The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. These statements are often identified by the use of words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate," or "continue," and similar expressions or variations. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including but not limited to those discussed in the section titled "Risk Factors" and in other parts of this Annual Report on Form 10-K. Our fiscal year endsJanuary 31 . A discussion, analysis, and comparison of our financial condition, results of operations, and cash flows for the year endedJanuary 31, 2019 to the year endedJanuary 31, 2018 is included in Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedJanuary 31, 2019 filed with theSEC onApril 1, 2019 . Overview We empower everyone to improve how they work. We are a leading cloud-based platform for work execution, enabling teams and organizations to plan, capture, manage, automate, and report on work at scale, resulting in more efficient processes and better business outcomes. We were founded in 2005 with a vision to build a universal application for work management that does not require coding capabilities. Unstructured or dynamic work is work that has historically been managed using a combination of email, spreadsheets, whiteboards, phone calls, and in-person meetings to communicate with team members and complete projects and processes. It is frequently changing, often ad-hoc, and highly reactive to new information. Our platform helps manage this kind of unstructured work and serves as a single source of truth across work processes, fostering accountability and engagement within teams, leading to more efficient decision-making and better business outcomes. We generate revenue primarily from the sale of subscriptions to our cloud-based platform. For subscriptions, customers select the plan that meets their needs and can begin usingSmartsheet within minutes. We offer four subscription levels: Individual, Business, Enterprise, and Premier, the pricing for which varies by the capabilities provided. Customers can also purchase Connectors, which provide data integration and automation to third-party applications. We also offer Dynamic View, Data Uploader, Control Center and Accelerators, which enable customers to implement solutions for a specific use case or for large scale projects, initiatives, or processes. We acquired 10,000ft inMay 2019 which augmented our product portfolio by providing resource allocation and planning. Professional services are offered to help customers create and administer solutions for specific use cases and for training purposes. Customers can begin using our platform by purchasing a subscription directly from our website or through our sales force, starting a free trial, or working as a collaborator on a project. COVID-19 InDecember 2019 , the novel COVID-19 coronavirus ("COVID-19") was reported inChina and inMarch 2020 theWorld Health Organization declared it a pandemic. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers and our sales cycles, and impact on our employees, all of which are uncertain and cannot be predicted. At this time, the extent to which COVID-19 may impact our financial condition or results of operations is uncertain. 46
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Key Business Metrics We review the following key business metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions. January 31, 2020 2019 2018 Domain-based customers 83,901 78,959 74,116
Average annualized contract value per domain-based customer
$ 3,643 $ 2,454 $ 1,640 Dollar -based net retention rate for all customers (trailing 12 months) 135 % 134
% 130 %
Number of domain-based customers We define domain-based customers as organizations with a unique email domain name such as @cisco. All other customers, which we designate as ISP customers, are typically small teams or individuals who register for our services with an email address hosted on a widely used domain such as @gmail, @outlook, or @yahoo. In previous fiscal years, including the fiscal year endedJanuary 31, 2020 , we considered the number of domain-based customers using our platform to be an indicator of our market penetration, the growth of our business, and our potential future business opportunities. Over time as our business has grown, an increasing percentage of our total annualized contract values has come from customers with higher annualized contract values. As ofJanuary 31, 2020 , over 75% of our cumulative total annualized contract value from all customers came from the customers who paid us$5 thousand or more. Due to this concentration in contract value from certain domain-based customers, beginning withFebruary 1, 2020 , the count of domain-based customers will be replaced as a key business metric with the following three metrics: • Count of customers with annualized contract value ("ACV") equal to or greater than$5 thousand
• Count of customers with ACV equal to or greater than
• Count of customers with ACV equal to or greater than
EffectiveFebruary 1, 2020 , we consider the customer growth in these segments to provide better insight into the effectiveness of our growth strategies, our market penetration, and our potential for future business opportunities. Going forward, these metrics will not include domain-based customers with annualized contract values of under$5,000 , which we no longer consider to be a key factor for evaluating our business. These revised metrics for the most recent fiscal years were as follows: January 31, 2020 2019 2018
Customers with ACV of
Average ACV per domain-based customer We use average annualized contract value ("ACV") per domain-based customer to measure customer commitment to our platform and sales force productivity. We define average ACV per domain-based customer as total outstanding ACV for domain-based subscriptions as of the end of the reporting period divided by the number of domain-based customers as of the same date. 47
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Dollar-based net retention rate We calculate dollar-based net retention rate as of a period end by starting with the ACV from the cohort of all customers as of the 12 months prior to such period end ("Prior Period ACV"). We then calculate the ACV from these same customers as of the current period end ("Current Period ACV"). Current Period ACV includes any upsells and is net of contraction or attrition over the trailing 12 months, but excludes subscription revenue from new customers in the current period. We then divide the total Current Period ACV by the total Prior Period ACV to arrive at the dollar-based net retention rate. The dollar-based net retention rate is used by us to evaluate the long-term value of our customer relationships and is driven by our ability to retain and expand the subscription revenue generated from our existing customers. Components of Results of Operations Revenue Subscription revenue Subscription revenue primarily consists of fees from customers for access to our cloud-based platform. We recognize subscription revenue ratably over the term of the subscription period beginning on the date access to our platform is provided, as no implementation work is required, assuming all other revenue recognition criteria have been met. Professional services revenue Professional services revenue primarily includes fees for consulting and training services. Our consulting services consist of platform configuration and use case optimization, and are primarily invoiced on a time and materials basis, with some smaller engagements being provided for a fixed fee. We recognize revenue for our consulting services as those services are delivered. Our training services are delivered either remotely or at the customer site. Training services are charged for on a fixed-fee basis and we recognize revenue as the training program is delivered. Our consulting and training services are generally considered to be distinct, for accounting purposes, and we recognize revenue as services are performed or upon completion of work. Cost of revenue and gross margin Cost of subscription revenue Cost of subscription revenue primarily consists of expenses related to hosting our services and providing support, including employee-related costs such as salaries, wages, and related benefits, third-party hosting fees and payment processing fees, software and maintenance costs, allocated overhead, amortization of acquisition-related intangibles, costs of Connectors betweenSmartsheet and third-party applications, costs of outside services to supplement our internal teams, and travel-related expenses. We intend to continue to invest in our platform infrastructure and our support organization. We currently utilize a combination of third-party co-location data centers and public cloud service providers. As our platform scales, we may require additional investments in infrastructure to host our platform and support our customers, which may negatively impact our subscription gross margin. Cost of professional services revenue Cost of professional services revenue consists primarily of employee-related costs for our consulting and training teams, allocated overhead, billable expenses, software-related costs, travel-related costs, and costs of outside services to supplement our internal teams. Gross margin Gross margin is calculated as gross profit expressed as a percentage of total revenue. Our gross margin may fluctuate from period to period as our revenue mix fluctuates, and as a result of the timing and amount of 48
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investments to expand our hosting capacity, our continued building of application support and professional services teams, increased share-based compensation expense, as well as the relative proportions of total revenue provided by subscriptions or professional services in a given time period. As we continue to migrate more of our infrastructure to cloud-based hosting providers, we expect our gross margin to decline. Operating expenses Research and development Research and development expenses consist primarily of employee-related costs, hardware- and software-related costs, overhead allocations, costs of outside services used to supplement our internal staff, travel-related costs, and marketing related costs. We consider continued investment in our development talent and our platform to be important for our growth. We expect our research and development expenses to increase in absolute dollars as our business grows and to gradually decrease over the long-term as a percentage of total revenue due to economies of scale. Sales and marketing Sales and marketing expenses consist primarily of employee-related costs, costs of general marketing and promotional activities, allocated overhead, travel-related expenses, software-related expenses, costs of outside services used to supplement our internal staff, and amortization of acquisition-related intangibles. Commissions earned by our sales force that are incremental to each customer contract, along with related fringe benefits and taxes, are capitalized and amortized over an estimated useful life of three years. We expect that sales and marketing expenses will increase in absolute dollars as we expect more of our future revenue to come from our inside and direct sales models, rather than through digital self-service sales. We expect sales and marketing costs to gradually decrease over the long-term as a percentage of total revenue due to economies of scale. General and administrative General and administrative expenses consist primarily of employee-related costs for accounting, finance, legal, IT, and human resources personnel. In addition, general and administrative expenses include non-personnel costs, such as legal, accounting, and other professional fees, allocated overhead, hardware and software costs, certain tax, license and insurance-related expenses, and travel-related expenses. We are incurring additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of theSEC , and increased expenses for insurance, investor relations, and professional services. We expect our general and administrative expenses to increase in absolute dollars as our business grows, and to gradually decrease over the long term as a percentage of total revenue due to economies of scale. Interest income Interest income consists of interest income from our investment holdings. Other income (expense), net Other income (expense), net primarily consists of interest expense associated with our finance leases, and foreign exchange gains and losses. Income tax provision (benefit) Our income tax provision has not been historically significant to our business as we have incurred operating losses to date. We maintain a valuation allowance on ourU.S. federal, state and certain foreign deferred tax assets as we have concluded that it is not more likely than not that the deferred assets will be realized. 49
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2017 TenderOffer During the three months endedJuly 31, 2017 , we facilitated a tender offer ("2017 Tender Offer"), in which our current and former employees and directors were able to sell a portion of their vested shares of common stock to certain existing investors. We recorded share-based compensation expense for the amount paid by our existing investors to our current and former employees and directors in excess of the estimated fair value of our common stock. That total amount resulted in$15.5 million incremental expense for the three months endedJuly 31, 2017 , of which$0.1 million was recorded to cost of revenue,$5.1 million was recorded to research and development expense,$0.6 million was recorded to sales and marketing expense, and$9.7 million was recorded to general and administrative expense. In addition, the excess over the estimated fair value of the sale price of the common and convertible preferred stock sold by non-employees, totaling$4.6 million , was recorded as a deemed dividend within additional paid-in capital. Our quarterly trends in total operating expenses, operating loss, and net loss, were significantly impacted by this transaction, which took place and was completed during the three months endedJuly 31, 2017 . 50
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Results of Operations The following tables set forth our results of operations for the periods presented and as a percentage of our total revenue for those periods:
Year Ended January 31, 2020 2019 2018 (in thousands) Revenue Subscription$ 244,058 $ 157,529 $ 100,368 Professional services 26,824 20,193 10,885 Total revenue 270,882 177,722 111,253 Cost of revenue Subscription(1) 32,707 19,297 13,008 Professional services(1) 20,193 14,552 8,674 Total cost of revenue 52,900 33,849 21,682 Gross profit 217,982 143,873 89,571 Operating expenses Research and development(1) 95,469 58,841 37,590 Sales and marketing(1) 176,060 106,067 72,925 General and administrative(1) 50,227 34,049 28,034 Total operating expenses 321,756 198,957 138,549 Loss from operations (103,774 ) (55,084 ) (48,978 ) Interest income 8,410 3,307 540 Other income (expense), net (462 ) (1,815 ) (975 ) Net loss before income tax provision (benefit) (95,826 ) (53,592 ) (49,413 ) Income tax provision (benefit) 114 293 (307 ) Net loss$ (95,940 ) $ (53,885 ) $ (49,106 )
(1) Amounts include share-based compensation expense as follows:
Year Ended January 31, 2020 2019 2018 (in thousands) Cost of subscription revenue$ 1,392 $ 346 $ 96
Cost of professional services revenue 1,259 466 67 Research and development
14,260 5,873 6,029 Sales and marketing 12,937 5,163 1,707 General and administrative 7,716 4,055 10,565
Total share-based compensation expense
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Share-based compensation expense related to the 2017 Tender Offer, which is included in the table above, was as follows:
Year Ended January 31, 2020 2019 2018 (in thousands) Cost of subscription revenue $ - $ -$ 53 Cost of professional services revenue - - 9 Research and development - - 5,124 Sales and marketing - - 583 General and administrative - - 9,701 Total share-based compensation expense $ - $ -$ 15,470
The following table sets forth the components of our statements of operations data, for each of the periods presented, as a percentage of total revenue.
Year Ended January 31, 2020 2019 2018 Revenue Subscription 90 % 89 % 90 % Professional services 10 11 10 Total revenue 100 100 100 Cost of revenue Subscription 12 11 12 Professional services 7 8 8 Total cost of revenue 20 19 19 Gross profit 80 81 81 Operating expenses Research and development 35 33 34 Sales and marketing 65 60 66 General and administrative 19 19 25 Total operating expenses 119 112 125 Loss from operations (38 ) (31 ) (44 ) Interest income 3 2 - Other income (expense), net - (1 ) -
Net loss before income tax provision (benefit) (35 ) (30 ) (44 ) Income tax provision (benefit)
- - - Net loss (35 )% (30 )% (44 )% 52
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Comparison of the years endedJanuary 31, 2020 and 2019 Revenue Year Ended January 31, Change 2020 2019 Amount % (dollars in thousands) Revenue Subscription$ 244,058 $ 157,529 $ 86,529 55 % Professional services 26,824 20,193 6,631 33 % Total revenue$ 270,882 $ 177,722 $ 93,160 52 % Percentage of total revenue Subscription revenue 90 % 89 % Professional services revenue 10 % 11 % The increase in subscription revenue between periods was driven by increased contributions from existing customers, as evidenced by our dollar-based net retention rate of 135% for the trailing 12-month period endedJanuary 31, 2020 , followed by contributions from new customers, as evidenced by the 6% increase in the number of domain-based customers. The increase in professional services revenue was primarily driven by increasing demand for our consulting and training services. Cost of revenue, gross profit, and gross margin Year Ended January 31, Change 2020 2019 Amount % (dollars in thousands) Cost of revenue Subscription$ 32,707 $ 19,297 $ 13,410 69 % Professional services 20,193 14,552 5,641 39 % Total cost of revenue$ 52,900 $ 33,849 $ 19,051 56 % Gross profit$ 217,982 $ 143,873 $ 74,109 52 % Gross margin Subscription 87 % 88 % Professional services 25 % 28 % Total gross margin 80 % 81 % Cost of subscription revenue increased$13.4 million , or 69%, for the year endedJanuary 31, 2020 compared to the year endedJanuary 31, 2019 . The increase was primarily due to an increase of$5.8 million in employee-related expenses due to increased headcount, of which$1.0 million was related to share-based compensation expenses, an increase of$3.5 million in data center and hosting costs, an increase of$1.4 million in amortization of acquisition-related intangibles, an increase of$1.1 million in software-related costs, an increase of$0.9 million in allocated overhead costs, an increase of$0.5 million in credit card processing fees, and an increase of$0.1 million in professional services and fees. 53
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Our gross margin for subscription revenue was 87% and 88% for the years endedJanuary 31, 2020 and 2019, respectively. Our gross margin for subscription revenue decreased primarily due to increased share-based compensation expenses and amortization of acquisition-related intangibles, partially offset by data center and hosting costs which decreased as a percentage of revenue, year over year, due to economies of scale. As we migrate more of our infrastructure to cloud-based hosting providers, add new functionality, expand internationally, and serve more regulated markets, our gross margin for subscription revenue will likely decline. Cost of professional services revenue increased$5.6 million , or 39%, for the year endedJanuary 31, 2020 compared to the year endedJanuary 31, 2019 . The increase was primarily due to an increase of$4.7 million in employee-related expenses, of which$0.8 million was related to share-based compensation expenses, as we continued to grow our professional services offerings and workforce, an increase of$0.6 million in allocated overhead costs, an increase of$0.2 million in software-related costs, and an increase of$0.1 million in travel-related costs. Our gross margin for professional services revenue was 25% and 28% for the year endedJanuary 31, 2020 and 2019, respectively. We expect our gross margin for professional services to decline in the future as we expand our team to support increasing demand. Operating expenses Research and development expenses Year Ended January 31, Change 2020 2019 Amount % (dollars in thousands) Research and development$ 95,469 $ 58,841 $ 36,628 62 % Percentage of total revenue 35 % 33 % Research and development expenses increased$36.6 million , or 62%, for the year endedJanuary 31, 2020 as compared to the year endedJanuary 31, 2019 . The increase was primarily due to an increase of$29.8 million in employee-related expenses due to increased headcount, of which$8.4 million related to increased share-based compensation expenses, an increase of$2.4 million in costs of outside services used to supplement our internal staff, an increase of$2.3 million in software-related costs, and an increase of$2.0 million in allocated overhead expense. Sales and marketing expenses Year Ended January 31, Change 2020 2019 Amount % (dollars in thousands) Sales and marketing$ 176,060 $ 106,067 $ 69,993 66 % Percentage of total revenue 65 % 60 % Sales and marketing expenses increased$70.0 million , or 66%, for the year endedJanuary 31, 2020 as compared to the year endedJanuary 31, 2019 . The increase was primarily due to an increase of$46.7 million in employee-related expenses due to increased headcount, of which$8.0 million related to increased share-based compensation expenses, an increase in marketing costs of$14.7 million , primarily due to a larger ENGAGE customer conference, investment in brand marketing, and pay-per-click advertising, an increase of$3.7 million in allocated overhead costs, an increase of$1.8 million in travel-related costs, an increase of$1.6 million in software-related costs, an increase of$0.9 million in amortization of acquisition-related intangibles, an increase of$0.4 million in costs of outside services used to supplement our internal staff, and an increase of$0.1 million in taxes, licenses and insurance. 54
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General and administrative expenses
Year Ended January 31, Change 2020 2019 Amount % (dollars in thousands) General and administrative$ 50,227 $ 34,049 $ 16,178 48 % Percentage of total revenue 19 % 19 % General and administrative expenses increased$16.2 million , or 48%, for the year endedJanuary 31, 2020 as compared to the year endedJanuary 31, 2019 . The increase was primarily due to an increase in employee-related expenses of$11.1 million , of which$3.7 million related to increased share-based compensation expenses, an increase of$3.9 million in costs for audit, accounting, legal, and other professional fees, an increase of$0.9 million in allocated overhead costs, an increase of$0.5 million in software-related costs, and an increase of$0.2 million in travel-related costs. This was offset by a decrease of$0.5 million in taxes, licenses, insurance, and other. Interest income Year Ended January 31, Change 2020 2019 Amount % (dollars in thousands) Interest income$ 8,410 $ 3,307 $ 5,103 154 % Percentage of total revenue 3 % 2 % For the year endedJanuary 31, 2020 compared to the year endedJanuary 31, 2019 , the increase in interest income of$5.1 million was driven by higher monetary value of cash, cash equivalents, and short-term investments held in interest-bearing accounts and instruments. Our ability to earn interest in the future is dependent upon the interest rate environment, and our interest income may significantly decrease. Other income (expense), net Year Ended January 31, Change 2020 2019 Amount % (dollars in thousands)
Other income (expense), net
(1 )% For the year endedJanuary 31, 2020 compared to the year endedJanuary 31, 2019 , the change in other income (expense), net was driven by a decrease of$1.3 million in warrant expense and a decrease of$0.1 million in interest expense. Quarterly Results of Operations and Other Data The following tables set forth selected unaudited quarterly statements of operations data for each of the eight fiscal quarters endedJanuary 31, 2020 , as well as the percentage of total revenue that each line item represents for each quarter. The information for each of these quarters has been prepared on the same basis as the audited annual consolidated financial statements included elsewhere in this Annual Report and, in the opinion of management, includes all adjustments, which consist only of normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods. This data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this Annual Report. These quarterly results are not necessarily indicative of our results of operations to be expected for any future period. 55
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Table of Contents Three Months Ended Jan. 31, 2020 Oct. 31, 2019 Jul. 31, 2019 Apr. 30, 2019 Jan. 31, 2019 Oct. 31, 2018 Jul. 31, 2018 Apr. 30, 2018 Revenue Subscription$ 71,067 $ 64,355 $ 58,315 $ 50,321 $ 46,482 $ 41,520 $ 37,470 $ 32,057 Professional services 7,452 7,170 6,329 5,873 5,669 5,348 4,914 4,262 Total revenue 78,519 71,525 64,644 56,194 52,151 46,868 42,384 36,319 Cost of revenue Subscription(1) 9,657 8,867 7,982 6,201 5,600 4,873 4,588 4,236 Professional services(1) 5,995 5,231 4,683 4,284 4,067 3,831 3,567 3,087 Total cost of revenue 15,652 14,098 12,665 10,485 9,667 8,704 8,155 7,323 Gross profit 62,867 57,427 51,979 45,709 42,484 38,164 34,229 28,996 Operating expenses Research and development(1) 27,973 25,049 22,210 20,238 15,986 15,599 14,412 12,844 Sales and marketing(1) 50,491 50,896 39,260 35,413 29,344 30,084 24,255 22,384 General and administrative(1) 14,499 13,330 11,457 10,939 9,839 8,888 8,524 6,798 Total operating expenses 92,963 89,275 72,927 66,590 55,169 54,571 47,191 42,026 Loss from operations (30,096 ) (31,848 ) (20,948 ) (20,881 ) (12,685 ) (16,407 ) (12,962 ) (13,030 ) Interest income 2,337 2,810 2,114 1,149 1,216 1,016 908 168 Other income (expense), net (219 ) 187 (319 ) (112 ) (33 ) (156 ) (159 ) (1,468 ) Net loss before income tax provision (benefit) (27,978 ) (28,851 ) (19,153 ) (19,844 ) (11,502 ) (15,547 ) (12,213 ) (14,330 ) Income tax provision (benefit) 182 5 (39 ) (35 ) 183 22 88 - Net loss$ (28,160 ) $ (28,856 ) $ (19,114 ) $ (19,809 ) $ (11,685 ) $ (15,569 ) $ (12,301 ) $ (14,330 ) Net loss per share, basic and diluted$ (0.24 ) $ (0.25 ) $ (0.17 ) $ (0.19 ) $ (0.11 ) $ (0.15 ) $ (0.12 ) $ (0.68 )
(1) Amounts include share-based compensation expense as follows:
Three Months Ended Jan. 31, Oct. 31, Jul. 31, Apr. 30, Jan. 31, Oct. 31, Jul. 31, Apr. 30, 2020 2019 2019 2019 2019 2018 2018 2018 Cost of subscription revenue$ 435 $ 366 $ 356 $ 235 $ 132 $ 96 $ 84 $ 34 Cost of professional services revenue 401 343 298 217 120 149 150 47 Research and development 4,737 3,934 3,317 2,272 1,278 2,552 1,378 665
Sales and marketing 4,036 3,516 3,276 2,108
1,306 1,973 1,370 514 General and administrative 2,243 2,170 1,839 1,464 1,083 1,274 1,116 582 Total share-based compensation expense$ 11,852 $ 10,329 $ 9,086 $ 6,296 $ 3,919 $ 6,044 $ 4,098 $ 1,842 56
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All values from the statement of operations, expressed as percentage of total revenue were as follows:
Three Months Ended Jan. 31, 2020 Oct. 31, 2019 Jul. 31, 2019 Apr. 30, 2019 Jan. 31, 2019 Oct. 31, 2018 Jul. 31, 2018 Apr. 30, 2018 Revenue Subscription 91 % 90 % 90 % 90 % 89 % 89 % 88 % 88 % Professional services 9 10 10 10 11 11 12 12 Total revenue 100 100 100 100 100 100 100 100 Cost of revenue Subscription 12 12 12 11 11 10 11 12 Professional services 8 7 7 8 8 8 8
8
Total cost of revenue 20 20 20 19 19 19 19 20 Gross profit 80 80 80 81 81 81 81 80 Operating expenses Research and development 36 35 34 36 31 33 34
35
Sales and marketing 64 71 61 63 56 64 57 62 General and administrative 18 19 18 19 19 19 20 19 Total operating expenses 118 125 113 119 106 116 111 116 Loss from operations (38 ) (45 ) (32 ) (37 ) (24 ) (35 ) (31 ) (36 ) Interest income 3 4 3 2 2 2 2 - Other income (expense), net - - - - - - - (4 ) Net loss before income tax provision (benefit) (36 ) (40 ) (30 )
(35 ) (22 ) (33 ) (29 ) (39 ) Income tax provision (benefit) - - - - - - - - Net loss (36 )% (40 )% (30 )% (35 )% (22 )% (33 )% (29 )% (39 )% Quarterly revenue trends Our quarterly revenue increased sequentially in each of the periods presented due primarily to expansion within existing customers, increases in the number of new customers, and sales of new offerings. We believe that our professional services business is subject to negative seasonal trends during the holiday period of our fourth fiscal quarter due to the fewer number of business days during this period. The growth in our business has offset this seasonal trend to date, but its impact may be more pronounced in future periods. Quarterly cost of revenue and gross margin trends Our quarterly gross margin has remained relatively consistent, varying between 80% and 81%, as we have invested in our own co-location data centers, which have generated economies of scale, partially offset by a proportional increase in lower-margin professional services revenue. As we continue to migrate more of our infrastructure to cloud-based hosting providers, we expect our gross margin to decline. Quarterly operating expense trends Total operating expenses generally increased for the fiscal quarters presented primarily due to the addition of personnel, related overhead, and investments in hardware and software in connection with the expansion of our business. 57
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Our sales and marketing expenses as a percentage of total revenue generated in the three months endedOctober 31 of each year increased due to our ENGAGE customer conference. We intend to continue to host ENGAGE annually during our third fiscal quarter. Our general and administrative expenses as a percentage of total revenue have increased since the quarter endedJanuary 31, 2018 in preparation for, and as a result of, operating as a public company. We expect these expenses to increase in absolute dollars as our business grows, and to gradually decrease over the long-term as a percentage of total revenue due to economies of scale. Non-GAAP Financial Measures In addition to our results determined in accordance with generally accepted accounting principles inthe United States ("GAAP"), we believe the following non-GAAP financial measures are useful in evaluating our operating performance. We use the below referenced non-GAAP financial measures, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial measures, when taken collectively, may be helpful to investors because they provide consistency and comparability with past financial performance, and assist in comparisons with other companies, some of which use similar non-GAAP financial measures to supplement their GAAP results. The non-GAAP financial measures are presented for supplemental informational purposes only, and should not be considered a substitute for financial measures presented in accordance with GAAP, and may be different from similarly-titled non-GAAP measures used by other companies. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures. Limitations of non-GAAP financial measures Our non-GAAP financial measures have limitations as analytical tools and you should not consider them in isolation or as a substitute for an analysis of our results under GAAP. There are a number of limitations related to the use of these non-GAAP financial measures versus their nearest GAAP equivalents. First, free cash flow and calculated billings are not substitutes for net cash used in operating activities and total revenue, respectively. Similarly, non-GAAP gross profit and non-GAAP operating loss are not substitutes for gross profit and operating loss, respectively. Second, other companies may calculate similar non-GAAP financial measures differently or may use other measures as tools for comparison. Additionally, the utility of free cash flow as a measure of our financial performance and liquidity is further limited as it does not represent the total increase or decrease in our cash balance for a given period. Furthermore, as calculated billings are affected by a combination of factors, including the timing of sales, the mix of monthly and annual subscriptions sold and the relative duration of subscriptions sold, and each of these elements has unique characteristics in the relationship between calculated billings and total revenue, our calculated billings activity is not closely correlated to revenue except over longer periods of time. 58
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Non-GAAP gross profit and non-GAAP gross margin We define non-GAAP gross profit as gross profit adjusted for share-based compensation expense and amortization of acquisition-related intangible assets. Non-GAAP gross margin represents non-GAAP gross profit as a percentage of total revenue. Year Ended January 31, 2020 2019 2018 (dollars in thousands) Gross profit$ 217,982 $ 143,873 $ 89,571 Add: Share-based compensation expense(1)(2) 2,651 812
163
Amortization of acquisition-related intangible assets 1,831 456 38 One-time costs of acquisition 69 - - Non-GAAP gross profit$ 222,533 $ 145,141 $ 89,772 Gross margin 80 % 81 % 81 % Non-GAAP gross margin 82 % 82 % 81 %
(1) Share-based compensation expense for the year ended
share-based compensation expense related to the 2017 Tender Offer.
(2) Includes amortization related to share-based compensation expense that was
capitalized in internal-use software in previous periods.
Non-GAAP operating loss and non-GAAP operating margin We define non-GAAP operating loss as loss from operations adjusted for share-based compensation expense, amortization of acquisition-related intangible assets, and one-time costs of acquisition. Non-GAAP operating margin represents non-GAAP operating loss as a percentage of total revenue. Year Ended January 31, 2020 2019 2018 (dollars in thousands) Loss from operations$ (103,774 ) $ (55,084 ) $ (48,978 ) Add: Share-based compensation expense(1)(2) 37,564 15,903
18,464
Amortization of acquisition-related intangible assets 2,734 480 40 One-time acquisition costs 686 196 195 Non-GAAP operating loss$ (62,790 ) $ (38,505 ) $ (30,279 ) Operating margin (38 )% (31 )% (44 )% Non-GAAP operating margin (23 )% (22 )% (21 )%
(1) Share-based compensation expense for the year ended
share-based compensation expense related to the 2017 Tender Offer.
(2) Includes amortization related to share-based compensation expense that was
capitalized in internal-use software in previous periods. 59
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Non-GAAP net loss We define non-GAAP net loss as net loss adjusted for share-based compensation expense, amortization of acquisition-related intangible assets, one-time costs of acquisition, and remeasurement of convertible preferred stock warrant liability. Year Ended January 31, 2020 2019 2018 (in thousands) Net loss$ (95,940 ) $ (53,885 ) $ (49,106 ) Add: Share-based compensation expense(1)(2) 37,564 15,903
18,464
Amortization of acquisition-related intangible assets 2,734 480
40
One-time acquisition costs 686 196
195
Remeasurement of convertible preferred stock warrant liability - 1,326 795 Non-GAAP net loss$ (54,956 ) $ (35,980 ) $ (29,612 )
(1) Share-based compensation expense for the year ended
share-based compensation expense related to the 2017 Tender Offer.
(2) Includes amortization related to share-based compensation expense that was
capitalized in internal-use software in previous periods.
Free cash flow We define free cash flow as net cash provided by (used in) operating activities less cash used for purchases of property and equipment, capitalized internal-use software, and payments on finance lease obligations. We believe free cash flow facilitates period-to-period comparisons of liquidity. We consider free cash flow to be a key performance metric because it measures the amount of cash we generate from our operations after our capital expenditures, payments on finance lease obligations and changes in working capital. We use free cash flow in conjunction with traditional GAAP measures as part of our overall assessment of our liquidity, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies, and to communicate with our board of directors concerning our liquidity. Year Ended January 31, 2020 2019 2018 (in thousands) Net cash used in operating activities$ (10,870 ) $ (2,855 ) $ (13,581 ) Less: Purchases of property and equipment (5,153 ) (5,767 ) (6,006 ) Capitalized internal-use software (6,699 ) (3,017 ) (3,350 ) Payments on principal of finance leases (4,167 ) (3,253 ) (2,326 ) Free cash flow$ (26,889 ) $ (14,892 ) $ (25,263 ) Calculated billings We define calculated billings as total revenue plus the change in deferred revenue in the period. Because we recognize subscription revenue ratably over the subscription term, calculated billings can be used to measure our 60
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subscription sales activity for a particular period, to compare subscription sales activity across particular periods, and as an indicator of future subscription revenue. Because we generate most of our revenue from customers who are invoiced on an annual basis, and because we have a wide range of customers, from those who pay us less than$200 per year to those who pay us more than$3.0 million per year, we experience seasonality and variability that is tied to typical enterprise buying patterns and contract renewal dates of our largest customers. We expect that our billings trends will continue to vary in future periods based on the timing and size of new and renewal bookings. Year Ended January 31, 2020 2019 2018 (in thousands) Total revenue$ 270,882 $ 177,722 $ 111,253 Add:
Deferred revenue (end of period) 158,809 96,133 57,281 Less: Deferred revenue (beginning of period) 96,133 57,281 32,712 Calculated billings
$ 333,558 $ 216,574 $ 135,822 Non-GAAP weighted average shares outstanding We use non-GAAP weighted average shares outstanding in calculating non-GAAP earnings per share. Our number of non-GAAP weighted average shares outstanding is calculated after assuming conversion of all outstanding preferred stock into shares of common stock either at the beginning of the fiscal period presented or when issued, if later. Year Ended January 31, 2020 2019 2018 (in thousands) GAAP weighted-average shares outstanding used in computing net loss per share attributable to common shareholders, basic and diluted 112,991 83,141
18,273
Add: common shares that would have resulted from conversion of convertible preferred stock at the beginning of the period, or when granted (if later), on a weighted average basis - 16,698
66,595
Non-GAAP weighted-average shares outstanding used in computing net loss per share attributable to common shareholders, basic and diluted 112,991 99,839 84,868 Liquidity and Capital Resources As ofJanuary 31, 2020 , our principal sources of liquidity were cash and cash equivalents totaling$515.9 million , which were held for working capital purposes. Our cash equivalents were comprised primarily of money market funds. We have generated significant operating losses and negative cash flows from operations as reflected in our accumulated deficit and consolidated statements of cash flows. We expect to continue to incur operating losses and negative cash flows from operations for the foreseeable future. We have financed our operations primarily through payments received from customers for subscriptions and professional services, net proceeds we received through sales of equity securities, option exercises, and contributions from our Employee Stock Purchase Plan ("ESPP"), finance leases, and interest income. 61
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We believe our existing cash, cash equivalents, and cash provided by sales of our products and services will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our subscription growth rate, subscription renewal activity, billing frequency, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced product offerings, and the continuing market adoption of our product. We may, in the future, enter into arrangements to acquire or invest in complementary businesses, services, and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies, our ability to compete successfully could be reduced, and this could harm our results of operations. A significant majority of our customers pay in advance for annual subscriptions. Therefore, a substantial source of our cash is from our deferred revenue, which is included on our balance sheet as a liability. Deferred revenue consists primarily of the unearned portion of billed fees for our subscriptions, which is recognized as revenue in accordance with our revenue recognition policy. As ofJanuary 31, 2020 , we had deferred revenue of$158.8 million , of which$158.0 million was recorded as a current liability and was expected to be recognized as revenue in the subsequent 12 months, provided all recognition criteria are met. Cash flows The following table summarizes our cash flows for the periods indicated: Year Ended January 31, 2020 2019 2018 Net cash used in operating activities$ (10,870 ) $ (2,855 ) $ (13,581 ) Net cash used in investing activities (90,043 ) (13,784 ) (809 ) Net cash provided by financing activities 402,022 171,321
51,436
Effects of changes in foreign currency exchange rates on cash, cash equivalents, and restricted cash (25 ) (36 ) - Net increase in cash, cash equivalents, and restricted cash$ 301,084 $ 154,646 $ 37,046 Operating activities Our largest sources of operating cash are cash collections from our customers for subscription and professional services. Our primary uses of cash from operating activities are for employee-related expenditures and sales and marketing expenses. Historically, we have generated negative cash flows from operating activities during most fiscal years, and have supplemented working capital requirements through net proceeds from the sale of equity securities. During the year endedJanuary 31, 2020 , net cash used in operating activities was$10.9 million , driven by our net loss of$95.9 million , adjusted for non-cash charges of$78.8 million , and net cash inflows of$6.3 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of share-based compensation, amortization of deferred commissions, depreciation of property and equipment, amortization of lease right-of-use assets, and amortization of intangible assets. Fluctuations in operating assets and liabilities included an increase in deferred revenue of$61.6 million , an increase in deferred commissions of$39.0 million , an increase in accounts receivable of$26.0 million , an increase in accounts payable and accrued expenses of$21.4 million , an increase in operating lease right-of-use assets of$12.2 million , an increase in operating lease liabilities of$5.6 million , an increase in prepaid expenses and other current assets of$3.9 million , a decrease in other long-term liabilities of$1.0 million , and an increase in other long-term assets of$0.3 million . During the year endedJanuary 31, 2019 , net cash used in operating activities was$2.9 million , driven by our net loss of$53.9 million , adjusted for non-cash charges of$35.7 million , and net cash inflows of$15.3 million provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of share-based 62
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compensation, amortization of deferred commissions, depreciation of property and equipment, remeasurement of the convertible preferred stock warrant liability, and amortization of intangible assets. Notable fluctuations in operating assets and liabilities included an increase in deferred revenue of$38.9 million , an increase in deferred commissions of$24.5 million , an increase in accounts receivable of$15.3 million , an increase in accounts payable and accrued expenses of$14.2 million , an increase in other long-term liabilities of$1.3 million , a decrease in prepaid expenses and other current assets of$0.5 million , and a decrease in other long-term assets of$0.2 million . Investing activities Net cash used in investing activities during the year endedJanuary 31, 2020 of$90.0 million consisted of purchases of short-term investments of$100.5 million , payments for business acquisition, net of cash acquired, of$26.7 million , spend on capitalized internal-use software development of$6.7 million , purchases of property and equipment of$5.2 million , and a purchase of a long-term investment of$1.0 million . This was offset by proceeds from maturity of an investment of$50.0 million . Net cash used in investing activities during the year endedJanuary 31, 2019 of$13.8 million consisted of purchases of property and equipment of$5.8 million , payments for business acquisitions, net of cash acquired, of$5.0 million , and capitalized internal-use software development costs of$3.0 million . Financing activities Net cash provided by financing activities during the year endedJanuary 31, 2020 of$402.0 million was primarily due to$379.8 million in proceeds from the follow-on offering, net of underwriters' discounts and commissions, executed during the second quarter of this fiscal year and discussed further in Note 2 to our consolidated financial statements. Additionally, we had$15.9 million in proceeds from the exercise of stock options, and$11.3 million in proceeds from our ESPP, which were partially offset by principal payments on finance leases of$4.2 million , and payments of deferred offering costs of$0.8 million . Net cash provided by financing activities during the year endedJanuary 31, 2019 of$171.3 million was primarily due to$163.8 million in proceeds from the IPO, net of underwriters' discounts and commissions,$7.1 million in proceeds from our ESPP, and$6.6 million in proceeds from the exercise of stock options. These proceeds were partially offset by principal payments on finance leases of$3.3 million , payments of deferred offering costs of$2.6 million , and taxes paid related to net share settlement of restricted stock units of$0.4 million . Obligations and Other Commitments Our contractual obligations consist primarily of obligations under our operating leases for office space, finance leases for our co-location data center-related equipment, our commitment with a cloud-based hosting service provider, and non-cancelable purchase commitments. The following table summarizes our contractual obligations as ofJanuary 31, 2020 : Payments Due by Period: Less than 1 More than 5 year 1 to 3 years 3 to 5 years years Total (in thousands) Operating lease obligations(1)$ 13,345 $ 24,055 $ 21,914 $ 12,961 $ 72,275 Finance lease obligations 2,599 1,712 - - 4,311 Other obligations(2) 15,128 6,565 - - 21,693
Total contractual obligations
(1) As ofJanuary 31, 2020 , we had signed leases for additional office space that had not yet commenced. Future non-cancelable lease payments associated with these agreements totaled$42.3 million , payable over lease terms ranging from 7 to 9 years. (2) Amounts include our commitment with a cloud-based hosting service provider for$5.0 million within one year and$3.5 million between one to three years. 63
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Indemnification Agreements In the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we agree to indemnify customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers, or employees. An indemnification claim has been made to the Company in a litigation in which a former director and shareholder are parties. At this time, the Company cannot reasonably estimate the magnitude of its indemnification obligation, if any. There are no other claims that we are aware of at this time that could have a material effect on our balance sheets, statements of operations and comprehensive loss, or statements of cash flows. Off-Balance Sheet Arrangements As ofJanuary 31, 2020 , we did not have any relationships with organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities, revenue and expenses. Generally, we base our estimates on historical experience and on various other assumptions in accordance with GAAP that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates. Revenue recognition We derive our revenue primarily from subscription services and professional services. Revenue is recognized when control of these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services, net of any sales taxes. We determine revenue recognition through the following steps: • identification of the contract, or contracts, with a customer;
• identification of the performance obligations in the contract;
• determination of the transaction price;
• allocation of the transaction price to the performance obligations in the
contract; and
• recognition of revenue when, or as, we satisfy a performance obligation.
Subscription revenue Subscription revenue primarily consists of fees from customers for access to our cloud-based platform. Our subscription revenue is recognized on a ratable basis over the subscription contract term, beginning on the date the access to our platform is provided, as no implementation work is required, if consideration we are entitled to receive is considered probable of collection. Subscription contracts generally have terms of one year or one month, are billed in advance, and are non-cancelable. The subscription arrangements do not allow the customer the contractual right to take possession of the platform; as such, the arrangements are considered to be service contracts. 64
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Certain of our subscription contracts contain performance guarantees related to service continuity. To date, refunds related to such guarantees have been immaterial in all periods presented. Professional services revenue Professional services revenue primarily includes revenue recognized from fees for consulting and training services. Our consulting services consist of platform configuration and use case optimization, and are primarily invoiced on a time and materials basis, monthly in arrears. Services revenue is recognized over time, as service hours are delivered. Smaller consulting engagements are on occasion provided for a fixed fee. These smaller consulting arrangements are typically of short duration (less than three months). In these cases, revenue is recognized over time, based on the proportion of hours of work performed, compared to the total hours expected to complete the engagement. Configuration and use case optimization services do not result in significant customization or modification of the software platform or user interface. Training services are billed in advance, on a fixed-fee basis, and revenue is recognized after the training program is delivered, or after the customer's right to receive training services expires. Associated out-of-pocket travel expenses related to the delivery of professional services are typically reimbursed by the customer. Out-of-pocket expense reimbursements are recognized as revenue at the point in time, or as, the distinct performance obligation to which they relate is delivered. Out-of-pocket expenses are recognized as cost of professional services revenue as incurred. On occasion, we sell our subscriptions to third-party resellers. The price at which we sell to the reseller is typically discounted, as compared to the price at which we would sell to an end customer, in order to enable the reseller to realize a margin on the eventual sale to the end customer. As we retain a fixed amount of the contract from the reseller, and do not have visibility into the pricing provided by the reseller to the end customer, the revenue is recorded net of any reseller margin. Contracts with multiple performance obligations Some of our contracts with customers contain multiple performance obligations. We account for individual performance obligations separately, as they have been determined to be distinct, i.e., the services are separately identifiable from other items in the arrangement and the customer can benefit from them on their own or with other resources that are readily available to the customer. The transaction price is allocated to the distinct performance obligations on a relative stand-alone selling price basis. Stand-alone selling prices are determined based on the prices at which we separately sell subscription services, consulting services and training, and based on our overall pricing objectives, taking into consideration market conditions, value of our contracts, the types of offerings sold, customer demographics, and other factors. Deferred revenue Deferred revenue is recorded for subscription services contracts upon establishment of unconditional right to payment under a non-cancelable contract before transferring the related services to the customer. Deferred revenue for such services is amortized into revenue over time, as those subscription services are delivered. Similarly, we record deferred revenue for fixed-fee professional services upon establishment of an unconditional right to payment under a non-cancelable contract. Deferred revenue for training services is recognized as revenue upon delivery of training services or upon expiration of customer's right to receive such services. Deferred revenue for consulting services is recognized as hours of service are delivered to the customer. Deferred commissions The majority of sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commission are paid on initial contracts and on any upsell contracts with a customer. No sales commissions are paid on customer renewals. Sales commissions are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be three years. We determined the period of benefit by taking into consideration our customer contracts, expected customer life, the expected life of 65
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our technology and other factors. Amortization expense is included in sales and marketing expenses in the accompanying statements of operations. Internal-use software development costs The Company capitalizes certain qualifying costs incurred during the application development stage in connection with the development of internal-use software. Costs related to preliminary project activities and post-implementation activities are expensed in research and development ("R&D") as incurred. R&D expenses consist primarily of employee-related costs, hardware- and software-related costs, costs of outside services used to supplement our internal staff, and overhead allocations. Internal-use software costs of$8.1 million were capitalized in the year endedJanuary 31, 2020 , of which$5.8 million related to costs incurred during the application development stage of software development for the Company's platform to which subscriptions are sold. Internal-use software costs of$3.5 million were capitalized in the year endedJanuary 31, 2019 , of which$1.5 million related to costs incurred during the application development stage of software development for the Company's platform to which subscriptions are sold. Capitalized software development costs are included within property and equipment, net on the balance sheets, and are amortized over the estimated useful life of the software, which is typically three years. The related amortization expense is recognized in the consolidated statements of comprehensive loss within the function that receives the benefit of the developed software. The Company evaluates the useful lives of these assets and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. Leases We determine if an arrangement is a lease at inception, and leases are classified at commencement as either operating or finance leases. Right-of-use ("ROU") assets and lease liabilities are recognized at commencement date based on the present value of the future minimum lease payments over the lease term. ROU assets also include any lease payments made. Operating lease ROU assets are presented separately in long-term assets and finance lease ROU assets are included in property and equipment, net on our consolidated balance sheets. As our operating leases do not provide an implicit rate, we use our incremental borrowing rate based on information available at the commencement date in determining the present value of future payments. This rate is an estimate of the collateralized borrowing rate we would incur on our future lease payments over a similar term based on the information available at commencement date. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. AtJanuary 31, 2020 , we did not include any options to extend leases in our lease terms as we were not reasonably certain to exercise them. The Company's lease agreements do not contain residual value guarantees or covenants. We utilize certain practical expedients and policy elections available under the lease accounting standard. Leases with a term of one year or less are not recognized on our consolidated balance sheets; we recognize lease expense for these leases on a straight-line basis over the lease term. Additionally, we have elected to include non-lease components with lease components for contracts containing real estate leases for the purpose of calculating lease right-of-use assets and liabilities, to the extent that they are fixed. Non-lease components that are not fixed are expensed as incurred as variable lease payments. Our real estate operating leases typically include non-lease components such as common-area maintenance costs. ROU assets are subject to evaluation for impairment or disposal on a basis consistent with other long-lived assets. Business combinations When we acquire a business, the purchase price is allocated to the net tangible and identifiable intangible assets acquired based on their estimated fair values. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets. These estimates can include, but are not 66
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limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unpredictable. During the measurement period, which may be up to one year from the acquisition date, adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed may be recorded, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.Goodwill on our consolidated balance sheets totaled$16.5 million and$5.5 million atJanuary 31, 2020 and 2019, respectively.Goodwill is tested for impairment annually onSeptember 1 , or more frequently if events or changes in circumstances indicate that impairment may exist. Based on the annual assessment, no indicator of impairment was noted and therefore no goodwill impairments were recorded during the years endedJanuary 31, 2020 , 2019, or 2018. Share-based compensation The Company measures and recognizes compensation expense for all share-based awards granted to employees and directors, based on the estimated fair value of the award on the date of grant. Expense is recognized on a straight-line basis over the vesting period of the award based on the estimated portion of the award that is expected to vest. We use the Black-Scholes option pricing model to measure the fair value of stock option awards when they are granted. We make several estimates in determining share-based compensation and these estimates generally require significant analysis and judgment to develop. These assumptions and estimates are as follows: Fair value of common stock. As our stock was not publicly traded prior to our IPO, we were required to estimate the fair value of common stock, as discussed in "Valuation of Common Stock" below. Expected term. The expected term of options represents the period that share-based awards are expected to be outstanding. We estimate the expected term using the simplified method due to the lack of historical exercise activity for our company. Risk-free interest rate. The risk-free interest rate is based on the implied yield available at the time of the option grant in theU.S. Treasury securities at maturity with a term equivalent to the expected term of the option. Expected volatility. Expected volatility is based on an average volatility of stock prices for a group of publicly traded peer companies. In considering peer companies, we assess characteristics such as industry, state of development, size and financial leverage. Dividend yield. We have never declared or paid any cash dividends and do not plan to pay cash dividends in the foreseeable future, and, therefore, use an expected dividend yield of zero. If any assumptions used in the Black-Scholes option pricing model change significantly, share-based compensation for future awards may differ materially compared with the awards granted previously. In addition to the assumptions used in the Black-Scholes option pricing model, we must also estimate a forfeiture rate to calculate the share-based compensation expense for awards. Our forfeiture rate is derived from historical employee termination behavior. If the actual number of forfeitures differs from these estimates, additional adjustments to compensation expense will be required. Valuation of common stock Given the absence of an active market for our common stock prior to our IPO, our board of directors was required to estimate the fair value of our common stock at the time of each option grant based upon several factors, including its consideration of input from management and contemporaneous third-party valuations. 67
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The exercise price for all stock options granted was at the estimated fair value of the underlying common stock, as estimated on the date of grant by our board of directors in accordance with the guidelines outlined in theAmerican Institute of Certified Public Accountants , Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Each fair value estimate was based on a variety of factors, which included the following: •contemporaneous valuations performed by an unrelated third-party valuation firm; •the prices, rights, preferences and privileges of our preferred stock relative to those of our common stock; •the lack of marketability of our common stock; •our actual operating and financial performance; •current business conditions and projections; •hiring of key personnel and the experience of our management; •our history and the timing of the introduction of new applications and capabilities; •our stage of development; •the likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of our business given prevailing market conditions; •the market performance of comparable publicly traded companies; and •U.S. and global capital market conditions. In valuing our common stock, our board of directors determined the equity value of our business using valuation methods they deemed appropriate under the circumstances applicable at the valuation date. One method, the market approach, estimates value based on a comparison of our company to comparable public companies in a similar line of business. To determine our peer group of companies, we considered public enterprise cloud-based application providers and selected those that are similar to us in size, stage of life cycle, and financial leverage. From the comparable companies, a representative market value multiple is determined which is applied to our operating results to estimate the value of our company. The market value multiple was determined based on consideration of the last 12-month revenue and the implied multiples for each of the comparable companies. Another method, the prior sale of our stock approach, estimates value by considering any prior arm's length sales of our equity. When considering prior sales of our equity, the valuation considers the size of the equity sale, the relationship of the parties involved in the transaction, the timing of the equity sale, and our financial condition at the time of the sale. Once an equity value was determined, our board of directors used one of the following methods to allocate the equity value to each of our classes of stock: (1) the option pricing method, or OPM; or (2) a probability weighted expected return method, or PWERM. The OPM treats common stock and preferred stock as call options on a business, with exercise prices based on the liquidation preference of the preferred stock. Therefore, the common stock only has value if the funds available for distribution to the holders of common stock exceed the value of the liquidation preference of the preferred stock at the time of a liquidity event, such as a merger, sale, or initial public offering, assuming the business has funds available to make a liquidation preference meaningful and collectible by shareholders. The common stock is modeled as a call option with a claim on the business at an exercise price equal to the remaining value immediately after the preferred stock is liquidated. The OPM uses the Black-Scholes option pricing model to price the call option. 68
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The estimated value of the common stock derived from the OPM is then discounted by a non-marketability factor due to the fact that shareholders of private companies do not have access to trading markets similar to those enjoyed by shareholders of public companies, which impacts liquidity. The PWERM employs various market approach calculations depending upon the likelihood of various liquidation scenarios. For each of the various scenarios, an equity value is estimated and the rights and preferences for each shareholder class are considered to allocate the equity value to common shares. The common stock value is then multiplied by a discount factor reflecting the calculated discount rate and the timing of the event. Lastly, the common stock value is multiplied by an estimated probability for each scenario. The probability and timing of each scenario were based on discussions between our board of directors and our management team. Under the PWERM, the value of our common stock is based upon possible future exit events for our company. Subsequent to the closing of the IPO onMay 1, 2018 , the fair value of our common stock is represented by the price quoted on theNew York Stock Exchange . Recent accounting pronouncements See the sections titled "Summary of Significant Accounting Policies-Recently adopted accounting pronouncements" and "Recent accounting pronouncements not yet adopted" in Note 2 to our Consolidated Financial Statements for more information. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Interest rate risk We had cash and cash equivalents totaling$515.9 million as ofJanuary 31, 2020 , of which$303.9 million was invested in money market funds. We had cash and cash equivalents totaling$213.1 million as ofJanuary 31, 2019 , of which$211.1 million was invested in money market funds. Our cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes. Our cash equivalents and our investment portfolio are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value adversely affected due to a rise in interest rates. Due in part to these factors, our future investment income may fall short of our expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our short-term investments as "available for sale," no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other-than-temporary. A hypothetical 10% relative change in interest rates would not have had a material impact on the value of our cash equivalents and short-term investments as ofJanuary 31, 2020 , and 2019, respectively. Foreign currency exchange risk Due to our international operations, although our sales contracts are primarily denominated inU.S. dollars, we have foreign currency risks related to revenue denominated in other currencies, such as the British Pound Sterling, Euro, Canadian dollar, and Australian dollar, as well as expenses denominated in the British Pound Sterling and Australian dollar. Changes in the relative value of theU.S. dollar to other currencies may negatively affect revenue and other operating results as expressed inU.S. dollars. We have not engaged in the hedging of foreign currency transactions to date. We do not believe that an immediate 10% increase or decrease in the relative value of theU.S. dollar to other currencies would have a material effect on our operating results. 69
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Item 8. Financial Statements and Supplementary Data
Index to the Consolidated Financial Statements Report of Independent Registered Public Accounting Firm 71 Consolidated Statements of Operations 75 Consolidated Statements of Comprehensive Loss 76 Consolidated Balance Sheets 77
Consolidated Statements of Change in Convertible Preferred Stock and Shareholders' Equity (Deficit)
78 Consolidated Statements of Cash Flows 79 Note 1. Overview and Basis of Presentation 81 Note 2. Summary of Significant Accounting Policies 82 Note 3. Revenue from Contracts with Customers 89 Note 4. Deferred Commissions 90 Note 5. Net Loss Per Share 90 Note 6. Fair Value Measurements 90 Note 7. Property and Equipment, Net 91 Note 8. Business Combinations 92 Note 9.Goodwill and Net Intangible Assets 93 Note 10. Share-Based Compensation 94 Note 11. Income Taxes 98 Note 12. Leases 101 Note 13. Commitments and Contingencies 103 Note 14. 401(k) and Pension Plans 104 Note 15. Related Party Transactions 104 Note 16. Geographic Information 104 Note 17. Subsequent Events 105 70
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Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders ofSmartsheet Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets ofSmartsheet Inc. and its subsidiaries (the "Company") as ofJanuary 31, 2020 and 2019, and the related consolidated statements of operations, of comprehensive loss, of change in convertible preferred stock and shareholders' equity (deficit) and of cash flows for each of the three years in the period endedJanuary 31, 2020 , including the related notes (collectively referred to as the "consolidated financial statements"). We also have audited the Company's internal control over financial reporting as ofJanuary 31, 2020 , based on criteria established in Internal Control - Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of theTreadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as ofJanuary 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period endedJanuary 31, 2020 in conformity with accounting principles generally accepted inthe United States of America . Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as ofJanuary 31, 2020 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO because material weaknesses in internal control over financial reporting existed as of that date related to (i) an ineffective control environment as the Company had an insufficient complement of resources with an appropriate level of controls knowledge and expertise commensurate with the Company's financial reporting requirements which contributed to additional material weaknesses in that the Company, (ii) did not design and maintain effective information technology general controls for certain information systems relevant to the preparation of the financial statements, and (iii) did not design and maintain effective controls related to the completeness, accuracy and occurrence of order entry and pricing during the billing and revenue processes. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the 2020 consolidated financial statements, and our opinion regarding the effectiveness of the Company's internal control over financial reporting does not affect our opinion on those consolidated financial statements. Change in Accounting Principle As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in fiscal year 2020. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in management's report referred to above. Our responsibility is to express opinions on the Company's consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with thePublic Company Accounting Oversight Board (United States ) (PCAOB) and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. 71
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Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Acquisition ofArtefact Product Group LLC - Fair value of finite-lived software technology and customer relationships intangible assets As described in Note 8 to the consolidated financial statements, the Company completed the acquisition ofArtefact Product Group, LLC onMay 1, 2019 for a total purchase price of$27.8 million , of which$8.0 million in finite-lived software technology intangible assets and$8.0 million in finite-lived customer relationships intangible assets were recorded. Management valued the finite-lived software technology using the relief-from-royalty method under the income approach. This method reflects the present value of the projected cash flows that are expected to be generated from the licensing of the asset to third parties. Management applied judgment in estimating the fair value of the finite-lived software technology which involved the use of significant assumptions with respect to the base year revenue and the royalty rate. Management valued the finite-lived customer relationships using the multi-period excess-earnings method. This method involves forecasting the net earnings to be generated by the asset, reducing them by appropriate returns on contributory assets, and then discounting the resulting net returns to a present value using an appropriate discount rate. Management applied judgment in estimating the fair value of the finite-lived customer relationships which involved the use of the significant assumption of the royalty rate impacting the returns on contributory assets for software technology. 72
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The principal considerations for our determination that performing procedures relating to the fair value of finite-lived software technology and customer relationships intangible assets from the acquisition ofArtefact Product Group, LLC is a critical audit matter are (i) there was a high degree of auditor judgment and subjectivity in applying procedures relating to the fair value measurements of finite-lived software technology and customer relationships acquired due to the significant amount of judgment by management when developing the estimates, (ii) significant audit effort was required in evaluating the significant assumptions relating to the estimates, such as base year revenue and the royalty rate as it relates to the estimation of fair value of finite-lived software technology and the royalty rate impacting the returns on contributory assets for software technology as it relates to the estimation of fair value of finite-lived customer relationships, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained from these procedures. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management's valuation of the finite-lived software technology and customer relationships and controls over the development of the assumptions related to base year revenue, the royalty rate, and the royalty rate impacting the returns on contributory assets for software technology. These procedures also included, among others, (i) reading the purchase agreement, and (ii) testing management's process for estimating the fair value of finite-lived software technology and customer relationships. Testing management's process included evaluating the appropriateness of the valuation methods, testing completeness and accuracy of the data used in the valuation methods, and evaluating the reasonableness of significant assumptions, including base year revenue, the royalty rate, and the royalty rate impacting the returns on contributory assets for software technology. Evaluating the reasonableness of base year revenue involved considering the past performance of the acquired business, as well as economic and industry forecasts. The royalty rates were evaluated by obtaining evidence to support the reasonableness of the assumption and evaluating whether it was consistent with industry and peer data. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company's valuation methods and certain significant assumptions, including the royalty rates. Consolidated Financial Statements - Impact of Control Environment and Information Technology General Controls The completeness and accuracy of the consolidated financial statements, including the financial condition, results of operations and cash flows, is dependent on, in part, the Company's ability to (i) design and maintain an effective control environment, including maintaining a sufficient complement of resources with an appropriate level of controls knowledge and expertise commensurate with financial reporting requirements, and (ii) design and maintain effective information technology general controls for certain information systems relevant to the preparation of the financial statements, including user access controls, program change management controls and computer operations controls. The principal considerations for our determination that performing procedures relating to the consolidated financial statements - impact of control environment and information technology general controls is a critical audit matter are there was a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to the consolidated financial statements and information systems. As described above in the "Opinions on the Financial Statements and Internal Control over Financial Reporting" section, material weaknesses related to (i) the control environment, and (ii) information technology general controls existed as ofJanuary 31, 2020 . Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, evaluating the nature and extent of audit procedures performed and evidence obtained. These procedures also included manually testing the completeness and accuracy of system reports or other information generated by the Company's information technology systems. Revenue Recognition - Subscription and Professional Services Revenues 73
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As described in Note 2 to the consolidated financial statements, the Company recognizes revenue when control of services is transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services, net of any sales taxes. The Company's subscription and professional services revenues were$244.1 million and$26.8 million , respectively, for the year endedJanuary 31, 2020 . As disclosed by management, the completeness, accuracy and occurrence of subscription and professional services revenues are dependent on customer orders being completely and accurately entered and recognized in the Company's billing and revenue processes. The principal considerations for our determination that performing procedures relating to revenue recognition - subscription and professional services revenues is a critical audit matter are there was a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to the accuracy and occurrence of revenue. As described above in the "Opinions on the Financial Statements and Internal Control over Financial Reporting" section, a material weakness related to the Company's billing and revenue processes existed as ofJanuary 31, 2020 . Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, evaluating the nature and extent of audit procedures performed and evidence obtained relating to subscription and professional services revenues. These procedures also included obtaining and inspecting source documents including, where applicable, cash receipts from customers. /s/PricewaterhouseCoopers LLP Seattle, Washington March 31, 2020
We have served as the Company's auditor since 2012.
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Table of Contents SMARTSHEET INC. Consolidated Statements of Operations (in thousands, except per share data) Year Ended January 31, 2020 2019 2018 Revenue Subscription$ 244,058 $ 157,529 $ 100,368 Professional services 26,824 20,193 10,885 Total revenue 270,882 177,722 111,253 Cost of revenue Subscription 32,707 19,297 13,008 Professional services 20,193 14,552 8,674 Total cost of revenue 52,900 33,849 21,682 Gross profit 217,982 143,873 89,571 Operating expenses Research and development 95,469 58,841 37,590 Sales and marketing 176,060 106,067 72,925 General and administrative 50,227 34,049 28,034 Total operating expenses 321,756 198,957 138,549 Loss from operations (103,774 ) (55,084 ) (48,978 ) Interest income 8,410 3,307 540 Other income (expense), net (462 ) (1,815 ) (975 ) Net loss before income tax provision (benefit) (95,826 ) (53,592 ) (49,413 ) Income tax provision (benefit) 114 293 (307 ) Net loss$ (95,940 ) $ (53,885 ) $ (49,106 ) Deemed dividend - - (4,558 ) Net loss attributable to common shareholders$ (95,940 ) $ (53,885 ) $ (53,664 ) Net loss per share attributable to common shareholders, basic and diluted$ (0.85 ) $ (0.65 ) $ (2.94 ) Weighted-average shares outstanding used to compute net loss per share attributable to common shareholders, basic and diluted 112,991 83,141 18,273 See notes to consolidated financial statements. 75
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Table of Contents SMARTSHEET INC. Consolidated Statements of Comprehensive Loss (in thousands) Year Ended January 31, 2020 2019 2018 Net loss$ (95,940 ) $ (53,885 ) $ (49,106 ) Other comprehensive loss: Net unrealized loss on available-for-sale securities - - (1 ) Comprehensive loss$ (95,940 ) $ (53,885 ) $ (49,107 ) See notes to consolidated financial statements. 76
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Table of Contents SMARTSHEET INC. Consolidated Balance Sheets (in thousands, except share data) January 31, 2020 2019 Assets Current assets Cash and cash equivalents$ 515,924 $ 213,085 Short-term investments 50,532
-
Accounts receivable, net of allowances of
56,863
30,173
Prepaid expenses and other current assets 7,643 3,922 Total current assets 630,962 247,180 Long-term assets Restricted cash 865 2,620 Deferred commissions 48,255 29,014 Property and equipment, net 26,981 22,540 Operating lease right-of-use assets 57,590 - Intangible assets, net 15,155 1,827 Goodwill 16,497 5,496 Other long-term assets 1,409 67 Total assets$ 797,714 $ 308,744 Liabilities and shareholders' equity Current liabilities Accounts payable$ 7,720 $ 4,658 Accrued compensation and related benefits 39,635
25,557
Other accrued liabilities 12,428
6,544
Operating lease liabilities, current 13,020
-
Finance lease liabilities, current 2,465 3,768 Deferred revenue 157,972 95,766 Total current liabilities 233,240 136,293 Operating lease liabilities, non-current 47,913
-
Finance lease liabilities, non-current 1,664
2,164
Deferred revenue, non-current 837 367 Other long-term liabilities - 2,928 Total liabilities 283,654 141,752 Commitments and contingencies (Note 13) Shareholders' equity: Preferred stock, no par value; 10,000,000 shares authorized, no shares issued or outstanding as of January 31, 2020 and January 31, 2019 -
-
Class A common stock, no par value; 500,000,000 shares
authorized, 118,194,159 shares issued and outstanding as of
-
-
Class B common stock, no par value; 500,000,000 shares
authorized, no shares issued and outstanding as of
- - Additional paid-in capital 770,518 327,510 Accumulated deficit (256,458 ) (160,518 ) Total shareholders' equity 514,060 166,992 Total liabilities and shareholders' equity$ 797,714 $ 308,744 See notes to consolidated financial statements. 77
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Table of Contents SMARTSHEET INC. Consolidated Statements of Change in Convertible Preferred Stock and Shareholders' Equity (Deficit) (dollars in thousands) Convertible Preferred Stock Common Stock (Class A and B) Additional Accumulated Paid-in Accumulated Other Comprehensive Income Total Shareholders' Shares Amount Shares Amount Capital Deficit (Loss) Equity (Deficit) Balances at January 31, 2017 61,284,703$ 60,260 16,278,895 $ -$ 4,783 $ (57,527 ) $ 1$ (52,743 ) Issuance of convertible preferred stock 6,334,674 52,427 - - - - - - Stock option exercises - - 4,001,846 - 2,645 - - 2,645 Share-based compensation expense - - - - 18,464 - - 18,464 Comprehensive loss - - - - - (49,106 ) (1 ) (49,107 ) Balances at January 31, 2018 67,619,377 112,687 20,280,741 - 25,892 (106,633 ) - (80,741 ) Issuance of common stock under employee stock plans - - 4,331,279 - 10,221 - - 10,221 Taxes paid related to net share settlement of equity awards - - - - (380 ) - - (380 ) Issuance of common stock upon net exercise of warrant - - 134,603 - 2,598 - - 2,598 Issuance of common stock in connection with initial public offering, net of underwriting discounts and issuance costs - - 11,745,088 - 160,401 - - 160,401 Conversion of convertible preferred stock to common stock in connection with initial public offering (67,619,377 ) (112,687 ) 68,479,732 - 112,687 - - 112,687 Share-based compensation expense - - - - 16,091 - - 16,091 Comprehensive loss - - - - - (53,885 ) - (53,885 ) Balances at January 31, 2019 - - 104,971,443 - 327,510 (160,518 ) - 166,992 Issuance of common stock under employee stock plans - - 4,197,716 - 25,519 - - 25,519 Issuance of common stock in connection with follow-on public offering, net of underwriting discounts, commissions and issuance costs - - 9,025,000 - 378,982 - - 378,982 Share-based compensation expense - - - - 38,507 - - 38,507 Comprehensive loss - - - - - (95,940 ) - (95,940 ) Balances at January 31, 2020 - $ - 118,194,159 $ -$ 770,518 $ (256,458 ) $ -$ 514,060 See notes to consolidated financial statements. 78
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Table of Contents SMARTSHEET INC. Consolidated Statements of Cash Flows (in thousands) Year Ended January 31, 2020 2019 2018 Cash flows from operating activities Net loss$ (95,940 ) $ (53,885 ) $ (49,106 ) Adjustments to reconcile net loss to net cash used in operating activities: Share-based compensation expense 37,493
15,903 18,464 Remeasurement of convertible preferred stock warrant liability
- 1,326 795 Depreciation of property and equipment 10,687 7,194 4,019 Amortization of deferred commission costs 19,806 10,770 4,989 Unrealized foreign currency loss 82 37 - Gain on disposal of assets - - 2 Amortization of intangible assets 2,762 510 57 Non-cash operating lease costs 7,971 - -
Amortization of premiums, accretion of discounts and gain on investments
- - 26 Changes in operating assets and liabilities: Accounts receivable (25,965 ) (15,265 ) (9,455 ) Prepaid expenses and other current assets (3,909 ) 481 (1,856 ) Operating lease right-of-use assets (12,173 ) - - Other long-term assets (339 ) 207 (1,022 ) Accounts payable 3,593 2,031 704 Other accrued liabilities 5,840 3,424 2,014 Accrued compensation and related benefits 11,994 8,732 6,466 Deferred commissions (39,046 ) (24,493 ) (14,704 ) Other long-term liabilities (1,003 ) 1,322 457 Deferred revenue 61,646 38,851 24,569 Operating lease liabilities 5,631 - - Net cash used in operating activities (10,870 ) (2,855 ) (13,581 ) Cash flows from investing activities Purchases of short-term investments (100,532 ) - - Purchases of long-term investments (1,000 ) - - Proceeds from maturity of investments 50,000 - 9,235 Proceeds from sales of investments - - 900 Purchases of property and equipment (5,153 ) (5,767 ) (6,006 ) Proceeds from sale of property and equipment - - 1 Capitalized internal-use software development costs (6,699 ) (3,017 ) (3,350 ) Purchases of intangible assets - - (125 ) Payments for business acquisition, net of cash acquired (26,659 ) (5,000 ) (1,464 ) Net cash used in investing activities (90,043 ) (13,784 ) (809 ) Cash flows from financing activities Proceeds from initial public offering of common stock, net of underwriters' discounts and commissions - 163,844 -
Proceeds from follow-on offering of common stock, net of underwriters' discounts and commissions
379,828 - - Payments on principal of finance leases (4,167 ) (3,253 ) (2,326 ) Payments of deferred offering costs (798 ) (2,603 ) (829 ) Proceeds from issuance of convertible preferred stock - - 52,427 Proceeds from exercise of stock options 15,905
6,649 2,164 Taxes paid related to net share settlement of restricted stock units
- (380 ) - Proceeds from Employee Stock Purchase Plan 11,254 7,064 - Net cash provided by financing activities 402,022
171,321 51,436 Effects of changes in foreign currency exchange rates on cash, cash equivalents, and restricted cash
(25 ) (36 ) -
Net increase in cash, cash equivalents, and restricted cash 301,084 154,646 37,046 Cash, cash equivalents, and restricted cash at beginning of period
215,705 61,059 24,013 Cash, cash equivalents, and restricted cash at end of period$ 516,789 $ 215,705 $ 61,059 79
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Table of Contents Supplemental disclosures Cash paid for interest$ 243 $ 324 $ 312 Cash paid for income taxes 106 8 - Purchases of fixed assets under finance leases 2,364
2,639 3,130 Right-of-use assets obtained in exchange for new operating lease liabilities
12,173 - -
Accrued purchases of property and equipment (including internal-use software)
1,155 992 181 Deemed dividends on convertible preferred stock - - (4,558 ) Deferred offering costs, accrued but not yet paid 60
12 648 Share-based compensation capitalized in internal-use software development costs
1,014 189 - See notes to consolidated financial statements. 80
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Table of ContentsSMARTSHEET INC. Notes to Consolidated Financial Statements 1. Overview and Basis of Presentation Description of businessSmartsheet Inc. (the "Company," "we," "our") was incorporated in theState of Washington in 2005, and is headquartered inBellevue, Washington . The Company is a leading cloud-based platform for work execution, enabling teams and organizations to plan, capture, manage, automate, and report on work at scale. Customers access their accounts online via a web-based interface or a mobile application. Some customers also purchase the Company's professional services, which primarily consist of consulting and training services. Collapse of dual class common stock structure OnSeptember 19, 2019 , all outstanding shares of the Company's Class B common stock automatically converted into the same number of shares of the Company's Class A common stock, pursuant to the terms of the Company's amended and restated articles of incorporation (the "Articles"). No additional shares of Class B common stock will be issued following this conversion. The conversion occurred pursuant to the Articles, which provides that each share of Class B common stock would convert automatically, without further action by the Company, into one share of Class A common stock at the close of business on the date on which the outstanding shares of Class B common stock represented less than 15% of the aggregate number of shares of Class A common stock and Class B common stock then outstanding. In accordance with the Articles, the shares of Class B common stock that converted as a result of the automatic conversion were retired and will not be reissued by the Company. Follow-on offering OnJune 14, 2019 , we completed a public equity offering in which we issued and sold 9,025,000 shares of Class A common stock, inclusive of the exercised over-allotment option, at a public offering price of$43.50 per share. In addition, 5,810,000 shares of the Company's common stock were sold by selling shareholders of the Company, inclusive of the over-allotment, as part of this offering. We received net proceeds of$379.0 million after deducting underwriting discounts and commissions of$12.8 million and other issuance costs of$0.9 million . We did not receive any proceeds from the sale of common stock by selling shareholders. Initial public offering OnMay 1, 2018 , we completed our initial public offering ("IPO") in which we issued and sold 11,745,088 shares of Class A common stock, inclusive of the over-allotment, at a public offering price of$15.00 per share. We received net proceeds of$160.4 million after deducting underwriting discounts and commissions of$12.3 million and other issuance costs of$3.4 million . Immediately prior to the closing of our IPO, all shares of our convertible preferred stock automatically converted into an aggregate of 68.5 million shares of Class B common stock. In addition, we authorized for future issuance a total of 500 million shares of each Class A and Class B common stock, and 10 million shares of preferred stock. Basis of presentation The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted inthe United States of America ("GAAP"), and applicable rules and regulations of theSecurities and Exchange Commission ("SEC") regarding financial reporting. The Company's fiscal year ends onJanuary 31 . The consolidated financial statements include the results ofSmartsheet Inc. and its wholly owned subsidiaries, which are located inthe United States , theUnited Kingdom , andAustralia . All intercompany balances and transactions have been eliminated upon consolidation. In the opinion of management, the information contained herein reflects all adjustments necessary for a fair presentation of our consolidated financial statements. All such adjustments are of a normal, recurring nature. 81
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Use of estimates The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. The Company bases its estimates on historical experience and on other assumptions that its management believes are reasonable under the circumstances. Actual results could differ from those estimates. The Company's most significant estimates and judgments involve revenue recognition with respect to the allocation of transaction consideration for the Company's offerings; determination of the amortization period for capitalized sales commission costs; capitalization of internal-use software development costs; valuation of assets and liabilities acquired as part of business combinations; and incremental borrowing rate estimates for operating leases, among others. InDecember 2019 , the novel COVID-19 coronavirus ("COVID-19") was reported inChina and inMarch 2020 theWorld Health Organization declared it a pandemic. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers and our sales cycles, and impact on our employees, all of which are uncertain and cannot be predicted. As of the date of issuance of the financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates, judgments or revise the carrying value of our assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to our financial statements. Liquidity The Company continues to be subject to the risks and challenges associated with companies at a similar stage of development, including the ability to raise additional capital to support future growth. Since inception throughJanuary 31, 2020 , the Company has incurred losses from operations and accumulated a deficit of$256.5 million . Historically, the Company has financed its operations primarily through the sale of equity securities and customer payments. The Company believes its existing cash will be sufficient to meet its working capital and capital expenditure needs for at least the next 12 months. 2. Summary of Significant Accounting Policies Segment information The Company operates as one operating segment. The Company's chief operating decision maker is its Chief Executive Officer, who reviews consolidated financial information for purposes of making operating decisions, assessing financial performance, and allocating resources. Revenue recognition The Company derives its revenue primarily from subscription services and professional services. Revenue is recognized when control of these services is transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services, net of any sales taxes. The Company determines revenue recognition through the following steps: • identification of the contract, or contracts, with a customer;
• identification of the performance obligations in the contract;
• determination of the transaction price;
• allocation of the transaction price to the performance obligations in the
contract; and
• recognition of revenue when, or as, the Company satisfies a performance
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Subscription revenue Subscription revenue primarily consists of fees from customers for access to the Company's cloud-based platform. Subscription revenue is recognized on a ratable basis over the subscription contract term, beginning on the date the access to the Company's platform is provided, as no implementation work is required, if consideration the Company is entitled to receive is probable of collection. Subscription contracts generally have terms of one year or one month, are billed in advance, and are non-cancelable. The subscription arrangements do not allow the customer the contractual right to take possession of the platform; as such, the arrangements are considered to be service contracts. Certain of the Company's subscription contracts contain performance guarantees related to service continuity. To date, refunds related to such guarantees have been immaterial in all periods presented. Professional services revenue Professional services revenue primarily includes revenue recognized from fees for consulting and training services. The Company's consulting services consist of platform configuration and use case optimization, and are primarily invoiced on a time and materials basis, monthly in arrears. Services revenue is recognized over time, as service hours are delivered. Smaller consulting engagements are, on occasion, provided for a fixed fee. These smaller consulting arrangements are typically of short duration (less than three months). In these cases, revenue is recognized over time, based on the proportion of hours of work performed, compared to the total hours expected to complete the engagement. Configuration and use case optimization services do not result in significant customization or modification of the software platform or user interface. Training services are billed in advance, on a fixed-fee basis, and revenue is recognized after the training program is delivered, or after the customer's right to receive training services expires. Associated out-of-pocket travel expenses related to the delivery of professional services are typically reimbursed by the customer. Out-of-pocket expense reimbursements are recognized as revenue at the point in time, or as the distinct performance obligation to which they relate is delivered. Out-of-pocket expenses are recognized as cost of professional services as incurred. On occasion, the Company sells its subscriptions to third-party resellers. The price at which the Company sells to the reseller is typically discounted, as compared to the price at which the Company would sell to an end customer, in order to enable the reseller to realize a margin on the eventual sale to the end customer. As the Company retains a fixed amount of the contract from the reseller, and does not have visibility into the pricing provided by the reseller to the end customer, the revenue is recorded net of any reseller margin. Contracts with multiple performance obligations Some of the Company's contracts with customers contain multiple performance obligations. The Company accounts for individual performance obligations separately, as they have been determined to be distinct, i.e., the services are separately identifiable from other items in the arrangement and the customer can benefit from them on its own or with other resources that are readily available to the customer. The transaction price is allocated to the distinct performance obligations on a relative stand-alone selling price basis. Stand-alone selling prices are determined based on the prices at which the Company separately sells subscription, consulting, and training services, and based on the Company's overall pricing objectives, taking into consideration market conditions, value of the Company's contracts, the types of offerings sold, customer demographics, and other factors. Accounts receivable Accounts receivable are primarily comprised of trade receivables that are recorded at the invoice amount, net of an allowance for doubtful accounts. Subscription fees billed in advance of the related subscription term represent contract liabilities and are presented as accounts receivable and deferred revenues upon establishment of the unconditional right to invoice, typically upon signing of the non-cancelable service agreement. Our typical payment terms provide for customer payment within 30 days of the date of the contract. 83
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The allowance for doubtful accounts is based on the Company's assessment of the collectability of accounts by considering the composition of the accounts receivable aging and historical trends on collectability. Amounts deemed uncollectible are recorded to the allowance for doubtful accounts in the consolidated balance sheets with an offsetting decrease in related deferred revenue and a reduction of revenue or charge to general and administrative expense in the statements of operations. During the year endedJanuary 31, 2020 , activity related to the Company's provision for doubtful accounts was as follows (in thousands): Balance atJanuary 31, 2018 $ 457 Write-offs (849 ) Additions, net 1,626 Balance atJanuary 31, 2019 1,234 Write-offs (1,629 ) Additions, net 3,384
Balance at
Activity related to the Company's provision for doubtful accounts during the year endedJanuary 31, 2018 was as follows (in thousands): Balance atJanuary 31, 2017 $ 104 Additions, net of write-offs 353 Balance atJanuary 31, 2018 $ 457 Deferred revenue Deferred revenue is recorded for subscription services contracts upon establishment of unconditional right to payment under a non-cancelable contract before transferring the related services to the customer. Deferred revenue for such services is amortized into revenue over time, as those subscription services are delivered. Similarly, the Company records deferred revenue for fixed-fee professional services upon establishment of an unconditional right to payment under a non-cancelable contract. Deferred revenue for training services is recognized as revenue upon delivery of training services or upon expiration of customer's right to receive such services. Deferred revenue for consulting services is recognized as hours of service are delivered to the customer. Deferred commissions The majority of sales commissions earned by the Company's sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions are paid on initial contracts and on any upsell contracts with a customer. No sales commissions are paid on customer renewals. Sales commissions are deferred and then amortized on a straight-line basis over a period of benefit that the Company has determined to be three years. The Company determined the period of benefit by taking into consideration its customer contracts, expected customer life, the expected life of its technology, and other factors. Amortization expense is included in sales and marketing expenses in the accompanying statements of operations. Overhead allocations The Company allocates shared costs, such as facilities (including rent, utilities, and depreciation on equipment shared by all departments), and information technology costs to all departments based on headcount. As such, allocated shared costs are reflected in each cost of revenue and operating expense category. Cash, cash equivalents, and short-term investments The Company considers all highly liquid investments with an original maturity of three months or less from date of purchase to be cash equivalents. Investments with terms greater than three months but less than or equal to 84
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twelve months are included in short-term investments. Interest income earned on cash, cash equivalents, and short-term investments is recorded in interest income in the accompanying statements of operations. Restricted cash Restricted cash as ofJanuary 31, 2020 primarily consisted of$0.9 million related to security deposits for the Company'sBellevue ,Boston ,London , andEdinburgh leases. Restricted cash as ofJanuary 31, 2019 consisted of$1.8 million related to collateral for irrevocable letters of credit (entered into during the year endedJanuary 31, 2019 ) for additional office space inBellevue , and$0.8 million primarily related to security deposits for the Company'sBellevue ,Boston ,London , andEdinburgh leases. Restricted cash as ofJanuary 31, 2018 consisted of$2.4 million related to collateral for irrevocable letters of credit and$0.5 million related to security deposits. The letters of credit that were outstanding as ofJanuary 31, 2018 were still in effect as ofJanuary 31, 2020 ; however, the requirement to maintain$2.4 million in collateral for those letters of credit was removed during the year endedJanuary 31, 2019 , and the restricted cash balance was reduced by this amount. Cash as reported on the consolidated statements of cash flows includes the aggregate amounts of cash and cash equivalents and restricted cash as shown on the consolidated balance sheets. Cash as reported on the consolidated statements of cash flows consists of the following (in thousands): January 31, 2020 2019 2018 Cash and cash equivalents$ 515,924 $ 213,085 $ 58,158 Restricted cash 865
2,620 2,901 Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows
$ 516,789 $ 215,705 $ 61,059 Property and equipment Property and equipment are recorded at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the following estimated useful lives: Computer equipment 3 years Computer software 3 years Furniture and fixtures 5-7 years Leasehold improvements are amortized over the shorter of the expected useful lives of the assets or the related lease term. Maintenance and repairs that do not improve or extend the lives of the respective assets are expensed as incurred. Internal-use software development costs The Company capitalizes certain qualifying costs incurred during the application development stage in connection with the development of internal-use software. Costs related to preliminary project activities and post-implementation activities are expensed in research and development ("R&D") as incurred. R&D expenses consist primarily of employee-related costs, hardware- and software-related costs, costs of outside services used to supplement our internal staff, and overhead allocations. Internal-use software costs of$8.1 million were capitalized in the year endedJanuary 31, 2020 , of which$5.8 million related to costs incurred during the application development stage of software development for the Company's platform to which subscriptions are sold. Internal-use software costs of$3.5 million were capitalized in 85
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the year endedJanuary 31, 2019 , of which$1.5 million related to costs incurred during the application development stage of software development for the Company's platform to which subscriptions are sold. Capitalized software development costs are included within property and equipment, net on the balance sheets, and are amortized over the estimated useful life of the software, which is typically three years. The related amortization expense is recognized in the consolidated statements of comprehensive loss within the function that receives the benefit of the developed software. Amortization expense of capitalized internal-use software costs totaled$2.3 million ,$1.0 million and$0.2 million for the years endedJanuary 31, 2020 , 2019 and 2018, respectively. The Company evaluates the useful lives of these assets and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. Business combinations When we acquire a business, the purchase price is allocated to the net tangible and identifiable intangible assets acquired based on their estimated fair values. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital, and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unpredictable. During the measurement period, which may be up to one year from the acquisition date, adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed may be recorded, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.Goodwill & Acquired Intangible Assets The Company evaluates goodwill for impairment at the reporting unit level on an annual basis (September 1 ), or whenever events or changes in circumstances indicate that impairment may exist. When evaluating goodwill for impairment, the Company may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If the Company does not perform a qualitative assessment, or if the Company determines that it is not more likely than not that the fair value of the reporting unit exceeds its carrying amount, the Company calculates the estimated fair value of the reporting unit. Fair value is the price a willing buyer would pay for the reporting unit and is typically calculated using a discounted cash flow model. If the carrying amount of the reporting unit exceeds the estimated fair value, an impairment charge is recorded to reduce the carrying value to the estimated fair value. Acquired intangible assets consist of identifiable intangible assets, primarily software technology and customer relationships, resulting from our acquisitions. Intangible assets are recorded at fair value on the date of acquisition and amortized over their estimated useful lives. Impairment of long-lived assets Long-lived assets, such as property and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of an asset group is measured by comparing the carrying amount to the estimated undiscounted future cash flows expected to be generated. If the carrying amount exceeds the undiscounted cash flows, the assets are determined to be impaired and an impairment charge is recognized as the amount by which the carrying amount exceeds its fair value. No impairments of long-lived assets were recorded during any of the periods presented. Leases We determine if an arrangement is a lease at inception, and leases are classified at commencement as either operating or finance leases. Right-of-use ("ROU") assets and lease liabilities are recognized at commencement date based on the present value of the future minimum lease payments over the lease term. ROU assets also include any lease payments made. 86
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Operating lease ROU assets are presented separately in long-term assets and finance lease ROU assets are included in property and equipment, net on our consolidated balance sheets. As our operating leases do not provide an implicit rate, we use our incremental borrowing rate based on information available at the commencement date in determining the present value of future payments. This rate is an estimate of the collateralized borrowing rate we would incur on our future lease payments over a similar term based on the information available at commencement date. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. AtJanuary 31, 2020 , we did not include any options to extend leases in our lease terms as we were not reasonably certain to exercise them. The Company's lease agreements do not contain residual value guarantees or covenants. We utilize certain practical expedients and policy elections available under the lease accounting standard. Leases with a term of one year or less are not recognized on our consolidated balance sheets; we recognize lease expense for these leases on a straight-line basis over the lease term. Additionally, we have elected to include non-lease components with lease components for contracts containing real estate leases for the purpose of calculating lease right-of-use assets and liabilities, to the extent that they are fixed. Non-lease components that are not fixed are expensed as incurred as variable lease payments. Our real estate operating leases typically include non-lease components such as common-area maintenance costs. ROU assets are subject to evaluation for impairment or disposal on a basis consistent with other long-lived assets. Self-funded health insurance InDecember 2017 , the Company elected to partially self-fund its health insurance plan. To reduce its risk related to high-dollar claims, the Company maintains individual and aggregate stop-loss insurance. The Company estimates its exposure for claims incurred but not paid at the end of each reporting period and uses historical claims data to estimate its self-insurance liability. As ofJanuary 31, 2020 and 2019, the Company's net self-insurance reserve estimate was$0.9 million and$0.8 million , respectively, included in other accrued liabilities in the accompanying consolidated balance sheets. Advertising expenses Advertising and marketing costs are expensed as incurred, and are included in sales and marketing expense in the statements of operations. Advertising and marketing expenses, inclusive of lead generation costs, were$35.5 million ,$20.6 million , and$14.8 million for the years endedJanuary 31, 2020 , 2019, and 2018, respectively. Deferred offering costs Deferred offering costs of$3.4 million , primarily consisting of legal, accounting, and other fees related to the IPO, were offset against proceeds upon the closing of the IPO onMay 1, 2018 . Deferred offering costs of$0.9 million were offset against proceeds upon the closing of the follow-on offering onJune 14, 2019 . Convertible preferred stock warrant liability The Company classified its warrant to purchase convertible preferred stock as a liability. The Company adjusted the carrying value of the warrant liability to fair value at the end of each reporting period utilizing the Black-Scholes option pricing model. The convertible preferred stock warrant liability was included on the Company's consolidated balance sheets and its revaluation was recorded as an expense in other income (expense), net for the fiscal years ended 2018 and 2019. Upon the closing of the IPO onMay 1, 2018 , the related warrant liability was reclassified to additional paid-in capital. Share-based compensation The Company measures and recognizes compensation expense for all share-based awards granted to employees and directors, based on the estimated fair value of the award on the date of grant. Expense is recognized on a straight-line basis over the vesting period of the award based on the estimated portion of the award that is expected to vest. 87
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The Company uses the Black-Scholes option pricing model to measure the fair value of stock option awards when they are granted. The Company makes several estimates in determining share-based compensation and these estimates generally require significant analysis and judgment to develop. Income taxes Income taxes are accounted for using the asset and liability method. Under this method, the Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The Company records a valuation allowance to reduce deferred tax assets to an amount for which realization is more likely than not. The Company evaluates and accounts for uncertain tax positions using a two-step approach. The first step is to evaluate if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company reflects interest and penalties related to income tax liabilities as a component of income tax expense. Concentrations of risk and significant customers Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash, cash equivalents, short-term investments, and accounts receivable. The Company maintains its cash accounts with financial institutions where deposits, at times, exceed theFederal Deposit Insurance Corporation ("FDIC") limits. No individual customers represented more than 10% of accounts receivable as of the years endedJanuary 31, 2020 or 2019. No individual customers represented more than 10% of revenue for the years endedJanuary 31, 2020 , 2019, or 2018. Net loss per share Prior to the IPO, holders of the Company's convertible preferred stock participated in dividends with holders of the Company's common stock, but they were not contractually required to share in net losses. Accordingly, during those periods of income, the Company was required to use the two-class method of calculating earnings per share. The two-class method requires that earnings per share be calculated separately for each class of security. As the Company incurred losses during the periods presented, the Company used the methods described below to calculate net loss per share. The Company calculates basic net loss per share by dividing net loss attributable to common shareholders by the weighted-average number of the Company's common stock shares outstanding during the respective period. Net loss attributable to common shareholders is net loss minus convertible preferred stock dividends declared, of which there were none during the periods presented. The Company calculates diluted net loss per share using the treasury stock and if-converted methods, which consider the potential impacts of outstanding stock options, restricted stock units ("RSUs"), shares issuable pursuant to our Employee Stock Purchase Plan ("ESPP"), warrants, and convertible preferred stock. Under these methods, the numerator and denominator of the net loss per share calculation are adjusted for these securities if the impact of doing so increases net loss per share. During the periods presented, the impact is to decrease net loss per share and therefore the Company is precluded from adjusting its calculation for these securities. As a result, diluted net loss per share is calculated using the same formula as basic net loss per share. 88
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Recently adopted accounting pronouncements We adopted Accounting Standard Update ("ASU") 2016-02, Leases - Topic 842 ("ASC 842") onFebruary 1, 2019 using the optional transition method described in ASU 2018-11, Leases - Targeted Improvements. Under the optional transition method, we recognized the cumulative effect of initially applying the guidance as an adjustment to the operating lease ROU assets and operating lease liabilities on our consolidated balance sheet onFebruary 1, 2019 without retrospective application to comparative periods. The new lease standard requires lessees to recognize ROU assets and lease liabilities on the balance sheet for operating leases, and also requires additional quantitative and qualitative disclosures to enable users of the financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. In adopting ASC 842, we utilized certain practical expedients available under the standard. These practical expedients include waiving reassessment of conclusions reached under the previous lease standard as to whether contracts contain leases and not recording ROU assets or lease liabilities for leases with terms of 12 months or less. As a result of implementing this guidance, we recognized a$53.4 million net operating ROU asset and a$55.3 million operating lease liability, inclusive of$1.9 million previously classified as deferred rent, in our consolidated balance sheet as ofFebruary 1, 2019 . The adoption of ASC 842 did not have an impact on our accumulated deficit on our consolidated balance sheet as ofFebruary 1, 2019 and is not expected to have a material impact on our consolidated statements of operations and comprehensive loss. See Note 12, Leases, for additional information regarding our leases. Recent accounting pronouncements not yet adopted InJune 2016 , the FASB issued ASU 2016-13, including subsequent amendments, Measurement of Credit Losses on Financial Instruments (Topic 326) ("ASU 2016-13") and has modified the standard thereafter, which modifies the accounting methodology for most financial instruments. The guidance establishes a new "expected loss model" that requires entities to estimate current expected credit losses on financial instruments by using all practical and relevant information. Additionally, any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. This guidance is effective for interim and annual periods beginning afterDecember 15, 2019 , and early adoption is permitted. The Company does not expect the adoption of this standard to have a material effect on our consolidated financial statements. InAugust 2018 , the FASB issued ASU 2018-15, Intangibles -Goodwill andOther-Internal-Use Software ("ASU 2018-15"), which 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. This guidance is effective for interim and annual reporting periods beginning afterDecember 15, 2019 , and early adoption is permitted. The Company does not expect adoption of this ASU to have a material effect on the Company's consolidated financial statements. InDecember 2019 , the FASB issued ASU 2019-12, Income Taxes (Topic 740) ("ASU 2019-12"), which simplifies certain aspects of accounting for income taxes. The guidance is effective for interim and annual reporting periods beginning afterDecember 15, 2020 , and early adoption is permitted. The Company does not expect adoption of this ASU to have a material effect on the Company's consolidated financial statements. 3. Revenue from Contracts with Customers During the years endedJanuary 31, 2020 , 2019, and 2018 the Company recognized$93.0 million ,$55.3 million , and$32.0 million of subscription revenue, respectively, and$2.1 million ,$1.5 million , and$0.6 million of professional services revenue, respectively, which were included in the deferred revenue balance as ofJanuary 31, 2019 , 2018, and 2017, respectively. As ofJanuary 31, 2020 , including amounts already invoiced and amounts contracted but not yet invoiced, approximately$166.9 million of revenue was expected to be recognized from remaining performance obligations, of which$163.0 million related to subscription services and$3.9 million related to professional services. 89
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Approximately 96% of revenue related to remaining performance obligations is expected to be recognized in the next 12 months. 4. Deferred Commissions Deferred commissions were$48.3 million as ofJanuary 31, 2020 and$29.0 million as ofJanuary 31, 2019 . Amortization expense for deferred commissions was$19.8 million ,$10.8 million , and$5.0 million for the years endedJanuary 31, 2020 , 2019, and 2018, respectively. Deferred commissions are amortized over a period of three years and the amortization expense is recorded in sales and marketing on the Company's consolidated statements of operations. 5. Net Loss Per Share The following tables present calculations for basic and diluted net loss per share (in thousands, except per share data): Year EndedJanuary 31, 2020 2019
2018
Numerator:
Net loss attributable to common shareholders$ (95,940 ) $ (53,885 ) $ (53,664 ) Denominator: Weighted-average common shares outstanding 112,991 83,141 18,273 Net loss per share, basic and diluted$ (0.85 ) $ (0.65 ) $
(2.94 )
The following outstanding shares of common stock equivalents (in thousands) as of the periods presented were excluded from the computation of diluted net loss per share attributable to common shareholders for the periods presented because the impact of including them would have been anti-dilutive:January 31, 2020 2019
2018
Convertible preferred shares (as converted) - -
68,480
Convertible preferred stock warrant - -
137
Shares subject to outstanding common stock awards 12,215 13,297
13,355
Shares issuable pursuant to the Employee Stock Purchase Plan 165 134
-
Total potentially dilutive shares 12,380 13,431 81,972 6. Fair Value Measurements Assets and liabilities recorded at fair value in the consolidated financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The lowest level of significant input determines the placement of the fair value measurement within the following hierarchical levels: • Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
• Level 2: Observable inputs, other than Level 1 prices, such as quoted
prices for similar assets or liabilities, quoted prices in markets that
are not active, or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets or
liabilities.
• Level 3: Unobservable inputs that are supported by little or no market
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The following tables present information about the Company's financial assets and liabilities that are measured at fair value and indicates the fair value hierarchy of the valuation inputs used (in thousands) as of: January 31, 2020 Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds$ 279,160 $ - $ -$ 279,160 Certificates of deposit - 50,585 - 50,585
Short-term investments:
Certificates of deposit - 50,532 - 50,532 Total assets$ 279,160 $ 101,117 $ -$ 380,277 January 31, 2019 Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds$ 203,746 $ - $ -$ 203,746 Restricted cash: Certificates of deposit - 1,775 - 1,775 Total assets$ 203,746 $ 1,775 $ -$ 205,521 The carrying amounts of certain financial instruments, including cash held in banks, accounts receivable, and accounts payable, approximate fair value due to their short-term maturities and are excluded from the fair value tables above. It is the Company's policy to recognize transfers of assets and liabilities between levels of the fair value hierarchy at the end of a reporting period. The Company does not transfer out of Level 3 and into Level 2 until observable inputs become available and reliable. 7. Property and Equipment, Net As of the dates specified below, property and equipment (in thousands) consisted of the following: January 31, 2020 2019 Computer equipment$ 22,513 $ 17,536
Computer software, purchased and developed 14,673 6,958 Furniture and fixtures
6,712 5,410 Leasehold improvements 4,501 4,158 Total property and equipment 48,399 34,062 Less: accumulated depreciation (21,418 ) (11,522 )
Total property and equipment, net
Depreciation expense was
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Property and equipment includes$14.2 million and$11.8 million of data center equipment purchased under finance leases atJanuary 31, 2020 and 2019, respectively. Accumulated depreciation related to these leased assets was$10.2 million and$6.1 million atJanuary 31, 2020 and 2019, respectively. Depreciation expense on finance leases, which is included in total depreciation expense described immediately above, was$4.3 million ,$3.6 million , and$2.2 million for the years endedJanuary 31, 2020 , 2019, and 2018, respectively. These leased assets are included in the computer equipment category in the table above. 8. Business Combinations OnMay 1, 2019 , we acquired 100% of the outstanding equity ofArtefact Product Group, LLC ("Artefact Product Group " or "10,000ft"), aWashington limited liability company, pursuant to an Agreement and Plan of Merger (the "Merger Agreement"). The acquisition is complementary to our existing product capabilities and accelerates our time to market for a resource planning software solution. The aggregate consideration paid in exchange for all of the outstanding equity interests ofArtefact Product Group was approximately$27.8 million in cash, after a working capital adjustment of$0.2 million and excluding cash acquired. Of the cash paid at closing, as ofJanuary 31, 2020 , a total of$2.8 million remains held in escrow for another three-month period to secure our indemnification rights under the Merger Agreement. We accounted for the transaction as a business combination using the acquisition method of accounting. We allocated the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition date. Excess purchase price consideration was recorded as goodwill, and is primarily attributable to the acquired assembled workforce and expected growth from the expansion of the acquired product offerings and customer base. The goodwill recognized upon acquisition is expected to be deductible forU.S. federal income tax purposes. We engaged a third-party valuation specialist to aid our analysis of the fair value of the acquired intangibles. All estimates, key assumptions, and forecasts were either provided by or reviewed by us. While we chose to utilize a third-party valuation specialist for assistance, the fair value analysis and related valuations reflect the conclusions of management and not those of any third party. 10,000ft's results of operations have been included in the Company's consolidated results of operations since the acquisition date. The purchase price allocation as of the acquisition date was based on a preliminary valuation and is subject to revision as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed becomes available. The major classes of assets and liabilities to which the Company preliminarily allocated the purchase price, net of the$0.2 million working capital adjustment, were as follows (in thousands): May 1, 2019 Cash$ 1,150 Current Assets 801 Intangible Assets 16,090 Goodwill 11,001 Current Liabilities (180 ) Deferred Revenue (1,030 ) Total$ 27,832
The estimated useful lives and fair values of the identifiable intangible assets at acquisition date were as follows (dollars in thousands):
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Table of Contents Fair Value Expected Useful Life Software Technology$ 8,000 5 years Customer Relationships 7,990 8 years Trade Name 100 32 months Total intangible assets$ 16,090 The significant identified intangible assets, software technology and customer relationships, were valued as follows: Software technology - we valued the finite-lived software technology using the relief-from-royalty method under the income approach. This method reflects the present value of the projected cash flows that are expected to be generated from the licensing of the asset to third parties. We applied judgment which involved the use of significant assumptions with respect to the base year revenue and the royalty rate. Customer relationships - we valued the finite-lived customer relationships using the multi-period excess-earnings method. This method involves forecasting the net earnings to be generated by the asset, reducing them by appropriate returns on contributory assets, and then discounting the resulting net returns to a present value using an appropriate discount rate. We applied judgment which involved the use of the significant assumption of the royalty rate impacting the returns on contributory assets for software technology. Fiscal 2019 Acquisition OnJanuary 11, 2019 ,Smartsheet Inc. purchased 100% of the issued and outstanding capital stock ofTernPro, Inc. in an all-cash transaction for a total purchase price of$6.0 million . As a result of this acquisition, the Company recorded goodwill of$5.2 million ; identifiable intangible assets of$0.8 million , of which$0.5 million related to acquired software technology, and$0.3 million related to customer relationships; and other net assets of less than$0.1 million . In addition, the Company recorded a long-term liability of$1.0 million related to a holdback payable on the 18-month anniversary of the closing date. As ofJanuary 31, 2020 , the liability of$1.0 million is classified as short-term, and is included within other accrued liabilities on the consolidated balance sheet. 9.Goodwill and Net Intangible Assets The changes in the carrying amount of goodwill during the twelve months endedJanuary 31, 2020 were as follows (in thousands): Goodwill balance as of January 31, 2019$ 5,496 Addition - acquisition of 10,000ft 11,181
Working capital adjustment - acquisition of 10,000ft (180 )
$ 16,497
No goodwill impairments were recorded during the years ended
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The following table presents the components of net intangible assets (in thousands):
As of January 31, 2020 As of January 31, 2019 Gross Carrying Accumulated Net Carrying
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount Amount Amortization Amount Acquired software technology$ 9,866 $ (2,325 ) $ 7,541 $ 1,866$ (494 ) $ 1,372 Acquired customer relationships 8,350 (900 ) 7,450 360 (25 ) 335 Trade names 100 (28 ) 72 - - - Patents 170 (91 ) 79 170 (63 ) 107 Domain name 13 - 13 13 - 13 Total$ 18,499 $ (3,344 ) $ 15,155 $ 2,409$ (582 ) $ 1,827 The components of intangible assets acquired as of the periods presented were as follows (in thousands): As of January 31, 2020 As of January 31, 2019 Weighted Weighted Average Average Net Carrying Life Net Carrying Life Amount (Years) Amount (Years) Acquired software technology$ 7,541 4.0 $ 1,372 2.3 Acquired customer relationships 7,450 7.1 335 2.9 Trade names 72 1.9 - - Total$ 15,063 5.5 $ 1,707 2.4 Amortization expense was$2.8 million ,$0.5 million , and$0.1 million for the twelve months endedJanuary 31, 2020 , 2019, and 2018, respectively. As ofJanuary 31, 2020 , estimated remaining amortization expense for the finite-lived intangible assets by fiscal year is as follows (in thousands): 2021$ 3,358 2022 2,897 2023 2,608 2024 2,607 2025 1,406 Thereafter 2,266 Total$ 15,142 10. Share-Based Compensation The Company has issued incentive and non-qualifying stock options to employees and non-employee directors under the 2005 Stock Option/Restricted Stock Plan ("2005 Plan"), the 2015 Equity Incentive Plan ("2015 Plan"), and the 2018 Equity Incentive Plan ("2018 Plan"). The Company has also issued RSUs to employees pursuant to the 2015 Plan and the 2018 Plan. Employee stock options are granted with exercise prices at the fair value of the underlying common stock on the grant date, in general vest based on continuous employment over four years, and expire 10 years from the date of grant. Employee RSUs are measured based on the grant date fair value of the awards and in general vest based on continuous employment over four years. Shares offered under our equity plans are authorized but unissued. Stock options The following table includes a summary of the option activity during the year endedJanuary 31, 2020 : 94
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Table of Contents Weighted-Average Remaining Aggregate Options Weighted-Average Contractual Term Intrinsic Value Outstanding Exercise Price (years) (in thousands) Outstanding at January 31, 2019 12,451,739 $ 5.72 8.0$ 319,519 Granted 600,592 38.37 Exercised (3,536,988 ) 4.54 Forfeited or canceled (438,672 ) 8.99 Outstanding at January 31, 2020 9,076,671 8.18 7.3 365,766 Exercisable at January 31, 2020 4,863,428 4.82 6.8 212,357 Vested and expected to vest at January 31, 2020 8,659,579 7.87 7.3 351,644 The weighted-average grant date fair value per share of stock options granted during the years endedJanuary 31, 2020 , 2019, and 2018 was$17.11 ,$4.66 , and$2.36 , respectively. The total grant date fair value of stock options vested was$11.1 million ,$5.8 million , and$2.4 million during the years endedJanuary 31, 2020 , 2019, and 2018, respectively. The intrinsic value of options exercised was$136.6 million ,$66.7 million , and$17.8 million during the years endedJanuary 31, 2020 , 2019, and 2018, respectively. Restricted stock units The following table includes a summary of the RSU activity during the year endedJanuary 31, 2020 : Number of Shares Weighted-Average Underlying Grant-Date Fair Value per Outstanding RSUs RSU Outstanding at January 31, 2019 845,199 $ 24.17 Granted 2,869,964 41.62 Vested (330,302 ) 23.01 Forfeited or canceled (246,531 ) 36.07 Outstanding at January 31, 2020 3,138,330 39.32 An RSU award entitles the holder to receive shares of the Company's common stock as the award vests, which is based on continued service. Non-vested RSUs do not have non-forfeitable rights to dividends or dividend equivalents. The weighted-average grant date fair value of RSUs granted during the years endedJanuary 31, 2020 and 2019 was$41.62 and$26.12 , respectively. 2018 Employee Stock Purchase Plan InApril 2018 , we adopted our 2018 ESPP. The ESPP became effective onApril 26, 2018 , with the effective date of our IPO. Under our ESPP, eligible employees are able to acquire shares of our common stock by accumulating funds through payroll deductions of up to 15% of their compensation, subject to plan limitations. Purchases are accomplished through participation in discrete offering periods. Each offering period is six months (commencing eachMarch 25 andSeptember 25 ) and consists of one six-month purchase period, unless otherwise determined by our board of directors or our compensation committee. The purchase price for shares of our common stock purchased under our ESPP is 85% of the lesser of the fair market value of our common stock on (i) the first trading 95
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day of the applicable offering period or (ii) the last trading day of the
purchase period in the applicable offering period.
The following table includes a summary of shares available for issuance under
our 2018 Plan and our 2018 ESPP during the year ended
Shares Available for Issuance 2018 Plan 2018 ESPP Balance at January 31, 2019 8,458,343 1,719,782 Authorized 5,248,572 1,049,714 Granted (3,470,556 ) (330,779 ) Forfeited 685,203 - Balance at January 31, 2020 10,921,562 2,438,717 The aggregate number of shares reserved for issuance under our ESPP will increase automatically onFebruary 1 of each of the first 10 calendar years after the first offering date under the ESPP by the number of shares equal to 1% of the total outstanding shares of our Class A common stock and Class B common stock as of the immediately precedingJanuary 31 (rounded to the nearest whole share) or such lesser number of shares as may be determined by our board of directors in any particular year. The aggregate number of shares issued over the term of our ESPP, subject to stock-splits, recapitalizations or similar events, may not exceed 20,400,000 shares of our Class A common stock. As ofJanuary 31, 2020 ,$5.4 million has been withheld on behalf of employees for a future purchase under the ESPP and is recorded in accrued compensation and related benefits. Valuation assumptions The fair value of employee stock options and ESPP purchase rights was estimated using a Black-Scholes option pricing model with the following assumptions: Year Ended January 31, 2020 2019 2018 Employee Stock Options Risk-free interest rate 2.28%-2.59% 2.7%-2.9% 1.8%-2.6% Expected volatility 42.3%-42.5% 40.2%-40.8% 41.7%-46.0% Expected term (in years) 6.19-6.25 6.25 6.25 Expected dividend yield - % - % - % Employee Stock Purchase Plan Risk-free interest rate 1.9%-2.5% 2.0%-2.4% N/A Expected volatility 38.3%-51.1% 38.3%-42.2% N/A Expected term (in years) 0.49-0.50 0.33-0.49 N/A Expected dividend yield - % - % N/A The risk-free interest rate used in the Black-Scholes option pricing model is based on theU.S. Treasury yield that corresponds with the expected term at the time of grant. The expected term of an option is determined using the simplified method, which is calculated as the average of the contractual life and the vesting period. The expected term for the ESPP purchase rights is estimated using the offering period, which is typically six months. We estimate volatility for options using volatilities of a group of public companies in a similar industry, stage of life cycle, and size; and volatility of ESPP purchase rights using our own volatility history. The Company does not currently issue dividends and does not expect to for the foreseeable future. In addition to the assumptions used in the Black-Scholes option pricing model, we must also estimate a forfeiture rate to calculate the share-based compensation expense for 96
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awards. Our forfeiture rate is derived from historical employee termination behavior. If the actual number of forfeitures differs from these estimates, additional adjustments to compensation expense will be required. Given the absence of an active market for the Company's common stock prior to the IPO, the board of directors was required to estimate the fair value of the Company's common stock at the time of each option grant based on several factors, including consideration of input from management and contemporaneous third-party valuations. These valuations included consideration of enterprise value and assessment of other common stock and convertible preferred stock transactions occurring during the period. Share-based compensation expense Share-based compensation expense included in the consolidated statements of operations was as follows (in thousands): Year Ended January 31, 2020 2019 2018
Cost of subscription revenue
14,260 5,873 6,029 Sales and marketing 12,937 5,163 1,707 General and administrative 7,716 4,055 10,565
Total share-based compensation
In the year endedJanuary 31, 2018 , subsequent to the sale of the Company's Series F convertible preferred stock, the Company facilitated a tender offer (the "2017 Tender Offer") in which certain of the Company's current and former employees and directors sold shares of common and convertible preferred stock to other existing shareholders. The sale of shares by the employees, directors, and other shareholders was facilitated by the Company. A total of 6,477,843 shares of common and convertible preferred stock were tendered for a total purchase price of$55.0 million . Our quarterly trends in total operating expenses, operating loss, and net loss, were significantly impacted by this transaction, which took place and was completed during the three months endedJuly 31, 2017 . The premium over the fair value of the shares of common and convertible preferred stock that was paid by existing investors to current employees and directors, totaling$15.5 million , was recorded as share-based compensation expense for the year endedJanuary 31, 2018 . The excess over the fair value of the sale price of the shares of common and convertible preferred stock sold by non-employees, totaling$4.6 million , was recorded as a deemed dividend within additional paid-in capital in the year endedJanuary 31, 2018 . Share-based compensation expense related to the 2017 Tender Offer, which is included in the table above, was as follows (in thousands): Year Ended January 31, 2020 2019 2018 Cost of subscription revenue $ - $ -$ 53 Cost of professional services revenue - - 9 Research and development - - 5,124 Sales and marketing - - 583 General and administrative - - 9,701 Total share-based compensation expense $ - $ -$ 15,470
As of
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11. Income Taxes The Company is liable for income taxes inthe United States , theUnited Kingdom , andAustralia .U.S. and international components of loss before provision for income taxes were as follows (in thousands): Year Ended January 31, 2020 2019 2018 United States$ (96,810 ) $ (53,939 ) $ (49,303 ) Foreign 984 347
(110 )
Loss before provision for income taxes
The expense (benefit) for income taxes consisted of (in thousands):
Year Ended January 31, 2020 2019 2018 Current: Federal $ - $ - $ - State 85 34 40 Foreign 17 69 - Total current provision for income taxes 102 103 40 Deferred and other: Federal - 203 (302 ) State - - (45 ) Foreign 12 (13 ) - Total deferred tax expense (benefit) 12 190 (347 ) Total tax expense (benefit)$ 114 $ 293 $ (307 ) Income tax expense for the year endedJanuary 31, 2020 was recognized primarily due to state and foreign income taxes. Income tax expense for the year endedJanuary 31, 2019 was recognized primarily due to changes in purchase accounting related to the acquisition of Converse.AI that reduced the overall acquired deferred tax liability. As a result, the increase in the valuation allowance was recognized in income tax expense. OnDecember 22, 2017 , theU.S. government enacted comprehensive tax legislation commonly referred to as the "Tax Cuts and Jobs Act" ("TCJA"). The TCJA made broad and complex changes to the Internal Revenue Code, including but not limited to, a reduction in theU.S. corporate income tax rate to 21%, requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries, a general elimination ofU.S. federal income taxes on dividends from foreign subsidiaries, and a new provision designed to tax global intangible low-taxed income ("GILTI"). The reduction in the corporate tax rate reduced the Company's effective tax rate in future periods. Since the Company has aJanuary 31 fiscal year end, theU.S. entity had a blended tax rate of 32.9% for the fiscal year endedJanuary 31, 2018 . As ofJanuary 31, 2018 , the Company also remeasured itsU.S. deferred tax assets and liabilities based upon the rates at which they were expected to reverse in the future. The result of the remeasurement was an$11.1 million reduction to the Company'sU.S. federal net deferred tax assets. A corresponding change was recorded to the valuation allowance. 98
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The TCJA subjects aU.S. shareholder to tax on GILTI earned by certain foreign subsidiaries. An entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as a GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as period expense. The Company has elected to account for GILTI in the year the tax is incurred as a period cost. The reconciliation of federal statutory income tax to the Company's provision for income taxes is as follows (in thousands): Year EndedJanuary 31, 2020 2019
2018
Expected provision at statutory federal rate$ (20,124 ) $ (11,254 ) $ (16,267 ) Tax credits (5,798 ) (2,408 ) (1,327 ) Change in valuation allowance 47,412 17,487 1,528 Share-based compensation (22,009 ) (4,631 ) 4,430 Impact of tax reform - - 11,125 Other 633 1,099 204
Total income tax provision (benefit)
(307 )
U.S. federal tax net operating loss carryforwards were approximately$205.6 million and$82.3 million atJanuary 31, 2020 and 2019, respectively, which will expire on various dates, starting in 2025. As ofJanuary 31, 2020 and 2019, the Company's tax credit carryforwards for income tax purposes were approximately$12.1 and$6.3 million , respectively, net of uncertain tax positions for research and development credits. If not used, a portion of the tax credit carryforwards will begin to expire in 2031. Deferred income taxes reflect the net tax effects of loss and credit carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. 99
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The tax effects of temporary differences and related deferred tax assets and
liabilities as of
January 31, 2020 2019 Deferred tax assets: Net operating loss carryforwards$ 49,433 $ 18,972 Deferred revenue 39,542 23,146 Lease liabilities 14,243 - Tax credits 12,094 6,340 Share-based compensation 6,661 1,776 Accrued compensation 3,308 1,963 Other 625 949 Total deferred tax assets 125,906 53,146 Valuation allowance (100,240 ) (45,761 ) Total deferred tax assets, net 25,666 7,385 Deferred tax liabilities: Lease right-of-use assets (13,475 ) - Capitalized commissions (11,724 ) (6,955 ) Property and equipment (431 ) - Intangibles (15 ) (398 )
Total deferred tax liabilities (25,645 ) (7,353 )
Net deferred tax assets
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period endedJanuary 31, 2020 . Such objective evidence limits the ability to consider other subjective evidence, such as the Company's projections for future growth. On the basis of this evaluation, the Company has established a full valuation allowance equal to itsU.S. andU.K. net deferred tax assets due to the uncertainty of future realization of the net deferred tax assets. The valuation allowance increased by$54.5 million during the period endedJanuary 31, 2020 . The increase in the valuation allowance was primarily related toU.S. federal and state losses incurred during the period. The calculation of the Company's tax obligations involves dealing with uncertainties in the application of complex tax laws and regulations. ASC 740, Income Taxes, provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. The Company has assessed its income tax positions and recorded tax benefits for all years subject to examination, based upon its evaluation of the facts, circumstances, and information available at each period end. For those tax positions where the Company has determined there is a greater than 50% likelihood that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit that may potentially be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is determined there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit has been recognized. The following is a tabular reconciliation of the total amounts of unrecognized tax benefits: 100
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Table of Contents Year Ended January 31, 2020 2019 2018 Balance, beginning of the year$ 1,416 $ 683 $ - Increases to tax positions taken during the current year 1,850 808 360 Increases to tax positions taken in prior years 73 - 323 Decreases to tax positions taken in prior years - (75 ) - Balance, end of year$ 3,339 $ 1,416 $ 683 Although the Company believes that it has adequately reserved for its uncertain tax positions, it can provide no assurance that the final tax outcome of these matters will not be materially different. The Company makes adjustments to its reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. No liability was recorded for uncertain tax positions, or related interest or penalties, as ofJanuary 31, 2020 and 2019. As ofJanuary 31, 2020 and 2019, the Company had$3.3 million and$1.4 million of unrecognized tax benefits, respectively, of which the total amount that would impact the effective tax rate, if recognized, is$3.3 million and$1.4 million , respectively. Any impact on the effective tax rate for unrecognized tax benefits would be offset by the impact of the Company's full valuation allowance on itsU.S. federal and state deferred tax assets. In theU.S. , the Company's tax years from 2005 to present remain effectively open to examination by the Internal Revenue Service, as well as various state and foreign jurisdictions. Interest or penalties, if incurred, are recognized as a component of income tax expense. Penalties and interest recognized were not material for the years endedJanuary 31, 2020 , 2019, and 2018. As a result of certain realization requirements of ASC 718, Compensation - Stock Compensation, the table of deferred tax assets and liabilities does not include certain deferred tax assets as ofJanuary 31, 2019 that arose directly from (or the use of which was postponed by) tax deductions related to equity compensation that are greater than the compensation recognized for financial reporting. 12. Leases The Company has operating leases primarily related to corporate offices and certain equipment, and finance leases primarily related to data center equipment. Our leases have remaining lease terms of less than 1 year to 7 years, some of which include options to extend the leases for up to 5 years. The components of lease expense recorded in the consolidated statements of operations and comprehensive loss were as follows (in thousands): Twelve Months Ended January 31, 2020 Operating lease cost $ 11,494 Finance lease cost: Amortization of assets 4,195 Interest on lease liabilities 250 Short-term lease cost 845 Variable lease cost 1,865 Total lease costs $ 18,649 101
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Supplemental balance sheet information related to leases was as follows (in thousands): Financial Statement Line Item January 31, 2020 Assets: Operating lease right-of-use Operating lease assets assets $ 57,590 Finance lease assets Property and equipment, net 3,939 Total leased assets $ 61,529 Liabilities: Current Operating lease liabilities, Operating lease liabilities current $ 13,020 Finance lease liabilities, Finance lease liabilities current 2,465 Non-current Operating lease liabilities, Operating lease liabilities non-current 47,913 Finance lease liabilities, Finance lease liabilities non-current 1,664 Total lease liabilities $ 65,062
Other information related to leases was as follows (dollars in thousands):
Twelve
Months Ended
January 31, 2020 Supplemental cash flow information: Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows related to operating leases* $
9,990
Operating cash flows related to finance leases
243
Financing cash flows related to finance leases
4,167
Right-of-use assets obtained in exchange for lease obligations: Operating leases 12,173 Finance leases 2,364 Weighted-average remaining lease term (in years): Operating leases 5.8 Finance leases 1.8 Weighted-average discount rate: Operating leases 5.9 % Finance leases 4.7 %
*Includes cash paid for lease liability accretion of
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As of
Operating Finance Leases Leases Fiscal 2021$ 13,345 $ 2,599 Fiscal 2022 12,510 1,286 Fiscal 2023 11,545 426 Fiscal 2024 11,812 - Fiscal 2025 10,102 - Thereafter 12,961 - Total lease payments$ 72,275 $ 4,311 Less: imputed interest (11,342 ) (182 ) Total$ 60,933 $ 4,129 As ofJanuary 31, 2020 , we had signed leases for additional office space that had not yet commenced. Future non-cancelable lease payments associated with these agreements totaled$42.3 million , payable over lease terms ranging from 7 to 9 years. Total rent and related operating expenses recorded under Topic 840, the previous lease standard, totaled$8.9 million , and$5.0 million for the years endedJanuary 31, 2019 , and 2018, respectively. As ofJanuary 31, 2019 , future minimum annual lease payments (in thousands) related to the lease agreements mentioned above were as follows: Operating Capital Leases Leases Total Fiscal 2020$ 10,255 $ 3,970 $ 14,225 Fiscal 2021 11,121 1,776 12,897 Fiscal 2022 11,293 463 11,756 Fiscal 2023 11,536 - 11,536 Fiscal 2024 11,812 - 11,812 Thereafter 23,064 - 23,064 Total minimum lease payments$ 79,081 $ 6,209 $ 85,290 Less: amount representing interest 277 Present value of capital lease obligations$ 5,932 13. Commitments and Contingencies Lease Commitments We have entered into various non-cancelable lease agreements related to corporate offices and certain equipment, and finance leases primarily related to data center equipment. For additional information regarding our lease agreements, see Note 12. 103
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Purchase Commitments The Company entered into a three-year commitment with a cloud-based hosting service provider for$15.0 million in the period endedJanuary 31, 2019 . As ofJanuary 31, 2020 ,$8.5 million of the total commitment amount remained unpaid, of which the greater of our on-demand usage or$5.0 million is to be paid in fiscal 2021, and an amount equal to the total commitment less the upfront payments and monthly charges incurred through fiscal 2021 is to be paid in fiscal 2022. Legal matters From time to time in the normal course of business, the Company may be subject to various legal matters such as threatened or pending claims or proceedings. We are not currently a party to any material legal proceedings or claims, nor are we aware of any pending or threatened litigation or claims against the Company that could have a material adverse effect on our business, operating results, cash flows, or financial condition should such litigation or claim be resolved unfavorably. An indemnification claim has been made to the Company in a litigation in which a former director and shareholder are parties. At this time, the Company cannot reasonably estimate the magnitude of its indemnification obligation, if any. 14. 401(k) and Pension Plans InMarch 2008 , the Company initiated a 401(k) plan for the benefit of its employees. No employer contributions were made to the 401(k) plan by the Company during the fiscal years endedJanuary 31, 2020 , 2019, or 2018. InJanuary 2018 , the Company began contributing to a pension plan for the benefit of its employees based in theUnited Kingdom . InJanuary 2020 , the Company began contributing to a pension plan for the benefit of its employees based inAustralia . Contributions to the plans by the Company were not material during the years endedJanuary 31, 2020 , 2019 and 2018. 15. Related Party Transactions Certain members of the board of directors serve as directors of, or are executive officers of, and in some cases are investors in, companies that are customers or vendors of the Company. Certain of the Company's executive officers also serve as directors of, or serve in an advisory capacity to, companies that are customers or vendors of the Company. Related-party transactions were not material as of and for the years endedJanuary 31, 2020 , 2019, and 2018. 16. Geographic Information Revenue by geographic location is determined by the location of the Company's customers. The following table sets forth revenue (in thousands) by geographic area: Year Ended January 31, 2020 2019 2018 United States$ 214,492 $ 135,761 $ 81,480 EMEA 29,246 21,087 14,654 Asia Pacific 12,969 11,863 9,181
$ 270,882 $ 177,722 $ 111,253
No individual country other than
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Property and equipment by geographic location is based on the location of the legal entity that owns the asset. As ofJanuary 31, 2020 andJanuary 31, 2019 , there was no significant property and equipment owned by the Company outside ofthe United States . 17. Subsequent Events InMarch 2020 , the Company withdrew early from two certificates of deposit and subsequently invested the aggregate amount withdrawn intoU.S. treasury securities funds, which qualify as cash and cash equivalents. The certificates of deposit totaled$101.1 million of which$50.6 million was included in cash and cash equivalents and$50.5 million was included in short-term investments on the consolidated balance sheet as ofJanuary 31, 2020 . Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our principal executive officer (Chief Executive Officer) and principal financial officer (Chief Financial Officer), we conducted an evaluation (pursuant to Rule 13a-15(b) of the Exchange Act) of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, as ofJanuary 31, 2020 . Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in theSEC's rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ineffective as ofJanuary 31, 2020 due to the material weaknesses identified in our internal control over financial reporting described below. Following identification of the material weaknesses and prior to filing this Annual Report on Form 10-K, we completed substantive procedures for the year endedJanuary 31, 2020 . Based on these procedures, management concluded that our consolidated financial statements included in this Form 10-K have been prepared in accordance withU.S. GAAP. Our Chief Executive Officer and Chief Financial Officer have certified that, based on their knowledge, the financial statements, and other financial information included in this Form 10-K, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this Form 10-K. Management's Report on Internal Control over Financial Reporting Our management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withU.S. GAAP. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance withU.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. 105
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Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as ofJanuary 31, 2020 , based on the framework in Internal Control - Integrated Framework issued by theCommittee of Sponsoring Organizations of theTreadway Commission (COSO) (2013 framework). A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. We identified a material weakness related to an ineffective control environment as we did not maintain a sufficient complement of resources with an appropriate level of controls knowledge and expertise commensurate with our financial reporting requirements. This contributed to additional material weaknesses as follows: • We did not design and maintain effective information technology ("IT")
general controls for certain information systems that are relevant to the
preparation of our financial statements. Specifically, we did not design
and maintain: (i) program change management controls for certain financial
systems to ensure that information technology program and data changes
affecting financial IT applications and underlying accounting records are
identified, tested, authorized and implemented appropriately; (ii) user access controls to ensure appropriate segregation of duties that adequately restrict user and privileged access to certain financial applications, programs, and data to appropriate Company personnel; and
(iii) computer operations controls to ensure that critical batch jobs are
monitored and data backups are authorized and monitored.
• We did not design and maintain effective controls relating to the
completeness, accuracy and occurrence of order entry and pricing during
our billing and revenue processes. This material weakness was impacted by
the material weakness related to the design and maintenance of the
Company's IT general controls.
Because of these material weaknesses, our management has concluded that as ofJanuary 31, 2020 , the Company did not maintain effective internal control over financial reporting. These material weaknesses did not result in a misstatement to the financial statements and there are no changes to previously released financial results. However, these material weaknesses could result in misstatements of account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. The effectiveness of the Company's internal control over financial reporting as ofJanuary 31, 2020 has been audited byPricewaterhouseCoopers LLP , an independent registered public accounting firm, as stated in their report, which is included in Item 8 of this Annual Report on Form 10-K. Remediation Activities The Company is working to remediate the material weaknesses in its internal control over financial reporting. • Control environment. The Company is hiring additional qualified staff with appropriate controls knowledge and expertise. Specifically, we are increasing our internal audit function and third-party resources, as necessary, to supplement internal staff. • IT general controls. The Company is hiring additional qualified staff with appropriate controls knowledge and expertise. In addition, investments are being made in systems and tools to automate controls in our systems to better support control requirements relating to proper segregation of duties, access management, and change management processes. • Revenue. In addition to remediating IT general control deficiencies impacting our revenue and billing processes, we will enhance certain processes and controls in our order entry and revenue recognition processes, and also formalize internal control over financial reporting for certain existing procedures in our billing and revenue recognition processes. 106
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We believe that these actions will remediate the material weaknesses.
The
material weaknesses will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Control Over Financial Reporting We concluded that the following changes during the quarter endedJanuary 31, 2020 have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. During the quarter endedJanuary 31, 2020 , we identified the material weaknesses relating to our IT general controls and subscription and professional services billing and revenue processes, as described above. Item 9B. Other Information None. Part III Item 10. Directors, Executive Officers and Corporate Governance The information required by this item is incorporated by reference to our Proxy Statement relating to our 2020 Annual Meeting of Shareholders. The Proxy Statement will be filed with theSecurities and Exchange Commission within 120 days of the fiscal year endedJanuary 31, 2020 . Item 11. Executive Compensation The information required by this item is incorporated by reference to our Proxy Statement relating to our 2020 Annual Meeting of Shareholders. The Proxy Statement will be filed with theSecurities and Exchange Commission within 120 days of the fiscal year endedJanuary 31, 2020 . Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters The information required by this item is incorporated by reference to our Proxy Statement relating to our 2020 Annual Meeting of Shareholders. The Proxy Statement will be filed with theSecurities and Exchange Commission within 120 days of the fiscal year endedJanuary 31, 2020 . Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item is incorporated by reference to our Proxy Statement relating to our 2020 Annual Meeting of Shareholders. The Proxy Statement will be filed with theSecurities and Exchange Commission within 120 days of the fiscal year endedJanuary 31, 2020 . Item 14. Principal Accountant Fees and Services The information required by this item is incorporated by reference to our Proxy Statement relating to our 2020 Annual Meeting of Shareholders. The Proxy Statement will be filed with theSecurities and Exchange Commission within 120 days of the fiscal year endedJanuary 31, 2020 . Part III 107
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