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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 2022
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 No. 001-38464
Smartsheet Inc.
(Exact name of Registrant as specified in its charter)
| | | | | | | | | | | |
Washington | | 20-2954357 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | |
500 108th Ave NE, Suite 200 | | |
Bellevue, | WA | | 98004 |
(Address of principal executive offices) | | (Zip Code) |
| | | | | | | | | | | |
| (844) | 324-2360 | |
| Registrant’s telephone number, including area code | |
| | | | | |
| |
|
(Former name, former address and former fiscal year, if changed since last report) |
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, no par value per share | SMAR | The 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, a 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 30, 2022, there were 131,329,957 shares of the registrant’s Class A common stock outstanding.
SMARTSHEET INC.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended October 31, 2022
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. All statements contained in this Quarterly Report on 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,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends, including, but not limited to, the macroeconomic impact of COVID-19, which we believe has affected and may continue to affect our financial condition, operating results, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described under Part II, Item 1A, “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management 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, the future events and trends discussed in this Quarterly Report on 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 that the future results, performance, or events and circumstances reflected in the forward-looking statements will be achieved or will occur. We undertake no obligation to update any of these forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q or to conform these statements to actual results or revised expectations.
Part I. Financial Information
Item 1. Financial Statements
SMARTSHEET 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 | | | | | | | |
Subscription | $ | 186,070 | | | $ | 132,597 | | | $ | 514,879 | | | $ | 361,720 | |
Professional services | 13,507 | | | 12,031 | | | 39,699 | | | 31,726 | |
Total revenue | 199,577 | | | 144,628 | | | 554,578 | | | 393,446 | |
Cost of revenue | | | | | | | |
Subscription | 29,294 | | | 18,253 | | | 82,154 | | | 55,155 | |
Professional services | 13,569 | | | 11,162 | | | 38,418 | | | 28,298 | |
Total cost of revenue | 42,863 | | | 29,415 | | | 120,572 | | | 83,453 | |
Gross profit | 156,714 | | | 115,213 | | | 434,006 | | | 309,993 | |
Operating expenses | | | | | | | |
Research and development | 50,526 | | | 41,151 | | | 156,829 | | | 116,704 | |
Sales and marketing | 120,116 | | | 83,114 | | | 359,522 | | | 231,613 | |
General and administrative | 28,629 | | | 26,928 | | | 94,873 | | | 79,567 | |
Total operating expenses | 199,271 | | | 151,193 | | | 611,224 | | | 427,884 | |
Loss from operations | (42,557) | | | (35,980) | | | (177,218) | | | (117,891) | |
Interest income | 2,344 | | | 12 | | | 4,013 | | | 35 | |
Other income (expense), net | 593 | | | (651) | | | 1,389 | | | 112 | |
Loss before income tax provision | (39,620) | | | (36,619) | | | (171,816) | | | (117,744) | |
Income tax provision | 517 | | | 99 | | | 1,091 | | | 214 | |
Net loss | $ | (40,137) | | | $ | (36,718) | | | $ | (172,907) | | | $ | (117,958) | |
Net loss per share, basic and diluted | $ | (0.31) | | | $ | (0.29) | | | $ | (1.33) | | | $ | (0.94) | |
Weighted-average shares outstanding used to compute net loss per share, basic and diluted | 130,634 | | | 126,118 | | | 129,611 | | | 125,157 | |
See notes to condensed consolidated financial statements.
SMARTSHEET 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 | $ | (40,137) | | | $ | (36,718) | | | $ | (172,907) | | | $ | (117,958) | |
Other comprehensive loss | | | | | | | |
Net unrealized losses on available-for-sale securities | (290) | | | — | | | (693) | | | — | |
Foreign currency translation adjustments | (794) | | | — | | | (794) | | | — | |
Comprehensive loss | $ | (41,221) | | | $ | (36,718) | | | $ | (174,394) | | | $ | (117,958) | |
See notes to condensed consolidated financial statements.
SMARTSHEET INC.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | |
| October 31, 2022 | | January 31, 2022 | | | | | | | | | |
Assets | | | | | | | | | | | | |
Current assets | | | | | | | | | | | | |
Cash and cash equivalents | $ | 194,404 | | | $ | 449,074 | | | | | | | | | | |
Short-term investments | 240,320 | | | — | | | | | | | | | | |
Accounts receivable, net of allowances of $5,250 and $7,561, respectively | 148,466 | | | 151,138 | | | | | | | | | | |
Prepaid expenses and other current assets | 35,190 | | | 34,390 | | | | | | | | | | |
Total current assets | 618,380 | | | 634,602 | | | | | | | | | | |
Restricted cash | 181 | | | 17 | | | | | | | | | | |
Deferred commissions | 110,038 | | | 91,312 | | | | | | | | | | |
Property and equipment, net | 39,409 | | | 36,835 | | | | | | | | | | |
Operating lease right-of-use assets | 61,233 | | | 67,171 | | | | | | | | | | |
Intangible assets, net | 41,360 | | | 44,096 | | | | | | | | | | |
Goodwill | 141,004 | | | 125,605 | | | | | | | | | | |
Other long-term assets | 2,800 | | | 3,194 | | | | | | | | | | |
Total assets | $ | 1,014,405 | | | $ | 1,002,832 | | | | | | | | | | |
Liabilities and shareholders’ equity | | | | | | | | | | | | |
Current liabilities | | | | | | | | | | | | |
Accounts payable | $ | 3,874 | | | $ | 1,506 | | | | | | | | | | |
Accrued compensation and related benefits | 54,670 | | | 66,744 | | | | | | | | | | |
Other accrued liabilities | 27,387 | | | 18,901 | | | | | | | | | | |
Operating lease liabilities, current | 19,132 | | | 18,003 | | | | | | | | | | |
Deferred revenue | 383,170 | | | 332,285 | | | | | | | | | | |
Total current liabilities | 488,233 | | | 437,439 | | | | | | | | | | |
Operating lease liabilities, non-current | 51,361 | | | 58,237 | | | | | | | | | | |
Deferred revenue, non-current | 2,181 | | | 2,377 | | | | | | | | | | |
Other long-term liabilities | 73 | | | — | | | | | | | | | | |
Total liabilities | 541,848 | | | 498,053 | | | | | | | | | | |
Commitments and Contingencies (Note 13) | | | | | | | | | | | | |
Shareholders’ equity | | | | | | | | | | | | |
Preferred stock, no par value; 10,000,000 shares authorized, no shares issued or outstanding as of October 31, 2022 and January 31, 2022 | — | | | — | | | | | | | | | | |
Class A common stock, no par value; 500,000,000 shares authorized, 130,869,093 shares issued and outstanding as of October 31, 2022; 500,000,000 shares authorized, 127,809,525 shares issued and outstanding as of January 31, 2022 | — | | | — | | | | | | | | | | |
Class B common stock, no par value; 500,000,000 shares authorized, no shares issued and outstanding as of October 31, 2022; 500,000,000 shares authorized, no shares issued and outstanding as of January 31, 2022 | — | | | — | | | | | | | | | | |
Additional paid-in capital | 1,189,485 | | | 1,047,313 | | | | | | | | | | |
Accumulated other comprehensive loss | (1,487) | | | — | | | | | | | | | | |
Accumulated deficit | (715,441) | | | (542,534) | | | | | | | | | | |
Total shareholders’ equity | 472,557 | | | 504,779 | | | | | | | | | | |
Total liabilities and shareholders’ equity | $ | 1,014,405 | | | $ | 1,002,832 | | | | | | | | | | |
See notes to condensed consolidated financial statements.
SMARTSHEET INC.
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(dollars in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended October 31, 2022 |
| Common Stock (Class A) | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Shareholders’ Equity |
| Shares | | Amount | | | | |
Balances at July 31, 2022 | 130,155,007 | | | $ | — | | | $ | 1,150,410 | | | $ | (675,304) | | | $ | (403) | | | $ | 474,703 | |
Issuance of common stock under employee stock plans | 714,086 | | | — | | | 868 | | | — | | | — | | | 868 | |
Taxes paid related to net share settlement of equity awards | — | | | — | | | (569) | | | — | | | — | | | (569) | |
Share-based compensation expense | — | | | — | | | 38,776 | | | — | | | — | | | 38,776 | |
Comprehensive loss | — | | | — | | | — | | | — | | | (1,084) | | | (1,084) | |
Net loss | — | | | — | | | — | | | (40,137) | | | — | | | (40,137) | |
Balances as of October 31, 2022 | 130,869,093 | | | $ | — | | | $ | 1,189,485 | | | $ | (715,441) | | | $ | (1,487) | | | $ | 472,557 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended October 31, 2021 |
| Common Stock (Class A) | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Shareholders’ Equity |
| Shares | | Amount | | | | |
Balances at July 31, 2021 | 125,622,097 | | | $ | — | | | $ | 963,825 | | | $ | (452,677) | | | $ | — | | | $ | 511,148 | |
Issuance of common stock under employee stock plans | 844,601 | | | — | | | 10,363 | | | — | | | — | | | 10,363 | |
Taxes paid related to net share settlement of equity awards | — | | | — | | | (1,447) | | | — | | | — | | | (1,447) | |
Share-based compensation expense | — | | | — | | | 28,407 | | | — | | | — | | | 28,407 | |
Comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | |
Net loss | — | | | — | | | — | | | (36,718) | | | — | | | (36,718) | |
Balances as of October 31, 2021 | 126,466,698 | | | $ | — | | | $ | 1,001,148 | | | $ | (489,395) | | | $ | — | | | $ | 511,753 | |
See notes to condensed consolidated financial statements.
SMARTSHEET INC.
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(dollars in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended October 31, 2022 |
| Common Stock (Class A) | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Shareholders’ Equity |
| Shares | | Amount | | | | |
Balances at January 31, 2022 | 127,809,525 | | | $ | — | | | $ | 1,047,313 | | | $ | (542,534) | | | $ | — | | | $ | 504,779 | |
Issuance of common stock under employee stock plans | 3,059,568 | | | — | | | 15,344 | | | — | | | — | | | 15,344 | |
Taxes paid related to net share settlement of equity awards | — | | | — | | | (3,082) | | | — | | | — | | | (3,082) | |
Share-based compensation expense | — | | | — | | | 129,910 | | | — | | | — | | | 129,910 | |
Comprehensive loss | — | | | — | | | — | | | — | | | (1,487) | | | (1,487) | |
Net loss | — | | | — | | | — | | | (172,907) | | | — | | | (172,907) | |
Balances as of October 31, 2022 | 130,869,093 | | | $ | — | | | $ | 1,189,485 | | | $ | (715,441) | | | $ | (1,487) | | | $ | 472,557 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended October 31, 2021 |
| Common Stock (Class A) | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Shareholders’ Equity |
| Shares | | Amount | | | | |
Balances at January 31, 2021 | 123,272,902 | | | $ | — | | | $ | 898,366 | | | $ | (371,437) | | | $ | — | | | $ | 526,929 | |
Issuance of common stock under employee stock plans | 3,193,796 | | | — | | | 26,133 | | | — | | | — | | | 26,133 | |
Taxes paid related to net share settlement of equity awards | — | | | — | | | (4,914) | | | — | | | — | | | (4,914) | |
Share-based compensation expense | — | | | — | | | 81,563 | | | — | | | — | | | 81,563 | |
Comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | |
Net loss | — | | | — | | | — | | | (117,958) | | | — | | | (117,958) | |
Balances as of October 31, 2021 | 126,466,698 | | | $ | — | | | $ | 1,001,148 | | | $ | (489,395) | | | $ | — | | | $ | 511,753 | |
See notes to condensed consolidated financial statements.
SMARTSHEET INC.
Condensed Consolidated Statements of Cash Flows
(in thousands, unaudited)
| | | | | | | | | | | |
| Nine Months Ended October 31, |
| 2022 | | 2021 |
Cash flows from operating activities | | | |
Net loss | $ | (172,907) | | | $ | (117,958) | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | |
Share-based compensation expense | 127,458 | | | 80,067 | |
Depreciation and amortization | 18,476 | | | 15,226 | |
Net amortization of premiums (discounts) on investments | (1,198) | | | — | |
Amortization of deferred commission costs | 36,712 | | | 31,175 | |
Unrealized foreign currency (gain) loss | (760) | | | 136 | |
Non-cash operating lease costs | 11,631 | | | 11,101 | |
Impairment of long-lived assets | 1,544 | | | — | |
Other | (1,636) | | | — | |
Changes in operating assets and liabilities: | | | |
Accounts receivable | 2,739 | | | (3,704) | |
Prepaid expenses and other current assets | (894) | | | (13,085) | |
Other long-term assets | (336) | | | 678 | |
Accounts payable | 1,356 | | | (1,079) | |
Other accrued liabilities | 8,494 | | | 6,257 | |
Accrued compensation and related benefits | (10,975) | | | 4,174 | |
Deferred commissions | (55,438) | | | (50,174) | |
Deferred revenue | 49,673 | | | 43,750 | |
Other long-term liabilities | 37 | | | — | |
Operating lease liabilities | (10,581) | | | (9,924) | |
Net cash provided by (used in) operating activities | 3,395 | | | (3,360) | |
Cash flows from investing activities | | | |
Purchases of short-term investments | (384,363) | | | — | |
Maturities of short-term investments | 144,548 | | | — | |
Purchase of long-term investments | — | | | (1,000) | |
Purchases of property and equipment | (4,175) | | | (9,169) | |
Proceeds from sale of property and equipment | 94 | | | — | |
Proceeds from liquidation of an investment | 622 | | | — | |
Capitalized internal-use software development costs | (5,826) | | | (5,509) | |
Payments for business acquisition, net of cash and restricted cash acquired | (20,342) | | | — | |
Net cash used in investing activities | (269,442) | | | (15,678) | |
Cash flows from financing activities | | | |
Proceeds from exercise of stock options | 4,499 | | | 9,173 | |
Taxes paid related to net share settlement of restricted stock units | (3,082) | | | (4,914) | |
Proceeds from contributions to Employee Stock Purchase Plan | 9,959 | | | 12,969 | |
Net cash provided by financing activities | 11,376 | | | 17,228 | |
Effects of changes in foreign currency exchange rates on cash, cash equivalents, and restricted cash | (131) | | | (134) | |
Net decrease in cash and cash equivalents | (254,802) | | | (1,944) | |
Cash, cash equivalents, and restricted cash at beginning of period | 449,680 | | | 442,348 | |
Cash, cash equivalents, and restricted cash at end of period | $ | 194,878 | | | $ | 440,404 | |
| | | | | | | | | | | | | |
Supplemental disclosures | | | | | |
Cash paid for income tax | $ | 224 | | | $ | 150 | | | |
Accrued purchases of property and equipment, including internal-use software | 1,727 | | | 726 | | | |
Share-based compensation expense capitalized in internal-use software development costs | 2,452 | | | 1,495 | | | |
Right-of-use assets obtained in exchange for new operating lease liabilities | 7,230 | | | 742 | | | |
Right-of-use assets reductions related to operating lease terminations and impairments | 1,535 | | | — | | | |
| | | | | |
See notes to condensed consolidated financial statements.
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Overview and Basis of Presentation
Description of business
Smartsheet Inc. (the “Company,” “we,” “our”) was incorporated in the State of Washington in 2005, and is headquartered in Bellevue, Washington. The Company is the enterprise platform for modern work management, enabling teams and organizations of all sizes to plan, capture, manage, automate, and report on work at scale, resulting in more efficient processes and better business outcomes. Customers access their accounts via a web-based interface or a mobile application. Some customers also purchase the Company’s professional services, which primarily consist of consulting and training services.
Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“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 in our Annual Report on Form 10-K for the year ended January 31, 2022, filed with the SEC on March 25, 2022.
The condensed consolidated financial statements include the results of Smartsheet Inc. and its wholly owned subsidiaries, including those located in the United States, the United Kingdom, Germany, Australia, and Costa Rica. All intercompany balances and transactions have been eliminated upon consolidation.
In the opinion of management, the information contained herein reflects all adjustments necessary for a fair presentation of our condensed consolidated financial statements. All such adjustments are of a normal, recurring nature. The results of operations for the three and nine months ended October 31, 2022 are not necessarily indicative of results to be expected for the full year ending January 31, 2023, or for any other interim period, or for any future year.
Use of estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make 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. The Company bases its estimates on historical experience and on other assumptions that its management believes are reasonable under the circumstances. Actual results could differ from those estimates. The Company’s most significant estimates and judgments involve revenue recognition with respect to the allocation of transaction consideration for the Company’s offerings; determination of the amortization period for capitalized sales commission costs; and the measurement of fair values of share-based compensation award grants, among others.
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Company completed an assessment of the amortization period for deferred sales commission costs and determined that it should increase the period over which we amortize deferred commissions from three years to four years. This change in accounting estimate was effective August 1, 2022 and is being accounted for prospectively in the condensed consolidated financial statements. For the three months ended October 31, 2022, the change in amortization period resulted in a benefit to both sales and marketing expense and net loss of approximately 3% of total revenue. For the nine months ended October 31, 2022, the change in amortization period resulted in a benefit to both sales and marketing expense and net loss of approximately 1% of total revenue. This resulted in a benefit of $0.05 per basic and diluted share for both periods. The effect of this change in estimate is based on the carrying value of deferred commissions included in the Company’s condensed consolidated balance sheets as of July 31, 2022 and those deferred during the three months ended October 31, 2022.
2. Summary of Significant Accounting Policies
Segment information
The Company operates as one operating segment. The Company’s chief operating decision maker is its Chief Executive Officer, who reviews financial information for purposes of making operating decisions, assessing financial performance, and allocating resources.
Deferred commissions
The majority of sales commissions earned by the Company’s sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions are paid on initial contracts and on any upsell contracts with a customer. No sales commissions are paid on customer renewals. Sales commissions and related payroll taxes and fringe benefits are deferred and then amortized on a straight-line basis over a period of benefit that the Company has determined to be four years. The Company determined the period of benefit by taking into consideration its customer contracts, expected customer life, the expected life of its technology, and other factors. Amortization expense is included in sales and marketing expense in the accompanying statements of operations and comprehensive loss. The Company evaluates the period of benefit and tests for impairment on a quarterly basis and whenever events or changes in circumstances occur that could impact the recoverability of these assets.
Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity of three months or less from date of purchase to be cash equivalents. Cash and cash equivalents are recorded at cost, which approximates fair value. Interest earned on cash and cash equivalents is recorded in interest income in the condensed consolidated statements of operations.
Restricted cash
Restricted cash was $0.5 million and $0.6 million as of October 31, 2022 and January 31, 2022, respectively, primarily related to Australian employee contributions to the Company’s 2018 Employee Stock Purchase Plan.
Cash as reported on the condensed consolidated statements of cash flows includes the aggregate amounts of cash and cash equivalents and restricted cash as shown on the condensed consolidated balance sheets. Cash as reported on the condensed consolidated statements of cash flows consisted of the following (in thousands): | | | | | | | | | | | |
| October 31, |
| 2022 | | 2021 |
Cash and cash equivalents | $ | 194,404 | | | $ | 439,950 | |
Restricted cash included in prepaid expenses and other current assets | 293 | | | 437 | |
Restricted cash | 181 | | | 17 | |
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows | $ | 194,878 | | | $ | 440,404 | |
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Short-term investments
The Company’s short-term investments primarily consist of U.S. Treasury securities, corporate bonds, and commercial paper that have original maturities greater than three months at the time of purchase. These investments are classified as available-for-sale securities and we reevaluate such classification as of each balance sheet date. The Company considers all investments as available for use in current operations, including those with maturity dates beyond one year, and therefore classify these securities as current assets in our condensed consolidated balance sheets.
Available-for-sale securities are recorded at fair value each reporting period. For unrealized losses in securities that the Company intends to hold and will not be more likely than not required to sell before recovery, the Company further evaluates whether declines in fair value below amortized cost are due to credit or non-credit related factors. The Company considers credit related impairments to be changes in value that are driven by a change in the creditor’s ability to meet its payment obligations, and records an allowance and recognizes a corresponding loss in other income (expense), net in the condensed consolidated statements of operations when the impairment is incurred. Unrealized non-credit related losses and unrealized gains are reported as a separate component of accumulated other comprehensive loss in the condensed consolidated balance sheets until realized. Realized gains and losses are determined based on the specific identification method and are reported in other income (expense), net in the condensed consolidated statements of operations.
Internal-use software development costs
The Company capitalizes certain qualifying costs incurred during the application development stage in connection with the development of internal-use software. Costs related to preliminary project activities and post-implementation activities are expensed in research and development (“R&D”) as incurred. R&D expenses consist primarily of employee-related costs, software-related costs, allocated overhead, and costs of outside services used to supplement our internal staff.
Internal-use software costs of $2.5 million were capitalized in each of the three months ended October 31, 2022 and 2021. All capitalized costs related to costs incurred during the application development stage of software development for the Company’s platform to which subscriptions are sold.
Internal-use software costs of $8.2 million and $6.7 million were capitalized in the nine months ended October 31, 2022 and 2021, respectively. All capitalized costs related to costs incurred during the application development stage of software development for the Company’s platform to which subscriptions are sold.
Capitalized internal-use software costs are included within property and equipment, net on the condensed consolidated balance sheets, and are amortized over the estimated useful life of the software, which is typically three years. The related amortization expense is recognized in the condensed consolidated statements of operations within the function that receives the benefit of the developed software. Amortization expense of capitalized internal-use software costs totaled $1.9 million and $1.4 million for the three months ended October 31, 2022 and 2021, respectively, and $5.8 million and $3.8 million for the nine months ended October 31, 2022 and 2021, respectively.
Concentrations of risk and significant customers
Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash, cash equivalents, short-term investments, and accounts receivable. The Company maintains its cash accounts with financial institutions where deposits, at times, exceed the Federal Deposit Insurance Corporation (“FDIC”) limits.
No individual customer represented more than 10% of accounts receivable as of October 31, 2022 or January 31, 2022. No individual customer represented more than 10% of revenue for the three and nine months ended October 31, 2022 or 2021.
Leases
The Company determines if an arrangement is a lease at inception, and leases are classified at commencement as either operating or finance leases. All the Company’s leases are classified as operating leases.
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Right-of-use (“ROU”) assets and lease liabilities are recognized at commencement date based on the present value of the future minimum lease payments over the lease term. ROU assets also include any lease payments made. Operating lease ROU assets are presented separately in long-term assets on our condensed consolidated balance sheets. As our operating leases do not provide an implicit rate, we estimate our incremental borrowing rate based on information available at the commencement date in determining the present value of future payments. This rate is an estimate of the collateralized borrowing rate the Company would incur on its future lease payments over a similar term based on the information available at commencement date. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. At October 31, 2022, we did not include any options to extend leases in our lease terms as we were not reasonably certain to exercise them. The Company’s lease agreements do not contain residual value guarantees or covenants.
The Company utilizes certain practical expedients and policy elections available under the lease accounting standard. Leases with a term of one year or less are not recognized on our condensed consolidated balance sheets; we recognize lease expense for these leases on a straight-line basis over the lease term. Additionally, we have elected to include non-lease components with lease components for contracts containing real estate leases for the purpose of calculating lease ROU 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. Our real estate operating leases typically include non-lease components such as common-area maintenance costs.
The Company accounts for subleases from the perspective of a lessor. The Company has two subleases, which are both classified as operating leases. The Company records sublease income as a reduction of lease expense using the straight-line method over the term of the sublease.
Impairment of long-lived assets
Long-lived assets, such as property and equipment, intangible assets, operating lease ROU assets, and internal-use software development costs, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of an asset group is measured by comparing the carrying amount to the estimated undiscounted future cash flows expected to be generated. When the carrying amount exceeds the undiscounted cash flows, the assets are adjusted to their estimated fair value and an impairment charge is recognized as the amount by which the carrying amount exceeds its fair value. We recorded an impairment charge of $1.5 million during the three months ended October 31, 2022, related to the ROU assets and underlying property and equipment associated with our subleased office spaces as described further in Note 12, Leases, to the condensed consolidated financial statements.
Foreign Currency Translation
The functional currency of the Company’s foreign operations is primarily the U.S. dollar, while a few of our wholly owned subsidiaries use their respective local currency as their functional currency. We present our consolidated financial statements in U.S. dollar. For subsidiaries where the functional currency is a foreign currency, the Company translates the foreign currency financial statements to U.S. dollar 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. The effects of foreign currency translation adjustments are recorded in accumulated other comprehensive loss as a component of shareholder’s equity in the condensed consolidated balance sheets and the related periodic movements are presented in the condensed consolidated statements of comprehensive loss. Foreign currency transaction gains and losses are included in other income (expense), net, in the condensed consolidated statements of operations for the period.
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Recently adopted accounting pronouncements
In October 2021, the Financial Accounting Standards Board issued Accounting Standards Update 2021-08, Business Combinations-Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 805). The new guidance requires contract assets and contract liabilities acquired in a business combination to be recognized in accordance with Accounting Standards Codification (“ASC”) Topic 606 as if the acquirer had originated the contracts. The standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company adopted this standard effective August 1, 2022. The adoption of this standard did not have a material effect on the Company’s condensed consolidated financial statements.
3. Revenue from Contracts with Customers
During the three months ended October 31, 2022 and 2021, the Company recognized $157.3 million and $109.0 million of subscription revenue, respectively, and $4.7 million and $4.3 million of professional services revenue, respectively, which were included in the deferred revenue balance as of July 31, 2022 and 2021, respectively.
During the nine months ended October 31, 2022 and 2021, the Company recognized $297.3 million and $196.6 million of subscription revenue, respectively, and $4.7 million of professional services revenue for each period, which were included in the deferred revenue balance as of January 31, 2022 and 2021, respectively.
As of October 31, 2022, approximately $451.2 million of revenue, including amounts already invoiced and amounts contracted but not yet invoiced, was expected to be recognized from remaining performance obligations, of which $443.5 million related to subscription services and $7.7 million related to professional services. Approximately 92% of revenue related to total remaining performance obligations is expected to be recognized in the next 12 months.
4. Deferred Commissions
Deferred commissions were $110.0 million as of October 31, 2022 and $91.3 million as of January 31, 2022.
Amortization expense for deferred commissions was $9.1 million and $11.4 million for the three months ended October 31, 2022 and 2021, respectively, and $36.7 million and $31.2 million for the nine months ended October 31, 2022 and 2021, respectively. Prior to August 1, 2022, deferred commissions were amortized over a period of three years. Effective as of August 1, 2022, deferred commissions are amortized over a period of four years. The amortization expense is recorded in sales and marketing on the Company’s condensed consolidated statements of operations.
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
5. Net Loss Per Share
The following table presents calculations for basic and diluted net loss per share (in thousands, except per share data): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended October 31, | | Nine Months Ended October 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
Numerator: | | | | | | | |
Net loss | $ | (40,137) | | | $ | (36,718) | | | $ | (172,907) | | | $ | (117,958) | |
Denominator: | | | | | | | |
Weighted-average common shares outstanding | 130,634 | | | 126,118 | | | 129,611 | | | 125,157 | |
Net loss per share, basic and diluted | $ | (0.31) | | | $ | (0.29) | | | $ | (1.33) | | | $ | (0.94) | |
The following outstanding shares of common stock equivalents as of the periods presented were excluded from the computation of diluted net loss per share attributable to common shareholders for the periods presented because the impact of including them would have been anti-dilutive (in thousands): | | | | | | | | | | | |
| October 31, |
2022 | | 2021 |
Shares subject to outstanding common stock awards | 11,380 | | | 10,926 | |
Shares issuable pursuant to the 2018 Employee Stock Purchase Plan | 126 | | | 43 | |
Total potentially dilutive shares | 11,506 | | | 10,969 | |
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
6. Investments
All cash equivalents and short-term investments were designated as available-for-sale securities as of October 31, 2022. The following table presents the amortized costs, unrealized gains and losses, and estimated fair values of the Company’s cash equivalents and short-term investments as of October 31, 2022 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| October 31, 2022 |
| Amortized Cost* | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
Cash equivalents: | | | | | | | |
Money market funds | $ | 130,118 | | | $ | — | | | $ | — | | | $ | 130,118 | |
Total cash equivalents | 130,118 | | | — | | | — | | | 130,118 | |
Short-term investments: | | | | | | | |
Corporate bonds | 73,989 | | | 32 | | | (413) | | | 73,608 | |
U.S. Treasury securities | 69,896 | | | — | | | (312) | | | 69,584 | |
Commercial paper | 94,973 | | | — | | | — | | | 94,973 | |
Agency securities | 2,155 | | | — | | | — | | | 2,155 | |
Total short-term investments | 241,013 | | | 32 | | | (725) | | | 240,320 | |
Total | $ | 371,131 | | | $ | 32 | | | $ | (725) | | | $ | 370,438 | |
*Excludes interest receivable of $0.6 million, which is included in prepaid expenses and other current assets on the condensed consolidated balance sheets. |
The Company does not intend to sell, nor is it more likely than not that we will be required to sell, any investments in unrealized loss positions before recovery of their amortized cost basis. We did not recognize any credit losses related to our investments during the three and nine months ended October 31, 2022. The unrealized losses on our short-term investments were primarily due to unfavorable changes in interest rates subsequent to initial purchase. None of the short-term investments held as of October 31, 2022 were in a continuous unrealized loss position for greater than 12 months. There were no realized gains or losses during the three and nine months ended October 31, 2022.
The following table presents the contractual maturities of the Company’s short-term investments as of October 31, 2022 (in thousands): | | | | | | | | | | | |
| October 31, 2022 |
| Amortized Cost | | Estimated Fair Value |
Due within one year | $ | 207,405 | | | $ | 206,865 | |
Due between one to five years | 33,608 | | | 33,455 | |
Total | $ | 241,013 | | | $ | 240,320 | |
As of January 31, 2022, the Company did not hold any available-for-sale securities.
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
7. Fair Value Measurements
Assets and liabilities recorded at fair value in the condensed consolidated financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The lowest level of significant input determines the placement of the fair value measurement within the following hierarchical levels:
•Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
•Level 2: Observable inputs, other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3: Unobservable inputs that are supported by little or no market activity.
Assets and liabilities measured at fair value on a recurring basis
The following tables present information about the Company’s financial assets and liabilities that are measured at fair value and indicate the fair value hierarchy of the valuation inputs used (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| October 31, 2022 |
Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | |
Cash equivalents: | | | | | | | |
Money market funds | $ | 130,118 | | | $ | — | | | $ | — | | | $ | 130,118 | |
Total cash equivalents | 130,118 | | — | | | — | | | 130,118 |
Short-term investments: | | | | | | | |
Corporate bonds | — | | | 73,608 | | | — | | | 73,608 | |
U.S. Treasury securities | — | | | 69,584 | | | — | | | 69,584 | |
Commercial paper | — | | | 94,973 | | | — | | | 94,973 | |
Agency securities | — | | | 2,155 | | | — | | | 2,155 | |
Total short-term investments | — | | | 240,320 | | | — | | | 240,320 | |
Total assets | $ | 130,118 | | | $ | 240,320 | | | $ | — | | | $ | 370,438 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| January 31, 2022 |
Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | |
Cash equivalents: | | | | | | | |
Money market funds | $ | 378,294 | | | $ | — | | | $ | — | | | $ | 378,294 | |
Total assets | $ | 378,294 | | | $ | — | | | $ | — | | | $ | 378,294 | |
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 tables above.
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
It is the Company’s policy to recognize transfers of assets and liabilities between levels of the fair value hierarchy at the end of a reporting period. The Company does not transfer out of Level 3 and into Level 2 until observable inputs become available and reliable. There were no transfers between fair value measurement levels during the three and nine months ended October 31, 2022 and 2021.
Assets and liabilities measured at fair value on a non-recurring basis
See Note 8, Business Combinations, and Note 9, Goodwill and Net Intangible Assets, of these notes to our condensed consolidated financial statements for fair value measurements of certain assets and liabilities recorded at fair value on a non-recurring basis.
The Company’s long-lived assets are measured at fair value on a non-recurring basis and are reduced if the assets are determined to be impaired. The fair value of the operating lease ROU assets and associated property and equipment was estimated as of the sublease execution date using an income approach by converting future sublease cash inflows and outflows to a single present value. Estimated cash flows were discounted at a rate commensurate with the inherent risks associated with the asset group to arrive at an estimate of fair value. See Note 12. Leases, to the condensed consolidated financial statements for further details on the impairment charges we recorded. As a result of the subjective nature of unobservable inputs used, these assets are classified within Level 3 of the fair value hierarchy.
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
8. Business Combinations
Outfit
On September 1, 2022, the Company acquired 100% of the outstanding equity of On Brand Holdings, Inc. and its subsidiaries, collectively doing business as Outfit, pursuant to an Agreement and Plan of Merger. The Company acquired Outfit to enhance Brandfolder’s templating and creative automation solution. The total purchase consideration for the acquisition of Outfit was $20.6 million in cash, net of customary purchase price adjustments.
The transaction was accounted for as a business combination and accordingly, the total fair value of purchase consideration was allocated to the tangible and intangible assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition date. Fair values were determined using income and cost approaches. The fair value measurements of the intangible assets were based primarily on significant unobservable inputs and thus represent a Level 3 measurement. The following table summarizes the preliminary fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands): | | | | | |
| September 1, 2022 |
Cash and restricted cash | $ | 266 | |
Intangible assets | 5,190 | |
Goodwill | 16,427 | |
Other net tangible assets and liabilities assumed | (1,276) | |
| $ | 20,607 | |
The excess purchase price consideration was recorded as goodwill, and is primarily attributable to the acquired assembled workforce and expected synergies with Brandfolder’s product offerings. The goodwill is not deductible for income tax purposes. The purchase price allocation was prepared on a preliminary basis and may be subject to further adjustments as additional information becomes available concerning the fair value of the assets acquired and liabilities assumed. The primary areas that remain preliminary as of October 31, 2022 relate to the fair values of intangible assets acquired, certain tangible assets and liabilities acquired, income taxes, and goodwill. The Company expects to finalize the fair value measurements as soon as practicable, but not later than one year from the acquisition date.
The estimated useful lives and fair values of the identifiable intangible assets at acquisition date were as follows (dollars in thousands): | | | | | | | | | | | |
| Fair Value | | Expected Useful Life |
Software technology | $ | 3,200 | | | 5 years |
Customer relationships | 1,990 | | | 7 years |
Total intangible assets | $ | 5,190 | | | |
The related software technology amortization expense is recognized over its useful life within cost of revenue in the condensed consolidated statements of operations. The amortization expense related to the customer relationship intangible asset is recognized over the useful life within sales and marketing in the condensed consolidated statements of operations. The weighted-average amortization period of the acquired intangible assets is 5.8 years.
We have included the financial results of Outfit in our condensed consolidated financial statements from the date of acquisition. Separate financial results and pro forma financial information for Outfit have not been presented as the effect of this acquisition was not material to our financial results.
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
9. Goodwill and Net Intangible Assets
The changes in the carrying amount of goodwill or measurement period adjustments during the nine months ended October 31, 2022 were as follows (in thousands): | | | | | |
| |
Goodwill balance as of January 31, 2022 | $ | 125,605 | |
Addition - acquisition of Outfit | 16,427 | |
Effects of foreign currency translation | (1,028) | |
Goodwill balance as of October 31, 2022 | $ | 141,004 | |
The following table presents the components of net intangible assets (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| October 31, 2022 | | January 31, 2022 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Acquired software technology | $ | 28,400 | | | $ | (13,105) | | | $ | 15,295 | | | $ | 25,400 | | | $ | (9,195) | | | $ | 16,205 | |
Acquired customer relationships | 34,016 | | | (11,086) | | | 22,930 | | | 32,150 | | | (7,735) | | | 24,415 | |
Trade names | 4,100 | | | (1,046) | | | 3,054 | | | 4,100 | | | (711) | | | 3,389 | |
Patents | 170 | | | (133) | | | 37 | | | 170 | | | (127) | | | 43 | |
Domain name | 44 | | | — | | | 44 | | | 44 | | | — | | | 44 | |
Total | $ | 66,730 | | | $ | (25,370) | | | $ | 41,360 | | | $ | 61,864 | | | $ | (17,768) | | | $ | 44,096 | |
The following table presents the components of acquired intangible assets (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| October 31, 2022 | | January 31, 2022 |
| Net Carrying Amount | | Weighted Average Life (Years) | | Net Carrying Amount | | Weighted Average Life (Years) |
Acquired software technology | $ | 15,295 | | | 3.0 | | $ | 16,205 | | | 3.3 |
Acquired customer relationships | 22,930 | | | 5.0 | | 24,415 | | | 5.5 |
Trade names | 3,054 | | | 6.9 | | 3,389 | | | 7.6 |
Total | $ | 41,279 | | | 4.4 | | $ | 44,009 | | | 4.9 |
Amortization expense related to intangible assets was $2.6 million and $2.5 million for the three months ended October 31, 2022 and 2021, respectively, and $7.6 million in each of the nine months ended October 31, 2022 and 2021. As of October 31, 2022, estimated remaining amortization expense for the finite-lived intangible assets by fiscal year is as follows (in thousands): | | | | | |
| |
Remainder of Fiscal 2023 | $ | 2,702 | |
Fiscal 2024 | 10,808 | |
Fiscal 2025 | 9,607 | |
Fiscal 2026 | 7,890 | |
Fiscal 2027 | 5,724 | |
Thereafter | 4,585 | |
Total | $ | 41,316 | |
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
10. Share-Based Compensation
The Company has issued incentive and non-qualifying stock options to employees and non-employee directors under the 2005 Stock Option/Restricted Stock Plan, the 2015 Equity Incentive Plan (the “2015 Plan”), and the 2018 Equity Incentive Plan (the “2018 Plan”).
The Company has also issued restricted stock units (“RSUs”) to employees and non-employee directors pursuant to the 2015 Plan and the 2018 Plan.
The Company has issued restricted stock awards (“RSAs”) to certain Brandfolder employees subject to vesting conditions. These shares were issued in a private placement transaction. As vesting of these RSAs is dependent on continuous employment, these were not considered part of the purchase price in accounting for the September 2020 acquisition.
Employee stock options are granted with exercise prices at the fair value of the underlying common stock on the grant date, in general vest based on continuous employment over four years, and expire 10 years from the date of grant. Employee RSUs are measured based on the grant date fair value of the awards and in general vest, based on continuous employment, over three or four years. The RSAs are measured based on the grant date fair value of the awards and vest over a three-year period.
Stock options
The following table includes a summary of the option activity during the nine months ended October 31, 2022: | | | | | | | | | | | |
| Options Outstanding | | Weighted-Average Exercise Price |
Outstanding at January 31, 2022 | 4,573,482 | | | $ | 20.87 | |
Granted | 3,744 | | | 52.72 | |
Exercised | (659,022) | | | 10.61 | |
Forfeited or canceled | (124,474) | | | 44.99 | |
Outstanding at October 31, 2022 | 3,793,730 | | | 21.89 | |
Exercisable at October 31, 2022 | 3,113,378 | | | 13.03 | |
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Restricted stock units
The following table includes a summary of the RSU activity during the nine months ended October 31, 2022: | | | | | | | | | | | |
| Number of Shares Underlying Outstanding RSUs | | Weighted-Average Grant-Date Fair Value per RSU |
Outstanding at January 31, 2022 | 7,281,232 | | | $ | 60.95 | |
Granted | 3,671,894 | | | 42.77 | |
Vested | (2,152,972) | | | 56.36 | |