PagerDuty, Inc. [PD] Filings

10-Q 1 pd-20221031.htm 10-Q pd-20221031

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________

FORM 10-Q

_________________________

(Mark One)


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

For the quarterly period ended October 31, 2022


☐			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: 001-38856

PAGERDUTY, INC.

(Exact name of registrant as specified in its charter)

_________________________


Delaware						27-2793871
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)

600 Townsend St., Suite 200

San Francisco, CA 94103

(844) 800-3889

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

_________________________

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

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, $0.000005 par value

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 x No o

Indicate by check mark whether the registrant has submitted electronically on its corporate Web site 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 and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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 7(a)(2)(B) of the Securities Act. ☐

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

The total number of shares of common stock outstanding as of November 30, 2022, was 89,975,860.

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PAGERDUTY, INC.

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PART I - FINANCIAL INFORMATION


Item 1	Financial Statements (unaudited)	5
	Condensed Consolidated Balance Sheets	5
	Condensed Consolidated Statements of Operations	6
	Condensed Consolidated Statements of Comprehensive Loss	7
	Condensed Consolidated Statements of Stockholders’ Equity	8
	Condensed Consolidated Statements of Cash Flows	10
	Notes to Condensed Consolidated Financial Statements	11
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3	Quantitative and Qualitative Disclosures about Market Risk	43
Item 4	Controls and Procedures	44

Part II - OTHER INFORMATION


Item 1	Legal Proceedings	45
Item 1A	Risk Factors	45
Item 2	Unregistered Sale of Equity Securities and Use of Proceeds	48
Item 6	Exhibits	48
	Signatures	50

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, or this Form 10-Q, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which statements involve substantial risk and uncertainties. All statements contained in this Form 10-Q other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, market growth and trends, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “could,” “would,” “project,” “plan,” “potentially,” “likely,” “target,” and similar expressions are intended to identify forward-looking statements.

Forward-looking statement contained in this Form 10-Q include, but are not limited to, statements about our expectations regarding:

•the impact of an economic downturn or recession, rising inflation or significant market volatility in the global economy on our customers, partners, employees and business;

•the effect of uncertainties related to the novel coronavirus and resulting COVID-19 pandemic on U.S. and global markets, our business, operations, revenue results, cash flow, operating expenses, demand for our solutions, sales cycles, customer retention, and our customers’ businesses;

•trends in key business metrics, including number of customers and dollar-based net retention rate, and non-GAAP financial measures and their usefulness in evaluating our business;

•trends in revenue, cost of revenue, and gross margin;

•trends in operating expenses, including research and development, sales and marketing, and general and administrative expense, and expectations regarding these expenses as a percentage of revenue;

•our existing cash and cash equivalents and cash provided by sales of our subscriptions being sufficient to support working capital and capital expenditures for at least the next 12 months;

•our ability to successfully identify, acquire, and integrate complementary companies, technologies, and assets;

•our ability to service the interest on our convertible notes and repay such notes, to the extent required;

•our efforts to maintain proper and effective internal controls;

•our ability to expand our operations and increase adoption of our platform internationally;

•our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business both in the United States and internationally;

•the increased expenses and administrative workload associated with being a public company; and

•other statements regarding our future operations, financial condition, and prospects and business strategies.

Such forward-looking statements are based on our expectations as of the date of this filing and are subject to a number of risks, uncertainties and assumptions, including but not limited to, risks detailed in the “Risk Factors” section of this Form 10-Q and in our Annual Report on Form 10-K. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission, or the SEC, that disclose risks and uncertainties that may affect our business. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the effect of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions,

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the future events and trends discussed in this Form 10-Q may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely on forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or may not occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. In addition, the forward-looking statements in this Form 10-Q are made as of the date of this filing, and we do not undertake, and expressly disclaim any duty, to update any of these forward-looking statements for any reason after the date of this Form 10-Q or to conform these statements to actual results or revised expectations.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

PAGERDUTY, INC.

Condensed Consolidated Balance Sheets

(in thousands)


	As of October 31, 2022		As of January 31, 2022
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	262,333	$	349,785
Investments	197,104		193,571
Accounts receivable, net of allowance for credit losses of $1,515 and $1,809 as of October 31, 2022 and January 31, 2022, respectively	72,628		75,279
Deferred contract costs, current	18,007		16,672
Prepaid expenses and other current assets	13,545		9,777
Total current assets	563,617		645,084
Property and equipment, net	18,339		18,229
Deferred contract costs, non-current	26,968		26,159
Lease right-of-use assets	15,141		20,227
Goodwill	118,862		72,126
Intangible assets, net	40,029		23,133
Other assets	1,054		1,490
Total assets	$	784,010	$	806,448
Liabilities, redeemable non-controlling interest, and stockholders’ equity
Current liabilities:
Accounts payable	$	7,692	$	9,505
Accrued expenses and other current liabilities	12,884		13,640
Accrued compensation	34,955		35,327
Deferred revenue, current	175,380		162,881
Lease liabilities, current	6,438		5,637
Total current liabilities	237,349		226,990
Convertible senior notes, net	282,445		281,069
Deferred revenue, non-current	4,335		7,343
Lease liabilities, non-current	14,155		20,912
Other liabilities	3,826		3,159
Total liabilities	542,110		539,473
Commitments and contingencies (Note 12)
Redeemable non-controlling interest (Note 3)	1,551		—
Stockholders’ equity:
Common stock	—		—
Additional paid-in capital	696,169		616,467
Accumulated other comprehensive loss	(3,136)		(669)
Accumulated deficit	(452,684)		(348,823)
Total stockholders’ equity	240,349		266,975
Total liabilities, redeemable non-controlling interest, and stockholders’ equity	$	784,010	$	806,448

See Notes to Condensed Consolidated Financial Statements

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PAGERDUTY, INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)


	Three Months Ended October 31,				Nine Months Ended October 31,
	2022		2021		2022		2021
Revenue	$	94,203	$	71,760	$	269,827	$	202,887
Cost of revenue	18,007		12,039		52,090		34,433
Gross profit	76,196		59,721		217,737		168,454
Operating expenses:
Research and development	35,004		24,554		100,307		68,062
Sales and marketing	47,118		40,176		143,001		118,224
General and administrative	26,616		19,808		77,316		56,680
Total operating expenses	108,738		84,538		320,624		242,966
Loss from operations	(32,542)		(24,817)		(102,887)		(74,512)
Interest income	1,382		705		2,760		2,306
Interest expense	(1,360)		(1,350)		(4,072)		(4,045)
Other expense, net	(172)		(729)		(1,326)		(1,931)
Loss before (provision for) benefit from income taxes	(32,692)		(26,191)		(105,525)		(78,182)
(Provision for) benefit from income taxes	(112)		(150)		1,302		(378)
Net loss	$	(32,804)	$	(26,341)	$	(104,223)	$	(78,560)
Net loss attributable to redeemable non-controlling interest	(262)		—		(362)		—
Net loss attributable to PagerDuty, Inc.	$	(32,542)	$	(26,341)	$	(103,861)	$	(78,560)
Net loss per share, basic and diluted, attributable to PagerDuty, Inc.	$	(0.36)	$	(0.31)	$	(1.18)	$	(0.94)
Weighted average shares used in calculating net loss per share, basic and diluted	89,285		85,092		88,200		83,979

See Notes to Condensed Consolidated Financial Statements

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PAGERDUTY, INC.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)


	Three Months Ended October 31,				Nine Months Ended October 31,
	2022		2021		2022		2021
Net loss	$	(32,804)	$	(26,341)	$	(104,223)	$	(78,560)
Unrealized loss on investments	(1,050)		(222)		(1,952)		(534)
Foreign currency translation adjustments	(374)		—		(515)		—
Total comprehensive loss	$	(34,228)	$	(26,563)	$	(106,690)	$	(79,094)
Less comprehensive loss attributable to redeemable non-controlling interest:
Net loss attributable to redeemable non-controlling interest	(262)		—		(362)		—
Foreign currency translation adjustments, attributable to redeemable non-controlling interest	2		—		5		—
Comprehensive loss attributable to redeemable non-controlling interest	(260)		—		(357)		—
Comprehensive loss attributable to PagerDuty, Inc.	$	(33,968)	$	(26,563)	$	(106,333)	$	(79,094)

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PAGERDUTY, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

(unaudited)


	Three Months Ended October 31, 2022
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balances as of July 31, 2022	88,928,089	$	—	$	672,126	$	(1,712)	$	(420,142)	$	250,272
Issuance of common stock upon exercise of stock options	328,471	—		2,137		—		—		2,137
Vesting of restricted stock units, net of employee payroll taxes	709,089	—		(9,864)		—		—		(9,864)
Other comprehensive loss	—	—		—		(1,424)		—		(1,424)
Stock-based compensation	—	—		31,770		—		—		31,770
Net loss attributable to PagerDuty, Inc.	—	—		—		—		(32,542)		(32,542)
Balances as of October 31, 2022	89,965,649	$	—	$	696,169	$	(3,136)	$	(452,684)	$	240,349


	Nine Months Ended October 31, 2022
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balances as of January 31, 2022	86,758,380	$	—	$	616,467	$	(669)	$	(348,823)	$	266,975
Issuance of common stock upon exercise of stock options	1,513,581	—		8,728		—		—		8,728
Vesting of restricted stock units, net of employee payroll taxes	1,349,991	—		(22,187)		—		—		(22,187)
Shares issued related to an asset acquisition	62,972	—		—		—		—		—
Issuance of common stock in connection with the Employee Stock Purchase Plan	280,725	—		5,736		—		—		5,736
Other comprehensive loss	—	—		—		(2,467)		—		(2,467)
Stock-based compensation	—	—		87,425		—		—		87,425
Net loss attributable to PagerDuty, Inc.	—			—		—		(103,861)		(103,861)
Balances as of October 31, 2022	89,965,649	$	—	$	696,169	$	(3,136)	$	(452,684)	$	240,349

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	Three Months Ended October 31, 2021
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balances as of July 31, 2021	84,801,124	$	—	$	578,728	$	31	$	(293,587)	$	285,172
Issuance of common stock upon exercise of stock options and restricted stock agreements	724,725	—		4,286		—		—		4,286
Vesting of restricted stock units, net of employee payroll taxes	269,436	—		(7,616)		—		—		(7,616)
Other comprehensive loss	—	—		—		(222)		—		(222)
Stock-based compensation	—	—		18,110		—		—		18,110
Net loss	—	—		—		—		(26,341)		(26,341)
Balances as of October 31, 2021	85,795,285	$	—	$	593,508	$	(191)	$	(319,928)	$	273,389


	Nine Months Ended October 31, 2021
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balances as of January 31, 2021	82,882,424	$	—	$	614,494	$	343	$	(248,110)	$	366,727
Cumulative effect adjustment due to adoption of ASU 2020-06	—	—		(68,478)		—		6,742		(61,736)
Issuance of common stock upon exercise of stock options and restricted stock agreements	2,010,991	—		12,508		—		—		12,508
Vesting of restricted stock units, net of employee payroll taxes	677,323	—		(18,619)		—		—		(18,619)
Shares issued related to a business combination	2,073	—		—		—		—		—
Issuance of common stock in connection with employee stock purchase plan	222,474	—		4,889		—		—		4,889
Other comprehensive loss	—	—		—		(534)		—		(534)
Stock-based compensation	—	—		48,714		—		—		48,714
Net loss	—	—		—		—		(78,560)		(78,560)
Balances as of October 31, 2021	85,795,285	$	—	$	593,508	$	(191)	$	(319,928)	$	273,389

See Notes to Condensed Consolidated Financial Statements

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PAGERDUTY, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	Nine Months Ended October 31,
	2022		2021
Cash flows from operating activities
Net loss attributable to PagerDuty, Inc.	$	(103,861)	$	(78,560)
Net loss attributable to redeemable non-controlling interest (Note 3)	(362)		—
Net loss	(104,223)		(78,560)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	12,778		6,160
Amortization of deferred contract costs	14,178		10,651
Amortization of debt issuance costs	1,376		1,350
Stock-based compensation	86,478		47,866
Non-cash lease expense	2,913		3,331
Tax benefit related to release of valuation allowance	(1,330)		—
Other	1,686		2,592
Changes in operating assets and liabilities:
Accounts receivable	3,048		360
Deferred contract costs	(16,323)		(16,842)
Prepaid expenses and other assets	(2,934)		(857)
Accounts payable	(1,117)		3,836
Accrued expenses and other liabilities	(1,350)		(79)
Accrued compensation	(624)		3,760
Deferred revenue	8,635		12,878
Lease liabilities	(3,783)		(3,812)
Net cash used in operating activities	(592)		(7,366)
Cash flows from investing activities
Purchases of property and equipment	(3,755)		(1,376)
Capitalization of internal-use software costs	(2,725)		(2,701)
Business acquisition, net of cash acquired	(66,262)		(160)
Asset acquisition	(1,845)		—
Purchases of available-for-sale investments	(155,310)		(150,608)
Proceeds from maturities of available-for-sale investments	149,625		156,616
Proceeds from sales of available-for-sale investments	—		27,380
Net cash (used in) provided by investing activities	(80,272)		29,151
Cash flows from financing activities
Investment from redeemable non-controlling interest holder	1,908		—
Proceeds from employee stock purchase plan	5,736		4,889
Proceeds from issuance of common stock upon exercise of stock options	8,459		12,517
Employee payroll taxes paid related to net share settlement of restricted stock units	(22,187)		(18,619)
Net cash used in financing activities	(6,084)		(1,213)
Effects of foreign currency exchange rates on cash, cash equivalents, and restricted cash	(504)		—
Net (decrease) increase in cash, cash equivalents, and restricted cash	(87,452)		20,572
Cash, cash equivalents, and restricted cash at beginning of period	349,785		339,166
Cash, cash equivalents, and restricted cash at end of period	$	262,333	$	359,738

Supplemental cash flow data:
Cash paid for income taxes	$	130	$	126
Cash paid for interests	$	1,797	$	1,797
Non-cash investing and financing activities:
Purchase of property and equipment, accrued but not yet paid	$	828	$	823
Stock-based compensation capitalized in internal use software	$	947	$	848
Bonuses capitalized in internal use software	$	263	$	121
Receivables for cash in-transit on stock options	$	269	$	9

See Notes to Condensed Consolidated Financial Statements

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PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Description of Business and Basis of Presentation

Description of Business

PagerDuty, Inc. was incorporated under the laws of the state of Delaware in May 2010.

PagerDuty is a digital operations management platform that manages urgent and mission-critical work for a modern, digital business. PagerDuty collects data and digital signals from virtually any software-enabled system or device and leverages powerful machine learning to correlate, process, and predict opportunities and issues. Using incident response, event management, and automation, the Company brings together the right people with the right information so they can resolve issues and act on opportunities in minutes or seconds from wherever they are.

As used herein, “PagerDuty”, “we”, “our”, “the Company” and similar terms include PagerDuty, Inc., unless the context indicates otherwise.

Basis of Presentation

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 condensed consolidated balance sheet as of January 31, 2022 was derived from the audited consolidated financial statements as of that date but does not include all of the information and notes required by GAAP for complete financial statements. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the year ended January 31, 2022, included in the Company’s Annual Report on Form 10-K, filed with the SEC.

The condensed consolidated financial statements include the results of the Company, its wholly owned subsidiaries, and subsidiaries in which the Company holds a controlling interest. All intercompany balances and transactions have been eliminated in consolidation.

In the opinion of management, the information contained herein reflects all adjustments necessary for a fair presentation of the Company’s financial position, results of operations and comprehensive loss, statements of stockholders’ equity, and cash flows. The results of operations for the three and nine months ended October 31, 2022 are not necessarily indicative of the results to be expected for the full year ending January 31, 2023 or for any other interim period, or for any future year.

The Company’s fiscal year ends on January 31. References to fiscal 2023, for example, refer to the fiscal year ending January 31, 2023.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make, on an ongoing basis, estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates. The Company’s most significant estimates and judgments involve the period of benefit for amortizing deferred contract costs, the determination of the allowance for credit losses, the provision for income taxes, including the related valuation allowance and any uncertain tax positions, fair value of acquired assets and assumed liabilities, impairment of goodwill and intangible assets, and estimates related to our revenue recognition, such as the assessment of

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PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

performance obligations in our revenue arrangements and the fair value assigned to each performance obligation, among others. Management bases its estimates on historical experience and on various other assumptions which management believes to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Foreign Currency Translations

The functional currency for the large majority of the Company's foreign operations is the U.S. dollar, although the Company has one subsidiary use the local currency as its functional currency for the three and nine months ended October 31, 2022. When a consolidated entity’s functional currency is the local currency, the Company translates the foreign functional currency financial statements to U.S. dollars using the exchange rates at the balance sheet date for assets and liabilities, the period average exchange rates for revenues and expenses, and the historical exchange rates for equity.

2. Summary of Significant Accounting Policies

Concentrations of Risk and Significant Customers

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, available-for-sale investments, and accounts receivable. All of the Company’s cash and cash equivalents and investments are invested in money market funds, U.S. Treasury securities, commercial paper, corporate debt securities, or U.S. Government agency securities that management believes to be of high credit quality.

No single customer accounted for 10% of the total accounts receivable balance as of October 31, 2022 or January 31, 2022. No single customer represented 10% or more of revenue for the three and nine months ended October 31, 2022 or 2021.

Segment Information

The Company manages its operations and allocates resources as one operating segment. The Company’s chief operating decision maker (“CODM”) is its chief executive officer, who reviews financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance, and allocating resources. Refer to Note 17, “Geographic Information” for information regarding the Company's long-lived assets and revenue by geography.

Related Party Transaction

Certain members of the Company’s Board of Directors serve as directors of, or are executive officers of, and in some cases are investors in, companies that are customers or vendors of the Company. The Company billed $1.6 million and $2.2 million to entities associated with related parties during the nine months ended October 31, 2022 and 2021, respectively. The Company recognized $1.1 million of revenue associated with related parties during the nine months ended October 31, 2021. Other related party transactions were not material for the three and nine months ended October 31, 2022 and 2021.

Significant Accounting Policies

There have been no significant changes to our significant accounting policies as compared to those described in our Annual Report on Form 10-K for the fiscal year ended January 31, 2022 other than as set forth below.

Redeemable Non-Controlling Interest

During the quarter ended July 31, 2022, the Company established a joint venture with Japan Cloud Computing II L.P. (the “Investor”) in Japan (“PagerDuty K.K.”), which is a variable interest entity, obtaining a 51% controlling interest. The Company has consolidated the financial results of the joint venture.

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PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The agreements with the non-controlling interest holders of PagerDuty K.K. contain redemption features whereby the interest held by the non-controlling interest holders is redeemable either (i) at the option of the non-controlling interest holders or (ii) at the option of the Company, both beginning on the tenth anniversary of the initial capital contribution. The balance of the redeemable non-controlling interest is reported at the greater of the initial carrying amount adjusted for the redeemable non-controlling interest's share of earnings or losses and other comprehensive income or loss, or its estimated redemption value. The resulting changes in the estimated redemption amount are recorded with corresponding adjustments against additional paid-in-capital due to the absence of retained earnings. The carrying amount of the redeemable non-controlling interest is recorded on the Company's condensed consolidated balance sheets as temporary equity. There were no adjustments attributable to redeemable non-controlling interest in the three and nine months ended October 31, 2022.

Recently Adopted Accounting Pronouncements

In March 2022, the FASB issued Accounting Standard Update No. 2022-01 (“ASU 2021-08”), Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 (Revenue from Contracts with Customers). At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The ASU is part of the FASB's simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. The Company early adopted ASU 2022-01 as of February 1, 2022 using the prospective method. The adoption of the standard impacted the accounting for the acquisition of Catalytic, Inc. (“Catalytic”) requiring the Company to measure acquired contract assets and liabilities in accordance with ASC 606. The adoption of ASU 2021-08 did not have a material impact on the condensed consolidated financial statements.

3. Redeemable Non-Controlling Interest

In May 2022, the Company established a joint venture, PagerDuty K.K, which is a variable interest entity. The Company obtained a 51% controlling interest and has consolidated the financial results of the joint venture.

The following table summarizes the activity in the redeemable non-controlling interest for the period indicated below:


	Three Months Ended October 31, 2022		Nine Months Ended October 31, 2022
	(in thousands)
Balance at beginning of period	$	1,811	$	—
Investment by redeemable non-controlling interest	—		1,908
Net loss attributable to redeemable non-controlling interest	(262)		(362)
Foreign currency translation adjustments	2		5
Balance at end of period	$	1,551	$	1,551

4. Cash, Cash Equivalents, and Investments

Cash, cash equivalents, and investments consisted of the following:

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PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)


	As of October 31, 2022		As of January 31, 2022
	(in thousands)
Cash and cash equivalents
Cash	$	118,604	$	268,091
Money market funds	141,730		73,194
Commercial paper	1,999		5,500
U.S. Treasury securities	—		3,000
Total cash and cash equivalents	$	262,333	$	349,785
Available-for-sale investments:
U.S. Treasury securities	$	50,569	$	41,105
Commercial paper	31,638		39,483
Corporate debt securities	108,964		112,983
U.S. Government agency securities	5,933		—
Total available-for-sale investments	$	197,104	$	193,571

The following tables summarize the Company’s investments’ adjusted cost, net unrealized losses, and fair value by significant investment category as of October 31, 2022 and January 31, 2022. Gross realized gains or losses from sales of available-for-sale securities were not material for the three and nine months ended October 31, 2022.


	As of October 31, 2022
	Cost Basis		Unrealized Loss		Recorded Basis
	(in thousands)
Available-for-sale investments:
U.S. Treasury securities	$	50,685	$	(116)	$	50,569
Commercial paper	31,918		(280)		31,638
Corporate debt securities	111,124		(2,160)		108,964
U.S. Government agency securities	5,998		(65)		5,933
Total available-for-sale investments	$	199,725	$	(2,621)	$	197,104


	As of January 31, 2022
	Cost Basis		Unrealized Loss, Net		Recorded Basis
	(in thousands)
Available-for-sale investments:
U.S. Treasury securities	$	41,147	$	(42)	$	41,105
Commercial paper	39,528		(45)		39,483
Corporate debt securities	113,565		(582)		112,983
Total available-for-sale investments	$	194,240	$	(669)	$	193,571

The following tables present the Company’s available-for-sale securities by contractual maturity date as of October 31, 2022 and January 31, 2022:

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PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)


	As of October 31, 2022
	Cost Basis		Recorded Basis
	(in thousands)
Due within one year	$	150,320	$	148,732
Due between one to five years	49,405		48,372
Total	$	199,725	$	197,104


	As of January 31, 2022
	Cost Basis		Recorded Basis
	(in thousands)
Due within one year	$	154,692	$	154,455
Due between one to five years	39,548		39,116
Total	$	194,240	$	193,571

As of October 31, 2022, there were 92 available-for-sale securities in an unrealized loss position, 27 of which were in a continuous unrealized loss position for the last 12 months. The total unrealized loss related to the 27 securities was $1.0 million. As of January 31, 2022, there were 69 available-for-sale securities in an unrealized loss position, seven of which were in a continuous unrealized loss position for the last 12 months. The total unrealized loss related to the seven securities was $0.7 million.

When evaluating investments for impairment, the Company reviews factors such as the extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not that the Company will be required to sell, the investment before recovery of the investment’s amortized cost. No impairment loss has been recorded on the securities included in the tables above, as the Company believes that any decrease in fair value of these securities is temporary and the Company expects to recover at least up to the initial cost of the investment for these securities. The Company has not recorded an allowance for credit losses, as the Company believes any such losses would be immaterial based on the high-grade credit rating for each of its marketable securities as of the end of each period.

5. Fair Value Measurements

The Company measures its financial assets and liabilities at fair value each reporting period using a fair value hierarchy that prioritizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value, as follows:

Level 1—Valuations based on observable inputs that reflect quoted prices for identical assets or liabilities in active markets.

Level 2—Valuations based on inputs that are directly or indirectly observable in the marketplace.

Level 3—Valuations based on unobservable inputs that are supported by little or no market activity.

The following tables present information about the Company’s financial assets that are required to be measured or disclosed at fair value using the above input categories:

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PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)


	As of October 31, 2022
	Level 1		Level 2		Level 3		Total
	(in thousands)
Money market funds	$	141,730	$	—	$	—	$	141,730
U.S. Treasury securities	—		50,569		—		50,569
Commercial paper	1,999		31,638		—		33,637
Corporate debt securities	—		108,964		—		108,964
U.S. Government agency securities	—		5,933		—		5,933
Total	$	143,729	$	197,104	$	—	$	340,833
Included in cash equivalents							$	143,729
Included in investments							$	197,104


	As of January 31, 2022
	Level 1		Level 2		Level 3		Total
	(in thousands)
Money market funds	$	73,194	$	—	$	—	$	73,194
U.S. Treasury securities	3,000		41,105		—		44,105
Commercial paper	5,500		39,483		—		44,983
Corporate debt securities	—		112,983		—		112,983
Total	$	81,694	$	193,571	$	—	$	275,265
Included in cash equivalents							$	81,694
Included in investments							$	193,571

The Company’s assets that are measured by management at fair value on a recurring basis are generally classified within Level 1 or Level 2 of the fair value hierarchy.

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. As of October 31, 2022 and January 31, 2022, the Company’s Level 2 securities were priced by pricing vendors. These pricing vendors utilize observable market information in pricing these securities or, if specific prices are not available for these securities, use other observable inputs like market transactions involving identical or comparable securities.

The carrying amounts of certain financial instruments, including cash held in banks, accounts receivable, and accounts payable approximate fair value due to their short-term maturities and are excluded from the fair value table above.

Convertible Senior Notes

As of October 31, 2022, the estimated fair value of our 1.25% Convertible Senior Notes due 2025 (the “Notes”) was approximately $282.6 million. The fair value was determined based on the quoted price for the Notes in an inactive market on the last trading day of the reporting period and is considered as Level 2 in the fair value hierarchy.

6. Business Combinations

On March 8, 2022, the Company completed the acquisition of Catalytic, a provider of a no-code/low-code workflow automation application. The Company acquired Catalytic for purchase consideration of $68.8 million in cash. The acquisition was accounted for as a business combination and the acquired assets and liabilities were recorded at their preliminary fair values on the acquisition date and any excess was recorded as goodwill. The values

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PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

assigned to the assets acquired and liabilities assumed are based on preliminary estimates of fair value available as of the date of this Quarterly Report on Form 10-Q and may be adjusted during the measurement period of up to 12 months from the date of acquisition as further information becomes available. Any changes in the fair values of the assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill. As of October 31, 2022, the primary area that remains preliminary relates to the valuation of certain tax-related items.

The following table presents the preliminary fair values of acquired assets and liabilities recorded in the Company’s condensed consolidated balance sheet as of the acquisition date:


	(in thousands)
Cash and cash equivalents	$	2,506
Accounts receivable and other assets	801
Prepaid and other current assets	841
Intangible assets	21,800
Goodwill	46,736
Accounts payable and other liabilities	(408)
Deferred revenue	(856)
Other tax liabilities	(1,322)
Deferred tax liability	(1,330)
Total purchase consideration	$	68,768

The goodwill was primarily attributed to the value of synergies created with the Company’s current and future offerings. Goodwill is not deductible for income tax purposes.

In connection with the acquisition, the Company recognized a net deferred tax liability for approximately $1.3 million, generated primarily from the difference between the tax basis and fair value of the acquired intangible assets, which increased goodwill. As the Company has a full valuation allowance as of October 31, 2022, the Company recorded an income tax benefit for this net deferred tax liability in the condensed consolidated statement of operations for the nine months ended October 31, 2022. Refer to Note 16, "Income Taxes", for further information.

The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition:


	Fair Value		Useful Life
	(in thousands)		(in years)
Developed technology	$	19,200	3
Customer relationships	$	2,600	10

This business combination resulted in increases of $46.7 million to goodwill, $19.2 million to developed technology and $2.6 million to customer relationships. The Company also entered into holdback agreements with the two founders of Catalytic with $3.4 million held back in cash which are subject to the recipients’ continued service with the Company and thus excluded from the purchase price and will be recognized ratably as research and development expense over the required two-year service period.

From the date of the acquisition, the financial results of Catalytic have been included in and are immaterial to the Company’s condensed consolidated financial statements. Pro forma revenue and results of operations have not been presented because the historical results are not material to the condensed consolidated financial statements in any period presented.

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PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The Company did not complete any other business combinations in the three and nine months ended October 31, 2022.

7. Goodwill and Acquired Intangible Assets

The changes in the carrying amount of goodwill for the nine months ended October 31, 2022 are as follows:


	Goodwill
	(in thousands)
Balance as of January 31, 2022	$	72,126
Goodwill resulting from business combination	46,736
Balance as of October 31, 2022	$	118,862

Acquired intangible assets subject to amortization consist of the following:


	As of October 31, 2022
	Cost		Accumulated Amortization		Net		Weighted Average Remaining Useful Life
	(in thousands)						(in years)
Customer relationships	$	24,400	$	(4,709)	$	19,691	8.1
Developed technology	24,800		(6,462)		18,338		2.5
Trademarks	400		(400)		—		0.0
Assembled workforce	2,527		(527)		2,000		1.6
Total acquired intangibles, net	$	52,127	$	(12,098)	$	40,029


	As of January 31, 2022
	Cost		Accumulated Amortization		Net		Weighted Average Remaining Useful Life
	(in thousands)						(in years)
Customer relationships	$	21,800	$	(2,907)	$	18,893	8.7
Developed technology	5,600		(1,493)		4,107		3.7
Trademarks	400		(267)		133		0.7
Total acquired intangibles, net	$	27,800	$	(4,667)	$	23,133

For the three months ended October 31, 2022 and 2021, amortization expense related to intangible assets was $2.6 million and $0.9 million, respectively. For the nine months ended October 31, 2022 and 2021, amortization expense related to acquired intangible assets was $7.4 million and $2.6 million, respectively.

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PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

8. Property and Equipment, Net

Property and equipment, net, consisted of the following:


	As of October 31, 2022		As of January 31, 2022
	(in thousands)
Leasehold improvements	$	15,599	$	15,392
Computers and equipment	9,168		7,483
Furniture and fixtures	4,774		4,686
Capitalized internal-use software	9,389		6,136
Gross property and equipment (1)	38,930		33,697
Accumulated depreciation and amortization	(20,591)		(15,468)
Property and equipment, net	$	18,339	$	18,229

(1) Gross property and equipment includes construction-in-progress for leasehold improvements and capitalized internal-use software of $4.6 million and $6.9 million that had not yet been placed in service as of October 31, 2022 and January 31, 2022, respectively. The costs associated with construction-in-progress are not amortized until the asset is available for its intended use.

Depreciation and amortization expense was $1.8 million and $1.3 million for the three months ended October 31, 2022 and 2021, respectively. Depreciation and amortization expense was $5.1 million and $3.4 million for the nine months ended October 31, 2022 and 2021, respectively.

In the nine months ended October 31, 2022, the Company recorded an impairment charge of $0.7 million on its capitalized internal-use software included in construction-in-progress. It was determined that the developed technology would not be placed in service as the technology was replaced with the acquired technology of Catalytic.

9. Deferred Contract Costs

Deferred contract costs, which primarily consist of deferred sales commissions, were $45.0 million and $42.8 million as of October 31, 2022 and January 31, 2022, respectively. Amortization expense for deferred contract costs was $4.9 million and $3.9 million for the three months ended October 31, 2022 and 2021, respectively. Amortization expense for deferred contract costs was $14.2 million and $10.7 million for the nine months ended October 31, 2022 and 2021, respectively. There was no impairment charge related to the costs capitalized for the periods presented.

10. Leases

Operating Leases

The Company has entered into various non-cancellable operating leases for its office spaces with lease periods expiring between fiscal 2023 and fiscal 2029. The operating lease agreements generally provide for rental payments on a graduated basis and for options to renew, which could increase future minimum lease payments if exercised.

Lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As the leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The lease right-of-use assets also include any lease payments made and exclude lease incentives such as tenant improvement allowances.

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PAGERDUTY, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The operating leases typically include non-lease components such as common-area maintenance costs. The Company has elected to include non-lease components with lease payments for the purpose of calculating lease right-of-use assets and liabilities, to the extent that they are fixed. Non-lease components that are not fixed are expensed as incurred as variable lease payments.

Leases with a term of one year or less are not recognized on our condensed consolidated balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term.

The following table presents information about leases on the condensed consolidated balance sheet.


	As of October 31, 2022		As of January 31, 2021
	(in thousands)
Assets
Lease right-of-use assets	$	15,141	$	20,227
Liabilities
Lease liabilities	6,438		5,637
Lease liabilities, non-current	14,155		20,912

As of October 31, 2022, the weighted average remaining lease term was 3.9 years and the weighted average discount rate used to determine the net present value of the lease liabilities was 3.7%.

The following table presents information about leases on the condensed consolidated statement of operations.


	Three Months Ended October 31,				Nine Months Ended October 31,
	2022		2021		2022		2021
	(in thousands)
Operating lease expense	$	1,371	$	1,401	$	4,293	$	4,173
Short-term lease expense

PagerDuty, Inc. [PD] Filings
10-Q	[2022-12-02]
10-Q	[2022-09-02]
10-Q	[2022-06-03]
10-K	[2022-03-17]
10-Q	[2021-12-08]
10-Q	[2021-09-03]
10-Q	[2021-06-04]
10-K	[2021-03-19]
10-Q	[2020-12-04]
10-Q	[2020-09-03]
10-Q	[2020-06-05]
10-K	[2020-03-19]
10-Q	[2019-12-06]
10-Q	[2019-09-06]
10-Q	[2019-06-07]
S-1	[2019-03-15]