SEC Filing | Confluent, Inc.

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10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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 March 31, 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: 001-40526

CONFLUENT, INC.

(Exact Name of Registrant as Specified in its Charter)


Delaware	47-1824387
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
899 W. Evelyn Avenue Mountain View, California	94041
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (800) 439-3207

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Class A Common Stock, par value $0.00001 per share

CFLT

The Nasdaq Stock Market LLC

(Nasdaq Global Select 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.

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

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

As of April 28, 2022, there were 125,926,055 shares of the registrant’s Class A common stock and 152,416,050 shares of the registrant's Class B common stock, each with a par value of $0.00001 per share, outstanding.

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TABLE OF CONTENTS


PART I. Financial Information
	ITEM 1. Financial Statements (unaudited)		3
		Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021	3
		Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2022 and 2021	5
		Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2022 and 2021	6
		Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Three Months Ended March 31, 2022 and 2021	7
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021	8
		Notes to Condensed Consolidated Financial Statements	10
	ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
	ITEM 3. Quantitative and Qualitative Disclosures about Market Risk		36
	ITEM 4. Controls and Procedures		37
PART II. Other Information
	ITEM 1. Legal Proceedings		38
	ITEM 1A. Risk Factors		38
	ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds		86
	ITEM 3. Defaults Upon Senior Securities		86
	ITEM 4. Mine Safety Disclosures		86
	ITEM 5. Other Information		86
	ITEM 6. Exhibits		87
Signatures			88

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SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and 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 because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “toward,” “will,” “would,” or the negative of these words or other similar terms or expressions. These forward-looking statements include, but are not limited to, statements concerning the following:

•

our expectations regarding our revenue, revenue mix, expenses, and other results of operations;

•

our ability to acquire new customers and successfully retain existing customers;

•

our ability to increase consumption of our offering and expand features and functionalities;

•

our ability to achieve or sustain our profitability;

•

future investments in our business, our anticipated capital expenditures, and our estimates regarding our capital requirements;

•

the costs and success of our sales and marketing efforts and our ability to promote our brand;

•

our growth strategies;

•

the estimated addressable market opportunity;

•

our reliance on key personnel and our ability to identify, recruit, and retain skilled personnel;

•

our ability to effectively manage our growth, including international expansion;

•

our ability to protect our intellectual property rights and any costs associated therewith;

•

the effects of the COVID-19 pandemic or other public health crises;

•

our ability to compete effectively with existing competitors and new market entrants; and

•

the growth rates of the markets in which we compete.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available. These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, including risks described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Other sections of this Quarterly Report on Form 10-Q may include additional factors that could harm our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in, or implied by, any forward-looking statements.

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You should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report or to conform these statements to actual results or to changes in our expectations. You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed as exhibits to this report with the understanding that our actual future results, levels of activity, performance, and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

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

Where You Can Find More Information

Investors and others should note that we may announce material business and financial information to our investors using our Investor Relations website (investors.confluent.io), our filings with the Securities and Exchange Commission (“SEC”), webcasts, press releases, public conference calls, and blogs published on our website. We use these mediums, including our website, to communicate with investors and the general public about our company, our products, and other issues. It is possible that the information that we make available on our website may be deemed to be material information. We therefore encourage investors and others interested in our company to review the information that we make available on our website.

We also use our Twitter, LinkedIn, and Facebook accounts as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these accounts, in addition to following our SEC filings, webcasts, press releases, public conference calls, and blogs published on our website. This list may be updated from time to time. The information we post through these channels is not a part of this Quarterly Report on Form 10-Q. These channels may be updated from time to time on our investor relations website.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

Confluent, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(unaudited)


	March 31, 2022		December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	1,047,589	$	1,375,932
Marketable securities		943,048		640,085
Accounts receivable, net		124,504		137,491
Deferred contract acquisition costs		28,433		27,646
Prepaid expenses and other current assets		51,675		44,919
Total current assets		2,195,249		2,226,073
Property and equipment, net		18,486		14,428
Operating lease right-of-use assets		34,814		37,281
Deferred contract acquisition costs, non-current		54,001		51,178
Other assets, non-current		14,951		13,769
Total assets	$	2,317,501	$	2,342,729
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	8,151	$	7,591
Accrued expenses and other liabilities		71,924		98,974
Operating lease liabilities		8,540		9,236
Deferred revenue		235,119		220,920
Liability for early exercise of unvested stock options		6,995		11,467
Total current liabilities		330,729		348,188
Operating lease liabilities, non-current		29,674		31,645
Deferred revenue, non-current		30,565		25,557
Convertible senior notes, net		1,081,637		1,080,701
Other liabilities, non-current		8,827		6,357
Total liabilities		1,481,432		1,492,448
Commitments and contingencies (Note 7)

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	March 31, 2022			December 31, 2021
Stockholders’ equity:
Preferred stock, par value of $0.00001 per share; 10,000,000 shares authorized as of March 31, 2022 and December 31, 2021; 0 shares issued and outstanding as of March 31, 2022 and December 31, 2021		-			-
Class A common stock, par value of $0.00001 per share; 1,000,000,000 shares authorized as of March 31, 2022 and December 31, 2021; 125,370,709 and 116,728,968 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively		1			1
Class B common stock, par value of $0.00001 per share; 500,000,000 shares authorized as of March 31, 2022 and December 31, 2021; 152,666,053 and 155,072,914 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively		2			2
Additional paid-in capital		1,703,449			1,599,962
Accumulated other comprehensive loss		(5,542	)		(830	)
Accumulated deficit		(861,841	)		(748,854	)
Total stockholders’ equity		836,069			850,281
Total liabilities and stockholders’ equity	$	2,317,501		$	2,342,729

See accompanying notes to the condensed consolidated financial statements.

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Confluent, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

(unaudited)


	Three Months Ended March 31,
	2022			2021
Revenue:
Subscription	$	113,920		$	67,992
Services		12,219			9,036
Total revenue		126,139			77,028
Cost of revenue:
Subscription		33,603			15,757
Services		12,174			8,081
Total cost of revenue		45,777			23,838
Gross profit		80,362			53,190
Operating expenses:
Research and development		57,661			24,313
Sales and marketing		106,702			58,509
General and administrative		27,481			15,512
Total operating expenses		191,844			98,334
Operating loss		(111,482	)		(45,144	)
Interest income		566			844
Other expense, net		(1,382	)		(336	)
Loss before income taxes		(112,298	)		(44,636	)
Provision for (benefit from) income taxes		689			(110	)
Net loss	$	(112,987	)	$	(44,526	)
Net loss per share, basic and diluted	$	(0.41	)	$	(0.41	)
Weighted-average shares used to compute net loss per share, basic and diluted		272,890,829			108,731,605

See accompanying notes to the condensed consolidated financial statements.

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Confluent, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)


	Three Months Ended March 31,
	2022			2021
Net loss	$	(112,987	)	$	(44,526	)
Other comprehensive loss:
Unrealized loss on marketable securities		(4,712	)		(185	)
Other comprehensive loss		(4,712	)		(185	)
Total comprehensive loss	$	(117,699	)	$	(44,711	)

See accompanying notes to the condensed consolidated financial statements.

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Confluent, Inc.

Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(in thousands, except share data)

(unaudited)


	Three Months Ended March 31, 2022
	Class A and Class B Common Stock				Additional Paid-In		Accumulated Other Comprehensive			Accumulated			Total Stockholders’
	Shares		Amount		Capital		Loss			Deficit			Equity
Balances as of January 1, 2022		271,801,882	$	3	$	1,599,962	$	(830	)	$	(748,854	)	$	850,281
Issuance of common stock upon early exercise of unvested options, net of repurchases		35,623		-		-		-			-			-
Vesting of early exercised options		-		-		5,701		-			-			5,701
Issuance of common stock upon exercise of vested options		5,026,565		-		16,405		-			-			16,405
Vesting of restricted stock units		437,875		-		-		-			-			-
Issuance of common stock under employee stock purchase plan		734,817		-		22,485		-			-			22,485
Stock-based compensation		-		-		58,896		-			-			58,896
Other comprehensive loss		-		-		-		(4,712	)		-			(4,712	)
Net loss		-		-		-		-			(112,987	)		(112,987	)
Balances as of March 31, 2022		278,036,762	$	3	$	1,703,449	$	(5,542	)	$	(861,841	)	$	836,069


	Three Months Ended March 31, 2021
	Redeemable Convertible Preferred Stock				Convertible Founder Stock				Common Stock				Additional Paid-In		Accumulated Other Comprehensive			Accumulated			Total Stockholders’
	Shares		Amount		Shares		Amount		Shares		Amount		Capital		Income			Deficit			Deficit
Balances as of January 1, 2021		115,277,850	$	574,634		635,818	$	-		109,447,843	$	1	$	99,575	$	228		$	(406,053	)	$	(306,249	)
Issuance of common stock upon early exercise of unvested options, net of repurchases		-		-		-		-		1,128,365		-		-		-			-			-
Vesting of early exercised options		-		-		-		-		-		-		1,208		-			-			1,208
Issuance of common stock upon exercise of vested options		-		-		-		-		2,875,314		-		6,215		-			-			6,215
Stock-based compensation		-		-		-		-		-		-		13,451		-			-			13,451
Other comprehensive loss		-		-		-		-		-		-		-		(185	)		-			(185	)
Net loss		-		-		-		-		-		-		-		-			(44,526	)		(44,526	)
Balances as of March 31, 2021		115,277,850	$	574,634		635,818	$	-		113,451,522	$	1	$	120,449	$	43		$	(450,579	)	$	(330,086	)

See accompanying notes to the condensed consolidated financial statements.

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Confluent, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	Three Months Ended March 31,
	2022			2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(112,987	)	$	(44,526	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		1,250			787
Net amortization of premiums or discounts on marketable securities		705			505
Amortization of debt issuance costs		936			-
Amortization of deferred contract acquisition costs		8,470			5,535
Non-cash operating lease costs		2,275			2,856
Stock-based compensation, net of amounts capitalized		57,369			13,353
Deferred income taxes		(4	)		(567	)
Other		204			439
Changes in operating assets and liabilities:
Accounts receivable		12,782			5,734
Deferred contract acquisition costs		(12,080	)		(10,866	)
Prepaid expenses and other assets		(7,985	)		(2,355	)
Accounts payable		177			839
Accrued expenses and other liabilities		(22,853	)		1,433
Operating lease liabilities		(2,497	)		(2,721	)
Deferred revenue		19,207			9,565
Net cash used in operating activities		(55,031	)		(19,989	)
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalization of internal-use software costs		(2,509	)		(596	)
Purchases of marketable securities		(403,883	)		(41,688	)
Maturities of marketable securities		95,545			56,763
Purchases of property and equipment		(887	)		(643	)
Other		-			9
Net cash (used in) provided by investing activities		(311,734	)		13,845
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock upon exercise of vested options		16,436			6,215
Proceeds from issuance of common stock upon early exercise of unvested options, net of repurchases		333			7,398
Payments of deferred offering costs		-			(153	)
Payments of debt issuance costs for convertible senior notes		(786	)		-
Proceeds from issuance of common stock under employee stock purchase plan		22,485			-
Net cash provided by financing activities		38,468			13,460
Effect of exchange rate changes on cash, cash equivalents, and restricted cash		(46	)		(8	)
Net (decrease) increase in cash, cash equivalents, and restricted cash		(328,343	)		7,308
Cash, cash equivalents, and restricted cash at beginning of period		1,376,682			37,806
Cash, cash equivalents, and restricted cash at end of period	$	1,048,339		$	45,114

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	Three Months Ended March 31,
	2022		2021
Reconciliation of cash, cash equivalents, and restricted cash within the consolidated balance sheets to the amounts shown above:
Cash and cash equivalents	$	1,047,589	$	44,097
Restricted cash included in other assets, current and non-current		750		1,017
Total cash, cash equivalents, and restricted cash	$	1,048,339	$	45,114
Supplementary cash flow disclosures:
Cash paid for:
Income taxes	$	712	$	524
Non-cash investing and financing activities:
Stock-based compensation capitalized as internal-use software costs	$	1,527	$	98
Vesting of early exercised stock options	$	5,701	$	1,208
Unpaid deferred offering costs	$	-	$	1,340

See accompanying notes to the condensed consolidated financial statements.

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Confluent, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Organization and Description of Business

Description of Business

Confluent, Inc. (“Confluent” or the “Company”) created a data infrastructure platform focused on data in motion. Confluent’s platform allows customers to connect their applications, systems, and data layers and can be deployed either as a self-managed software offering, Confluent Platform, or as a fully-managed cloud-native software-as-a-service (“SaaS”) offering, Confluent Cloud. Confluent also offers professional services and education services. The Company was incorporated in the state of Delaware in September 2014 and is headquartered in California with various other global office locations.

2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on February 24, 2022 (the “Annual Report”).

In management’s opinion, the unaudited condensed consolidated financial statements have been prepared on a basis consistent with the annual consolidated financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of March 31, 2022 and the results of operations and cash flows for the three months ended March 31, 2022 and 2021. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the full year or any other future interim or annual period.

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Such estimates include, but are not limited to, the standalone selling price for each distinct performance obligation included in customer contracts, deferred contract acquisition costs and their period of benefit, valuation of stock-based awards, the fair value of the Company’s common stock prior to its initial public offering (“IPO”) in June 2021, capitalization and estimated useful life of internal-use software, the incremental borrowing rate used to measure operating lease liabilities, and accounting for income taxes.

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The Company bases its estimates on historical and anticipated results, trends, and various other assumptions that it believes are reasonable under the circumstances. Estimates and assumptions about future events and their effects, including the impact of the COVID-19 pandemic, cannot be determined with certainty and therefore require the exercise of judgment. Actual results could differ from those estimates and any such differences may be material to the Company’s condensed consolidated financial statements.

Significant Accounting Policies

Other than the policies described below, there were no significant changes to the Company’s significant accounting policies disclosed in “Note 2 – Basis of Presentation and Summary of Significant Accounting Policies” of the Company’s Annual Report.

Marketable Securities

The Company’s marketable securities consist of corporate notes and bonds, commercial paper, U.S. agency obligations, U.S. treasury securities, and municipal bonds. The Company determines the appropriate classification of its marketable securities at the time of purchase and reevaluates such determination at each balance sheet date. The Company has classified and accounted for its marketable securities as available-for-sale securities. The Company may sell these securities at any time for use in its current operations or for other purposes, even prior to maturity. As a result, the Company classifies its marketable securities within current assets.

Available-for-sale securities are recorded at fair value each reporting period, and are adjusted for amortization of premiums and accretion of discounts to maturity and such amortization and accretion are included in other income (expense), net in the consolidated statements of operations. Realized gains and losses are determined based on the specific identification method and are reported in other income (expense), net in the condensed consolidated statements of operations. Unrealized gains are reported as a separate component of accumulated other comprehensive income (loss) on the condensed consolidated balance sheets until realized.

For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell the security or it is more likely than not that the Company will be required to sell the security before the recovery of its entire amortized cost basis. If either of these criteria is met, the security’s amortized cost basis is written down to fair value through other income (expense), net in the condensed consolidated statements of operations. If neither of these criteria is met, the Company evaluates whether the decline in fair value below amortized cost is due to credit or non-credit related factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and any adverse conditions specifically related to the security, among other factors. Credit related unrealized losses are recognized as an allowance for expected credit losses of available-for-sale debt securities on the condensed consolidated balance sheets with a corresponding charge in other income (expense), net in the condensed consolidated statements of operations. Non-credit related unrealized losses are included in accumulated other comprehensive income (loss).

Accounts Receivable and Allowance for Credit Losses

Accounts receivable on the condensed consolidated balance sheets consists of trade accounts receivable and unbilled receivables, net of an allowance for expected credit losses. Trade accounts receivable are stated at the invoiced amount and consist of amounts currently due from customers. Unbilled receivables represent revenue recognized in excess of invoiced amounts for the Company’s unconditional right to consideration in exchange for goods or services that the Company has transferred to the customer, such that only the passage of time is required before payment of consideration is due. The unbilled receivables balance was $38.1 million and $32.3 million as of March 31, 2022 and December 31, 2021, respectively.

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Accounts receivable are reduced by an allowance for expected credit losses. The allowance for expected credits losses represents the best estimate of lifetime expected credit losses against the existing accounts receivable, inclusive of unbilled receivables, based on certain factors including the age of the receivable balance, past collection experience with the customer, historical write-off experience, credit quality of the customer, current economic conditions, and reasonable and supportable forecasts of future economic conditions. Accounts receivable deemed uncollectible are written off against the allowance for expected credit losses when identified and the Company no longer actively pursues collection of the receivable. The Company’s allowance for expected credit losses was not material as of March 31, 2022 and December 31, 2021. Additions to and write-offs against the allowance for expected credit losses were not material for the three months ended March 31, 2022 and 2021.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Credit Losses: In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments