Quarterly Report (10-q)

Date : 12/16/2019 @ 9:09PM
Source : Edgar (US Regulatory)
Stock : Zuora Inc (ZUO)
Quote : 8.45  -0.33 (-3.76%) @ 9:00PM
After Hours
Last Trade
Last $ 8.54 ▲ 0.09 (1.07%)

Quarterly Report (10-q)

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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 October 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 001-38451
_____________________________ 
Zuora, Inc.
(Exact name of registrant as specified in its charter)
_____________________________ 
 
Delaware   20-5530976
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification Number)

3050 South Delaware Street, Suite 301,
San Mateo, California
  94403
(Address of principal executive offices)   (Zip Code)
(800) 425-1281
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
_____________________________ 

Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name on each exchange on which registered
Class A common stock, $0.0001 par value per share ZUO New York Stock Exchange

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

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

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




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

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

As of November 30, 2019, the Registrant had approximately 93.7 million shares of Class A common stock and 19.5 million shares of Class B common stock outstanding.




Page   
PART I.
2
Item 1.
2
2
3
4
6
7
Item 2.
24
Item 3.
41
Item 4.
41
PART II.
43
Item 1.
43
Item 1A.
43
Item 2.
74
Item 6.
75
76




SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q (Form 10-Q) to “Zuora,” “Company,” “our,” “us,” and “we” refer to Zuora, Inc. and, where appropriate, its consolidated subsidiaries.
This Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. All statements contained in this Form 10-Q, other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, market growth, and our objectives for future operations, are forward-looking statements. Words such as “believes,” “may,” “will,” “estimates,” “potential,” “continues,” “anticipates,” “intends,” “expects,” “could,” “would,” “projects,” “plans,” “targets,” and variations of such words and similar expressions are intended to identify forward-looking statements.
Forward-looking statements contained in this Form 10-Q include, but are not limited to, statements about our expectations regarding:
trends in revenue, cost of revenue, and gross margin;
our investments in our platform and the cost of third-party hosting fees;
trends in operating expenses, including research and development expense, sales and marketing expense, and general and administrative expense, and expectations regarding these expenses as a percentage of revenue;
our existing cash and cash equivalents, investment balances, funds available under our loan and security agreement, and cash provided by subscriptions to our platform and related professional services being sufficient to meet our working capital and capital expenditure needs for at least the next 12 months; and
other statements regarding our future operations, financial condition, and prospects and business strategies.
Such forward-looking statements are based on our expectations as of the date of this filing and are subject to a number of risks, uncertainties and assumptions, including but not limited to, risks detailed in the “Risk Factors” section of this Form 10-Q. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission (SEC) that disclose risks and uncertainties that may affect our business. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all risks, 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 materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and circumstances discussed in this Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance or achievements. In addition, the forward-looking statements in this Form 10-Q are made as of the date of this filing, and we do not undertake, and expressly disclaim any duty, to update such statements for any reason after the date of this Form 10-Q or to conform statements to actual results or revised expectations, except as required by law.

1


PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
ZUORA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
  October 31, 2019 January 31, 2019
As Adjusted¹
Assets
Current assets:
Cash and cash equivalents $ 64,621    $ 67,940   
Short-term investments 105,777    107,908   
Accounts receivable, net of allowance for doubtful accounts of $2,622 and $2,522 as of October 31, 2019 and January 31, 2019, respectively 60,073    58,258   
Restricted cash, current portion —    400   
Deferred commissions, current portion 8,981    8,616   
Prepaid expenses and other current assets 16,157    14,632   
Total current assets 255,609    257,754   
Property and equipment, net 28,392    19,625   
Restricted cash, net of current portion —    1,684   
Purchased intangibles, net 6,043    7,396   
Deferred commissions, net of current portion 18,044    18,664   
Goodwill 17,632    17,632   
Other assets 5,569    3,292   
Total assets $ 331,289    $ 326,047   
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable $ 1,719    $ 1,512   
Accrued expenses and other current liabilities 17,158    14,210   
Accrued employee liabilities 27,227    22,603   
Debt, current portion 4,447    2,963   
Deferred revenue, current portion 94,010    86,784   
Total current liabilities 144,561    128,072   
Debt, net of current portion 7,187    10,494   
Deferred revenue, net of current portion 209    112   
Deferred tax liabilities 1,877    1,877   
Other long-term liabilities 9,712    3,678   
Total liabilities 163,546    144,233   
Commitments and contingencies (note 16)
Stockholders’ equity:
Class A common stock    
Class B common stock    
Additional paid-in capital 534,642    488,776   
Accumulated other comprehensive income 186    481   
Accumulated deficit (367,096)   (307,454)  
Total stockholders’ equity 167,743    181,814   
Total liabilities and stockholders’ equity $ 331,289    $ 326,047   
(1) See Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements for a summary of adjustments related to the adoption of Topic 606.
See notes to unaudited condensed consolidated financial statements.
2


ZUORA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands, except per share data)
(unaudited) 
  Three Months Ended
October 31,
Nine Months Ended
October 31,
  2019 2018 2019 2018
As Adjusted¹ As Adjusted¹
Revenue:
Subscription $ 54,038    $ 43,083    $ 151,996    $ 119,849   
Professional services 17,784    18,273    53,668    51,802   
Total revenue 71,822    61,356    205,664    171,651   
Cost of revenue:
Subscription 13,858    10,987    38,589    31,273   
Professional services 20,443    19,190    61,445    53,569   
Total cost of revenue 34,301    30,177    100,034    84,842   
Gross profit 37,521    31,179    105,630    86,809   
Operating expenses:
Research and development 17,903    14,282    53,662    39,667   
Sales and marketing 28,027    24,849    80,818    71,008   
General and administrative 10,597    9,579    32,366    27,553   
Total operating expenses 56,527    48,710    166,846    138,228   
Loss from operations (19,006)   (17,531)   (61,216)   (51,419)  
Interest and other income (expense), net 1,190    633    2,294    (1,218)  
Loss before income taxes (17,816)   (16,898)   (58,922)   (52,637)  
Income tax provision (421)   (326)   (720)   (921)  
Net loss (18,237)   (17,224)   (59,642)   (53,558)  
Comprehensive loss:
Foreign currency translation adjustment (141)   (679)   (416)   (341)  
Unrealized gain (loss) on available-for-sale securities 75    (32)   121    (32)  
Comprehensive loss $ (18,303)   $ (17,935)   $ (59,937)   $ (53,931)  
Net loss per share attributable to common stockholders, basic and diluted $ (0.16)   $ (0.16)   $ (0.54)   $ (0.62)  
Weighted-average shares outstanding used in calculating net loss per share attributable to common stockholders, basic and diluted 111,835    106,049    110,436    85,820   
(1) See Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements for a summary of adjustments related to the adoption of Topic 606.
See notes to unaudited condensed consolidated financial statements.

3


ZUORA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
Nine Months Ended October 31, 2019   
Accumulated    Total   
Class A    Class B    Additional    Other    Accumulated    Stockholders'   
Common Stock    Common Stock    Paid-in    Comprehensive    Deficit    Equity   
Shares    Amount    Shares    Amount    Capital    Income    As Adjusted¹    As Adjusted¹   
Balance, January 31, 2019 77,119    $   32,575    $   $ 488,776    $ 481    $ (307,454)   $ 181,814   
Conversion of Class B common stock to Class A common stock 15,477    —    (15,477)   —    —    —    —    —   
Issuance of common stock upon exercise of stock options, net of repurchases (15)   —    2,217    —    8,981    —    —    8,981   
Lapse of restrictions on common stock related to early exercise of stock options —    —    —    —    365    —    —    365   
Purchases of common stock under the ESPP 422    —    —    —    5,069    —    —    5,069   
RSU releases 595    —    147    —    —    —    —    —   
Stock-based compensation —    —    —    —    31,413    —    —    31,413   
Deferred offering costs —    —    —    —    38    —    —    38   
Other comprehensive loss —    —    —    —    —    (295)   —    (295)  
Net loss —    —    —    —    —    —    (59,642)   (59,642)  
Balance, October 31, 2019 93,598    $   19,462    $   $ 534,642    $ 186    $ (367,096)   $ 167,743   
Three Months Ended October 31, 2019   
Accumulated   
Class A    Class B    Additional    Other    Total   
Common Stock    Common Stock    Paid-in    Comprehensive    Accumulated    Stockholders'   
Shares    Amount    Shares    Amount    Capital    Income    Deficit    Equity   
Balance, July 31, 2019 87,875    $   24,422    $   $ 520,812    $ 252    $ (348,859)   $ 172,216   
Conversion of Class B common stock to Class A common stock 5,413    —    (5,413)   —    —    —    —    —   
Issuance of common stock upon exercise of stock options, net of repurchases (7)   —    406    —    1,933    —    —    1,933   
Lapse of restrictions on common stock related to early exercise of stock options —    —    —    —    59    —    —    59   
RSU releases 317    —    47    —    —    —    —    —   
Stock-based compensation —    —    —    —    11,838    —    —    11,838   
Other comprehensive loss —    —    —    —    —    (66)   —    (66)  
Net loss —    —    —    —    —    —    (18,237)   (18,237)  
Balance, October 31, 2019 93,598    $   19,462    $   $ 534,642    $ 186    $ (367,096)   $ 167,743   
(1) See Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements for a summary of adjustments related to the adoption of Topic 606.
See notes to unaudited condensed consolidated financial statements.

4


ZUORA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
(in thousands)
(unaudited)
Nine Months Ended October 31, 2018
Accumulated Total
Convertible Class A Class B Additional Related Other Accumulated Stockholders'
Preferred Stock Common Stock Common Stock Paid-in Party Comprehensive Deficit Equity
Shares    Amount    Shares    Amount    Shares    Amount    Capital    Receivable    Income    As Adjusted¹    As Adjusted¹   
Balance, January 31, 2018 61,984    $   —    $ —    30,524    $   $ 286,152    $ (1,281)   $ 471    $ (234,713)   $ 50,638   
Conversion of convertible preferred stock to common stock in connection with initial public offering (61,984)   (6)   —    —    61,984      —    —    —    —    —   
Issuance of common stock in connection with initial public offering, net of underwriting discounts and issuance costs —    —    12,650      —    —    159,999    —    —    —    160,000   
Conversion of Class B common stock to Class A common stock —    —    59,478      (59,478)   (6)   —    —    —    —    —   
Issuance of common stock upon exercise of stock options, net of repurchases —    —    369    —    2,543      7,012    —    —    —    7,013   
RSU releases —    —    106    —    212    —    —    —    —    —    —   
Lapse of restrictions on common stock related to early exercise of stock options —    —    —    —    —    —    1,751    —    —    —    1,751   
Deferred offering costs —    —    —    —    —    —    (543)   —    —    —    (543)  
Stock-based compensation —    —    —    —    —    —    17,722    —    —    —    17,722   
Related party notes receivable —    —    —    —    —    —    —    1,281    —    —    1,281   
Other comprehensive loss —    —    —    —    —    —    —    —    (373)   —    (373)  
Net loss —    —    —    —    —    —    —    —    —    (53,558)   (53,558)  
Balance, October 31, 2018 —    $ —    72,603    $   35,785    $   $ 472,093    $ —    $ 98    $ (288,271)   $ 183,931   
Three Months Ended October 31, 2018
Accumulated Total
Convertible Class A Class B Additional Related Other Accumulated Stockholders'
Preferred Stock Common Stock Common Stock Paid-in Party Comprehensive Deficit Equity
Shares    Amount    Shares    Amount    Shares    Amount    Capital    Receivable    Income    As Adjusted¹    As Adjusted¹   
Balance, July 31, 2018 —    $ —    44,970    $   62,680    $   $ 461,804    $ (5,657)   $ 809    $ (271,047)   $ 185,919   
Conversion of Class B common stock to Class A common stock —    —    27,239      (27,239)   (2)   —    —    —    —     
Issuance of common stock upon exercise of stock options —    —    369    —    297    —    2,264    —    —    —    2,264   
RSU releases —    —    25    —    47    —    —    —    —    —    —   
Lapse of restrictions on common stock related to early exercise of stock options —    —    —    —    —    —    614    —    —    —    614   
Deferred offering costs —    —    —    —    —    —    (10)   —    —    —    (10)  
Stock-based compensation —    —    —    —    —    —    7,459    —    —    —    7,459   
Related party notes receivable —    —    —    —    —    —    (38)   5,657    —    —    5,619   
Other comprehensive loss —    —    —    —    —    —    —    —    (711)   —    (711)  
Net loss —    —    —    —    —    —    —    —    —    (17,224)   (17,224)  
Balance, October 31, 2018 —    $ —    72,603    $   35,785    $   $ 472,093    $ —    $ 98    $ (288,271)   $ 183,931   
(1) See Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements for a summary of adjustments related to the adoption of Topic 606. The cumulative effect adjustment to Accumulated Deficit and Total Stockholders' Equity related to the adoption of Topic 606 as of January 31, 2018 was a credit of $24.0 million primarily related to deferred commissions.
See notes to unaudited condensed consolidated financial statements.
5


ZUORA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
  Nine Months Ended October 31,
  2019 2018
As Adjusted¹
Cash flows from operating activities:
Net loss $ (59,642)   $ (53,558)  
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 8,399    6,628   
Stock-based compensation 31,413    17,722   
Provision for doubtful accounts 3,229    4,518   
Amortization of deferred commissions 7,049    5,769   
Other (1,268)   68   
Changes in operating assets and liabilities:
Accounts receivable (5,044)   (6,133)  
Prepaid expenses and other assets (3,521)   (4,254)  
Deferred commissions (6,794)   (8,923)  
Accounts payable (228)   26   
Accrued expenses and other liabilities 6,861    4,211   
Accrued employee liabilities 4,624    6,815   
Deferred revenue 7,323    10,519   
Net cash used in operating activities (7,599)   (16,592)  
Cash flows from investing activities:
Purchases of property and equipment (12,878)   (10,621)  
Purchases of short-term investments (155,936)   (97,118)  
Sales of short-term investments 3,496    —   
Maturities of short-term investments 155,800    —   
Business combinations, net of cash acquired —    (247)  
Net cash used in investing activities (9,518)   (107,986)  
Cash flows from financing activities:
Payments under capital leases —    (1,336)  
Proceeds from issuance of common stock upon exercise of stock options 8,981    9,026   
Payments of offering costs —    (4,399)  
Proceeds of issuance of common stock under employee stock purchase plan 5,069    —   
Proceeds from initial public offering, net of underwriters’ discounts and commissions —    164,703   
Payments under related party notes receivable —    (4,344)  
Repayments of related party notes receivable —    5,625   
Repurchases of unvested common stock (70)   (10)  
Principal payments on long-term debt (1,850)   (834)  
Payments related to business combination —    (12,558)  
Net cash provided by financing activities 12,130    155,873   
Effect of exchange rates on cash and cash equivalents and restricted cash (416)   (341)  
Net (decrease) increase in cash and cash equivalents and restricted cash (5,403)   30,954   
Cash and cash equivalents and restricted cash, beginning of period 70,024    53,363   
Cash and cash equivalents and restricted cash, end of period $ 64,621    $ 84,317   
Supplemental disclosure of non-cash investing and financing activities:
Lapse of restrictions on common stock related to early exercise of stock options $ 365    $ 1,751   
Property and equipment purchases accrued or in accounts payable $ 3,056    $ 367   
Deferred offering costs payable or accrued but not paid $ —    $ 210   
Property and equipment acquired under capital leases $ —    $ 2,392   
Reconciliation of cash and cash equivalents and restricted cash within the unaudited condensed consolidated balance sheets to the amounts shown in the unaudited condensed consolidated statements of cash flows above:
Cash and cash equivalents $ 64,621    $ 77,883   
Restricted cash, current —    4,350   
Restricted cash, net of current portion —    2,084   
Total cash and cash equivalents and restricted cash $ 64,621    $ 84,317   
(1) See Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements for a summary of adjustments related to the adoption of Topic 606.
See notes to unaudited condensed consolidated financial statements.
6


ZUORA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Overview and Basis of Presentation
Description of Business
Zuora, Inc. was incorporated in the state of Delaware in 2006 and began operations in 2007. Zuora’s fiscal year ends on January 31. Zuora is headquartered in San Mateo, California.
The Company provides software that enables companies across multiple industries and geographies to launch, manage or transform to a subscription business model. Architected specifically for dynamic, recurring subscription business models, Zuora's cloud-based software functions as an intelligent subscription management hub that automates and orchestrates the entire subscription order-to-revenue process, including billing and revenue recognition. Zuora's solution enables businesses to easily change pricing and packaging for products and services to grow and scale, to efficiently comply with revenue recognition standards, and to build meaningful relationships with their subscribers.
References to Zuora, “Company”, “our”, or “we” in these notes refer to Zuora, Inc. and its subsidiaries on a consolidated basis.
Initial Public Offering
In April 2018, the Company completed an initial public offering (IPO), in which the Company issued and sold an aggregate of 12.7 million shares of its newly authorized Class A common stock at a price to the public of $14.00 per share. The shares sold included 1.7 million shares pursuant to the exercise by the underwriters of an option to purchase additional shares. The Company received aggregate net proceeds of $159.7 million from the IPO after deducting underwriting discounts and commissions and payments of offering costs.
Prior to the completion of the IPO, 30.5 million shares of common stock then outstanding were reclassified as Class B common stock, and all shares of convertible preferred stock outstanding immediately prior to the IPO were converted into 62.0 million shares of Class B common stock on a one-to-one basis.
Basis of Presentation and Principles of Consolidation
Effective February 1, 2019, the Company adopted the requirements of Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) issued by the Financial Accounting Standards Board (FASB), as Discussed in Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements. Topic 606 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers which requires the deferral of incremental costs of obtaining a contract with a customer. Collectively, the Company refers to Topic 606 and Subtopic 340-40 as "Topic 606" or the "new standard." The Company adopted the standard using the full retrospective adoption method. Consequently, all amounts and disclosures set forth in this Quarterly Report on Form 10-Q, including historical amounts, have been adjusted on a full retrospective basis to comply with the new standard.
The accompanying unaudited condensed consolidated financial statements, which include the accounts of the Company and its wholly owned subsidiaries, have been prepared in conformity with accounting principles generally accepted in the United States (GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. All intercompany balances and transactions have been eliminated in consolidation.
The unaudited condensed consolidated balance sheet as of January 31, 2019 included herein was derived from the audited financial statements as of that date, but does not include all disclosures including certain notes required by GAAP on an annual reporting basis. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the balance sheets, statements of comprehensive loss, statements of cash flows and statements of stockholders' equity for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year ending January 31, 2020 or any future period.
7


The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2019, filed with the Securities and Exchange Commission (SEC) on April 18, 2019 (Annual Report).
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the unaudited condensed consolidated financial statements, as well as reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates. The Company’s most significant estimates and assumptions are related to revenue recognition with respect to the determination of the standalone selling prices for the Company’s services; estimates of the useful life of benefits of commissions; determination of the fair value of the Company’s common stock for valuation of the Company’s stock-based awards issued prior to the completion of the IPO; valuation of the Company’s stock-based awards; estimates of allowance for doubtful accounts; estimates of the fair value of goodwill, intangible assets and other long-lived assets; and the valuation of deferred income tax assets and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ materially from these estimates under different assumptions or conditions.
Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements
The Company’s significant accounting policies are discussed in Note 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2019, filed with the Securities and Exchange Commission (SEC) on April 18, 2019. There have been no significant changes to these policies during the nine months ended October 31, 2019, except for the accounting policies for revenue recognition and deferred commissions that were updated as a result of adopting Topic 606, as discussed below.
Revenue Recognition
Adoption of Topic 606
Effective February 1, 2019, the Company adopted the provisions and expanded disclosure requirements of Topic 606 using the full retrospective method. Accordingly, the results for the prior comparable period were adjusted to conform to the current period measurement and recognition of results.
The impact of Topic 606 on reported revenue results was not material. Topic 606, however, modified the Company’s revenue recognition policy in the following ways:
Removal of the limitation on contingent revenue, which can result in revenue for certain multi-element customer contracts being recognized differently during the contract term;
Allocation of discounts over the entire committed contract period, which have affected transactions where customer commitments increased or where discounts fluctuated over the contract term;
The treatment of revenue recognition related to on-premise term licenses. The Company has a limited number of on-premise term licenses. Under Topic 606, the Company recognizes the revenue on these licenses when the software is delivered to the customer, which is typically at the beginning of the contract term. In the past the Company recognized revenue for on-premise term licenses ratably over the contract term; and
Allocation between periods and between subscription revenues and professional services revenues driven by changes mandated by Topic 606 for the treatment of material rights.
8


Revenue Recognition Policy
The Company generates revenue primarily from two sources: (1) subscription services, which is comprised of revenue from subscription fees from customers accessing the Company’s cloud-based software; and (2) professional services and other revenue.
With the adoption of Topic 606, revenue is recognized upon satisfaction of performance obligations in an amount that reflects the consideration the Company expects to receive in exchange for those products or services.
The Company determines the amount of revenue to be recognized through application of the following steps:
Identification of the contract, or contracts with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when or as the Company satisfies the performance obligations.
The Company’s subscription service arrangements are typically non-cancelable for a pre-specified subscription term and do not typically contain refund-type provisions.
Subscription Services
Subscription services revenues are primarily comprised of fees that provide customers with access to the Company's cloud-based software during the term of the arrangement. Cloud-based services typically allow customers to use the Company's multi-tenant software without taking possession of the software. Revenue is generally recognized ratably over the contract term beginning on the commencement date of each contract, which is the date the Company’s cloud-based software is made available to customers.
Leeyo Legacy On-Premise Arrangements
The Company acquired Leeyo Software, Inc. (Leeyo) in May 2017 and inherited some legacy on-premise license arrangements. These licenses are primarily term based and bundled with related maintenance (PCS). Revenue for the software license is generally recognized at the beginning of the contract term and the PCS is recognized ratably over the contract term.
Subscription and on-premise license agreements generally have terms ranging from one to three years and are invoiced to customers annually or quarterly in advance upon execution of the contract or subsequent renewals. Amounts that have been invoiced are recorded in accounts receivable and in either deferred revenue or revenue in the Company's consolidated financial statements, depending on whether the underlying performance obligation has been satisfied.
Professional Services and Other Revenue
Professional services and other revenues consists primarily of fees from consultation services to support configuration, data migration, and integration. The Company’s professional services contracts are either on a time and materials or fixed fee basis. The underlying revenues are recognized as the services are rendered for time and materials contracts or on a proportional performance basis for fixed price contracts. Training revenues are recognized as the services are performed.
Contracts with Multiple Performance Obligations
The Company enters into contracts with its customers that often include cloud-based software subscriptions and professional services performance obligations. A performance obligation is a commitment in a contract with a customer to transfer products or services that are distinct. Determining whether products and services are distinct
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performance obligations that should be accounted for separately or combined as one unit of accounting may require significant judgment.
The Company's cloud-based software products are distinct as such services are often sold separately. In determining whether professional services are distinct, the Company considers the following factors for each professional services agreement: availability of the services from other vendors, the nature of the professional services, the timing of when the professional services contract was signed in comparison to the cloud-based software, start date and the contractual dependence of the cloud-based software on the customer’s satisfaction with the professional services work. To date, the Company has concluded that all of the professional services included in contracts with multiple performance obligations are distinct.
The Company allocates the transaction price to each performance obligation on a relative standalone selling price (SSP) basis. The SSP is the estimated price at which the Company would sell a promised product or service separately to a customer. Judgment is required to determine the SSP for each distinct performance obligation.
The Company establishes SSP for both its subscription services and professional services elements primarily by considering the actual sales prices of the element when sold on a stand-alone basis or when sold together with other elements.
When the Company is unable to rely on actual observable sales inputs, it determines SSP based on overarching pricing objectives and strategies, taking into consideration market conditions and other factors, including customer size, volume purchased, market and industry conditions, product-specific factors and historical sales of the deliverables.
Deferred commissions
The Company capitalizes sales commission expenses and associated payroll taxes paid to internal sales personnel that are incremental to obtaining customer contracts. These costs are deferred and then amortized over the expected period of benefit, which is estimated to be five years. The Company has determined the period of benefit taking into consideration several factors including the expected subscription term and expected renewals of its customer contracts, the duration of its relationships with its customers, and its technology. Amortization expense is included in Sales and marketing in the accompanying unaudited condensed consolidated statements of comprehensive loss.
Contract Assets
Subscription services revenue is generally recognized ratably over the contract term beginning on the commencement date of each contract. Under Topic 606, the timing and amount of revenue recognition may differ in certain situations from the revenue recognized under previous accounting guidance, which included a contingent revenue rule that limited subscription revenue to the customer invoice amount for the period of service (collectively billings). Under Topic 606, the Company records a contract asset when revenue recognized on a contract exceeds the billings for the period. Contract assets are included in Prepaid expenses and other current assets and Other assets in the Company's unaudited condensed consolidated balance sheets. The total value of the Company's contract assets was $4.5 million as of October 31, 2019 and $4.2 million as of January 31, 2019.
For further detail regarding the Company's remaining performance obligations please refer to Note 10. Deferred Revenue and Performance Obligations.
Recent Accounting Pronouncements—Not Yet Adopted
Under the Jumpstart Our Business Startups Act (JOBS Act), the Company currently qualifies as an “emerging growth company” and has elected to use the extended transition period for complying with new or revised accounting standards under the JOBS Act. However, the Company will no longer qualify as an emerging growth company beginning as of January 31, 2020 and therefore the expected adoption dates for the ASUs discussed below reflect the public business entity effective dates.
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In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes the guidance in topic ASC 840, Leases. Under the new standard, lessees will be required to record a right-of-use asset and a lease liability for all leases, with certain exceptions, on their balance sheets. The Company expects to adopt ASU 2016-02 using the modified retrospective method beginning with its Annual Report on Form 10-K for the fiscal year ending January 31, 2020, including interim period disclosures within that filing. The Company is currently evaluating its lease portfolio and expects the adoption of this standard to have a material impact on its consolidated balance sheets.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method rather than the incurred loss model for recognizing credit losses. Additionally, any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. The Company expects to adopt ASU 2016-13 beginning with its fiscal year ending January 31, 2021, including interim periods within that fiscal year. The Company is currently evaluating the impact of adopting this standard and does not expect its adoption to have a significant impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which amends ASC 820, Fair Value Measurement. The standard no longer requires disclosure of the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted-average used to develop significant unobservable inputs for Level 3 fair value measurements. The Company expects to adopt ASU 2018-13 beginning with its fiscal year ending January 31, 2021, including interim periods within that fiscal year. The Company is currently evaluating the impact of adopting this standard and does not expect the adoption to have a significant impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The Company expects to adopt ASU 2018-15 beginning with its fiscal year ending January 31, 2021, including interim periods within that fiscal year. The Company is currently evaluating the impact of adopting this standard and does not expect the adoption to have a significant impact on its consolidated financial statements.
Recent Accounting Pronouncements—Adopted
In January 2016, the FASB issued ASU No. 2016-01 (Subtopic 825-10), Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged. The Company adopted ASU 2016-01 effective February 1, 2019 and the adoption did not have a significant impact on its unaudited condensed consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. Under existing GAAP, the effects of changes in tax rates and laws on deferred tax balances are recorded as a component of income tax expense in the period in which the law was enacted. When deferred tax balances related to items originally recorded in accumulated other comprehensive income are adjusted, certain tax effects become stranded in accumulated other comprehensive income. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings (accumulated deficit) for stranded income tax effects resulting from the Tax Cuts and Jobs Act (the Tax Reform Act). The amendments in this ASU also require certain disclosures about stranded income tax effects. The Company’s provisional adjustments recorded in the fiscal year ended January 31, 2018 to account for the impact of the Tax Reform Act did not result in stranded tax effects. The Company adopted ASU 2018-02 effective February 1, 2019, and the adoption of the standard did not have a significant impact on its unaudited condensed consolidated financial statements.
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In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting. The guidance expands the scope of the topic to include share-based payments granted to non-employees in exchange for goods or services. Upon adoption, the fair value of awards granted to non-employees will be determined as of the grant date, which will be recognized over the service period. Previous guidance required the awards to be remeasured at fair value periodically when determining the related expense. The Company adopted ASU 2018-07 effective February 1, 2019 and the adoption of the standard did not have an impact on its unaudited condensed consolidated financial statements.
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that have become redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. The Company adopted this release effective February 1, 2019.
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) and has modified the standard thereafter. This standard replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements. The Company adopted ASU 2014-09 ("Topic 606" or the "new standard"), effective February 1, 2019, using the full retrospective method of transition. 
The impacts of adopting Topic 606 on the Company's consolidated financial statements is shown in the tables below. The primary impacts on revenue are an increased number of allocations of arrangement consideration between subscription and professional services and the recognition of discounts evenly across the term for multiple year subscription arrangements. Both of these impacts are primarily due to the elimination of the contingent revenue rule. There was an impact due to a change in the recognition of legacy on-premise term deals inherited during the Company's acquisition of Leeyo which requires more revenue being recognized at the beginning of the license term as opposed to evenly over the term. In addition to impacting the way that the Company recognizes revenue, the new standard also impacts the accounting for incremental commission costs of obtaining contracts. Under the new standard, the Company defers all incremental commission costs to obtain the contract and amortize these costs on a straight-line basis over the period of economic benefit which has been determined to be five years.
The adoption of Topic 606 did not have a significant impact on U.S. taxes due to the full valuation allowance against the deferred tax asset. However, the deferral of incremental commissions for foreign employees increased foreign deferred tax liabilities which will be realized over the period of the deferred commission amortization.
The adoption of Topic 606 required the Company to record a contract asset related to certain transactions acquired as part of the acquisition of Leeyo in the second quarter of fiscal 2018. The creation of this new contract asset affected the valuation of customer relationships intangibles recorded at the time of the acquisition. Consequently, the Company reduced the value of the customer intangible and decreased goodwill in the unaudited adjusted condensed consolidated balance sheet as a result of the adoption of Topic 606.
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The following table summarizes the adjustments on affected line items of the unaudited adjusted condensed consolidated balance sheet resulting from the adoption of Topic 606 (in thousands):
January 31, 2019
As Reported Under ASC 605 Topic 606 Adjustment As Adjusted Under Topic 606
Assets
Deferred commissions, current portion $ —    $ 8,616    $ 8,616   
Prepaid expenses and other current assets¹ 10,414    4,218    14,632   
Deferred commissions, net of current portion —    18,664    18,664   
Purchased intangibles, net 9,042    (1,646)   7,396   
Goodwill 20,861    (3,229)   17,632   
Liabilities
Deferred revenue, current portion 90,565    (3,781)   86,784   
Deferred revenue, net of current portion 406    (294)   112   
Deferred tax liabilities —    1,877    1,877   
Equity
Accumulated deficit (336,275)   28,821    (307,454)  
(1) Prepaid expenses and other current assets includes the impact of contract assets.
The following tables summarize the adjustments on affected line items of the unaudited adjusted condensed consolidated statements of comprehensive loss resulting from the adoption of Topic 606 (in thousands):
Three Months Ended October 31, 2018
As Reported Under ASC 605 Topic 606 Adjustment As Adjusted Under Topic 606
Revenue
Subscription $ 44,485    $ (1,402)   $ 43,083   
Professional services 17,152    1,121    18,273   
Total revenues 61,637    (281)   61,356   
Gross profit 31,460    (281)   31,179   
Sales and marketing 25,896    (1,047)   24,849   
Total operating expenses 49,757    (1,047)   48,710   
Loss from operations (18,297)   766    (17,531)  
Loss before income taxes (17,664)   766    (16,898)  
Income tax provision (225)   (101)   (326)  
Net loss (17,889)   665    (17,224)  
Comprehensive loss (18,600)   665    (17,935)  
Net loss per share attributable to common stockholders, basic and diluted (0.17)   0.01    (0.16)  

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Nine Months Ended October 31, 2018
As Reported Under ASC 605 Topic 606 Adjustment As Adjusted Under Topic 606
Revenue
Subscription $ 122,069    $ (2,220)   $ 119,849   
Professional services 49,066    2,736    51,802   
Total revenues 171,135    516    171,651   
Gross profit 86,293    516    86,809   
Sales and marketing 74,162    (3,154)   71,008   
Total operating expenses 141,382    (3,154)   138,228   
Loss from operations (55,089)   3,670    (51,419)  
Loss before income taxes (56,307)   3,670    (52,637)  
Income tax provision (616)   (305)   (921)  
Net loss (56,923)   3,365    (53,558)  
Comprehensive loss (57,296)   3,365    (53,931)  
Net loss per share attributable to common stockholders, basic and diluted (0.66)   0.04    (0.62)  

Note 3. Investments
The amortized costs, unrealized gains and losses and estimated fair values of the Company’s short-term investments as of October 31, 2019 were as follows (in thousands):
October 31, 2019
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
U.S. government securities $ 27,930    $ 72    $ —    $ 28,002   
Corporate bonds 36,908    56    —    36,964   
Commercial paper 40,811    —    —    40,811   
Total short-term investments $ 105,649    $ 128    $ —    $ 105,777   
The amortized costs, unrealized gains and losses and estimated fair values of the Company’s short-term investments as of January 31, 2019 were as follows (in thousands):
January 31, 2019
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
U.S. government securities $ 17,950    $   $ —    $ 17,951   
Corporate bonds 34,296      (2)   34,302   
Commercial paper 55,655    —    —    55,655   
Total short-term investments $ 107,901    $   $ (2)   $ 107,908   
There were no material realized gains or losses from sales of marketable securities that were reclassified out of accumulated other comprehensive income into investment income during the three and nine months ended October 31, 2019 and 2018. The Company does not believe that any unrealized losses represent other-than-temporary impairments based on its evaluation of available evidence. All securities had stated effective maturities of two years or less as of October 31, 2019.
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Note 4. Fair Value Measurements
The accounting guidance for fair value measurements establishes a three-tier hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:
Level input Input definition
Level 1 Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets
Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date
Level 3 Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date
In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then the Company uses quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly.
The following tables summarize the Companys fair value hierarchy for its financial assets measured at fair value on a recurring basis (in thousands):
October 31, 2019
Level 1 Level 2 Level 3 Total
Cash equivalents:
Money market funds $ 53,274    $ —    $ —    $ 53,274   
Short-term investments:
U.S. government securities $ —    $ 28,002    $ —    $ 28,002   
Corporate bonds —    36,964    —    36,964   
Commercial paper —    40,811    —    40,811   
Total short-term investments $ —    $ 105,777    $ —    $ 105,777   

January 31, 2019
Level 1 Level 2 Level 3 Total
Cash equivalents:
Money market funds $ 61,201    $ —    $ —    $ 61,201   
Short-term investments:
U.S. government securities $ —    $ 17,951    $ —    $ 17,951   
Corporate bonds —    34,302    —    34,302   
Commercial paper —    55,655    —    55,655   
Total short-term investments $ —    $ 107,908    $ —    $ 107,908   
Restricted cash:
Money market funds $ 2,084    $ —    $ —    $ 2,084   
The carrying amounts of certain financial instruments, including cash held in bank accounts, accounts receivable, accounts payable, and accrued expenses, approximate fair value due to their relatively short maturities. The carrying amount of debt approximates fair value due to its floating interest rate.
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Note 5. Deferred Commissions
Deferred commissions, related to incremental costs of obtaining customer contracts, were $27.0 million as of October 31, 2019 and $27.3 million as of January 31, 2019 (as adjusted), respectively. Amortization expense for deferred commissions was $2.4 million and $7.0 million for the three and nine months ended October 31, 2019, respectively, and $2.0 million and $5.8 million for the three and nine months ended October 31, 2018 (as adjusted), respectively. There was no impairment loss in relation to the costs capitalized for the periods presented.
Note 6. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
  October 31, 2019 January 31, 2019
As Adjusted¹
Contract assets $ 4,152    $ 4,218   
Prepaid software subscriptions 4,037    4,797   
Prepaid hosting costs 1,556    1,251   
Prepaid insurance 1,342    790