Management’s Discussion and Analysis of Financial Condition and Results of Operations
Section summary: The “MD&A” section provides investors with the financial side of the issuer’s equity story and gives context and color to the issuer’s operating results, liquidity and financial statements more broadly. In addition to elucidating the key drivers of the issuer’s historical generally accepted accounting principles (GAAP) operating results from both a revenue and expense perspective, the “MD&A” section provides investors with insights that allow them to model the future performance of the business, as well known trends and uncertainties that could impact future operating results. The “MD&A” section also provides a forum to discuss historical and future cash sources and uses, thereby setting investors’ expectations with respect to potential future dilutive issuances of securities that may be needed to fund the business. The “MD&A” section covers the business as a whole, as well as the performance of each operating segment. Companies typically also discuss key financial and operating metrics in the “MD&A” section, including non-GAAP metrics that management uses to assess the performance of the business.
Beyond the key metrics that are identified as such (thereby setting the expectation that they will be reported on an annual or quarterly basis going forward), issuers also often provide “one-time” disclosures of data points that they believe will be helpful to investors in building the initial model of the business. In recent years, issuers have also increasingly used the “MD&A” section as the forum to provide investors with insight into unique and potentially attractive aspects of the business, including with respect to unit economics, operating leverage and customer cohort behavior. The technical requirements for the “MD&A” section are contained in Item 303 of Regulation S-K.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. References to 2023 and 2024 refer to the year ended December 31, 2023 and the year ended December 31, 2024, respectively
Overview
Our mission is to save the world. The whole world, including the children, but to a lesser extent their parents. Really everyone, to be honest. We are just saying that if we had limited lifeboats, we would prioritize appropriately.
Our vision is to realize our mission. For that, we have objectives, which are made of goals, which are conglomerations of little designs and plans, all of which are reinforced by our strategies. Sometimes we will sit, motionless and open-mouthed, but very quiet, and just strategize about what designs will achieve the goals needed to meet the objectives required by our vision to further our mission, and then do all those things. Like it is no big deal. This makes us thirsty.
Fortunately for us, and for our investors, Lazy Susan is a platform, maybe even more than a platform – a regime, an ethos, a transcendence – but it is also software, infrastructure, a solution set and more. Its features are products, and its products are features.
We are cloud indigenous. We are the leading pioneer uniquely revolutionizing a heretofore unseen industry like no one have has even considered.
Our platform integrates billions of bits of data in as little as one minute, which is a short amount of time, but also a smaller minute than most legacy minutes. Our competitors’ minutes are huge and clunky and gross. Try walking in the dark around them and see if you don’t hit your shin on them. That’ll smart, but only metaphorically, because our competitors are not the brightest.
We generate revenue primarily from sales to our customers of subscriptions to access our Lazy Susan Platform. Customers will typically pay us an annual base fee for our Basic plan. Customers have the option to upgrade to our Pro, ProPro and ProProPro plans, which offer additional functionality, enhanced capabilities and access to exclusive emojis.
In addition, we have strategic partnerships with major retailers to sell physical lazy Susans for our customers who cannot figure out that we are a bleeding-edge technology company at the limits of human innovation.
Our go-to-market strategy is focused on driving continued use of our platform for existing customers, cross-selling our enhanced subscription plans and acquiring new customers.
We are headquartered in San Francisco, California, with offices around the world.
Recent Acquisition
In 2023, we acquired eNtropicly, an innovative start-up company leveraging a complex algorithm based on the second law of social thermodynamics to predict people’s increasingly depressing and cringy web-browsing habits. We believe this acquisition will significantly increase our ability to understand our customers and properly leverage that omniscient wisdom in selling them our products.
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No additional comments.
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Overview of MD&A
Consider whether to include a graphic of critical business developments that might help investors better understand the historical financials and growth rates, including material product releases, significant acquisitions, sales milestones, etc. See Rubrik for a good example.
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Recent acquisitions
Completing a significant acquisition or disposition during the IPO process can have a significant impact on timing. Material disclosures may be required for transactions completed within the past two years, including for incomplete but contemplated transactions. It is important to work with your legal advisors and auditors early to determine whether completed or in-process transactions may be deemed “significant” and require additional disclosure. While the SEC has been very reasonable in granting relief in certain situations where an acquisition may technically trigger disclosure but is not material to investors, depending on the “significance” of an acquisition under accounting and disclosure rules, additional financial statements, including pro forma financial statements and separate audited financial statements related to the acquired businesses, may be required, which can require significant additional work and slow down your IPO. Consider building in a “drop dead” date to your IPO timeline, following which your corporate development team no longer seeks opportunistic transactions that might affect timing and disclosure until the IPO is complete.
Factors Affecting Our Performance11
Adoption of Our Platform
Our future success depends in large part on the market adoption of our Lazy Susan Platform. While we see growing demand for our platform, many of our customers remain fixated on the physical circular platform, despite the inherent limitations of being stuck in the past. While this makes it difficult to predict customer adoption rates and future demand, we believe that the benefits of our Lazy Susan Platform put us in a strong position to capture significant market opportunity.
Expanding Within Our Existing Customer Base
Our large base of customers represents a significant opportunity for further consumption of our Lazy Susan Platform. As of December 31, 2024, our customers included leading technology companies, captains of innovation, aspirational aspirers and restaurants. We believe that there is a substantial opportunity to continue growing our customer base, expand the usage of our enhanced plans by our existing customers, and convert the table spinners to tech-savvy, productive members of society. We plan to continue investing in our sales and marketing teams to increase education and encourage consumption and adoption of our Lazy Susan Platform and plans among our existing customer base.
Acquiring New Customers
We believe there is a substantial opportunity to further grow our customer base by continuing to make significant investments in sales and marketing and increasing brand awareness. Our ability to attract new customers will depend on a number of factors, including our success in promoting our platform, recruiting and scaling our sales and marketing organization and competitive dynamics in our target markets. We intend to flood the airwaves with everything from AM talk radio and cringey Super Bowl commercials to tasteful product placement in critically acclaimed television shows and movies. Our army of zealots will also knock on every door and ring every doorbell.
Investing in Growth and Scaling Our Business
It takes money to make money, and we hope to have a lot of money after this offering.
Key Business Metrics12
In addition to the measures presented in our financial statements, we regularly monitor the following key operational and business metrics to evaluate the growth of our business, measure the effectiveness of our marketing efforts, identify trends, formulate financial forecasts and make strategic decisions.13
Subscription Revenue
Subscription revenue includes revenue from subscriptions of our Basic plan and our enhanced Pro, ProPro and ProProPro plans and excludes revenue from our partnership with retailers selling lazy Susans. Subscription revenue is a key metric for us because we don’t care about the retailers selling physical lazy Susans to innovation haters.
Total Customers
We count the total number of customers at the end of each period. For purposes of determining our customer count, we treat each customer account as a unique customer, and a single organization with multiple businesses, subsidiaries or employees may be counted as multiple customers. We believe that the number of customers is an important indicator of the growth of our business and future revenue trends.
Non-GAAP Financial Measures14
We report our financial results in accordance with generally accepted accounting principles (GAAP) in the United States. However, management believes that the non-GAAP financial measures, adjusted EBITDA and free cash flow provide investors with additional useful information in evaluating our performance.15 Our calculation of these non-GAAP financial measures may differ from similarly titled non-GAAP measures, if any, reported by our peer companies. Our non-GAAP financial measures should not be considered in isolation from, or as substitutes for, financial information prepared in accordance with GAAP.
Management believes that excluding certain items that may vary substantially in frequency and magnitude period-to-period from net income provides useful supplemental measures that assist in evaluating our ability to generate earnings and more readily compare these metrics between past and future periods.
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11 Include one paragraph describing each of the key drivers of your business. Consider including three to five factors, which often will map to the strategies elucidated in the “Business” section. These factors should reflect the key financial drivers of the business that would cause you to meet and/or miss guidance in the next 24 months and the challenges against executing against those drivers. These drivers are often a good place to identify and properly frame business trends and uncertainties where management can give more nuance as to financial impacts of business strategies. For example, for software companies, such drivers may include product consumption volatility due to customer spend optimization in uncertain macro environments; for consumer internet platforms, these drivers may be marketing spend strategy and particular expected impacts on near-term operating expenses and/or gross merchandise value. The descriptions of these drivers as well as their corresponding trends and uncertainties not only guides investors in their forward-modeling of the business but are also important pieces of liability protection (in addition to risk factors).
12 Presenting information in this section (as opposed to in the narrative text of the “MD&A” section) would suggest that the company intends to report on it on a go-forward, quarterly basis. Consider whether to include key business metrics or weave them instead into the broader MD&A narrative.
13 Insert paragraphs and comparative annual tables relating to key operational and business metrics. Note that if non-GAAP metrics will be included as key performance indicators (KPIs), they will need to be preceded by the comparable GAAP measures.
14 A company can choose to include the description of non-GAAP measures it would like to report that are not “key business metrics,” but information it wants the market to have. If non-GAAP financial measures are used, Regulation G requires complementary disclosure of the most directly comparable GAAP financial measure and a reconciliation of the two measures. Item 10(e) of Regulation S-K further requires that such disclosure of the most directly comparable GAAP financial measure be of equal or greater prominence than the corresponding non-GAAP financial measure, and that a statement be included explaining why management believes each non-GAAP financial measure is useful to investors, along with a second statement about the additional purposes for which management uses each non-GAAP financial measure.
15 See Item 10(e) of Regulation S-K, which requires a statement disclosing the reasons why the company’s management believes that presentation of the non-GAAP financial measure provides useful information to investors regarding the registrant’s financial condition and results of operations and, to the extent material, a statement disclosing the additional purposes not already disclosed, if any, for which the registrant’s management uses the non-GAAP financial measure.
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Key business metrics
Public investors will be expecting you to disclose and discuss the key operating metrics, beyond the GAAP financials, that management uses to measure and run the business. While your lead banks will be very helpful in this process, you should have your own perspective on the metrics that will work best for your company over time. Be sure to consider how your business might evolve and how that might affect your key metrics. For at least a few years following the IPO, you want your key metrics disclosures to be as consistent as possible with your IPO disclosures. In addition, consider any non-GAAP financial metrics early and how the SEC may view those during your IPO review process. We have provided just two examples here, but it would not be uncommon to have three to five.
The following table presents a reconciliation of Adjusted EBITDA to net income and Free Cash Flow to net cash provided by (used in) operating activities, the most directly comparable financial measures stated in accordance with GAAP, for the periods presented:
Components of Results of Operations16
Revenue
We generate revenue from subscriptions to our Lazy Susan Platform and from fees earned by our partnerships with retailers selling physical Lazy Susans.
Subscription Revenue
Subscription revenue consists of subscriptions to access our Lazy Susan Platform, including our Basic plan and enhanced Pro, ProPro and ProProPro plans.
Partnership Revenue
Partnership revenue represents fees generated from our partnerships with retailers selling physical Lazy Susans. For each Lazy Susan sold by our partners, we earn a commission.
Cost of Revenue
Cost of subscription revenue primarily includes personnel-related costs, including salaries, bonuses and benefits, and stock-based compensation, for employees associated with customer support and maintenance, infrastructure costs, and allocated overhead. We expect our cost of subscription revenue to increase in absolute dollars as our subscription revenue increases, but decrease as a percentage of revenue as we increase operating leverage.
Gross Profit and Gross Margin
Gross profit is total revenues less total cost of revenues. Gross margin is gross profit expressed as a percentage of total revenues. We expect that our gross margin may fluctuate from period to period as a result of changes in product and services mix, but increase over time as we increase operating leverage and focus on growing our subscription revenue.
Operating Expenses
Our operating expenses consist of sales and marketing, general and administrative and research and development expenses.
Research and Development
Research and development expenses consist primarily of employee-related costs, including salaries, bonuses, benefits, stock-based compensation, other related costs, and an allocation of our general overhead. Also included are non-personnel costs, such as subcontracting, consulting and professional fees for third-party development resources and depreciation costs. Our research and development efforts focus on adding new features and services and maintaining and enhancing functionality of existing services. We expect research and development expense to increase in absolute dollars as we invest in the enhancement of our product offerings.
Sales and Marketing
Sales and marketing expenses consist primarily of employee-related costs, including salaries, bonuses, benefits, stock-based compensation, other related costs, and an allocation of our general overhead. These expenses also include expenditures related to advertising, marketing, promotional events and brand awareness activities. We expect sales and marketing expense to continue to increase in absolute dollars as we enhance our product offerings and implement new marketing strategies.
General and Administrative
General and administrative expenses consist primarily of personnel-related expenses for our finance, legal, human resources, facilities, and administrative personnel, including salaries, benefits, bonuses, and stock-based compensation. General and administrative expenses also include external legal, accounting, and other professional services fees, software and subscription services dedicated for use by our general and administrative functions, and other corporate expenses.
Following the completion of this offering, we expect to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations, and increased expenses for insurance, investor relations and
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16 This section provides investors with insight into what is included in each line of the income statement, as well as known trends and uncertainties. Each of the drivers highlighted in the period-over-period comparisons should be mentioned in this section.
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Non-GAAP financial measures
Non-GAAP financial measures are financial metrics that are not based on the standard accounting principles but are presented by a company to provide additional insight into its performance. These measures often exclude certain items or adjust the reported numbers to better reflect the company’s underlying business performance.
Common examples of non-GAAP financial measures include adjusted earnings, EBITDA, free cash flow and others. Companies use these measures to provide a clearer picture of their financial performance, especially when they believe that standard GAAP measures may not fully represent the economic reality of their business.
While non-GAAP measures can offer valuable insights, the SEC, which regulates the disclosure of financial information by public companies in the United States, has expressed concerns about potential abuse and misleading use of such measures, including that companies often use non-GAAP measures to present a rosier financial picture. To address these concerns, the SEC has established regulations and guidelines for the use of non-GAAP financial measures.
Here are some key points regarding the SEC’s view on non-GAAP financial measures:
- Regulation G and Item 10(e) of Regulation S-K: The SEC has specific rules regarding the use of non-GAAP financial measures. Regulation G requires companies to reconcile any non-GAAP measures to the most directly comparable GAAP measures. Item 10(e) of Regulation S-K provides additional guidance on the presentation of non-GAAP measures in public filings.
- Reconciliation to GAAP measures: When presenting non-GAAP financial measures, companies are generally required to include a reconciliation to the most directly comparable GAAP measures. This reconciliation helps investors understand the differences between the non-GAAP measures and the standard accounting measures.
- Prominence of GAAP measures: The SEC emphasizes that non-GAAP measures should not be presented with greater prominence than GAAP measures. This ensures that investors are not unduly influenced by non-GAAP information.
- Consistency and comparability: Companies are encouraged to be consistent in the calculation and presentation of non-GAAP measures over time. This promotes comparability and helps investors track changes in performance using these metrics.
- Misleading presentation: The SEC prohibits the presentation of non-GAAP measures in a way that is misleading or would obscure the company’s GAAP results.
Companies that fail to comply with these regulations may face SEC enforcement actions or other regulatory consequences. It’s important for investors to carefully review the reconciliation of non-GAAP measures to GAAP measures and consider the context in which these measures are presented when assessing a company’s financial performance.
One of the most common pitfalls of disclosure in registration statements is leading with the non-GAAP financial measure or failing to also present the corresponding GAAP measure. Below are some examples of statements where the SEC has dinged companies for disclosure of non-GAAP measures on a more prominent basis than the comparable GAAP measures:
- Presenting an income statement of non-GAAP measures.
- Presenting a non-GAAP measure before the most directly comparable GAAP measure or omitting the comparable GAAP measure altogether.
- Presenting a ratio where a non-GAAP financial measure is the numerator and/or denominator without also presenting the ratio calculated using the most directly comparable GAAP measure(s) with equal or greater prominence.
- Presenting a non-GAAP measure using a style of presentation (e.g., bold, larger font, etc.) that emphasizes the non-GAAP measure over the comparable GAAP measure.
- Describing a non-GAAP measure as, for example, “record performance” or “exceptional” without at least an equally prominent descriptive characterization of the comparable GAAP measure.
- Presenting charts, tables or graphs of non-GAAP financial measures without presenting charts, tables or graphs of the comparable GAAP measures with equal or greater prominence, or omitting the comparable GAAP measures altogether.
- Providing discussion and analysis of a non-GAAP measure without a similar discussion and analysis of the comparable GAAP measure in a location with equal or greater prominence.
professional services. We expect that our general and administrative expenses will increase in absolute dollars as our business grows but will decrease as a percentage of our revenue over time.
Interest Income
Interest income consists primarily of interest income earned on our cash equivalents.
Other Income (Expense), Net
Other income (expense), net consists primarily of the effect of exchange rates on our foreign currency-denominated asset and liability balances, and interest expense.
Provision for (Benefit from) Income Taxes
Provision for (benefit from) income taxes consists of U.S. federal and state income taxes and income taxes in certain foreign jurisdictions in which we conduct business. We maintain a full valuation allowance on our U.S. federal and state deferred tax assets, as we have concluded that it is more likely than not that the deferred tax assets will not be realized. Our effective tax rate is affected by tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions, as well as non-deductible expenses, such as stock-based compensation, and changes in our valuation allowance.
Results of Operations
Year Ended December 31, 2024 Compared to Year Ended December 31, 202317
Quarterly Results of Operations
The following table sets forth our unaudited quarterly consolidated statements of operations data for each of the quarters indicated. In our opinion, the unaudited quarterly statements of operations data set forth below have been prepared on a basis consistent with our audited financial statements and contain all adjustments, consisting only of normal and recurring adjustments, necessary for the fair statement of such data. Our historical results are not necessarily indicative of the results that may be expected in the future, and the results for any particular quarter are not necessarily indicative of results to be expected for a full year or any other period. The following unaudited quarterly financial data should be read together with our consolidated financial statements and the related notes included elsewhere in this prospectus.
Liquidity and Capital Resources 18
We have financed operations since our inception primarily through sales of subscriptions to our Lazy Susan Platform and the net proceeds we have received from sales of equity securities, as further detailed below.
As of December 31, 2024, our principal sources of liquidity were cash and cash equivalents totaling $ million. Our primary uses of cash include personnel-related expenses, sales and marketing expenses, third-party cloud infrastructure expenses, overhead costs and capital expenditures. As of December 31, 2023, our material cash requirements from known contractual obligations and commitments relate primarily to (i) third-party cloud infrastructure agreements, (ii) operating leases for office facilities, and (iii) subscription arrangements used to facilitate our operations at the enterprise level. These agreements are enforceable and legally binding and specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. For more information regarding our contractual obligations and commitments as of December 31, 2024, see Note 8, “Commitments and Contingencies,” to our consolidated financial statements included elsewhere in this prospectus. Our long-term purchase commitments may be satisfied earlier than the payment periods presented as we continue to grow and scale our business.
We believe that our existing cash and cash equivalents will be sufficient to support our working capital and capital expenditure requirements for at least the next 12 months. For the period beyond the next 12 months, we believe we will be able to meet our working capital and capital expenditure needs from our existing cash and cash equivalents and cash flows from our operating activities. Our future capital requirements will depend on many factors, including our subscription growth rate, subscription renewal activity, including the timing and the amount of cash received from customers, expenditures related to our headcount growth, the expansion of sales and marketing activities, the timing and extent of spending to support development efforts, the introduction of new and enhanced products, and the continuing market adoption of our platform. We may, in the future, enter into arrangements to acquire or invest in complementary businesses, products, and technologies. We may be required to seek additional equity or debt financing. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, operations and financial condition.
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17 To the extent that interim financial statements are required to be included in the S-1, the issuer also needs to provide period-over-period discussion as for the annual financial statements.
To supplement the required annual and quarterly financial statements, issuers often disclose quarterly results for eight to 12 historical quarters in tabular format, together with a brief narrative describing any material changes or trends not otherwise covered in the period-over-period comparisons above. This information may be useful to investors in building their financial models. Together with counsel, issuers should consider the required level of auditor review on each of these historical quarterly periods.
18 Descriptions need to describe (1) internal and external sources of liquidity, any material unused sources of liquid assets and identify any material known trends or demands, commitments or events that will increase or decrease liquidity and (2) commitments for capital expenditures, the purpose of such commitments, anticipated source(s) of funds to meet those expenditures and identify any known trends in capital resources. To the extent that there is substantial doubt about an issuer’s ability to continue as a going concern, discussion should be included in this section.
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Results of operations – overview
This section is intended to provide a period-over-period analysis of each of the lines from the income statement. Issuers are expected to go beyond a simple narrative recitation of information that could otherwise be gleaned from the face of the financials and provide qualitative and quantitative discussion of the factors that contributed to the applicable increase or decrease. This is particularly true with respect to the discussion of revenue, where issuers often provide color on the relative contribution of new versus existing customers, customer verticals, different product lines and geographic distribution, particularly where such factors have different financial profiles (e.g., where different product lines have different margin profiles). Care should be taken to ensure that the presentation supports the segment posture taken by the issuer.
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Stub period analysis
The Fixing America’s Surface Transportation (FAST) Act, for reasons eponymically beyond our comprehension, allows companies to exclude from their S-1 filings with the SEC quarters that would not be required to be included in the final prospectus for the IPO, effectively requiring the company to make a good faith determination of when it will go public and what disclosure would be required at that time. For example, in this Lazy Susan IPO, we are assuming that the company will go public before May 14, 2025, the date after which the prospectus would require the inclusion of results of operations for the first quarter of 2025. If, however, the company was targeting an IPO in July 2025, it would need to include those quarterly financials when ready. If the company did not expect to do the offering until after the stale date (see our Staleness Calendar) for the second quarter of 2025, it could exclude those first quarter financials in its filings with the SEC and just wait to drop in the six-month stub financials through June 30 (this all assumes a December 31 year-end calendar) later in the process. There are (somewhat rare) instances where, despite no legal requirement to include those earlier stub quarters, it makes sense to present them to the SEC in the confidential submission review process, which should be discussed with your accountants and outside legal counsel.
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Quarterly results of operations
While quarterly results of operations covered by audited years or reviewed stub periods in the S-1 are not required to be included, it is quite common for issuers with meaningful revenue to present selected quarterly data for the last two years (i.e., eight quarters) to give investors some insight into the sort of quarterly fluctuations they can expect to see once the company is public. Since these quarterly results are not audited in the same manner as the full fiscal year period, it is important to discuss disclosure expectations early with the underwriters and the auditors. In many cases, it will be important to have the auditors complete additional (SAS100) reviews of these quarters to be presented to ensure that everyone is comfortable with the accuracy of the data presented and the disclosure implications of those quarterly results.
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Liquidity and capital resources
This section is intended to provide qualitative and quantitative discussion of the issuer’s statement of cash flows, with specific disclosure on cash provided by/used in each of operating activities, investing activities and financing activities for each of the periods presented. Unlike the period-over-period discussion of the income statement contemplated above, the discussion of cash flows is typically more factual as to what occurred in each period rather than comparative to other periods.
Contractual Obligations and Commitments
As of December 31, 2024, our commitments consisted of (i) obligations under operating leases for offices and data centers on an undiscounted basis, of which $ million will be due within 12 months and $ million will be due thereafter, (ii) purchase obligations relating primarily to hosting and software and subscription services, of which $ million will be due within 12 months and $ million will be due thereafter, and (iii) debt, including the quarterly interest payments. As of December 31, 2024, the aggregate principal amount of our $ million debt obligation is due in fiscal 2028.
The contractual commitment amounts above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty are not included above. Purchase orders issued in the ordinary course of business are not included above, as our purchase orders represent authorizations to purchase rather than binding agreements.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Quantitative and Qualitative Disclosures about Market Risk19
Critical Accounting Policies and Estimates
Recent Accounting Pronouncements
See Note X to our consolidated financial statements included elsewhere in this prospectus for recently adopted accounting pronouncements and accounting pronouncements not yet adopted.
JOBS Act Accounting Election
We are an “emerging growth company” as defined in the JOBS Act. The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act for the adoption of certain accounting standards until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
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19 To the extent material, there should be a description of how these market risk exposures are managed, changes since the end of the last fiscal year in the primary market risk exposures or how they are managed in future years, and any expected changes going forward.
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Market risk
This section is intended to provide a discussion of market risks that represent a material risk of loss that may impact the issuer’s financial position due to adverse changes in financial market prices and rates. The principal risks covered generally include interest rates, inflation and foreign currency exchange. To the extent material, there should be a description of how these market risk exposures are managed, changes since the end of the last fiscal year in the primary market risk exposures or how they are expected to be managed in future years, along with any expected changes going forward. Specifically, with respect to interest rate risk and foreign exchange risk, a flux analysis should be provided to show the impact of a hypothetical 10% change in interest/foreign exchange rates on the issuer’s cash and cash equivalents and rate-sensitive financial obligations, as applicable.
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Critical accounting policies and estimates
This section is intended to provide a discussion of those significant accounting policies (contained in the issuer’s financial statements) that require substantial management judgements and estimates, and are therefore somewhat more uncertain in their application than accounting policies that are more mechanical in nature. These policies typically include those related to revenue recognition, accounting for acquisitions, goodwill and stock-based compensation expense, although the list may expand or contract based on issuer-specific facts. Issuers must include qualitative and quantitative information necessary to understand the estimation uncertainty and the impact the critical accounting estimate has had or is reasonably likely to have on the company’s financial condition or results of operations, to the extent the information is material and reasonably available. Additionally, the disclosure should include a discussion of why each critical accounting estimate is subject to uncertainty; how much each estimate and/or assumption has changed over a relevant period (to the extent the information is material and reasonably available), and the sensitivity of the reported amounts to the material methods, assumptions and estimates underlying its calculation.
With the exception of stock-based compensation, the disclosure of appliable policies is typically copied directly from the financial statements. The discussion of stock-based compensation in this section is generally more robust than that contained in the financial statements and is intended to support the issuer’s cheap stock analysis, whereby the issuer will need to reconcile for the SEC any material difference between the price at which compensatory equity was granted in the year before the IPO and the anticipated IPO price range.
If the company has granted stock options or other equity awards to its employees within the 12 months prior to filing the registration statement significantly below the listing price before the anticipated IPO, the grant(s) may trigger stock-based compensation expense that could reduce net income and prompt the SEC to ask for a detailed explanation of the change in the company’s valuation in the form of a “cheap stock letter.” With equity being a popular (and necessary) form of compensation for many pre-IPO companies, such “cheap stock” issues may emerge when companies are contemplating an IPO. If a company is issued a cheap stock comment by the SEC, the company should be prepared to explain the price changes over time, relative to material equity grants, especially describing those events that led to significant increases in valuations shortly before the expected IPO. The final common stock valuation should thus be reasonable, compared to the IPO price range.
