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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 April 30, 2019

OR

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

For the transition period from to

Commission File Number: 001-38933

CROWDSTRIKE HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

 

 

45-3788918
(I.R.S. Employer
Identification Number)

 

 

150 Mathilda Place, Suite 300
Sunnyvale, California 94086
(Address of principal executive offices)

 

 

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

Title of each class of securities

Trading symbol(s)

Name of each national exchange and
principal U.S. market for the securities

Class A common stock, par value $0.0005 per share

CRWD

The Nasdaq Stock Market LLC
(Nasdaq Global Select Market)

Registrant’s telephone number, including area code: (888) 512-8906

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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

(Do not check if a 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 June 30, 2019, the number of shares of the registrant’s Class A common stock outstanding was 20,700,000, and the number of shares of the registrant’s Class B common stock outstanding was 184,298,485.

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CROWDSTRIKE HOLDINGS, INC.

TABLE OF CONTENTS

 

 

Page No.

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements (unaudited)

Condensed Consolidated Balance Sheets as of April 30, 2019 and January 31, 2019

5

Condensed Consolidated Statements of Operations for the Three Months Ended April 30, 2019 and April 30, 2018

6

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended April 30, 2019 and April 30, 2018

7

Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit for the Three Months Ended April 30, 2019 and April 30, 2018

8

Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2019 and April 30, 2018

9

Notes to Condensed Consolidated Financial Statements

10

Item 2.

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

39

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

58

Item 4.

Controls and Procedures

59

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

60

Item 1A.

Risk Factors

60

Item 2.

Unregistered Shares of Equity Securities and Use of Proceeds

93

Item 3.

Defaults Upon Senior Securities

94

Item 4.

Mine Safety Disclosures

94

Item 5.

Other Information

94

Item 6.

Exhibits

95

Signatures

96

2

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans and our objectives for future operations, are forward-looking statements. The words "believe," "may," "will," "potentially," "estimate," "continue," "anticipate," "intend," "could," "would," "project," "plan," "expect" and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements.

These forward-looking statements include, but are not limited to, statements concerning the following:

oour future financial performance, including our expectations regarding our revenue, cost of revenue, gross profit or gross margin, operating expenses (including changes in sales and marketing, research and development, and general and administrative expenses), and our ability to achieve, and maintain, future profitability;
omarket acceptance of our cloud platform;
othe effects of increased competition in our markets and our ability to compete effectively;
oour ability to maintain the security and availability of our cloud platform;
oour ability to maintain and expand our customer base, including by attracting new customers;
oour ability to develop new solutions, or enhancements to our existing solutions, and bring them to market in a timely manner;
oanticipated trends, growth rates and challenges in our business and in the markets in which we operate;
oour business plan and our ability to effectively manage our growth and associated investments;
obeliefs and objectives for future operations;
oour relationships with third parties, including channel partners and technology alliance partners;
oour ability to maintain, protect and enhance our intellectual property rights;
oour ability to successfully defend litigation brought against us;
oour ability to successfully expand in our existing markets and into new markets;
osufficiency of cash to meet cash needs for at least the next 12 months;
oour ability to expand internationally;
oour ability to comply with laws and regulations that currently apply or become applicable to our business both in the United States and internationally;
oour ability to implement, maintain, and improve our internal control over financial reporting;
othe attraction and retention of qualified employees and key personnel; and

3

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othe expected date of the expiration of the lock-up agreements entered into in connection with our initial public offering.

These statements are based on our current plans, estimates and projections in light of information currently available to us. These forward-looking statements may be affected by risks, uncertainties and other factors discussed elsewhere in this Quarterly Report on Form 10-Q, including under “Risk Factors.” Furthermore, new risks and uncertainties emerge from time to time, and it is impossible for us to predict all risks and uncertainties or how they may affect us. If any of these risks or uncertainties occurs, our business, revenue and financial results could be harmed, and the trading price of our Class A common stock could decline. Forward-looking statements made in this Quarterly Report on Form 10-Q speak only as of the date on which such statements are made, and we undertake no obligation to update them in light of new information or future events, except as required by law.

4

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CrowdStrike Holdings, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except per share data)

(unaudited)

    

April 30, 

    

January 31, 

 

2019

 

2019

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

92,993

$

88,408

Marketable securities

 

82,066

 

103,247

Accounts receivable, net of allowance for doubtful accounts of $0.7 million and $1.0 million as of April 30, 2019 and January 31, 2019, respectively

 

87,355

 

92,476

Deferred contract acquisition costs, current

 

26,193

 

28,847

Prepaid expenses and other current assets

 

22,644

 

18,410

Total current assets

 

311,251

 

331,388

Property and equipment, net

 

86,349

 

73,735

Deferred contract acquisition costs, noncurrent

 

38,004

 

9,918

Goodwill

 

7,809

 

7,947

Intangible assets, net

 

879

 

1,048

Other assets

 

13,069

 

9,183

Total assets

$

457,361

$

433,219

Liabilities, Redeemable Convertible Preferred Stock, and Stockholders’ Deficit

 

  

Current liabilities:

 

  

Accounts payable

$

9,915

$

6,855

Accrued expenses

 

31,185

 

32,541

Accrued payroll and benefits

 

12,683

 

19,284

Deferred revenue

 

244,271

 

218,700

Other current liabilities

 

4,667

 

4,040

Total current liabilities

 

302,721

 

281,420

Deferred revenue, noncurrent

 

70,941

 

71,367

Other liabilities, noncurrent

 

10,964

 

10,313

Total liabilities

 

384,626

 

363,100

Commitments and contingencies (Note 11)

 

  

Redeemable Convertible Preferred Stock

 

  

Redeemable convertible preferred stock, $0.0005 par value; 137,419 shares authorized as of both April 30, 2019 and January 31, 2019; 131,268 shares issued and outstanding as of both April 30, 2019 and January 31, 2019; liquidation preference $545,000 as of both April 30, 2019 and January 31, 2019

 

557,912

 

557,912

Stockholders’ Deficit

 

  

Common stock, $0.0005 par value; 220,000 shares authorized as of both April 30, 2019 and January 31, 2019; 48,127, and 47,421 shares issued and outstanding as of April 30, 2019 and January 31, 2019, respectively

 

24

 

24

Additional paid-in capital

 

36,670

 

31,211

Accumulated deficit

 

(521,685)

 

(519,126)

Accumulated other comprehensive income (loss)

 

(186)

 

98

Total stockholders’ deficit

 

(485,177)

 

(487,793)

Total liabilities, redeemable convertible preferred stock, and stockholders’ deficit

$

457,361

$

433,219

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CrowdStrike Holdings, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

Three Months Ended April 30, 

    

2019

    

2018

Revenue

 

  

 

  

Subscription

$

85,990

$

39,758

Professional services

 

10,087

 

7,531

Total revenue

 

96,077

 

47,289

Cost of revenue

 

  

 

  

Subscription

 

23,691

 

15,171

Professional services

 

5,582

 

4,223

Total cost of revenue

 

29,273

 

19,394

Gross profit

 

66,804

 

27,895

Operating expenses

 

  

 

  

Sales and marketing

 

56,843

 

36,617

Research and development

 

23,875

 

17,615

General and administrative

 

11,861

 

6,777

Total operating expenses

 

92,579

 

61,009

Loss from operations

 

(25,775)

 

(33,114)

Interest expense

 

(1)

 

(192)

Other income (expense), net

 

394

 

(190)

Loss before provision for income taxes

 

(25,382)

 

(33,496)

Provision for income taxes

 

(595)

 

(121)

Net loss

$

(25,977)

$

(33,617)

Net loss per share attributable to common stockholders, basic and diluted

$

(0.55)

$

(0.77)

Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted

 

47,205

 

43,614

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CrowdStrike Holdings, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

Three Months Ended April 30, 

    

2019

    

2018

Net loss

$

(25,977)

$

(33,617)

Other comprehensive loss:

 

  

 

  

Foreign currency translation adjustments

 

(280)

 

(332)

Unrealized loss on available-for-sale securities, net of tax

 

(4)

 

Other comprehensive loss

 

(284)

 

(332)

Total comprehensive loss

$

(26,261)

$

(33,949)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CrowdStrike Holdings, Inc.

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

Three Months Ended April 30, 2019

(in thousands)

(unaudited)

Redeemable

Accumulated

Convertible

Additional

Other

Total

Preferred Stock

Common Stock

Paid-in

Accumulated

Comprehensive

Stockholders'

    

Shares

    

Amount

  

  

Shares

    

Amount

    

Capital

    

Deficit

    

Income (Loss)

    

Deficit

Balances at January 31, 2019

 

131,268

$

557,912

47,421

$

24

$

31,211

$

(519,126)

$

98

$

(487,793)

Cumulative effect of accounting change

 

 

 

 

 

23,418

 

 

23,418

Issuance of common stock upon exercise of options

 

 

706

 

 

1,510

 

 

 

1,510

Vesting of early exercised options

 

 

 

 

144

 

 

 

144

Stock-based compensation expense

 

 

 

 

3,752

 

 

 

3,752

Capitalized stock-based compensation

 

 

 

 

53

 

 

 

53

Net loss

 

 

 

 

 

(25,977)

 

 

(25,977)

Other comprehensive loss

 

 

 

 

 

 

(284)

 

(284)

Balances at April 30, 2019

 

131,268

$

557,912

48,127

$

24

$

36,670

$

(521,685)

$

(186)

$

(485,177)

CrowdStrike Holdings, Inc.

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

Three Months Ended April 30, 2018

(in thousands)

(unaudited)

Redeemable

Accumulated

Convertible

Additional

Other

Total

Preferred Stock

Common Stock

    

Paid-in

    

Accumulated

    

Comprehensive

    

Stockholders'

    

Shares

    

Amount

  

  

Shares

    

Amount

    

Capital

    

Deficit

    

Income (Loss)

    

Deficit

Balance at January 31, 2018

 

118,693

$

351,016

44,231

$

22

$

8,482

$

(378,948)

$

970

$

(369,474)

Cumulative effect of accounting change

 

 

 

 

101

 

(101)

 

 

Issuance of common stock upon exercise of options

 

 

499

 

 

751

 

 

 

751

Issuance of common stock related to early exercise options

 

 

38

 

 

 

 

 

Issuance of restricted stock awards

 

 

6

 

 

 

 

 

Vesting of early exercised options

 

 

 

 

14

 

 

 

14

Stock-based compensation expense

 

 

 

 

1,719

 

 

 

1,719

Net loss

 

 

 

 

 

(33,617)

 

 

(33,617)

Other comprehensive loss

 

 

 

 

 

 

(332)

 

(332)

Balance at April 30, 2018

 

118,693

$

351,016

44,774

$

22

$

11,067

$

(412,666)

$

638

$

(400,939)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CrowdStrike Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

Three Months Ended April 30, 

    

2019

    

2018

Operating activities

 

  

 

  

Net loss

$

(25,977)

$

(33,617)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

  

 

  

Depreciation and amortization

 

4,873

 

2,983

Amortization of intangible assets

 

146

 

166

Amortization of deferred contract acquisition costs

 

7,345

 

5,596

Change in fair value of redeemable convertible preferred stock warrant liability

 

1,167

 

Allowance for doubtful accounts

 

(254)

 

85

Stock-based compensation expense

 

3,752

 

1,719

Accretion of marketable securities purchased at a discount

 

(513)

 

(7)

Other

 

(424)

 

47

Changes in operating assets and liabilities

 

  

 

  

Accounts receivable

 

5,375

 

20,684

Deferred contract acquisition costs

 

(8,471)

 

(5,026)

Prepaid expenses and other assets

 

(4,049)

 

1,202

Accounts payable

 

2,818

 

2,316

Accrued expenses and other current liabilities

 

(2,407)

 

(7,328)

Accrued payroll and benefits

 

(6,601)

 

(4,297)

Deferred revenue

 

24,812

 

9,395

Other liabilities, noncurrent

 

(177)

 

(311)

Net cash provided by (used in) operating activities

 

1,415

 

(6,393)

Investing activities

 

  

 

  

Purchases of property and equipment

 

(15,541)

 

(8,649)

Capitalized internal-use software

 

(1,984)

 

(1,707)

Purchases of marketable securities

 

(51,805)

 

Proceeds from sales of marketable securities

 

4,473

 

Maturities of marketable securities

 

68,995

 

2,600

Net cash provided by (used in) investing activities

 

4,138

 

(7,756)

Financing activities

 

  

 

  

Repayment of notes receivable from related parties

 

 

198

Payments of indemnity holdback

 

 

(500)

Payments of deferred offering costs

 

(2,392)

 

Proceeds from issuance of common stock upon exercise of stock options

 

1,510

 

751

Net cash provided by (used in) financing activities

 

(882)

 

449

Effect of foreign exchange rates on cash and cash equivalents

 

(86)

 

(74)

Net increase (decrease) in cash and cash equivalents

 

4,585

 

(13,774)

Cash and cash equivalents, beginning of period

 

88,408

 

63,179

Cash and cash equivalents, end of period

$

92,993

$

49,405

Supplemental disclosure of cash flow information:

 

  

 

  

Interest paid

$

1

$

191

Income taxes paid

 

114

 

187

Supplemental disclosure of non-cash investing and financing activities:

 

  

 

  

Indemnity holdback consideration associated with business combinations

 

 

1,799

Contingent consideration associated with business combinations

 

 

686

Net change in deferred offering costs, accrued but not paid

 

(1,210)

 

Net change in property and equipment included in accounts payable and accrued expenses

 

(54)

 

(539)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CrowdStrike Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1.  Description of Business and Basis of Presentation

CrowdStrike Holdings, Inc. (the “Company”) was formed on November 7, 2011. The Company provides a leading cloud-delivered solution for next-generation endpoint protection that offers 10 cloud modules on its Falcon platform via a SaaS subscription-based model that spans multiple large security markets, including endpoint security, security and IT operations (including vulnerability management), and threat intelligence. The Company is headquartered in Sunnyvale, California. The Company conducts its business in the United States, as well as locations internationally, including in Australia, Germany, India, Romania, and the United Kingdom.

The Company has funded its operations through several rounds of financings with net proceeds totaling $493.0 million through April 30, 2019. However, the Company has incurred losses and negative cash flows from operations since inception. As of April 30, 2019, the Company had an accumulated deficit of $521.7 million. Management of the Company expects that operating losses and negative cash flows from operations will continue for the foreseeable future. While management believes that the Company’s cash and cash equivalents and marketable securities as of April 30, 2019 are adequate to meet its needs for at least the next twelve months, the Company may need to borrow funds or raise additional equity to achieve its longer term business objectives.

On June 14, 2019, the Company closed its initial public offering ("IPO"), in which it sold 20,700,000 shares of Class A common stock. The shares were sold at a public offering price of $34.00 per share for net proceeds of $659.1 million, after deducting underwriters’ discounts and commissions and estimated offering expenses of $44.7 million. Immediately prior to the closing of the IPO, all outstanding shares of redeemable convertible preferred stock automatically converted into 131,267,586 shares of Class B common stock on a one-to-one basis. Additionally, in connection with the IPO all of the Company’s outstanding common stock was reclassified into shares of Class B common stock on a one-for-one basis. Redeemable convertible preferred stock warrants also converted into 336,386 warrants to purchase Class B common stock on a one-to-one basis.

2.  Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America, ("U.S. GAAP"), and applicable rules and regulations of the Securities and Exchange Commission, ("SEC"), regarding interim financial reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP have been condensed or omitted, and accordingly the balance sheet as of January 31, 2019, and related disclosures, have been derived from the audited consolidated financial statements at that date but do not include all of the information required by U.S. GAAP for complete consolidated financial statements. These unaudited condensed consolidated financial statements have been prepared on the same basis as the Company’s annual consolidated financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for the fair statement of the Company’s condensed consolidated financial information. The results of operations for the three months ended April 30, 2019 are not necessarily indicative of the results to be expected for the year ending January 31, 2020 or for any other interim period or for any other future year.

The accompanying interim unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended January 31, 2019 included in the Company’s prospectus dated June 11, 2019 filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended.

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Principles of Consolidation

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

Certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the applicable required disclosures and regulations of the SEC. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the year ended January 31, 2019, included in the Company’s prospectus dated June 11, 2019.

JOBS Act Accounting Election

The Company is an "emerging growth company" ("EGC") as defined in the Jumpstart Our Business Startups Act of 2012 ("JOBS Act"). An EGC may take advantage of specified reduced reporting requirements that are otherwise applicable generally to public companies, including, but not limited to, delayed adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act"), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

The Company may take advantage of these exemptions until it is no longer an EGC. The Company would cease to be an EGC upon the earliest to occur of: (i) the first fiscal year following the fifth anniversary of its initial public offering; (ii) the first fiscal year after annual gross revenue is $1.0 billion or more; (iii) the date on which the Company has, during the previous three-year period, issued more than $1.07 billion in non-convertible debt securities; or (iv) the date on which the Company qualifies as a "large accelerated filer," as defined in Rule 12b-2 under the Exchange Act, which would occur at the end of any fiscal year in which the market value of the Company’s common stock held by non-affiliates exceeded $700.0 million as of the end of the second quarter of that fiscal year, and as of the end of such fiscal year the Company has been a reporting company for at least 12 months.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the Company’s condensed consolidated financial statements and accompanying notes. These estimates are based on information available as of the date of the condensed consolidated financial statements. On a regular basis, management evaluates these estimates and assumptions. Actual results may differ from these estimates and such difference could be material to the Company’s condensed consolidated financial statements.

Significant estimates and assumptions used by management affect revenue recognition, the allowance for doubtful accounts, the carrying value of long-lived assets, the useful lives of long-lived assets, the fair value of financial instruments, the period of benefit for deferred contract acquisition costs, the recognition and disclosure of contingent liabilities, the provision for income taxes and related deferred taxes, stock-based compensation, and the fair value of the Company’s common stock and redeemable convertible preferred stock warrants.

Concentration of Credit Risk and Geographic Information

The Company generates revenue from the sale of subscriptions to access its cloud platform and professional services. The Company’s sales team, along with its channel partner network of system integrators and value-added resellers (collectively, “channel partners”), sells the Company’s services worldwide to organizations of all sizes. Due to the nature of the Company’s services and the terms and conditions of the Company’s contracts with its channel partners, the Company’s business could be affected unfavorably if it is not able to continue its relationships with them.

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Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash, cash equivalents and accounts receivable. The Company’s cash is placed with high-credit-quality financial institutions and issuers, and at times exceed federally insured limits. The Company limits its concentration of risk in cash equivalents and marketable securities by diversifying its investments among a variety of industries and issuers. The Company has not experienced any credit loss relating to its cash equivalents and marketable securities. The Company performs periodic credit evaluations of its customers and generally does not require collateral.

Outstanding accounts receivable from one of the Company’s channel partners accounted for 11% of its consolidated accounts receivable as of April 30, 2019. No channel partner accounted for 10% or more of the Company’s consolidated accounts receivable as of January 31, 2019. Outstanding accounts receivable from one of the Company’s direct customers accounted for 11% of its consolidated accounts receivable as of April 30, 2019. Outstanding accounts receivable from two of the Company’s direct customers accounted for 10% and 19% of its consolidated accounts receivable as of January 31, 2019.

Revenue from sales to one of the Company’s channel partners accounted for 12% and 17% of its consolidated revenue for the three months ended April 30, 2019 and April 30, 2018, respectively.

There were no direct customers who represented 10% or more of the Company’s total revenue during the three months ended April 30, 2019 or April 30, 2018.

Cash Equivalents and Marketable Securities

The Company considers all highly liquid investments with original maturities of three months or less at date of purchase to be cash equivalents. Cash equivalents as of April 30, 2019 and January 31, 2019 consisted of corporate debt securities and money market funds stated at fair value. The Company classifies investments in marketable securities as available-for-sale securities at the time of purchase, since it is the Company’s intent that these investments are available to support current operations. Marketable securities are classified as current or long-term based on the nature of the investments and their availability for use in current operations. Available-for-sale securities are carried at fair value with unrealized gains and losses, if any, included in accumulated other comprehensive income (loss). Unrealized losses are recorded in other income (expense), net, for declines in fair value below the cost of an individual investment that is deemed to be other-than-temporary. The Company did not identify any marketable securities as other-than-temporarily impaired as of April 30, 2019 and January 31, 2019. The Company determines realized gains or losses on the sale of marketable securities on a specific identification method and records such gains or losses in other income (expense), net. Marketable securities as of April 30, 2019 and January 31, 2019 consisted of corporate debt securities and U.S. treasury securities.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash equivalents, marketable securities, accounts receivable, accounts payable, accrued expenses, redeemable convertible preferred stock warrant liability, and loans payable. The carrying values of cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value due to their short-term nature.

The Company reports the redeemable convertible preferred stock warrant liability at fair value (see Note 3, Fair Value Measurements). The warrants issued by the Company for redeemable convertible preferred stock in January 2015, December 2016, and March 2017 (see Note 7, Redeemable Convertible Preferred Stock) have been recorded as a liability based on “Level 3” inputs, which consist of unobservable inputs and reflect management’s estimates of assumptions that market participants would use in pricing the liability. The fair value of the warrants was determined using the Black-Scholes option-pricing model, which is affected by changes in inputs to that model including the Company’s stock price, expected stock price volatility, risk-free rate, and contractual term.

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Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount and are non-interest bearing. Accounts receivable are stated at their net realizable value, net of an allowance for doubtful accounts. The Company has a well-established collections history from its customers. Credit is extended to customers based on an evaluation of their financial condition and other factors. The Company generally does not require collateral from its customers; however, the Company may require payment prior to commencing service in certain instances to limit credit risk. The Company records an allowance for doubtful accounts based on management’s assessment of the collectability of accounts. Management regularly reviews the adequacy of the allowance for doubtful accounts by considering the age of each outstanding invoice, each customer’s expected ability to pay, and the collection history with each customer, when applicable, to determine whether the allowance is appropriate. Amounts deemed uncollectible are written off against the allowance for doubtful accounts. As of April 30, 2019 and January 31, 2019, the allowance for doubtful accounts was $0.7 million and $1.0 million, respectively.

Deferred Offering Costs

Deferred offering costs of $4.0 million and $2.9 million have been recorded as other assets on the condensed consolidated balance sheet as of April 30, 2019 and January 31, 2019, respectively, and consist of expenses incurred in connection with the Company’s IPO, including legal, accounting, printing, and other IPO-related costs. Upon closing of the IPO on June 14, 2019 these deferred offering costs were reclassified to stockholders’ equity and recorded against the proceeds from the offering.

Property and Equipment, Net

Property and equipment, net, is stated at historical cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets as follows:

Data center and other computer equipment

    

3 5 years

Furniture and equipment

 

5 years

Purchased software

 

3 5 years

Capitalized internal-use software

 

3 years

Leasehold improvements

 

Estimated useful life or term of the lease, whichever is shorter

Expenditures for routine maintenance and repairs are charged to operating expense as incurred. Major renewals and improvements are capitalized and depreciated over their estimated useful lives. Upon retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts, and any gain or loss is recorded in operating expenses in the condensed consolidated statements of operations.

Capitalized Internal-Use Software

The Company capitalizes certain development costs incurred in connection with its internal-use software. These capitalized costs are primarily related to the Company’s cloud-delivered solution for next-generation endpoint protection. Costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Capitalized costs are recorded as property and equipment, net. Maintenance and training costs are expensed as incurred. Internal-use software is amortized to cost of revenue on a straight-line basis over its estimated useful life of three years. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. There were no impairments of internal-use software during the three months ended April 30, 2019 and April 30, 2018. The Company capitalized $2.0 million and $1.7 million in internal-use software during the three months ended April 30, 2019 and April 30, 2018, respectively. Amortization expense associated with internal-use software totaled $1.5 million

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and $1.1 million during the three months ended April 30, 2019 and April 30, 2018, respectively. The net book value of capitalized internal-use software was $12.0 million and $11.5 million as of April 30, 2019 and January 31, 2019, respectively.

Intangible Assets, Net

Intangible assets, net, consisting of developed technology, customer relationships, and non-compete agreements, are stated at cost less accumulated amortization. All intangible assets have been determined to have definite lives and are amortized on a straight-line basis over their estimated economic lives of three to five years. Amortization expense related to developed technology is included in cost of revenue, amortization expense related to customer relationships is included in sales and marketing expenses, and amortization expense related to non-compete agreements is included in research and development expenses.

Deferred Contract Acquisition Costs

The Company capitalizes contract acquisition costs that are incremental to the acquisition of customer contracts. Contract acquisition costs are accrued and capitalized upon execution of the sales contract by the customer. Sales commissions for renewal of a contract are not considered commensurate with the commissions paid for the acquisition of the initial contract or follow-on upsell given the substantive difference in commission rates in proportion to their respective contract values. Commissions, including referral fees paid to channel partners, paid upon the initial acquisition of a contract or subsequent upsell are amortized over an estimated period of benefit of four years while commissions paid for renewal contracts are amortized over the contractual term of the renewals. Sales commissions associated with professional service contract are amortized ratably over an estimated period of benefit of six months. Amortization of deferred contract acquisition costs is recognized on a straight-line basis commensurate with the pattern of revenue recognition and included in sales and marketing expense in the condensed consolidated statements of operations. The Company capitalized contract acquisition costs of $8.5 million and $5.0 million, which is under ASC 605, during the three months ended April 30, 2019 and April 30, 2018, respectively. Contract acquisition cost amortization expense was $7.3 million and $5.6 million, which is under ASC 605, during the three months ended April 30, 2019 and April 30, 2018, respectively.

Impairment of Long-Lived Assets

The Company reviews for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of the asset (or asset group) may not be recoverable. Events and changes in circumstances considered by the Company in determining whether the carrying value of long-lived assets may not be recoverable, include, but are not limited to: significant changes in performance relative to expected operating results, significant changes in the use of the assets, significant negative industry or economic trends, and changes in the Company’s business strategy. Impairment testing is performed at an asset level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (an “asset group”). An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset (or asset group) and its eventual disposition is less than its carrying amount. No impairment indicators were identified by the Company and no impairment losses were recorded by the Company during the three months ended April 30, 2019 and April 30, 2018.

Deferred Revenue

The deferred revenue balance consists of subscription and professional services which have been invoiced upfront and are recognized as revenue only when the revenue recognition criteria are met. The Company typically invoices its customers at the beginning of the term, or in some instances, such as in multi-year arrangements, in installments. Professional services are either invoiced upfront, invoiced in installments, or invoiced as the services are performed. Accordingly, the Company’s deferred revenue balance does not include revenues for future years of multi-year non-cancellable contracts that have not yet been billed.

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The Company recognizes subscription revenue ratably over the contract term beginning on the commencement date of each contract, the date that services are made available to customers. Once services are available to customers, the Company records amounts due in accounts receivable and in deferred revenue. To the extent the Company bills customers in advance of the contract commencement date, the accounts receivable and corresponding deferred revenue amounts are netted to zero on the condensed consolidated balance sheets, unless such amounts have been paid as of the balance sheet date.

Redeemable Convertible Preferred Stock Warrants

Warrants related to the Company’s redeemable convertible preferred stock are classified as liabilities on the Company’s consolidated balance sheet. The warrants are subject to reassessment at each balance sheet date, and any change in fair value is recognized as a component of other income (expense), net, in the condensed consolidated statements of operations. The Company will continue to adjust the liability for changes in fair value until the earlier of the expiration or exercise of the warrants, or upon their automatic conversion into warrants to purchase common stock in connection with a qualified initial public offering (as defined in Note 7, Redeemable Convertible Preferred Stock) such that they qualify for equity classification and no further remeasurement is required.

Revenue Recognition – ASC 606

The Company adopted ASC 606 on February 1, 2019, using the modified retrospective transition method. Under this method, results for reporting periods beginning on February 1, 2019 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with prior accounting under Topic 605. The Company has shown the effect of applying ASC 606 for the three months ended April 30, 2019 in the disclosures below.

The Company recorded a cumulative effect adjustment to opening accumulated deficit of $23.4 million, net of tax, as of the date of adoption. The change resulted from a $23.7 million reduction in the amortization of deferred contract acquisition costs offset by a $0.3 million reduction in revenue.

The following tables summarize the effect of the adoption of Topic 606 on the Company’s select line items included in the condensed consolidated financial statements as of and for the three months ended April 30, 2019, as if the previous accounting was in effect:

April 30, 2019

January 31, 2019

As Reported

Impact of

Without Adoption

As Reported

    

(ASC 606)

    

Adoption

    

(ASC 605)

    

(ASC 605)

(in thousands)

Condensed Consolidated Balance Sheet

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Assets:

 

  

 

  

 

  

 

  

Deferred contract acquisition costs, current

$

26,193

$

1,815

$

28,008

$

28,847

Deferred contract acquisition costs, noncurrent

 

38,004

 

(30,337)

 

7,667

 

9,918

 

  

 

  

 

  

 

  

Liabilities:

 

  

 

  

 

  

 

  

Accrued expenses

 

31,185

 

(555)

 

30,630

 

32,541

Deferred revenue, current

 

244,271

 

(250)

 

244,021

 

218,700

Deferred revenue, noncurrent

 

70,941

 

 

70,941

 

71,367

 

  

 

  

 

  

 

  

Stockholders' Equity:

 

  

 

  

 

  

 

  

Accumulated deficit

 

(521,685)

 

(27,717)

 

(549,402)

 

(519,126)

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Three Months Ended April 30, 2019

Three Months Ended April 30, 2018

As Reported

Impacts of

Without Adoption

As Reported

    

(ASC 606)

    

Adoption

    

(ASC 605)

    

(ASC 605)

(in thousands)

Condensed Consolidated Statement of Operations

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Revenue

$

96,077

$

(83)

$

95,994

$

47,289

Operating expenses:

 

  

 

  

 

  

 

  

Sales and marketing

 

56,843

 

4,216

 

61,059

 

36,617

 

  

 

  

 

  

 

  

Net loss

 

(25,977)

 

(4,299)

 

(30,276)

 

(33,617)

 

  

 

  

 

  

 

  

Net loss per share, basic and diluted

$

(0.55)

 

  

$

(0.64)

$

(0.77)

The adoption of Topic 606 had no impact on net cash provided by or used in operating, investing, or financing activities in the Company’s condensed consolidated statement of cash flows for the three months ended April 30, 2019.

In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration that the Company expects to be entitled to receive in exchange for these services. To achieve the core principle of this standard, the Company applies the following five steps:

1)Identify the contract with a customer

The Company considers the terms and conditions of contracts with customers and its customary business practices in identifying contracts under ASC 606. The Company determines it has a contract with a customer when the contract is approved, each party’s rights regarding the services to be transferred can be identified, payment terms for the services can be identified, it has been determined that the customer has the ability and intent to pay, and the contract has commercial substance. The Company applies judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, credit and financial information pertaining to the customer.

2)Identify the performance obligations in the contract

Performance obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from the Company or from third parties, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. The Company’s performance obligations consist of (i) subscriptions and (ii) professional services.

3)Determine the transaction price

The transaction price is determined based on the consideration which the Company is expected to be entitled to in exchange for transferring services to the customer. Variable consideration is included in the transaction price if it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of the Company’s contracts contain a significant financing component.

4)Allocate the transaction price to performance obligations in the contract

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price ("SSP").

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5)Recognize revenue when or as performance obligations are satisfied

Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised service to the customer. Revenue is recognized when control of the services is transferred to the customer, in an amount that reflects the consideration expected to be received in exchange for those services. The Company generates all its revenue from contracts with customers.

Subscription Revenue

The Company’s Falcon Platform technology solutions are subscription, software as a service (“SaaS”) offerings designed to continuously monitor, share, and mitigate risks from determined attackers. Customers do not have the right to take possession of the cloud-based software platform. Fees are based on several factors, including the solutions subscribed for by the customer and the number of endpoints purchased by the customer. The subscription fees are typically payable within 30 to 60 days after the execution of the arrangement, and thereafter upon renewal or subsequent installment. The Company initially records the subscription fees as deferred revenue and recognizes revenue on a straight-line basis over the term of the agreement.

The typical subscription term is one to three years. Most of the Company’s contracts are non-cancelable over the contractual term. Customers typically have the right to terminate their contracts for cause if the Company fails to perform in accordance with the contractual terms. Some customers have the option to purchase additional subscription at a stated price. These options generally do not provide a material right as they are priced at our SSP.

Professional Services Revenue

The Company offers several types of professional services including incident response and forensic services, surge forensic and malware analysis, and attribution analysis, which are focused on responding to imminent and direct threats, assessing vulnerabilities, and recommending solutions. These services are distinct from subscription services. Professional services do not result in significant customization of the subscription service. The professional services are available through hourly rate and fixed fee contracts, one-time and ongoing engagements, and retainer-based agreements. Revenue for time and materials arrangements is recognized as services are performed and revenue for fixed fees is recognized on a proportional performance basis as the services are performed.

Contracts with Multiple Performance Obligations

Some contracts with customers contain multiple promised services consisting of subscription and professional services that are distinct and accounted for separately. The transaction price is allocated to the separate performance obligations on a relative SSP basis. The SSP is the price at which the Company would sell promised subscription or professional services separately to a customer. Judgment is required to determine the SSP for each distinct performance obligation. The Company determines SSP based on its overall pricing objectives, taking into consideration the type of subscription or professional service and the number of endpoints.

Variable Consideration

Revenue from sales is recorded at the net sales price, which is the transaction price, and includes estimates of variable consideration. The amount of variable consideration that is included in the transaction price is constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue will not occur when the uncertainty is resolved.

If subscriptions do not meet certain service level commitments, the Company’s customers are entitled to receive service credits, and in certain cases, refunds, each representing a form of variable consideration. The Company has historically not experienced any significant incidents affecting the defined levels of reliability and performance as required by its subscription contracts. Accordingly, any estimated refunds related to these agreements in the condensed consolidated financial statements is not material during the periods presented.

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The Company provides rebates and other credits within its contracts with certain resellers, which are estimated based on the most likely amounts expected to be earned or claimed on the related sales transaction. Overall, the transaction price is reduced to reflect the Company’s estimate of the amount of consideration to which it is entitled based on the terms of the contract. Estimated rebates and other credits were not material during the periods presented.

Revenue Recognition – ASC 605

Prior to adopting ASC 606 on February 1, 2019, the Company recognized subscription and professional services when: (1) persuasive evidence of the contract exists in the form of a written contract, amendments to that contract, or purchase orders from a third party; (2) delivery has occurred, or services have been rendered; (3) the price is fixed or determinable; and (4) collectability is reasonably assured based on customer creditworthiness and history of collection.

The timing and the amount the Company recognized as revenue was determined based on the facts and circumstances of each customer’s arrangements. Evidence of an arrangement consisted of a signed customer agreement. The Company considered that the delivery of its solution had commenced once it provided the customer with log-in information and the term of the contract had started. Fees were fixed based on stated rates specified in the customer agreement. The Company assessed collectability based on several factors, including the credit worthiness of the customer and transaction history. If collectability was not reasonably assured, revenue was deferred until the fees were collected.

For arrangements that involve the contemporaneous sale of subscription and professional services, the Company applied the multiple-element arrangement guidance to allocate the arrangement consideration to all deliverables based on their relative selling price. The Company determined that the cloud-based platform subscription has standalone value, because once access is given to the customer, the solutions are fully functional and do not require any additional development, modification, or customization. Professional services have standalone value because they are regularly sold by the Company in separate transactions. Additionally, the performance of these professional services generally does not require highly specialized or technologically skilled individuals and the professional services are not essential to the functionality of the solutions.

The Company used a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (‘‘VSOE’’); (ii) third-party evidence of selling price (‘‘TPE’’); and (iii) best estimate of selling price (‘‘BESP’’). BESP reflected the Company’s best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. The Company’s process for determining BESP involved management’s judgment and considered numerous factors including the nature of the deliverables themselves and historical discounting practices. The Company updated its estimates of BESP on an ongoing basis as events and circumstances required.

Research and Development Expense

Research and development costs are expensed when incurred, except for certain internal-use software development costs, which may be capitalized as noted above. Research and development expenses consist primarily of personnel and related headcount costs, costs of professional services associated with the ongoing development of the Company’s technology, and allocated overhead.

Advertising

All advertising costs are expensed as incurred and are included in sales and marketing expense in the condensed consolidated statements of operations. The Company incurred $1.1 million and $0.5 million of advertising costs during the three months ended April 30, 2019 and April 30, 2018, respectively.

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Stock-Based Compensation

The Company accounts for stock-based awards granted to employees and directors based on the awards’ estimated grant date fair value. The Company estimates the fair value of its stock options using the Black-Scholes option-pricing model. The resulting fair value is recognized on a straight-line basis over the period during which the employee or director is required to provide service in exchange for the award, usually the vesting period, which is generally four years. The Company accounts for forfeitures as they occur.

Prior to the Company’s adoption of ASU 2018-07, stock-based awards issued to non-employees were accounted for at fair value determined by using the Black-Scholes option-pricing model. The Company believes that the fair value of the stock options is more reliably measured than the fair value of the services received. The fair value of each non-employee stock-based award is remeasured each period until a commitment date is reached, which is generally the vesting date. The Company early adopted ASU 2018-07 on February 1, 2019 and began accounting for stock-based awards issued to non-employees the same as it accounts for stock-based awards issued to employees. The effect on the Company’s condensed consolidated financial statements for the three months ended April 30, 2019 was not material.

Restricted stock units ("RSUs") granted under the 2011 Plan are subject to a service-based vesting condition and a performance-based vesting condition. The service-based vesting condition is generally satisfied based on one of three vesting schedules: (i) vesting of one-fourth of the RSUs on the first "Company vest date" (defined as March 20, June 20, September 20, or December 20) on or following the one-year anniversary of the vesting commencement date with the remainder of the RSUs vesting in twelve equal quarterly installments thereafter, subject to continued service, (ii) vesting in sixteen equal quarterly installments beginning on December 20, 2018, subject to continued service, or (iii) vesting in eight equal quarterly installments beginning on December 20, 2022, subject to continued service. The performance-based vesting condition is satisfied on the earlier of (i) a change in control, in which the consideration paid to holders of shares is either cash, publicly traded securities, or a combination thereof, or (ii) the first Company vest date to occur following the expiration of the lock-up period upon an IPO, subject to continued service through such change in control or lock-up expiration, as applicable. None of the RSUs vest unless the performance-based vesting condition is satisfied. As of April 30, 2019 the performance based vesting condition had not yet been met, and thus no stock-based compensation relating to these RSUs was recognized. In the quarter in which the performance-based vesting condition is met, the Company will begin recording stock-based compensation expense using the accelerated attribution method based on the grant date fair value of the RSUs. As of April 30, 2019, the total amount of stock-based compensation expense deferred related to this performance-based vesting condition was approximately $13.0 million.

Business Combinations

The Company allocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired users, acquired technology, trade names from a market participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded in the condensed consolidated statement of operations.

Goodwill and Intangible Assets

The Company evaluates and tests the recoverability of goodwill for impairment at least annually, on January 31, or more frequently if circumstances indicate that goodwill may not be recoverable. The Company performs the impairment testing by first assessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of its reporting unit is less than its carrying amount. The Company has one reporting unit. If, after assessing the totality of events or circumstances, the

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Company determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company performs the first step of a two-step analysis by comparing the book value of net assets to the fair value of the reporting unit. To calculate any potential impairment, the Company compares the fair value of a reporting unit with its carrying amount, including goodwill. Any excess of the carrying amount of the reporting unit’s goodwill over its fair value is recognized as an impairment loss, and the carrying value of goodwill is written down. In assessing the qualitative factors, the Company considers the impact of certain key factors including macroeconomic conditions, industry and market considerations, management turnover, changes in regulation, litigation matters, changes in enterprise value, and overall financial performance. No impairment was recorded during the three months ended April 30, 2019 or April 30, 2018. The change in goodwill balance during the three months ended April 30, 2019 and April 30, 2018 was due to changes in foreign currency exchange rates.

Acquired intangible assets consisting of identifiable intangible assets, were comprised of developed technology, customer relationships, and non-compete agreements resulting from acquisitions. Acquired intangible assets are recorded at fair value on the date of acquisition and amortized over their estimated economic lives following the pattern in which the economic benefits of the assets will be consumed which is on a straight-line basis. Acquired intangible assets are presented net of accumulated amortization on the condensed consolidated balance sheets. The Company reviews the carrying amounts of intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company measures the recoverability of intangible assets by comparing the carrying amount of each asset to the future undiscounted cash flows it expects the asset to generate. If the Company considers any of these assets to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair value. In addition, the Company periodically evaluates the estimated remaining useful lives of long-lived assets to determine whether events or changes in circumstances warrant a revision to the remaining period of depreciation or amortization.

Leases

The Company leases its office space under various noncancelable operating lease agreements and recognizes related rent expense on a straight-line basis over the term of the lease. Certain lease agreements contain rent holidays, scheduled rent increases, lease incentives, and renewal options. Rent holidays and scheduled rent increases are included in the determination of rent expense to be recorded over the lease term. Lease incentives are recognized as a reduction of rent expense on a straight-line basis over the term of the lease. Renewals are not assumed in the determination of the lease term unless they are deemed to be reasonably assured at the inception of the lease. The Company begins to recognize rent expense on the date that the Company obtains the legal right to use and control the leased space.

Foreign Currency Translation

The functional currencies of the Company’s foreign subsidiaries are each country’s local currency. Assets and liabilities of the subsidiaries are translated into U.S. Dollars at exchange rates in effect at the reporting date. Amounts classified in stockholders’ deficit are translated at historical exchange rates. Revenue and expenses are translated at the average exchange rates during the period. The resulting translation adjustments are recorded in accumulated other comprehensive income (loss). Foreign currency transaction gains or losses, whether realized or unrealized, are reflected in the condensed consolidated statements of operations within other expense, net, and have not been material for all periods presented.

Income Taxes

The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial statement and tax basis of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

The Company accounts for unrecognized tax benefits using a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company

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establishes a liability for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. The Company records an income tax liability, if any, for the difference between the benefit recognized and measured and the tax position taken or expected to be taken on the Company’s tax returns. To the extent that the assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. The liability is adjusted considering changing facts and circumstances, such as the outcome of a tax audit. The provision for income taxes includes the impact of liability provisions and changes to the liability that are considered appropriate. As the Company maintained a full valuation allowance against its deferred tax assets, the changes resulted in no additional tax expense during the three months ended April 30, 2019 or April 30, 2018. As of April 30, 2019, the Company does not expect that changes in the liability for unrecognized tax benefits for the next twelve months will have a material impact on its condensed consolidated financial statements.

Sales Taxes

When sales and other taxes are billed, such amounts are recorded as accounts receivable with a corresponding increase to other current liabilities, respectively. The balances are then removed from the condensed consolidated balance sheet as cash is collected from the customer and as remitted to the respective tax authority.

Segment and Geographic Information

The Company’s chief operating decision maker (“CODM”) is its chief executive officer. The CODM reviews financial information presented on a consolidated basis for the purposes of allocating resources and evaluating financial performance. Accordingly, management has determined that the Company operates as one operating and reportable segment. The Company presents financial information about its geographic areas in Note 12 to the condensed consolidated financial statements.

Net Loss per Share

Basic and diluted net loss per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities. The Company considers all series of its redeemable convertible preferred stock to be participating securities. Net income is attributed to common stockholders and participating securities based on their participation rights. Net loss attributable to common stockholders is not allocated to the redeemable convertible preferred stock as the holders of the redeemable convertible preferred stock do not have a contractual obligation to share in any losses.

Under the two-class method, basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period.

Diluted earnings per share attributable to common stockholders adjusts basic earnings per share for the potentially dilutive impact of stock options and redeemable convertible preferred stock. As the Company has reported losses for all periods presented, all potentially dilutive securities including redeemable convertible preferred stock, stock options, and warrants, are antidilutive and accordingly, basic net loss per share equals diluted net loss per share.

Recently Issued Accounting Pronouncements

Under the JOBS Act, the Company meets the definition of an emerging growth company. The Company has elected to use the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.

In February 2016, the FASB issued ASU No. 2016-02, Leases. The new guidance supersedes current guidance related to accounting for leases and generally requires an entity to recognize on its balance sheet operating and financing lease liabilities and corresponding right-of-use assets. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842. This ASU makes 16 technical corrections to the new lease standard and other accounting topics, alleviating unintended consequences from applying the new standard. It does not make any substantive changes

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to the core provisions or principles of the new standard. In July 2018, the FASB also issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. This ASU provides (1) an optional transition method that entities can use when adopting the standard and (2) a practical expedient that permits lessors to not separate non-lease components from the associated lease component if certain conditions are met. As an emerging growth company as defined in the JOBS Act, the Company has elected to delay adoption of this ASU until February 1, 2020. ASU No. 2016-02 can be adopted using either full or modified retrospective approach as of the earliest period presented or as of the adoption date with the cumulative effect adjustment to the opening balance recognized in retained earnings in the period of adoption. The Company is currently evaluating the potential impact of these ASUs on its condensed consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies the measurement of goodwill by eliminating step two of the two-step impairment test. Step two measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. This ASU requires an entity to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, 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. As an emerging growth company defined in the JOBS Act, the Company has elected to delay adoption of this ASU until February 1, 2022. The Company is currently evaluating the potential impact of this ASU on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. As an emerging growth company as defined in the JOBS Act, the Company has elected to delay adoption of this ASU until February 1, 2020. The Company is currently evaluating the potential impact of this ASU on its condensed 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 (a consensus of the FASB Emerging Issues Task Force). This ASU 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. As an emerging growth company defined in the JOBS Act, the Company has elected to delay adoption of this ASU until February 1, 2021. Entities can choose to adopt this ASU prospectively or retrospectively. The Company is currently evaluating the potential impact of this ASU on its condensed consolidated financial statements.

Recently Adopted Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides guidance for revenue recognition. Under the new guidance, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. In addition, the guidance requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Subsequently, the FASB has issued the following guidance to amend ASU 2014-09: ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date; ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net); ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, which clarifies narrow aspects of Topic 606 or corrects unintended application of the guidance. The Company must adopt ASU No. 2015-14, ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12, and ASU No. 2016-20 with ASU No. 2014-09, which are referred to collectively

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as the “new revenue guidance.” On February 1, 2019, the company adopted ASU No. 2014-09 using the modified retrospective transition method. Under this method, results for reporting periods beginning on February 1, 2019 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under Topic 605. The Company recorded a cumulative effect adjustment to opening accumulated deficit of $23.4 million, net of tax, as of the date of adoption. The change resulted from a $23.7 million reduction in commissions expense that we capitalized under Topic 606, but would have been recognized during the period as commissions expense under our historical accounting practices under Topic 605 and a $0.3 million reduction in revenue that would have been recognized during the period under Topic 605.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set of transferred assets and activities is not a business. On February 1, 2019, the Company adopted ASU No. 2018-07, which did not have a material effect on the Company’s 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. This ASU simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. This ASU is effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, this ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than the adoption date of Topic 606. On February 1, 2019, the Company adopted ASU No. 2018-07, which did not have a material effect on the Company’s condensed consolidated financial statements.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification. This release amends 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 final rule was effective November 5, 2018. The Company adopted this amendment as of February 1, 2019, including presenting the activity of the stockholder’s equity accounts in the accompanying Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit for the periods presented.

3.  Fair Value Measurements and Marketable Securities

The Company follows ASC 820, Fair Value Measurements, with respect to marketable securities that are measured at fair value on a recurring basis. Under the standard, fair value is defined as the exit price, or the amount that would be received to sell an asset or a liability in an orderly transaction between market participants as of the measurement date. The standard also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances.

The hierarchy is broken down into three levels as follows:

Level 1

Assets and liabilities whose values are based on unadjusted quoted market prices for identical assets and liabilities in active markets

Level 2

Assets and liabilities whose values are based on quoted prices in markets that are not active or inputs that are observable for substantially the full term of the asset or liability

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Table of Contents

Level 3

Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement

Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The Company’s fair value hierarchy for its financial assets and liabilities that are measured at fair value on a recurring basis are as follows:

April 30, 2019

January 31, 2019

    

Level 1

    

Level 2

    

Level 3

    

Total

    

Level 1

    

Level 2

    

Level 3

    

Total

(in thousands)

(in thousands)

Assets

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Cash equivalents (1)

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Money market funds

$

48,499

$

$

$

48,499

$

42,132

$

$

$

42,132

Corporate debt securities

 

 

33,861

 

 

33,861

 

 

27,941

 

 

27,941

US treasuries

 

 

5,493

 

 

5,493

 

 

  

 

 

  

Total cash equivalents

 

48,499

 

39,354

 

 

87,853

 

42,132

 

27,941

 

 

70,073

Marketable securities

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Corporate debt securities

 

 

75,124

 

 

75,124

 

 

91,796

 

 

91,796

US treasuries

 

 

6,942

 

 

6,942

 

11,451

 

 

 

11,451

Total marketable securities

 

 

82,066

 

 

82,066

 

11,451

 

91,796

 

 

103,247

Total assets

$

48,499

$

121,420

$

$

169,919

$

53,583

$

119,737

$

$

173,320

Liability

 

  

 

  

 

  

 

  

 

  

 

  </