Coupa Software Inc - Quarter Report: 2016 October (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended October 31, 2016

OR

Commission File Number: 001-37901

COUPA SOFTWARE INCORPORATED

(Exact Name of Registrant as Specified in its Charter)

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

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

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

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

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

As of December 7, 2016, the registrant had 49,981,986 shares of common stock, $0.0001 par value per share, outstanding.

Table of Contents

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NOTE ABOUT FORWARD-LOOKING STATEMENTS

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

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations  reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

COUPA SOFTWARE INCORPORATED

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(unaudited)

See Notes to Condensed Consolidated Financial Statements.

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COUPA SOFTWARE INCORPORATED

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(unaudited)

See Notes to Condensed Consolidated Financial Statements.

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COUPA SOFTWARE INCORPORATED

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

See Notes to Condensed Consolidated Financial Statements.

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COUPA SOFTWARE INCORPORATED

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Organization and Description of Business

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

Initial Public Offering

In October 2016, we closed our initial public offering (“IPO”), in which we issued and sold 8,510,000 shares of common stock inclusive of the underwriters’ option to purchase additional shares that was exercised in full.  The price per share to the public was $18.00.  We received aggregate proceeds of $142.5 million from the IPO, net of underwriters’ discounts and commissions, before deducting offering costs of approximately $5.3 million. Upon the closing of the IPO, all shares of our outstanding preferred stock automatically converted into 34,610,979 shares of common stock.     

Note 2. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on October 6, 2016 (the “Prospectus”). The consolidated financial statements include the results of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated during consolidation.

The condensed consolidated balance sheet as of January 31, 2016, included herein, was derived from the audited financial statements as of that date, but does not include all disclosures including certain notes required by U.S. GAAP on an annual reporting basis.

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

There have been no changes to our significant accounting policies described in the Prospectus.

Reverse Stock Split

Our board of directors and stockholders approved a 1-for-4 reverse stock split of our capital stock, which was effected on September 21, 2016. All references to common stock, options to purchase common stock, restricted stock units, share data, per share data, warrants, convertible preferred stock and related information have been retroactively adjusted where applicable in these condensed consolidated financial statements to reflect the reverse stock split of our capital stock for all periods presented.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, management evaluates its significant estimates including the valuation of accounts receivable, the lives of tangible and intangible assets, stock-based compensation, stock warrants, revenue recognition, the valuation of acquired intangible assets, and provisions for income taxes. Management bases its estimates on historical experience and on various other market-specific and relevant assumptions that management believes to be reasonable under the circumstances. Actual results could differ from those estimates and such differences could be material to the financial position and results of operations.

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Comprehensive Loss

Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company’s comprehensive loss is composed only of net loss.

Recently Adopted Accounting Pronouncements

In September 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. The new guidance simplifies the accounting for measurement period adjustments in connection with business combinations by requiring that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  There was no material impact due to the adoption of this new standard.

In April 2015, the FASB issued ASU No. 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2015-05”). ASU 2015-05 provides guidance to clarify the customer’s accounting for fees paid in a cloud computing arrangement. ASU 2015-05 is effective for the Company in the first quarter of the year ending January 31, 2017. There was no material impact due to the adoption of this new standard.

In August 2014, the FASB issued ASU No. 2014-15, Disclosures of Uncertainties About an Entity’s Ability to Continue as a Going Concern. This standard provides guidance on how and when reporting entities must disclose going-concern uncertainties in their financial statements. The guidance is effective for the Company in the year ending January 31, 2017. There was no material impact due to the adoption of this new standard.

New Accounting Pronouncements Not Yet Adopted

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides guidance for revenue recognition. This ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets. This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. ASU No. 2014-09 is effective for public entities for annual reporting periods, and interim periods within those annual reporting periods, beginning after December 31, 2017. Early adoption is permitted for all public entities only as of annual reporting periods, and interim periods within those annual reporting periods, beginning after December 15, 2016. The guidance allows for the amendment to be applied either retrospectively to each prior reporting period presented or retrospectively as a cumulative-effect adjustment as of the date of adoption. The Company is not planning to early adopt the new standard but it is currently evaluating the impact of adopting ASU 2014-09 on its consolidated financial statements.

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

In March 30, 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies the accounting for share-based payment transactions, including accounting for income taxes, forfeitures, and classification in the statement of cash flows. The guidance is effective for public entities for annual periods beginning after December 15, 2016 and for all other entities for annual periods beginning after December 15, 2017. Early adoption is permitted. We are evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.

Note 3. Fair Value Measurements

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Subsequent changes in fair value of these financial assets and liabilities are recognized in earnings or other comprehensive income

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when they occur. When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurement or assumptions that market participants would use in pricing the assets or liabilities, such as inherent risk, transfer restrictions and credit risk.

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

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

The following table represents the change in the fair value of the preferred stock warrant liability (in thousands):

Note 4. Property, Plant and Equipment

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

Depreciation and amortization expense related to property and equipment, excluding software development costs, was approximately $110,000 and $312,000 for the three and nine months ended October 31, 2016, respectively, and $62,000 and $179,000 for the three and nine months ended October 31, 2015, respectively.

The Company capitalized $1.1 million and $3.2 million of software development costs in the three and nine months ended October 31, 2016, respectively, of which $0.1 million and $0.2 million, respectively, was stock-based compensation expense. The

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Company capitalized $0.8 million and $2.2 million of software development costs in the three and nine months ended October 31, 2015, respectively, of which $0.1 million and $0.1 million, respectively, was stock-based compensation expense.

Amortization expense related to software development costs was approximately $1.0 million and $2.7 million for the three and nine months ended October 31, 2016, respectively. Amortization expense related to software development costs was approximately $0.6 million and $1.6 million for the three and nine months ended October 31, 2015, respectively.

Note 5. Goodwill and Other Intangible Assets

Goodwill

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

Other Intangible Assets

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

Amortization expense related to other intangible assets was approximately $212,000 and $119,000 for the three months ended October 31, 2016 and 2015, respectively, and $644,000 and $198,000 for the nine months ended October 31, 2016 and 2015, respectively.

As of October 31, 2016, the future amortization expense of other intangible assets is as follows (in thousands):

Note 6. Share-Based Compensation

2016 Equity Incentive Plan

The 2016 Equity Incentive Plan, or 2016 Plan, was approved by our stockholders in September 2016. The 2016 Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights and performance cash awards. Awards could be granted under the 2016 Plan beginning on the effective date of the registration statement, October 5, 2016. The 2016 Plan replaced our 2006 Stock Plan, however awards outstanding under the 2006 Stock Plan will continue to be governed by their existing terms.

We have reserved 4,500,000 shares of our common stock for issuance under the 2016 Plan, plus up to 13,750,000 shares subject to awards outstanding under our 2006 Plan on October 5, 2016, that subsequently expire, lapse unexercised, are forfeited or are repurchased by us. The number of shares reserved for issuance under the 2016 Plan will automatically increase on the first day of each fiscal year during the term of the 2016 Plan by a number of shares equal to 5% of our outstanding shares of common stock on the last day of the prior fiscal year. The number and class of shares reserved under the 2016 Plan will be adjusted in the event of a stock split, stock dividend or other changes in our capitalization.

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The following table summarizes stock option activity under the 2006 Stock Plan and the 2016 Plan during the nine months ended October 31, 2016 (aggregate intrinsic value in thousands):

The options exercisable as of October 31, 2016 include options that are exercisable prior to vesting. The aggregate intrinsic value of options vested and expected to vest and exercisable as of October 31, 2016 is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of October 31, 2016. Prior to the IPO, the fair value of the Company’s common stock was estimated by the Company’s board of directors. After the IPO, the fair value of the common stock is the Company’s closing stock price as reported on the Nasdaq Global Select Market. The aggregate intrinsic value of exercised options was $5.8 million and $8.0 million for the three and nine months ended October 31, 2016, respectively, and $0.2 million and $3.6 million for the three and nine months ended October 31, 2015, respectively, and is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of the exercise date.

The weighted-average grant date fair value of options granted during the three and nine months ended October 31, 2016 was $6.16 and $4.48 per share, respectively, and $2.57 and $2.16 per share, for the three and nine months ended October 31, 2015, respectively.

During the three and nine months ended October 31, 2016, 31,250 and 83,500 options were granted to non-employees, respectively. During the three and nine months ended October 31, 2015, 20,000 and 25,000 options were granted to non-employees, respectively.

Early Exercises of Stock Options

Certain option grants under the 2006 Stock Plan are allowed to be exercised prior to vesting. The unvested shares of common stock exercised are subject to the Company’s right to repurchase at the lower of the original exercise price or the fair market value of the share at the time the repurchase right is exercised. Early exercises of options are not deemed to be substantive exercises for accounting purposes and accordingly, amounts received for early exercises are initially recorded in accrued expenses and other current liabilities and reclassified to additional paid-in capital as the underlying shares vest. At January 31, 2016 and October 31, 2016, the Company had $1.1 and $2.8 million, respectively, recorded in accrued expenses and other current liabilities related to early exercises of stock options, and the related number of unvested shares subject to repurchase was 208,008 and 284,959, respectively.

RSUs

The following table summarizes the activity related to the Company’s RSUs:

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2016 Employee Stock Purchase Plan

Our board of directors adopted the 2016 Employee Stock Purchase Plan, or ESPP, in September 2016 and it has been approved by our stockholders. The ESPP allows eligible employees to purchase shares of our common stock through payroll deductions and is intended to qualify under Section 423 of the Internal Revenue Code.

We have reserved 818,750 shares of our common stock for issuance under the ESPP. The number of shares reserved for issuance under the ESPP will automatically increase on the first day of each fiscal year during the term of the ESPP by a number of shares equal to the least of (i) 1% of our outstanding shares of common stock on the last day of the prior fiscal year, (ii) 1,250,000 shares or (iii) a lesser number of shares determined by our board of directors. The number and class of shares reserved under the ESPP will be adjusted in the event of a stock split, stock dividend or other changes in our capitalization.

Each offering period will last a number of months determined by the administrator, up to a maximum of 27 months. The initial offering period began on the effective date of our IPO, October 5, 2016, and ends on September 15, 2018, and new 24 month offering periods will begin on each March 16 and September 16 thereafter. Currently each offering period consists of 4 consecutive purchase periods, of approximately 6 months duration, at the end of which payroll contributions are used to purchase shares of our common stock. Participants may purchase our common stock through payroll deductions, up to a maximum of 15% of their eligible compensation. Participants may withdraw from the ESPP and receive a refund of their accumulated payroll contributions at any time prior to a purchase date. Unless changed by the administrator, the purchase price for each share of our common stock purchased under the ESPP will be 85% of the lower of the fair market value per share on the first day of the applicable offering period (or, in the case of the initial offering period, the price at which one share of common stock is offered to the public in this offering) or the fair market value per share on the applicable purchase date.

For the three months and nine months ended October 31, 2016, no shares of common stock were purchased under the 2016 ESPP and 845,645 shares are expected to be purchased at the end of the initial offering period. The Company selected the Black-Scholes option-pricing model as the method for determining the estimated fair value for the Company’s 2016 ESPP. As of October 31, 2016, total unrecognized compensation cost related to 2016 ESPP was $9.4 million, net of estimated forfeitures, which will be amortized over a weighted-average period of 1.87 years.

Market-based Options

In September 2016, the Board of Directors of the Company granted 544,127 stock options to the Chief Executive Officer (2016 CEO Grant) under the 2006 Equity Plan with an exercise price of $13.04 per share. The 2016 CEO Grant is eligible to vest based on the achievement of stock price appreciation targets after the consummation of the initial public offering, as well as continuous service over a four year period following the grant date.  The fair value of the 2016 CEO Grant was determined using a Monte Carlo simulation approach. The Company amortizes the fair value of the option award using the graded-vesting method, adjusted for estimated forfeitures.  Of the total stock-based compensation expense recognized, $158,000 has been recognized for the three and nine months ended October 31, 2016. As of October 31, 2016, none of the performance-based milestones have been achieved, resulting in no shares vested.  No shares are exercisable at October 31, 2016.  

Stock-based Compensation

The Company’s total stock-based compensation expense was as follows as the dates specified (in thousands):

Of the total stock-based compensation expenses, costs recognized for options granted to non-employees were immaterial for all periods presented.

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As of October 31, 2016 there was approximately $23.5 million of total unrecognized compensation cost related to unvested stock options granted to employees and non-employee service providers under the 2006 Stock Plan and 2016 Equity Incentive Plan. This unrecognized compensation cost is expected to be recognized over an estimated weighted-average amortization period of approximately 2.85 years.

Prior to October 5, 2016, the Company did not recognize stock-based compensation expense for the RSUs previously granted under its 2006 Plan to its employees because the qualifying events for the awards vesting were not probable. The qualifying events for the awards were satisfied upon occurrence of the Company’s IPO in October 2016. As of July 31, 2016 the Company had deferred recognition of $230,000 of cumulative share-based compensation expense related to these RSUs for which the service condition was satisfied, after giving effect to estimated forfeitures. This amount was recorded into the quarterly period ended October 31, 2016.

The fair values of the Company’s stock options granted during the three months ended October 31, 2016 and 2015 and during the nine months ended October 31, 2016 and 2015 was estimated using the following assumptions:

Note 7. Equity

Convertible Preferred Stock

Immediately prior to the completion of the IPO, all shares of convertible preferred stock then outstanding were automatically converted into 34,610,979 shares of common stock.    

Common Stock

Each share of common stock has the right to one vote. The holders of the common stock are also entitled to receive dividends whenever funds are legally available and when declared by the Board of Directors, subject to the prior rights of holders of all classes of stock outstanding having priority rights as to dividends. No dividends have been declared or paid since inception.

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Note 8. Commitments and Contingencies

Commitments

The Company leases office space under non-cancelable operating leases with various expiration dates through September 2020. Rent expense, which is being recognized on a straight-line basis over the lease term, was $927,000 and $673,000 during the three months ended October 31, 2016 and 2015, respectively, and $2.9 million and $1.6 million for the nine months ended October 31, 2016 and 2015, respectively. The difference between the lease payments made and the lease expense recognized to date using the straight-line method is recorded as a liability and included within accrued expenses and other current liabilities in the accompanying consolidated balance sheet.

Future minimum lease payments required under these agreements as of October 31, 2016 are as follows (in thousands):

Contingencies

From time to time the Company may become involved in legal proceedings or be subject to claims arising in the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not have a material adverse effect on the Company’s business, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.

Warranties and Indemnifications

The Company’s cloud-based software platform and applications are typically warranted to perform in a manner consistent with general industry standards and in accordance with the Company’s on-line documentation under normal use and circumstances.

The Company includes service level commitments to its customers regarding certain levels of uptime reliability and performance and permitting those customers to receive credits in the event that the Company fails to meet those levels. To date, the Company has not incurred any material costs as a result of such commitments.

The Company generally agrees to defend and indemnify its customers against legal claims that the Company’s platform infringes certain patents, copyrights or other intellectual property rights. To date, the Company has not been required to make any payment resulting from such infringement claims and has not recorded any related liabilities.

Note 9. Income Taxes

The Company is subject to Federal and various state income taxes in the United States as well as other foreign jurisdictions in which it conducts business. Earnings from non-U.S. activities are subject to local country income tax. The Company does not provide for federal income taxes on the undistributed earnings of its foreign subsidiaries as such earnings are reinvested indefinitely.

In accordance with applicable accounting guidance, the income tax provision for the three and nine months ended October 31, 2016 is based on the estimated annual effective tax rate for fiscal year 2017. The estimated effective tax rate may be subject to adjustment in subsequent quarterly periods as the estimates of pretax income for the year, along with other items that may affect the rate, change.

The Company recorded a tax provision of $211,000 and $502,000 for the three and nine months ended October 31, 2016 as compared to $75,000 and $200,000 in the same prior year periods, representing effective tax rates of (1.67)% and (0.58)% for the nine month periods ending October 31, 2016 and October 31, 2015, respectively.         

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The difference between the U.S. federal statutory tax rate of 34% and our effective tax rate in all periods is primarily due to a full valuation allowance related to the Company’s U.S. Federal and state and Canada deferred tax assets offset by foreign tax expense on the Company’s profitable foreign operations.

The Company's policy is to include interest and penalties related to income tax liabilities with the provision for income taxes on the consolidated statements of income.  The Company reported an immaterial amount for interest and penalites for the nine months ended October 31, 2016, as compared to none in the same prior year period.  

The Company's material income tax jurisdictions are the United States (federal) and California.  As a result of net operating loss carryforwards, the Company is subject to audit for tax years 2007 and forward for federal purposes and 2010 and forward for California purposes.  There are tax years which remain subject to examination in various other jurisdictions that are not material to the Company's financial statements.

Note 10. Net Loss per Share Attributable to Common Stockholders

Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, without consideration for potentially dilutive securities as they do not share in losses. During periods when the Company is in a net loss position, basic net loss per share attributable to common stockholders is the same as diluted net loss per share attributable to common stockholders as the effects of potentially dilutive securities are antidilutive given the net loss of the Company.

The following table sets forth the computation of the basic and diluted net loss per share attributable to common stockholders during the three months ended October 31, 2016 and 2015 and for the nine months ended October 31, 2016 and 2015 (in thousands, except per share amounts):

Since the Company was in a loss position for all periods presented, basic net loss per share attributable to common stockholders is the same as diluted net loss per share for all periods as the inclusion of all potential common shares outstanding would have been anti-dilutive. Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows:

Note 11. Segment Information

The Company’s chief operating decision maker is the Chief Executive Officer (“CEO”). The CEO reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating the Company’s financial performance. Accordingly, the Company has determined that it operates in a single reporting segment: cloud platform.

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Note 12. Concentration of Risks

Concentration of Risk and Significant Customers

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents and accounts receivable. Cash deposits may, at times, exceed amounts insured by the Federal Deposit Insurance Corporation (“FDIC”) and the Securities Investor Protection Corporation (“SIPC”). The Company has not experienced any losses on its deposits of cash and cash equivalents to date.

No customer balance comprised 10% or more of total accounts receivable at October 31, 2016 or January 31, 2016.

During the three months ended October 31, 2016 and 2015 and for the nine months ended October 31, 2016, and 2015, revenues by geographic area, based on billing addresses of the customers, was as follows.

Note 13. Related parties

One of the Company’s customers, T. Rowe Associates, Inc., is an investment adviser of certain of the Company’s stockholders. For the three months ended October 31, 2016 and 2015, the Company recognized subscription revenue of $131,000 and $120,000 from this customer, respectively. During the nine months ended October 31, 2016 and 2015, the Company recognized subscription revenue of $378,000 and 160,000 from this customer, respectively. As of January 31, 2016 the Company had an outstanding receivable of $3,000 while as of October 31, 2016, no receivables were outstanding.   

Note 14. Subsequent event

In November 2016, the Series D warrant was exercised for 36,971 shares of the Company’s common stock at an exercise price of $1.35 per share for a total of $50,000. The related preferred stock warrant liability was remeasured to fair value through the exercise date, and the remaining liability was reclassified to stockholders’ equity.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Prospectus.  As discussed in the section titled “Note About Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements.  Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” under Part II, Item 1A  in this Quarterly Report on Form 10-Q and in our Prospectus.

Overview

We are the leading provider of a unified, cloud-based spend management platform that connects our customers with more than 2 million suppliers globally.

Our platform provides greater visibility into and control over how companies spend money. Using our platform, businesses are able to achieve real, measurable value and savings that drive their profitability; we call this “Value as a Service.” We refer to the process companies use to purchase goods and services as spend management and to the money that they manage with this process as spend under management.  We offer a unified, cloud-based spend management platform that is tightly integrated and delivers a broad range of capabilities that would otherwise require the purchase and use of multiple disparate point applications. The core of our platform consists of procurement, invoicing and expense management modules that form our transactional engine and capture a company’s spend. In addition, our platform offers supporting modules, including sourcing, analytics, contract management, supplier management, inventory management and storefront, that help companies further manage their spend. Moreover, through our free Coupa Open Business Network, suppliers of all sizes can easily interact with buyers electronically, thus significantly reducing paper, improving operating efficiencies and reducing costs.

We offer access to our platform under a Software-as-a-Service (SaaS) business model. At the time of initial deployment, our customers often make a set of common functions available to the majority of their employees, as well as incremental modules for regular employees and procurement specialists, which we refer to as power users. Therefore, we are typically able to capture most of the expected annual recurring revenue opportunity at the inception of our customer relationships, rather than targeting specific power users at the outset of the customer relationship with the intention of expanding and getting more annual recurring revenue at later stages of the customer relationship. Customers can rapidly implement our platform, with implementation periods typically ranging from a few weeks to several months. Customers also benefit from automatic software updates with virtually no downtime.

We market and sell our solutions to a broad range of enterprises worldwide. We have a diverse, multi-national customer base spanning various sizes and industries and no significant customer concentration. No customer accounted for more than 10% of our total revenues for the three and nine months ended October 31, 2016 and 2015, respectively.

We market our platform primarily through a direct sales force and also benefit from leads driven by our partner ecosystem. Our initial contract terms are typically three years, although some customers commit for longer or shorter periods. Substantially all of our customers pay annually, one year in advance. We provide a scaled pricing model based on the number of users per module—as the number of users increases, the subscription price per user decreases. Our subscription fee includes access to our service, technical support and management of the hosting infrastructure. We generally recognize revenues from our subscription fees ratably over the contractual term of the arrangement. We do not charge suppliers who are on our platform to transact with our customers. We believe this approach helps attract more suppliers to our platform and increases the value of our platform to customers. The number of suppliers on our platform has grown to more than 2 million.

We have continued to make significant expenditures and investments for long-term growth, including investment in our platform and infrastructure to deliver new functionality and modules to meet the evolving needs of our customers and to take advantage of our market opportunity. We intend to continue to increase our investment in sales and marketing, as we further expand our sales teams, increase our marketing activities, and grow our international operations. Internationally, we currently offer our platform in Europe, Middle East and Africa (EMEA), Latin America (LATAM) and Asia-Pacific (APAC). The combined revenues from non-U.S. regions, as determined based on the billing address of our customers, constituted 31% and 27%, respectively, of our total revenues for the nine months ended October 31, 2016 and 2015, and 34% and 27%, respectively, for the three months ended October 31, 2016 and 2015. We believe there is further opportunity to increase our international revenues in absolute dollars and as a percentage of our total revenues. As a result, we are increasingly investing in our international operations and we intend to expand our footprint in international markets.

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Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic and political risks that are different from those in the United States. Because of our limited experience with international operations, our international expansion efforts may not be successful in creating additional demand for our platform outside of the United States or in effectively selling subscriptions to our platform in all of the international markets we enter.

Our business model focuses on maximizing the lifetime value of a customer relationship, and we continue to make significant investments in order to grow our customer base. Due to our subscription model, we recognize subscription revenues ratably over the term of the subscription period. As a result, the profitability of a customer to our business in any particular period depends in part upon how long a customer has been a subscriber on our platform. In general, the associated upfront costs with respect to new customers are higher in the first year than the aggregate revenues we recognize from those new customers in the first year. We believe that, over time, as our customer base grows and a relatively higher percentage of our subscription revenues are attributable to renewals versus new customers or upsells to existing customers, associated sales and marketing expenses and other allocated upfront costs as a percentage of revenues will decrease, subject to investments we plan to make in our business. Over the lifetime of the customer relationship, we also incur sales and marketing costs to manage the account, renew or upsell the customer to more modules and more users. However, these costs are significantly less than the costs initially incurred to acquire the customer. We calculate the lifetime value of our customers and associated customer acquisition costs for a particular year by comparing (i) gross profit from net new subscription revenues for the year multiplied by the inverse of the estimated subscription renewal rate to (ii) total sales and marketing expense incurred in the preceding year.

In October 2016, we closed our initial public offering, or IPO, in which we issued and sold 8,510,000 shares of common stock inclusive of the underwriters’ option to purchase additional shares that was exercised in full.  The price per share to the public was $18.00.  We received aggregate proceeds of $142.5 million from the IPO, net of underwriters’ discounts and commissions, before deducting offering costs of approximately $5.3 million. Upon the closing of the IPO, all shares of our outstanding preferred stock automatically converted into 34,610,979 shares of common stock. 

Key Metrics

We review the following key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions:

Cumulative Spend Under Management

Cumulative spend under management represents the aggregate amount of money that has been transacted through our platform for all of our customers collectively since we launched our platform. We calculate this metric by aggregating the actual transaction data, such as invoices or purchase orders, from customers on our platform. While we do not believe this metric is directly correlated to our financial results, we believe the adoption of our platform, as evidenced by growth in cumulative spend under management, drives additional value to our customers, which will enhance our ability to acquire new customers, to increase renewals and to increase upsells due to an increase in the number of authorized users and modules per customer.

Deferred Revenue

We generally sign multiple year subscription contracts for our platform and invoice an initial amount at contract signing followed by subsequent annual invoices. Our deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenues as of the end of a reporting period. The majority of our deferred revenue balance consists of subscription revenues that are recognized ratably over the contractual period.

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Non‑GAAP Financial Measures

In addition to our results determined in accordance with U.S. generally accepted accounting principles, or GAAP, we believe the following non‑GAAP measures are useful in evaluating our operating performance. We regularly review the measures set forth below as we evaluate our business.

We define non‑GAAP operating loss as operating loss before stock‑based compensation, litigation‑related costs and amortization of acquired intangible assets. We define non‑GAAP net loss and comprehensive loss as net loss and comprehensive loss before stock‑based compensation, litigation‑related costs and amortization of acquired intangible assets and related tax effects.

We believe non‑GAAP operating loss and non-GAAP net loss and comprehensive loss provide investors and other users of our financial information consistency and comparability with our past financial performance and facilitate period to period comparisons of operations. We believe non‑GAAP operating loss and non-GAAP net loss and comprehensive loss are useful in evaluating our operating performance compared to that of other companies in our industry, as these metrics generally eliminate the effects of certain items that may vary for different companies for reasons unrelated to overall operating performance.

We use non‑GAAP operating loss and non-GAAP net loss and comprehensive loss in conjunction with traditional GAAP measures as part of our overall assessment of our performance, 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 financial performance. Our definitions may differ from the definitions used by other companies and therefore comparability may be limited. In addition, other companies may not publish these or similar metrics. Thus, our non‑GAAP operating loss and non-GAAP net loss and comprehensive loss should be considered in addition to, not as substitutes for, or in isolation from, measures prepared in accordance with GAAP.

We compensate for these limitations by providing investors and other users of our financial information a reconciliation of non‑GAAP operating loss to loss from operations and non-GAAP net loss and comprehensive loss to net loss and comprehensive loss, the related GAAP financial measures. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view non‑GAAP operating loss and non-GAAP net loss and comprehensive loss in conjunction with loss from operations and net loss and comprehensive loss. The following tables provide a reconciliation of loss from operations to non‑GAAP operating loss and from net loss and comprehensive loss to non-GAAP net loss and comprehensive loss:

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Components of Results of Operations

Revenues

We offer subscriptions to our cloud-based spend management platform, including procurement, invoicing and expense management. We derive our revenues primarily from subscription fees and professional services fees.  Subscription revenues consist primarily of fees to provide our customers access to our cloud-based platform, which includes routine customer support at no additional cost. Professional service fees include deployment services, optimization services, and training. Subscription revenues are a function of the number of customers, the number of users at each customer, the number of modules subscribed to by each customer, the price of our modules, and renewal rates.

Subscription fees are recognized ratably as revenues over the contract term beginning on the date the application is made available to the customer. Our new business subscriptions typically have a term of three years, although some of our customers opt for a shorter period. We generally invoice our customers in annual installments at the beginning of each year in the subscription period. Amounts that have been invoiced are initially recorded as deferred revenue and are recognized ratably over the subscription period. Amounts that have not been invoiced are not reflected in our consolidated financial statements.

Professional services revenues consist primarily of fees associated with the implementation and configuration of our subscription service. Professional services are generally sold on a fixed-fee or time-and-materials basis. Revenue for time-and-material arrangements is recognized as the services are performed. For fixed-fee and other types of arrangements, revenue is generally deferred and recognized upon the completion of the project under the completed performance method of accounting.

Our professional services engagements typically span from a few weeks to several months, which makes it somewhat difficult to predict the timing of revenue recognition for such services. The terms of our typical professional services arrangements provide that our customers pay us within 30 days of invoice. Fixed-fee services arrangements are generally invoiced in advance. We have made significant investments in our professional services business that are designed to ensure customer success and adoption of our platform. We are continuing to invest in expanding our professional services partner ecosystem to further support our customers. As the professional services practices of our partner firms continue to develop, we expect them to increasingly contract directly with our subscription customers and we incentivize our sales force to further this objective.

Cost of Revenues

Subscription Services

Cost of subscription services consists primarily of expenses related to hosting our service and providing customer support. Significant expenses are comprised of data center capacity costs; personnel and related costs directly associated with our cloud infrastructure and customer support, including salaries, benefits, bonuses and stock-based compensation; allocated overhead; and amortization of developed technology.

Professional Services and Other Cost of Revenues

Cost of professional services and other cost of revenues consist primarily of personnel and related costs directly associated with our professional services and training departments, including salaries, benefits, bonuses and stock-based compensation; the costs of contracted third-party vendors; and allocated overhead. These costs are generally expensed in the period incurred; therefore, the costs associated with our professional services revenues often do not align with the period in which the corresponding professional services revenues are recognized because we are currently using the completed performance method of accounting for professional services revenues under fixed fee arrangements.

Professional services associated with the implementation and configuration of our subscription platform are performed directly by our services team, as well as by contracted third-party vendors. In cases in which third party vendors invoice Coupa for services performed for our customers, those fees are accrued over the requisite service period.

Operating Expenses

Research and Development

Research and development expenses consist primarily of personnel costs of our development team, including salaries, benefits, bonuses, stock-based compensation expense and allocated overhead costs. Our cycle of frequent updates has facilitated rapid innovation and the introduction of new modules throughout our history. We have aggressively invested, and intend to continue to

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invest, in developing technology to support our growth. We capitalize certain software development costs that are attributable to developing new modules, features and adding incremental functionality to our platform, and amortize such costs as costs of subscription revenues over the estimated life of the new application or incremental functionality, which is two years.

Sales and Marketing

Sales and marketing expenses consist primarily of personnel and related costs directly associated with our sales and marketing staff, including salaries, benefits, bonuses, commissions and stock-based compensation. Commissions earned by our sales force that can be associated specifically with a noncancellable subscription contract are deferred and amortized over the same period that revenues are to be recognized for the related noncancellable contract. Other sales and marketing costs include promotional events to promote our brand, including our INSPIRE conferences, advertising and allocated overhead.

General and Administrative

General and administrative expenses consist of personnel costs and related expenses for executive, finance, legal, human resources, recruiting, and employee-related information technology and administrative personnel, including salaries, benefits, bonuses and stock-based compensation expense; professional fees for external legal, accounting, recruiting and other consulting services; allocated overhead costs; and legal settlements.

Other Expense, Net

Other expense, net consists primarily of the change in the fair value of our preferred stock warrants, effect of exchange rates on our foreign currency-denominated asset and liability balances, and interest income earned on our cash and cash equivalents. All translation adjustments are recorded as foreign currency gains (losses) in the consolidated statements of operations. To date, we have had minimal interest income.

Provision for Income Taxes

Provision for income taxes consists primarily of income taxes related to foreign and state jurisdictions in which we conduct business. We maintain a full valuation allowance on our federal and state deferred tax assets as we have concluded that it is not more likely than not that the deferred assets will be utilized.

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Results of Operations

The following tables set forth selected consolidated statements of operations data and such data as a percentage of total revenues for each of the periods indicated: