778 6,386,036
Repurchase of early exercise of options - - 30,801
Ending balance 26,700,713 23,050,732 4,023,140
(1) Reflects an automatic increase to the number of shares of common stock reserved for issuance pursuant to future awards under the 2019 Plan, which annual increase is provided for in the 2019 Plan.
Medallia, Inc.
Notes to Consolidated Financial Statements
The stock-based compensation expense by line item in the consolidated statements of operations is summarized as follows (in thousands):
Year Ended January 31,
2021 2020 2019
Cost of subscription revenue $ 3,650 $ 3,058 $ 1,143
Cost of professional services revenue 10,266 8,824 2,379
Research and development expense 25,469 18,176 7,563
Sales and marketing expense 37,625 28,519 6,813
General and administrative expense 27,795 50,879 9,960
Total stock-based compensation $ 104,805 $ 109,456 $ 27,858
Restricted Stock Units Activity
The following table summarizes restricted stock unit activities:
Restricted Stock Units Performance Based Restricted Stock Units
Number of Shares Weighted Average Grant Date Fair Value Number of Shares Weighted Average Grant Date Fair Value
Balance as of January 31, 2019 3,155,197 $ 6.29 - $ -
Stock units granted 7,448,329 18.78 900,579 13.91
Stock units vested (1,170,861) 6.98
Stock units cancelled and expired (412,984) 16.10 (74,246) 13.41
Balance as of January 31, 2020 9,019,681 16.07 826,333 13.95
Stock units granted 4,265,788 25.37 349,945 22.30
Stock units vested (4,826,720) 16.30 - -
Stock units cancelled and expired (705,401) 20.89 (127,825) 14.27
Balance as of January 31, 2021 7,753,348 $ 20.61 1,048,453 $ 19.79
The total unrecognized compensation expense related to the RSUs was $123.6 million, $98.5 million and $19.9 million as of January 31, 2021, 2020 and 2019 and will be recognized over a weighted-average remaining period of 2.1 years, 2.4 years, and 3.5 years, respectively. Certain RSUs, in addition to the satisfaction of the service-based performance vesting conditions, also require the fulfillment of performance vesting conditions which include subscription revenue growth targets and a combination of subscription revenue growth and operating margin targets.
Medallia, Inc.
Notes to Consolidated Financial Statements
Option Activity
The fair value of each stock option granted to employees was estimated at the date of grant using the Black-Scholes-Merton option-pricing model with the following assumptions. Options were not granted during fiscal year 2021.
Year Ended January 31,
2020 2019
Risk free interest rate 2.5 % 2.50% - 3.00%
Expected volatility 41 % 40% - 44%
Expected term (years) 5.85 5.50 - 6.69
Expected dividend rate - -
The following table summarizes the stock option activity:
Options Outstanding
Number of Shares Average Exercise Price per Share Weighted Average Remaining Contractual Term (years) Aggregate Intrinsic Value (in thousands)
Balance as of Balance as of January 31, 2019 52,797,213 $ 5.27 8.12 $ 388,531
Options granted 478,278 12.63
Options exercised (7,972,770) 4.31 $ 339,899
Options cancelled or expired (3,367,548) 6.14
Balance as of January 31, 2020 41,935,173 $ 5.47 7.29 $ 954,124
Options exercised (16,782,477) 4.67 618,160
Options cancelled or expired (815,168) 6.65
Balance as of January 31, 2021 24,337,528 $ 5.98 6.85 $ 864,527
Exercisable as of January 31, 2021 16,399,672 $ 5.69 6.50 $ 587,313
The weighted-average grant-date fair value of stock options granted during the years ended January 31, 2021, 2020 and 2019 was nil, $5.38, $2.88 per share, respectively. The grant date fair value of stock options vested during the years ended January 31, 2021, 2020 and 2019 was $21.7 million, $35.2 million and $23.3 million respectively. Total unrecognized compensation expense related to stock options was $22.3 million, $45.6 million and $82.5 million as of January 31, 2021, 2020 and 2019, which are expected to be recognized over a weighted-average remaining recognition period of 1.3 years, 2.5 years and 3.0 years respectively.
Employee Stock Purchase Plan
The fair value of each Employee Stock Purchase Plan (ESPP) share is estimated on the enrollment date of the offering period using the Black-Scholes-Merton option-pricing model and the assumptions noted in the following table:
January 31, 2021
Risk-free interest rate 0.1%
Expected volatility 67%
Expected term (in years) 0.5
Expected dividend rate -
Medallia, Inc.
Notes to Consolidated Financial Statements
The fair value of stock purchase rights to be granted under the ESPP during the six-month period from September 15, 2021 was $9.25 per share. As of January 31, 2021 the Company had $0.7 million of unrecognized compensation expense related to ESPP subscriptions that will be recognized over 0.1 years.
14. Employee Benefit Plans
The Company has a 401(k) retirement plan that covers substantially all of its U.S. employees. The 401(k) retirement plan provides for voluntary salary contributions of eligible participants' annual compensation, subject to the maximum allowed by law. During the year ended January 31, 2021 the Company provided a matching contribution equal to 50% of eligible participants' contributions, up to a maximum of $4,000 per participant during the plan year. During the year ended January 31, 2020 the Company provided a matching contribution equal to 50% of eligible participants' contributions, up to a maximum of $2,000 per participant during the plan year. The Company recognized approximately $4.0 million and $2.5 million in expense related to the 401(k) match for the year ended January 31, 2021 and 2020, respectively. During the year ended January 31, 2019 the Company did not provide matching contributions.
15. Net Loss Per Share Attributable to Common Stockholders
The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders (in thousands, except per share data):
Year Ended January 31,
2021 2020 2019
Net loss attributable to common stockholders $ (148,656) $ (112,333) $ (82,234)
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted 144,563 83,269 26,770
Net loss per share attributable to common stockholders, basic and diluted $ (1.03) $ (1.35) $ (3.07)
The potential shares of common stock that were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented because including them would have been antidilutive are as follows (in thousands):
Year Ended January 31,
2021 2020 2019
Convertible preferred stock - - 72,483
Stock options 24,337 41,935 52,797
Restricted stock units 8,802 9,846 3,155
ESPP 377 683 -
Unvested early exercises subject to repurchase - - 147
Convertible preferred stock warrant - - 56
Convertible stock warrant - - 75
Convertible senior notes (if-converted) 14,611 - -
Total 48,127 52,464 128,713
Medallia, Inc.
Notes to Consolidated Financial Statements
16.Selected Quarterly Financial Information (unaudited)
Selected summarized quarterly financial information for fiscal years ended January 31, 2021 and 2020 is as follows (in thousands):
Year Ended January 31, 2021 Year Ended January 31, 2020
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
(stated in thousands, except per share amounts)
Total revenue $ 128,047 $ 120,958 $ 115,525 $ 112,691 $ 110,100 $ 103,074 $ 95,670 $ 93,619
Total cost of revenue 46,101 43,848 41,172 39,563 39,116 38,595 34,883 32,595
Gross profit 81,946 77,110 74,353 73,128 70,984 64,479 60,787 61,024
Operating expense 123,149 106,655 108,869 105,892 103,750 106,146 99,239 63,069
Loss from operations (41,203) (29,545) (34,516) (32,764) (32,766) (41,667) (38,452) (2,045)
Net loss $ (48,770) $ (32,159) $ (35,198) $ (32,529) $ (31,870) $ (39,620) $ (38,284) $ (2,559)
Weighted average shares used in computing net loss per share attributable to common stockholders, basic and diluted 151,663 147,930 142,479 135,993 129,365 127,715 43,986 30,430
Net loss per share attributable to common stockholders, basic and diluted $ (0.32) $ (0.22) $ (0.25) $ (0.24) $ (0.25) $ (0.31) $ (0.87) $ (0.08)
17. Subsequent Event
On March 12, 2021, the Company acquired Decibel Group London Ltd. (Decibel), a privately-held company, for approximately $162.5 million in cash. Decibel is a leader in digital experience analytics. With this acquisition, the Company's leading customer experience and engagement platform will seamlessly include always-on, unsolicited digital feedback, providing a single view of all customers and prospective customers at every point of the customers journey across all channels.
PART II-OTHER INFORMATION

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of January 31, 2021, the last day of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were effective at a reasonable assurance level.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles.
Our management, under the supervision of our Chief Financial Officer and Chief Accounting Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of January 31, 2021 based on the framework in Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of January 31, 2021.
The effectiveness of our internal control over financial reporting as of January 31, 2021 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report, which is included in Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(d) and 15d-15(d) under the Exchange Act) that occurred during the three months ended January 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our principal executive officer and principal financial officer, do not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference to our Proxy Statement relating to our 2021 Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended January 31, 2021.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to our Proxy Statement relating to our 2021 Meeting of Stockholders.The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended January 31, 2021.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference to our Proxy Statement relating to our 2021 Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended January 31, 2021.
Securities Authorized for Issuance under Equity Compensation Plans
The information concerning our equity compensation plans is incorporated by reference herein to our Proxy Statement relating to our 2021 Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended January 31, 2021.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference to our Proxy Statement relating to our 2021 Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended January 31, 2021.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated herein by reference to our Proxy Statement relating to our 2021 Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended January 31, 2021.

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
We have filed the following documents as part of this Form 10-K:
(a) Financial Statements
Page
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheet
Consolidated Statement of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Stockholders' Deficit
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
(b) Financial Statement Schedules. All financial statement schedules are omitted because the information called for is not required or is shown either in the consolidated financial statements or in the notes thereto.
(c) Exhibits. The following exhibits, as required by Item 601 of Regulation S-K are attached and incorporated by reference as stated below.
EXHIBIT INDEX
Incorporation by Reference
Exhibit
Number Description Form File No. Exhibit Number Filing Date with SEC Filed or Furnished Herewith
2.1
Agreement and Plan of Merger, by and among Medallia, Inc., Steely Merger Sub, Inc., StellaService Inc. and Shareholder Representative Services LLC, dated September 1, 2020.
8-K 001-38982 3.1 September 8, 2020
3.1
Amended and Restated Certificate of Incorporation of the registrant.
10-Q 001-38982 3.1 September 12, 2019
3.2
Amended and Restated Bylaws of the registrant.
8-K 001-38982 3.1 May 29, 2020
4.1
Form of common stock certificate of the registrant.
S-1/A 333-232271 4.1 June 28, 2019
4.2
Description of Company’s Securities.
X
4.3
Amended and Restated Investor Rights Agreement by and among the registrant and certain holders of its capital stock, dated as of February 25, 2019, as amended.
S-1/A 333-232271 4.2 July 8, 2019
4.4
Indenture, dated September 18, 2020, between the registrant and U.S. Bank National Association., dated September 18, 2020, between the registrant and U.S. Bank National Association.
8-K 001-38982 4.1 September 18, 2020
4.5
Form of 0.125% Convertible Senior Note due 2025 (included in Exhibit 4.4) convertible Senior Note due 2025 (included in Exhibit 4.4).
8-K 001-38982 4.2 September 18, 2020
10.1+
Form of Indemnification Agreement between the registrant and each of its directors and executive officers.
S-1 333-232271 10.1 June 21, 2019
10.2+
2019 Equity Incentive Plan and related form agreements.
S-1/A 333-232271 10.2 June 28, 2019
10.3+
Amended and Restated 2019 Employee Stock Purchase Plan and related form agreements.
S-1/A 333-232271 10.3 July 8, 2019
10.4+
2017 Equity Incentive Plan, as amended, and related form agreements.
S-1 333-232271 10.4 June 21, 2019
10.5+
2008 Equity Incentive Plan, as amended, and related form agreements.
S-1 333-232271 10.5 June 21, 2019
Incorporation by Reference
Exhibit
Number Description Form File No. Exhibit Number Filing Date with SEC Filed or Furnished Herewith
10.6+
Outside Director Compensation Policy.
S-1/A 333-232271 10.6 June 28, 2019
10.7+
Change in Control and Severance Policy and related form agreements.
S-1/A 333-232271 10.7 June 28, 2019
10.8
Office Lease between the registrant and BRE Market Street Property Owner LLC, dated as of March 21, 2019.
S-1 333-232271 10.8 June 21, 2019
10.9+
Letter Agreement between the registrant and Elizabeth Carducci, dated December 20, 2020.
X
10.10+
Executive Incentive Compensation Plan.
S-1/A 333-232271 10.10 June 28, 2019
10.11+
Letter Agreement between the registrant and Leslie Stretch, dated June 27, 2019.
S-1/A 333-232271 10.12 July 8, 2019
10.12+
Letter Agreement between the registrant and Roxanne Oulman, dated June 27, 2019.
S-1/A 333-232271 10.13 July 8, 2019
10.13+
Letter Agreement between the registrant and Borge Hald, dated June 27, 2019.
S-1/A 333-232271 10.14 July 8, 2019
10.14+
Letter Agreement between the registrant and Mikael Ottosson, dated June 27, 2019.
S-1/A 333-232271 10.15 July 8, 2019
10.15
Purchase Agreement, dated September 15, 2020, by and among the registrant and BofA Securities, Inc., Citigroup Global Markets Inc., Wells Fargo Securities, LLC and KeyBanc Capital Markets, Inc. as representatives of the initial purchasers named therein.
8-K 001-38982 10.1 September 18, 2020
10.16
Form of Capped Call Confirmation.
8-K 001-38982 10.2 September 18, 2020
10.17
First Amendment by and between Market Center Owner, LP and the registrant, dated as of February 10, 2020.
10-Q 001-38982 10.1 June 9, 2020
10.18
Credit Agreement, dated as of September 4, 2020, by and among the registrant, as borrower, the lenders from time to time party thereto, and Wells Fargo Bank, National Association, as administrative agent, swingline lender and issuing lender.
10-Q 001-38982 10.1 September 9, 2020
21.1
Subsidiaries of Medallia Inc.
X
23.1
Consent of Independent Registered Public Accounting Firm.
X
24.1
Power of Attorney (included in signature pages hereto (included in signature pages hereto)
X
31.1
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
X
31.2
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
X
32.1†
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
X
32.2†
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
X
101.INS XBRL. Instance Document X
101.SCH XBRL. Taxonomy Extension Schema Document X
101.CAL XBRL. Taxonomy Extension Calculation Linkbase Document X
101.DEF XBRL. Taxonomy Extension Definition Linkbase Document X
101.LAB XBRL. Taxonomy Extension Label Linkbase Document X
101.PRE XBRL.Extension Presentation Linkbase Database X
104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
____________
+ Indicates management contract or compensatory plan.
† The certifications attached as Exhibits 32.1 and 32.2 that accompany this Annual Report on Form 10-K are deemed furnished and not filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Medallia, Inc. under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing.