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COUPA SOFTWARE INC filed this Form 10-Q on 12/10/2018
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coup-10q_20181031.htm

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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, 2018

OR

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

Commission File Number: 001-37901

 

COUPA SOFTWARE INCORPORATED

(Exact name of Registrant as specified in its charter)

 

 

Delaware

 

20-4429448

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

1855 S. Grant Street

San Mateo, CA

 

94402

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (650) 931-3200

 

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 December 6, 2018, the Registrant had 59,444,864 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

Page

PART I.

 

FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements (Unaudited)

 

2

 

 

Condensed Consolidated Balance Sheets

 

2

 

 

Condensed Consolidated Statements of Operations

 

3

 

 

Condensed Consolidated Statements of Comprehensive Loss

 

4

 

 

Condensed Consolidated Statements of Cash Flows

 

5

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

29

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

42

Item 4.

 

Controls and Procedures

 

42

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

43

Item 1A.

 

Risk Factors

 

43

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

65

Item 3.

 

Defaults Upon Senior Securities

 

65

Item 4.

 

Mine Safety Disclosures

 

65

Item 5.

 

Other Information

 

65

Item 6.

 

Exhibits

 

66

 

 

Exhibit Index

 

66

 

 

Signatures

 

67

 

 

 

i


 

NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical facts contained in this report, including statements regarding our future results of operations and financial position, customer lifetime value, strategy and plans, market size and opportunity, competitive position, industry environment, potential growth opportunities, product capabilities, our expectations for future operations and our convertible senior notes, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “design,” “intend,” “expect,” “could,” “plan,” “potential,” “predict,” “seek,” “should,” “would” or the negative version of these words and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short- and long-term business operations and objectives, and financial needs. The forward-looking statements are contained principally in “Management’s Discussion and Analysis of Financial Condition and Result of Operations” and “Risk Factors.”

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management 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 forward-looking events and circumstances discussed in this Quarterly Report on 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. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations.

 

1


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

COUPA SOFTWARE INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(unaudited)

 

 

 

October 31,

 

 

January 31,

 

 

 

2018

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

227,606

 

 

$

412,903

 

Marketable securities

 

 

178,686

 

 

 

-

 

Accounts receivable, net of allowances

 

 

50,526

 

 

 

61,366

 

Prepaid expenses and other current assets

 

 

13,480

 

 

 

10,952

 

Deferred commissions, current portion

 

 

6,029

 

 

 

3,756

 

Total current assets

 

 

476,327

 

 

 

488,977

 

Property and equipment, net

 

 

8,583

 

 

 

5,186

 

Deferred commissions, net of current portion

 

 

14,998

 

 

 

3,896

 

Goodwill

 

 

125,621

 

 

 

44,410

 

Intangible assets, net

 

 

41,189

 

 

 

20,020

 

Other assets

 

 

7,090

 

 

 

9,961

 

Total assets

 

$

673,808

 

 

$

572,450

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,037

 

 

$

1,342

 

Accrued expenses and other current liabilities

 

 

34,068

 

 

 

26,643

 

Deferred revenue, current portion

 

 

128,683

 

 

 

125,714

 

Convertible senior notes, net

 

 

171,605

 

 

 

-

 

Total current liabilities

 

 

338,393

 

 

 

153,699

 

Convertible senior notes, net

 

 

-

 

 

 

163,010

 

Deferred revenue, net of current portion

 

 

1,430

 

 

 

2,316

 

Other liabilities

 

 

22,464

 

 

 

12,880

 

Total liabilities

 

 

362,287

 

 

 

331,905

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value per share; 25,000,000 shares authorized

   at October 31, 2018 and January 31, 2018; zero shares issued and outstanding

   at October 31, 2018 and January 31, 2018

 

 

-

 

 

 

-

 

Common stock, $0.0001 par value per share; 625,000,000 shares authorized

   at October 31, 2018 and January 31, 2018; 59,324,301 and 55,712,342

   shares issued and outstanding at October 31, 2018 and January 31, 2018,

   respectively

 

 

6

 

 

 

6

 

Additional paid-in capital

 

 

550,113

 

 

 

445,318

 

Accumulated other comprehensive loss

 

 

(311

)

 

 

(298

)

Accumulated deficit

 

 

(238,287

)

 

 

(204,481

)

Total stockholders’ equity

 

 

311,521

 

 

 

240,545

 

Total liabilities and stockholders’ equity

 

$

673,808

 

 

$

572,450

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

2


 

COUPA SOFTWARE INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

October 31,

 

 

October 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription services

 

$

60,559

 

 

$

42,795

 

 

$

165,899

 

 

$

118,223

 

Professional services and other

 

 

6,896

 

 

 

4,545

 

 

 

19,559

 

 

 

14,805

 

Total revenues

 

 

67,455

 

 

 

47,340

 

 

 

185,458

 

 

 

133,028

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription services

 

 

13,990

 

 

 

9,554

 

 

 

36,937

 

 

 

26,575

 

Professional services and other

 

 

7,674

 

 

 

5,441

 

 

 

21,492

 

 

 

16,865

 

Total cost of revenues

 

 

21,664

 

 

 

14,995

 

 

 

58,429

 

 

 

43,440

 

Gross profit

 

 

45,791

 

 

 

32,345

 

 

 

127,029

 

 

 

89,588

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

16,077

 

 

 

11,409

 

 

 

42,693

 

 

 

31,301

 

Sales and marketing

 

 

25,622

 

 

 

22,402

 

 

 

76,862

 

 

 

66,892

 

General and administrative

 

 

14,010

 

 

 

9,693

 

 

 

40,085

 

 

 

27,300

 

Total operating expenses

 

 

55,709

 

 

 

43,504

 

 

 

159,640

 

 

 

125,493

 

Loss from operations

 

 

(9,918

)

 

 

(11,159

)

 

 

(32,611

)

 

 

(35,905

)

Interest expense

 

 

(3,181

)

 

 

(6

)

 

 

(9,276

)

 

 

(12

)

Interest income and other, net

 

 

1,112

 

 

 

126

 

 

 

1,562

 

 

 

1,273

 

Loss before provision for (benefit from) income taxes

 

 

(11,987

)

 

 

(11,039

)

 

 

(40,325

)

 

 

(34,644

)

Provision for (benefit from) income taxes

 

 

(2,342

)

 

 

263

 

 

 

(1,372

)

 

 

438

 

Net loss

 

$

(9,645

)

 

$

(11,302

)

 

$

(38,953

)

 

$

(35,082

)

Net loss per share attributable to common stockholders, basic and

   diluted

 

$

(0.17

)

 

$

(0.21

)

 

$

(0.68

)

 

$

(0.67

)

Weighted-average number of shares used in computing net loss per

   share attributable to common stockholders, basic and diluted

 

 

58,212

 

 

 

53,779

 

 

 

57,030

 

 

 

52,388

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

3


 

COUPA SOFTWARE INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

October 31,

 

 

October 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

 

$

(9,645

)

 

$

(11,302

)

 

$

(38,953

)

 

$

(35,082

)

Other comprehensive gain (loss) in relation to defined benefit

   plans, net of tax

 

 

(22

)

 

 

-

 

 

 

87

 

 

 

-

 

Unrealized loss on marketable securities, net of tax

 

 

(68

)

 

 

-

 

 

 

(100

)

 

 

-

 

Comprehensive loss

 

$

(9,735

)

 

$

(11,302

)

 

$

(38,966

)

 

$

(35,082

)

 

See Notes to Condensed Consolidated Financial Statements.

 

4


 

COUPA SOFTWARE INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

October 31,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(38,953

)

 

$

(35,082

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,720

 

 

 

5,557

 

Accretion of discounts on marketable securities, net

 

 

(956

)

 

 

-

 

Amortization of deferred commissions

 

 

4,127

 

 

 

2,967

 

Amortization of debt discount and issuance costs

 

 

8,595

 

 

 

-

 

Stock-based compensation

 

 

38,690

 

 

 

20,783

 

Other

 

 

(374

)

 

 

202

 

Changes in operating assets and liabilities net of effects from acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

12,391

 

 

 

15,625

 

Prepaid expenses and other current assets

 

 

(3,304

)

 

 

(571

)

Other assets

 

 

(542

)

 

 

286

 

Deferred commissions

 

 

(8,467

)

 

 

(2,915

)

Accounts payable

 

 

2,458

 

 

 

335

 

Accrued expenses and other liabilities

 

 

6,362

 

 

 

8,408

 

Deferred revenue

 

 

1,216

 

 

 

5,703

 

Net cash provided by operating activities

 

 

27,963

 

 

 

21,298

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(209,331

)

 

 

-

 

Maturities of marketable securities

 

 

31,834

 

 

 

-

 

Acquisitions, net of cash acquired

 

 

(49,211

)

 

 

(39,593

)

Purchases of property and equipment

 

 

(4,870

)

 

 

(3,587

)

Net cash used in investing activities

 

 

(231,578

)

 

 

(43,180

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Payment of issuance costs for the issuance of convertible senior notes

 

 

(639

)

 

 

-

 

Proceeds from issuance of common stock, net of underwriting discounts, commissions

   and offering costs

 

 

-

 

 

 

22,264

 

Proceeds from the exercise of common stock options

 

 

10,174

 

 

 

10,120

 

Proceeds from issuance of common stock for employee stock purchase plan

 

 

8,778

 

 

 

6,824

 

Net cash provided by financing activities

 

 

18,313

 

 

 

39,208

 

Net (decrease) increase in cash, cash equivalents, and restricted cash

 

 

(185,302

)

 

 

17,326

 

Cash, cash equivalents, and restricted cash at beginning of year

 

 

412,976

 

 

 

201,972

 

Cash, cash equivalents, and restricted cash at end of period

 

$

227,674

 

 

$

219,298

 

Reconciliation of cash, cash equivalents, and restricted cash to the condensed

   consolidated balance sheets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

227,606

 

 

$

219,298

 

Restricted cash included in other assets

 

 

68

 

 

 

-

 

Total cash, cash equivalents, and restricted cash

 

$

227,674

 

 

$

219,298

 

 

See Notes to Condensed Consolidated Financial Statements.

5


 

COUPA SOFTWARE INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

October 31,

 

 

 

2018

 

 

2017

 

Supplemental disclosure of cash flow data

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

4,056

 

 

$

632

 

Supplemental disclosure of non-cash investing and financing activities

 

 

 

 

 

 

 

 

Vesting of early exercised stock options

 

$

273

 

 

$

2,128

 

Property and equipment included in accounts payable and accrued expenses and other

   current liabilities

 

$

897

 

 

$

72

 

 

See Notes to Condensed Consolidated Financial Statements.

 

6


 

COUPA SOFTWARE INCORPORATED

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Organization and Description of Business

Coupa Software Incorporated (the “Company”) was incorporated in the state of Delaware in 2006. The Company provides a comprehensive, cloud-based business spend management (or BSM) platform that provides greater visibility into and control over how companies spend money. The BSM platform enables businesses to achieve savings that drive profitability. The Company is based in San Mateo, California.

 

 

Note 2. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2018 filed with the SEC on March 28, 2018 (the “Form 10-K”). The condensed consolidated financial statements include the results of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated during consolidation.

The condensed consolidated balance sheet as of January 31, 2018, 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.  Certain amounts in the condensed consolidated financial statements and notes to the condensed consolidated financial statements for the prior period have been reclassified to conform to the presentation for the three and nine months ended October 31, 2018. Net operating results have not been affected by these reclassifications.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, comprehensive loss and cash flows for the interim periods, but are not necessarily indicative of the results to be expected for the full fiscal year or any other period.

There have been no changes to our significant accounting policies described in the Form 10-K for the year ended January 31, 2018 except for changes applied due to the adoption of ASU No. 2014-09, Revenue from Contracts with Customers and in relation to the Company’s recent marketable securities activities.  Refer to “Recently Adopted Accounting Pronouncements.”

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, management evaluates its significant estimates including, but not limited to, the valuation of accounts receivable, the lives of tangible and intangible assets, stock-based compensation, the fair value of the contingent stock consideration, the valuation of acquired intangible assets and the recoverability or impairment of tangible and intangible assets, including goodwill, revenue recognition, the fair value of marketable securities, convertible senior notes fair value, the benefit period of deferred commissions, and provision for (benefit from) income taxes. Management bases its estimates on historical experience and on various other market-specific and relevant assumptions that management believes to be reasonable under the circumstances. Actual results could differ from those estimates and such differences could be material to the financial position and results of operations.

Concentration of Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, marketable securities, and accounts receivable. Cash deposits exceed amounts insured by the Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation. The Company has not experienced any losses on its deposits of cash and cash equivalents to date.

7


 

Comprehensive Loss

Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company’s comprehensive gain or loss consists of other comprehensive gain or loss in relation to defined benefits plans, and unrealized gain or loss on marketable securities, net of tax. 

Revenue Recognition

The Company derives its revenues primarily from subscription services fees and professional services fees. Revenues are recognized when control of these services are transferred to the Company’s customers in an amount that reflects the consideration expected to be entitled to in exchange for those services.  Revenues are recognized net of applicable taxes imposed on the related transaction. The Company’s revenue recognition policy follows guidance from Accounting Standards Codification 606, Revenue from Contracts with Customers (Topic 606).

The Company determines revenue recognition through the following five-step framework:

 

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 a performance obligation.

Subscription Services Revenues

The Company offers subscriptions to its cloud-based business spend management platform, including procurement, invoicing and expense management. Subscription services revenues consist primarily of fees to provide the Company’s customers access to its cloud-based platform, which includes routine customer support. Subscription service contracts do not provide customers with the right to take possession of the software, are non-cancelable, and do not contain general rights of return. Generally revenues are recognized ratably over the contractual term of the arrangement, beginning on the date that the service is made available to the customer. Subscription contracts typically have a term of three years with invoicing occurring in annual installments at the beginning of each year in the subscription period.

Professional Services Revenues and Other

The Company offers professional services which include deployment services, optimization services, and training. Professional services are generally sold on a fixed-fee or time-and-materials basis.  For services billed on a fixed-fee basis, invoicing typically occurs in advance, and revenue is recognized over time based on the proportion performed.  For services billed on a time-and-materials basis, revenue is recognized over time as services are performed.

Refer to Note 14, “Significant Customers and Geographic Information” for additional information on disaggregated revenue during the period.

Significant Judgments

The Company’s contracts with customers often include promises to transfer multiple products and services to a customer.  For these contracts, the Company accounts for individual performance obligations separately if they are distinct.  Subscription services and professional services are both distinct performance obligations that are accounted for separately.  In contracts with multiple performance obligations, the transaction price is allocated to separate performance obligations on a relative standalone selling price basis.

The determination of standalone selling price (“SSP”) for each distinct performance obligations requires judgment.  The Company determines SSP for performance obligations based on overall pricing objectives, which take into consideration market conditions and entity-specific factors. This includes a review of historical data related to the size of arrangements, the cloud applications being sold, customer demographics and the numbers and types of users within the arrangements.  The Company uses a range of amounts to estimate SSP for performance obligations.  There is typically more than one SSP for individual products and services due to the stratification of those products and services by considerations such as size and type of customer.

8


 

Contract Balances

The timing of revenue recognition may differ from the timing of invoicing for contracts with customers. The Company records a receivable when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing. Subscription services and certain professional services arrangements are commonly billed in advance, recognized as deferred revenue, and then amortized as revenue over time.  However, other professional services arrangements, primarily those recognized on a time-and-materials basis, are billed in arrears following services that have been rendered.  This may result in revenue recognition greater than invoiced amounts which results in a receivable balance.  Receivables represent an unconditional right to payment. As of October 31, 2018 and January 31, 2018, the balance of accounts receivable, net of the allowance for doubtful accounts, was $50.5 million and $61.4 million, respectively.  Of these balances, $1.7 million and $1.2 million represent unbilled receivable amounts as of October 31, 2018 and January 31, 2018, respectively.

When the timing of revenue recognition differs from the timing of invoicing, the Company uses judgment to determine whether the contract includes a significant financing component requiring adjustment to the transaction price. Various factors are considered in this determination including the duration of the contract, payment terms, and other circumstances. Generally, the Company determined that contracts do not include a significant financing component. The Company applies the practical expedient for instances where, at contract inception, the expected timing difference between when promised goods or services are transferred and associated payment will be one year or less.  Payment terms vary by contract type, however arrangements typically stipulate a requirement for the customer to pay within 30 days.

At any point in the contract term, transaction price may be allocated to performance obligations that are unsatisfied or are partially unsatisfied.  These amounts relate to remaining performance obligations on non-cancelable contracts which include both the deferred revenue balance and amounts that will be invoiced and recognized as revenue in future periods.  As of October 31, 2018, approximately $406.7 million of revenue is expected to be recognized from remaining performance obligations, a majority of which is related to multi-year subscription arrangements.  The Company expects to recognize revenue on approximately three fourths of these remaining performance obligations within the next 24 months and the remainder thereafter.  The Company applies the practical expedient to exclude remaining performance obligations that are part of contracts with an original expected duration of one year or less. During the three and nine months ended October 31, 2018, the revenue recognized from performance obligations satisfied in prior periods was approximately $193,000 and $825,000.

Accounts Receivable and Allowance for Doubtful Accounts

The Company extends credit to its customers in the normal course of business, and does not require cash collateral or other security to support the collection of customer receivables. The Company estimates the amount of uncollectible accounts receivable at the end of each reporting period based on the aging of the receivable balance, historical experience, and communications with customers, and provides a reserve when needed. Accounts receivable are written off when deemed uncollectible. The allowance for doubtful accounts was not material at October 31, 2018 and January 31, 2018.

Deferred Revenue

Deferred revenue consists of customer billings or payments received in advance of the recognition of revenue and is recognized as revenue as the revenue recognition criteria are met. The Company generally invoices its customers annually for the forthcoming year of service. Accordingly, the Company’s deferred revenue balance does not include revenue for future years of multiple year non-cancellable contracts that have not yet been billed. During the three and nine months ended October 31, 2018, the Company recognized revenue of $56.5 million that was included in the deferred revenue balance as of July 31, 2018 and $113.8 million that was included in the deferred revenue balance as of January 31, 2018.

Deferred Commissions

Commissions are earned by sales personnel upon the execution of the sales contract by the customer, and commission payments are made shortly after they are earned. Commission costs can be associated specifically with subscription and professional services arrangements.  Commissions earned by the Company’s sales personnel are considered incremental and recoverable costs of obtaining a contract with a customer. These costs are deferred and then amortized over a period of benefit of five years.  The Company determined the period of benefit by taking into consideration its past experience with customers, present value of future cash flows, industry peers and other available information.  

Deferred commissions totaled $21.0 million at October 31, 2018.  For the three and nine months ended October 31, 2018, $1.5 million and $4.1 million of deferred commissions were amortized to sales and marketing expense in the accompanying condensed consolidated statements of operations.

9


 

Marketable Securities

Marketable securities consist of financial instruments such as U.S. treasury securities, U.S. agency obligations, corporate notes and bonds, commercial paper, and asset backed securities. The Company classifies marketable securities as available-for-sale at the time of purchase and reevaluates such classification as of each balance sheet date. All marketable securities are recorded at estimated fair value.

Unrealized gains and losses for available-for-sale securities are included in accumulated other comprehensive loss, a component of stockholders’ equity. The Company evaluates its marketable securities to assess whether those with unrealized loss positions are other than temporarily impaired. Impairments are considered to be other than temporary if they are related to a deterioration in credit risk or if it is likely that the Company will sell the securities before recovering its cost basis. Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in interest income and other, net in the condensed consolidated statements of operations.

If quoted prices for identical instruments are available in an active market, marketable securities are classified within Level 1 of the fair value hierarchy. If quoted prices for identical instruments in active markets are not available, fair values are estimated using quoted prices of similar instruments and are classified within Level 2 of the fair value hierarchy.

Recently Adopted Accounting Pronouncements

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) which provided a comprehensive model for entities to use in accounting for revenue arising from contracts with customers.  Topic 606 superseded the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The core principle of Topic 606 is to recognize revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  Topic 606 also includes Subtopic 340-40 which provides accounting guidance for incremental costs of obtaining a contract with a customer. The Company refers to Topic 606 and Subtopic 340-40 collectively as the “new revenue standard.”

The Company adopted the new revenue standard effective on February 1, 2018 using the modified retrospective method applied to all contracts not completed as of the adoption date.  Results for reporting periods beginning on February 1, 2018 are presented under the new revenue standard, while comparative results have not been restated. The primary impact of adopting the new revenue standard relates to Subtopic 340-40 and the deferral of incremental commission costs to obtain contracts with customers.  Under Topic 605, the Company deferred only direct and incremental commission costs to obtain a contract and amortized those costs over the non-cancelable contract term. Under the new revenue standard, the Company defers all incremental commission costs to obtain the contract. The Company amortizes these costs over a period of benefit of five years.  The adoption of the new revenue standard also removed the limitation on contingent revenue under Topic 605 which impacted revenue recognition and is reflected in the changes to the Company’s revenue recognition accounting policy.

The following table summarizes the cumulative impact of adoption of the new revenue standard for revenue recognition on line items within the Condensed Consolidated Balance Sheets (in thousands): 

 

 

 

As of January 31, 2018

 

 

As Previously

Reported

 

 

Adjustments

for the New

Revenue

Standard

 

 

As Adjusted

Assets

 

 

 

 

 

 

 

 

 

 

 

Deferred commissions, current portion

 

$

3,756

 

 

$

778

 

 

$

4,534

Deferred commissions, net of current portion

 

 

3,896

 

 

 

8,257

 

 

 

12,153

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue, current portion

 

 

125,714

 

 

 

(1,732

)

 

 

123,982

Deferred revenue, net of current portion

 

 

2,316

 

 

 

(10)

 

 

 

2,306

Accumulated deficit

 

 

(204,481

)

 

 

10,777

 

 

 

(215,258)

 

10


 

The impact of adoption on the condensed consolidated statements of cash flows for the nine months ended October 31, 2018 was immaterial.  The impact to sales and marketing expense within the condensed consolidated statements of operations was a decrease of approximately $1.3 million and $3.4 million for the three and nine months ended October 31, 2018, respectively, due to deferred commission costs that would have been expensed prior to adoption of the new standard. The following table summarizes the effects of the new revenue standard for revenue recognition on line items within the Condensed Consolidated Balance Sheets (in thousands):

 

 

 

As of October 31, 2018

 

 

Prior to

Adoption of the

New Revenue

Standard

 

 

Adjustments

for the New

Revenue

Standard

 

 

As Adjusted

Assets

 

 

 

 

 

 

 

 

 

 

 

Deferred commissions, current portion

 

$

4,429

 

 

$

1,600

 

 

$

6,029

Deferred commissions, net of current portion

 

 

4,133

 

 

 

10,856

 

 

 

14,998

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue, current portion

 

 

130,915

 

 

 

(2,232

)

 

 

128,683

Deferred revenue, net of current portion

 

 

1,421

 

 

 

9

 

 

 

1,430

Accumulated deficit

 

 

(223,599

)

 

 

14,688

 

 

 

(238,287)

 

In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16"). ASU 2016-16 requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. As of January 31, 2018, the Company had an aggregate prepaid tax asset of $5.6 million recorded in prepayments and other current assets and other long-term assets, which represents tax expense that was deferred in accordance with GAAP prior to adoption of ASU 2016-16. The Company adopted this standard on February 1, 2018 and reversed the deferred tax charge of $5.6 million through a cumulative-effect adjustment to the accumulated deficit.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). ASU 2016-18 requires an entity to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows, and an entity will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. This guidance is effective for annual and interim reporting periods, beginning after December 15, 2017. Entities are required to apply the standard’s provisions on a retrospective basis. The Company adopted this standard on February 1, 2018, which did not have material impact on the Company consolidated statement of cash flows.

In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715), (“ASU 2017-07”).  ASU 2017-07 provides guidance on the presentation of the service cost component and the other components of net period pension cost in the consolidated statements of operations.  The standard is effective for annual and interim reporting periods beginning after December 15, 2017 and requires retrospective adoption.  The Company adopted this standard on February 1, 2018, which did not have a material impact on the Company’s consolidated financial statements and related disclosures.

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”), which provides clarified guidance on applying modification accounting to changes in the terms or conditions of a share-based payment award. ASU 2017-09 is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted. This change is required to be applied prospectively to an award modified on or after the adoption date. The Company adopted this standard on February 1, 2018, which did not have impact on the Company’s consolidated financial statements and related disclosures.

New Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”) which provides guidance for lease accounting. Since the issuance of ASU 2016-02, the FASB has also issued ASU 2017-13, ASU 2018-01, ASU 2018-10 and ASU 2018-11, all of which clarify certain aspects of ASU 2016-02. The new lease standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new lease standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and early adoption is permitted. A modified retrospective transition approach is required for lessees with capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.

11


 

The Company will adopt the new lease standard in the first quarter of fiscal 2020 and plans to utilize certain practical expedients for this adoption. Upon adoption, the Company will recognize right-of-use assets and operating lease liabilities on the Company’s condensed consolidated balance sheets, which will increase total assets and total liabilities. The Company anticipates that the adoption of the new lease standard will have a material impact on its condensed consolidated balance sheets given that the Company had operating lease commitments of approximately $34.2 million as of October 31, 2018, on an undiscounted basis.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. ASU 2017-04 also clarifies the requirements for excluding and allocating foreign currency translation adjustments to reporting units related to an entity’s testing of reporting units for goodwill impairment, and clarifies that an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The guidance is effective for annual reporting periods beginning after January 1, 2020 and interim periods within those fiscal years. The Company is not expecting this standard to have an impact on its historical financial statements.

In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”), which provides the option to reclassify certain income tax effects related to the Tax Cuts and Jobs Act passed in December of 2017 between accumulated other comprehensive income and retained earnings and also requires additional disclosures.  ASU 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted.  Adoption of ASU 2018-02 is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the tax laws or rates were recognized.  The Company is currently evaluating the impact of adopting ASU 2018-02 on its consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Non-Employee Share Based Payment Accounting (“ASU 2018-07”), with an intent to reduce cost and complexity and to improve financial reporting for share-based payments issued to non-employees. The amendments in ASU 2018-07 provide for the simplification of the measurement of share-based payment transactions for acquiring goods and services from non-employees. Currently, the accounting requirements for nonemployee and employee share-based payment transactions are significantly different. This standard expands the scope of Topic 718 to include share-based payments issued to nonemployees for goods or services, aligning the accounting for share-based payments to nonemployees and employees. ASU 2018-17 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those periods, and early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2018-07 on its consolidated financial statements.In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which amends ASC 820, Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The effective date is the first quarter of fiscal year 2021, with early adoption permitted for the removed disclosures and delayed adoption until fiscal year 2021 permitted for the new disclosures. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. The Company is currently evaluating the impact of adopting ASU 2018-13 on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 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 (“ASU 2018-15”). The amendment 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 (and hosting arrangements that include an internal-use software license). The effective date is for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption allowed. The Company is currently evaluating the method of adoption and related impact of ASU 2018-15 on its consolidated financial statements.

 

 

Note 3. Marketable Securities

 

The following is a summary of available-for-sale marketable securities, excluding those securities classified within cash and cash equivalents on the condensed consolidated balance sheets at October 31, 2018 (in thousands):

 

 

Amortized

Cost

 

Unrealized

Gain

 

Unrealized

Losses

 

 

Fair Value

 

U.S. agency obligations

$

37,148

 

$

-

 

$

(23

)

 

$

37,125

 

U.S. treasury securities

85,186

 

-

 

(27

)

 

85,159

 

Corporate notes and bonds

26,779

 

-

 

(40

)

 

26,739

 

Commercial paper

17,844

 

-

 

-

 

 

17,844

 

Asset backed securities

11,829

 

1

 

(11

)

 

11,819

 

Total marketable securities

$

178,786

 

$

1

 

$

(101

)

 

$

178,686

 

 

12


 

As of October 31, 2018, the fair values of available-for-sale marketable securities, by remaining contractual maturity, were as follows (in thousands):

 

Due within one year

$

161,436

 

Due in one year through five years

17,250

 

 

$

178,686

 

 

The Company does not believe that any unrealized losses represent other-than-temporary impairments based on its evaluation of available evidence. To determine whether a decline in value is other-than-temporary, the Company evaluates, among other factors: the duration and extent to which the fair value has been less than the carrying value and its intent and ability to retain the marketable securities for a period of time sufficient to allow for any anticipated recovery in fair value. The Company considers all marketable securities as available for use in current operations, including those with maturity dates beyond one year, and therefore classifies these securities as current assets in the accompanying condensed consolidated balance sheets. No marketable securities were sold during the three months ended October 31, 2018.

 

 

Note 4. Business Combinations

 

Vinimaya, Inc. (d/b/a Aquiire)

On October 12, 2018, the Company completed its acquisition of Vinimaya, Inc. which conducted business as Aquiire (“Aquiire”) pursuant to an agreement dated October 7, 2018. Aquiire is a real-time supplier catalog search company, and the acquisition extended the Company’s capability to deliver a comprehensive business-to-business shopping experience spanning real-time, cached, and localized catalog search.

The acquisition was accounted for as a business combination and, accordingly, the total fair value of purchase consideration was allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values on the acquisition date. The purchase consideration comprises $30.5 million in cash (of which $3.8 million is being held back by the Company for 18 months after closing of the acquisition) and 300,560 shares of the Company’s common stock (of which 37,570 shares are being held back by the Company for 18 months after closing of the acquisition).

 

The major classes of assets and liabilities to which the Company has allocated the fair value of purchase consideration were as follows (in thousands):

 

 

October 12, 2018

Accounts receivable

$

1,511

Intangible assets

 

12,400

Other assets

 

1,104

Goodwill

 

41,850

Accounts payable and other liabilities

 

(1,610)

Deferred revenue

 

(2,609)

Deferred tax liability, net

 

(3,126)

Total consideration

$

49,520

 

Other assets include indemnification assets totaling approximately $1.1 million due to assumed liability for which the seller is responsible. The Company continues to collect information and reevaluate the estimates and assumptions and records any adjustments to the Company’s preliminary estimates to goodwill provided that the Company is within the measurement period. The goodwill recognized was primarily attributed to increased synergies that are expected to be achieved from the integration of Aquiire and is not expected to be deductible for income tax purposes.  The Company determined the fair values of intangible assets acquired and liabilities assumed with the assistance of third party valuation consultants. Based on this valuation, the intangible assets acquired are (in thousands):  

 

 

Fair Value

 

 

Useful life

(in Years)

Developed technology

$

8,900

 

 

5

Customer relationships

 

3,500

 

 

5

Total intangible assets

$

12,400

 

 

 

 

13


 

The Company incurred costs related to this acquisition of approximately $424,000 during the three months ended October 31, 2018. All acquisition related costs were expensed as incurred and have been recorded in general and administrative expenses in the accompanying consolidated statements of operations.

The revenue and earnings of the acquired business have been included in the Company’s results since the acquisition date and are not material to the Company’s consolidated financial results. Pro forma results of operations for this acquisition have not been presented as the financial impact to the Company’s condensed consolidated financial statements would be immaterial.

DCR Workforce, Inc.

On August 1, 2018, the Company completed the acquisition of the technology assets of DCR Workforce Inc. ("DCR") for aggregate cash consideration of $25 million paid at closing (of which $3.75 million is being held back by the Company until the second anniversary after closing of the acquisition) and certain contingent stock consideration that may be earned and issued in the future. The maximum contingent stock consideration that may be earned and issued is up to 668,740 shares of the Company’s common stock. The payout of the contingent stock consideration will be determined based on the achievement of distinct revenue performance targets for each of three separate measurement periods that continue through December 31, 2022. As of October 31, 2018, the revenue performance target for the first measurement period ending October 31, 2019 has been met, and the Company expects to issue 291,602 shares of the Company’s common stock to the shareholders of DCR in the fourth quarter ending January 31, 2019.

The acquisition was accounted for as a business combination. The contingent stock consideration for each of three separate measurement periods may individually result in the delivery of a fixed number of shares and as a result it was classified as equity on the Company’s consolidated balance sheet. The fair value of the contingent stock consideration as of August 1, 2018, was determined to be $27.2 million using the Monte Carlo simulation method. This estimate was based on level 3 inputs under the fair value measurement and disclosure guidance which are not observable in the market including estimated financial forecasts.

The aggregate fair value of purchase consideration of $52.2 million, comprising of $25 million cash consideration and $27.2 million stock consideration, was allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values on the acquisition date.

The major classes of assets to which the Company has allocated the fair value of purchase consideration were as follows (in thousands):

 

 

August 1, 2018

 

Other current assets

$

46

 

Intangible assets

 

12,800

 

Goodwill

 

39,361

 

Total consideration

$

52,207

 

 

There were no liabilities assumed by the Company for the DCR acquisition. The Company continues to collect information and reevaluate the estimates and assumptions and records any adjustments to the Company’s preliminary estimates to goodwill provided that the Company is within the measurement period. The goodwill recognized was primarily attributed to increased synergies that are expected to be achieved from the integration of DCR and is expected to be deductible for income tax purposes.  The Company determined the fair values of intangible assets acquired with the assistance of third party valuation consultants. Based on this valuation, the intangible assets acquired are as follows (in thousands):  

 

 

Fair Value

 

 

Useful life

(in Years)

Developed technology

$

9,500

 

 

5

Customer relationships

 

3,300

 

 

5

Total intangible assets

$

12,800

 

 

 

 

14


 

The Company incurred costs related to this acquisition of approximately $316,000 during the three months ended October 31, 2018. All acquisition related costs were expensed as incurred and have been recorded in general and administrative expenses in the accompanying consolidated statements of operations.

The revenue and earnings of the acquired business have been included in the Company’s results since the acquisition date. Pro forma results of operations for this acquisition have not been presented as the financial impact to the Company’s condensed consolidated financial statements would be immaterial.

In conjunction with the acquisition of technology assets of DCR, the Company signed a license agreement with DCR pursuant to which the Company granted DCR a limited, non-sublicensable, non-transferable, and nonexclusive license right to use certain of the intellectual property that the Company acquired from DCR. The Company also signed a transition service agreement, pursuant to which DCR will provide administrative services to the Company during a transitional service period to support the continuing operation of the acquired business. In addition, the Company signed a three-year office lease agreement beginning from August 1, 2018 with an entity that is wholly owned by the shareholders of DCR. Refer to Note 15 Related Parties for additional disclosure on the agreements.

Simeno Holdings AG

On December 1, 2017, the Company acquired all of the issued and outstanding capital stock held by of Simeno Holdings AG (“Simeno”), a Switzerland based cross-catalog search and catalog management company.

The acquisition was accounted for as a business combination and, accordingly, the total fair value of purchase consideration was allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values on the acquisition date. The total purchase consideration was $8.7 million in cash, of which $1.5 million is being held until the second anniversary after closing of the acquisition. In addition, approximately $8.0 million in the form of 221,257 shares of the Company’s common stock was issued to the selling shareholder of Simeno and this stock is subject to service vesting conditions including continued employment with the Company. The value assigned to the common stock issued will be recorded as post-acquisition compensation expense over the requisite service period and has been excluded from the purchase consideration.

 

The major classes of assets and liabilities to which the Company has allocated the fair value of purchase consideration were as follows (in thousands):

 

 

December 1, 2017

 

Cash and cash equivalents

$

747

 

Accounts receivable

 

1,912

 

Intangible assets

 

3,820

 

Other assets

 

331

 

Deferred tax assets, net

 

285

 

Goodwill

 

7,264

 

Accounts payable and other liabilities

 

(1,405

)

Pension plan obligation

 

(4,226

)

Total consideration

$

8,728

 

 

The goodwill recognized was primarily attributed to increased synergies that are expected to be achieved from the integration of Simeno and is not expected to be deductible for income tax purposes.  The Company determined the fair values of intangible assets acquired and liabilities assumed with the assistance of third party valuation consultants. Based on this valuation, the intangible assets acquired are as follows (in thousands):  

 

 

Fair Value

 

 

Useful life

(in Years)

Developed technology

$

2,300

 

 

4

Customer relationships

 

1,520

 

 

4

Total intangible assets

$

3,820

 

 

 

 

15


 

Simeno maintained a pension plan covering employees in Switzerland pursuant to the requirements of Swiss pension law, which has been assumed by the Company upon the completion of the acquisition. The pension plan is accounted for as a defined benefit pension plan, which requires the Company to recognize the underfunded status of the plan as a liability in the consolidated balance sheets and changes in the funded status of defined benefit pension plan through other comprehensive loss. As of the acquisition date in December 2017, the Company recorded net liabilities of $4.2 million on its consolidated balance sheet in connection with this pension plan.

The Company incurred costs related to this acquisition of approximately $445,000 during the year ended January 31, 2018 and no significant costs were incurred during the nine months ended October 31, 2018. All acquisition related costs were expensed as incurred and have been recorded in general and administrative expenses in the accompanying consolidated statements of operations.

Trade Extensions TradeExt AB

On May 3, 2017, the Company acquired substantially all of the issued and outstanding capital stock held by shareholders of Trade Extensions TradeExt AB (“Trade Extensions”), a Swedish corporation. The acquisition enabled the Company to broaden its cloud platform for business spend, particularly in the area of strategic sourcing.

Upon the closing of the acquisition, the Company paid aggregate consideration of approximately $40.9 million in cash, of which $7.2 million is being held in escrow for 18 months after the transaction closing date. In November 2018, substantially all of the amount that was being held in escrow was released after deducting certain amounts to cover indemnification obligations and associated contractual provisions.

In addition, approximately $4.1 million in the form of 148,476 shares of the Company’s common stock was issued to certain key employees of Trade Extensions, which stock is subject to service vesting conditions including continued employment with the Company. The value assigned to the common stock issued will be recorded as post-acquisition compensation expense and has been excluded from the purchase consideration.

The major classes of assets and liabilities to which the Company has allocated the fair value of purchase consideration were as follows (in thousands):

 

 

May 3, 2017

 

Cash and cash equivalents

$

2,016

 

Accounts receivable

 

1,172

 

Intangible assets

 

12,960

 

Other assets

 

2,086

 

Goodwill

 

30,840

 

Accounts payable and other liabilities

 

(8,125

)

Total consideration

$

40,949

 

 

Other assets include indemnification assets totaling $1.4 million due to assumed liability for which the seller is responsible.  The goodwill recognized was primarily attributed to increased synergies that are expected to be achieved from the integration of Trade Extensions and is not expected to be deductible for income tax purposes.  The Company determined the fair values of intangible assets acquired with the assistance of third party valuation consultants. Based on this valuation, the intangible assets acquired are (in thousands):

 

 

Fair Value

 

 

Useful life

(in Years)

Developed technology

$

9,700

 

 

7

Customer relationships

 

3,100

 

 

5

Trademarks

 

160

 

 

1

Total intangible assets

$

12,960

 

 

 

 

The Company incurred costs related to this acquisition of approximately $526,000 during the year ended January 31, 2018. All acquisition related costs were expensed as incurred and have been recorded in general and administrative expenses in the accompanying consolidated statements of operations.

 

16


 

Note 5. Fair Value Measurements

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Subsequent changes in fair value of these financial assets and liabilities are recognized in earnings or other comprehensive loss when they occur. When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurement or assumptions that market participants would use in pricing the assets or liabilities, such as inherent risk, transfer restrictions and credit risk.

The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities.

 

Level 2 - Observable inputs other than quoted price in active markets for identical assets or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially full term of assets or liabilities.

 

Level 3 - Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the assets or liabilities.

The following table summarizes the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis (in thousands):

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

October 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

191,027

 

 

$

-

 

 

$

-

 

 

$

191,027

 

U.S. agency obligations

 

-

 

 

 

9,170

 

 

-

 

 

 

9,170

 

Commercial paper

 

-

 

 

 

1,597

 

 

-

 

 

 

1,597

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency obligations

 

-

 

 

 

37,125

 

 

-

 

 

 

37,125

 

U.S. treasury securities

 

-

 

 

 

85,159

 

 

-

 

 

 

85,159

 

Corporate notes and bonds

 

-

 

 

 

26,739

 

 

-

 

 

 

26,739

 

Commercial paper

 

-

 

 

 

17,844

 

 

-

 

 

 

17,844

 

Asset backed securities

 

-

 

 

 

11,819

 

 

-

 

 

 

11,819

 

January 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

 

389,357

 

 

-

 

 

-

 

 

 

389,357

 

 

 

(1)

Included in cash and cash equivalents.

The Company carries Convertible Senior Notes (the “Convertible Notes”) at face value less unamortized discount and issuance costs on its consolidated balance sheet, and presents the fair value for required disclosure purposes only. As of October 31, 2018, the fair value of the Convertible Notes was $356.9 million. The estimated fair values of the Convertible Notes, which the Company has classified as Level 2 financial instruments, were determined based on the quoted bid prices of the Convertible Notes on the last trading day of each reporting period. As of January 31, 2018, the fair value of the Convertible Notes approximated its carrying amount at that time. For Note 9 for further information on the Convertible Notes.

 

 

17


 

Note 6. Property and Equipment, net

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

 

 

 

October 31,

 

 

January 31,

 

 

 

2018

 

 

2018

 

Furniture and equipment

 

$

2,829

 

 

$

1,897

 

Software development costs

 

 

21,845

 

 

 

16,574

 

Leasehold improvements

 

 

848

 

 

 

557

 

Construction in progress

 

 

-

 

 

 

149

 

Total property and equipment

 

 

25,522

 

 

 

19,177

 

Less: accumulated depreciation and amortization

 

 

(16,939

)

 

 

(13,991

)

Property and equipment, net

 

$

8,583

 

 

$

5,186

 

 

Depreciation and amortization expense related to property and equipment, excluding software development costs, was approximately $205,000 and $140,000 for the three months ended October 31, 2018 and 2017, respectively and $581,000 and $379,000 for the nine months ended October 31, 2018 and 2017, respectively.

 

Amortization expense related to software development costs was approximately $753,000 and $932,000 for the three months ended October 31, 2018 and 2017, respectively, and $2.4 million and $3.0 million for the nine months ended October 31, 2018 and 2017, respectively.

 

 

Note 7. Goodwill and Other Intangible Assets

Goodwill

The following table represents the changes in goodwill (in thousands):.

 

Balance at January 31, 2018

 

$

44,410

 

Additions from acquisitions

 

 

81,211

 

Balance at October 31, 2018

 

$

125,621

 

 

Other Intangible Assets

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

 

 

 

As of

 

 

 

October 31, 2018

 

 

January 31, 2018

 

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

Developed technology

 

$

38,435

 

 

$

(7,190

)

 

 

31,245

 

 

$

19,385

 

 

$

(4,153

)

 

 

15,232

 

Customer relationships

 

 

11,494

 

 

 

(1,550

)

 

 

9,944

 

 

 

4,694

 

 

 

(597

)

 

 

4,097

 

Trademarks

 

 

160

 

 

 

(160

)

 

 

-

 

 

 

160

 

 

 

(119

)

 

 

41

 

In-process research and development

 

 

-

 

 

 

-

 

 

 

-

 

 

 

650

 

 

 

-

 

 

 

650

 

Total other intangible assets

 

$

50,089

 

 

$

(8,900

)

 

$

41,189

 

 

$

24,889

 

 

$