Freshworks Inc

(UNAUDITED)

1. Business, Basis of Presentation and Summary of Significant Accounting Policies

Description of Business

Freshworks Inc. (Freshworks, or the Company) is a software development company that provides software-as-a-service (SaaS) products that deliver modern and innovative AI-guided customer and employee service solutions that enable companies of all sizes to drive delightful engagement and increase productivity. The Company was incorporated in Delaware in 2010 and is headquartered in San Mateo, California.

Basis of Presentation and Principles of Consolidation

The accompanying condensed consolidated financial statements have been prepared in conformity 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, and all intercompany balances and transactions have been eliminated in consolidation.

Unaudited Interim Consolidated Financial Statements

The accompanying condensed consolidated balance sheet as of March 31, 2024, the condensed consolidated statements of operations, of comprehensive loss, of cash flows, and of stockholders’ equity for the three months ended March 31, 2024 and 2023, and the related notes to such condensed consolidated financial statements are unaudited. These unaudited condensed consolidated financial statements are presented in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC) and do not include all disclosures normally required in annual consolidated financial statements prepared in accordance with GAAP. 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, 2024 and its results of operations and cash flows for the three months ended March 31, 2024 and 2023. The results of operations for the three months ended March 31, 2024 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 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 year ended December 31, 2023, which was filed with the SEC on February 16, 2024.

Use of Estimates

The preparation of the condensed consolidated financial statements in accordance 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 consolidated financial statements, and the reported amounts of income and expense during the reporting periods. Significant items subject to such estimates and assumptions include, but are not limited to, the following:

•determination of standalone selling price (SSP) for each distinct performance obligation included in customer contracts with multiple performance obligations;

•allowance for doubtful accounts;

•expected benefit period of deferred contract acquisition costs;

•capitalization of internal-use software development costs;

•fair value of goodwill;

•useful lives of long-lived assets;

•valuation of deferred tax assets;

•valuation of employee defined benefit plan and other compensation liabilities;

•fair value of share-based awards; and

•incremental borrowing rate used for operating leases.

Concentrations of Risk

Financial instruments that potentially expose the Company to significant concentration of credit risk consist primarily of cash, cash equivalents, marketable securities, and accounts receivable. The Company’s cash, cash equivalents and marketable securities are generally held with large financial institutions and are in excess of the federally insured limits provided on such deposits. In addition, the Company has cash and cash equivalents held in international bank accounts, which are denominated primarily in Euros, British Pounds, and Indian Rupees.

There were no customers that individually exceeded 10% of the Company’s revenue for the three months ended March 31, 2024 and 2023 or that represented 10% or more of the Company’s consolidated accounts receivable balance as of March 31, 2024.

The Company primarily relies upon its third-party cloud infrastructure partner, Amazon Web Services, to serve customers and operate certain aspects of its services. Any disruption of this cloud infrastructure partner would impact the Company's operations and its business could be adversely impacted.

Significant Accounting Policies

The Company's significant accounting policies are described in the Annual Report on Form 10-K for the year ended December 31, 2023. There have been no significant changes to these policies that have had a material impact on the condensed consolidated financial statements and the related notes for the three months ended March 31, 2024.

Recent Accounting Pronouncements

There have been no recently issued accounting pronouncements that are expected to have a material impact on the Company's condensed consolidated financial statements.

2. Revenue From Contracts with Customers

The Company derives revenue from subscription fees and related professional services. The Company sells subscriptions for its cloud-based solutions directly to customers and indirectly through channel partners through arrangements that are non-cancelable and non-refundable. The Company’s subscription arrangements do not provide customers with the right to take possession of the software supporting the solutions and, as a result, are accounted for as service arrangements. The Company records revenue net of sales or value-added taxes.

Disaggregation of Revenue

The following table summarizes revenue by the Company’s service offerings (in thousands):

See Note 11 for revenue by geographic location.

Deferred Revenue and Remaining Performance Obligations

Deferred revenue consists of customer billings in advance of revenue being recognized from the Company’s subscription and professional services arrangements.

Revenue recognized during the three months ended March 31, 2024 and 2023 from amounts included in deferred revenue at the beginning of these periods was $121.9 million and $93.7 million, respectively.

The aggregate balance of remaining performance obligations as of March 31, 2024 was $435.4 million. The Company expects to recognize $324.5 million of the balance as revenue in the next 12 months and the remainder thereafter. The aggregate balance of remaining performance obligations represents contracted revenue that has not yet been recognized, which includes unearned revenue and unbilled amounts that will be recognized as revenue in future periods.

Deferred Contract Acquisition Costs

The change in the balance of deferred contract acquisition costs during the periods presented is as follows (in thousands):

3. Cash Equivalents and Marketable Securities

Cash equivalents and available-for-sale debt securities consisted of the following as of March 31, 2024 and December 31, 2023 (in thousands):

The following table presents gross unrealized losses and fair values for the securities that were in a continuous unrealized loss position as of March 31, 2024 and December 31, 2023 (in thousands):

The amortized cost and fair value of the available-for-sale debt securities based on contractual maturities are as follows (in thousands):

Accrued interest receivable of $3.9 million and $4.4 million was classified in prepaid expenses and other current assets in the condensed consolidated balance sheet as of March 31, 2024 and December 31, 2023, respectively.

In addition to available-for-sale debt securities, marketable securities also include term bond mutual funds, which are measured at fair value. As of March 31, 2024, we did not have any term bond mutual funds. As of December 31, 2023, the fair value of the term bond mutual funds was $1.6 million. The change in fair value of the term bond mutual funds is recorded in interest and other income, net in the condensed consolidated statements of operations. The realized and unrealized gains recognized in the condensed consolidated statements of operations were not material during the three months ended March 31, 2024 and 2023.

4. Fair Value Measurements

The Company measures its financial assets at fair value each reporting period using a fair value hierarchy that prioritizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1—Inputs are observable and reflect quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2—Inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly.

Level 3—Inputs that are unobservable.

Money market funds and U.S. treasury securities are classified within Level 1 because they are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs. Other debt securities and investments are classified within Level 2 if the investments are valued using model driven valuations which use observable inputs such as quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. Available-for-sale debt securities are held by custodians who obtain investment prices from a third-party pricing provider that incorporates standard inputs in various asset price models.

The Company did not have any assets or liabilities subject to fair value remeasurement on a nonrecurring basis as of March 31, 2024 and December 31, 2023.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table represents the fair value hierarchy for the Company’s financial assets measured at fair value on a recurring basis as of March 31, 2024 and December 31, 2023 (in thousands):

The fair value of derivative assets and liabilities as of March 31, 2024, and all related unrealized and realized gains and losses during the three months ended March 31, 2024, were not material. As of March 31, 2024, the total notional amount of outstanding designated foreign currency forward contracts was $58.9 million.

5. Balance Sheet Components

Property and Equipment, net

The following table summarizes property and equipment, net as of March 31, 2024 and December 31, 2023 (in thousands):

The following table summarizes depreciation expense and internal-use software capitalization and amortization for the three months ended March 31, 2024 and 2023 (in thousands):

As of March 31, 2024 and December 31, 2023, the net carrying value of capitalized internal-use software was $14.3 million and $14.1 million, respectively

Accrued Liabilities

The following table summarizes accrued liabilities as of March 31, 2024 and December 31, 2023 (in thousands):

Noncurrent liabilities include $20.1 million and $22.7 million of long term accrued compensation as of March 31, 2024 and December 31, 2023, respectively.

6. Leases

The Company has operating leases primarily for office space. The leases have remaining lease terms ofone toeight years, some of which include options to extend the lease for up to an additionalsix years. The Company's leases do not contain any residual value guarantee.

The following table presents various components of the lease costs (in thousands):

The weighted-average remaining term of the Company's operating leases and the weighted-average discount rate used to measure the present value of the operating lease liabilities are as follows:

The following table presents supplemental information arising from lease transactions. Cash payments related to short-term leases are not included in the measurement of the operating lease liabilities, and as such, are excluded from the amounts below (in thousands):

As of March 31, 2024, maturities of the operating lease liabilities are as follows (in thousands):

As of March 31, 2024, there were no material future payments related to signed leases that have not yet commenced.

7. Commitments and Contingencies

Other Contractual Commitments

The Company's other contractual commitments primarily consist of third-party cloud infrastructure agreements and service subscription purchase arrangements used to support operations at the enterprise level. As of March 31, 2024, other contractual commitments totaling $313.9 million remain outstanding under these agreements through 2028.

Litigation and Loss Contingencies

On November 1, 2022, a purported Company stockholder filed a securities class action complaint in the U.S. District Court for the Northern District of California against the Company, certain of its current officers and directors, and underwriters of the Company's initial public offering (IPO). On April 14, 2023, the court-appointed lead plaintiff filed a consolidated amended class action complaint. The complaint alleges that defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 by making material misstatements or omissions in offering documents filed in connection with the IPO. The complaint seeks unspecified damages, interest, fees, costs, and rescission on behalf of purchasers and/or acquirers of common stock issued in the IPO. On September 28, 2023, the court issued an order granting in part and denying in part defendants' motion to dismiss. The Company and the other defendants intend to vigorously defend against the remaining claims in this action.

On March 20, 2023, a purported stockholder derivative complaint was filed in the U.S. District Court for the Northern District of California. The complaint names as defendants the Company’s current directors, as well as the Company, as nominal defendant, and asserts state and federal claims based on some of the same alleged misstatements as the securities class action complaint. The derivative complaint seeks unspecified damages, attorneys’ fees, and other costs. On June 21, 2023, the court stayed the case in light of the pending securities class action. On October 16, 2023, the court extended the stay of the case in light of the pending securities class action. The Company and the other defendants intend to vigorously defend against the claims in this action.

From time to time, the Company has been and may be in the future subject to other legal proceedings, claims, investigations, and government inquiries (collectively, legal proceedings) in the ordinary course of business. It has received and may receive claims from third parties asserting, among other things, infringement of their intellectual property rights, defamation, labor and employment rights, privacy, and contractual rights. There are no currently pending legal proceedings that the Company believes will have a material adverse impact on the business or condensed consolidated financial statements.

Indemnifications

In the ordinary course of business, the Company enters into contractual arrangements under which the Company agrees to provide indemnification of varying scope and terms to customers, business partners, and other parties with respect to certain matters, including losses arising out of intellectual property infringement claims made by third parties, if the Company has violated applicable laws, if the Company is negligent or commits acts of willful misconduct, and other liabilities with respect to its products and services and its business. In these circumstances, payment is typically conditional on the other party making a claim pursuant to the procedures specified in the particular contract. The Company also indemnifies certain of its officers, directors and certain key employees while they are serving in good faith in their respective capacities. To date, the Company has not incurred any material costs as a result of such indemnifications and has not accrued any liabilities related to such obligations in its condensed consolidated financial statements.

8. Stockholders' Equity and Stock-Based Compensation

Equity Compensation Plans

In August 2021, the board of directors (the Board) adopted the 2021 Equity Incentive Plan (the 2021 Plan) and the 2021 Employee Stock Purchase Plan (ESPP), effective upon the IPO. Pursuant to the 2021 Plan, the Board may grant incentive stock options to purchase shares of the Company’s common stock, non-statutory stock options to purchase shares of the Company’s common stock, stock appreciation rights, restricted stock, restricted stock units (RSUs), performance awards (PRSUs) and other awards. The ESPP enables eligible employees to purchase shares of the Company's Class A common stock. Both the 2021 Plan and ESPP include an automatic increase to their shares reserve on January 1 of each year as set forth in the respective plan documents.

In August 2022, the Compensation Committee of the Board adopted the 2022 Inducement Plan (the Inducement Plan) in accordance with Listing Rule 5635(c)(4) of the Nasdaq Stock Market. Under the Inducement Plan, nonstatutory stock options, stock appreciation rights, restricted stock, RSUs, PRSUs and other awards may be granted as an inducement material to an eligible person's entering into employment with the Company.

Shares of common stock outstanding and reserved for future issuance were as follows (in thousands):

(1)Outstanding shares include the Executive PRSUs and 2024 CEO Award, as discussed below, based on 100% achievement of target performance.

2021 Employee Stock Purchase Plan

Under the ESPP, the price at which common stock is purchased is equal to 85% of the fair market value of a share of the Company’s common stock on the first day of the offering period or the applicable purchase date, whichever is lower. The fair market value of common stock will generally be the closing sales price on the determination date. The ESPP provides an offering period of 24 months, with four purchase periods that are generallysix months long and end on May 15 and November 15 of each year. During the three months ended March 31, 2024 and March 31, 2023, the Company didnot issue any shares under the ESPP.

The ESPP also includes a reset provision for the purchase price if the fair market value of a share of the Company's common stock on the first day of any purchase period is less than or equal to the fair market value of a share of the Company's common stock on the first day of an ongoing offering. If the reset provision is triggered, a new 24-month offering period begins. The reset provision under the ESPP was triggered on May 16, 2022, and again on November 16, 2022. Each triggering of the reset provision was considered a modification in accordance with ASC 718, Stock Based Compensation, with the modification charge recognized on a straight-line basis over the new offering period. The previous modifications did not have a material effect on the Company's stock-based compensation expense during the three months ended March 31, 2024 and March 31, 2023.

Stock-based compensation expense related to ESPP was $1.2 million and $2.0 million for the three months ended March 31, 2024 and 2023, respectively.

Stock Options

Stock options are generally granted with an exercise price equal to the fair market value of a share of common stock on the date of grant, have a 10-year contractual term, and vest over afour-year period.

(1)Aggregate intrinsic value for stock options represents the difference between the exercise price and the per share fair value of the Company’s common stock as of the end of the period, multiplied by the number of stock options outstanding, exercisable, or vested.

Restricted Stock Units

RSUs are granted at fair market value at the date of the grant and typically vest over afour-year period.

RSU activity, which includes PRSUs, during the three months ended March 31, 2024 was as follows:

(1) During the three months ended March 31, 2024, shares granted includes 0.9 million shares granted to the CEO as long-term equity incentive award accounted for as a modification with a weighted average grant date fair value of $69.78 per share. Refer to the CEO Awards discussion below.

(2) During the three months ended March 31, 2024, total shares that vested were 2.8 million, of which 1.0 million were withheld for tax purposes.

(3) Shares forfeited includes the cancellation of the CEO Performance Award consisting of 6,000,000 PRSUs discussed in the CEO Awards section below.

The total fair value of vested RSUs during the three months ended March 31, 2024 and 2023 was $45.1 million and $39.0 million, respectively.

Performance-Based Awards

CEO Awards

In September 2021, the Board approved a grant of 6,000,000 PRSUs to the Company's CEO with a time-based service condition beginning January 1, 2022, and a market condition involving five separate stock price hurdles ranging from $70.00 to $200.00 per share for each of thefive vesting tranches (CEO Performance Award). The

CEO Performance Award had a total grant date fair value of $131.0 million. During the three months ended March 31, 2024 and 2023, the Company recognized $4.6 million and $6.9 million of stock-based compensation expense related to this CEO Performance Award.

As a result of macroeconomic conditions outside the control of the Company’s leadership team, thefive separate stock price hurdles were considered by the Board to be too high for the CEO Performance Award to have the retention value expected at the time the award was granted. In February 2024, the Board approved the cancellation of the CEO Performance Award and the grant of a 2024 CEO Award with a fair value of $19 million, both effective March 1, 2024.

The Company accounted for the 2024 CEO Award as a modification. There wereno incremental costs recognized as a result of the modification and the remaining unrecognized stock-based compensation expense from the CEO Performance Award of $61.9 million will be recognized over the vesting period of the new 2024 CEO Award. The 2024 CEO Award comprised of 70% time-based RSUs that vest quarterly over four years and 30% PRSUs with the same terms as the Executive PRSUs discussed below. For the three months ended March 31, 2024, the Company recognized $1.9 million of stock-based compensation expense related to the 2024 CEO Award.

Executive PRSUs

In February 2024, the Board approved PRSUs to be granted to certain members of the executive team (Executive PRSUs), subject to service and performance-based vesting conditions. The performance-based vesting conditions include revenue and free cash flow targets over the performance period from January 1 to December 31, 2024, and vest over 3 years from the grant date.70% and 30% of each Executive PRSU award will be earned based on the Company’s achievement of revenue and free cash flow targets, respectively. The performance targets allow the Company's executives to earn up to a maximum of 177.5% of target performance in the aggregate for significant outperformance.

The fair value of each PRSU is based on the fair value of the Company's common stock on the date of grant. Stock-based compensation associated with these Executive PRSUs is recognized using the accelerated attribution method over the requisite service period, based on the Company's periodic assessment of the probability that the performance will be achieved. For the three months ended March 31, 2024, the Company recognized $0.6 million of stock-based compensation expense related to the Executive PRSUs.

Stock-Based Compensation

Total stock-based compensation expense recorded for the three months ended March 31, 2024 and 2023 was as follows (in thousands):

(1) Stock-based compensation expense recorded to research and development in the consolidated statements of operations excludes amounts that were capitalized for internal-use software.

(2) General and administrative expense includes $13.5 million and $13.8 million of stock-based compensation expense for the three months ended March 31, 2024 and 2023, respectively, associated with RSUs and PRSUs granted to our CEO.

As of March 31, 2024, unrecognized stock-based compensation expense related to unvested stock-based awards was as follows (in thousands, except for period data):

9. Net Loss Per Share

Basic net loss per share attributable to common stockholders is computed by dividing the net loss by the number of weighted-average outstanding shares of common stock. Diluted net loss per share attributable to common stockholders is determined by giving effect to all potential common equivalents during the reporting period, unless including them yields an antidilutive result. The Company considers its stock options and RSUs as potential common stock equivalents, but excluded them from the computation of diluted net loss per share attributable to common stockholders for the three months ended March 31, 2024 and 2023, as their effect was antidilutive.

The rights, including the liquidation and dividend rights, of the holders of Class A and Class B common stock are identical, except with respect to voting, conversion, and transfer rights. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis to each class of common stock and the resulting basic and diluted net loss per share attributable to common stockholders, are the same for both Class A and Class B common stock on both an individual and combined basis.

The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders (in thousands, except per share data):

The following table summarizes the potential common equivalents that were excluded from the computation of diluted net loss per share attributable to Class A and Class B common stockholders for the periods presented (in thousands):

10. Income Taxes

The Company's quarterly tax provision and estimates of its annual effective tax rate are estimates due to several factors, including changes in pre-tax income (or loss), the mix of jurisdictions to which such income relates, discrete items (such as windfalls or shortfalls from stock-based compensation) in the period offset with our valuation allowance. The provision for income taxes was$4.0 million each for the three months ended March 31, 2024 and 2023 as profits before tax for foreign jurisdictions remained relatively flat for the three months ended March 31, 2024 and 2023.

11. Geographic Information

Revenue by geographic location is determined based on the customers' billing address. The following table summarizes revenue by geographic location (in thousands):

Revenue from North America consists primarily of revenue from the United States. For the three months ended March 31, 2024 and 2023, revenue generated from the United States was $65.9 million and $53.9 million, or approximately 40% and 39% of total consolidated revenue, respectively. The United Kingdom, included within Europe, Middle East and Africa in the table above, contributed $21.2 million and $17.1 million, or approximately 13% and 12% of total consolidated revenue for the three months ended March 31, 2024 and 2023, respectively.

Long-lived assets consist primarily of property, plant and equipment and ROU assets. The following table summarizes long-lived assets by geographic information (in thousands):

Long-lived assets in North America are primarily located in the United States, and long-lived assets in Asia Pacific are primarily located in India.

12. Subsequent Event

On April 30, 2024, the Company entered into a definitive agreement to acquire all outstanding shares of D42 Parent, Inc. ("Device42"), an IT asset management company, for $230 million, on a cash-free, debt-free basis, subject to customary purchase price adjustments. The acquisition will further strengthen the Company’s IT solutions for midmarket and enterprise companies and is subject to regulatory approvals and other customary closing conditions.