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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 September 30, 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 Number 001-40351
KNOWBE4, INC.
(Exact name of Registrant as specified in its charter)
Delaware737036-4827930
(State or other jurisdiction of incorporation or organization)(Primary Standard Industrial Classification Code Number)(I.R.S. Employer Identification Number)
KnowBe4, Inc.
33 N. Garden Avenue
Clearwater, FL 33755
(855) 566-9234
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
Sjoerd Sjouwerman
Chief Executive Officer
KnowBe4, Inc.
33 N. Garden Avenue
Clearwater, FL 33755
(855) 566-9234
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Class A common stock, par value $0.00001KNBEThe Nasdaq Stock Market LLC
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 by Rule 12b-2 of the Exchange Act).    Yes      No ☒
At November 4, 2022, there were 85,993,560 shares of the registrant’s Class A Common Stock outstanding and 90,448,981 shares of the registrant’s Class B Common Stock outstanding.


KNOWBE4, INC.
Quarterly Report on Form 10-Q
TABLE OF CONTENTS
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Table of Contents


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which statements involve substantial risk and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include statements about:
•    our pending merger with affiliates of Vista Equity Partners, including our expectations around the timing and completion thereof;
our future financial performance, including our revenues, cost of revenues, gross profit or gross margin and operating expenses and free cash flow;
•    the sufficiency of our cash, cash equivalents and investments to meet our liquidity needs;
•    our ability to achieve or maintain profitability;
•    our ability to effectively manage our growth and future expenses;
•    our investment strategy, business strategy and growth strategy, including the use of acquisitions to grow our business;
•    the impact of our acquisitions and our ability to successfully integrate acquired businesses;
•    management’s plans, beliefs and objectives for future operations;
•    our expectations about competition and our ability to compete effectively;
•    our ability to attract new customers, cross-sell or upsell our existing customers and develop new products;
•    our ability to continue to build our direct sales organization and expand our network of channel partners;
•    our ability to successfully expand in our existing markets and into new markets;
•    our anticipated investments in sales and marketing and research and development;
•    our ability to maintain our brand;
•    our ability to offer high-quality customer support;
•    our ability to manage our global operations;
•    our ability to maintain the security and availability of our platform and products;
•    potential harm caused by significant disruptions of service, or the actual or perceived failure of our products to prevent security incidents;
•    our ability to prevent serious errors or defects across, and to otherwise maintain the interrupted operation of our network;
•    our ability to maintain, protect and enhance our intellectual property;
•    our expectations of the impact of, and our ability to comply with existing, modified or new laws and regulations applicable to our business;
•    our ability to correctly estimate our tax obligations;
•    the impact of macroeconomic factors including COVID-19, the conflict in Ukraine, inflation, and government actions to counter inflation; and
•    our ability to successfully defend litigation brought against us.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations


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and projections about future events and trends that we believe may affect our business, financial condition and results of operations, and prospects. The outcomes of the events described in these forward-looking statements are subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.
You should read this Quarterly Report on Form 10-Q in conjunction with the audited consolidated financial statements and related notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (“SEC”) on March 10, 2022.


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PART I. FINANCIAL INFORMATION
Item 1. Financial Information
KNOWBE4, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)

September 30, 2022December 31, 2021
(unaudited)
Assets
Current assets:
Cash and cash equivalents$343,936 $273,723 
Accounts receivable, net63,952 54,071 
Current portion of deferred commissions19,797 17,842 
Prepaid and other current assets15,640 10,580 
Total current assets443,325 356,216 
Deferred commissions, net of current portion39,467 33,869 
Capitalized software and content, net30,551 27,074 
Property and equipment, net10,147 9,120 
Operating lease right of use assets, net14,003 12,998 
Intangible assets, net7,969 7,992 
Goodwill87,704 89,329 
Other assets3,879 1,080 
Total assets
$637,045 $537,678 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued expenses$41,827 $37,642 
Current portion of deferred revenue227,662 184,496 
Current portion of operating lease liabilities3,560 2,938 
Total current liabilities273,049 225,076 
Non-current liabilities:
Deferred revenue, net of current portion101,947 81,278 
Operating lease liabilities, net of current portion10,959 10,484 
Other non-current liabilities3,905 3,573 
Total liabilities
389,860 320,411 
Stockholders’ equity
Preferred stock, $0.00001 par value, 100,000,000 shares authorized, and 0 issued and outstanding at September 30, 2022 and December 31, 2021
  
Common stock, Class A, $0.00001 par value, 1,000,000,000 shares authorized; and 85,601,803 and 66,335,930 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively
1 1 
Common stock, Class B, $0.00001 par value, 500,000,000 shares authorized; and 90,452,534 and 107,936,779 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively
1 2 
Additional paid-in capital413,206 391,803 
Accumulated deficit(161,925)(173,148)
Accumulated other comprehensive loss(4,098)(1,391)
Total stockholders’ equity247,185 217,267 
Total liabilities and stockholders equity
$637,045 $537,678 
The accompanying notes are an integral part of these consolidated financial statements.
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KNOWBE4, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)

Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
Revenues, net$85,836 $64,091 $241,631 $176,991 
Cost of revenues11,437 9,609 32,491 25,543 
Gross profit74,399 54,482 209,140 151,448 
Operating expenses:
Sales and marketing34,603 27,731 100,034 82,312 
Technology and development9,716 7,579 27,389 20,081 
General and administrative25,537 19,852 71,764 62,765 
Total operating expenses69,856 55,162 199,187 165,158 
Operating income (loss)4,543 (680)9,953 (13,710)
Other income (expense):
Interest income1,570 16 2,103 41 
Interest expense(65)(67)(216)(329)
Other income (expense)519 114 245 (445)
Income (loss) before income tax expense6,567 (617)12,085 (14,443)
Income tax expense(52)(963)(862)(1,800)
Net income (loss)$6,515 $(1,580)$11,223 $(16,243)
Net income (loss) per share, basic $0.04 $(0.01)$0.06 $(0.17)
Net income (loss) per share, diluted$0.04 $(0.01)$0.06 $(0.17)
Weighted-average shares used in calculating basic net income (loss) per share175,864,081 170,359,220 175,231,892 98,076,290 
Weighted-average shares used in calculating diluted net income (loss) per share182,332,431 170,359,220 182,254,395 98,076,290 


The accompanying notes are an integral part of these consolidated financial statements.
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KNOWBE4, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)

Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
Net income (loss)$6,515 $(1,580)$11,223 $(16,243)
Other comprehensive loss:
Net change in foreign currency translation adjustments(1,436)(790)(2,707)(705)
Other comprehensive loss:(1,436)(790)(2,707)(705)
Total comprehensive income (loss)$5,079 $(2,370)$8,516 $(16,948)

The accompanying notes are an integral part of these consolidated financial statements.
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KNOWBE4, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except shares)
(unaudited)

For the three months ended September 30, 2022:
Common Stock, Class ACommon Stock, Class BAdditional Paid In CapitalAccumulated Other Comprehensive LossAccumulated DeficitTotal
SharesAmountSharesAmount
Balance, June 30, 2022
78,178,186 $1 97,492,186 $1 $407,620 $(2,662)$(168,440)$236,520 
Issuance of common stock for exercise of stock options— — 340,526 — 1,013 — — 1,013 
Issuance of common stock upon settlement of restricted stock units77,113 — — — — — — — 
Conversion of Common stock, Class B to Common stock, Class A7,380,178 — (7,380,178)— — — — — 
Taxes paid related to net share settlement of equity awards(33,674)— — — (697)— — (697)
Stock compensation expense— — — — 5,270 — — 5,270 
Other comprehensive loss— — — — — (1,436)— (1,436)
Net income— — — — — — 6,515 6,515 
Balance, September 30, 2022
85,601,803 $1 90,452,534 $1 $413,206 $(4,098)$(161,925)$247,185 
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KNOWBE4, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except shares)
(unaudited)
For the three months ended September 30, 2021:
Common Stock, Class ACommon Stock, Class BAdditional Paid In CapitalAccumulated Other Comprehensive LossAccumulated DeficitTotal
SharesAmountSharesAmount
Balance, June 30, 2021
11,709,402 $ 157,697,645 $2 $351,124 $(254)$(175,966)$174,906 
Issuance of common stock for exercise of stock options— — 2,309,071 — 2,483 — 2,483 
Issuance of common stock upon settlement of restricted stock units4,482 — — — — — — 
Conversion of Common stock, Class B to Common stock, Class A20,370,291 — (20,370,291)— — — — 
Taxes paid related to net share settlement of equity awards— — (362,741)— (5,110)— (5,110)
Stock compensation expense— — — — 2,196 — 2,196 
Other comprehensive loss— — — — — (790)(790)
Net loss— — — — — — (1,580)(1,580)
Balance, September 30, 2021
32,084,175 $ 139,273,684 $2 $350,693 $(1,044)$(177,546)$172,105 
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KNOWBE4, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except shares)
(unaudited)
For the nine months ended September 30, 2022:
Common Stock, Class ACommon Stock, Class BAdditional Paid In CapitalAccumulated Other Comprehensive LossAccumulated DeficitTotal
SharesAmountSharesAmount
Balance, December 31, 2021
66,335,930 $1 107,936,779 $2 $391,803 $(1,391)$(173,148)$217,267 
Issuance of common stock for exercise of stock options— — 1,303,530 — 3,235 — — 3,235 
Issuance of common stock under the employee stock purchase plan193,595 — — — 2,932 — — 2,932 
Issuance of common stock upon settlement of restricted stock units431,556 — — — — — — — 
Conversion of Common stock, Class B to Common stock, Class A18,787,775 — (18,787,775)(1)— — — (1)
Taxes paid related to net share settlement of equity awards(147,053)— — — (2,682)— — (2,682)
Stock compensation expense— — — — 17,918 — — 17,918 
Other comprehensive loss— — — — — (2,707)— (2,707)
Net income— — — — — — 11,223 11,223 
Balance, September 30, 2022
85,601,803 $1 90,452,534 $1 $413,206 $(4,098)$(161,925)$247,185 

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KNOWBE4, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except shares)
(unaudited)
For the nine months ended September 30, 2021:
Convertible Preferred StockCommon StockCommon Stock, Class ACommon Stock, Class BAdditional Paid In CapitalAccumulated Other Comprehensive LossAccumulated DeficitTotal
SharesAmountSharesAmountSharesAmountSharesAmount
Balance, December 31, 2020
114,164,600 $ 42,279,000 $  $  $ $158,483 $(339)$(161,303)$(3,159)
Issuance of common stock for exercise of stock options— — 274,720 — — — 2,899,008 — 3,435 — — 3,435 
Issuance of common stock for business combinations— — 1,245,440 — — — — — 24,675 — — 24,675 
Repurchase of common stock— — (97,600)— — — — — (181)— — (181)
Conversion of convertible preferred stock and previously authorized Common Stock to Common Stock, Class B(114,164,600)— (43,701,560)— — — 157,866,160 2 — — — 2 
Issuance of common stock in connection with initial public offering, net of underwriting discounts and issuance costs— — — — 10,425,000 — — — 153,796 — — 153,796 
Issuance of common stock upon settlement of restricted stock units— — — — 954,297 — — — — — — — 
Conversion of Common stock, Class B to Common stock, Class A— — — — 21,128,743 — (21,128,743)— — — — — 
Taxes paid related to net share settlement of equity awards— — — — (423,865)— (362,741)— (11,892)— — (11,892)
Stock compensation expense— — — — — — — — 22,377 — — 22,377 
Other comprehensive loss— — — — — — — — — (705)— (705)
Net loss— — — — — — — — — — (16,243)(16,243)
Balance, September 30, 2021
 $  $ 32,084,175 $ 139,273,684 $2 $350,693 $(1,044)$(177,546)$172,105 

The accompanying notes are an integral part of these consolidated financial statements.
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KNOWBE4, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

Nine Months Ended
September 30,
20222021
Cash flows from operating activities:
Net income (loss)$11,223 $(16,243)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Additions to capitalized content(5,807)(4,504)
Depreciation and amortization expense11,440 9,999 
Deferred commissions amortization16,709 13,806 
Stock compensation expense18,268 23,151 
Other, net(727)327 
Changes in operating assets and liabilities, net of business combinations:
Accounts receivable(10,587)(4,943)
Deferred commissions(25,799)(23,112)
Prepaid and other assets(4,728)(7,656)
Accounts payable and other liabilities4,901 13,675 
Deferred revenue65,228 51,299 
Net cash provided by operating activities80,121 55,799 
Cash flows from investing activities:
Business combinations, net of cash acquired40 (11,227)
Purchases of investments(3,375) 
Purchases of property and equipment(4,467)(2,214)
Capitalized internal-use software costs(2,681)(1,895)
Net cash used in investing activities(10,483)(15,336)
Cash flows from financing activities:
Proceeds from the exercise of stock options3,235 3,435 
Proceeds from issuance of common stock under the employee stock purchase plan2,932  
Repurchases of common stock (1,171)
Proceeds from the issuance of common stock 155,958 
Acquisition-related contingent consideration payments (375)
Payments for finance lease obligations(31)(30)
Taxes paid for the net share settlement of equity awards(2,682)(11,892)
Net cash provided by financing activities3,454 145,925 
Effect of exchange rate changes on cash and cash equivalents(2,879)303 
Net change in cash and cash equivalents$70,213 $186,691 
Cash and cash equivalents, beginning of period$273,723 $85,582 
Cash and cash equivalents, end of period$343,936 $272,273 

The accompanying notes are an integral part of these consolidated financial statements.
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KNOWBE4, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL CASH FLOW DISCLOSURES
(in thousands)
(unaudited)
Nine Months Ended
September 30,
20222021
Supplemental disclosure of cash flow information:
Cash paid for taxes$2,326 $1,590 
Supplemental disclosure of noncash investing and financing activities:
Capital expenditures and other assets included in accounts payable and accrued expenses$362 $508 

The accompanying notes are an integral part of these consolidated financial statements.
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KNOWBE4, INC.

INDEX TO THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Description of Business
KnowBe4, Inc. (“KnowBe4” or the “Company”), was incorporated in Delaware in January 2016 and is the successor to operations which began in August 2010. The Company is headquartered in Clearwater, Florida.
The Company provides a comprehensive platform incorporating security awareness training and simulated phishing with advanced analytics and reporting that helps organizations manage the ongoing problem of social engineering. Additional offerings on the Company’s platform include a security orchestration, automation and response (“SOAR”) tool, a governance, risk and compliance (“GRC”) product, and comprehensive compliance training, all of which further the Company’s goal of providing products focused on meeting the needs of information security professionals. KnowBe4 conducts business globally and its platform is available as a software as a service (“SaaS”) subscription.
Stock Split
On April 9, 2021, the Company effected a 40-for-1 forward stock split of its authorized, issued and outstanding capital stock. All share and per share amounts presented in the accompanying consolidated financial statements have been retrospectively adjusted to reflect the forward stock split for all periods presented.
Initial Public Offering
As further described in Note 11 “Stockholders’ Equity”, in April 2021, the Company completed an initial public offering (“IPO”) of its Class A common stock.
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Note 2 – Summary of Significant Accounting Policies
a.Basis of Presentation and Consolidation
The Company’s consolidated financial statements and accompanying notes include the accounts of KnowBe4, Inc. and its wholly-owned subsidiaries. The accompanying consolidated balance sheets as of September 30, 2022 and the consolidated statements of operations, consolidated statements of comprehensive income (loss), consolidated statements of stockholders' equity for the three and nine months ended September 30, 2022 and 2021 and consolidated statements of cash flows for the nine months ended September 30, 2022 and 2021 are unaudited.
These financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the financial information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of the Company’s management, the unaudited consolidated financial statements include all adjustments necessary for the fair presentation of the Company’s consolidated balance sheets as of September 30, 2022, and its consolidated statements of operations, consolidated statements of comprehensive income (loss), consolidated statements of stockholders' equity for the three and nine months ended September 30, 2022 and 2021 and its consolidated statements of cash flows for the nine months ended September 30, 2022 and 2021. All intercompany balances and transactions have been eliminated in consolidation. The results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending December 31, 2022. The accompanying interim unaudited consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
b. Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the Company’s consolidated financial statements and accompanying notes. Estimates and assumptions used by management primarily affect revenue recognition, deferred commissions, fair value of net assets acquired in business combinations, common stock valuations (prior to the IPO), and stock compensation expense.
These estimates are based on information available as of the date of the consolidated financial statements. On an ongoing basis, the Company evaluates these assumptions, judgments and estimates. Actual results may differ materially from these estimates.
c. Operating Segments
The Company operates as a single operating segment, which engages in the development, marketing and sale of the Company’s SaaS-based security awareness platform. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. The Company’s chief operating decision maker is the Chief Executive Officer, who is responsible for evaluating the Company’s financial results, evaluating the Company’s resources and assessing the performance of the operations on a consolidated basis.
d. Cash and Cash Equivalents
The Company considers all investments purchased with an original maturity of 90 days or less to be cash equivalents. Cash and cash equivalents include $116.6 million and $180.2 million of overnight money market mutual funds at September 30, 2022 and December 31, 2021, respectively. The carrying amount of such cash equivalents approximates their fair value due to the short-term and highly liquid nature of these instruments.
e. Accounts Receivable, Net
Accounts receivable represents amounts owed to the Company for subscriptions to the Company’s platform and unbilled receivables representing the Company’s unconditional right to consideration for subscription contracts for
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which revenues have been earned in excess of the amount invoiced. Accounts receivable balances are recorded at the invoiced amount and are non-interest bearing.
The Company maintains an allowance for doubtful accounts based on future expected credit losses measured over the contractual term of the receivable. Management regularly reviews the adequacy of the allowance for doubtful accounts by considering various factors including the age of each outstanding invoice, each customer’s expected ability to pay, historical loss rates and expectations of forward-looking loss estimates to determine whether the allowance is appropriate. The Company writes off accounts receivable balances to the allowance for doubtful accounts when the Company has exhausted all collection efforts. As of September 30, 2022 and December 31, 2021 the allowance for doubtful accounts was $0.6 million and $0.5 million, respectively, and allowance activity for the periods presented was not material to the consolidated financial statements.
f. Deferred Commissions
The Company capitalizes sales commissions and associated benefits and payroll taxes paid to internal sales personnel that are considered incremental costs to acquire a customer contract. These costs are classified as deferred commissions on the consolidated balance sheets. Sales commissions related to an initial subscription contract are considered incremental to the acquisition of the customer contract to the extent that they exceed commissions earned on renewal sales. Sales commissions related to the renewal of a subscription contract are not considered commensurate with the commissions paid for the acquisition of the initial subscription contract given the substantive difference in commission rate between new and renewal contracts. The portion of commissions paid upon the initial acquisition of a contract that are incremental to acquisition of the customer contract are amortized over an estimated period of benefit of six years. The portion of commissions paid upon initial acquisition that are commensurate with those paid on a renewal contract and commissions paid related to renewal contracts are amortized over the average length of the related revenues contract. An estimate of the portion of commissions related to the downloadable content performance obligation is made, which is recognized at contract inception consistent with the pattern of revenue recognition. The estimated period of benefit for commissions paid for the acquisition of the initial subscription contract is determined based on qualitative and quantitative factors including the initial estimated customer life, the technological life of the Company’s platform and related significant features, customer attrition and industry practices. Amortization of deferred sales commissions is included in sales and marketing expense in the accompanying consolidated statements of operations. 
g. Property and Equipment, Net
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, as follows:
Computers and equipment3 years
Furniture and fixtures
5 - 7 years
Leasehold improvements
shorter of lease term or 5 years
Expenditures which significantly add to productive capacity or extend the useful life of an asset are capitalized. Maintenance and repairs to property and equipment are expensed as incurred. When assets are retired or otherwise disposed of, the cost and accumulated depreciation is removed from the accounts and gains or losses, if any, are recorded in other income (expenses).
h. Capitalized Software and Content, Net
The Company capitalizes costs incurred related to the development of internal use software during the application development stage. These capitalized costs are primarily related to the development of the Company’s security awareness platform. Costs are capitalized to develop new internal use software or to significantly increase the functionality of existing software. Additionally, the Company records acquired internal-use software and technology assets within the capitalized software and content caption on its consolidated balance sheets. Capitalized software costs are amortized on a straight-line basis over the software’s estimated useful life of three to six years. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events
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or changes in circumstances occur that could impact the recoverability of these assets. There were no impairments of capitalized internal use software during the three and nine months ended September 30, 2022 or 2021.
The Company also capitalizes costs related to the production of its training content, which includes interactive modules, movie series, videos, games and other content. Costs associated with the production of content, including development costs, direct costs and production overhead, are capitalized. Capitalized content is amortized over the estimated period of use, which generally ranges from three to seven years. The Company’s business model is subscription based, therefore, capitalized content is reviewed in the aggregate when an event or change in circumstances indicates a change in the expected usefulness of the content. To date, we have not identified any such event or change in circumstances. If such changes are identified in the future, capitalized content will be stated at the lower of unamortized cost, net realizable value or fair value. In addition, unamortized costs for assets that have been, or are expected to be, abandoned are written off.
i.Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price in a business combination over the estimated fair value of identifiable net assets acquired. The Company evaluates and tests the recoverability of goodwill for impairment at least annually, on October 1, or more frequently if circumstances indicate that goodwill may not be recoverable. The Company performs the impairment testing by first assessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of its single reporting unit is less than its carrying amount. In assessing the qualitative factors, the Company considers the impact of certain key factors including macroeconomic conditions, industry and market considerations, changes in management, litigation or regulatory matters, changes in enterprise value, and overall financial performance. If, after assessing the totality of events or circumstances, the Company determines it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the Company calculates the estimated fair value of the reporting unit and any excess of the carrying amount over fair value is recognized as a goodwill impairment loss. Based on the results of the qualitative goodwill impairment analyses, the Company has determined there were no triggering events indicating impairment of goodwill during the three and nine months ended September 30, 2022 and 2021.
Intangible assets consist of both definite-lived intangible assets, primarily acquired content, customer relationships, patents, trademarks and domain names, and indefinite-lived trade name intangible assets. Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, as follows:
Acquired content
3 - 4 years
Customer relationships
4 - 6 years
Other Intangibles
3 - 10 years
Patents20 years
j. Impairment of Intangible and Other Long-Lived Assets
The Company performs an impairment review of long-lived assets, including property and equipment and both definite and indefinite-lived intangible assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable, in accordance with the respective accounting standards. If the Company determines that the carrying value of an asset group may not be recoverable, the Company measures recoverability by comparing the carrying amount of the asset group to the future undiscounted cash flows it expects the asset group to generate. If the Company considers any of these assets to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair value. In addition, the Company periodically evaluates the estimated remaining useful lives of long-lived assets to determine whether events or changes in circumstances warrant a revision to the remaining period of depreciation or amortization. No impairment indicators were identified and no impairment charges were recorded during the three and nine months ended September 30, 2022 or 2021.
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k. Leases
The Company determines whether an arrangement is or contains a lease at inception and classifies its leases at commencement. Operating leases with initial terms of twelve months or greater are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in the consolidated balance sheets.
ROU assets represent the Company’s right to use underlying assets over the term of the lease and lease liabilities represent the Company’s contractual obligation to make lease payments over the lease term. Operating lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of the lease payments over the lease term. Operating lease ROU assets also include any unamortized initial direct costs and any prepayments less any unamortized lease incentives received. As the Company’s leases do not provide an implicit rate for use in determining the present value of future payments, the Company uses its incremental borrowing rate. Options to extend or terminate a lease are included in the ROU asset and lease liability when it is reasonably certain that the Company will exercise the option.
Lease expense for minimum lease payments for operating leases is recognized on a straight-line basis over the lease term and is included in operating expenses within the consolidated statements of operations. Variable lease costs represent non-lease components, namely common area maintenance and taxes, that are not fixed and are expensed as incurred.
l. Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
The Company’s tax positions are subject to income tax audits by certain tax jurisdictions throughout the world. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the position will be sustainable upon examination by the taxing authority. The tax benefit recognized is measured as the largest amount of benefit which is greater than 50 percent likely to be realized upon settlement with the taxing authority. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in the income tax provision.
Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more likely than not expected to be realized based on the weighting of positive and negative evidence. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the applicable tax law. The Company regularly reviews the deferred tax assets for recoverability based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. The Company’s judgments regarding future profitability may change due to many factors, including future market conditions and the ability to successfully execute its business plans and/or tax planning strategies. Should there be a change in the ability to recover deferred tax assets, the tax provision would increase or decrease in the period in which the assessment is changed.
m. Foreign Currency Transactions
The functional currency of the Company’s subsidiaries is determined based on the primary economic environment in which the subsidiary operates. Assets and liabilities of its non-U.S. dollar functional currency subsidiaries are translated into U.S. dollars using exchange rates in effect at the end of each period and revenues and expenses are translated at the average exchange rate for the period. Gains and losses from these translations are recognized as cumulative translation adjustments and included in accumulated other comprehensive loss.
The Company remeasures monetary assets and liabilities that are not denominated in the functional currency at exchange rates in effect at each period. Gains and losses from these remeasurement adjustments are recognized within other income (expense).
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n. Revenue Recognition
The Company derives substantially all of its revenues from subscription services fees paid by customers for access to the Company’s cloud-based platform and content. The Company applies the following five-step approach for considering contracts:
identification of the contract, or contracts, with the customer;
identification of the performance obligations in the contract;
determination of the transaction price;
allocation of the transaction price to the performance obligations in the contract; and
recognition of revenues when, or as, the Company satisfies a performance obligation.
The Company recognizes revenues at the time the related performance obligation is satisfied by transferring the service to a customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services, net of any sales or other tax. The Company’s subscription contracts typically vary from one year to three years and are generally noncancellable and nonrefundable.
Subscription service revenues consist of subscription fees earned from providing access to the Company’s cloud-based platform, including support services and feature upgrades, if and when available. The Company’s cloud-based platform also includes training content which can be downloaded by the customer during their subscription term. The subscription service contracts do not provide customers with the right to take possession of the software operating on the cloud platform and, as a result, are accounted for as service arrangements. Access to the platform represents a series of distinct services that the Company continually provides access to, which fulfills its obligation to the end customer over the subscription term. This series of distinct services represents a single performance obligation that is satisfied over time. Accordingly, the amounts allocated to the ratable portion of subscription revenues are recorded as deferred revenue and recognized on a straight-line basis over the contract term, beginning on the date that the service is made available to the customer. Amounts expected to be recognized within one year of the balance sheet date are classified within current liabilities and the remaining portion is classified in long-term liabilities.
The customers’ ability to access and download content throughout their subscription term is considered distinct and accounted for as a separate performance obligation. The portion of the transaction price allocated to the downloadable content performance obligation is recognized as revenue at contract inception when the customer gains access to the downloadable content.
The transaction price is allocated to the separate performance obligations on a relative stand-alone selling price (“SSP”) basis, which requires significant judgment. The Company determines SSP using an adjusted market assessment approach based on the prices at which it sells subscription services, including adjustments for standard discounting practices. As it relates to the content available for download, the calculation of SSP primarily utilizes suggested royalty rates, assumptions regarding content production costs and other industry pricing data.
o. Cost of Revenues
Cost of revenues consists of certain direct costs associated with delivering the Company’s platform and includes hosting fees as well as amortization of capitalized internal-use software and content and allocated overhead. Cost of revenues also includes personnel costs, including salaries, benefits, bonuses, and stock compensation, for employees who provide support services to customers.
p. Stock Compensation
The Company measures and recognizes compensation expense for all stock-based awards based on the estimated fair value of the award on the date of grant. Following the IPO, stock awards primarily consist of time and performance-based restricted stock units (“RSUs”). The grant date fair value of RSUs is measured at the grant date closing stock price and expense is recognized on a straight-line basis over the vesting period of the award, which is generally three years, and net of forfeitures, which are recorded as incurred.
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Performance-based RSUs vest, if at all, based on internal performance targets in effect during the year of grant. Stock compensation expense related to these awards is initially based on the number of shares that would vest if the Company achieved 100% of the performance target, which is the intended outcome at the grant date. Throughout the requisite service period, which is generally three years, management monitors the probability of achievement of the performance target. If it becomes probable that more or less than the current estimate of awarded shares will vest, an adjustment to stock compensation expense will be recognized as a change in accounting estimate in the period that such probability changes.

Stock compensation expenses related to the Company’s Employee Stock Purchase Plan (“ESPP”) are based on the grant date fair value using the Black-Scholes option-pricing model. These expenses are recognized on a straight-line basis over the offering period, which is generally 6 months unless otherwise determined by the Company’s board of directors or compensation committee. The ESPP allows eligible employees to purchase shares of the Company’s Class A common stock at a 15.0% discount from the lesser of the fair market value of our common stock on (i) the first trading day of the applicable offering period or (ii) the last trading day of the purchase period in the applicable offering period.

Prior to the IPO, given the absence of an active market for the Company’s Class A common stock, the Company estimated the grant date fair value of its stock options using the Black-Scholes option-pricing model. The Company’s board of directors who exercised judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our common stock at each grant date, including (i) valuations performed at or near the time of grant; (ii) rights, preferences, and privileges of our redeemable convertible preferred stock relative to those of our common stock; (iii) our actual operating and financial performance at the time of the option grant; (iv) likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of our business; (v) the value of comparable companies with respect to industry, business model, stage of growth, financial risk or other factors; (vi) our stage of development and future financial projections; (vii) market transactions at or near the time of grant; and (viii) the lack of marketability of our common stock. Following the IPO, the Company’s Class A common stock is traded on the Nasdaq Global Select Market and the Company is no longer estimating the fair value of its common stock.
q. 401(k) Plan
The Company maintains a tax-qualified retirement plan, or the 401(k) plan, that provides eligible employees with an opportunity to save for retirement on a tax-advantaged basis. Eligible employees are able to participate in the 401(k) plan as of the first day of the month following the date they meet the 401(k) plan’s eligibility requirements, and participants are able to defer up to 100% of their eligible compensation subject to applicable annual Internal Revenue Code limits. All participants’ interests in their deferrals are 100% vested when contributed and the Company’s matching contributions are 100% vested following one year of service. The Company contracted with a third-party provider to act as a custodian and trustee, and to process and maintain the records of participant data. For the three months ended September 30, 2022 and 2021, the Company made contributions to the 401(k) Plan of $1.1 million and $0.5 million, respectively. For the nine months ended September 30, 2022 and 2021 the Company made contributions of $2.9 million and $1.6 million, respectively.
r. Advertising
Advertising costs are expensed as incurred. Advertising expenses were $6.8 million and $3.3 million for the three months ended September 30, 2022 and 2021, respectively, and were $18.3 million and $10.5 million for the nine months ended September 30, 2022 and 2021, respectively. These costs are included within sales and marketing expenses in the accompanying consolidated statements of operations.
s. Research and Development Costs
Research and development costs are expensed when incurred, except for certain internal-use software development costs, which may be capitalized as noted above. Research and development expenses consist primarily of personnel and related headcount costs, costs of professional services associated with the ongoing development of
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the Company’s technology, and allocated overhead and are recorded within technology and development expense in the accompanying consolidated statements of operations.
t. Net Income (Loss) per Share
Basic and diluted net income (loss) per share is presented in conformity with the two-class method required for participating securities. The Company considers shares of Class B common stock to be participating securities, since each share of Class B common stock is convertible into one share of Class A common stock at the option of the holder. Net income is attributed to common stockholders and participating securities based on their participation rights.
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed by giving effect to all potentially dilutive common stock equivalents to the extent they are dilutive.
u. Business Combinations
The Company includes the results of operations of the businesses that it acquires as of the respective dates of acquisition. The Company allocates the fair value of the purchase price of its acquisitions to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the fair value of the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customers, acquired technology, the value of trade names from a market participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and, as a result, actual results may differ from estimates. During the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of assets acquired and liabilities assumed. Upon conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations. Transaction costs associated with business combinations are expensed as incurred and are included in general and administrative expense in the Company’s consolidated statements of operations.
v. Concentrations of Credit Risk and Significant Customers
The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company’s cash deposits typically exceed the federally insured limits. Collateral is not required for accounts receivable.
No single customer accounted for more than ten percent of total revenues, net during the three and nine months ended September 30, 2022 and 2021. Additionally, no single customer accounted for more than ten percent of accounts receivable at September 30, 2022 or at December 31, 2021.
w. Fair Value Measurement
Assets and liabilities recorded at fair value in the 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: Other inputs that are directly or indirectly observable in the marketplace.
Level 3: Unobservable inputs which are supported by little or no market activity.
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):
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September 30, 2022
Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Assets:
Cash equivalents:
Money market mutual funds$116,616 $ $ $116,616 
Other assets:
Investments  3,375 3,375 
Total assets$116,616 $ $3,375 $119,991 
Liabilities:
Accounts payable and accrued expenses:
Contingent consideration$ $ $5,000 $5,000 
Other non-current liabilities:
Contingent consideration  1,239 1,239 
Total liabilities$ $ $6,239 $6,239 
December 31, 2021
Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Assets:
Cash equivalents:
Money market mutual funds$180,170 $ $ $180,170 
Total assets$180,170 $ $ $180,170 
Liabilities:
Accounts payable and accrued expenses:
Contingent consideration$ $ $5,000 $5,000 
Total liabilities$ $ $5,000 $5,000 
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.
The Company invested in securities of privately held companies which do not have a readily determinable fair value. The Company elected to measure these securities at cost less impairment, if any, adjusted for observable price changes resulting from orderly transactions for the identical or a similar security of the same issuer.
The Company’s contingent consideration liabilities were initially measured using both a probability estimate of achieving the contingency and a Monte Carlo simulation utilizing future revenues projections, a risk-adjusted discount rate and performance volatility assumptions both of which involve inherent uncertainties.
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There were no transfers between levels during the three and nine months ended September 30, 2022 or the year ended December 31, 2021.
Note 3 – Revenues, Deferred Revenue and Remaining Performance Obligations
The following table summarizes revenues recognized from performance obligations delivered to customers, which relate to (i) subscription services that are recognized ratably over the term of the contract and (ii) subscription revenues allocated to downloadable content which are recognized at a point in time, as follows (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
Ratable portion of subscription revenues
$76,111 $55,354 $213,404 $151,084 
Subscription revenues allocated to downloadable content
9,725 8,737 28,227 25,907 
Total$85,836 $64,091 $241,631 $176,991 
The following table summarizes the revenues by region based on the shipping address of customers who have contracted to use the Company’s platform (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021