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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, 2021
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 1, 2021, there were 34,749,759 shares of the registrant’s Class A Common Stock outstanding.and 136,663,968 shares of the registrant’s Class B Common Stock outstanding.



TABLE OF CONTENTS
Page



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, and Section 21E of the Securities Exchange Act of 1934, as amended, 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 future financial performance, including our revenues, cost of revenues, gross profit or gross margin and operating expenses;
•    the sufficiency of our cash, cash equivalents and investments to meet our liquidity needs;
•    our ability to attract new customers, cross-sell or upsell our existing customers and develop new products;
•    our ability to maintain the security and availability of our platform and products;
•    our ability to continue to build our direct sales organization and expand our network of channel partners;
•    our ability to effectively manage our growth and future expenses;
•    our ability to successfully expand in our existing markets and into new markets;
•    our ability to effectively manage our growth and future expenses;
•    our ability to maintain, protect and enhance our intellectual property;
•    our ability to comply with modified or new laws and regulations applying to our business;
•    our anticipated investments in sales and marketing and research and development; 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 and projections about future events and trends that we believe may affect our business, financial condition, 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.



PART I. FINANCIAL INFORMATION
Item 1.  Financial Information
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
September 30, 2021December 31, 2020
(unaudited)
Assets
Current assets
Cash and cash equivalents$272,273 $85,582 
Accounts receivable, net44,814 38,664 
Current portion of deferred commissions17,043 13,177 
Prepaid and other current assets12,462 6,124 
Total current assets346,592 143,547 
Deferred commissions, net of current portion29,370 24,022 
Capitalized software and content, net14,525 15,523 
Property and equipment, net9,117 10,284 
Operating lease right of use assets, net12,460 12,067 
Intangible assets, net8,168 2,985 
Goodwill42,607 8,605 
Other assets1,074 1,177 
Total assets
$463,913 $218,210 
Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable and accrued expenses$36,040 $19,265 
Current portion of deferred revenue170,149 127,043 
Current portion of operating lease liabilities3,245 2,651 
Total current liabilities209,434 148,959 
Non-current liabilities:
Deferred revenue, net of current portion70,425 58,653 
Operating lease liabilities, net of current portion9,765 9,766 
Other non-current liabilities2,184 3,991 
Total liabilities
291,808 221,369 
Stockholders’ equity (deficit)
Preferred stock, $0.00001 par value, 0 shares authorized, issued, and outstanding at September 30, 2021 and 114,164,600 shares authorized, issued and outstanding (liquidation value $384.5 million) at December 31, 2020
  
Common stock, $0.00001 par value, 0 shares authorized, issued, and outstanding at September 30, 2021 and 176,000,000 shares authorized; and 42,279,000 shares issued and outstanding as of December 31, 2020
  
Common stock, 0.00001 par value, Class A, 1,000,000,000 shares authorized; and 32,084,175 shares issued and outstanding at September 30, 2021 and 0 shares authorized, issued and outstanding at December 31, 2020
  
Common stock, $0.00001 par value, Class B, 500,000,000 shares authorized; and 139,273,684 issued and outstanding at September 30, 2021 and 0 shares authorized, issued and outstanding at December 31, 2020
2  
Additional paid-in capital350,693 158,483 
Accumulated deficit(177,546)(161,303)
Accumulated other comprehensive loss(1,044)(339)
Total stockholders’ equity (deficit)172,105 (3,159)
Total liabilities and stockholders equity (deficit)
$463,913 $218,210 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
1


CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Revenues, net$64,091 $44,932 $176,991 $125,599 
Cost of revenues9,609 6,918 25,543 19,264 
Gross profit54,482 38,014 151,448 106,335 
Operating expenses:
Sales and marketing27,731 20,752 82,312 60,254 
Technology and development7,579 4,822 20,081 14,119 
General and administrative19,852 13,440 62,765 34,536 
Total operating expenses55,162 39,014 165,158 108,909 
Operating loss(680)(1,000)(13,710)(2,574)
Other income (expense):
Interest income16 20 41 159 
Interest expense(67)(16)(329)(45)
Other income (loss)114 29 (445)142 
Loss before income tax expense(617)(967)(14,443)(2,318)
Income tax expense(963)(735)(1,800)(316)
Net loss$(1,580)$(1,702)$(16,243)$(2,634)
Net loss per share, basic and diluted(1)
$(0.01)$(0.04)$(0.17)$(0.06)
Weighted-average shares used in calculating basic and diluted net loss per share170,359,220 42,169,160 98,076,290 42,116,480 
(1) At September 30, 2021, basic and diluted loss per share for Class A and Class B common stock are the same.

The accompanying notes are an integral part of these unaudited consolidated financial statements.
2


CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
(unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Net loss$(1,580)$(1,702)$(16,243)$(2,634)
Other comprehensive (loss) income:
Net change in foreign currency translation adjustments(790)426 (705)(1,072)
Other comprehensive (loss) income:(790)426 (705)(1,072)
Total comprehensive loss$(2,370)$(1,276)$(16,948)$(3,706)
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands, except shares)
(unaudited)
Convertible Preferred StockCommon StockClass A Common StockClass B Common StockAdditional Paid In CapitalAccumulated Other Comprehensive (Loss) IncomeAccumulated DeficitTotal
SharesAmountSharesAmountSharesAmountSharesAmount
Balance, December 31, 2020114,164,600 $ 42,279,000 $  $  $ $158,483 $(339)$(161,303)$(3,159)
Issuance of common stock for exercise of stock options— — 274,720 — — — — — — 347 — — 347 
Issuance of common stock— — 1,245,440 — — — — — — 24,675 — — 24,675 
Repurchase of common stock— — (97,600)— — — — — — (861)— — (861)
Stock compensation expense— — — — — — — — — 1,681 — — 1,681 
Other comprehensive loss— — — — — — — — — — (199)— (199)
Net income— — — — — — — — — — — 2,200 2,200 
Balance, March 31, 2021114,164,600  43,701,560      184,325 (538)(159,103)24,684 
Issuance of common stock for exercise of stock options— — — — — — 589,937 — 605 — — 605 
Conversion of convertible preferred stock and previously authorized common stock to Class B common stock(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 from the vesting of restricted stock units— — — — 949,815 — — — — — — — 
Conversion of Class B common stock to Class A common stock— — — — 758,452 — (758,452)— — — — — 
Taxes paid related to net share settlement of equity awards— — — — (423,865)— — — (6,782)— — (6,782)
Repurchase of common stock— — — — — — — — 680 — — 680 
Stock compensation expense— — — — — — — — 18,500 — — 18,500 
Other comprehensive income— — — — — — — — — 284 — 284 
Net loss— — — — — — — — — — (16,863)(16,863)
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 from the vesting of restricted stock units— — — — 4,482 — — — — — — — 
Conversion of Class B common stock to Class A common stock— — — — 20,370,291 — (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 

4





CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)
(in thousands, except shares)
(unaudited)

Convertible Preferred StockCommon StockAdditional Paid In CapitalAccumulated Other Comprehensive (Loss) IncomeAccumulated DeficitTotal
SharesAmountSharesAmount
Balance, December 31, 2019114,164,600 $ 42,087,280 $ $154,287 $(429)$(158,873)$(5,015)
Issuance of common stock for exercise of stock options— — 85,400 — 60 — — 60 
Repurchase of common stock— — (81,840)— (192)— — (192)
Stock compensation expense— — — — 710 — — 710 
Other comprehensive loss— — — — — (1,624)— (1,624)
Net loss— — — — — — (1,361)(1,361)
Balance, March 31, 2020114,164,600  42,090,840  154,865 (2,053)(160,234)(7,422)
Issuance of common stock for exercise of stock options— — 128,080 — 75 — — 75 
Repurchase of common stock— — (55,040)— (657)— — (657)
Stock compensation expense— — — — 1,327 — — 1,327 
Other comprehensive income— — — — — 126 — 126 
Net income— — — — — — 429 429 
Balance, June 30, 2020114,164,600  42,163,880  155,610 (1,927)(159,805)(6,122)
Issuance of common stock for exercise of stock options— $— 21,000 $— $22 $— $— 22 
Repurchase of common stock— $— — $— $(78)$— $— (78)
Stock compensation expense— $— — $— $1,248 $— $— 1,248 
Other comprehensive income— $— — $— $— $426 $— 426 
Net loss— $— — $— $— $— $(1,702)(1,702)
Balance, September 30, 2020
114,164,600 $ 42,184,880 $ $156,802 $(1,501)$(161,507)$(6,206)
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5


CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended September 30,
20212020
Cash flows from operating activities:
Net loss$(16,243)$(2,634)
Adjustments to reconcile net loss to net cash from operating activities:
Additions to capitalized content(4,504)(4,063)
Depreciation and amortization expense9,999 8,660 
Deferred commissions amortization13,806 10,402 
Stock-based compensation expense23,151 3,285 
Other, net327 (92)
Changes in operating assets and liabilities, net of business combinations:
Accounts receivable(4,943)828 
Deferred commissions(23,112)(15,427)
Prepaid and other assets(7,656)782 
Accounts payable and other liabilities13,675 7,096 
Deferred revenue51,299 30,787 
Net cash provided by operating activities55,799 39,624 
Cash flows from investing activities:
Business combinations, net of cash acquired(11,227) 
Purchases of property and equipment(2,214)(4,692)
Capitalized internal-use software costs(1,895)(2,304)
Net cash used in investing activities(15,336)(6,996)
Cash flows from financing activities:
Proceeds from the exercise of stock options3,435 157 
Repurchase of common stock(1,171)(497)
Proceeds from the issuance of common stock155,958  
Acquisition-related contingent liability payments(375)(252)
Proceeds from finance lease obligations 214 
Payments for finance lease obligations(30)(24)
Taxes paid for the net share settlement of restricted stock units(11,892) 
Net cash provided by (used in) financing activities145,925 (402)
Effect of exchange rate changes on cash and cash equivalents303 (100)
Net change in cash and cash equivalents$186,691 $32,126 
Cash and cash equivalents, beginning of period$85,582 $48,864 
Cash and cash equivalents, end of period$272,273 $80,990 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6


CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL CASH FLOW DISCLOSURES
(in thousands)
(unaudited)
Nine Months Ended September 30,
20212020
Supplemental disclosure of cash flow information:
Cash paid for taxes$1,590 $74 
September 30, 2021September 30, 2020
Supplemental disclosure of noncash investing and financing activities:
Capital expenditures and other assets included in accounts payable and accrued expenses$508 $602 
Stock compensation recorded as liability$ $700 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
7


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 – Description of Business
KnowBe4, Inc. (“KnowBe4” or the “Company”), was incorporated in Delaware in January 2016 and is the successor of operations that began in August 2010. The Company is currently 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 or “SOAR” tool and a governance, risk and compliance or “GRC” product, both 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.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The Company’s consolidated financial statements and accompanying notes include the accounts of the Company and its wholly-owned subsidiaries. The accompanying consolidated balance sheets as of September 30, 2021 and the consolidated statements of operations, consolidated statements of comprehensive (loss) income and consolidated statements of stockholders' equity (deficit) for the three and nine months ended September 30, 2021 and 2020 and the consolidated statements of cash flows for the nine months ended September 30, 2021 and 2020 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, 2021, and its consolidated statements of operations, consolidated statements of comprehensive (loss) income, consolidated statements of stockholders' equity (deficit) and its consolidated statements of cash flows for the nine months ended September 30, 2021 and 2020. All intercompany balances and transactions have been eliminated in consolidation. The results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending December 31, 2021. 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 for the year ended December 31, 2020, included in our prospectus filed under Rule 424(b) of the Securities Act of 1933, as amended (the “Prospectus”). Certain prior period amounts within the accompanying consolidated balance sheets reflect an immaterial error correction and have been reclassified. The consolidated balance sheet as of December 31, 2020 included herein differs from the previously filed Form S-1 as it reflects an adjustment to reclassify amounts from noncurrent deferred revenue to current deferred revenue.
8


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, business combinations, common stock valuations and stock-based 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.
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.
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 $26.3 million and $22.5 million of overnight money market mutual funds at September 30, 2021 and December 31, 2020, respectively. The carrying amount of such cash equivalents approximates their fair value due to the short-term and highly liquid nature of these instruments.
Accounts Receivable
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 related to subscription contracts for which revenue has 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 both September 30, 2021 and December 31, 2020 the allowance for doubtful accounts was $0.4 million. Allowance activity for the periods was not material to the consolidated financial statements.
Deferred Commissions
The Company capitalizes sales commissions and associated 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 revenue contract. An estimate of the portion of commissions related to the downloadable content
9


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. 
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 expenses.
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. Capitalized software costs are amortized on a straight-line basis over the software’s estimated useful life of two to five years. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events 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, 2021 and 2020.
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 two to four 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 changes 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.
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.
10


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, 2021 and 2020.
Intangible assets consist of both definite-lived intangible assets, primarily acquired training content, customer relationship assets, 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
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, 2021 and 2020.
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 the 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 primarily in operating expenses within the consolidated statement of operations. Variable lease costs represent non-lease components, namely common area maintenance and taxes, that are not fixed and are expensed as incurred.
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
11


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.
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) income.
The Company remeasures monetary assets and liabilities that are not denominated in the functional currency at average exchange rates in effect during each period. Gains and losses from these remeasurement adjustments are recognized within other income (expense).
Revenue Recognition
The Company derives substantially all of its revenue 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 revenue when, or as, the Company satisfies a performance obligation.
The Company recognizes revenue 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 revenue consists 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 invoiced related to the ratable portion
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of subscription revenue 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 considers pricing differences among varying subscription tiers, which provide customers with differing levels of content.
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-based compensation, for employees who provide support services to customers.
Stock-Based Compensation
The Company accounts for stock-based awards, including restricted stock units (“RSUs”) and stock options, based on the awards’ estimated grant date fair value. 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 requisite service period of the awards and forfeitures are accounted for as incurred.
The Company estimates the fair value of its stock options using the Black-Scholes option-pricing model. The determination of the grant date fair value using an option-pricing model is affected by the estimated fair value of the Company’s common stock as well as assumptions regarding a number of other complex and subjective variables. These variables include:
Fair Value of Common Stock - Prior to the Company’s IPO, because the Company’s common stock was not yet publicly traded, the Company estimated the fair value of common stock, as discussed below.
Expected Term - The expected term is estimated using the simplified method, due to a lack of historical exercise activity. The simplified method calculates the expected term as the mid-point of the vesting date and the contractual expiration date of the award.
Volatility - Since the Company does not have a trading history of its common stock, the expected volatility is determined based on the historical stock volatilities of comparable companies. Comparable companies consist of public companies in the industry, which are similar in size, stage of life cycle and financial leverage. The Company intends to continue to apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of its own share price becomes available, or until circumstances change such that the identified companies are no longer similar, in which case, more suitable companies whose share prices are publicly available would be used in the calculation.
Risk-Free Interest Rate - The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date closest to the grant date for U.S. Treasury zero-coupon issues with maturities approximating the expected term of the awards.
Dividend Yield - The expected dividend assumption is based on the Company’s current expectations about its anticipated dividend policy. As the Company has a history of only paying a single one-time dividend
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and does not anticipate paying dividends in the future, the Company uses an expected dividend yield of zero.
The resulting fair value is recognized on a straight-line basis, net of forfeitures, which are recorded as incurred, over the requisite service period.
Prior to the Company’s IPO, our board of directors exercised judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our common stock 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. The Company has historically utilized unrelated third-party specialists to prepare valuations in accordance with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or AICPA Guide. Prior to the Company’s IPO, the Company used the Probability Weighted Expected Return Method (“PWERM”), method for estimating the Company’s common stock value, since this is the preferred method for a company expecting a liquidity event in the near future. PWERM involves a forward-looking analysis of the possible future outcomes of the enterprise. Discrete future outcomes considered under the PWERM included an IPO as well as non-IPO market-based outcomes. Determining the fair value of the enterprise using the PWERM required the Company to develop assumptions and estimates for both the probability of an IPO liquidity event and non-IPO outcomes, as well as the values the Company expected those outcomes could yield. After the equity value is determined and allocated to the various classes of shares, a discount for lack of marketability (“DLOM”), is applied to arrive at the fair value of common stock based on the theory that as an owner of a private company stock, the stockholder has limited opportunities to sell this stock and any such sale would involve significant transaction costs, thereby reducing overall fair market value.
Following the IPO, there is an active market for the Company’s Class A common stock, and the Company is no longer applying these valuation approaches.
The Company’s Employee Stock Purchase Plan (“ESPP”) allows eligible employees to acquire shares of the Company’s Class A common stock by accumulating funds through payroll deductions of up to 15% of their compensation, subject to plan limitations. Purchases are accomplished through participation in discrete offering periods. Each offering period consists of one six-month purchase period, unless otherwise determined by the Company’s board of directors or compensation committee. The purchase price for shares of common stock purchased under the ESPP is 85% of 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. Stock-based compensation expense related to ESPP purchases is recorded based on the fair value of the ESPP purchase right estimated on the grant date using a Black-Scholes option-pricing model.
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. The Company made contributions to the 401(k) Plan for the three months ended September 30, 2021 and 2020 of $0.6 million, and $1.1 million, respectively, and for the nine months ended September 30, 2021 and 2020 of $1.6 million and $1.8 million, respectively.
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Advertising
Advertising costs are expensed as incurred. Advertising expenses were $3.3 million and $3.6 million for the three months ended September 30, 2021 and 2020, respectively, and were $10.5 million and $9.9 million for the nine months ended September 30, 2021 and 2020, respectively. Advertising costs are included within sales and marketing expenses in the accompanying consolidated statements of operations.
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 the Company’s technology, and allocated overhead and are recorded within technology and development expense in the accompanying consolidated statements of operations.
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. Prior to the IPO, the Company considered all series of its convertible preferred stock to be participating securities. Net loss was not allocated to the convertible preferred stock as the holders of the convertible preferred stock did not have a contractual obligation to share in any losses. Subsequent to the completion of the IPO, the Company considers shares of its 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 the 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 affect to all potentially dilutive common stock equivalents to the extent they are dilutive.
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 users, 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 statement of operations.
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 revenue during the three and nine months ended September 30, 2021 and 2020. Additionally, no single customer accounted for more than ten percent of accounts receivable at September 30, 2021 or December 31, 2020.
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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.
As of September 30, 2021, the only financial asset or liability measured at fair value was $26.3 million of cash equivalents held in money market funds, which represents a Level 1 asset within the fair value hierarchy. As of December 31, 2020 the following financial assets and liabilities were measured at fair value (in thousands):
December 31, 2020
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$22,479 $ $ $22,479 
Total assets$22,479 $ $ $22,479 
Liabilities:
Accounts payable and accrued expenses:
Business acquisition contingent liabilities$ $ $350 $350 
Total liabilities$ $ $350 $350 
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.
There were no transfers between levels during the three and nine months ended September 30, 2021 or the year ended December 31, 2020.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, (“ASU 2019-12”), which removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of US GAAP. The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company adopted ASU 2019-12 on January 1, 2021 and the adoption was not material to the Company’s consolidated financial statements.

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Note 3 – Revenue, Deferred Revenue and Remaining Performance Obligations
The following table summarizes revenue recognized from performance obligations delivered to customers which relates to (i) subscription services, which is recognized ratably over the term of the contract and (ii) initial subscription revenue representing content available for download, which is recognized at a point in time, for the three and nine months ended September 30, 2021 and 2020 (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Ratable portion of subscription revenue$55,354 $38,487 $151,084 $107,435 
Subscription revenue allocated to downloadable content8,737 6,445 25,907 18,164 
Total$64,091 $44,932 $176,991 $125,599 
The following table summarizes the revenue 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,
2021202020212020
North America $53,324 $39,521 $149,744 $111,596 
International10,767 5,411 27,247 14,003 
Total$64,091 $44,932 $176,991 $125,599 
Contract Balances
The Company records unbilled receivables when revenue recognized on a contract exceeds amounts invoiced. Unbilled receivables were not material as of September 30, 2021 or December 31, 2020.
Contract liabilities consist of deferred revenue which represents contractual billings made in advance of performance under the contract. Changes in deferred revenue for the three and nine months ended September 30, 2021 and 2020 were as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Beginning balance$221,947 $159,266 $185,696 $138,990 
Plus: Additions to deferred revenue82,718 55,278 231,869 156,221 
Less: Recognition of revenue deferred in prior periods(53,929)(37,743)(112,460)(