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udmy-20220930

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


			☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
						For the quarterly period ended September 30, 2022


			☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
						For the transition period from ___________ to ___________

Commission File Number 001-40956

Udemy, Inc.

(Exact Name of Registrant as Specified in its Charter)


Delaware						27-1779864
(State or Other Jurisdiction of Incorporation or Organization)						(I.R.S. Employer Identification No.)

600 Harrison Street, 3rd Floor San Francisco, California						94107
(Address of Principal Executive Offices)						(Zip Code)

(415) 813-1710

(Registrant’s Telephone Number, Including Area Code)

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.00001 par value	UDMY	The Nasdaq Stock Market

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

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

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


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

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

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

As of October 26, 2022, 141,322,356 shares of the registrant’s common stock were outstanding.

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		Page

	Summary of Risk Factors	i
	Special Note Regarding Forward-Looking Statements	ii

PART I.	FINANCIAL INFORMATION	1

Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Comprehensive Loss	3
	Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	49

PART II.	OTHER INFORMATION	50

Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	81
Item 3.	Defaults Upon Senior Securities	81
Item 4.	Mine Safety Disclosures	81
Item 5.	Other Information	81
Item 6.	Exhibits	82
	Signatures	83

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Summary of risk factors

Our business is subject to numerous risks and uncertainties, including those highlighted in the section of this report titled “Risk Factors.” The following is a summary of the principal risks we face, any of which could adversely affect our business, operating results, financial condition, or prospects:

•We have a history of losses, and we may not be able to generate sufficient revenue to achieve or maintain profitability in the future. We incurred net losses of $101.7 million and $38.6 million during the nine months ended September 30, 2022 and 2021, respectively, and, as of September 30, 2022, we had an accumulated deficit of $560.3 million.

•We have a limited history in an emerging and dynamic market, which makes it difficult to evaluate our future results of operations.

• Our results of operations may fluctuate significantly from period to period due to a wide range of factors, which makes our future results difficult to predict.

• Our rapid growth may not be sustainable and depends on our ability to attract new learners, instructors, and organizations and retain existing ones.

• Our platform relies on a limited number of instructors who create a significant portion of the most popular content on our platform, and the loss of these instructor relationships could adversely affect our business, financial condition, and results of operations.

• If we fail to maintain and expand our relationships with Udemy Business (“UB” or “Enterprise”) customers, our ability to grow our business and revenue will suffer.

• We operate in a highly competitive market, and we may not be able to compete successfully against current and future competitors.

• The market for online learning solutions is relatively new and may not grow as we expect, which may harm our business, financial condition, and results of operations.

• Adherence to our values and our focus on long-term sustainability may negatively impact our short or medium term financial performance.

• The COVID-19 pandemic could affect our business, financial condition, and results of operations in volatile and unpredictable ways.

• Acquisitions and other strategic investments may expose us to significant risks, any of which could materially adversely affect our business, financial condition, and results of operations.

• Changes in laws or regulations relating to privacy, data protection, or cybersecurity, including those relating to the protection or transfer of data relating to individuals, or any actual or perceived failure by us to comply with such laws and regulations or any other obligations could adversely affect our business.

• We may be unable to adequately obtain, maintain, protect, and enforce our intellectual property and proprietary information, which could adversely affect our business, financial condition, and results of operations.

• We could face liability, or our reputation might be harmed, as a result of courses posted to our platform.

• Intellectual property litigation, including litigation related to content available on our platform, could result in significant costs and adversely affect our business, financial condition, results of operations, and reputation.

• We are an emerging growth company, and any decision to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

• The trading price of our common stock may be volatile, and you could lose all or part of your investment.

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Special note regarding forward-looking statements

This Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts contained in this Form 10-Q, including statements regarding our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “would,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or the negative of these terms or other similar expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Form 10-Q include, but are not limited to, statements about:

•our expectations regarding our financial and operating performance, including our expectations regarding our revenue, costs, monthly average buyers, number of UB customers, UB Annual Recurring Revenue, UB Net Dollar Retention Rate, segment revenue, segment gross profit, adjusted EBITDA, and adjusted EBITDA margin;

•our ability to successfully execute our business and growth strategy;

•our ability to attract and retain learners, instructors, and enterprise customers;

•the timing and success of new features, integrations, capabilities, and other platform enhancements by us, or by our competitors to their offerings, or any other changes in the competitive landscape of our markets and industry;

•anticipated trends, developments, and challenges in our industry, business, and the markets in which we operate;

•the size of our addressable markets, market share, and market trends, including our ability to grow our business internationally;

•the effects of the COVID-19 pandemic on our business, the market for online learning solutions, and the global economy generally;

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

•our ability to develop and protect our brand and reputation;

•our expectations and management of future growth;

•our expectations concerning relationships with third parties;

•our ability to attract, retain, and motivate our skilled personnel, including members of our senior management team;

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

•our ability to maintain the security and availability of our platform;

•our ability to successfully defend litigation brought against us;

•our ability to successfully identify, execute, and integrate any potential acquisitions or strategic investments;

•our expectations regarding our income and other tax liabilities;

•our ability to effectively manage our exposure to fluctuations in foreign currency exchange rates;

•our ability to obtain, maintain, protect, and enforce our intellectual property and proprietary information; and

•the increased expenses associated with being a public company.

Actual events or results may differ from those expressed in forward-looking statements. As such, you should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, prospects, strategy, and financial needs. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, assumptions, and other factors described in the section titled “Risk Factors” and elsewhere in this Form 10-Q. Moreover, we operate in a highly 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 Form 10-Q. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

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

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The forward-looking statements made in this Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Form 10-Q to reflect events or circumstances after the date of this Form 10-Q or to reflect new information, actual results, revised expectations, 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.

Investors and others should note that we may announce material information to the public through filings with the Securities and Exchange Commission, our website (udemy.com), press releases, public conference calls, and public webcasts. We encourage our investors and others to review the information disclosed through such channels as such information could be deemed to be material information. Please note that this list may be updated from time to time.

iii

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (unaudited)

Udemy, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

(unaudited)


	September 30,		December 31,
	2022		2021
Assets
Current assets:
Cash and cash equivalents	$	427,914	$	533,868
Marketable securities	66,052		—
Accounts receivable, net of allowance for doubtful accounts of $1,072 and $678 as of September 30, 2022, and December 31, 2021, respectively.	71,580		73,180
Prepaid expenses and other current assets	13,478		15,927
Deferred contract costs, current	29,373		18,898
Total current assets	608,397		641,873
Property and equipment, net	7,816		9,887
Capitalized software, net	25,887		20,054
Operating lease right-of-use assets	12,939		—
Restricted cash, non-current	3,629		2,900
Deferred contract costs, non-current	32,817		25,647
Strategic investments	12,104		10,000
Intangible assets, net	10,397		13,597
Goodwill	12,646		12,646
Other assets	3,761		3,247
Total assets	$	730,393	$	739,851
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	17,060	$	34,627
Accrued expenses and other current liabilities	36,777		40,140
Content costs payable	34,437		35,961
Accrued compensation and benefits	25,111		22,341
Operating lease liabilities, current	7,008		—
Deferred revenue, current	237,852		208,274
Total current liabilities	358,245		341,343
Operating lease liabilities, non-current	8,014		—
Deferred revenue, non-current	3,096		2,280
Other liabilities, non-current	4,522		6,528
Total liabilities	373,877		350,151
Note 10 – Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.00001 par value - 50,000,000 shares authorized; zero shares issued and outstanding as of September 30, 2022, and December 31, 2021.	—		—
Common stock, $0.00001 par value - 950,000,000 shares authorized; 141,260,274 and 139,164,693 shares issued and outstanding as of September 30, 2022, and December 31, 2021, respectively.	1		1
Additional paid-in capital	917,031		848,229
Accumulated other comprehensive loss	(265)		(1)
Accumulated deficit	(560,251)		(458,529)
Total stockholders’ equity	356,516		389,700
Total liabilities and stockholders' equity	$	730,393	$	739,851

See accompanying notes to condensed consolidated financial statements.

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Udemy, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share amounts)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenue	$	158,432	$	129,563	$	463,767	$	380,206
Cost of revenue	69,080		57,986		201,330		171,902
Gross profit	89,352		71,577		262,437		208,304
Operating expenses
Sales and marketing	77,490		52,258		212,789		156,399
Research and development	28,062		16,703		74,595		46,898
General and administrative	27,051		12,166		72,147		41,969
Total operating expenses	132,603		81,127		359,531		245,266
Loss from operations	(43,251)		(9,550)		(97,094)		(36,962)
Other income (expense)
Interest income (expense), net	592		(61)		962		(452)
Other expense, net	(3,523)		(196)		(4,439)		(714)
Total other expense, net	(2,931)		(257)		(3,477)		(1,166)
Net loss before taxes	(46,182)		(9,807)		(100,571)		(38,128)
Income tax (provision) benefit	(511)		545		(1,151)		(514)
Net loss attributable to common stockholders	$	(46,693)	$	(9,262)	$	(101,722)	$	(38,642)
Net loss per share attributable to common stockholders
Basic and diluted	$	(0.33)	$	(0.25)	$	(0.73)	$	(1.04)
Weighted-average shares used in computing net loss per share attributable to common stockholders
Basic and diluted	140,951,605		37,740,586		140,116,156		37,068,570

See accompanying notes to condensed consolidated financial statements.

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Udemy, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net loss	$	(46,693)	$	(9,262)	$	(101,722)	$	(38,642)
Foreign currency translation loss, net of tax	(32)		—		(50)		—
Change in unrealized gain or loss on marketable securities, net of tax	(214)		—		(214)		—
Comprehensive loss	$	(46,939)	$	(9,262)	$	(101,986)	$	(38,642)

See accompanying notes to condensed consolidated financial statements.

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Udemy, Inc

Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and

Stockholders’ Equity (Deficit)

(in thousands, except share amounts)

(unaudited)


	Redeemable Convertible Preferred Stock			Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity (Deficit)
	Shares	Amount		Shares	Amount
Balance—June 30, 2022	—	$	—	140,622,937	$	1	$	888,522	$	(19)	$	(513,558)	$	374,946
Stock-based compensation	—	—		—	—		26,428		—		—		26,428
Exercise of stock options	—	—		427,684	—		2,019		—		—		2,019
Vesting of restricted stock units	—	—		209,553	—		—		—		—		—
Reclassification of stock appreciation rights	—	—		—	—		62		—		—		62
Other comprehensive loss	—	—		—	—		—		(246)		—		(246)
Net loss	—	—		—	—		—		—		(46,693)		(46,693)
Balance—September 30, 2022	—	$	—	141,260,174	$	1	$	917,031	$	(265)	$	(560,251)	$	356,516

Balance—June 30, 2021	85,403,933	$	274,267	37,523,533	$	—	$	141,112	$	—	$	(407,883)	$	(266,771)
Stock-based compensation	—	—		—	—		7,578		—		—		7,578
Exercise of stock options	—	—		416,393	—		1,647		—		—		1,647
Restricted stock issued for business combination	—	—		61,300	—		—		—		—		—
Net loss	—	—		—	—		—		—		(9,262)		(9,262)
Balance—September 30, 2021	85,403,933	$	274,267	38,001,226	$	—	$	150,337	$	—	$	(417,145)	$	(266,808)


	Redeemable Convertible Preferred Stock			Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity (Deficit)
	Shares	Amount		Shares	Amount
Balance—December 31, 2021	—	$	—	139,164,693	$	1	$	848,229	$	(1)	$	(458,529)	$	389,700
Stock-based compensation	—	—		—	—		57,457		—		—		57,457
Exercise of stock options	—	—		1,273,968	—		5,653		—		—		5,653
Vesting of restricted stock units	—	—		294,759	—		67		—		—		67
Reclassification of stock appreciation rights	—	—		—	—		62		—		—		62
Issuance of common stock under employee stock purchase plan	—	—		526,754	—		5,563		—		—		5,563
Other comprehensive loss	—	—		—	—		—		(264)		—		(264)
Net loss	—	—		—	—		—		—		(101,722)		(101,722)
Balance—September 30, 2022	—	$	—	141,260,174	$	1	$	917,031	$	(265)	$	(560,251)	$	356,516

Balance—December 31, 2020	85,391,338	$	274,104	35,627,503	$	—	$	117,818	$	—	$	(378,503)	$	(260,685)
Exercise of Series A-1 redeemable convertible preferred stock warrants	12,595	163		—	—		—		—		—		—
Stock-based compensation	—	—		—	—		24,511		—		—		24,511
Exercise of stock options	—	—		2,312,423	—		8,008		—		—		8,008
Restricted stock issued for business combination	—	—		61,300	—		—		—		—		—
Net loss	—	—		—	—		—		—		(38,642)		(38,642)
Balance—September 30, 2021	85,403,933	$	274,267	38,001,226	$	—	$	150,337	$	—	$	(417,145)	$	(266,808)

See accompanying notes to condensed consolidated financial statements.

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Udemy, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	Nine Months Ended September 30,
	2022		2021
Cash flows from operating activities:
Net loss	$	(101,722)	$	(38,642)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	15,616		10,400
Amortization of deferred sales commissions	22,558		11,995
Stock-based compensation	53,043		23,704
Provision for doubtful accounts	467		324
Accretion of marketable securities	(138)		—
Non-cash operating lease expense	4,643		—
Unrealized loss on strategic investments	2,896		—
Other	460		—
Changes in operating assets and liabilities:
Accounts receivable	1,132		5,715
Prepaid expenses and other assets	1,375		(6,252)
Deferred contract costs	(40,203)		(25,455)
Accounts payable, accrued expenses and other liabilities	(14,257)		(13,455)
Content costs payable	(1,525)		(989)
Operating lease liabilities	(5,012)		—
Deferred revenue	30,395		23,234
Net cash used in operating activities	(30,272)		(9,421)
Cash flows from investing activities:
Purchases of marketable securities	(66,128)		—
Purchases of property and equipment	(1,397)		(4,554)
Capitalized software costs	(10,652)		(9,767)
Purchases of strategic investments	(5,000)		—
Payments related to business combination, net of cash acquired	(1,500)		(24,490)
Net cash used in investing activities	(84,677)		(38,811)
Cash flows from financing activities:
Net proceeds from exercise of stock options	5,785		7,619
Proceeds from share purchases under employee stock purchase plan	5,563		—
Payment of redeemable convertible preferred stock issuance costs	—		(2,250)
Payment of deferred offering costs	(1,586)		(1,992)
Net proceeds from exercise of Series A-1 redeemable convertible preferred stock warrants	—		2
Net cash provided by financing activities	9,762		3,379

Effect of foreign exchange rates on cash flows	(38)		—

Net decrease in cash, cash equivalents and restricted cash	(105,225)		(44,853)
Cash, cash equivalents and restricted cash—Beginning of period	536,768		177,931
Cash, cash equivalents and restricted cash—End of period	$	431,543	$	133,078

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	Nine Months Ended September 30,
	2022		2021
Reconciliation of cash, cash equivalents, and restricted cash:
Cash and cash equivalents	$	427,914	$	130,178
Restricted cash	3,629		2,900
Total cash, cash equivalents, and restricted cash	$	431,543	$	133,078

Supplemental disclosures of cash flow information:
Interest paid	$	13	$	72
Income taxes paid	$	516	$	385

Supplemental disclosure of non-cash investing and financing activities:
Unpaid deferred offering costs	$	—	$	3,090
Stock-based compensation in capitalized costs	$	4,310	$	1,451
Acquisition holdback liability	$	—	$	1,500
Changes in purchases of property and equipment in accounts payable and accrued expenses	$	108	$	119
Unrealized gains and losses on marketable securities	$	215	$	—

See accompanying notes to condensed consolidated financial statements.

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Udemy, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Organization and description of business

Description of business

Udemy, Inc. (“Udemy” or the “Company”) was incorporated in January 2010 under the laws of the state of Delaware. The Company is headquartered in San Francisco, California.

Udemy is a global marketplace platform for teaching and learning, connecting millions of learners to the skills they need to succeed. The Company’s platform allows learners all over the world to access affordable and relevant content from expert instructors. Udemy combines high-quality content, insights and analytics, and technology into a single, unified platform that is purpose-built to meet the specific needs of both individual learners and enterprise customers.

Initial public offering

On October 29, 2021, the Company completed its initial public offering ("IPO") of common stock, in which it sold 14,500,000 shares. The shares were sold at a price to the public of $29.00 per share for net proceeds of $397.4 million, after deducting underwriting discounts and commissions of $23.1 million. Underwriters were granted an option for a period of 30 days to purchase up to 2,175,000 additional shares of common stock. Upon the completion of the IPO, deferred offering costs of $6.8 million were reclassified into additional paid-in capital as a reduction of the net proceeds received from the IPO. Upon the closing of the IPO, all outstanding shares of the Company’s redeemable convertible preferred stock automatically converted into 85,403,933 shares of common stock on a one-for-one basis.

On November 24, 2021, the underwriters exercised the right to purchase 650,000 additional shares of common stock from the Company, resulting in additional net proceeds of $17.8 million, after deducting underwriting discounts and commissions of $1.0 million. The remaining option to purchase additional shares expired unexercised at the end of the 30 day period.

2. Summary of significant accounting policies

Basis of consolidation and presentation— The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation, and all other normal and recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results of the periods presented have been made.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, which was originally filed with the SEC on March 25, 2022.

Segment information— The Company defines its segments as those operations the chief operating decision maker (“CODM”), determined to be the Chief Executive Officer of the Company, regularly reviews to allocate resources and assess performance. For the three and nine months ended September 30, 2022 and 2021, the Company operated under two operating and reportable segments: Consumer and Enterprise. The Company continually monitors and reviews its segment reporting structure in accordance with Accounting Standards Codification (“ASC”) Topic 280, Segment Reporting, to determine whether any changes have occurred that would impact its reportable segments. For further information on the Company’s segment reporting, see Note 16 – Segment and geographic information.

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Use of estimates— The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the condensed consolidated financial statements and the results of operations during the reporting periods.

Significant estimates and assumptions reflected in the condensed consolidated financial statements include, but are not limited to, allowance for doubtful accounts, capitalization of internally developed software and associated useful lives, stock-based compensation, determination of the income tax valuation allowance and the potential outcome of uncertain tax positions, estimated instructor withholding tax obligations, estimated period of consumption for consumer learners’ single course purchases, the period of benefit for deferred commissions, the fair value and associated useful lives of intangible assets and goodwill acquired via business combinations, and the valuation of privately-held strategic investments, including impairments. Management periodically evaluates such estimates and assumptions for continued reasonableness.

Actual results may ultimately differ from management’s estimates and such differences could be material to the financial position and results of operations.

Coronavirus disease 2019 (“COVID-19”)— In March 2020, the World Health Organization declared the outbreak of the coronavirus disease named COVID-19 a pandemic. The COVID-19 pandemic has created and may continue to create significant uncertainty in global financial markets. This uncertainty may positively or adversely impact certain aspects of the business, including but not limited to customer demand and spending, the ability to raise capital, impairment of assets, and cash collections. While the Company has not experienced a material negative impact to its business, results of operations, financial position, and liquidity, the future duration, impact, and disruption of the COVID-19 outbreak to the Company’s operations is uncertain.

Concentration of credit risk— Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, restricted cash, and accounts receivable. For cash and restricted cash, the Company is exposed to credit risk in the event of default by the financial institutions to the extent the amounts recorded on the accompanying condensed consolidated balance sheets are in excess of federal insurance limits. The Company’s investments, classified as cash equivalents and marketable securities, consist of high-credit-quality instruments and fixed-income securities.

The Company generally does not require collateral or other security in support of accounts receivable. To reduce credit risk, management performs ongoing evaluations of its customers’ financial condition. The Company analyzes the need for reserves for potential credit losses and records allowances for doubtful accounts when necessary. No customer accounted for more than 10% of total accounts receivable as of September 30, 2022, or December 31, 2021. No customer accounted for more than 10% of total revenue during the three and nine months ended September 30, 2022 and 2021.

Summary of significant accounting policies— Except as described below, there were no significant changes to the Company’s significant accounting policies disclosed in Note 2 – Summary of significant accounting policies of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, which was originally filed with the SEC on March 25, 2022.

Accounts receivable and allowance for doubtful accounts— Accounts receivable primarily represent amounts owed to the Company for Enterprise subscriptions. Also included in accounts receivable are amounts due from payment processors or mobile application store partners that settle over a period longer than five business days. Accounts receivable balances are recorded at the invoiced amount and are non-interest-bearing. Accounts receivable are presented net of allowances for doubtful accounts. Management assesses the Company’s ability to collect outstanding receivables and records allowances when collection becomes doubtful. The provision for bad debt is recorded in general and administrative expenses in the accompanying condensed consolidated statements of operations. These estimates are based on the assessment of the credit worthiness of the Company’s customers based on multiple sources of information and analysis of such factors as the Company’s historical collection experience and industry and geographic concentrations of credit risk. Accounts receivable deemed to be uncollectible are written off, net of any amounts that may be collected.

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	Balance at Beginning of Period		Charged to Expenses		Charges Utilized/Written-off		Balance at End of Period
Allowance for doubtful accounts
Nine months ended September 30, 2022	$	678	$	467	$	(73)	$	1,072
Nine months ended September 30, 2021	$	643	$	324	$	(260)	$	707

Operating leases— The Company leases real estate facilities under non-cancelable operating leases with various expiration dates through fiscal year 2026. The Company determines if an arrangement contains a lease at inception based on whether there is an identified tangible asset and whether the Company controls the use of the identified asset throughout the period of use.

The Company adopted Accounting Standard Update (“ASU”) No. 2016-02, Leases (Topic 842) on January 1, 2022.

Operating leases are included in operating lease right-of-use (“ROU”) assets and in operating lease liabilities in the accompanying condensed consolidated balance sheet. Operating lease ROU assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease.

The Company measures its operating lease liabilities at lease inception date based on the present value of total lease payments over the lease term. Total lease payments are discounted to present value using the more readily determinable of (i) the rate implicit in the lease or (ii) the Company’s incremental borrowing rate (which is the estimated rate the Company would be required to pay for a collateralized borrowing equal to the total lease payments over the term of the lease). Because the Company’s operating leases generally do not provide an implicit rate, the Company estimates its incremental borrowing rate using information available at the lease commencement date, including but not limited to credit rating, lease term, and the currency in which the arrangement is denominated. The Company’s operating lease ROU assets are equal to the corresponding operating lease liability, adjusted for payments made to the lessor at or before the commencement date, initial direct costs incurred, and tenant incentives under the lease.

The Company does not assume renewals or early terminations unless it is reasonably certain to exercise these options at commencement. The Company does not allocate consideration between lease and non-lease components. Variable lease payments, such as those for common area maintenance or property taxes, are not included in the measurement of operating lease liabilities and are expensed as incurred. In addition, the Company does not recognize operating ROU assets or operating lease liabilities for leases with a term of 12 months or less for all asset classes. Operating lease expense is recognized on a straight-line basis over the lease term.

Lease accounting prior to the adoption of Topic 842

The Company recorded total rent expense on a straight-line basis over the lease term consistent with Topic 840. The Company recorded the difference between cash rent payments and straight-line rent expense, generally due to rent escalations and tenant improvement allowances, as a deferred rent liability within accrued expenses and other current liabilities and other liabilities, non-current, each of which were immaterial as of December 31, 2021.

Marketable securities— Marketable securities consist of obligations issued by the U.S. Treasury and other U.S. federal agencies, corporate debt, and commercial paper securities, with an original maturity greater than 90 days at the date of purchase and are classified as available-for-sale securities. As the Company views these securities as available to support current operations, it has classified all available-for-sale securities as current assets. Available-for-sale securities are initially recorded at cost and periodically adjusted to fair value with unrealized gains and losses reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity (deficit), while realized gains and losses are reported within other income (expense), net as a component of net loss. An impairment charge is recorded in the condensed consolidated statements of operations for declines in fair value below the cost of an individual investment that are deemed to be other-than-temporary.

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Recently Adopted Accounting Pronouncements— In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The Company adopted the standard with an effective date of January 1, 2021 using the prospective transition adoption approach. Capitalized implementation costs are recorded in prepaid expenses and other current assets and other assets in the condensed consolidated balance sheet. The adoption of this ASU did not have a material impact on the condensed consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard requires a lessee to record an asset representing the lessees’ right to use the underlying asset and a liability to make lease payments. At inception, lessees must classify all leases as either finance or operating based on five criteria. Balance sheet recognition of finance and operating leases is similar, but the pattern of expense recognition in the income statement, as well as the effect on the statement of cash flows, differs depending on the lease classification.

The Company adopted Topic 842 on January 1, 2022, using the modified retrospective approach. The Company elected the package of practical expedients, the use of hindsight in determining the lease term, and the practical expedient to not recognize an operating ROU asset or operating lease liability for leases with a term of 12 months or less. Upon adoption, the Company recognized $17.6 million in operating ROU assets and $20.0 million in operating lease liabilities in its condensed consolidated balance sheets. The difference between the amounts of operating ROU assets and operating lease liabilities consisted of deferred rent and prepaid rent that were derecognized upon transition. There was no adoption date impact to accumulated deficit, and adoption of the new standard did not have a material impact on the Company’s condensed consolidated statements of operations or cash flows.

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which aims to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to (1) recognition of an acquired contract liability and (2) payment terms and their effect on subsequent revenue recognized by the acquirer. The Company elected to early adopt this standard on a prospective basis on January 1, 2022. There has been no impact of adoption to date, as the Company has not entered into any business combinations since adoption.

The Company is an emerging growth company (“EGC”), as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, EGCs can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an EGC or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, the condensed consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. Based on the market value of its common stock held by non-affiliates as of the last business day of the second fiscal quarter ended June 30, 2022, the Company will cease to be an EGC on December 31, 2022.

New accounting pronouncements not yet adopted— In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. The FASB issued ASU 2019-10 in November 2019, which deferred the effective date for nonpublic entities, including EGCs, that had not yet adopted the original ASU. The Company will meet the criteria to become a large accelerated filer as of December 31, 2022, upon which time the ASU will become effective for the fiscal year ending on December 31, 2022. The Company is currently assessing the potential impact of the new standard on the Company’s condensed consolidated financial statements.

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In December 31, 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles of income taxes and reducing the cost and complexity in accounting for income taxes. The ASU is effective for the Company’s fiscal year beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company is currently assessing the potential impact of the new standard on the Company’s condensed consolidated financial statements.

3. Revenue recognition

Deferred revenue— Revenue recognized for the three months ended September 30, 2022 from amounts included in deferred revenue as of June 30, 2022 was $122.5 million. Revenue recognized for the three months ended September 30, 2021 from amounts included in deferred revenue as of June 30, 2021 was $92.4 million.

Revenue recognized for the nine months ended September 30, 2022 from amounts included in deferred revenue as of December 31, 2021 was $187.4 million. Revenue recognized for the nine months ended September 30, 2021 from amounts included in deferred revenue as of December 31, 2020 was $127.4 million.

The below table presents a summary of deferred revenue balances by reportable segment (in thousands):


	September 30,		December 31,		December 31,
	2022		2021		2020
Deferred revenue:
Enterprise	$	186,646	$	148,966	$	84,241
Consumer	54,302		61,588		58,135
Total deferred revenue	$	240,948	$	210,554	$	142,376

Remaining performance obligations— Remaining performance obligations represent the aggregate amount of the transaction price in contracts for performance obligations not delivered, or partially undelivered, as of the end of the reporting period. Remaining performance obligations primarily relate to unearned revenue from Consumer single course purchase arrangements and unearned and unbilled revenue from multi-year Enterprise subscription contracts with future installment payments at the end of any given period. As of September 30, 2022, the aggregate transaction price for remaining performance obligations was $433.7 million, of which 69% is expected to be recognized over the next twelve months and the remainder thereafter.

Deferred contract costs— The following table represents a rollforward of the Company’s deferred contract costs (in thousands):


	Balance at Beginning of Period		Additions		Amortization Expense		Balance at End of Period
Nine months ended September 30, 2022	$	44,545	$	40,203	$	(22,558)	$	62,190
Nine months ended September 30, 2021	$	25,837	$	25,455	$	(11,995)	$	39,297

4. Investments and fair value measurements

The Company considers fair value as the exchange price that would be received for an asset or paid to transfer a liability, an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value are either observable or unobservable. Observable inputs reflect assumptions that market participants would use in pricing an asset or liability based on market data obtained from independent sources, while unobservable inputs reflect a reporting entity’s pricing based on their own market assumptions.

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The Company utilizes the following three-level fair value hierarchy to establish the priorities of the inputs used to measure fair value:

Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2—Inputs are observable, unadjusted quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data; and

Level 3—Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

The carrying amounts of cash, cash equivalents, restricted cash, accounts receivable, and accounts payable approximate fair value due to the relatively short-term maturities and are classified as short-term assets and liabilities, as appropriate, in the accompanying condensed consolidated balance sheets.

The Company’s money market funds and sweep account are classified within Level 1 of the fair value hierarchy because they are valued using quoted prices in active markets. The Company’s investments in U.S. government securities are classified within Level 2 of the fair value hierarchy because they have been valued using inputs other than quoted prices in active markets that are directly or indirectly observable. The Company’s strategic investment is classified within Level 3 of the fair value hierarchy because it has been valued using significant unobservable inputs for which the Company has been required to develop its own assumptions.

The Company accounts for its strategic investment under the measurement alternative, under which the cost to purchase is adjusted to fair value when there are observable transactions, less impairment. The Company evaluates its strategic investment for impairment at each reporting period. This evaluation consists of several potential qualitative and quantitative impairment indicators including, but not limited to, the investee's financial metrics, whether there were any significant adverse changes in the economic environment or general market conditions of the geographies and industries in which the investee operates, and any other publicly available information that may affect the value of the investment. Based on the assessment performed as of September 30, 2022, the Company recognized an impairment loss of $2.9 million during the three and nine months ended September 30, 2022, which is recorded in other expense, net in the accompanying condensed consolidated statements of operations.

The Company’s assets and liabilities that are measured at fair value on a recurring or nonrecurring basis within the fair value hierarchy are as follows (in thousands):


As of September 30, 2022	Level 1		Level 2		Level 3
Cash equivalents:
Money market funds	$	1,457	$	—	$	—
U.S. government securities	—		7,464		—
Total cash equivalents	$	1,457	$	7,464	$	—

Marketable securities:
U.S. government securities	$	—	$	66,052	$	—

Noncurrent assets:
Strategic investments	$	—	$	—	$	12,104

Liabilities:
Cash settled stock appreciation rights	$	—	$	—	$	522

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As of December 31, 2021	Level 1		Level 2		Level 3
Noncurrent assets:
Strategic investments	$	—	$	—	$	10,000

Liabilities:
Cash settled stock appreciation rights	$	—	$	—	$	818

A summary of the changes in the fair value of Level 3 financial instruments, of which remeasurement of stock appreciation rights (“SARs”) are recognized in the condensed consolidated statements of operations, is as follows (in thousands):


	Warrants		Stock Appreciation Rights		Strategic Investments
Balance— June 30, 2022	$	—	$	419	$	15,000
Vesting and remeasurement of SARs, net of exercises	—		165		—
Amount reclassified from liability to equity upon exchange	—		(62)		—
Unrealized loss on strategic investments	—		—		(2,896)
Balance— September 30, 2022	$	—	$	522	$	12,104

Balance— June 30, 2021	$	—	$	791	$	—
Vesting and remeasurement of SARs	—		121		—
Balance— September 30, 2021	$	—	$	912	$	—

Balance— December 31, 2021	$	—	$	818	$	10,000
Vesting and remeasurement of SARs, net of exercises	—		(234)		—
Purchases of strategic investments	—		—		5,000
Amount reclassified from liability to equity upon exchange	—		(62)		—
Unrealized loss on strategic investments	—		—		(2,896)
Balance— September 30, 2022	$	—	$	522	$	12,104

Balance— December 31, 2020	$	160	$	268	$	—
Exercise of redeemable convertible preferred stock warrants	(160)		—		—
Vesting and remeasurement of SARs	—		644		—
Balance— September 30, 2021	$	—	$	912	$	—

During the nine months ended September 30, 2021, the remaining outstanding 12,595 warrants to purchase Series A-1 redeemable convertible preferred stock were exercised for an immaterial amount of cash proceeds at an exercise price of $0.196 per share. The Company reclassified the $0.2 million fair value of the warrants into Series A-1 redeemable convertible preferred stock on the condensed consolidated balance sheet. The change in fair value of the warrants during nine months ended September 30, 2021 was immaterial.

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5. Consolidated balance sheet components

Cash, cash equivalents, and marketable securities— The amortized cost, unrealized gains and losses, and estimated fair value of cash, cash equivalents, and marketable securities consisted of the following (in thousands):


As of September 30, 2022	Amortized cost		Unrealized Gains		Unrealized Losses		Fair Value
Cash and cash equivalents:
Cash	$	418,993	$	—	$	—	$	418,993
Money market funds	1,457		—		—		1,457
U.S. government securities	7,463		1		—		7,464
Total cash and cash equivalents	427,913		1		—		427,914
Marketable securities:
U.S. government securities	66,267		—		(215)		66,052
Total cash, cash equivalents, and marketable securities	$	494,180	$	1	$	(215)	$	493,966

The Company periodically evaluates its investments for other-than-temporary declines in fair value. The unrealized losses on available-for-sale securities were primarily due to unfavorable changes in interest rates subsequent to the initial purchase of these securities. No securities had been in a continuous unrealized loss position for twelve months or longer as of September 30, 2022. The Company expects to recover the full carrying value of its available-for-sale securities in an unrealized loss position as it does not intend or anticipate a need to sell these securities prior to recovering the associated unrealized losses. As a result, the Company does not consider any portion of the unrealized losses as of September 30, 2022 to represent an other-than temporary impairment.

As of September 30, 2022, the entirety of the Company’s marketable securities portfolio had contractual maturities of one year or less.

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


	September 30,		December 31,
	2022		2021
Prepaid expenses	$	9,904	$	12,465
Capitalized cloud computing costs, current	913		808
Short term deposits	115		745
Other current assets	2,546		1,909
Prepaid expenses and other current assets	$	13,478	$	15,927

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


	September 30,		December 31,
	2022		2021
Computers and equipment	$	7,843	$	6,798
Furniture and fixtures	4,843		4,701
Purchased software	383		383
Leasehold improvements	19,045		18,932
Construction in progress	18		18
Total property and equipment	32,132		30,832
Less accumulated depreciation and amortization	(24,316)		(20,945)
Property and equipment, net	$	7,816	$	9,887

Depreciation expense was $1.1 million for both the three months ended September 30, 2022 and 2021, and $3.4 million and $3.3 million for the nine months ended September 30, 2022 and 2021, respectively.

Capitalized software, net— Capitalized software, net consisted of the following (in thousands):


	September 30,		December 31,
	2022		2021
Capitalized software	$	58,637	$	43,804
Less accumulated amortization	(32,750)		(23,750)
Capitalized software, net	$	25,887	$	20,054

Amortization expense of capitalized software was $3.3 million and $2.5 million for the three months ended September 30, 2022 and 2021, respectively, and $9.0 million and $6.7 million for the nine months ended September 30, 2022 and 2021, respectively.