Zuora Earnings 2019-07-31

ZUO 10Q Quarterly Report

Balance Sheet	Income Statement	Cash Flow

10-Q 1 a20190731q2form10-q.htm 10-Q Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

_____________________________

FORM 10-Q

_____________________________

(Mark One)



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2019



☐	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 ý 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 ý 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	ý	Smaller reporting company	☐

		Emerging growth company	ý

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 ý

As of August 31, 2019, the Registrant had approximately 88.0 million shares of Class A common stock and 24.4 million shares of Class B common stock outstanding.



		Page
PART I.	FINANCIAL INFORMATION	2
Item 1.	Financial Statements (unaudited)	2
	Condensed Consolidated Balance Sheets as of July 31, 2019 and January 31, 2019	2
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended July 31, 2019 and 2018	3
	Condensed Consolidated Statements of Stockholders' Equity for the Three and Six Months Ended July 31, 2019 and 2018	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 31, 2019 and 2018	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	41

PART II.	OTHER INFORMATION	43
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	74
Item 6.	Exhibits	75
Signatures		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.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

ZUORA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)



	July 31, 2019			January 31, 2019
				As Adjusted¹
Assets
Current assets:
Cash and cash equivalents	$	56,551		$	67,940
Short-term investments	118,065			107,908
Accounts receivable, net of allowance for doubtful accounts of $2,448 and $2,522 as of July 31, 2019 and January 31, 2019, respectively	46,905			58,258
Restricted cash, current portion	—			400
Deferred commissions, current portion	8,713			8,616
Prepaid expenses and other current assets	15,331			14,632
Total current assets	245,565			257,754
Property and equipment, net	20,381			19,625
Restricted cash, net of current portion	—			1,684
Purchased intangibles, net	6,465			7,396
Deferred commissions, net of current portion	17,696			18,664
Goodwill	17,632			17,632
Other assets	5,922			3,292
Total assets	$	313,661		$	326,047
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	959		$	1,512
Accrued expenses and other current liabilities	13,774			14,210
Accrued employee liabilities	22,624			22,603
Debt, current portion	4,444			2,963
Deferred revenue, current portion	86,093			86,784
Total current liabilities	127,894			128,072
Debt, net of current portion	8,293			10,494
Deferred revenue, net of current portion	83			112
Deferred tax liabilities	1,877			1,877
Other long-term liabilities	3,298			3,678
Total liabilities	141,445			144,233
Commitments and contingencies (note 16)
Stockholders’ equity:
Class A common stock	8			8
Class B common stock	3			3
Additional paid-in capital	520,812			488,776
Accumulated other comprehensive income	252			481
Accumulated deficit	(348,859		)	(307,454		)
Total stockholders’ equity	172,216			181,814
Total liabilities and stockholders’ equity	$	313,661		$	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.

ZUORA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands, except per share data)

(unaudited)



	Three Months Ended July 31,						Six Months Ended July 31,
	2019			2018			2019			2018
				As Adjusted¹						As Adjusted¹
Revenue:
Subscription	$	50,647		$	40,877		$	97,958		$	76,766
Professional services	19,086			16,970			35,884			33,529
Total revenue	69,733			57,847			133,842			110,295
Cost of revenue:
Subscription	12,798			10,421			24,731			20,286
Professional services	20,904			18,226			41,002			34,379
Total cost of revenue	33,702			28,647			65,733			54,665
Gross profit	36,031			29,200			68,109			55,630
Operating expenses:
Research and development	18,744			13,323			35,759			25,385
Sales and marketing	27,290			24,379			52,791			46,159
General and administrative	11,324			8,563			21,769			17,974
Total operating expenses	57,358			46,265			110,319			89,518
Loss from operations	(21,327		)	(17,065		)	(42,210		)	(33,888		)
Interest and other income (expense), net	569			(1,178		)	1,104			(1,851		)
Loss before income taxes	(20,758		)	(18,243		)	(41,106		)	(35,739		)
Income tax provision	(55		)	(302		)	(299		)	(595		)
Net loss	(20,813		)	(18,545		)	(41,405		)	(36,334		)
Comprehensive loss:
Foreign currency translation adjustment	(200		)	417			(275		)	338
Unrealized gain on available-for-sale securities	22			—			46			—
Comprehensive loss	$	(20,991	)	$	(18,128	)	$	(41,634	)	$	(35,996	)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.19	)	$	(0.18	)	$	(0.38	)	$	(0.48	)
Weighted-average shares outstanding used in calculating net loss per share attributable to common stockholders, basic and diluted	110,595			105,146			109,724			75,529

(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.

ZUORA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands)

(unaudited)



	Six Months Ended July 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		$	8	32,575		$	3	$	488,776	$	481		$	(307,454	)	$	181,814
Conversion of Class B common stock to Class A common stock	10,064		—		(10,064	)	—		—		—			—			—
Issuance of common stock upon exercise of stock options, net of repurchases	(8	)	—		1,811		—		7,048		—			—			7,048
Lapse of restrictions on common stock related to early exercise of stock options	—		—		—		—		306		—			—			306
Purchases of common stock under the ESPP	422		—		—		—		5,069		—			—			5,069
RSU releases	278		—		100		—		—		—			—			—
Stock-based compensation	—		—		—		—		19,575		—			—			19,575
Deferred offering costs	—		—		—		—		38		—			—			38
Other comprehensive loss	—		—		—		—		—		(229		)	—			(229		)
Net loss	—		—		—		—		—		—			(41,405		)	(41,405		)
Balance, July 31, 2019	87,875		$	8	24,422		$	3	$	520,812	$	252		$	(348,859	)	$	172,216

	Three Months Ended July 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, April 30, 2019	85,097		$	8	25,964		$	3	$	501,824	$	430		$	(328,046	)	$	174,219
Conversion of Class B common stock to Class A common stock	2,155		—		(2,155	)	—		—		—			—			—
Issuance of common stock upon exercise of stock options, net of repurchases	(1	)	—		564		—		2,202		—			—			2,202
Lapse of restrictions on common stock related to early exercise of stock options	—		—		—		—		101		—			—			101
Purchases of common stock under the ESPP	422		—		—		—		5,069		—			—			5,069
RSU releases	202		—		49		—		—		—			—			—
Stock-based compensation	—		—		—		—		11,616		—			—			11,616
Other comprehensive loss	—		—		—		—		—		(178		)	—			(178		)
Net loss	—		—		—		—		—		—			(20,813		)	(20,813		)
Balance, July 31, 2019	87,875		$	8	24,422		$	3	$	520,812	$	252		$	(348,859	)	$	172,216

(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.

ZUORA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)

(in thousands)

(unaudited)



	Six Months Ended July 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		$	6		—	$	—	30,524		$	3		$	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		6			—			—			—		—			—
Issuance of common stock in connection with initial public offering, net of underwriting discounts and issuance costs	—		—			12,650	1		—		—			159,999			—			—		—			160,000
Conversion of Class B common stock to Class A common stock	—		—			32,239	3		(32,239	)	(4		)	—			—			—		—			(1		)
Issuance of common stock upon exercise of stock options, net of repurchases	—		—			—	—		2,246		1			4,748			—			—		—			4,749
RSU releases	—		—			81	—		165		—			—			—			—		—			—
Lapse of restrictions on common stock related to early exercise of stock options	—		—			—	—		—		—			1,137			—			—		—			1,137
Deferred offering costs	—		—			—	—		—		—			(533		)	—			—		—			(533		)
Stock-based compensation	—		—			—	—		—		—			10,263			—			—		—			10,263
Related party notes receivable	—		—			—	—		—		—			38			(4,376		)	—		—			(4,338		)
Other comprehensive income	—		—			—	—		—		—			—			—			338		—			338
Net loss	—		—			—	—		—		—			—			—			—		(36,334		)	(36,334		)
Balance, July 31, 2018	—		$	—		44,970	$	4	62,680		$	6		$	461,804		$	(5,657	)	$	809	$	(271,047	)	$	185,919

	Three Months Ended July 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, April 30, 2018	—		$	—		12,650	$	1	94,476		$	10		$	455,610		$	(5,619	)	$	392	$	(252,502	)	$	197,892
Conversion of Class B common stock to Class A common stock	—		—			32,239	3		(32,239	)	(4		)	—			—			—		—			(1		)
Issuance of common stock upon exercise of stock options	—		—			—	—		278		—			723			—			—		—			723
RSU releases	—		—			81	—		165		—			—			—			—		—			—
Lapse of restrictions on common stock related to early exercise of stock options	—		—			—	—		—		—			304			—			—		—			304
Deferred offering costs	—		—			—	—		—		—			(533		)	—			—		—			(533		)
Stock-based compensation	—		—			—	—		—		—			5,662			—			—		—			5,662
Related party notes receivable	—		—			—	—		—		—			38			(38		)	—		—			—
Other comprehensive income	—		—			—	—		—		—			—			—			417		—			417
Net loss	—		—			—	—		—		—			—			—			—		(18,545		)	(18,545		)
Balance, July 31, 2018	—		$	—		44,970	$	4	62,680		$	6		$	461,804		$	(5,657	)	$	809	$	(271,047	)	$	185,919

(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.

ZUORA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Six Months Ended July 31,
	2019			2018
				As Adjusted¹
Cash flows from operating activities:
Net loss	$	(41,405	)	$	(36,334	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	5,164			4,495
Stock-based compensation	19,575			10,263
Provision for doubtful accounts	2,252			2,512
Amortization of deferred commissions	4,656			3,740
Other	(887		)	144
Changes in operating assets and liabilities:
Accounts receivable	9,101			5,198
Prepaid expenses and other current assets	(2,411		)	(1,786		)
Deferred commissions	(3,785		)	(5,847		)
Other assets	(813		)	(1,881		)
Accounts payable	(665		)	159
Accrued expenses and other current liabilities	(1,113		)	2,626
Accrued employee liabilities	21			3,275
Deferred revenue	(720		)	2,515
Other long-term liabilities	(78		)	699
Net cash used in operating activities	(11,108		)	(10,222		)
Cash flows from investing activities:
Purchases of property and equipment	(4,242		)	(6,690		)
Purchases of short-term investments	(103,073		)	—
Sales of short-term investments	3,496			—
Maturities of short-term investments	90,400			—
Business combinations, net of cash acquired	—			(247		)
Net cash used in investing activities	(13,419		)	(6,937		)
Cash flows from financing activities:
Payments under capital leases	—			(464		)
Proceeds from issuance of common stock upon exercise of stock options	7,048			6,665
Payments of offering costs	—			(4,272		)
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		)
Repurchases of unvested common stock	(47		)	(6		)
Principal payments on long-term debt	(741		)	(417		)
Payments related to business combination	—			(12,558		)
Net cash provided by financing activities	11,329			149,307
Effect of exchange rates on cash and cash equivalents and restricted cash	(275		)	338
Net (decrease) increase in cash and cash equivalents and restricted cash	(13,473		)	132,486
Cash and cash equivalents and restricted cash, beginning of period	70,024			53,363
Cash and cash equivalents and restricted cash, end of period	$	56,551		$	185,849
Supplemental disclosure of non-cash investing and financing activities:
Lapse of restrictions on common stock related to early exercise of stock options	$	306		$	1,137
Property and equipment purchases accrued or in accounts payable	$	899		$	1,069
Deferred offering costs payable or accrued but not paid	$	—		$	337
Property and equipment acquired under capital leases	$	—		$	2,335
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	$	56,551		$	179,195
Restricted cash, current	—			1,770
Restricted cash, net of current portion	—			4,884
Total cash and cash equivalents and restricted cash	$	56,551		$	185,849

(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.

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. During fiscal 2019, 63.5 million shares were converted from Class B to Class A common stock.

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.

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.

Foreign Currency

The functional currencies of the Company’s foreign subsidiaries are the respective local currencies. Assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenue and expenses are translated at the average exchange rate during the period, and equity balances are translated using historical exchange rates. Translation adjustments arising from the use of differing exchange rates from period to period are included in accumulated other comprehensive income within the unaudited condensed consolidated balance sheets.

Foreign currency transaction gains and losses are included in Interest and other income (expense), net in the unaudited condensed consolidated statements of comprehensive loss and were not material for the three and six months ended July 31, 2019 and 2018.

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 six months ended July 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.

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 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 as of July 31, 2019 and January 31, 2019 was $4.2 million.

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 qualifies as an “emerging growth company.” However, the Company will no longer qualify as an emerging growth company beginning as of January 31, 2020. While the Company maintains emerging growth company status, it has elected to use the extended transition period for complying with new or revised accounting standards under the JOBS Act. The adoption dates discussed below reflect this election.

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 for its fiscal year ending January 31, 2020 and interim periods thereafter. 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. This guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. The Company expects to adopt ASU 2016-13 for 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. ASU 2018-13 is effective for interim and annual periods beginning after December 15, 2019. The Company expects to adopt ASU 2018-13 for 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 standard is effective for annual periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. The Company expects to adopt ASU 2018-15 for its fiscal year ending January 31, 2022, and interim periods following 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.

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 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.

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 ASC 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 July 31, 2018
	As Reported Under ASC 605			Topic 606 Adjustment			As Adjusted Under ASC 606
Revenue
Subscription	$	41,470		$	(593	)	$	40,877
Professional services	16,284			686			16,970
Total revenues	57,754			93			57,847
Gross profit	29,107			93			29,200
Sales and marketing	25,429			(1,050		)	24,379
Total operating expenses	47,315			(1,050		)	46,265
Loss from operations	(18,208		)	1,143			(17,065		)
Loss before income taxes	(19,386		)	1,143			(18,243		)
Income tax provision	(201		)	(101		)	(302		)
Net loss	(19,587		)	1,042			(18,545		)
Comprehensive loss	$	(19,170	)	$	1,042		$	(18,128	)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.19	)	$	0.01		$	(0.18	)



	Six Months Ended July 31, 2018
	As Reported Under ASC 605			Topic 606 Adjustment			As Adjusted Under ASC 606
Revenue
Subscription	$	77,584		$	(818	)	$	76,766
Professional services	31,914			1,615			33,529
Total revenues	109,498			797			110,295
Gross profit	54,833			797			55,630
Sales and marketing	48,266			(2,107		)	46,159
Total operating expenses	91,625			(2,107		)	89,518
Loss from operations	(36,792		)	2,904			(33,888		)
Loss before income taxes	(38,643		)	2,904			(35,739		)
Income tax provision	(391		)	(204		)	(595		)
Net loss	(39,034		)	2,700			(36,334		)
Comprehensive loss	$	(38,696	)	$	2,700		$	(35,996	)
Net loss per share attributable to common stockholders, basic and diluted	$	(0.52	)	$	0.04		$	(0.48	)

Note 3. Investments

The amortized costs, unrealized gains and losses and estimated fair values of the Company’s short-term investments as of July 31, 2019 were as follows (in thousands):



	July 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. government securities	$	45,847	$	46	$	(2	)	$	45,891
Corporate bonds	24,183		12		(3		)	24,192
Commercial paper	47,982		—		—			47,982
Total short-term investments	$	118,012	$	58	$	(5	)	$	118,065

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	$	1	$	—		$	17,951
Corporate bonds	34,296		8		(2		)	34,302
Commercial paper	55,655		—		—			55,655
Total short-term investments	$	107,901	$	9	$	(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 six months ended July 31, 2019. 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 one year or less. The company had no short-term investments during the six months ended July 31, 2018.

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 Company’s fair value hierarchy for its financial assets measured at fair value on a recurring basis (in thousands):



	July 31, 2019
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	45,053	$	—	$	—	$	45,053
Short-term investments:
U.S. government securities	$	—	$	45,891	$	—	$	45,891
Corporate bonds	—		24,192		—		24,192
Commercial paper	—		47,982		—		47,982
Total short-term investments	$	—	$	118,065	$	—	$	118,065



	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.

Note 5. Deferred Commissions

Deferred commissions, related to incremental costs of obtaining customer contracts, were $26.4 million and $27.3 million as of July 31, 2019 and January 31, 2019 (as adjusted), respectively. Amortization expense for deferred commissions was $2.3 million and $4.7 million for the three and six months ended July 31, 2019, respectively, and $1.9 million and $3.7 million for the three and six months ended July 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):



	July 31, 2019		January 31, 2019
			As Adjusted¹
Contract assets	$	3,578	$	4,218
Prepaid software subscriptions	3,541		4,797
Prepaid insurance	1,764		790
Prepaid hosting costs	1,684		1,251
Prepaid rent	1,356		991
Taxes	433		579
Other	2,975		2,006
Total	$	15,331	$	14,632

(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.

Note 7. Property and Equipment, Net

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



	July 31, 2019			January 31, 2019
Servers	$	16,410		$	14,972
Software	12,397			10,770
Computer equipment	10,862			10,109
Leasehold improvements	5,906			5,010
Furniture and fixtures	2,626			2,523
Vehicles	112			109
	48,313			43,493
Less accumulated depreciation and amortization	(27,932		)	(23,868		)
Total	$	20,381		$	19,625

Depreciation and amortization expense related to property and equipment, which includes amortization of capitalized internal-use software, was $2.2 million and $4.2 million for the three and six months ended July 31, 2019, respectively, and $1.7 million and $2.9 million for the three and six months ended July 31, 2018, respectively. Depreciation and amortization expense is included in Operating expenses and Cost of revenue in the accompanying unaudited condensed consolidated statements of comprehensive loss.

As of July 31, 2019 and January 31, 2019, capitalized internal-use software costs were $5.2 million and $4.3 million, respectively. Internal-use software amortization recorded to cost of subscription revenue was $0.4 million and $0.8 million for the three and six months ended July 31, 2019, respectively, and $0.3 million and $0.6 million for the three and six months ended July 31, 2018, respectively.

Note 8. Purchased Intangible Assets

The following table summarizes the purchased intangible asset balances (in thousands):



	July 31, 2019
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Developed technology	$	7,697	$	(4,607	)	$	3,090
Customer relationships	4,287		(1,539		)	2,748
Trade names	909		(282		)	627
Total	$	12,893	$	(6,428	)	$	6,465



	January 31, 2019
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Developed technology	$	7,697	$	(4,045	)	$	3,652
Customer relationships (as adjusted)¹	4,287		(1,236		)	3,051
Trade names	909		(216		)	693
Total	$	12,893	$	(5,497	)	$	7,396

(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.

Amortization expense related to purchased intangible assets was approximately $0.4 million and $0.9 million for the three and six months ended July 31, 2019, respectively, and $0.6 million and $1.2 million for the three and six months ended July 31, 2018, respectively. Amortization expense related to purchased intangible assets is included in Cost of subscription revenue in the accompanying unaudited condensed consolidated statements of comprehensive loss.

Note 9. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):



	July 31, 2019		January 31, 2019
Accrued goods and services taxes	$	3,020	$	3,098
Accrued outside services and consulting	2,337		2,089
Accrued taxes	1,624		1,651
Accrued hosting and third party license fees	1,332		1,073
Employee early exercised stock options	192		436
Other accrued expenses	5,269		5,863
Total	$	13,774	$	14,210

Note 10. Deferred Revenue and Performance Obligations

Subscription revenue recognized during the three and six months ended July 31, 2019 that was included in the deferred revenue balances at the beginning of the respective periods was $41.4 million and $59.8 million, respectively, and was $28.6 million and $41.0 million for the three and six months ended July 31, 2018 (as adjusted), respectively. Professional service and other revenue recognized in the same periods from deferred revenue balances at the beginning of the respective periods was not material.

As of July 31, 2019, total remaining noncancelable performance obligations under the Company's subscription contracts with customers was approximately $238.8 million, including $85.5 million of deferred revenue, and the Company expects to recognize revenue on approximately 64% of these remaining performance obligations over the next 12 months, with the balance to be recognized thereafter. Revenue from the remaining performance obligations for professional service and other contracts as of July 31, 2019 was not material.

Note 11. Geographical Information

Disaggregation of Revenue

Revenue by country, based on the customer’s address at the time of sale, was as follows (in thousands):



	Three Months Ended July 31,						Six Months Ended July 31,
	2019			2018			2019			2018
				As Adjusted¹						As Adjusted¹
United States	$	48,030		$	41,853		$	92,476		$	79,638
Others	21,703			15,994			41,366			30,657
Total	$	69,733		$	57,847		$	133,842		$	110,295
Percentage of revenue by geographic area:
United States	69		%	72		%	69		%	72		%
Other	31		%	28		%	31		%	28		%

(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.

Other than the United States, no individual country exceeded 10% of total revenue for the three or six months ended July 31, 2019 and 2018.

Note 12. Debt

In June 2017, the Company and certain of its subsidiaries entered into a loan and security agreement with Silicon Valley Bank that includes a revolving and term loan facility. In October 2018, the agreement was amended (Debt Agreement) to, among other things, increase the revolving loan availability to $30.0 million (from $10 million), lower the borrowing costs under both the revolving and term loans to the prime rate published by the Wall Street Journal (WSJ Prime Rate) minus 1.00%, extend the interest only repayment period under the term loan until June 2019, after which time principal and interest are due in thirty-six (36) equal monthly installments, extend the revolving loan maturity date until October 2021, and extend the latest term loan maturity date until June 2022. The Company accounted for this amendment as a debt modification and will recognize the unamortized fees related to the Debt Agreement over the duration of the term loan.

Revolving Loan. The Debt Agreement allows the Company to borrow up to $30.0 million in revolving loans until October 2021. Advances drawn down under the revolving loan incur interest at the WSJ Prime Rate minus 1.00% which is due monthly on any amounts drawn down, with the principal due at maturity. Any outstanding amounts must be fully repaid on or before October 2021. The Company is required to pay an annual fee of $20,000 on this revolving loan, regardless of any amounts drawn down. As of July 31, 2019, the Company had not drawn down any amounts under this revolving loan.

Term Loan. The Debt Agreement allows the Company to borrow $15.0 million in term loans, which was drawn down in June 2017 to partially finance the acquisition of Leeyo. Any outstanding amounts under the term loan accrue interest at the WSJ Prime rate minus 1.00%. The interest rate was 4.50% as of July 31, 2019. The Company is required to make equal monthly payments of principal and interest over 36 months until the term loan is repaid in June 2022. The Company may prepay all outstanding principal and accrued interest at any time without penalty. The Company will incur a fee of 1.5% of the original principal amount of the term loan, or $225,000, upon the earlier to occur of prepayment or the termination of the facility. As of July 31, 2019, the Company had $12.7 million outstanding under the term loan.

Both the revolving loan and the term loan are subject to a certain financial covenant to maintain an adjusted quick ratio of no less than 1.10:1.00. As of July 31, 2019, the Company was in compliance with this financial covenant. The Debt Agreement also imposes certain limitations with respect to lines of business, mergers, investments and acquisitions, additional indebtedness, distributions, guarantees, liens, and encumbrances. The Company was also in compliance with these restrictions as of July 31, 2019.

The Company incurred transaction costs and fees payable to the lender related to the issuance of the term loan. The amount, net of amortization, is immaterial and reduces the carrying amount of the term loan presented under Debt, current portion and Debt, net of current portion in the Company's unaudited condensed consolidated balance sheets.

The Company’s indebtedness under the Debt Agreement is secured by a lien on substantially all of its assets, including its intellectual property.

Note 13. Income Taxes

The following table reflects the Company's income tax provision, pretax loss and effective tax rate for the periods presented (in thousands, except percentages):



	Three Months Ended July 31,						Six Months Ended July 31,
	2019			2018			2019			2018
				As Adjusted¹						As Adjusted¹
Loss before income taxes	$	20,758		$	18,243		$	41,106		$	35,739
Income tax provision	$	55		$	302		$	299		$	595
Effective tax rate	(0.3		)%	(1.7		)%	(0.7		)%	(1.7		)%

(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 effective tax rates differ from the statutory rates primarily as a result of no benefit on pretax losses incurred in the United States, as the Company has determined that the benefit of the losses is not more likely than not to be realized.

Note 14. Stockholders’ Equity

Preferred Stock

As of July 31, 2019, the Company had authorized 10 million shares of preferred stock, each with a par value of $0.0001 per share. As of July 31, 2019, no shares of preferred stock were issued and outstanding.

Common Stock

Prior to Zuora's IPO, which was effective in April 2018, all shares of common stock then outstanding were reclassified into Class B common stock. Shares offered and sold in the IPO consisted of newly authorized shares of Class A common stock.

As of July 31, 2019, the Company had authorized 500 million shares of Class A common stock and 500 million shares of Class B common stock, each with a par value of $0.0001 per share. As of July 31, 2019, 87.9 million shares of Class A common stock and

10-Q	2019-07-31	Quarter: 2019-07-31
10-Q	2019-04-30	Quarter: 2019-04-30
10-K	2019-01-31	Annual: 2019-01-31
10-Q	2018-10-31	Quarter: 2018-10-31
10-Q	2018-07-31	Quarter: 2018-07-31
10-Q	2018-04-30	Quarter: 2018-04-30

8-K	2019-09-26	Other Events
8-K	2019-08-28	Earnings, Exhibits
8-K	2019-06-18	Shareholder Vote
8-K	2019-05-30	Earnings, Exhibits
8-K	2019-05-29	Officers
8-K	2019-03-21	Enter Agreement, Off-BS Arrangement, Exhibits
8-K	2019-03-21	Earnings, Exhibits
8-K	2019-02-28	Officers
8-K	2018-11-29	Earnings, Exhibits
8-K	2018-08-30	Earnings, Exhibits
8-K	2018-08-15	Other Events
8-K	2018-07-10	Other Events
8-K	2018-05-31	Earnings, Exhibits

DOCU	Docusign	8,068
MDSO	Medidata Solutions	5,704
BLKB	Blackbaud	4,326
BL	Blackline	2,780
MIME	Mimecast	2,463
INST	Instructure	1,467
SPSC	SPS Commerce	903
AMSWA	American Software	439
GEC	Great Elm Capital Group	86
TAOP	Taoping	21

EX-10.1	a20190731q2-ex101.htm
EX-31.1	a20190731q2-ex311.htm
EX-31.2	a20190731q2-ex312.htm
EX-32.1	a20190731q2-ex321.htm
EX-32.2	a20190731q2-ex322.htm