10-Q 1 d31861d10q.htm 10-Q 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-39540

 

 

Palantir Technologies Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   68-0551851

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1555 Blake Street, Suite 250

Denver, Colorado

  80202
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (720) 358-3679

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

Class A Common Stock, par value $0.001 per share   PLTR   New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
Emerging growth company       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of November 6, 2020, there were 1,471,832,735 shares of the registrant’s Class A common stock outstanding, 269,207,902 shares of the registrant’s Class B common stock outstanding, and 1,005,000 shares of the registrant’s Class F common stock outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  

PART I. FINANCIAL INFORMATION

  

Item 1

 

Financial Statements (unaudited)

  
 

Condensed Consolidated Balance Sheets

     5  
 

Condensed Consolidated Statements of Operations

     6  
 

Condensed Consolidated Statements of Comprehensive Loss

     7  
 

Condensed Consolidated Statements of Redeemable Convertible and Convertible Preferred Stock and Stockholders’ Equity (Deficit)

     8  
 

Condensed Consolidated Statements of Cash Flows

     11  
 

Notes to Unaudited Condensed Consolidated Financial Statements

     13  

Item 2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     35  

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

     56  

Item 4

 

Controls and Procedures

     57  

PART II. OTHER INFORMATION

  

Item 1

 

Legal Proceedings

     58  

Item 1A

 

Risk Factors

     58  

Item 2

 

Unregistered Sales of Equity Securities

     118  

Item 3

 

Defaults Upon Senior Securities

     119  

Item 4

 

Mine Safety Disclosures

     119  

Item 5

 

Other Information

     119  

Item 6

 

Exhibits

     120  

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “would,” “intend,” “target,” “goal,” “outlook,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

 

   

our expectations regarding financial performance, including but not limited to our expectations regarding revenue, cost of revenue, operating expenses, stock-based compensation, and our ability to achieve and maintain future profitability;

 

   

our ability to successfully execute our business and growth strategy;

 

   

the sufficiency of our cash and cash equivalents to meet our liquidity needs;

 

   

the demand for our platforms in general;

 

   

our ability to increase our number of customers and revenue generated from customers;

 

   

our expectations regarding the future contribution margin of our existing and future customers;

 

   

our expectations regarding our ability to quickly and effectively integrate our platforms for our existing and future customers;

 

   

our ability to develop new platforms, and enhancements to existing platforms, and bring them to market in a timely manner;

 

   

the size of our addressable markets, market share, category positions, and market trends, including our ability to grow our business in large government and commercial organizations, including our expectations regarding the impact of FASA;

 

   

our ability to compete with existing and new competitors in existing and new markets and products;

 

   

our expectations regarding anticipated technology needs and developments and our ability to address those needs and developments with our platforms;

 

   

our expectations regarding litigation and legal and regulatory matters;

 

   

our expectations regarding our ability to meet existing performance obligations and maintain the operability of our products;

 

   

our expectations regarding the effects of existing and developing laws and regulations, including with respect to taxation, privacy and data protection;

 

   

our expectations regarding new and evolving markets;

 

   

our ability to develop and protect our brand;

 

   

our ability to maintain the security and availability of our platforms;

 

   

our expectations and management of future growth;

 

   

our expectations concerning relationships with third parties, including our customers, equity method investment partners, and vendors;

 

   

our ability to maintain, protect, and enhance our intellectual property;

 

   

our expectations regarding our multi-class stock and governance structure and the benefits thereof;

 

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the impact of the ongoing COVID-19 pandemic, including on our and our customers’, vendors’, and partners’ respective businesses and the markets in which we and our customers, vendors, and partners operate; and

 

   

the increased expenses associated with being a public company.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors, including those described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on any forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in such forward-looking statements.

Neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. Moreover, the forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, restructurings, joint ventures, partnerships, or investments we may make.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

 

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PART I.

FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS (UNAUDITED)

Palantir Technologies Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

(unaudited)

 

     As of September 30,   As of December 31,
     2020   2019

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 1,800,190   $ 1,079,154

Restricted cash

     43,800     52,099

Accounts receivable

     162,269     50,315

Prepaid expenses and other current assets

     388,165     32,585
  

 

 

 

 

 

 

 

Total current assets

     2,394,424     1,214,153

Property and equipment, net

     29,369     31,589

Restricted cash, noncurrent

     86,343     270,709

Other assets

     93,576     77,574
  

 

 

 

 

 

 

 

Total assets

   $         2,603,712   $        1,594,025
  

 

 

 

 

 

 

 

Liabilities, Redeemable Convertible and Convertible Preferred Stock, and Stockholders’ Equity (Deficit)

 

Current liabilities:

    

Accounts payable

   $ 22,221   $ 51,735

Accrued liabilities

     466,999     126,620

Deferred revenue(1)

     172,066     186,105

Customer deposits

     280,901     364,138
  

 

 

 

 

 

 

 

Total current liabilities

     942,187     728,598

Deferred revenue, noncurrent(1)

     67,064     77,030

Customer deposits, noncurrent

     102,231     167,538

Debt, noncurrent, net

     197,753     396,065

Other noncurrent liabilities

     42,724     78,205
  

 

 

 

 

 

 

 

Total liabilities

     1,351,959     1,447,436
  

 

 

 

 

 

 

 

Commitments and Contingencies (Note 8)

    

Redeemable convertible preferred stock, $0.001 par value: 0 and 35,002,700 shares authorized as of September 30, 2020 and December 31, 2019, respectively; 0 and 4,017,378 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively; aggregate liquidation preference of $0 and $14,101 as of September 30, 2020 and December 31, 2019, respectively

     —         33,569

Convertible preferred stock, $0.001 par value: 0 and 877,442,966 shares authorized as of September 30, 2020 and December 31, 2019, respectively; 0 and 742,839,990 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively; aggregate liquidation preference of $0 and $2,102,556 as of September 30, 2020 and December 31, 2019, respectively

     —         2,093,662

Stockholders’ equity (deficit):

    

Preferred stock, par value $0.001: 2,000,000,000 and 0 shares authorized as of September 30, 2020 and December 31, 2019, respectively; 0 shares issued and outstanding as of September 30, 2020 and December 31, 2019

     —         —    

Common stock, $0.001 par value: 20,000,000,000 and 2,200,000,000 Class A shares authorized as of September 30, 2020 and December 31, 2019, respectively; 1,320,584,721 shares issued and outstanding as of September 30, 2020, and 315,615,753 shares issued and 309,223,182 shares outstanding as of December 31, 2019; 2,700,000,000 and 1,800,000,000 Class B shares authorized as of September 30, 2020 and December 31, 2019, respectively; 405,096,034 and 272,273,934 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively; and 1,005,000 Class F shares authorized, issued, and outstanding as of September 30, 2020, and 0 Class F shares authorized, issued and outstanding as of December 31, 2019

     1,727     588

Additional paid-in capital

     6,065,869     1,857,331

Treasury stock, at cost: 0 and 6,392,571 shares held as of September 30, 2020 and December 31, 2019, respectively

     —         (38,895

Accumulated other comprehensive income (loss)

     1,168     (703

Accumulated deficit

     (4,817,011     (3,798,963
  

 

 

 

 

 

 

 

Total stockholders’ equity (deficit)

     1,251,753     (1,980,642
  

 

 

 

 

 

 

 

Total liabilities, redeemable convertible and convertible preferred stock, and stockholders’ equity (deficit)

   $ 2,603,712   $ 1,594,025
  

 

 

 

 

 

 

 

 

(1)

Deferred revenue as of September 30, 2020 and December 31, 2019 includes $71.0 million and $75.0 million, respectively, from Palantir Technologies Japan, K.K. See Note 6, Equity Method Investments, for more information.

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Palantir Technologies Inc..

Condensed Consolidated Statements of Operations

(in thousands, except share and per share amounts)

(unaudited)

 

     Three Months Ended
September 30,
  Nine Months Ended
September 30,
     2020   2019   2020   2019

Revenue

   $ 289,366   $ 190,541   $ 770,582   $ 513,197

Cost of revenue

     149,340     65,073     282,044     166,471
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

     140,026     125,468     488,538     346,726

Operating expenses:

        

Sales and marketing

     334,911     119,666     536,082     337,255

Research and development

     313,915     75,880     466,530     229,728

General and administrative

     338,977     74,062     503,033     208,736
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

     987,803     269,608     1,505,645     775,719
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

     (847,777     (144,140     (1,017,107     (428,993

Interest income

     494     3,390     4,312     12,953

Interest expense

     (2,085     (173     (12,325     (395

Change in fair value of warrants

     (9,201     784     811     2,743

Other income (expense), net

     (3,293     2,305     1,218     1,858
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before provision (benefit) for income taxes

     (861,862     (137,834     (1,023,091     (411,834

Provision (benefit) for income taxes

     (8,543     2,026     (5,043     8,485
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

   $ (853,319   $ (139,860   $ (1,018,048   $ (420,319
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common stockholders, basic

   $ (0.94   $ (0.24   $ (1.43   $ (0.73
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common stockholders, diluted

   $ (0.94   $ (0.24   $ (1.43   $ (0.73
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares of common stock outstanding used in computing net loss per share attributable to common stockholders, basic

     905,462,010     580,104,846     713,879,104     574,342,061
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares of common stock outstanding used in computing net loss per share attributable to common stockholders, diluted

     905,462,010     580,104,846     716,027,459     574,342,061
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Palantir Technologies Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

 

                                                                           
     Three Months Ended
September 30,
  Nine Months Ended
September 30, 2020
     2020   2019   2020   2019

Net loss

   $ (853,319   $ (139,860   $ (1,018,048   $ (420,319

Other comprehensive income (loss):

        

Foreign currency translation adjustments

     268     (5,133     1,871     (470
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

   $ (853,051   $ (144,993   $ (1,016,177   $ (420,789
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Palantir Technologies Inc.

Condensed Consolidated Statements of Redeemable Convertible and Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(in thousands, except share amounts)

(unaudited)

 

    Redeemable Convertible
Preferred Stock
  Convertible Preferred
Stock
      Common Stock   Additional
Paid-in
Capital
  Accumulated
Other
Comprehensive
Income
  Accumulated
Deficit
  Total
Stockholders’
Equity (Deficit)
  Shares   Amount   Shares   Amount       Shares   Amount

Balance as of June 30, 2020

    4,017,378   $ 33,569     742,932,765   $ 2,094,509       736,634,601   $ 737   $ 2,563,354   $ 900   $ (3,963,692   $ (1,398,701

Issuance of Series D preferred stock upon net exercise of Series D preferred stock warrants

    —         —         2,380,034     10,810       —         —         —         —         —         —    

Issuance of common stock upon net exercise of common stock warrants

    —         —         —         —           7,631,329     8     (8     —         —         —    

Issuance of common stock, net of issuance costs

    —         —         —         —           88,279,569     88     404,591     —         —         404,679

Conversion of redeemable convertible preferred stock to common stock

    (4,017,378     (33,569     —         —           4,017,378     4     33,565     —         —         33,569

Conversion of convertible preferred stock to common stock

    —         —         (745,312,799     (2,105,319       793,725,807     794     2,104,525     —         —         2,105,319

Conversion of preferred stock warrants to common stock warrants

    —         —         —         —           —         —         31,007     —         —         31,007

Issuance of common stock from the exercise of stock options

    —         —         —         —           31,747,857     32     87,175     —         —         87,207

Issuance of common stock upon vesting of restricted stock units (“RSUs”)

    —         —         —         —           68,149,214     68     (68     —         —         —    

Stock-based compensation

    —         —         —         —           —         —         841,929     —         —         841,929

Settlement of employee loan accounted for as a modification to stock option

    —         —         —         —           (3,500,000     (4     (201     —         —         (205

Other comprehensive income

    —         —         —         —           —         —         —         268     —         268

Net loss

    —         —         —         —           —         —         —         —         (853,319     (853,319
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of September 30, 2020

    —       $  —         —       $  —           1,726,685,755   $ 1,727   $ 6,065,869   $ 1,168   $ (4,817,011   $ 1,251,753
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Palantir Technologies Inc.

Condensed Consolidated Statements of Redeemable Convertible and Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(in thousands, except share amounts)

(unaudited)

 

    Redeemable Convertible
Preferred Stock
  Convertible Preferred
Stock
       Common Stock   Additional
Paid-in
Capital
  Treasury Stock   Accumulated
Other
Comprehensive
Income (Loss)
  Accumulated
Deficit
  Total
Stockholders’
Equity (Deficit)
  Shares   Amount   Shares   Amount        Shares   Amount   Shares   Amount

Balance as of December 31, 2019

    4,017,378   $ 33,569     742,839,990   $ 2,093,662         581,497,116   $ 588   $ 1,857,331     6,392,571   $ (38,895   $ (703   $ (3,798,963   $ (1,980,642

Conversion of Series H-1 convertible preferred stock to common stock

    —         —         (28,490     (100         28,490     —         100     —         —         —         —         100

Issuance of Series K convertible preferred stock

    —         —         121,265     947         —         —         —         —         —         —         —         —    

Issuance of Series D preferred stock upon net exercise of Series D preferred stock warrants

    —         —         2,380,034     10,810         —         —         —         —         —         —         —         —    

Repurchase of common stock, held in treasury

    —         —         —         —             (808,201     —         —         808,201     (3,777     —         —         (3,777

Retirement of treasury stock

    —         —         —         —             —         (7     (42,665     (7,200,772     42,672     —         —         —    

Issuance of common stock upon net exercise of common stock warrants

    —         —         —         —             7,631,329     8     (8     —         —         —         —         —    

Issuance of common stock, net of issuance costs

    —         —         —         —             206,500,523     207     942,322     —         —         —         —         942,529

Conversion of redeemable convertible preferred stock to common stock

    (4,017,378     (33,569     —         —             4,017,378     4     33,565     —         —         —         —         33,569

Conversion of convertible preferred stock to common stock

    —         —         (745,312,799     (2,105,319         793,725,807     794     2,104,525     —         —         —         —         2,105,319

Conversion of preferred stock warrants to common stock warrants

    —         —         —         —             —         —         31,007     —         —         —         —         31,007

Issuance of common stock from the exercise of stock options

    —         —         —         —             69,444,099     69     115,961     —         —         —         —         116,030

Issuance of common stock upon vesting of RSUs

    —         —         —         —             68,149,214     68     (68     —         —         —         —         —    

Stock-based compensation

    —         —         —         —             —         —         1,024,000     —         —         —         —         1,024,000

Settlement of employee loan accounted for as a modification to stock option

    —         —         —         —             (3,500,000     (4     (201     —         —         —         —         (205

Other comprehensive income

    —         —         —         —             —         —         —         —         —         1,871     —         1,871

Net loss

    —         —         —         —             —         —         —         —         —         —         (1,018,048     (1,018,048
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of September 30, 2020

    —       $  —         —       $  —             1,726,685,755   $ 1,727   $ 6,065,869     —       $ —       $ 1,168   $ (4,817,011   $ 1,251,753
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents

Palantir Technologies Inc.

Condensed Consolidated Statements of Redeemable Convertible and Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(in thousands, except share amounts)

(unaudited)

 

    Redeemable Convertible
Preferred Stock
  Convertible Preferred
Stock
       Common Stock   Additional
Paid-in
Capital
  Treasury Stock   Accumulated
Other
Comprehensive
Income
  Accumulated
Deficit
  Total
Stockholders’
Deficit
  Shares   Amount   Shares   Amount        Shares   Amount   Shares   Amount

Balance as of June 30, 2019

    23,931,624   $ —         745,886,186   $ 2,099,054         571,702,167   $ 577   $ 1,727,804     5,435,072     $ (34,439   $ 5,425   $ (3,499,776   $ (1,800,409

Issuance of Series H redeemable convertible preferred stock upon exercise of warrants

    2,949,002     26,069     —         —             —         —         —         —         —         —         —         —    

Redemption of Series H redeemable convertible preferred stock previously accrued for

    (23,931,624     —         —         —             —         —         —         —         —         —         —         —    

Sale of Series H redeemable convertible preferred stock

    1,068,376     7,500     —         —             —         —         —         —         —         —         —         —    

Repurchase of common stock, held in treasury

    —         —         —         —             (66,666     —         —         66,666       (327     —         —         (327

Issuance of common stock from the exercise of stock options

    —         —         —         —             1,799,680     2     1,374     —         —         —         —         1,376

Stock-based compensation

    —         —         —         —             —         —         51,763     —         —         —         —         51,763

Other comprehensive loss

    —         —         —         —             —         —         —         —         —         (5,133     —         (5,133

Net loss

    —         —         —         —             —         —         —         —         —         —         (139,860     (139,860
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of September 30, 2019

    4,017,378   $ 33,569     745,886,186   $ 2,099,054         573,435,181   $ 579   $ 1,780,941       5,501,738     $   (34,766   $ 292   $ (3,639,636   $ (1,892,590
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                                     
    Redeemable Convertible
Preferred Stock
  Convertible Preferred
Stock
       Common Stock   Additional
Paid-in
Capital
  Treasury Stock   Accumulated
Other
Comprehensive
Income
  Accumulated
Deficit
  Total
Stockholders’
Deficit
  Shares   Amount   Shares   Amount        Shares   Amount   Shares   Amount

Balance as of December 31, 2018

    25,947,422   $ 172,163     742,813,372   $ 2,087,560         549,367,691   $ 570   $ 1,627,737     20,636,798   $ (148,621   $ 762   $ (3,231,876   $ (1,751,428

Cumulative effect of accounting changes

    —         —         —         —             —         —         (34     —         —         —         12,559     12,525

Issuance of Series H redeemable convertible preferred stock upon exercise of warrants

    2,949,002     26,069     —         —             —         —         —         —         —         —         —         —    

Redemption of Series H redeemable convertible preferred stock

    (23,931,624     (168,000     —         —             —         —         —         —         —         —         —         —    

Sale of Series H redeemable convertible preferred stock

    1,068,376     7,500     —         —             —         —         —         —         —         —         —         —    

Reclassification of Series H redeemable convertible preferred stock into convertible preferred stock upon expiration of redemption option

    (2,015,798     (4,163     2,015,798     4,163         —         —         —         —         —         —         —         —    

Conversion of Series F convertible stock to common stock

    —         —         (10,078     (20         10,078     —         20     —         —         —         —         20

Issuance of Series D convertible preferred stock upon exercise of warrants

    —         —         1,097,094     7,375         —         —         —         —         —         —         —         —    

Conversion of Series D convertible stock to common stock

    —         —         (30,000     (24         30,000     —         24     —         —         —         —         24

Sale of common stock, held in treasury

    —         —         —         —             16,583,747     —         (20,928     (16,583,747     120,928     —         —         100,000

Repurchase of common stock, held in treasury

    —         —         —         —             (1,448,687     —         —         1,448,687     (7,073     —         —         (7,073

Issuance of common stock from the exercise of stock options

    —         —         —         —             8,892,352     9     9,328     —         —         —         —         9,337

Stock-based compensation

    —         —         —         —             —         —         164,794     —         —         —         —         164,794

Other comprehensive loss

    —         —         —         —             —         —         —         —         —         (470     —         (470

Net loss

    —         —         —         —             —         —         —         —         —         —         (420,319     (420,319
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of September 30, 2019

    4,017,378   $ 33,569     745,886,186   $ 2,099,054         573,435,181   $ 579   $ 1,780,941     5,501,738   $ (34,766   $ 292   $ (3,639,636   $ (1,892,590
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Palantir Technologies Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

     Nine Months Ended
September 30,
   2020    2019

Operating activities

     

Net loss

   $ (1,018,048    $ (420,319

Adjustments to reconcile net loss to net cash used in operating activities:

     

Depreciation and amortization

     10,308      9,450

Stock-based compensation

     1,028,914      164,650

Amortization of debt issuance costs

     2,319      87

Change in fair value of warrants

     (811      (2,743

Loss from equity method investments

     1,439      —    

Impairment of assets

     674      —    

Changes in operating assets and liabilities:

     

Accounts receivable

     (112,723      (96,142

Prepaid expenses and other current assets

     (16,434      (8,045

Other assets

     (14,192      (6,393

Accounts payable

     (29,372      (21,133

Accrued liabilities

     33,634      12,105

Deferred revenue, current and noncurrent

     (30,937      (226,829

Customer deposits, current and noncurrent

     (140,162      102,100

Other noncurrent liabilities

     7,071      (6,836
  

 

 

 

  

 

 

 

Net cash used in operating activities

     (278,320      (500,048

Investing activities

     

Purchases of property and equipment

     (7,475      (10,947

Purchase of equity method investment

     (2,500      —    
  

 

 

 

  

 

 

 

Net cash used in investing activities

     (9,975      (10,947

Financing activities

     

Proceeds from the issuance of common stock, net of issuance costs

     942,529      100,000

Proceeds from issuance of debt, net of issuance costs

     199,369      —    

Principal payments on borrowings

     (400,000      —    

Proceeds from the exercise of common stock options

     79,473      9,337

Repurchase of common stock

     (3,777      (7,073

Proceeds from the sale of redeemable convertible preferred stock

     —          7,500

Redemption of redeemable convertible preferred stock

     —          (168,000

Other financing activities

     (250      (1,198
  

 

 

 

  

 

 

 

Net cash provided by (used in) financing activities

     817,344      (59,434

Effect of foreign exchange on cash, cash equivalents, and restricted cash

     (678      (2,992
  

 

 

 

  

 

 

 

Net increase (decrease) in cash, cash equivalents, and restricted cash

     528,371      (573,421

Cash, cash equivalents, and restricted cash - beginning of period

     1,401,962      1,266,835
  

 

 

 

  

 

 

 

Cash, cash equivalents, and restricted cash - end of period

   $ 1,930,333    $ 693,414
  

 

 

 

  

 

 

 

 

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Table of Contents

Palantir Technologies Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

     Nine Months Ended
September 30,
   2020    2019

Supplemental disclosures of cash flow information:

     

Cash paid for income taxes

   $ 9,143    $ 1,981

Cash paid for interest

     9,737        —    

Supplemental disclosures of non-cash investing and financing information:

     

Conversion of redeemable convertible and convertible preferred stock to common stock

   $ 2,138,988    $ —    

Receivable from the exercise of common stock options included in prepaid expenses and other current assets

     36,557      —    

Conversion of convertible preferred stock warrants to common stock warrants

     31,007      —    

Cashless net exercise of warrants for convertible preferred stock

     10,810      7,375

Cashless net exercise of warrants for redeemable convertible preferred stock

     —               26,069

Reclassification of redeemable convertible preferred stock into convertible preferred stock upon expiration of redemption option

     —          4,163

Accrued purchase of property and equipment

     461      —    

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

Palantir Technologies Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Organization

Palantir Technologies Inc. (including its subsidiaries, “Palantir,” or “the Company”) was incorporated in Delaware on May 6, 2003. The Company builds and deploys software platforms, Palantir Gotham and Palantir Foundry, that serve as the central operating systems for its customers.

Direct Listing

On September 30, 2020, the Company completed a direct listing of its Class A common stock (the “Direct Listing”) on the New York Stock Exchange (“NYSE”).

In connection with the Direct Listing, on September 22, 2020, the Company filed an amended and restated certificate of incorporation, which became effective on that date. The amended and restated certificate of incorporation authorized the issuance of a total of 20,000,000,000 shares of Class A common stock and 2,700,000,000 shares of Class B common stock, authorized 1,005,000 shares of a new class of common stock (“Class F common stock”) and 2,000,000,000 shares of undesignated preferred stock. In connection with the Direct Listing, Alexander Karp, Stephen Cohen, and Peter Thiel (the “Founders”) each transferred 335,000 shares of their Class B common stock to a voting trust, which were then exchanged for an equivalent number of shares of Class F common stock.

Immediately prior to the filing of the amended and restated certificate of incorporation, all outstanding shares of redeemable convertible preferred stock and convertible preferred stock were converted into 797,743,185 shares of the Company’s Class B common stock, and all of the Company’s outstanding preferred stock warrants were converted into common stock warrants, which resulted in the reclassification of the warrants liability to additional paid-in capital. Subsequent to the filing of the amended and restated certificate of incorporation, there were no shares of redeemable convertible preferred stock or convertible preferred stock outstanding.

Furthermore, upon the occurrence of the Direct Listing, the Company determined that the performance-based vesting condition was satisfied for 68,149,214 restricted stock units (“RSUs”), which resulted in the issuance of an equivalent number of shares of Class A common stock. See further discussion in Note 11. Stock-Based Compensation regarding the cumulative stock-based compensation charge recognized upon the Direct Listing.

2. Significant Accounting Policies

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The accompanying condensed consolidated financial statements include the accounts of Palantir Technologies Inc. and its consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Investments in entities where the Company holds at least a 20% ownership interest and has the ability to exercise significant influence over the investee, but does not control, are accounted for using the equity method of accounting. For such investments, the share of the investee’s results of operations is included as a component of other income (expense), net in the condensed consolidated statements of operations and the investment balance is included in other assets and classified as noncurrent in the condensed consolidated balance sheets. The Company’s fiscal year ends on December 31.

The unaudited condensed consolidated balance sheet as of December 31, 2019 included herein was derived from the audited consolidated financial statements as of that date, but does not include all disclosures, including

 

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Table of Contents

Palantir Technologies Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

certain notes required by GAAP on an annual reporting basis. In management’s opinion, the unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the balance sheets and statements of operations, comprehensive loss, stockholders’ equity (deficit), and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year or any future period.

These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on September 30, 2020 (the “Prospectus”).

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods.

Significant estimates and assumptions made in the accompanying condensed consolidated financial statements include, but are not limited to, identification of performance obligations in customer contracts, the fair value of common stock and other assumptions used to measure stock-based compensation, the fair value of preferred and common stock warrants, the valuation of deferred tax assets and uncertain tax positions, collectability of accounts receivable, and useful lives of tangible assets. Estimates and judgments are based on historical experience, forecasted events, and various other assumptions that management believes to be reasonable under the circumstances. Actual results could differ from those estimates and such differences could affect the Company’s financial position and results of operations.

Summary of Significant Accounting Policies

The Company’s significant accounting policies are discussed in Note 2. Significant Accounting Policies in the Notes to Consolidated Financial Statements in its Prospectus. There have been no significant changes to these policies during the three months ended September 30, 2020.

Cash, Cash Equivalents, and Restricted Cash

The Company considers all highly liquid investments purchased with an original maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents consists of amounts invested in money market funds.

Restricted cash primarily consists of cash and certificates of deposit that are held as collateral against letters of credit and guarantees that the Company is required to maintain for operating lease agreements, certain customer contracts, other guarantees, and financing arrangements.

 

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Table of Contents

Palantir Technologies Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the amounts shown in the condensed consolidated statements of cash flows (in thousands):

 

     As of September 30,
     2020    2019

Cash and cash equivalents

   $ 1,800,190    $ 507,319

Restricted cash

     43,800      72,219

Restricted cash, noncurrent

     86,343      113,876
  

 

 

 

  

 

 

 

Total cash, cash equivalents, and restricted cash

   $ 1,930,333    $ 693,414
  

 

 

 

  

 

 

 

Concentrations of Credit Risk and Other Concentrations

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, restricted cash, and accounts receivable. Cash equivalents consist of money market funds with original maturities of three months or less, which are invested primarily with U.S. financial institutions. Cash deposits with financial institutions, including restricted cash, generally exceed federally insured limits. Management believes minimal credit risk exists with respect to these financial institutions and the Company has not experienced any losses on such amounts.

The Company is exposed to concentrations of credit risk with respect to accounts receivable presented on the condensed consolidated balance sheets. The Company’s accounts receivable balance as of September 30, 2020 and December 31, 2019 was $162.3 million and $50.3 million, respectively. Customers E and H represented 15% and 11% of total accounts receivable as of September 30, 2020. Customers A and C represented 38% and 21% of total accounts receivable as of December 31, 2019, respectively. No other customer comprised more than 10% of total accounts receivable as of September 30, 2020 and December 31, 2019. The Company seeks to mitigate its credit risk with respect to accounts receivable by contracting with large commercial customers and government agencies and regularly monitoring the aging of accounts receivable balances. As of September 30, 2020 and December 31, 2019, the Company had not experienced any significant losses on its accounts receivable.

For the three months ended September 30, 2020, no customer represented more than 10% of total revenue. For the nine months ended September 30, 2020, Customer F (in the government operating segment) represented 11% of total revenue. For the three and nine months ended September 30, 2019, Customer D (in the commercial operating segment) represented 12% and 13% of total revenue, respectively. No other customer represented more than 10% of total revenue for the three and nine months ended September 30, 2020 or 2019.

The Company relies on the technology, infrastructure, and software applications, including software-as-a-service offerings, of third parties in order to host or operate certain key products and functions of its business.

Recently Adopted Accounting Pronouncements

As of September 30, 2020, the Company qualified as an emerging growth company (“EGC”) under the Jumpstart Our Business Startups Act (“JOBS Act”) which permits the Company an extended transition period for complying with new or revised accounting standards affecting public companies.

 

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Table of Contents

Palantir Technologies Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

The Company adopted the following accounting standard during the nine months ended September 30, 2020:

Accounting Standard Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This standard update modified the disclosure requirements on fair value measurements by removing, modifying, or adding certain disclosures. The ASU eliminated such disclosures as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and valuation processes for Level 3 fair value measurements. The ASU adds new disclosure requirements for Level 3 measurements. The Company adopted ASU 2018-13 as of January 1, 2020. The Company’s disclosures related to its Level 3 financial instruments did not materially change for the periods presented. See Note 4. Fair Value Measurements for more information.

Recently Issued Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use (“ROU”) asset and lease liability on its condensed consolidated balances sheet for all leases with a term longer than twelve months. Leases will be classified as finance or operating leases, with classification affecting the pattern and classification of expense recognition in the condensed consolidated statements of operation. If the Company loses its EGC status as of December 31, 2020, the new standard will be effective for the Company for its fiscal year beginning January 1, 2020. The Company is currently evaluating the impact of the new standard on its condensed consolidated financial statements and related disclosures; however, the Company believes that, upon adopting the new standard, it will recognize material right-of-use assets and lease liabilities on its condensed consolidated balance sheets associated primarily with real estate related operating leases. The Company intends to adopt the standard using an optional transition method and will not restate comparative periods. The Company does not believe this standard will have a material impact on its condensed consolidated statements of operations.

In June 2016, the FASB amended guidance related to impairment of financial instruments as part of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss impairment methodology with an expected credit loss model for which a company recognizes an allowance based on the estimate of expected credit loss. If the Company loses its EGC status as of December 31, 2020, the new standard will be effective for the Company for its fiscal year beginning January 1, 2020. The Company is currently evaluating the impact of the new standard on its condensed consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software – (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires a customer in a hosting arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. If the Company loses its EGC status as of December 31, 2020, the new standard will be effective for the Company for its fiscal year beginning January 1, 2020. The amendments in this ASU can be applied either retrospectively or prospectively to all implementation costs after the date of adoption. The Company is currently evaluating the impact of the new standard on its condensed consolidated financial statements and related disclosures.

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740), which is intended to simplify various aspects related to accounting for income taxes. If the Company loses its EGC status as of December 31, 2020, the new standard will be effective for the Company for its fiscal year beginning January 1, 2021. The Company is currently evaluating the impact of the new standard on its condensed consolidated financial statements and related disclosures.

 

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Palantir Technologies Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

3. Revenue Recognition

Contract Balances

The Company’s contract liabilities consist of deferred revenue and customer deposits. The changes in the Company’s contract liabilities were as follows (in thousands):

 

     Nine Months Ended
September 30, 2020

Balance, beginning of period

   $ 794,811

Billings and other (1)

     608,033

Revenue recognized

     (770,582

Refunds accrued or paid to customers

     (10,000
  

 

 

 

Balance, end of period

   $           622,262
  

 

 

 

 

  

(1)  Other primarily includes the impact of foreign currency translation.

   

Remaining Performance Obligations

The Company’s arrangements with its customers often have terms that span over multiple years. However, the Company generally allows its customers to terminate contracts for convenience prior to the end of the stated term with less than twelve months’ notice. Revenue allocated to remaining performance obligations represents noncancelable contracted revenue that has not yet been recognized, which includes deferred revenue and, in certain instances, amounts that will be invoiced. The Company has elected the practical expedient allowing the Company to not disclose remaining performance obligations for contracts with original terms of twelve months or less. Cancelable contracted revenue, which includes customer deposits, is not considered a remaining performance obligation.

The Company’s remaining performance obligations were $321.6 million as of September 30, 2020, of which the Company expects to recognize approximately 58% as revenue over the next twelve months.

Disaggregation of Revenue

See Note 14. Segment and Geographic Information for disaggregated revenue by customer segment and geographic region.

4. Fair Value Measurements

Financial instruments consist of cash equivalents, restricted cash, accounts receivable, other assets accounted for at fair value, accounts payable, accrued liabilities, and warrants liability. Cash equivalents, restricted cash, and warrants liability are stated at fair value on a recurring basis. Accounts receivable, accounts payable, and accrued liabilities are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment date. The carrying amount of the Company’s outstanding debt approximates the fair value as the debt bears a floating rate that approximates the market interest rate.

 

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Palantir Technologies Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring and nonrecurring basis and indicates the fair value hierarchy of the valuation (in thousands):

 

     As of September 30, 2020
     Total    Level 1    Level 2    Level 3

Assets:

           

Cash equivalents:

           

Money market funds

   $ 980,254    $ 980,254    $ —        $ —    

Restricted cash:

                            

Certificates of deposit

     80,912      —          80,912      —    
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total

   $ 1,061,166    $ 980,254    $   80,912    $ —    
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

     As of December 31, 2019
     Total    Level 1    Level 2    Level 3

Assets:

           

Cash equivalents:

           

Money market funds

   $ 650,498    $ 650,498    $ —        $ —    

Restricted cash:

                            

Certificates of deposit

     102,904      —          102,904      —    

Prepaid expenses and other current assets:

           

Assets held for sale

     980      —          —          980
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total

   $    754,382    $ 650,498    $ 102,904    $ 980
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Liabilities:

           

Warrants liability

   $ 42,628    $ —        $ —        $ 42,628
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total

   $ 42,628    $ —        $ —        $ 42,628
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Certificates of Deposit

The Company’s Level 2 instruments consist of restricted cash invested in certificates of deposit. The fair value of such instruments are estimated based on valuations obtained from third-party pricing services that utilize industry standard valuation models, including both income-based and market-based approaches, for which all significant inputs are observable either directly or indirectly. These inputs include interest rate curves, foreign exchange rates, and credit ratings.

Gross unrealized gains or losses for cash equivalents as of September 30, 2020 and December 31, 2019 were not material.

Warrants Liability

In connection with the completion of the Company’s Direct Listing, all of the outstanding warrants to purchase shares of redeemable convertible and convertible preferred stock converted into warrants to purchase shares of Class B common stock. As a result, the Company reclassified the warrants liability to additional paid-in capital.

 

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Palantir Technologies Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

Immediately prior to the Direct Listing and the reclassification to additional paid-in capital, the fair value of the warrants liability was estimated using a Black Scholes model and considered the closing price of the Company’s common stock on the first day of trading, the strike price of the warrants, the remaining term of the warrants, a risk-free interest rate that corresponds to the remaining term, and the volatility of comparable companies.

For the year ended December 31, 2019, the warrants liability was included in other noncurrent liabilities in the condensed consolidated balance sheet and the fair value of the warrant liability was estimated using a combination of an option-pricing model and a Monte Carlo simulation model with equal weighting applied to both models in determining the fair values. These models consider many assumptions, including the likelihood of various potential liquidity events, the nature and timing of such potential events, actions taken with regard to the warrants at expiration, as well as discounts for lack of marketability of the underlying securities and warrants.

The assumptions used to calculate the warrants liability as of September 29, 2020, the date immediately before the Direct Listing, and December 31, 2019 were as follows:

 

                                                                     
     September 29,
2020
  December 31,
2019

Discounts for lack of marketability

   —     20.0% - 28.0%

Fair value of underlying securities

   $9.50   $6.81 - $8.04

Expected volatility

   66.0%   66.0%

Dividend rate

   —     —  

Risk-free interest rate

   0.1%   1.3%

The following table sets forth a summary of the changes in the estimated fair value of the Company’s warrants liability (in thousands):

 

Balance as of December 31, 2019

   $ 42,628

Net exercises in the period

     (10,810

Change in fair value of warrants

     (811

Reclassification to additional paid-in capital as a result of conversion of preferred stock warrants to common stock warrants

     (31,007
  

 

 

 

Balance as of September 30, 2020

   $ —    
  

 

 

 

5. Balance Sheet Components

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):

 

                                                             
     As of September 30,
2020
   As of December 31,
2019

Equity related withholding tax and exercise proceeds receivable

   $ 339,409    $ —    

Other prepaid expenses and current assets

     48,756      32,585
  

 

 

 

  

 

 

 

Total prepaid expenses and other current assets

   $             388,165    $            32,585
  

 

 

 

  

 

 

 

 

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Palantir Technologies Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):

 

                                                                   
     As of September 30,
2020
  As of December 31,
2019

Leasehold improvements

   $ 88,198   $ 93,530

Computer equipment, software, and other

     18,722     32,757

Furniture and fixtures

     9,596     10,753

Construction in progress

     5,817     3,161
  

 

 

 

 

 

 

 

Total property and equipment, gross

     122,333     140,201

Less: accumulated depreciation and amortization

     (92,964     (108,612
  

 

 

 

 

 

 

 

Total property and equipment, net

   $              29,369   $             31,589
  

 

 

 

 

 

 

 

Depreciation and amortization expense related to property and equipment, net was $2.5 million and $3.1 million for the three months ended September 30, 2020 and 2019, respectively, and $9.3 million and $9.5 million for the nine months ended September 30, 2020 and 2019, respectively.

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

 

                                                                   
     As of September 30,
2020
   As of December 31,
2019

Accrued payroll and related expenses(1)

   $ 342,191    $ 31,355

Accrued other liabilities

     124,808      95,265
  

 

 

 

  

 

 

 

Total accrued liabilities

   $              466,999    $             126,620
  

 

 

 

  

 

 

 

 

     

(1)   Includes $302.9 million owed by the Company for equity related employee withholding taxes related to the Direct Listing.

    

6. Equity Method Investments

Palantir Technologies Japan, K.K.

During November 2019, the Company and SOMPO Holdings, Inc. (“SOMPO”) created a Japanese Kabushiki Kaisha (“K.K.”), Palantir Technologies Japan, K.K. (“Palantir Japan”) to distribute Palantir platforms to the Japanese market. Upon closing of the transaction with SOMPO, the Company purchased a total of 100,000 shares of Palantir Japan common stock for $25.0 million. The shares the Company received in exchange represent a 50% voting interest in Palantir Japan. The remaining 50% of the voting interest is held by SOMPO. The Company’s investment in Palantir Japan is accounted for as an equity method investment as the Company is able to exercise significant influence over, but does not control, the investee. The Company recorded a $25.9 million initial investment in Palantir Japan, of which $0.9 million was related to direct costs incurred in connection with the transaction. The Company’s 50% share of profits or losses generated from Palantir Japan are reported on a quarter lag. The Company recorded $0.5 million and $1.4 million share of losses during the three and nine months ended September 30, 2020.

 

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Palantir Technologies Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

Concurrently with the formation of Palantir Japan, the Company entered into a ten-year license and services agreement with Palantir Japan for a limited non-transferable right to resell the Company’s platforms and use certain of the Company’s trademarks in exchange for $25.0 million and future quarterly royalty payments to be paid based on Palantir Japan’s net revenue. In addition, the Company received a prepayment of $50.0 million to be used toward future services provided by the Company to support the business operations and future deployments of the Company’s platforms by Palantir Japan (“service credit”).

In connection with the license rights sold to Palantir Japan, the Company recorded the receipt of the $25.0 million in deferred revenue which will be recognized over the term of the agreement. The Company recorded the $50.0 million service credit in deferred revenue, which will be utilized on an as-needed basis and expires after five years. In the event there was a dissolution of Palantir Japan in the first five years following its formation, any remaining service credit would be refunded by the Company to Palantir Japan. As of December 31, 2019, Palantir Japan did not utilize any of the outstanding services credit. For the three and nine months ended September 30, 2020, Palantir Japan utilized $0.9 million and $1.9 million, respectively, of the services credit.

7. Debt

2014 Credit Facility

In October 2014, the Company entered into an unsecured revolving credit facility (the “2014 Credit Facility”). The 2014 Credit Facility bears interest at the London Interbank Offered Rate (“LIBOR”) plus a margin of 2.75% per annum, subject to certain adjustments, and incurs a commitment fee of 0.375% assessed on the daily average undrawn portion of revolving commitments. Interest and commitment fees are payable at the end of an interest period or at each three-month interval if the interest period is longer than three months.

In December 2019, the Company entered into an amendment to the 2014 Credit Facility to include an additional $150.0 million term loan and secured the credit facility with substantially all of the Company’s assets. Upon entering into this amendment, the Company drew down the $150.0 million term loan and $150.0 million under the existing revolving credit facility. The term loan portion of the 2014 Credit Facility was fully repaid and terminated as of December 31, 2019.

In June 2020, the Company amended the 2014 Credit Facility to include a $150.0 million term loan, extend the maturity date to June 4, 2023, and add an additional lender. Additionally, this amendment increased the requirement to maintain minimum liquidity to $50.0 million, and provided the Company with an option to increase the total commitments by up to an additional $200.0 million, subject to the lenders’ approval. All other terms and conditions remained substantially the same upon the effectiveness of the amendment. Upon entering into this amendment, the Company drew down the total available term loan commitment of $150.0 million.

In July 2020, the Company entered into another amendment to the 2014 Credit Facility, which added an additional lender and provided for an increase of $50.0 million to the revolving credit facility and a $50.0 million term loan. The incremental commitments were provided under the same terms as the existing commitments under the 2014 Credit Facility. During July 2020, the Company drew down the additional available term loan of $50.0 million and repaid the $150.0 million outstanding revolving credit facility.

As of September 30, 2020, the Company had a $200.0 million term loan outstanding under the 2014 Credit Facility and an additional $200.0 million undrawn revolving credit facility available.

 

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Palantir Technologies Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

The 2014 Credit Facility contains customary representations and warranties, and certain financial and nonfinancial covenants, including but not limited to maintaining minimum liquidity of $50.0 million, and certain limitations on liens and indebtedness. The Company was in compliance with all covenants associated with the 2014 Credit Facility as of September 30, 2020.

2019 Credit Facility

On December 31, 2019, the Company entered into a senior secured revolving credit facility (the “2019 Credit Facility”) with a second lender. The 2019 Credit Facility allowed for the drawdown of up to $250.0 million. Amounts outstanding under the 2019 Credit Facility incurred interest at LIBOR plus a margin of 2.0% per annum, subject to certain adjustments. Interest was payable at the end of an interest period or at each three-month interval if the interest period was longer than three months. The 2019 Credit Facility also required the Company to maintain 50% of the aggregate revolving commitment in a specified collateral account, which was reported in restricted cash, noncurrent on the condensed consolidated balance sheets.

As of December 31, 2019, the Company had $250.0 million outstanding and elected to incur interest at three-month LIBOR plus 2.0%. During June 2020, the outstanding balance was fully repaid and the 2019 Credit Facility was terminated, which released all restrictions on the cash collateral.

The Company’s outstanding debt consisted of the following as of September 30, 2020 and December 31, 2019 (in thousands):

 

     As of September 30,
2020
  As of December 31,
2019

Principal amount

   $ 200,000   $ 400,000

Unamortized discount

     (2,247     (3,935
  

 

 

 

 

 

 

 

Carrying value of debt

   $             197,753   $             396,065
  

 

 

 

 

 

 

 

8. Commitments and Contingencies

Lease Commitments

As of September 30, 2020, the majority of the Company’s leases were classified as operating. The Company leases office space under noncancelable operating leases with various expiration dates through March 2032. Certain of the Company’s operating leases contain renewal options and rent acceleration clauses. During the three months ended September 30, 2020 and 2019, net rent expense was $8.3 million and $10.4 million, respectively, which includes sublease income of $4.5 million and $3.7 million, respectively. During the nine months ended September 30, 2020 and 2019, net rent expense was $26.8 million and $26.0 million, respectively, and sublease income was $13.9 million and $10.5 million, respectively.

 

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Palantir Technologies Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

Future annual minimum payments under noncancelable operating leases as of September 30, 2020 were as follows (in thousands):

 

     Operating Lease
Commitments
   Less: Sublease Income    Net Operating Lease
Commitments

Remainder 2020

   $ 11,846    $ 4,352    $ 7,494

2021

     46,209      17,582      28,627

2022

     44,753      18,393      26,360

2023

     44,015      18,288      25,727

2024

     41,068      16,407      24,661

Thereafter

     169,543      85,612      83,931
  

 

 

 

  

 

 

 

  

 

 

 

Total minimum lease payments

   $ 357,434    $ 160,634    $ 196,800
  

 

 

 

  

 

 

 

  

 

 

 

Letters of Credit and Guarantees

The Company had irrevocable standby letters of credit and guarantees, including bank guarantees, outstanding in the amounts of $130.1 million and $322.8 million as of September 30, 2020 and December 31, 2019, respectively, which were fully collateralized. The Company is required to maintain these letters of credit and guarantees primarily for the 2019 Credit Facility, operating lease agreements, certain customer contracts, and other guarantees and financing arrangements. As a result of the 2019 Credit Facility being terminated during June 2020, as described in Note 7. Debt, the restricted cash collateral previously required was released. These letters of credit and guarantees had expiration dates through August 2028 as of September 30, 2020 and December 31, 2019.

Purchase Commitments

In December 2019, the Company entered into a minimum annual commitment to purchase cloud hosting services of at least $1.49 billion over six contract years, with an optional seventh carryover year, effective beginning January 1, 2020, in exchange for various discounts on such services. If the spend does not meet the minimum annual commitment each year or at the end of the term, the Company is obligated to make a return payment. If the difference is greater than $30.0 million for each of the first three contract years or $50.0 million for each of the contract years thereafter (“relief amounts”), the Company has the option to pay the respective relief amount for that year for services to be utilized in the future and the excess amount of the difference above the relief amount would be added to the minimum annual commitment of the following year through the end of the contract. As of September 30, 2020, the Company had satisfied $60.0 million of its $126.0 million commitment for the year ending December 31, 2020. If the Company is required to pay the $30.0 million relief amount it will be recorded as a prepayment for future cloud hosting services when due. The difference between the commitment and the amount satisfied will also be added to the Company’s commitment for the year ended December 31, 2021.

In June 2020, the Company entered into a commitment to purchase at least $45.0 million of cloud hosting services over a period of five years commencing on June 1, 2020 and ending on May 31, 2025. If the spend commitment is not met at the end of the term, the Company is obligated to pay the full amount of the outstanding balance (“shortfall payment”). The shortfall payment may be applied as a prepayment against consumption, including to purchase reserved instances, during an additional twelve-month coverage period expiring on May 31, 2026, at which time any unused amount would be forfeited. As of September 30, 2020, the Company had satisfied $1.6 million of its commitment.

 

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Palantir Technologies Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

Litigation and Legal Proceedings

From time to time, third parties may assert patent infringement claims against the Company. In addition, from time to time, the Company may be subject to other legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks, copyrights, and other intellectual property rights; employment claims; securities claims; investor claims; corporate claims; class action claims; and general contract, tort, or other claims. The Company may from time to time also be subject to various legal or government claims, disputes, or investigations. Such matters may include, but not be limited to, claims, disputes, allegations, or investigations related to warranty; refund; breach of contract; breach, leak, or misuse of personal data or confidential information; employment; government procurement; intellectual property; government regulation or compliance (including but not limited to anti-corruption requirements, export or other trade controls, data privacy or data protection, cybersecurity requirements, or antitrust/competition law requirements); securities; investor; corporate; or other matters. The Company is unable to predict whether or when any such matters may arise, the outcome of these matters, or the ultimate legal and financial liability, and cannot reasonably estimate the possible loss or range of loss at this time and accordingly has not accrued a related liability.

On December 14, 2017, members of KT4 Partners LLC (Managing Member Marc Abramowitz) and Sandra Martin Clark, as trustee for the Marc Abramowitz Irrevocable Trust Number 7 (together, “KT4 Plaintiffs”) filed an action in the Delaware Superior Court against the Company and Disruptive Technology Advisers LLC. The complaint alleges tortious interference with prospective economic advantage and civil conspiracy in connection with a potential sale of stock by the KT4 Plaintiffs to a third party. The KT4 Plaintiffs seek compensatory and punitive damages, interest, fees, and costs.

On August 30, 2019, BTIG, LLC (the “BTIG Plaintiff”), the alleged broker of the potential sale of stock that is the subject of the KT4 Plaintiffs’ December 2017 action, filed an action in the Delaware Superior Court against the Company and Disruptive Technology Advisers LLC. The complaint alleges tortious interference with prospective economic advantage and civil conspiracy in connection with the same potential sale of stock at issue in the KT4 Plaintiffs’ action by a group of sellers purportedly represented by the BTIG Plaintiff to a third party. The BTIG Plaintiff is seeking compensatory and punitive damages, interest, fees, and costs.

The Company believes these lawsuits are without merit and is vigorously defending itself against them. Given the uncertainty of litigation it may be reasonably possible that the Company will incur a loss with regards to these matters; however, it cannot currently estimate a range of possible losses. Accordingly, the Company is unable at this time to estimate the overall effects that may result from these cases on its financial condition, results of operations, or cash flows.

As of September 30, 2020 and December 31, 2019, the Company was not aware of any currently pending legal matters or claims, individually or in the aggregate, that are expected to have a material adverse impact on its condensed consolidated financial statements.

Warranties and Indemnification

The Company generally provides a warranty for its software products and services and a service level agreement (“SLA”) for the Company’s performance of software operations via its operations and maintenance (“O&M”) services to its customers. The Company’s products are generally warranted to perform substantially as described in the associated product documentation during the subscription term or for a period of up to 90 days where the software is hosted by the customer; and the Company includes O&M services as part of its subscription and license agreements to support this warranty and maintain the operability of the software. The Company’s services

 

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Palantir Technologies Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

are generally warranted to be performed in a professional manner and by an adequate staff with knowledge about the products. In the event there is a failure of such warranties, the Company generally is obligated to correct the product or service to conform to the warranty provision, as set forth in the applicable SLA, or, if the Company is unable to do so, the customer is entitled to seek a refund of the purchase price of the product and service (generally prorated over the contract term). Due to the absence of historical warranty claims, the Company’s expectations of future claims related to products under warranty continue to be insignificant. The Company has not recorded warranty expense or related accruals as of September 30, 2020 and December 31, 2019.

The Company generally agrees to indemnify its customers against legal claims that the Company’s software products infringe certain third-party intellectual property rights and accounts for its indemnification obligations. In the event of such a claim, the Company is generally obligated to defend its customer against the claim and to either settle the claim at the Company’s expense or pay damages that the customer is legally required to pay to the third-party claimant. In addition, in the event of an infringement, the Company generally agrees to secure the right for the customer to continue using the infringing product; to modify or replace the infringing product; or, if those options are not commercially practicable, to refund the cost of the software, as prorated over the period. To date, the Company has not been required to make any payment resulting from infringement claims asserted against its customers and does not believe that the Company will be liable for such claims in the foreseeable future. As such, the Company has not recorded a liability for infringement costs as of September 30, 2020 and December 31, 2019.

The Company has obligations under certain circumstances to indemnify each of the defendant directors and certain officers against judgments, fines, settlements, and expenses related to claims against such directors and certain officers and otherwise to the fullest extent permitted under the law and the Company’s bylaws and Amended and Restated Certificate of Incorporation.

Contingent Compensation

During 2008, the Company formed a retention plan for certain employees and other service providers that were previously focused on the development of certain products of the Company relating to the financial industry (“Retention Plan”). The Company had not accrued any amounts under the Retention Plan, as of December 31, 2019 as payments were contingent on future events that were not considered probable. During August 2020, the Company’s Board of Directors determined no amounts were payable under the Retention Plan and the Retention Plan was terminated.

9. Stockholders’ Equity (Deficit)

During September 2020, the Company filed an amended and restated certificate of incorporation, which became effective on the date of its filing. The amended and restated certificate of incorporation authorized the issuance of a total of 20,000,000,000 shares of Class A common stock, 2,700,000,000 shares of Class B common stock, 1,005,000 shares of Class F common stock, and 2,000,000,000 shares of undesignated preferred stock. Substantially concurrently with the filing and acceptance of the amended and restated certificate of incorporation in connection with the Direct Listing, each of the Founders exchanged 335,000 shares of their Class B common stock for an equivalent number of shares of Class F common stock.

The Company’s Class A, Class B, and Class F common stock all have the same rights, except with respect to voting and conversion rights. Class A and Class B common stock have voting rights of 1 and 10 votes per share, respectively. The Class F common stock has a variable number of votes and is convertible at any time, at the option of the holder thereof, into one share of Class B common stock. All shares of Class F common stock are held by a voting trust established by the Founders. The Class F common stock generally give the Founders the

 

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Palantir Technologies Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

ability to control up to 49.999999% of the total voting power of the Company’s capital stock, so long as the Founders and certain of their affiliates collectively meet a minimum ownership threshold, which was 100.0 million of the Company’s equity securities as of September 30, 2020.

Holders of Class A, Class B, and Class F common stock are entitled to dividends when, as and, if declared by the Company’s Board of Directors, subject to the rights of the holders of all classes of stock outstanding having priority rights to dividends. No dividends have been declared as of September 30, 2020.

During the nine months ended September 30, 2020 the Company sold a total of 206,500,523 shares of its Class A common stock at a price of $4.65 per share, for aggregate proceeds of $942.5 million, net of issuance costs of $17.7 million. Included in these sales were 107,526,881 shares of Class A common stock sold to SOMPO, a partner investor in the Company’s equity method investee, Palantir Japan.

In connection with the Direct Listing in September 2020, all outstanding shares of redeemable convertible preferred stock and convertible preferred stock were converted into 4,017,378 and 793,725,807 shares of Class B common stock, respectively, and 1,005,000 shares of Class B common stock held by the Founders were exchanged for an equal number of shares of Class F common stock.

The following represented the total authorized, issued, and outstanding shares for each class of common stock:

 

     As of September 30, 2020    As of December 31, 2019
     Authorized    Issued    Outstanding    Authorized    Issued    Outstanding

Common stock:

 

        

Class A

     20,000,000,000      1,320,584,721        1,320,584,721        2,200,000,000      315,615,753      309,223,182

Class B

     2,700,000,000      405,096,034        405,096,034        1,800,000,000      272,273,934      272,273,934

Class F

     1,005,000      1,005,000      1,005,000      —          —          —    
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total

     22,701,005,000      1,726,685,755      1,726,685,755      4,000,000,000      587,889,687      581,497,116
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Treasury Stock

On April 30, 2020, the Board of Directors approved the retirement of all shares of treasury stock. Retirement of treasury stock was recorded as a reduction of common stock and additional paid-in capital. As of September 30, 2020, the Company held no shares as treasury stock.

10. Warrants

During the three months ended September 30, 2020, a warrant for 2,586,208 shares of Series D preferred stock with a strike price of $0.7406 was cashless exercised and net settled into 2,380,034 shares of Series D convertible preferred stock. Additionally, a warrant for 7,632,154 shares of Class B common stock with a strike price of $0.001 was cashless exercised and net settled into 7,631,329 shares of Class B common stock.

Upon the effectiveness of the amended and restated certificate of incorporation filed in connection with the Direct Listing, all of the outstanding preferred stock warrants were converted into common stock warrants. As a result of the conversion, the warrants became equity-classified and the warrants liability was reclassified to additional paid-in capital.

 

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Palantir Technologies Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

As of September 30, 2020, warrants outstanding include warrants to purchase 5,211,093 shares of Class B common stock with a strike price of $6.13 per share, and warrants to purchase 814,666 shares of Class B common stock with a strike price of $3.51 per share. The warrants expire in between December 2021 to January 2025.

In addition, the Company has warrants outstanding to purchase up to 13,042,415 shares of Class B common stock that will be automatically net exercised upon a Qualifying IPO, which did not include the Company’s Direct Listing, and only if the valuation of the Company immediately prior to such IPO (“IPO Valuation”) is less than $12.9 billion. These warrants expire in November 2023 and, as of September 30, 2020, were considered not probable of vesting.

11. Stock-Based Compensation

2010 Equity Incentive Plan

In 2010, the Company adopted the 2010 Equity Incentive Plan, as amended from time to time (“Amended 2010 Equity Incentive Plan”, or “2010 Plan”). The 2010 Plan permitted the granting of incentive stock options (“ISOs”), non-statutory stock options (“NSOs”), stock appreciation rights (“SARs”), restricted stock, RSUs, and growth units to eligible participants. Under the 2010 Plan, the exercise price of options granted generally was at least equal to the fair market value of the applicable class of the Company’s common stock on the date of grant. Options and other equity awards become vested and, if applicable, exercisable based on terms determined by the Board of Directors or other plan administrator on the date of grant (or per later modification), which was typically five years for new employees and varies for subsequent grants. Under the 2010 Plan, unless provided otherwise for an applicable award, the vesting and exercisability of awards accelerates by 25% on a change in control, if the award holder remains a service provider as of or immediately prior to such event.

The 2010 Plan was terminated prior to the Company’s Direct Listing, and no additional awards will be granted under the 2010 Plan. However, the 2010 Plan will continue to govern the terms and conditions of the outstanding awards previously granted under the 2010 Plan.

2020 Executive Equity Incentive Plan

In August 2020, the Company’s Board of Directors approved the 2020 Executive Equity Incentive Plan (the “Executive Equity Plan”). The Executive Equity Plan permitted the granting NSOs and RSUs to the Company’s employees, consultants, and directors. A total of 165,900,000 shares of the Company’s Class B common stock were reserved for issuance under the Executive Equity Plan. During August 2020, options to purchase 162,000,000 shares of Class B common stock and restricted stock units covering 3,900,000 shares of the Company’s Class B common stock were granted to certain officers and all were outstanding as of September 30, 2020.

The Executive Equity Plan was terminated prior to the Company’s Direct Listing, and no additional awards will be granted under the Executive Equity Plan. However, the Executive Equity Plan will continue to govern the terms and conditions of the outstanding awards previously granted under the Executive Equity Plan.

2020 Equity Incentive Plan

In September 2020, prior to the Direct Listing, the Company’s Board of Directors approved the 2020 Equity Incentive Plan (“2020 Plan”). The 2020 Plan provides for the grant of ISOs, NSOs, restricted stock, RSUs, SARs, and performance awards to the Company’s employees, directors, and consultants. A total of 150,000,000 shares

 

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Palantir Technologies Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

of the Company’s Class A common stock are reserved for issuance pursuant to the 2020 Plan. In addition, the number of shares of Class A common stock reserved for issuance under the 2020 Plan includes the number of shares of Class A common stock or Class B common stock subject to awards under the Company’s Amended 2010 Equity Incentive Plan and Executive Equity Plan. Shares of Class B common stock added to the 2020 Plan from the 2010 Plan or Executive Equity Plan are reserved for issuance under the Company’s 2020 Plan as Class A common stock. The number of shares of Class A common stock available for issuance under the 2020 Plan will also include an annual increase on the first day of each fiscal year beginning on January 1, 2022, equal to the least of:

 

   

250,000,000 shares of the Company’s Class A common stock;

 

   

Five percent (5%) of the outstanding shares of the Company’s common stock as of the last day of the immediately preceding fiscal year; or

 

   

such other amount as the administrator of the 2020 Plan determines.

Under the 2020 Plan, the exercise price of options granted is generally at least equal to the fair market value of the Company’s Class A common stock on the date of grant. The term of an ISO generally may not exceed ten years. Additionally, the exercise price of any ISO granted to a 10% stockholder shall not be less than 110% of the estimated fair value of the common stock on the date of grant, and the term of such option grant shall not exceed five years. Options and other equity awards become vested and, if applicable, exercisable based on terms determined by the Board of Directors or an other plan administrator on the date of grant, which is typically five years for new employees and varies for subsequent grants.

Stock Options

The following table summarizes stock option activity for the nine months ended September 30, 2020 (in thousands, except share and per share amounts):

 

     Options
Outstanding
   Weighted-
Average

Exercise Price
Per Share
     Weighted-
Average

Remaining
Contractual
Life (years)
     Aggregate
Intrinsic Value
 

Balance as of December 31, 2019

     497,441,159    $ 4.10      5.81    $ 975,798

Options granted(1)

     397,885,337      7.43      

Options exercised

     (69,444,099      1.67      

Options canceled and forfeited(1)

     (238,005,542      5.95      
  

 

 

 

        

Balance as of September 30, 2020

     587,876,855    $ 5.89      7.99    $ 2,120,561
  

 

 

 

        

Options vested and exercisable as of September 30, 2020

     344,033,233    $ 3.64      5.90    $ 2,014,537
  

 

 

 

        

 

  (1)

Includes options that were canceled and re-granted as part of the option repricing modification, as further discussed below.

As of September 30, 2020, the unrecognized expense related to options outstanding was $1.2 billion, which is expected to be recognized over a weighted-average service period of 8.07 years.

Additionally, as of September 30, 2020, there were 100,000 cash-settled SARs outstanding and exercisable at an exercise price of $2.70 per share. No SARs were granted during the nine months ended September 30, 2020.

 

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Palantir Technologies Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

Stock Option Modifications

During the nine months ended September 30, 2020, the Company modified 37,451,458 fully vested and outstanding options that were approaching expiration. The extension of the original options was recorded as a stock option modification whereby the incremental fair value of each option was determined at the date of the modification and $9.4 million was immediately recognized related to vested options. The weighted average extended term for the modified options was approximately 0.46 years.

In June 2020, the Company repriced 235,885,337 stock options. As part of the repricing, the original options were canceled and new options were granted with an exercise price of $4.72 per share and a remaining contractual term of ten years. The new options were generally subject to the same service-based vesting schedule as the original options. The repricing was recorded as a stock option modification whereby the incremental fair value of each option was determined at the date of the modification and $74.0 million was immediately recognized related to vested options in June 2020 and an additional $4.5 million was recognized during the three months ended September 30, 2020. As of September 30, 2020, there was remaining incremental fair value of $27.0 million which will be recognized over the remaining requisite service period.

RSUs

The following table summarizes the RSU activity for the nine months ended September 30, 2020:

 

     RSUs
Outstanding
  Weighted Average
Grant Date Fair
Value per Share

Unvested and outstanding as of December 31, 2019

     179,494,619   $ 6.03

RSUs granted

     96,707,758     7.49

RSUs vested

     (68,149,214     6.18

RSUs canceled

     (8,397,930     6.02
  

 

 

 

 

Unvested and outstanding at September 30, 2020

     199,655,233   $ 6.69
  

 

 

 

 

The performance-based vesting condition for all RSUs was satisfied upon the Company’s Direct Listing, September 30, 2020. Upon such satisfaction, 68,149,214 RSUs, for which the service-based vesting condition was met as of such date, vested and converted into an equivalent number of shares of Class A common stock. As a result, the Company recognized $769.5 million in cumulative stock-based compensation expense using the accelerated attribution method from the grant date. As of September 30, 2020, the total unrecognized stock-based compensation expense related to the RSUs outstanding was $1.0 billion, which the Company expects to recognize over 3.13 years.

Growth Units

In May 2019, the Company granted growth units which vest upon the satisfaction of both a performance-based vesting condition, which was satisfied upon the Company’s Direct Listing, and a service-based vesting condition. Growth units have a formula used to calculate the number of shares of the Company’s common stock that would be earned by the holder upon the satisfaction of all vesting criteria.

Upon the Direct Listing, the Company recognized $8.4 million in cumulative stock-based compensation expense using the accelerated attribution method from the service start date through the effective date of the Direct

 

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Palantir Technologies Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

Listing. As of September 30, 2020, the total unrecognized stock-based compensation expense related to the 3,582,674 growth units outstanding was $2.4 million, which the Company expects to recognize over the remainder of the 180-day service period following the Direct Listing. Upon satisfaction of the 180-day service period, the outstanding growth units will fully vest and convert into 1.5 million shares of common stock.

Stock-based Compensation Expense

Total stock-based compensation expense was as follows (in thousands):

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
         2020            2019            2020            2019    

Cost of revenue

   $ 94,385    $ 7,183    $ 120,285    $ 16,520

Sales and marketing

     263,958      15,898      322,353      56,242

Research and development

     256,769      15,031      309,698      49,137

General and administrative

     231,847      13,651      276,578      42,751
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total stock-based compensation expense

   $ 846,959    $ 51,763    $ 1,028,914    $ 164,650
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Related Party Non-Recourse Note

In November 2016, the Company entered into a non-recourse promissory note to lend an employee director $25.9 million, which was secured by 10,500,000 shares of the Company common stock held by the employee director (“pledged collateral”). Such arrangement was accounted for as a stock option issued to the employee, and the Company recorded the related stock-based compensation expense upon the issuance of the note. The promissory note accrued interest at a rate of 1.5% per annum, compounded semi-annually.

In August 2020, the Company received a payment of $26.6 million for a portion of the principal and accrued interest on the outstanding non-recourse promissory note in the form of 3,500,000 shares of common stock based on the fair market value of the common stock on the date of repayment. The Company forgave the remaining $0.8 million owed under the note, guaranteed the employee director a tax neutrality payment to cover his additional tax liability associated with the transaction, and terminated its security interest in the remaining shares of common stock that were originally pledged as collateral. The forgiveness of the remaining debt and the provision of the tax neutrality payment was accounted for as a modification to the original stock option, and the Company recorded additional stock-based compensation expense of $4.5 million during the three months ended September 30, 2020. As of September 30, 2020, the Company paid $0.8 million in tax neutrality payments and accrued a $4.0 million liability for its estimate of the remaining amount to be paid to the employee director.

12. Income Taxes

The Company recorded a benefit from income taxes of $8.5 million and a provision (benefit) for income taxes $2.0 million for the three months ended September 30, 2020 and 2019, respectively, and a benefit from income taxes of $5.0 million and a provision (benefit) for income taxes of $8.5 million for the nine months ended September 30, 2020 and 2019, respectively. The Company is subject to income tax in the U.S. as well as other tax jurisdictions in which it conducts business. The change in provision (benefit) for income taxes was primarily due to decreases in profits from the Company’s international operations, benefits from stock-based compensation windfalls, and the revaluation of its United Kingdom (“UK”) deferred tax assets as a result of a change in the UK corporate tax rate enacted during the current quarter.

 

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Palantir Technologies Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

The realization of deferred tax assets is dependent upon the generation of sufficient taxable income of the appropriate character in future periods. The Company assesses its ability to realize the deferred tax assets on a quarterly basis and it establishes a valuation allowance if it is more-likely-than-not that some portion of the deferred tax assets will not be realized. The Company weighs all available positive and negative evidence, including its earnings history and results of recent operations, scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies. Due to the weight of objectively verifiable negative evidence, including its history of losses in certain jurisdictions, the Company believes that it is more likely than not that its U.S. federal and state deferred tax assets will not be fully realized. Accordingly, the Company has maintained a valuation allowance on its U.S. federal and state deferred tax assets. The Company’s effective rate differs from the U.S. statutory rate primarily due to the valuation allowance recorded on its U.S. federal losses, foreign income taxed at different rates, non-deductible of stock-based compensation, and withholding tax expense.

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020 in the United States. The CARES Act and related notices include several significant provisions, including delaying certain payroll tax payments, mandatory transition tax payments under the Tax Cut and Jobs Act, and estimated income tax payments that the Company is deferring to future periods. The CARES Act did not have a material impact on the Company’s financial results, including on its annual estimated effective tax rate or on its liquidity. The Company will continue to monitor and assess the impact the CARES Act and similar legislation in other countries may have on its business and financial results.

13. Net Loss Per Share Attributable to Common Stockholders

The following table presents the calculation of basic and diluted net loss per share attributable to common stockholders (in thousands, except share and per share amounts):

 

                                                                                           
    Three Months Ended
September  30,
  Nine Months Ended
September  30,
    2020   2019   2020   2019

Numerator

       

Net loss attributable to common stockholders

  $ (853,319   $ (139,860   $ (1,018,048   $ (420,319

Less: Change in fair value attributable to participating securities

    —         —         (5,483     —    
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders, for diluted net loss per share

  $ (853,319   $ (139,860   $ (1,023,531   $ (420,319
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator

       

Weighted-average shares used in computing net loss per share, basic

    905,462,010     580,104,846     713,879,104     574,342,061
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares used in computing net loss per share, diluted

    905,462,010     580,104,846     716,027,459     574,342,061
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share

       

Net loss per share attributable to common stockholders, basic

  $ (0.94   $ (0.24   $ (1.43   $ (0.73
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common stockholders, diluted

  $ (0.94   $ (0.24   $ (1.43   $ (0.73
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Palantir Technologies Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

The following outstanding potentially dilutive common stock equivalents have been excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented due to their anti-dilutive effect:

 

     As of September 30,  
     2020      2019  

Redeemable convertible preferred stock

     —          4,017,378

Convertible preferred stock

     —          794,336,186

Warrants to purchase redeemable convertible and convertible preferred stock

     —          21,831,545

Warrants to purchase common stock

     19,068,174      993,266

Options and SARs issued and outstanding

     587,976,855      470,352,024

RSUs outstanding

     199,655,233      —    

Growth units outstanding

     3,582,674      22,377,040
  

 

 

    

 

 

 

Total

     810,282,936      1,313,907,439
  

 

 

    

 

 

 

14. Segment and Geographic Information

The following reporting segment tables reflect the results of the Company’s reportable operating segments consistent with the manner in which the chief operating decision maker (“CODM”) evaluates the performance of each segment and allocates the Company’s resources. The CODM does not evaluate the performance of the Company’s assets on a segment basis for internal management reporting and, therefore, such information is not presented.

Contribution is used, in part, to evaluate the performance of, and allocate resources to, each of the segments. Segment contribution is segment revenue less the related costs of revenue and sales and marketing expenses. It excludes certain operating expenses that are not allocated to segments because they are separately managed at the consolidated corporate level. These unallocated costs include stock-based compensation expense, research and development expenses, and general and administrative expenses.

 

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Palantir Technologies Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

Financial information for each reportable segment was as follows (in thousands):

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2020    2019    2020    2019

Revenue:

           

Government

   $ 162,561    $ 96,801    $ 420,257    $ 242,843

Commercial

          126,805           93,740           350,325           270,354
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total revenue

   $ 289,366    $ 190,541    $ 770,582    $ 513,197
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
         2020        2019    2020    2019

Contribution:

           

Government

   $ 93,962    $ 23,934    $ 226,186    $ 46,614

Commercial

               69,496                4,949                168,908                35,619
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total segment contribution

   $ 163,458    $ 28,883    $ 395,094    $ 82,233
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

The reconciliation of segment financial information to loss from operations is as follows (in thousands):

 

     Three Months Ended
September 30,
  Nine Months Ended
September 30,
     2020   2019   2020   2019

Loss from operations

   $ (847,777   $ (144,140   $ (1,017,107   $ (428,993

Research and development expenses(1)

     57,146     60,849     156,832     180,591

General and administrative expenses(1)

     107,130     60,411     226,455     165,985

Stock-based compensation expense

     846,959     51,763     1,028,914     164,650
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment contribution

   $        163,458   $       28,883   $         395,094   $         82,233
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  (1) 

Excludes stock-based compensation expense.

Geographic Information

Revenue by geography is based on the customer’s headquarters or agency location at the time of sale. Revenue is as follows (in thousands, except percentages):

 

     Three Months Ended September 30,
     2020   2019
     Amount    %   Amount    %

Revenue:

          

United States

   $ 156,336      54   $ 79,185      42

United Kingdom

     35,432      12     29,765      16

France

     23,214      8     16,930      9

Rest of world(1)

     74,384      26     64,661      33
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Total revenue

   $           289,366                 100   $           190,541                 100
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

  (1) 

No other country represents 10% or more of total revenue for the three months ended September 30, 2020 or 2019.

 

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Palantir Technologies Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

                                                                                           
     Nine Months Ended September 30,
     2020   2019
     Amount    %   Amount    %

Revenue:

          

United States

   $ 391,106      51   $ 197,351      38

United Kingdom

     94,440      12     89,384      17

France

     78,572      10     50,222      10

Rest of world(1)

     206,464      27     176,240      35
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

Total revenue

   $           770,582                 100   $           513,197                 100
  

 

 

 

  

 

 

 

 

 

 

 

  

 

 

 

 

  (1)

No other country represents 10% or more of total revenue for the nine months ended September 30, 2020 or 2019.

 

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ITEM 2.

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 condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and the accompanying notes thereto included in our final prospectus (the “Prospectus”) filed with the Securities and Exchange Commission (the “SEC”) pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”) on September 30, 2020. This discussion contains forward-looking statements based upon current plans, expectations, and beliefs, involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements. You should review the section titled “Special Note Regarding Forward-Looking Statements” for a discussion of forward-looking statements and the section titled “Risk Factors” for a discussion of factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis and elsewhere in this Quarterly Report on Form 10-Q. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.

Overview

We founded the company in 2003 to build software for use in counterterrorism operations.

In 2008, we released our first platform, Palantir Gotham (“Gotham”), for customers in the intelligence sector. Gotham enables users to identify patterns hidden deep within datasets, ranging from signals intelligence sources to reports from confidential informants.

Defense agencies in the United States then began using Gotham to investigate potential threats and to help protect soldiers from improvised explosive devices. Today, the platform is widely used by government agencies in the United States and its allies. Our software is on the front lines, sometimes literally, and that means so are we.

We later began working with leading companies across industries, including companies in the energy, transportation, financial services, and healthcare sectors. In 2016, we released our second software platform, Palantir Foundry (“Foundry”), to address a common set of challenges that we saw at large companies.

Foundry is becoming a central operating system not only for individual institutions but also for entire industries.

In 2017, for example, our partnership with Airbus expanded into a platform for the aviation industry, and today connects data from more than one hundred airlines and 9,000 aircraft around the world.

We believe that every large institution faces challenges that our platforms were designed to address. Our focus in the near term is to build partnerships with institutions that have the leadership necessary to effect structural change within their organizations — to reconstitute their operations around data. Over the long term, we believe that every large institution in the markets we serve is a potential partner.

Direct Listing

On September 30, 2020, we completed a direct listing of our Class A common stock (the “Direct Listing”), on the New York Stock Exchange (the “NYSE”). Immediately prior to the direct listing and the filing of our amended and restated certificate of incorporation, all outstanding shares of redeemable convertible preferred stock and convertible preferred stock were converted into 797,743,185 shares of our Class B common stock, and all of our outstanding preferred stock warrants were converted into common stock warrants, which resulted in the reclassification of the warrants liability to additional paid-in capital. Additionally, our restricted stock units

 

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(“RSUs”) had a performance vesting condition that was satisfied upon the completion of the Direct Listing. Accordingly, the Direct Listing resulted in the vesting and settlement of RSUs covering 68,149,214 shares of Class A common stock and as a result we recorded cumulative stock-based compensation of $769.5 million on September 30, 2020.

In addition, we incurred fees related to financial advisory, accounting, legal and other professional services related to the Direct Listing and public company readiness initiatives and recorded $53.7 million and $56.2 million primarily in general and administrative expense for the three and nine months ended September 30, 2020, respectively.

Our Business

For the three months ended September 30, 2020, we generated $289.4 million in revenue, reflecting a 52% growth rate from the three months ended September 30, 2019, when we generated $190.5 million in revenue. In the nine months ended September 30, 2020, we generated $770.6 million in revenue, reflecting a 50% growth rate from the nine months ended September 30, 2019, when we generated $513.2 million in revenue.

As of September 30, 2020, we had 132 customers, including leading companies in various commercial sectors as well as government agencies around the world.

We define a customer as an organization from which we have recognized revenue in a reporting period. For large government agencies, where a single institution has multiple divisions, units, or subsidiary agencies, each such division, unit, or subsidiary agency that enters into a separate contract with us and is invoiced as a separate entity is treated as a separate customer. For example, while the U.S. Food and Drug Administration, Centers for Disease Control, and National Institutes of Health are subsidiary agencies of the U.S. Department of Health and Human Services, we treat each of those agencies as a separate customer given that the governing structures and procurement processes of each agency are independent.

We have built lasting and significant customer relationships with some of the world’s leading government institutions and companies. Our average revenue per customer in the nine months ended September 30, 2020 was $5.8 million, which grew 38% from $4.2 million per customer in the nine months ended September 30, 2019. Our top twenty customers, based on our revenue in the nine months ended September 30, 2020, generated $471.1 million in revenue, or 61% of our total revenue in that period. From those top twenty customers, we generated an average revenue per customer of $23.6 million during the nine months ended September 30, 2020, which grew 36% from $17.4 million per customer in the nine months ended September 30, 2019.

Coronavirus (“COVID-19”) Impact

As a result of COVID-19, we have taken precautionary measures in order to minimize the risk of the virus to our employees, our customers, and the communities in which we operate, including the suspension of all non-essential business travel of employees and the temporary closure of all of our major offices. Although the majority of our workforce currently works remotely, there has been minimal disruption in our ability to ensure the effective operation of our software platforms.

The economic consequences of the COVID-19 pandemic have been challenging for certain of our customers and prospective customers. While the broader implications of the COVID-19 pandemic on our results of operations and overall financial performance remain uncertain, the COVID-19 pandemic has, to date, not had a material adverse impact on our results of operations. The economic effects of the pandemic and resulting societal changes are currently not predictable.

The pandemic has made clear to many of our customers that accommodating the extended timelines ordinarily required to realize results from implementing new software solutions is not an option during a crisis. As a result,

 

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customers are increasingly adopting our software, which can be ready in days, over internal software development efforts, which may take months or years.

We have seen a decrease in our travel and office-related expenditures, including temporary closures of our offices globally and reductions in related operating expenses, related to the ongoing pandemic. However, improvement of our contribution metric in the first nine months of this year has also been driven by the expansion of existing customer accounts, improved sales efficiency, and the increasing deployment of centralized hosting and other software deployment infrastructure. While we expect our travel and office-related expenditures to increase moving forward, especially once we reopen our offices, we do not expect such expenditures to return to their pre-pandemic levels, given that we have made significant investments in enabling employees to work with customers remotely.

See the section titled “Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q and our final Prospectus for further discussion of the possible impact of the COVID-19 pandemic on our business.

Expansion & Growth

We expanded into the commercial sector in recent years. In the three months ended September 30, 2020, 44% of our revenue came from commercial customers and 56% came from government agencies. In the nine months ended September 30, 2020, 45% of our revenue came from commercial customers and 55% came from government agencies.

Large organizations in the commercial and government sectors face similar challenges when it comes to managing data, and we intend to expand our reach in both markets moving forward.

We have also expanded significantly outside the United States. In the three months ended September 30, 2020, we generated 54% of our revenue from customers in the United States and the remaining 46% from customers abroad. In the nine months ended September 30, 2020, we generated 51% of our revenue from customers in the United States and the remaining 49% from customers abroad.

Our operating results have improved significantly in recent years when excluding stock-based compensation. In the three and nine months ended September 30, 2020, we incurred losses from operations of $847.8 million and $1.0 billion, respectively, or losses from operations of $0.8 million and income from operations of $11.8 million, respectively, when excluding stock-based compensation. In the three and nine months ended September 30, 2019, our losses from operations were $144.1 million and $429.0 million, respectively, or $92.4 million and $264.3 million, respectively, when excluding stock-based compensation.

In the nine months ended September 30, 2020, our gross profit was $488.5 million, reflecting a gross margin of 63%, or 79% when excluding stock-based compensation. In the nine months ended September 30, 2019, our gross profit was $346.7 million, reflecting a gross margin of 68%, or 71% when excluding stock-based compensation. In the three months ended September 30, 2020, our gross profit was $140.0 million, reflecting a gross margin of 48%, or 81% when excluding stock-based compensation. In the three months ended September 30, 2019, our gross profit was $125.5 million, reflecting a gross margin of 66%, or 70% when excluding stock-based compensation.

Our Business Model

Our customers pay us to use the software platforms we have built.

As of September 30, 2020, we expect to generate revenue under our existing customer contracts for an additional 3.6 years on average, including existing contractual obligations and assuming that our customers exercise all of the contractual options available to them, although this may change as we enter into new contracts or if

 

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customers terminate for convenience. We calculate this duration on a dollar-weighted basis to adjust for small deals. The timing of our customer billings and receipt of payments varies from contract to contract. Revenue is generally recognized over the contract term. Our contracts generally include terms that allow the customer to terminate the contract for convenience.

Our business model with respect to acquiring and growing our accounts has three phases: (1) Acquire, (2) Expand, and (3) Scale. We categorize all customers into cohorts on December 31st each year.

Our decisions about which customer relationships require further investment may change over time, based on our assessment of the potential long-term value that our software can generate for them.

As a result, customers may move back and forth through phases, as relationship needs and our assessment of the merits of further investment change. We enter into initial pilots with customers, generally at our own expense and without a guarantee of future returns, in order to access a unique set of opportunities that others may pass over for lack of resources and shorter investment horizons.

Some customers may have a rapid Acquire phase followed by a long Expand phase. Others may skip the Expand phase altogether and move immediately into the Scale phase. We manage customers at the account level, not by industry or sector, so that we can optimize on the specific growth opportunities for each.

In 2019, we generated a total of $742.6 million in revenue, of which $0.6 million came from customers in the Acquire phase, $176.3 million came from customers in the Expand phase, and $565.7 million came from customers in the Scale phase.

In the nine months ended September 30, 2020, those same customers from 2019 generated a total of $747.7 million in revenue. New customers acquired during the nine months ended September 30, 2020 generated an additional $22.8 million in revenue and will be assigned a cohort as of December 31, 2020. A more detailed discussion of the three phases, for purposes of illustration of how we manage accounts across the business, follows below.

Acquire

We actively pursue discussions with existing and prospective customers in order to identify ways in which our software platforms can provide long-term value.

In the first phase, we typically acquire new opportunities with minimal risk to our customers through short-term pilot deployments of our software platforms at no or low cost to them. We believe in proving the value of our platforms to our customers. During these short-term pilots, we operate the accounts at a loss. We believe that our investments during this phase will drive future revenue growth.

We define a customer or potential customer as being in the Acquire phase if, as of the end of a calendar year, we have recognized less than $100,000 in revenue from the customer that respective year. Customers may make nominal payments in connection with the evaluation of our software that we do not consider material in evaluating the performance of our accounts.

We evaluate the success of customer accounts in the Acquire phase based on the revenue such accounts generate in the following year. In 2019, we generated $0.6 million in revenue from customers in the Acquire phase, which yielded a contribution loss of $65.4 million. In the nine months ended September 30, 2020, those same customers generated $41.1 million in revenue which yielded a contribution loss of $4.2 million.

 

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Expand

Our investment in this second phase is often significant as we seek to understand the principal challenges faced by our customers and ensure that our software delivers value and results.

We define a customer in the Expand phase as any customer from which we have recognized more than $100,000 in revenue in a calendar year and whose account had a negative contribution margin during the year at issue, as determined as of the end of the year. In this phase, we operate at a loss, as measured by contribution margin, in order to drive future revenue growth and margin expansion.

In 2019, we generated $176.3 million in revenue from customers that were in the Expand phase as of the end of that year, with a contribution margin of (43)%. In the nine months ended September 30, 2020, those same customers generated $254.4 million in revenue, with a contribution margin of 41%.

Scale

As customer accounts mature, our investment costs relative to revenue generally decrease, while the value our software provides to our customer increases, often significantly, as usage of the platform increases across the customer’s operations. In this third phase, after having installed and configured the software across an entire enterprise, customers become more self-sufficient in their use of our platforms, including developing software and applications that run on top of our platforms, while still continuing to benefit from the support of our operations and maintenance (“O&M”) services.

We define a customer in the Scale phase as any customer from which we recognized more than $100,000 in revenue in a calendar year and whose account had a positive contribution margin during the year at issue, as determined as of the end of the year.

It is in the Scale phase of our partnerships with customers that we generally see contribution margin on particular accounts improve. In 2019, we generated $565.7 million in revenue from customers in the Scale phase, with a contribution margin of 55%. In the nine months ended September 30, 2020, those same customers generated $452.2 million in revenue with a contribution margin of 69%.

We believe that our customers will move into the Scale phase over the long term. We also believe that contribution margin for Scale phase accounts will increase further as we become more efficient at deploying our software platforms across the entirety of our customers’ operations and at managing and operating our software.

Government Contracts

Our partnerships with government agencies in the United States and abroad have had and will continue to have a significant impact on our business.

As of September 30, 2020, the total remaining deal value of the contracts that we had been awarded by government agencies in the United States and allied countries around the world, including existing contractual obligations and contractual options available to those government agencies, was $1.3 billion, up 14% from December 31, 2019, when the total value of such contracts was $1.1 billion.

When calculating the total value of such contracts, we do not include government contracts totaling $2.6 billion, as of September 30, 2020, that we have been awarded where the funding of such contracts — also known as indefinite delivery, indefinite quantity (“IDIQ”) contracts — has not yet been determined. Funding of such contracts is not guaranteed. The majority of our government contracts are subject to termination for convenience provisions, and the U.S. federal government is prohibited from exercising contract options more than one year in advance. As a result, there can be no guarantee that our contracts with government customers will not be terminated or that contract options will be exercised.

 

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Key Business Measure

In addition to the measures presented in our condensed consolidated financial statements, we use the following key non-GAAP business measure to help us evaluate our business, identify trends affecting our business, formulate business plans and financial projections, and make strategic decisions.

Contribution Margin

We believe that the revenue we generate relative to the costs we incur in order to generate such revenue is an important measure of the efficiency of our business. We define contribution margin as revenue less our cost of revenue and sales and marketing expenses, excluding stock-based compensation, divided by revenue. At the end of each year, we categorize each customer account into one of the three phases based on its revenue and contribution margin for that year.

Revenue is allocated to each customer account directly. The cost of revenue and sales and marketing costs include both the costs associated with the deployment and operation of our software as well as expenses associated with identifying new customers and expanding partnerships with existing ones. Our software engineers working with existing customers often manage the deployment and operation of our platforms as well as identify new ways that those platforms can be used. To calculate the contribution by customer, we allocate cost of revenue and sales and marketing expenses, excluding stock-based compensation, to an account pro rata based on headcount and time spent on the account during the period. To the extent certain costs or personnel are not directly assigned to a specific account, they are allocated pro rata based on total headcount staffed during such period. Direct costs, such as third-party cloud hosting services, are directly allocated to the account to which they relate.

Contribution margin, both across our business and on specific customer accounts, is intended to capture how much we have earned from customers after accounting for the costs associated with deploying and operating our software, as well as any sales and marketing expenses involved in acquiring and expanding our partnerships with those customers, including allocated overhead. We exclude stock-based compensation as it is a non-cash expense.

We believe that our contribution margin across the business and on specific customer accounts provides an important measure of the efficiency of our operations over time. We have included contribution margin because it is a key measure used by our management to evaluate our performance, and we believe that it also provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management team. Our calculation of contribution margin may differ from similarly titled measures, if any, reported by other companies. Contribution margin should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

For more information about contribution margin, including the limitations of this measure, and a reconciliation to loss from operations, see the section titled “— Non-GAAP Reconciliations” below.

 

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Non-GAAP Reconciliations

We use the non-GAAP measures contribution margin; gross profit and gross margin, excluding stock-based compensation; and income (loss) from operations, excluding stock-based compensation to help us evaluate our business, identify trends affecting our business, formulate business plans and financial projections, and make strategic decisions. We exclude stock-based compensation, which is a non-cash expense, from these non-GAAP financial measures because we believe that excluding this item provides meaningful supplemental information regarding operational performance and provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management team. Our definitions may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Further, these metrics have certain limitations, as they do not include the impact of certain expenses that are reflected in our condensed consolidated statement of operations. Thus, our non-GAAP contribution margin; gross profit and gross margin, excluding stock-based compensation; and income (loss) from operations, excluding stock-based compensation should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP.

We compensate for these limitations by providing reconciliations of these non-GAAP measures to the most comparable GAAP measures. We encourage investors and others to review our business, results of operations, and financial information in its entirety, not to rely on any single financial measure, and to view these non-GAAP measures in conjunction with the most directly comparable GAAP financial measures.

Contribution Margin

The following table provides a reconciliation of contribution margin for the three and nine months ended September 30, 2020 and 2019 (in thousands, except percentages):

 

                                                                           
     Three Months Ended
September 30,
  Nine Months Ended
September  30,
     2020   2019   2020   2019

Loss from operations

   $ (847,777   $ (144,140   $ (1,017,107   $ (428,993

Add:

        

Research and development expenses (1)

     57,146     60,849     156,832     180,591

General and administrative expenses (1)

     107,130     60,411     226,455     165,985

Stock-based compensation

     846,959     51,763     1,028,914     164,650
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contribution

   $ 163,458   $ 28,883   $ 395,094   $ 82,233
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contribution margin

     56     15     51     16
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  (1) 

Excludes stock-based compensation.

 

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Gross Profit and Gross Margin, Excluding Stock-Based Compensation

The following table provides a reconciliation of gross profit and gross margin, excluding stock-based compensation for the three and nine months ended September 30, 2020 and 2019 (in thousands, except percentages):

 

                                                                   
                Three Months Ended
September 30,
  Nine Months Ended
September  30,
     2020   2019   2020   2019

Gross profit

   $ 140,026   $ 125,468   $ 488,538   $ 346,726

Add: stock-based compensation

     94,385     7,183     120,285     16,520
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit, excluding stock-based compensation

   $ 234,411   $ 132,651   $ 608,823   $ 363,246
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin, excluding stock-based compensation

     81     70     79     71
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) from Operations, Excluding Stock-Based Compensation

The following table provides a reconciliation of income (loss) from operations, excluding stock-based compensation for the three and nine months ended September 30, 2020 and 2019 (in thousands):

 

                                                                           
     Three Months Ended
September 30,
   Nine Months Ended
September  30,
     2020    2019    2020    2019

Loss from operations

   $ (847,777    $ (144,140    $ (1,017,107    $ (428,993

Add: stock-based compensation

     846,959      51,763      1,028,914      164,650
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Income (loss) from operations, excluding stock- based compensation

   $ (818    $ (92,377    $ 11,807    $ (264,343
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Components of Results of Operations

Revenue

We generate revenue from the sale of subscriptions to access our software in our hosted environment with O&M services (“Palantir Cloud”), software subscriptions in our customers’ environments with ongoing O&M services (“On-Premises Software”), and professional services.

Palantir Cloud

Our Palantir Cloud subscriptions grant customers the right to access the software functionality in a hosted environment controlled by Palantir and are sold together with stand-ready O&M services, as further described below. We promise to provide continuous access to the hosted software throughout the contract term. Revenue associated with Palantir Cloud subscriptions is recognized over the contract term on a ratable basis, which is consistent with the transfer of control of the Palantir services to the customer.

On-Premises Software

Sales of our software subscriptions grant customers the right to use functional intellectual property, either on their internal hardware infrastructure or on their own cloud instance, over the contractual term and are also sold together with stand-ready O&M services. O&M services include critical updates and support and maintenance

 

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services required to operate the software and, as such, are necessary for the software to maintain its intended utility over the contractual term. Because of this requirement, we have concluded that the software subscriptions and O&M services, which together we refer to as our On-Premises Software, are highly interdependent and interrelated and represent a single distinct performance obligation within the context of the contract. Revenue is generally recognized over the contract term on a ratable basis.

Professional Services

Our professional services support the customers’ use of the software and include, as needed, on-demand user support, user-interface configuration, training, and ongoing ontology and data modeling support. Professional services contracts typically include the provision of on-demand professional services for the duration of the contractual term. These services are typically coterminous with a Palantir Cloud or On-Premises Software subscriptions. Professional services are on-demand, whereby we perform services throughout the contract period; therefore, the revenue is recognized over the contractual term.

Cost of Revenue

Cost of revenue primarily includes salaries, stock-based compensation expense, and benefits for personnel involved in performing O&M and professional services, as well as third-party cloud hosting services, allocated overhead, and other direct costs.

We expect that cost of revenue will increase in absolute dollars as our revenue grows and will vary from period-to-period as a percentage of revenue.

Sales and Marketing

Our sales and marketing efforts span all stages of our sales cycle, including personnel engaging with or executing pilots at new or existing customers. Sales and marketing costs primarily include salaries, stock-based compensation expense, and benefits for personnel involved in executing on pilots and customer growth activities, as well as third-party cloud hosting services for our pilots, marketing and sales event-related costs, and allocated overhead. Sales and marketing costs are generally expensed as incurred.

We expect that sales and marketing expenses will increase in absolute dollars as we continue to invest in our potential and current customers, in growing our business and enhancing our brand awareness.

Research and Development

Our research and development efforts are aimed at continuing to develop and refine our platforms, including adding new features and modules, increasing their functionality, and enhancing the usability of our platforms. Research and development costs primarily include salaries, stock-based compensation expense, and benefits for personnel involved in performing the activities to develop and refine our platforms, internal use third-party cloud hosting services and other IT-related costs, and allocated overhead. Research and development costs are expensed as incurred.

We plan to continue to invest in personnel to support our research and development efforts. As a result, we expect that research and development expenses will increase in absolute dollars for the foreseeable future as we continue to invest to support these activities.

General and Administrative

General and administrative costs include salaries, stock-based compensation expense, and benefits for personnel involved in our executive, finance, legal, human resources, and administrative functions, as well as third-party professional services and fees, and allocated overhead.

 

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We expect that general and administrative expenses will increase in absolute dollars as we hire additional personnel and enhance our systems, processes, and controls to support the growth in our business as well as our increased compliance and reporting requirements as a public company.

Interest Income

Interest income consists primarily of interest income earned on our cash, cash equivalents, and restricted cash balances.

Interest Expense

Interest expense consists primarily of interest expense and commitment fees incurred under our credit facilities.

Other Income (Expense), Net

Other income (expense), net consists primarily of foreign currency exchange gains and losses and our share of income and losses from our equity method investments.

Change in Fair Value of Warrants

The change in the fair value of warrants consists of the net changes in the fair value of our liability classified warrants to purchase redeemable convertible and convertible preferred stock that were remeasured at the end of each reporting period. In connection with the Direct Listing, all of the Company’s outstanding preferred stock warrants were converted into common stock warrants, which resulted in the reclassification of the warrants liability to additional paid-in capital. As such, we do not expect additional charges related to the fair value of these warrants.

Provision (Benefit) for Income Taxes

Provision (benefit) for income taxes consists of income taxes related to foreign and state jurisdictions in which we conduct business.

Segments

We have two operating segments, commercial and government, which were determined based on the manner in which the chief operating decision maker (“CODM”), who is our chief executive officer, manages our operations for purposes of allocating resources and evaluating performance. Various factors, including our organizational and management reporting structure and customer type, were considered in determining these operating segments.

Our operating segments are described below:

 

   

Commercial: This segment primarily serves customers working in non-government industries.

 

   

Government: This segment primarily serves customers that are agencies in the U.S. federal government and non-U.S. governments.

Segment profitability is evaluated based on contribution and contribution margin, which is segment revenue less the related costs of revenue and sales and marketing expenses, excluding stock-based compensation expense. To the extent costs of revenue or sales and marketing expenses are not directly attributable to a particular segment, they are allocated based upon headcount at each segment during the period. We use it, in part, to evaluate the performance of, and allocate resources to, each of our segments. It excludes certain operating expenses that are not allocated to segments because they are separately managed at the consolidated corporate level. These

 

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unallocated costs include stock-based compensation expense, research and development costs, and general and administrative costs, such as legal and accounting. Contribution margin is segment contribution divided by revenue.

Results of Operations

The following table summarizes our condensed consolidated statements of operations data (in thousands):

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2020    2019    2020    2019

Revenue

   $ 289,366    $ 190,541    $ 770,582    $ 513,197

Cost of revenue(1)

     149,340      65,073      282,044      166,471
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Gross profit

     140,026      125,468      488,538      346,726

Operating expenses:

           

Sales and marketing(1)

     334,911      119,666      536,082      337,255

Research and development(1)

     313,915      75,880      466,530      229,728

General and administrative(1)

     338,977      74,062      503,033      208,736
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total operating expenses

     987,803      269,608      1,505,645      775,719
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Loss from operations

     (847,777      (144,140      (1,017,107      (428,993

Interest income

     494      3,390      4,312      12,953

Interest expense

     (2,085      (173      (12,325      (395

Change in fair value of warrants

     (9,201      784      811      2,743

Other income (expense), net

     (3,293      2,305      1,218      1,858
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Loss before provision (benefit) for income taxes

     (861,862      (137,834      (1,023,091      (411,834

Provision (benefit) for income taxes

     (8,543      2,026      (5,043      8,485
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Net loss

   $ (853,319    $ (139,860    $ (1,018,048    $ (420,319
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

  (1) 

Includes stock-based compensation expense as follows (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2020      2019      2020      2019  

Cost of revenue

   $ 94,385    $ 7,183    $ 120,285    $ 16,520

Sales and marketing

     263,958      15,898      322,353      56,242

Research and development

     256,769      15,031      309,698      49,137

General and administrative

     231,847      13,651      276,578      42,751
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense (i) (ii)

   $     846,959    $      51,763    $    1,028,914    $    164,650
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (i) 

On September 30, 2020, in connection with the Direct Listing, we incurred $769.5 million and $8.4 million of stock-based compensation using the accelerated attribution method related to the satisfaction of the performance-based vesting condition for RSUs and growth units, respectively, that had satisfied the service-based vesting condition as of such date.

  (ii) 

During the three months ended September 30, 2020 and 2019, we incurred modification charges of $7.8 million, and $4.6 million, respectively, related to the repricing of certain options held by our employees. During the nine months ended September 30, 2020 and 2019, we incurred modification charges of $89.5 million, and $14.2 million, respectively, related to the repricing of certain options held by our employees.

 

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The following table sets forth the components of our condensed consolidated statements of operations data as a percentage of revenue:

 

                                                           
     Three Months Ended
September 30,
  Nine Months Ended
September 30,
       2020       2019       2020       2019  

Revenue

     100     100     100     100

Cost of revenue

     52       34       37       32  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

     48       66       63       68  

Operating expenses:

        

Sales and marketing

     116       63       70       66  

Research and development

     108       40       61       45  

General and administrative

     117       39       64       41  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

     341       142       195       152  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

     (293     (76     (132     (84

Interest income

     —         2       1       3  

Interest expense

     (1     —         (2     —    

Change in fair value of warrants

     (3     1       —         1  

Other income (expense), net

     (1     1       —         —    
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before provision (benefit) for income taxes

     (298     (72     (133     (80

Provision (benefit) for income taxes

     (3     1       (1     2  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

     (295 )%      (73 )%      (132 )%      (82 )% 
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comparison of the Three Months Ended September 30, 2020 and 2019

Revenue

 

     Three Months Ended
September 30,
   Change
     2020    2019    Amount    %

Revenue:

           

Government

   $ 162,561    $ 96,801      $ 65,760                  68

Commercial

               126,805                93,740                33,065      35
  

 

 

 

  

 

 

 

  

 

 

 

  

Total revenue

   $ 289,366    $ 190,541    $ 98,825      52
  

 

 

 

  

 

 

 

  

 

 

 

  

Revenue increased by $98.8 million, or 52%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. Revenue from government customers increased by $65.8 million, or 68%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, primarily in the United States. Of the increase, $46.7 million was from customers existing as of December 31, 2019. Revenue from commercial customers increased by $33.1 million, or 35%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The increase is primarily due to an increase of $24.3 million from customers existing as of December 31, 2019.

 

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Cost of Revenue and Gross Profit

 

     Three Months Ended
September 30,
  Change
     2020   2019   Amount   %

Cost of revenue

   $ 149,340   $ 65,073   $ 84,267       129

Gross profit

               140,026               125,468               14,558                 12

Gross margin

     48     66     (18 )%   

Cost of revenue for the three months ended September 30, 2020 increased by $84.3 million, or 129%, compared to the three months ended September 30, 2019. The increase was primarily due to increases in personnel costs of $89.0 million, which included an increase of $87.2 million in stock-based compensation expense primarily due to the recognition of cumulative stock-based compensation expense upon the Direct Listing related to the Company’s RSUs as well as vesting of stock options, and an increase of $4.3 million primarily driven by an increase in headcount attributable to cost of revenue functions to support new and existing customers. These costs were partially offset by a decrease in travel-related expenses and other personnel costs of $2.5 million as a result of COVID-related travel restrictions and company-wide initiatives to decrease overall travel. Additionally, there was an increase of $2.1 million related to other direct deployment costs, offset by decreases of $3.4 million related to third-party cloud hosting services and $3.4 million related to allocated overhead, including office related expenses.

Our gross margin for the three months ended September 30, 2020 decreased by 18% compared to the three months ended September 30, 2019. Gross margin decreased primarily as a result of cumulative stock-based compensation expense related to the Company’s RSUs recognized upon the Direct Listing. For the three months ended September 30, 2020 and 2019, gross margin, excluding stock-based compensation would have increased by 11% to 81%.

Operating Expenses

 

     Three Months Ended
September 30,
   Change
     2020    2019    Amount    %

Sales and marketing

   $ 334,911      $ 119,666      $ 215,245        180

Research and development

               313,915                75,880                238,035                314

General and administrative

     338,977      74,062      264,915      358
  

 

 

 

  

 

 

 

  

 

 

 

  

Total operating expenses

   $ 987,803    $ 269,608    $ 718,195      266
  

 

 

 

  

 

 

 

  

 

 

 

  

Sales and Marketing

Sales and marketing expenses increased by $215.2 million, or 180%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The increase was primarily driven by increases in personnel costs of $230.2 million, which included an increase of $248.1 million in stock-based compensation expense primarily due to the recognition of cumulative stock-based compensation expense upon the Direct Listing related to the Company’s RSUs and growth units, as well as vesting of stock options; and an increase of $8.0 million related to an increase in headcount attributable to our sales and marketing functions. These costs were partially offset by a decrease of $25.9 million in travel-related expenses and other personnel costs as a result of COVID-related travel restrictions and company-wide initiatives to decrease overall travel. Additionally, there was a decrease of $15.0 million related to allocated overhead, including office related expenses.

 

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Research and Development

Research and development expenses increased by $238.0 million, or 314%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The increase was primarily driven by increases in personnel costs of $244.0 million, which included an increase of $241.7 million in stock-based compensation expense primarily due to the recognition of cumulative stock-based compensation expense upon the Direct Listing related to the Company’s RSUs as well as vesting of stock options, and an increase of $5.1 million related to an increase in headcount attributable to our research and development functions. These costs were partially offset by a decrease of $2.8 million in travel-related expenses and other personnel costs as a result of COVID-related travel restrictions and company-wide initiatives to decrease overall travel. Additionally, there was a decrease of $6.0 million in third-party cloud hosting services generally as a result of volume-based discounts.

General and Administrative

General and administrative expenses increased by $264.9 million, or 358%, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The increase in expenses was primarily driven by increases in personnel costs of $220.7 million, which included an increase of $218.2 million in stock-based compensation expense primarily due to the recognition of cumulative stock-based compensation expense upon the Direct Listing related to the Company’s RSUs and growth units, as well as vesting of stock options; and an increase of $3.2 million related to an increase in headcount attributable to our general and administrative functions; These costs partially offset by a decrease of $0.7 million in travel-related expenses and other personnel costs primarily as a result of COVID-related travel restrictions and company-wide initiatives to decrease overall travel. Additionally, there were increases of $42.7 million in legal professional services primarily related to the Direct Listing and $8.0 million for other professional services related to the Direct Listing and corporate IT and consulting functions to support initiatives for becoming a public company and the overall growth of our operations, which were offset by a decrease of $6.5 million related to allocated overhead, including office related expenses.

Interest Income

 

     Three Months Ended
September 30,
   Change
         2020            2019        Amount

Interest income

   $ 494    $ 3,390    $ (2,896

Interest income decreased by $2.9 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily due to a reduction in U.S. interest rates on interest earned from our cash, cash equivalents, and restricted cash.

Interest Expense

 

                                
     Three Months Ended
September  30,
  Change
         2020           2019       Amount

Interest expense

   $ (2,085   $    (173)    $ (1,912

Interest expense increased by $1.9 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The increase was primarily due to the absence of outstanding debt during the three months ended September 30, 2019.

 

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Change in Fair Value of Warrants

 

     Three Months Ended
September 30,
   Change
         2020           2019        Amount

Change in fair value of warrants

   $ (9,201   $ 784    $ (9,985

The gain on the change in fair value of warrants decreased by $10.0 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The change was primarily due to adjustments to the fair value of the warrants immediately before reclassifying them from a liability to equity, partially offset by an increase in the fair value of the securities underlying certain warrants during the three months ended September 30, 2020 as compared to the changes in the fair value of the underlying securities during the three months ended September 30, 2019.

Other Income (Expense), Net

 

     Three Months Ended
September 30,
   Change
    

    2020    

      2019        Amount

Other income (expense), net

   $ (3,293   $ 2,305    $ (5,598

Other income (expense), net decreased by $5.6 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily due to changes in net realized and unrealized gains from foreign exchange transactions.

Provision (Benefit) for Income Taxes

 

                                            
     Three Months Ended
September  30,
   Change
         2020           2019        Amount

Provision (benefit) for income taxes

   $ (8,543   $ 2,026    $ (10,569

Provision (benefit) for income taxes decreased by $10.6 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The change in provision (benefit) for income taxes was primarily due to decreases in profits from our international operations, benefits from stock-based compensation windfalls, and the revaluation of our UK deferred tax assets as a result of a change in the UK corporate tax rate enacted during the current quarter.

Comparison of the Nine Months Ended September 30, 2020 and 2019

Revenue

 

                                                                       
     Nine Months Ended
September  30,
   Change
     2020    2019    Amount    %

Revenue:

           

Government

   $   420,257    $   242,843    $    177,414          73

Commercial

     350,325      270,354      79,971      30
  

 

 

 

  

 

 

 

  

 

 

 

  

Total revenue

   $ 770,582    $ 513,197    $ 257,385      50
  

 

 

 

  

 

 

 

  

 

 

 

  

 

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Revenue increased by $257.4 million, or 50%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. Revenue from government customers increased by $177.4 million, or 73%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, primarily in the United States. Of the increase, $148.5 million was from customers existing as of December 31, 2019. Revenue from commercial customers increased by $80.0 million, or 30%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The increase was primarily due to an increase of $67.1 million from customers existing as of December 31, 2019.

Cost of Revenue and Gross Profit

 

     Nine Months Ended
September 30,
  Change
     2020   2019   Amount   %

Cost of revenue

   $   282,044   $ 166,471   $ 115,573       69

Gross profit

     488,538     346,726     141,812         41

Gross margin

     63     68     (5 )%   

Cost of revenue increased by $115.6 million, or 69%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The increase was primarily due to increases in personnel costs of $123.3 million, which included an increase of $103.8 million in stock-based compensation expense primarily due to the recognition of cumulative stock-based compensation expense upon the Direct Listing related to the Company’s RSUs and vesting of stock options, as well as the incremental charge from the repricing of certain options; and an increase of $23.2 million primarily driven by an increase in headcount attributable to cost of revenue functions to support new and existing customers. These costs were partially offset by a decrease in travel-related expenses and other personnel costs of $3.7 million as a result of COVID-related travel restrictions and company-wide initiatives to decrease overall travel. Such increases to cost of revenue were also offset by decreases of $6.1 million related to third-party cloud hosting services generally as a result of volume-based discounts and $2.6 million related to other direct deployment costs.

Our gross margin for the nine months ended September 30, 2020 decreased by 5% compared to the nine months ended September 30, 2019. Gross margin decreased primarily as a result of cumulative stock-based compensation expense related to the Company’s RSUs recognized upon the Direct Listing. For the nine months ended September 30, 2020, gross margin, excluding stock-based compensation would have increased by 8% to 79% compared to the nine months ended September 30, 2019.

Operating Expenses

 

     Nine Months Ended
September 30,
  Change
     2020   2019   Amount   %

Sales and marketing

   $ 536,082        $ 337,255        $ 198,827          59

Research and development

     466,530     229,728     236,802     103

General and administrative

     503,033     208,736     294,297     141
  

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

   $ 1,505,645   $ 775,719   $ 729,926     94
  

 

 

 

 

 

 

 

 

 

 

 

 

Sales and Marketing

Sales and marketing expenses increased by $198.8 million, or 59%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The increase was primarily due to increases in personnel costs of $215.9 million, which included an increase of $266.1 million in stock-based compensation expense primarily due to the recognition of cumulative stock-based compensation expense upon the Direct

 

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Listing related to the Company’s RSUs and growth units, and vesting of stock options, as well as the incremental charge from the repricing of certain options. Such increase was partially offset by decreases of $49.8 million in travel-related expenses and other personnel costs as a result of COVID-related travel restrictions and company-wide initiatives to decrease overall travel and $17.1 million related to allocated overhead, including office related expenses.

Research and Development

Research and development expenses increased by $236.8 million, or 103%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The increase was primarily due to increases in personnel costs of $250.0 million, which included an increase of $260.6 million in stock-based compensation expense primarily due to the recognition of cumulative stock-based compensation expense upon the Direct Listing related to the Company’s RSUs and vesting of stock options, as well as the incremental charge from the repricing of certain options. Such increase was partially offset by a decrease of $10.5 million in travel-related expenses and other personnel costs as a result of COVID-related travel restrictions and company-wide initiatives to decrease overall travel, as well as a decrease of $11.8 million in third-party cloud hosting services generally as a result of volume-based discounts.

General and Administrative

General and administrative expenses increased by $294.3 million, or 141%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The increase in expenses was primarily driven by increases in personnel costs of $231.9 million which included an increase of $233.8 million in stock-based compensation expense primarily due to the recognition of cumulative stock-based compensation expense upon the Direct Listing related to the Company’s RSUs and growth units, and vesting of stock options, as well as the incremental charge from the repricing of certain options; an increase of $4.1 million primarily driven by an increase in headcount attributable to general and administrative functions, $51.3 million in legal professional services primarily related to the Direct Listing and $17.9 million for other professional services related to the Direct Listing and corporate IT and consulting functions to support initiatives for becoming a public company and the overall growth of our operations. These costs were partially offset by decreases of $6.0 million in travel-related expenses and other personnel costs primarily as a result of COVID-related travel restrictions and company-wide initiatives to decrease overall travel, and $6.8 million in allocated overhead, including office related expenses.

Interest Income

 

     Nine Months Ended
September 30,
   Change
     2020    2019    Amount

Interest income

   $       4,312    $ 12,953    $     (8,641) 

Interest income decreased by $8.6 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily due to a reduction in U.S. interest rates on interest earned from our cash, cash equivalents, and restricted cash during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019.

Interest Expense

 

     Nine Months Ended
September 30,
  Change
     2020   2019   Amount

Interest expense

   $    (12,325)    $     (395)    $ (11,930

Interest expense increased by $11.9 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The increase was primarily due to the absence of outstanding debt during the nine months ended September 30, 2019.

 

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Change in Fair Value of Warrants

 

     Nine Months Ended
September 30,
   Change
         2020            2019        Amount

Change in fair value of warrants

   $    811    $ 2,743    $     (1,932) 

The gain on the change in fair value of warrants decreased by $1.9 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The change was primarily due to adjustments to the fair value of the warrants immediately before reclassifying them from a liability to equity, partially offset by an increase in the fair value of the securities underlying certain warrants during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019.

Other Income (Expense), Net

 

     Nine Months Ended
September 30,
   Change
         2020            2019        Amount

Other income (expense), net

   $  1,218    $ 1,858    $       (640) 

Other income (expense), net decreased by $0.6 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily due to changes in net realized and unrealized gains from foreign exchange transactions.

Provision (Benefit) for Income Taxes

 

     Nine Months Ended
September 30,
   Change
         2020            2019        Amount

Provision (benefit) for income taxes

   $ (5,043    $ 8,485    $ (13,528

Provision (benefit) for income taxes decreased by $13.5 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The change in provision (benefit) for income taxes was primarily due to decreases in profits from our international operations, benefits from stock-based compensation windfalls, and the revaluation of our UK deferred tax assets as a result of a change in the UK corporate tax rate enacted during the current quarter.

Liquidity and Capital Resources

Since our inception, we have generated negative cash flows from operations and have financed our operations primarily through the sale of our equity securities, borrowings under our credit facilities, and payments received from our customers. For many customers, we bill and collect payment for the entire contract term in advance of our performance of the related obligations. We believe our existing cash and cash equivalents will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months.

As of September 30, 2020, our accumulated deficit balance was $4.8 billion, and our principal sources of liquidity were $1.8 billion of cash and cash equivalents, exclusive of additional restricted cash of $130.1 million.

 

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Cash and cash equivalents consist primarily of cash on deposit with banks as well as institutional money market funds. Restricted cash primarily consists of cash and certificates of deposit that are held as collateral against letters of credit and guarantees we are required to maintain for various purposes.

As of September 30, 2020, we had fully drawn down the $200.0 million available term commitment under the 2014 Credit Facility and had $200.0 million revolving credit facility available and undrawn. For more information, see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations Credit Facilities.

Additionally, during the nine months ended September 30, 2020, we sold 206,500,523 shares of our Class A common stock at $4.65 per share for net proceeds of approximately $942.5 million, which is net of issuance costs of $17.7 million.

The following table summarizes our cash flows for the periods indicated (in thousands):

 

     Nine Months Ended
September 30,
     2020    2019

Net cash (used in) provided by:

     

Operating activities

   $ (278,320    $ (500,048

Investing activities

     (9,975      (10,947

Financing activities

     817,344      (59,434

Effect of foreign exchange on cash, cash equivalents, and restricted cash

     (678      (2,992
  

 

 

 

  

 

 

 

Net increase (decrease) in cash, cash equivalents, and restricted cash

   $ 528,371    $ (573,421
  

 

 

 

  

 

 

 

Operating Activities

Net cash used in operating activities was $278.3 million for the nine months ended September 30, 2020. The factors affecting our operating cash flows during this period were our net loss of $1.0 billion, offset by non-cash charges of $1.0 billion, and changes in net operating assets and liabilities of $303.1 million. The net change in operating assets and liabilities were primarily due to net decrease of $171.1 million in deferred revenue and customer deposits due to increases in revenue recognized from amounts billed and collected in prior periods, and an increase in assets of $143.3 million primarily due to an increase in accounts receivable driven by the timing of billings to and collections from our customers. The non-cash charges primarily consisted of $1.0 billion in stock-based compensation expense, and $10.3 million of depreciation and amortization.

Net cash used in operating activities was $500.0 million for the nine months ended September 30, 2019. The factors affecting our operating cash flows during this period were our net loss of $420.3 million, offset by non-cash charges of $171.4 million, and changes in net operating assets and liabilities of $251.2 million. The net change in operating assets and liabilities were primarily due to net decrease of $124.7 million in deferred revenue and customer deposits due to increases in revenue recognized from amounts billed and collected in prior periods, an increase in assets of $110.6 million primarily due to an increase in accounts receivable. The non-cash charges primarily consisted of $164.7 million in stock-based compensation expense and $9.5 million of depreciation and amortization.

Investing Activities

Net cash used in investing activities was $10.0 million for the nine months ended September 30, 2020, which consisted of purchases of property and equipment of $7.5 million and purchase of an equity method investment of $2.5 million.

 

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Net cash used in investing activities was $10.9 million for the nine months ended September 30, 2019, which consisted of purchases of property and equipment.

Financing Activities

Net cash provided by financing activities was $817.3 million for the nine months ended September 30, 2020, which primarily consisted of $942.5 million of net proceeds from the issuance of common stock, $199.4 million of net proceeds from borrowings under our credit facilities, and $79.5 million of proceeds from the exercise of common stock options, partially offset by repayments of $400.0 million of debt.

Net cash used in financing activities was $59.4 million for the nine months ended September 30, 2019, which primarily consisted of $168.0 million for the redemption of redeemable convertible preferred stock, and $7.1 million net cash used for repurchases of common stock, partially offset by $100.0 million of net proceeds from the issuance of common stock, $9.3 million of proceeds from exercise of common stock options, and $7.5 million of proceeds from the sale of redeemable convertible preferred stock.

Credit Facilities

2014 Credit Facility

In October 2014, we entered into an unsecured revolving credit facility (the “2014 Credit Facility”). The 2014 Credit Facility bears interest at the London Interbank Offered Rate (“LIBOR”) plus a margin of 2.75% per annum, subject to certain adjustments, and incurs a commitment fee of 0.375% assessed on the daily average undrawn portion of revolving commitments. Interest and commitment fees are payable at the end of an interest period or at each three-month interval if the interest period is longer than three months.

In December 2019, we entered into an amendment to the 2014 Credit Facility to include an additional $150.0 million term loan and secured the credit facility with substantially all of our assets. Upon entering into this amendment, we drew down the $150.0 million term loan and $150.0 million under the existing revolving credit facility. The term loan portion of the 2014 Credit Facility was fully repaid and terminated as of December 31, 2019.

In June 2020, we amended the 2014 Credit Facility to include a $150.0 million term loan, extend the maturity date to June 4, 2023, and add an additional lender. Additionally, this amendment increased the requirement to maintain minimum liquidity to $50.0 million, and we were provided with an option to increase the total commitments by up to an additional $200.0 million, subject to the lenders’ approval. All other terms and conditions remained substantially the same upon the effectiveness of the amendment. Upon entering into this amendment, we drew down the total available term loan commitment of $150.0 million.

In July 2020, we entered into another amendment to the 2014 Credit Facility, which added an additional lender and provided for an increase of $50.0 million to the revolving credit facility and a $50.0 million term loan. The incremental commitments were provided under the same terms as the existing commitments under the 2014 Credit Facility. During July 2020, we drew down the additional available term loan of $50.0 million and repaid the $150.0 million outstanding revolving credit facility.

As of September 30, 2020, we had a $200.0 million term loan outstanding under the 2014 Credit Facility and an additional $200.0 million undrawn revolving credit facility available.

Contractual Obligations and Commitments

Our contractual obligations and commitments primarily consist of operating lease commitments for our facilities and non-cancelable purchase commitments related to third-party cloud hosting services. For additional

 

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information, refer to Note 8. Commitments and Contingencies to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. There has been no material change in our contractual obligations and commitments other than in the ordinary course of business since our fiscal year ended December 31, 2019. See our Prospectus for additional information regarding the Company’s contractual obligations.

Off-Balance Sheet Arrangements

We did not have, during the periods presented, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q are prepared in accordance with GAAP. The preparation of condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from our estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.

There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates discussed in the Prospectus except for the determination of the fair value of our common stock, which is used in estimating the fair value of stock-based awards at grant date as discussed below.

Prior to our Direct Listing, our common stock was not publicly traded; therefore we estimated the fair value of our common stock as discussed in the Prospectus. Following our Direct Listing, the closing sale price per share of our common stock as reported on the NYSE on the date of grant is used to determine the fair value of our common stock. Our significant accounting policies are discussed in “Notes to Consolidated Financial Statements — Note 2. Significant Accounting Policies” in the Prospectus.

JOBS Act Accounting Election

We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until those standards apply to private companies. We have elected to use this extended transition period for complying with certain 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 or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our condensed consolidated financial statements may or may not be comparable to companies that comply with new or revised accounting pronouncements as of public companies’ effective dates.

Recent Accounting Pronouncements

For information on recently issued accounting pronouncements, refer to Note 2. Significant Accounting Policies in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

 

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks in the ordinary course of our business, which primarily relate to fluctuations in interest rates, foreign exchange, and inflation.

Interest Rate Risk

Our cash, cash equivalents, and restricted cash consist of cash, certificates of deposit, time deposits, and money market funds. Our investment policy and strategy are focused on the preservation of capital and supporting our liquidity requirements. We have not entered into investments for trading or speculative purposes.

Due to the short-term nature of the financial instruments, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our condensed consolidated financial statements.

As of September 30, 2020, we had a $200.0 million variable rate term loan outstanding that is scheduled to mature in June 2023. An immediate 10% change in LIBOR would not have a material impact on our debt-related obligations, financial position or results of operations.

Foreign Currency Exchange Risk

Our contracts with customers are primarily denominated in U.S. dollars, with a small amount denominated in foreign currencies. Our expenses are generally denominated in the currencies of the jurisdictions in which we conduct our operations, which are primarily in the United States, United Kingdom, and Europe. Our results of current and future operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro and GBP. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statement of operations. To date, foreign currency transaction gains and losses have not been material to our condensed consolidated financial statements, and we have not engaged in any foreign currency hedging transactions.

Inflation Risk

We do not believe that inflation has had a material effect on our business, results of operations, or financial condition.

 

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ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures are designed to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation and supervision of our Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of such date, our disclosure controls and procedures were, in design and operation, effective at a reasonable assurance level.

Changes in Internal Controls Over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on the Effectiveness of Controls

The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, in designing and evaluating the disclosure controls and procedures, management recognizes that any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

From time to time we are subject to legal proceedings and claims arising in the ordinary course of business. Based on our current knowledge, we believe that the amount or range of reasonably possible losses will not, either individually or in the aggregate, have a material adverse effect on our business, results of operations, or financial condition.

The results of any litigation cannot be predicted with certainty, and an unfavorable resolution in any legal proceedings could materially affect our future business, results of operations, or financial condition. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

 

ITEM 1A.

RISK FACTORS

Investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and accompanying notes, before making a decision to invest in our Class A common stock. Our business, financial condition, results of operations, or prospects could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material. If any of the risks actually occur, our business, financial condition, results of operations, and prospects could be adversely affected. In that event, the trading price of our Class A common stock could decline, and you could lose part or all of your investment.

Risks Related to Our Business and Industry

We have incurred losses each year since our inception, we expect our operating expenses to increase, and we may not become profitable in the future.

We have incurred losses each year since our inception, including net losses of $580.0 million and $579.6 million for the years ended December 31, 2018 and 2019, respectively, and net losses of $420.3 million and $1.0 billion for the nine months ended September 30, 2019 and 2020, respectively, and we may never achieve or maintain profitability. In addition, our operating expenses have increased over time. As we continue to expand our business, industry verticals, and the breadth of our operations, upgrade our infrastructure, hire additional employees, expand into new markets, invest in research and development, invest in sales and marketing, including expanding our sales organization and related sales-based payments that may come with such expansion, lease more real estate to accommodate our anticipated future growth, and incur costs associated with general administration, including expenses related to being a public company, we expect that our costs of revenue and operating expenses will continue to increase. To the extent we are successful in increasing our customer base, we may also incur increased losses because the costs associated with acquiring and growing our customers via our Acquire, Expand, and Scale business model and with research and development are generally incurred upfront, while our revenue from customer contracts is generally recognized over the contract term. Furthermore, our sales model often requires us to spend months and invest significant resources working with customers on pilot deployments at no or low cost to them, which may result in no or minimal future revenue. We may not be able to increase our revenue at a rate sufficient to offset increases in our costs of revenue and operating expenses in the near term or at all, which would prevent us from achieving or maintaining profitability in the future. Any failure by us to achieve, and then sustain or increase, profitability on a consistent basis could adversely affect our business, financial condition, and results of operations.

We may not be able to sustain our revenue growth rate in the future.

Although our revenue has increased in recent periods, there can be no assurances that revenue will continue to grow or do so at current rates, and you should not rely on the revenue of any prior quarterly or annual period as an indication of our future performance. Our revenue growth rate may decline in future periods. Many factors may contribute to declines in our revenue growth rate, including increased competition, slowing demand for our platforms from existing and new customers, a failure by us to continue capitalizing on growth opportunities, terminations of existing contracts or failure to exercise existing options by our customers, and the maturation of our business, among others. If our revenue growth rate declines, our business, financial condition, and results of operations could be adversely affected.

Our sales efforts involve considerable time and expense and our sales cycle is often long and unpredictable.

Our results of operations may fluctuate, in part, because of the intensive nature of our sales efforts and the length and unpredictability of our sales cycle. As part of our sales efforts, we invest considerable time and expense

 

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evaluating the specific organizational needs of our potential customers and educating these potential customers about the technical capabilities and value of our platforms and services. We often also provide our platforms to potential customers at no or low cost initially to them for evaluation purposes through short-term pilot deployments of our platforms in the Acquire phase of our business model, and there is no guarantee that we will be able to move customers from the Acquire phase into later phases. In addition, we currently have a limited direct sales force, and our sales efforts have historically depended on the significant involvement of our senior management team. The length of our sales cycle, from initial demonstration of our platforms to sale of our platforms and services, tends to be long and varies substantially from customer to customer. Our sales cycle often lasts six to nine months but can extend to a year or more for some customers. Because decisions to purchase our platforms involve significant financial commitments, potential customers generally evaluate our platforms at multiple levels within their organization, each of which often have specific requirements, and typically involve their senior management.

Our results of operations depend on sales to enterprise customers, which make product purchasing decisions based in part or entirely on factors, or perceived factors, not directly related to the features of the platforms, including, among others, that customer’s projections of business growth, uncertainty about economic conditions (including as a result of the recent COVID-19 outbreak), capital budgets, anticipated cost savings from the implementation of our platforms, potential preference for such customer’s internally-developed software solutions, perceptions about our business and platforms, more favorable terms offered by potential competitors, and previous technology investments. In addition, certain decisionmakers and other stakeholders within our potential customers tend to have vested interests in the continued use of internally developed or existing software, which may make it more difficult for us to sell our platforms and services. As a result of these and other factors, our sales efforts typically require an extensive effort throughout a customer’s organization, a significant investment of human resources, expense and time, including by our senior management, and there can be no assurances that we will be successful in making a sale to a potential customer. If our sales efforts to a potential customer do not result in sufficient revenue to justify our investments, our business, financial condition, and results of operations could be adversely affected.

Historically, existing customers have expanded their relationships with us, which has resulted in a limited number of customers accounting for a substantial portion of our revenue. If existing customers do not make subsequent purchases from us or renew their contracts with us, or if our relationships with our largest customers are impaired or terminated, our revenue could decline, and our results of operations would be adversely impacted.

We derive a significant portion of our revenue from existing customers that expand their relationships with us. Increasing the size and number of the deployments of our existing customers is a major part of our growth strategy. We may not be effective in executing this or any other aspect of our growth strategy.

Our top three customers together accounted for 33% and 28% of our revenue for the years ended December 31, 2018 and 2019, respectively, and 29% and 27% of our revenue for the nine months ended September 30, 2019 and 2020, respectively. Our top three customers by revenue, for the year ended December 31, 2019, have been with us for an average of 8 years as of December 31, 2019. Certain of our customers, including customers that represent a significant portion of our business, have in the past reduced their spend with us or terminated their agreements with us, which has reduced our anticipated future payments or revenue from these customers, and which has required us to refund some previously paid amounts to these customers. It is not possible for us to predict the future level of demand from our larger customers for our platforms and applications.

While we generally offer contract terms up to five years in length, our customers sometimes enter into shorter-term contracts, such as one-year subscriptions, which may not provide for automatic renewal and may require the customer to opt-in to extend the term. Our customers have no obligation to renew, upgrade, or expand their agreements with us after the terms of their existing agreements have expired. In addition, many of our customer contracts permit the customer to terminate their contracts with us with notice periods of varying lengths,

 

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generally three to six months. If one or more of our customers terminate their contracts with us, whether for convenience, for default in the event of a breach by us, or for other reasons specified in our contracts, as applicable; if our customers elect not to renew their contracts with us; if our customers renew their contractual arrangements with us for shorter contract lengths; or if our customers otherwise seek to renegotiate terms of their existing agreements on terms less favorable to us, our business and results of operations could be adversely affected. This adverse impact would be even more pronounced for customers that represent a material portion of our revenue or business operations.

Our ability to renew or expand our customer relationships may decrease or vary as a result of a number of factors, including our customers’ satisfaction or dissatisfaction with our platforms and services, the frequency and severity of software and implementation errors, our platforms’ reliability, our pricing, the effects of general economic conditions, competitive offerings or alternatives, or reductions in our customers’ spending levels. If our customers do not renew or expand their agreements with us or if they renew their contracts for shorter lengths or on other terms less favorable to us, our revenue may grow more slowly than expected or decline, and our business could suffer. Our business, financial condition, and results of operations would also be adversely affected if we face difficulty collecting our accounts receivable from our customers or if we are required to refund customer deposits.

Achieving renewal or expansion of deployments may require us to increasingly engage in sophisticated and costly sales efforts that may not result in additional sales. In addition, our customers’ decisions to expand the deployment of our platforms depends on a number of factors, including general economic conditions, the functioning of our platforms, the ability of our forward-deployed engineers to assist our customers in identifying new use cases, modernizing their data architectures, and achieving success with data-driven initiatives, and our customers’ satisfaction with our services. If our efforts to expand within our existing customer base are not successful, our business may suffer.

Our results of operations and our key business measures are likely to fluctuate significantly on a quarterly basis in future periods and may not fully reflect the underlying performance of our business, which makes our future results difficult to predict and could cause our results of operations to fall below expectations.

Our quarterly results of operations, including cash flows, have fluctuated significantly in the past and are likely to continue to do so in the future. Accordingly, the results of any one quarter should not be relied upon as an indication of future performance. Our quarterly results, financial position, and operations are likely to fluctuate as a result of a variety of factors, many of which are outside of our control, and as a result, may not fully reflect the underlying performance of our business. Fluctuation in quarterly results may negatively impact the value of our Class A common stock.

We typically close a large portion of our sales in the last several weeks of a quarter, which impacts our ability to plan and manage margins and cash flows. Our sales cycle is often long, and it is difficult to predict exactly when, or if, we will actually make a sale with a potential customer or when we will be able to move them to the Expand or Scale phases. As a result, large individual sales have, in some cases, occurred in quarters subsequent to those we anticipated, or have not occurred at all. The loss or delay of one or more large sales transactions in a quarter would impact our results of operations and cash flow for that quarter and any future quarters in which revenue from that transaction is lost or delayed. In addition, downturns in new sales may not be immediately reflected in our revenue because we generally recognize revenue over the term of our contracts. The timing of customer billing and payment varies from contract to contract. A delay in the timing of receipt of such collections, or a default on a large contract, may negatively impact our liquidity for the period and in the future. Because a substantial portion of our expenses are relatively fixed in the short-term and require time to adjust, our results of operations and liquidity would suffer if revenue falls below our expectations in a particular period.

Other factors that may cause fluctuations in our quarterly results of operations and financial position include, without limitation, those listed below:

 

   

The success of our sales and marketing efforts, including the success of our pilot deployments;

 

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Our ability to increase our contribution margins and move our customers into the Expand or Scale phases;

 

   

The timing of expenses and revenue recognition;

 

   

The timing and amount of payments received from our customers;

 

   

Termination of one or more large contracts by customers, including for convenience;

 

   

The time and cost-intensive nature of our sales efforts and the length and variability of sales cycles;

 

   

The amount and timing of operating expenses related to the maintenance and expansion of our business and operations;

 

   

The timing and effectiveness of new sales and marketing initiatives;

 

   

Changes in our pricing policies or those of our competitors;

 

   

The timing and success of new products, features, and functionality introduced by us or our competitors;

 

   

Interruptions or delays in our operations and maintenance (“O&M”) services;

 

   

Cyberattacks and other actual or perceived data or security breaches;

 

   

Our ability to hire and retain employees, in particular, those responsible for operations and maintenance of and the selling or marketing of our platforms, and develop and retain talented sales personnel who are able to achieve desired productivity levels in a reasonable period of time and provide sales leadership in areas in which we are expanding our sales and marketing efforts;

 

   

The amount and timing of our stock-based compensation expenses;

 

   

Changes in the way we organize and compensate our sales teams;

 

   

Changes in the way we operate and maintain our platforms;

 

   

Unforeseen negative results in operations from our partnerships, including those accounted for under the equity method;

 

   

Changes in the competitive dynamics of our industry;

 

   

The cost of and potential outcomes of existing and future claims or litigation, which could have a material adverse effect on our business;

 

   

Changes in laws and regulations that impact our business, such as the Federal Acquisition Streamlining Act of 1994 (“FASA”);

 

   

Indemnification payments to our customers or other third parties;

 

   

Ability to scale our business with increasing demands;

 

   

The timing of expenses related to any future acquisitions; and

 

   

General economic, regulatory, and market conditions, including the impact of the COVID-19 pandemic.

In addition, our contracts generally contain termination for convenience provisions, and we may be obligated to repay prepaid amounts or otherwise not realize anticipated future revenue should we fail to provide future services as anticipated. These factors make it difficult for us to accurately predict financial metrics for any particular period.

The variability and unpredictability of our quarterly results of operations, cash flows, or other operating metrics could result in our failure to meet our expectations or those of analysts that cover us or investors with respect to

 

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revenue or other key metrics for a particular period. If we fail to meet or exceed such expectations for these or any other reasons, the trading price of our Class A common stock could fall, and we could face costly lawsuits, including securities class action suits.

Seasonality may cause fluctuations in our results of operations and position.

Historically, the first quarter of our year generally has relatively lower sales, and sales generally increase in each subsequent quarter with substantial increases during our third and fourth quarters ending September 30 and December 31, respectively. We believe that this seasonality results from a number of factors, including:

 

   

The fiscal year end procurement cycle of our government customers, and in particular U.S. government customers which have a fiscal year end of September 30;

 

   

The fiscal year budgeting process for our commercial customers, many of which have a fiscal year end of December 31;

 

   

Seasonal reductions in business activity during the summer months in the United States, Europe, and certain other regions; and

 

   

Timing of projects and our customers’ evaluation of our work progress.

This seasonality has historically impacted and may in the future continue to impact the timing of collections and recognized revenue. Because a significant portion of our customer contracts are typically finalized near the end of the year, and we typically invoice customers shortly after entering into a contract, we receive a significant portion of our customer payments near the end of the year and record an increase in contract liabilities, while the revenue from our customer contracts is generally recognized over the contract term. While we have historically billed and collected payments for multiple contract years from certain customers in advance, we have and may continue to shift to collecting payments on an annual or other basis.

While this has been the historical seasonal pattern of our quarterly sales, we believe that our customers’ required timing for certain new government or commercial programs requiring new software may outweigh the nature or magnitude of seasonal factors that might have influenced our business to date. As a result, we may experience future growth from additional government or commercial mandates that do not follow the seasonal purchasing and evaluation decisions by our customers that we have historically observed.

For example, increased government spending on technology aimed at national defense, financial or policy regulation, cybersecurity, or healthcare mandates may drive customer demand at different times throughout our year, the timing of which we may not be able to anticipate and may cause fluctuations in our results of operations. The timing of our fiscal quarters and the U.S. federal government’s September 30 fiscal year end also may impact sales to governmental agencies in the third quarter of our year, offsetting, at least in part, the otherwise seasonal downturn we have historically observed in later summer months.

Our rapid growth in recent years may obscure the extent to which seasonality trends have affected our business and may continue to affect our business. We expect that seasonality will continue to materially impact our business in the future and may become more pronounced over time. The seasonality of our business may cause continued or increased fluctuations in our results of operations and cash flows, which may prevent us from achieving our quarterly or annual forecasts or meeting or exceeding the expectations of research analysts or investors, which in turn may cause a decline in the trading price of our Class A common stock.

Our platforms are complex and have a lengthy implementation process, and any failure of our platforms to satisfy our customers or perform as desired could harm our business, results of operations, and financial condition.

Our platforms and services are complex and are deployed in a wide variety of network environments. Implementing our platforms can be a complex and lengthy process since we often configure our existing

 

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platforms for a customer’s unique environment. Inability to meet the unique needs of our customers may result in customer dissatisfaction and/or damage to our reputation, which could materially harm our business. Further, the proper use of our platforms requires training of the customer and the initial or ongoing services of our technical personnel as well as O&M services over the contract term. If training and/or ongoing services require more of our expenditures than we originally estimated, our margins will be lower than projected.

In addition, if our customers do not use our platforms correctly or as intended, inadequate performance or outcomes may result. It is possible that our platforms may also be intentionally misused or abused by customers or their employees or third parties who obtain access and use of our platforms. Similarly, our platforms sometimes used by customers with smaller or less sophisticated IT departments, potentially resulting in sub-optimal performance at a level lower than anticipated by the customer. Because our customers rely on our platforms and services to address important business goals and challenges, the incorrect or improper use or configuration of our platforms and O&M services, failure to properly train customers on how to efficiently and effectively use our platforms, or failure to properly provide implementation or analytical or maintenance services to our customers may result in contract terminations or non-renewals, reduced customer payments, negative publicity, or legal claims against us. For example, as we continue to expand our customer base, any failure by us to properly provide these services may result in lost opportunities for follow-on expansion sales of our platforms and services.

Furthermore, if customer personnel are not well trained in the use of our platforms, customers may defer the deployment of our platforms and services, may deploy them in a more limited manner than originally anticipated, or may not deploy them at all. If there is substantial turnover of the company or customer personnel responsible for procurement and use of our platforms, our platforms may go unused or be adopted less broadly, and our ability to make additional sales may be substantially limited, which could negatively impact our business, results of operations, and growth prospects.

If we do not successfully develop and deploy new technologies to address the needs of our customers, our business and results of operations could suffer.

Our success has been based on our ability to design software and products that enable the integration of data into a common operating environment to facilitate advanced data analysis, knowledge management, and collaboration. We spend substantial amounts of time and money researching and developing new technologies and enhanced versions of existing features to meet our customers’ and potential customers’ rapidly evolving needs. There is no assurance that our enhancements to our platforms or our new product features or capabilities will be compelling to our customers or gain market acceptance. If our research and development investments do not accurately anticipate customer demand or if we fail to develop our platforms in a manner that satisfies customer preferences in a timely and cost-effective manner, we may fail to retain our existing customers or increase demand for our platforms.

The introduction of new products and services by competitors or the development of entirely new technologies to replace existing offerings could make our platforms obsolete or adversely affect our business, financial condition, and results of operations. We may experience difficulties with software development, design, or marketing that delay or prevent our development, introduction, or implementation of new platforms, features, or capabilities. We have in the past experienced delays in our internally planned release dates of new features and capabilities, and there can be no assurance that new platforms, features, or capabilities will be released according to schedule. Any delays could result in adverse publicity, loss of revenue or market acceptance, or claims by customers brought against us, any of which could harm our business. Moreover, the design and development of new platforms or new features and capabilities to our existing platforms may require substantial investment, and we have no assurance that such investments will be successful. If customers do not widely adopt our new platforms, experiences, features, and capabilities, we may not be able to realize a return on our investment and our business, financial condition, and results of operations may be adversely affected.

 

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Our new and existing platforms and changes to our existing platforms could fail to attain sufficient market acceptance for many reasons, including:

 

   

Our failure to predict market demand accurately in terms of product functionality and to supply offerings that meet this demand in a timely fashion;

 

   

Product defects, errors, or failures or our inability to satisfy customer service level requirements;

 

   

Negative publicity or negative private statements about the security, performance, or effectiveness of our platforms or product enhancements;

 

   

Delays in releasing to the market our new offerings or enhancements to our existing offerings;

 

   

Introduction or anticipated introduction of competing platforms or functionalities by our competitors;

 

   

Inability of our platforms or product enhancements to scale and perform to meet customer demands;

 

   

Receiving qualified or adverse opinions in connection with security or penetration testing, certifications or audits, such as those related to IT controls and security standards and frameworks or compliance;

 

   

Poor business conditions for our customers, causing them to delay software purchases;

 

   

Reluctance of customers to purchase proprietary software products; and

 

   

Reluctance of customers to purchase products incorporating open source software.

If we are not able to continue to identify challenges faced by our customers and develop, license, or acquire new features and capabilities to our platforms in a timely and cost-effective manner, or if such enhancements do not achieve market acceptance, our business, financial condition, results of operations, and prospects may suffer and our anticipated revenue growth may not be achieved.

Because we derive, and expect to continue to derive, substantially all of our revenue from customers purchasing our two platforms Gotham and Foundry, market acceptance of these platforms, and any enhancements or changes thereto, is critical to our success.

If any of the systems of any third parties upon which we rely, our customers’ cloud or on-premises environments, or our internal systems, are breached or if unauthorized access to customer or third-party data is otherwise obtained, public perception of our platforms and O&M services may be harmed, and we may lose business and incur losses or liabilities.

Our success depends in part on our ability to provide effective data security protection in connection with our platforms and services, and we rely on information technology networks and systems to securely store, transmit, index, and otherwise process electronic information. Because our platforms and services are used to store, transmit, index, or otherwise process and analyze large data sets that often contain proprietary, confidential, and/or sensitive information (including in some instances personal or identifying information and personal health information), we are perceived as an attractive target for attacks by computer hackers or others seeking unauthorized access, and we face threats of unintended exposure, exfiltration, alteration, deletion, or loss of data. Additionally, because many of our customers use our platforms to store, transmit, and otherwise process proprietary, confidential, or sensitive information, and complete mission critical tasks, they have a lower risk tolerance for security vulnerabilities in our platforms and services than for vulnerabilities in other, less critical, software products and services.

We, and the third-party vendors upon which we rely, have experienced, and may in the future experience, cybersecurity threats, including threats or attempts to disrupt our information technology infrastructure and unauthorized attempts to gain access to sensitive or confidential information. Our and our third-party vendors’ technology systems may be damaged or compromised by malicious events, such as cyberattacks (including

 

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computer viruses, malicious and destructive code, phishing attacks, and denial of service attacks), physical or electronic security breaches, natural disasters, fire, power loss, telecommunications failures, personnel misconduct, and human error. Such attacks or security breaches may be perpetrated by internal bad actors, such as employees or contractors, or by third parties (including traditional computer hackers, persons involved with organized crime, or foreign state or foreign state-supported actors). Cybersecurity threats can employ a wide variety of methods and techniques, which may include the use of social engineering techniques, are constantly evolving, and have become increasingly complex and sophisticated; all of which increase the difficulty of detecting and successfully defending against them. Furthermore, because the techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until after they are launched against a target, we and our third-party vendors may be unable to anticipate these techniques or implement adequate preventative measures. Although prior cyberattacks directed at us have not had a material impact on our financial results, and we are continuing to bolster our threat detection and mitigation processes and procedures, we cannot guarantee that future cyberattacks, if successful, will not have a material impact on our business or financial results. While we have security measures in place to protect our information and our customers’ information and to prevent data loss and other security breaches, we have not always been able to do so and there can be no assurance that in the future we will be able to anticipate or prevent security breaches or unauthorized access of our information technology systems or the information technology systems of the third-party vendors upon which we rely. Despite our implementation of network security measures and internal information security policies, data stored on personnel computer systems is also vulnerable to similar security breaches, unauthorized tampering or human error.

Many governments have enacted laws requiring companies to provide notice of data security incidents involving certain types of data, including personal data. In addition, most of our customers, including U.S. government customers, contractually require us to notify them of data security breaches. If an actual or perceived breach of security measures, unauthorized access to our system or the systems of the third-party vendors that we rely upon, or any other cybersecurity threat occurs, we may face direct or indirect liability, costs, or damages, contract termination, our reputation in the industry and with current and potential customers may be compromised, our ability to attract new customers could be negatively affected, and our business, financial condition, and results of operations could be materially and adversely affected.

Further, unauthorized access to our or our third-party vendors’ information technology systems or data or other security breaches could result in the loss of information; significant remediation costs; litigation, disputes, regulatory action, or investigations that could result in damages, material fines, and penalties; indemnity obligations; interruptions in the operation of our business, including our ability to provide new product features, new platforms, or services to our customers; damage to our operation technology networks and information technology systems; and other liabilities. Moreover, our remediation efforts may not be successful. Any or all of these issues, or the perception that any of them have occurred, could negatively affect our ability to attract new customers, cause existing customers to terminate or not renew their agreements, hinder our ability to obtain and maintain required or desirable cybersecurity certifications, and result in reputational damage, any of which could materially adversely affect our results of operations, financial condition, and future prospects. There can be no assurance that any limitations of liability provisions in our license arrangements with customers or in our agreements with vendors, partners, or others would be enforceable, applicable, or adequate or would otherwise protect us from any such liabilities or damages with respect to any particular claim.

We maintain cybersecurity insurance and other types of insurance, subject to applicable deductibles and policy limits, but our insurance may not be sufficient to cover all costs associated with a potential data security incident. We also cannot be sure that our existing general liability insurance coverage and coverage for cyber liability or errors or omissions will continue to be available on acceptable terms or will be available in sufficient amounts to cover one or more large claims or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could harm our financial condition.

 

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If we fail to manage future growth effectively, our business could be harmed.

Since our founding in 2003, we have experienced rapid growth. We operate in a growing market and have experienced, and may continue to experience, significant expansion of our operations. This growth has placed, and may continue to place, a strain on our employees, management systems, operational, financial, and other resources. As we have grown, we have increasingly managed larger and more complex deployments of our platforms and services with a broader base of government and commercial customers. As we continue to grow, we face challenges of integrating, developing, retaining, and motivating a rapidly growing employee base in various countries around the world. For example, our headcount has grown from 313 full-time employees as of December 31, 2010 to 2,464 full-time employees as of September 30, 2020, with employees located both in the United States and outside the United States. In the event of continued growth of our operations, our operational resources, including our information technology systems, our employee base, or our internal controls and procedures may not be adequate to support our operations and deployments. Managing our growth may require significant expenditures and allocation of valuable management resources, improving our operational, financial, and management processes and systems, and effectively expanding, training, and managing our employee base. If we fail to achieve the necessary level of efficiency in our organization as it grows, our business, financial condition, and results of operations would be harmed. As our organization continues to grow, we may find it increasingly difficult to maintain the benefits of our traditional company culture, including our ability to quickly respond to customers, and avoid formal corporate structure. This could negatively affect our business performance or ability to hire or retain personnel in the near- or long-term.

In addition, our rapid growth may make it difficult to evaluate our future prospects. Our ability to forecast our future results of operations is subject to a number of uncertainties, including our ability to effectively plan for and model future growth. We have encountered in the past, and may encounter in the future, risks and uncertainties frequently experienced by growing companies with global operations in rapidly changing industries. If we fail to achieve the necessary level of efficiency in our organization as it grows, or if we are not able to accurately forecast future growth, our business, financial condition, and results of operations would be harmed.

If we are unable to hire, retain, train, and motivate qualified personnel and senior management, including Alexander Karp, one of our founders and our Chief Executive Officer, and deploy our personnel and resources to meet customer demand around the world, our business could suffer.

Our ability to compete in the highly competitive technology industry depends upon our ability to attract, motivate, and retain qualified personnel. We are highly dependent on the continued contributions and customer relationships of our management and particularly on the services of Alexander Karp, our Chief Executive Officer. Mr. Karp was part of our founding team and has been integral to our growth since our founding. We believe that Mr. Karp’s management experience would be difficult to replace. All of our executive officers and key personnel are at-will employees and may terminate their employment relationship with us at any time. The loss of the services of our key personnel and any of our other executive officers, and our inability to find suitable replacements, could result in a decline in sales, delays in product development, and harm to our business and operations.

At times, we have experienced, and we may continue to experience, difficulty in hiring and retaining personnel with appropriate qualifications, and we may not be able to fill positions in a timely manner or at all. Potential candidates may not perceive our compensation package, including our equity awards, as favorably as personnel hired prior to our listing. In addition, our recruiting personnel, methodology, and approach may need to be altered to address a changing candidate pool and profile. We may not be able to identify or implement such changes in a timely manner. In addition, we may incur significant costs to attract and recruit skilled personnel, and we may lose new personnel to our competitors or other technology companies before we realize the benefit of our investment in recruiting and training them. As we move into new geographies, we will need to attract and recruit skilled personnel in those geographic areas, but it may be challenging for us to compete with traditional

 

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local employers in these regions for talent. If we fail to attract new personnel or fail