10-Q 1 domoq2fy1910-q.htm 10-Q Document
 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________
Form 10-Q
__________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For transition period from to .
Commission File Number 001-38553.

DOMO, INC.
(Exact Name of Registrant as Specified in its Charter)
__________________________
Delaware
(State or Other Jurisdiction
of Incorporation or Organization)
 
27-3687433
(I.R.S. Employer
Identification Number)
772 East Utah Valley Drive
American Fork, UT 84003
(Address of principal executive office, including zip code)

(801) 899-1000
(Registrant's telephone number, including area code)
__________________________

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the Registrant has submitted electronically 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 ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer ý (Do not check if a smaller reporting company)
 
Smaller reporting company o
 
 
Emerging growth company ý
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No ý
As of August 3, 2018, there were approximately 3,263,659 shares of the registrant's Class A common stock and 23,073,611 shares of the registrant's Class B common stock outstanding.



TABLE OF CONTENTS
 
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Information (unaudited)
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Operations
Condensed Consolidated Statements of Comprehensive Loss
Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders' (Deficit) Equity
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
Item 6. Exhibits
Signatures



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Domo, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
(unaudited)
 
As of January 31,
 
As of July 31,
 
2018
 
2018
Assets
 
 
 

Current assets:
 
 
 

Cash and cash equivalents
$
61,972

 
$
238,802

Accounts receivable, net of allowances of $2,919 and $1,810 as of January 31, 2018 and July 31, 2018, respectively
35,484

 
27,266

Contract acquisition costs
9,661

 
6,982

Prepaid expenses and other current assets
6,144

 
8,662

Total current assets
113,261

 
281,712

Property and equipment, net
14,952

 
13,830

Contract acquisition costs, noncurrent
11,521

 
16,089

Intangible assets, net
3,026

 
2,986

Goodwill
9,478

 
9,478

Other assets
3,117

 
1,674

Total assets
$
155,355

 
$
325,769

Liabilities, convertible preferred stock and stockholders' (deficit) equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
12,121

 
$
8,409

Accrued expenses and other current liabilities
49,428

 
45,852

Deferred revenue
66,712

 
70,693

Total current liabilities
128,261

 
124,954

Deferred revenue, noncurrent
4,244

 
3,429

Other liabilities, noncurrent
5,324

 
5,785

Long-term debt
46,332

 
97,103

Total liabilities
184,161

 
231,271

Commitments and contingencies (Note 10)


 


Convertible preferred stock, $0.001 par value per share; 15,328 and no shares authorized as of January 31, 2018 and July 31, 2018, respectively; 14,099 and no shares issued and outstanding as of January 31, 2018 and July 31, 2018, respectively
693,158

 

Stockholders' (deficit) equity:
 
 
 
Preferred stock, $0.001 par value per share; no and 10,000 shares authorized as of January 31, 2018 and July 31, 2018, respectively; no shares issued and outstanding as of January 31, 2018 and July 31, 2018

 

Class A common stock, $0.001 par value per share; 3,700 shares authorized as of January 31, 2018 and July 31, 2018; no and 3,264 shares issued and outstanding as of January 31, 2018 and July 31, 2018, respectively

 
3

Class B common stock, $0.001 par value per share; 21,200 and 500,000 shares authorized as of January 31, 2018 and July 31, 2018, respectively; 1,639 and 23,074 shares issued and outstanding as of January 31, 2018 and July 31, 2018, respectively
2

 
23

Additional paid-in capital
35,301

 
943,722

Accumulated other comprehensive income
506

 
414

Accumulated deficit
(757,773
)
 
(849,664
)
Total stockholders' (deficit) equity
(721,964
)
 
94,498

Total liabilities and stockholders' (deficit) equity
$
155,355

 
$
325,769

See accompanying notes to condensed consolidated financial statements.

1


Domo, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2018
 
2017
 
2018
Revenue:
 
 
 

 
 
 
 
Subscription
$
21,052

 
$
28,166

 
$
40,155

 
$
54,829

Professional services and other
4,851

 
6,101

 
9,994

 
11,383

Total revenue
25,903

 
34,267

 
50,149

 
66,212

Cost of revenue:
 
 
 
 
 
 
 
Subscription
7,570

 
8,265

 
14,506

 
16,321

Professional services and other
3,083

 
4,253

 
5,885

 
7,763

Total cost of revenue
10,653

 
12,518

 
20,391

 
24,084

Gross profit
15,250

 
21,749

 
29,758

 
42,128

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
31,413

 
34,002

 
66,930

 
73,658

Research and development
20,191

 
20,919

 
39,894

 
39,983

General and administrative
7,288

 
10,207

 
14,533

 
14,851

Total operating expenses
58,892

 
65,128

 
121,357

 
128,492

Loss from operations
(43,642
)
 
(43,379
)
 
(91,599
)
 
(86,364
)
Other income (expense), net
243

 
(2,898
)
 
325

 
(4,817
)
Loss before income taxes
(43,399
)
 
(46,277
)
 
(91,274
)
 
(91,181
)
Provision for income taxes
94

 
107

 
197

 
710

Net loss
$
(43,493
)
 
$
(46,384
)
 
$
(91,471
)
 
$
(91,891
)
Net loss per share, basic and diluted
$
(27.27
)
 
$
(4.41
)
 
$
(58.22
)
 
$
(14.94
)
Weighted-average number of shares used in
computing net loss per share, basic and diluted
1,595

 
10,509

 
1,571

 
6,151

See accompanying notes to condensed consolidated financial statements.

2


Domo, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2018
 
2017
 
2018
Net loss
$
(43,493
)
 
$
(46,384
)
 
$
(91,471
)
 
$
(91,891
)
Change in cumulative foreign currency translation adjustments
40

 
(55
)
 
86

 
(92
)
Comprehensive loss
$
(43,453
)
 
$
(46,439
)
 
$
(91,385
)
 
$
(91,983
)
See accompanying notes to condensed consolidated financial statements.

3


Domo, Inc.
Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders' (Deficit) Equity
(in thousands, except share amounts)
(unaudited)
 
 
 
 
 
 
 
 
 
 
Stockholders' (Deficit) Equity
 
Convertible Preferred Stock
 
 
Class A Common Stock
 
Class B Common Stock
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive
Income
 
Accumulated
Deficit
 
Total
Stockholders'
(Deficit) Equity
 
Shares
 
Amount
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance as of January 31, 2018
14,098,937

 
$
693,158

 
 

 
$

 
1,638,648

 
$
2

 
$
35,301

 
$
506

 
$
(757,773
)
 
$
(721,964
)
Initial public offering, net of offering costs of $4,201

 

 
 

 

 
10,580,000

 
10

 
202,416

 

 

 
202,426

Conversion of convertible preferred stock
(14,098,937
)
 
(693,158
)
 
 
3,263,659

 
3

 
10,835,278

 
11

 
693,144

 

 

 
693,158

Exercise of stock options

 

 
 

 

 
19,685

 

 
272

 

 

 
272

Stock-based compensation expense

 

 
 

 

 

 

 
12,463

 

 

 
12,463

Common stock warrants

 

 
 

 

 

 

 
126

 

 

 
126

Change in cumulative foreign currency translation adjustments

 

 
 

 

 

 

 

 
(92
)
 

 
(92
)
Net loss

 

 
 

 

 

 

 

 

 
(91,891
)
 
(91,891
)
Balance as of July 31, 2018

 
$

 
 
3,263,659

 
$
3

 
23,073,611

 
$
23

 
$
943,722

 
$
414

 
$
(849,664
)
 
$
94,498

See accompanying notes to condensed consolidated financial statements.

4


Domo, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Six Months Ended July 31,
 
2017
 
2018
Cash flows from operating activities
 
 
 
Net loss
$
(91,471
)
 
$
(91,891
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
3,813

 
4,522

Amortization of intangible assets
40

 
40

Amortization of contract acquisition costs
4,378

 
3,633

Stock-based compensation
4,777

 
12,259

Reversal of contingent tax-related accrual

 
(3,513
)
Capitalized interest

 
993

Remeasurement of warrant liability

 
(56
)
Change in operating assets and liabilities:
 
 
 
Accounts receivable, net
352

 
8,218

Contract acquisition costs
(6,813
)
 
(5,782
)
Prepaid expenses and other
171

 
(2,393
)
Accounts payable
1,076

 
(1,288
)
Accrued expenses and other liabilities
(1,327
)
 
(891
)
Deferred revenue
3,978

 
3,166

Net cash used in operating activities
(81,026
)
 
(72,983
)
Cash flows from investing activities
 
 
 
Purchases of property and equipment
(4,178
)
 
(3,205
)
Cash flows from financing activities
 
 
 
Proceeds from initial public offering, net of underwriting discounts and commissions

 
206,627

Payments of costs related to initial public offering

 
(3,413
)
Proceeds from issuance of convertible preferred stock, net of issuance costs
99,086

 
(87
)
Debt proceeds, net of issuance costs
(50
)
 
49,651

Proceeds from exercise of stock options
671

 
272

Repurchases of common stock
(121
)
 

Principal payments on capital lease obligations
(18
)
 
(44
)
Net cash provided by financing activities
99,568

 
253,006

Effect of exchange rate changes on cash and cash equivalents
59

 
12

Net increase in cash and cash equivalents
14,423

 
176,830

Cash and cash equivalents at beginning of period
68,984

 
61,972

Cash and cash equivalents at end of period
$
83,407

 
$
238,802

Supplemental disclosures of cash flow information
 
 
 
Cash paid for income taxes
$
242

 
$
436

Cash paid for interest
$
2

 
$
2,723

Non-cash investing and financing activities
 
 
 
Stock-based compensation capitalized as internal-use software
$

 
$
195

Deferred offering costs in accounts payable and accrued liabilities
$

 
$
86

Issuance of warrants in connection with credit facility
$

 
$
166

See accompanying notes to condensed consolidated financial statements.

5


Domo, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Overview and Basis of Presentation
Description of Business and Basis of Presentation
Domo, Inc. (the Company) provides a cloud-based platform that digitally connects everyone from the CEO to the frontline employee with all the people, data and systems in an organization, giving them access to real-time data and insights and allowing them to manage their business from their smartphones. The Company was originally incorporated in September 2010 under the corporate name Shacho, Inc. in Delaware and, in December 2011, the Company reincorporated in Delaware as Domo, Inc. The Company's headquarters are located in American Fork, Utah and the Company has subsidiaries in the United Kingdom, Australia, Japan, Hong Kong, Singapore, New Zealand, and Canada.
The accompanying unaudited condensed consolidated financial statements, which include the accounts of the Company and its wholly owned subsidiaries, have been prepared in conformity with accounting principles generally accepted in the United States of America or GAAP. All intercompany balances and transactions have been eliminated in consolidation. The Company’s fiscal year ends on January 31.
Unaudited Condensed Consolidated Financial Statements
The accompanying condensed consolidated balance sheet as of July 31, 2018, the condensed consolidated statements of operations and comprehensive loss for the three and six months ended July 31, 2017 and 2018, the condensed consolidated statement of convertible preferred stock and stockholders' (deficit) equity for the six months ended July 31, 2018 and the condensed consolidated statements of cash flows for the six months ended July 31, 2017 and 2018 and are unaudited. The unaudited condensed consolidated financial statements have been prepared on a basis consistent with the annual consolidated financial statements and, in the opinion of management, reflect all adjustments necessary to state fairly the Company's financial position as of July 31, 2018 and its results of operations and cash flows for the three and six months ended July 31, 2017 and 2018. The financial data and the other financial information disclosed in the notes to these condensed consolidated financial statements related to the three-month and six-month periods are also unaudited. The results of operations for the three and six months ended July 31, 2018 are not necessarily indicative of the results to be expected for the fiscal year ending January 31, 2019 or for any other future year or interim period.
The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the year ended January 31, 2018, included in the Company's prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on June 28, 2018, referred to as the Prospectus.
Initial Public Offering
On July 3, 2018, the Company closed its initial public offering (IPO), in which the Company issued and sold 10,580,000 shares (inclusive of the underwriters' over-allotment option to purchase 1,380,000 shares, which was exercised on June 29, 2018) of Class B common stock at $21.00 per share. The Company received aggregate proceeds of $206.6 million, net of underwriters' discounts and commissions, before deducting offering costs of $4.2 million.
Immediately prior to the closing of the Company’s IPO, 14,098,937 shares of convertible preferred stock outstanding converted into 3,263,659 shares of Class A common stock and 10,835,278 shares of Class B common stock.
Upon the effectiveness of the registration statement for the Company's IPO, which was June 28, 2018, the liquidity event-related performance vesting condition associated with the Company's restricted stock units (RSUs) was deemed probable of being satisfied. As a result, the Company recognized cumulative stock-based compensation related to its RSUs using the accelerated attribution method of $6.6 million attributable to service prior to such effective date. As of July 31, 2018, the remaining unamortized stock-based compensation related to RSUs was $23.7 million, which will be recognized if the requisite service is provided over a weighted average period of 1.9 years.

6


Domo, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
1. Overview and Basis of Presentation (Continued)

Stock Split
On June 15, 2018, the Company amended its amended and restated certificate of incorporation to effect a 15-to-one reverse stock split of its common stock and convertible preferred stock. All of the share and per share information referenced throughout the condensed consolidated financial statements and notes to the condensed consolidated financial statements have been retroactively adjusted to reflect this reverse stock split.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes. 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 estimates and judgments include the determination of standalone selling prices for the Company’s services, which are used to determine revenue recognition for arrangements with multiple performance obligations; the amortization period for deferred contract acquisition costs; valuation of the Company’s stock-based compensation, including the underlying estimated fair value of common stock in periods prior to the date of the Company's IPO; useful lives of fixed assets; capitalization and estimated useful life of internal-use software; valuation estimates used when evaluating impairment of long-lived and intangible assets including goodwill; and the allowance for doubtful accounts.
Foreign Currency
The functional currencies of the Company’s foreign subsidiaries are the respective local currencies. The cumulative effect of translation adjustments arising from the use of differing exchange rates from period to period is included in accumulated other comprehensive income within the condensed consolidated balance sheets. Changes in the cumulative foreign translation adjustment are reported in the condensed consolidated statements of convertible preferred stock and stockholders’ deficit and the condensed consolidated statements of comprehensive loss. Transactions denominated in currencies other than the functional currency are remeasured at the end of the period and when the related receivable or payable is settled, which may result in transaction gains or losses. Foreign currency transaction gains and losses are included in other income (expense), net in the condensed consolidated statements of operations and were not material for the three and six months ended July 31, 2017 and 2018. All assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenue and expenses are translated at the average exchange rate during the period, and equity balances are translated using historical exchange rates.
Segment Information
The Company operates as one operating segment. The Company’s chief operating decision maker is its chief executive officer, who reviews financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance and allocating resources.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and money market funds. The fair value of cash equivalents approximated their carrying value as of January 31, 2018 and July 31, 2018.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount (net of allowances), do not require collateral, and do not bear interest. The Company’s payment terms generally provide that customers pay within 30 days of the invoice date. 
The Company maintains an allowance for doubtful accounts for amounts the Company does not expect to collect. In establishing the required allowance, management considers historical losses, current market conditions, customers’ financial condition, the age of the receivables, and current payment patterns. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

7


Domo, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
2. Summary of Significant Accounting Policies (Continued)

Contract Acquisition Costs
Contract acquisition costs primarily consist of deferred sales commissions, which are considered incremental and recoverable costs of obtaining a contract with a customer. Contract acquisition costs for initial contracts are deferred and then amortized on a straight-line basis over the period of benefit, which the Company has determined to be approximately four years. The period of benefit is determined by taking into consideration contractual terms, expected customer life, changes in the Company's technology and other factors. Contract acquisition costs for renewal contracts are not commensurate with contract acquisition costs for initial contracts and are recorded as expense when incurred if the period of benefit is one year or less. If the period of benefit is greater than one year, costs are deferred and then amortized on a straight-line basis over the period of benefit. Contract acquisition costs related to professional services and other performance obligations with a period of benefit of one year or less are recorded as expense when incurred. Amortization of contract acquisition costs is included in sales and marketing expenses in the accompanying condensed consolidated statements of operations.
Amortization expense related to contract acquisition costs was $2.2 million and $1.9 million for the three months ended July 31, 2017 and 2018, respectively, and $4.4 million and $3.6 million for the six months ended July 31, 2017 and 2018, respectively. There was no impairment charge in relation to contract acquisition costs for the periods presented.
Deferred Offering Costs
The Company capitalized qualified legal, accounting and other direct costs related to the IPO. As of January 31, 2018, the balance of deferred offering costs was $1.7 million and included in other assets in the condensed consolidated balance sheets. During the three months ended July 31, 2018, the Company reclassified $4.2 million of offering costs into stockholders’ equity as a reduction of the net proceeds received from the IPO.
Property and Equipment
Property and equipment, net, are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets or over the related lease terms (if shorter). Repairs and maintenance costs are expensed as incurred.
The estimated useful lives of property and equipment are as follows:
Computer equipment and software
2-3 years
Furniture, vehicles and office equipment
3 years
Leasehold improvements
Shorter of remaining lease term or estimated useful life
Capitalized Internal-Use Software Costs
The Company capitalizes certain costs related to development of its platform incurred during the application development stage. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. Maintenance and training costs are also expensed as incurred. Capitalized costs are included in property and equipment.
Capitalized internal-use software is amortized as subscription cost of revenue on a straight-line basis over its estimated useful life, which is generally three years. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired. Goodwill and indefinite-lived intangible assets are not amortized, but rather tested for impairment at least annually on November 1 or more often if and when circumstances indicate that the carrying value may not be recoverable. Finite-lived intangible assets are amortized over their useful lives.

8


Domo, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
2. Summary of Significant Accounting Policies (Continued)

Goodwill is tested for impairment based on reporting units. The Company periodically reevaluates the business and has determined that it continues to operate in one segment, which is also considered the sole reporting unit. Therefore, goodwill is tested for impairment at the consolidated level.
The Company reviews its long-lived assets, including property and equipment and finite-lived intangible assets, for impairment whenever an event or change in facts and circumstances indicates that their carrying amounts may not be recoverable. Recoverability of these assets 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 fair value.
There was no goodwill acquired and no impairment charges for goodwill or long-lived assets recorded during the periods presented.
Revenue Recognition
The Company derives revenue primarily from subscriptions to its cloud-based platform and professional services. Revenue is recognized when control of these services is transferred to customers in an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those services, net of sales taxes.
For sales through channel partners, the Company considers the channel partner to be the end customer for the purposes of revenue recognition as the Company's contractual relationships with channel partners do not depend on the sale of the Company's services to their customers and payment from the channel partner is not contingent on receiving payment from their customers. The Company's contractual relationships with channel partners do not allow returns, rebates, or price concessions.
The price of subscriptions is generally fixed at contract inception and therefore, the Company's contracts do not contain a significant amount of variable consideration.
Revenue recognition is determined 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
Recognition of revenue when, or as, performance obligations are satisfied
Subscription Revenue
Subscription revenue primarily consists of fees paid by customers to access the Company’s cloud-based platform, including support services. The Company's subscription agreements generally have annual contractual terms and a smaller percentage have multi-year contractual terms. Revenue is recognized ratably over the related contractual term beginning on the date that the platform is made available to a customer. Access to the platform represents a series of distinct services as the Company continually provides access to and fulfills its obligation to the end customer over the subscription term. The series of distinct services represents a single performance obligation that is satisfied over time. The Company recognizes revenue ratably because the customer receives and consumes the benefits of the platform throughout the contract period. The Company's contracts are generally non-cancelable.
Professional Services and Other Revenue
Professional services revenue consists of implementation services sold with new subscriptions as well as professional services sold separately. Other revenue includes training and education. Professional services arrangements are billed in

9


Domo, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
2. Summary of Significant Accounting Policies (Continued)

advance, and revenue from these arrangements is recognized as the services are provided, generally based on hours incurred. Training and education revenue is also recognized as the services are provided.
Contracts with Multiple Performance Obligations
Most of the Company's contracts with new customers contain multiple performance obligations, generally consisting of subscriptions and professional services. For these contracts, individual performance obligations are accounted for separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices are determined based on historical standalone selling prices, taking into consideration overall pricing objectives, market conditions and other factors, including contract value, customer demographics and the number and types of users within the contract.
Deferred Revenue
The Company's contracts are typically billed annually in advance. Deferred revenue includes amounts collected or billed in excess of revenue recognized. Deferred revenue is recognized as revenue as the related performance obligations are satisfied. Deferred revenue that will be recognized during the succeeding twelve-month period is recorded as a current liability and the remaining portion is recorded as a noncurrent liability.
Cost of Revenue
Cost of subscription revenue consists primarily of third-party hosting services and data center capacity; employee-related costs directly associated with cloud infrastructure and customer support personnel, including salaries, benefits, bonuses and stock-based compensation; amortization expense associated with capitalized software development costs; depreciation expense associated with computer equipment and software; certain fees paid to various third parties for the use of their technology and services; and allocated overhead. Allocated overhead includes items such as information technology infrastructure, rent, and employee benefit costs.
Cost of professional services and other revenue consists primarily of employee-related costs associated with these services, including stock-based compensation; third-party consultant fees related to implementations; and allocated overhead.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was $6.1 million and $3.1 million for the three months ended July 31, 2017 and 2018, respectively, and $11.7 million and $10.4 million for the six months ended July 31, 2017 and 2018, respectively.
Research and Development
Research and development expenses consist primarily of employee-related costs for the design and development of the Company's platform, contractor costs to supplement staff levels, third-party web services, consulting services, and allocated overhead. Research and development expenses, other than software development costs qualifying for capitalization, are expensed as incurred.
Stock-Based Compensation
The Company records stock-based compensation based on the grant date fair value of the awards, which include stock options and restricted stock units, and recognizes the fair value of those awards as expense using the straight-line method over the requisite service period of the award. For restricted stock units that contain performance conditions, the Company recognizes expense using the accelerated attribution method. The Company estimates the grant date fair value of stock options using the Black-Scholes option-pricing model.
Stock-based compensation expense related to purchase rights issued under the 2018 Employee Stock Purchase Plan (ESPP) is based on the Black-Scholes option-pricing model fair value of the estimated number of awards as of the beginning of the offering period. Stock-based compensation expense is recognized using the straight-line method over the offering period.

10


Domo, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
2. Summary of Significant Accounting Policies (Continued)

The determination of the grant date fair value of stock-based awards is affected by the estimated fair value of the Company's common stock as well as other assumptions and judgments, which are estimated as follows:
Fair Value Per Share of Common Stock. Because there was no public market for the Company's common stock prior to the IPO, the board of directors determined the common stock fair value at the time of the grant of stock options by considering numerous objective and subjective factors, including contemporaneous valuations of the Company’s common stock, actual operating and financial performance, market conditions, and performance of comparable publicly traded companies, business developments, the likelihood of achieving a liquidity event, and transactions involving preferred and common stock, among other factors. Subsequent to the IPO, the Company determines the fair value of common stock as of each grant date using the market closing price of the Company's Class B common stock on the date of grant.
Expected Term. The expected term is determined using the simplified method, which is calculated as the midpoint of the option’s contractual term and vesting period. The Company uses this method due to limited stock option exercise history. For the ESPP, the Company uses the period from the beginning of the offering period to the end of each purchase period.
Expected Volatility. Since a public market for the Company's common stock did not exist prior to the IPO and, therefore, the Company does not have sufficient trading history of its common stock, expected volatility is estimated based on the volatility of similar publicly held companies over a period equivalent to the expected term of the awards.
Risk-free Interest Rate. The risk-free interest rate is determined using U.S. Treasury rates with a similar term as the expected term of the option.
Expected Dividend Yield. The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero.
Income Taxes
The Company accounts for income taxes in accordance with the liability method of accounting for income taxes. Under this method, the Company recognizes a liability or asset for the deferred income tax consequences of all temporary differences between the tax basis of assets and liabilities and their reported amounts in the condensed consolidated financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the assets and liabilities are recovered or settled. These deferred income tax assets or liabilities are measured using the enacted tax rates that will be in effect when the differences are expected to affect taxable income.
Valuation allowances are provided when it is more-likely-than-not that some or all of the deferred income tax assets may not be realized. In assessing the need for a valuation allowance, the Company has considered its historical levels of income, expectations of future taxable income and ongoing tax planning strategies. Because of the uncertainty of the realization of its deferred tax assets, the Company has a full valuation allowance for domestic net deferred tax assets, including net operating loss carryforwards, and tax credits related primarily to research and development. Realization of its deferred tax assets is dependent primarily upon future U.S. taxable income.
Tax positions are recognized in the condensed consolidated financial statements when it is more-likely-than-not the position will be sustained upon examination by the tax authorities. The Company’s policy for recording interest and penalties related to income taxes, including uncertain tax positions, is to record such items as a component of the provision for income taxes.
Concentrations of Risk and Significant Customers
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.

11


Domo, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
2. Summary of Significant Accounting Policies (Continued)

The Company maintains its cash and cash equivalents in bank accounts, which at times may exceed federally insured limits. The Company has not experienced any losses in these instruments and believes it is not exposed to any significant risk with respect to cash and cash equivalents.
No single customer accounted for more than 10% of revenue for the three and six months ended July 31, 2017 and 2018 or more than 10% of accounts receivable as of January 31, 2018 and July 31, 2018.
The Company is primarily dependent upon third parties in order to meet the uptime and performance requirements of its customers. Any disruption of or interference with the Company's use of these third parties would impact operations.
Net Loss per Share
The Company computes net loss per share using the two-class method required for multiple classes of common stock and participating securities. The rights, including the liquidation and dividend rights, of the Class A common stock and Class B common stock are substantially identical, other than voting rights. Accordingly, the Class A common stock and Class B common stock share equally in the Company’s net losses. Before the IPO, the Company’s participating securities also included convertible preferred stock. The holders of convertible preferred stock did not have a contractual obligation to share in the Company’s losses, and as a result net losses were not allocated to these participating securities.
Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period increased by common shares that could be issued upon conversion or exercise of other outstanding securities to the extent those additional common shares would be dilutive. The dilutive effect of potentially dilutive securities is reflected in diluted net loss per share by application of the treasury stock method. During periods when the Company is in a net loss position, basic net loss per share is the same as diluted net loss per share as the effects of potentially dilutive securities are anti-dilutive.
Recently Adopted Accounting Pronouncements
ASU No. 2014-09
In May 2014, the Financial Accounting Standards Board or FASB issued Accounting Standards Update or ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). Topic 606 establishes a principle for recognizing revenue upon the transfer of promised goods or services to customers in an amount that reflects the considerations to which the entity expects to be entitled to in exchange for those goods or services. ASU No. 2014-09 also added Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer. Topic 606 and Subtopic 340-40 are collectively referred to herein as the "new standard."
The Company elected to early adopt the requirements of the new standard as of February 1, 2017 with an initial application date of February 1, 2016, utilizing the full retrospective method of transition. The primary impact of adopting the new standard is the deferral of incremental costs of obtaining subscription contracts. Prior to adopting the new standard, deferral of commissions was not required and the Company's policy was to expense commission costs as incurred. Under the new standard, all incremental costs to obtain the contract are deferred if the period of benefit is greater than one year. These costs are amortized on a straight-line basis over the period of benefit, the determination of which is discussed in the contract acquisition costs policy above.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to record most leases on the balance sheet and recognize the expenses on the income statement in a manner similar to current practice. ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. For public entities, the new standard is effective for fiscal years beginning after December 15, 2018 and interim periods within that reporting period. For all other entities, this standard is effective for annual reporting periods beginning after December 15, 2019 and interim periods within annual periods beginning after December 15, 2020. Early adoption is permitted. The Company expects to adopt this standard as of February

12


Domo, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
2. Summary of Significant Accounting Policies (Continued)

1, 2020, assuming it remains an emerging growth company. The Company is currently evaluating the impact to its condensed consolidated financial statements and related disclosures, but expects assets and liabilities related to leases to increase as a result of adopting this standard.
3. Fair Value Measurements
Assets Measured at Fair Value on a Recurring Basis
Financial instruments recorded at fair value in the financial statements are categorized as follows:
Level 1: Observable inputs that reflect quoted prices 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 reflecting management's assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
The following table summarizes the assets measured at fair value on a recurring basis as of January 31, 2018 and July 31, 2018 by level within the fair value hierarchy (in thousands):
 
January 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
15,210

 
$

 
$

 
$
15,210

Financial liability:
 
 
 
 
 
 
 
Series D-2 convertible preferred stock warrants
$

 
$

 
$
229

 
$
229

 
July 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(unaudited)
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
200,092

 
$

 
$

 
$
200,092

There were no realized or unrealized losses or other-than-temporary impairments for money market funds as of January 31, 2018 and July 31, 2018.
Level 3 instruments consist of a Series D-2 convertible preferred stock warrant liability (see Note 9) and a Class B common stock warrant liability (see Note 11) (warrant liabilities). These warrant liabilities were estimated using assumptions related to the remaining contractual term of the warrants, the risk-free interest rate, the volatility of comparable public companies over the remaining term and the fair value of underlying shares. The significant unobservable inputs used in the fair value measurement of the warrant liabilities are the fair value of the underlying stock at the valuation date and the estimated term of the warrants. Generally, increases (decreases) in the fair value of the underlying stock and estimated term would result in a directionally similar impact to the fair value measurement, and are recognized in other income (expense), net in the condensed consolidated statements of operations.

13


Domo, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
3. Fair Value Measurements (Continued)

The changes in the fair value of the Series D-2 convertible preferred stock and Class B common stock warrant liabilities were as follows (in thousands):
Balance as of January 31, 2018
$
229

Decrease in fair value of convertible preferred stock warrants
(16
)
Write-off of convertible preferred stock warrant liability due to conversion to warrants on Class B common stock
(213
)
Issuance of Class B common stock warrants
166

Decrease in fair value of Class B common stock warrants
(40
)
Reclassification to additional paid-in capital of Class B common stock warrant liability due to resolution of contingency
(126
)
Balance as of July 31, 2018
$

The Class B common stock warrant liability was recorded at fair value upon issuance in April 2018 and remeasured on the date the contingency was resolved, which was the effective date of the Company's IPO. The remaining liability balance was then reclassified to additional paid-in capital within stockholders' equity.
At each reporting date or immediately prior to an event that changes the classification of the related warrants from liability to equity, the warrant liabilities are remeasured to fair value using the Black-Scholes option-pricing model. The assumptions used as of January 31, 2018 and during the six months ended July 31, 2018 were as follows:
 
January 31,
 
July 31,
 
2018
 
2018
Expected stock price volatility
45 %
 
42% - 44%
Expected term
2.6 years
 
2.6 - 3.0 years
Risk-free interest rate
2.72 %
 
2.54% - 2.60%
Expected dividend yield
 
During the three and six months ended July 31, 2017 and 2018, the Company had no transfers between levels of the fair value hierarchy of its assets and liabilities measured at fair value.
Fair Value of Other Financial Instruments
The carrying amounts of certain financial instruments, including cash held in banks, accounts receivable, accounts payable, accrued liabilities, and other liabilities approximate fair value due to their short-term maturities and are excluded from the fair value tables above.

14


Domo, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

4. Property and Equipment
Property and equipment, net consisted of the following (in thousands):
 
As of January 31,
 
As of July 31,
 
2018
 
2018
Computer equipment and software
$
16,201

 
$
16,489

Capitalized internal-use software development costs
11,823

 
14,755

Leasehold improvements
3,558

 
3,630

Furniture, vehicles and office equipment
2,430

 
2,538

 
34,012

 
37,412

Less accumulated depreciation and amortization
(19,060
)
 
(23,582
)
 
$
14,952

 
$
13,830

Depreciation and amortization expense related to property and equipment was $2.0 million and $2.3 million for the three months ended July 31, 2017 and 2018, respectively, and $3.8 million and $4.5 million for the six months ended July 31, 2017 and 2018, respectively.
The Company capitalized $0.5 million and $1.6 million in software development costs during the three months ended July 31, 2017 and 2018, respectively, and $1.2 million and $2.9 million during the six months ended July 31, 2017 and 2018, respectively. Amortization of capitalized software development costs was $0.8 million and $1.0 million for the three months ended July 31, 2017 and 2018, respectively, and $1.4 million and $1.9 million for the six months ended July 31, 2017 and 2018, respectively.
5. Intangible Assets
Intangible assets consisted of the following (in thousands):
 
As of January 31,
 
As of July 31,
 
2018
 
2018
Intellectual property excluding patents
$
2,289

 
$
2,289

Patents
950

 
950

 
3,239

 
3,239

Less accumulated amortization
(213
)
 
(253
)
 
$
3,026

 
$
2,986

Amortization expense related to intangible assets was $20,000 and $20,000 for the three months ended July 31, 2017 and 2018, respectively, and $40,000 and $40,000 for the six months ended July 31, 2017 and 2018, respectively. Intellectual property excluding patents is considered an indefinite-lived asset due to the fact that it is renewable in perpetuity. The patents were acquired and are being amortized over a weighted-average remaining useful life of approximately 11 years.


15


Domo, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

6. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
 
As of January 31,
 
As of July 31,
 
2018
 
2018
Accrued payroll taxes
$
13,925

 
$
11,198

Accrued expenses
11,677

 
14,602

Accrued bonus
7,200

 
5,413

Accrued benefits
6,005

 
6,333

Accrued commissions
6,120

 
4,893

Sales and other taxes payable
966

 
1,236

Other accrued liabilities
3,535

 
2,177

 
$
49,428

 
$
45,852

7. Deferred Revenue and Performance Obligations
Deferred Revenue
Significant changes in the Company's deferred revenue balance for the six months ended July 31, 2018 were as follows (in thousands):
Balance as of January 31, 2018
 
 
$
70,956

Revenue recognized that was included in the deferred revenue balance at the beginning of the period:
 
 
 
Subscription
$
(34,049
)
 
 
Professional services and other
(3,461
)
 
 
Total
 
 
(37,510
)
Increase due to billings excluding amounts recognized as revenue during the period
 
 
40,676

Balance as of July 31, 2018
 
 
$
74,122

Transaction Price Allocated to Remaining Performance Obligations
As of July 31, 2018, approximately $146.5 million of revenue was expected to be recognized from remaining performance obligations for subscription contracts. The Company expects to recognize approximately $55.0 million of this amount during the year ending January 31, 2019, with an additional $52.8 million being recognized during the year ending January 31, 2020, and the balance recognized thereafter. As of July 31, 2018, approximately $10.6 million of revenue was expected to be recognized from remaining performance obligations for professional services and other contracts, $5.1 million of which is expected to be recognized during the year ending January 31, 2019, and the balance recognized thereafter.


16


Domo, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

8. Geographic Information
Revenue by geographic area is determined by the billing address of the customer. The following table sets forth revenue by geographic area (in thousands): 
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2018
 
2017
 
2018
United States
$
21,564

 
$
26,364

 
$
41,802

 
$
51,483

Outside the United States
4,339

 
7,903

 
8,347

 
14,729

Total
$
25,903

 
$
34,267

 
$
50,149

 
$
66,212

Percentage of revenue by geographic area:
 
 
 
 
 
 
 
United States
83
%
 
77
%
 
83
%
 
78
%
Outside the United States
17
%
 
23
%
 
17
%
 
22
%
Other than the United States, no other individual country exceeded 10% of total revenue for the three and six months ended July 31, 2017 and 2018. As of July 31, 2018, substantially all of the Company’s property and equipment was located in the United States.
9. Line of Credit and Credit Facility
Line of Credit
In July 2016, the Company entered into a two-year secured line of credit that allowed for borrowings up to $20.0 million to fund working capital and general corporate purposes with interest payable on the borrowed amounts at a floating rate equal to the prime rate plus 0.75%. The line of credit was secured by the assets of the Company, excluding intellectual property. The Company was required to pay an annual commitment fee of $50,000 and a fee of 0.25% per annum (payable quarterly) on the unused portion of the facility. Origination fees were amortized over the term of the facility as interest expense. Any amounts outstanding under this facility were originally scheduled to be due and payable on July 18, 2018; however, in November 2017 the line of credit was canceled in conjunction with the Company entering into a new credit facility with a different lender. This credit facility is described in further detail below.
The Company did not make any draws on the line of credit during the term of the agreement.
Credit Facility
In December 2017, the Company entered into an $80.0 million credit facility and drew $50.0 million at closing, which matures on January 1, 2021. The Company had until April 30, 2018 to request an additional term loan of up to $30.0 million under the credit facility. In April 2018, the Company entered into an amendment to this credit facility pursuant to which the Company was able to incur an additional $20.0 million in term loan borrowings, for a total availability of $100.0 million under the amended facility. The Company drew the remaining $50.0 million during April 2018, which matures on May 1, 2021. The credit facility is secured by substantially all of the Company's assets.
Each term loan under the credit facility requires interest-only payments until such term loan matures on the first business day of the 37th full month after the date of the credit advance. A portion of the interest that accrues on the outstanding principal of each term loan is payable in cash on a monthly basis, which portion accrues at a floating rate equal to the greater of (1) 7% and (2) three-month LIBOR plus 5.5% per year. This interest rate was approximately 7.9% as of July 31, 2018. In addition, a portion of the interest that accrues on the outstanding principal of each term loan is capitalized and added to the principal amount of the outstanding term loan on a monthly basis, which portion accrues at a fixed rate equal to 2.5% per year. There were no amounts capitalized during the three and six months ended July 31, 2017, and $0.3 million and $0.7 million of interest was capitalized during the three and six months ended July 31, 2018, respectively.
The original credit facility also required a closing fee of $3.6 million to be paid in full on January 1, 2021. The amendment increased the closing fee payable by the Company from $3.6 million to $4.5 million, 50% of which will be paid on January 1, 2021

17


Domo, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
9. Line of Credit and Credit Facility (Continued)


and the remaining 50% on May 1, 2021. Due to the long-term nature of the $4.5 million closing fee, it was recorded at present value as an increase to other liabilities, noncurrent and an increase to debt issuance costs. The present value was determined using the effective interest rate of each $50.0 million term loan. The closing fee liability will be accreted to its full value over the term of the respective term loan, with such accretion recorded as interest expense in other income (expense), net in the condensed consolidated statements of operations. As of January 31, 2018, the Company had incurred other upfront issuance fees of $1.2 million, with an additional $0.2 million incurred during the six months ended July 31, 2018, which were also recorded as debt issuance costs. Debt issuance costs are presented as an offset to the outstanding principal balance of the term loans on the condensed consolidated balance sheets and are being amortized as interest expense in other income (expense), net in the condensed consolidated statements of operations over the term of the respective term loan using the effective interest rate method.
The $100.0 million credit facility as amended contains customary conditions to borrowing, events of default and covenants, including covenants that restrict the Company's ability to dispose of assets, make material changes to the nature, control or location of the business, merge with or acquire other entities, incur indebtedness or encumbrances, make distributions to holders of the Company's capital stock, make investments or enter into transactions with affiliates. In addition, the Company is required to comply with a financial covenant based on the ratio of outstanding indebtedness to annualized recurring revenue. The April 2018 amendment revised the financial covenant regarding the ratio of the Company’s outstanding indebtedness to its annualized recurring revenue. Under the amended facility, the minimum ratio is 1.0 on January 31, 2018 and April 30, 2018; 0.95 on July 31, 2018 and October 31, 2018; 0.90 on January 31, 2019 and April 30, 2019; 0.85 on July 31, 2019 and October 31, 2019; and 0.80 on January 31, 2020 through the maturity date. The credit facility defines annualized recurring revenue as four times the Company's aggregate revenue for the immediately preceding quarter (net of recurring discounts and discounts for periods greater than one year) less the annual contract value of any customer contracts pursuant to which the Company was advised during such quarter would not be renewed at the end of the current term plus annual contract value of existing customer contract increases during such quarter. This covenant is measured quarterly on a three-month trailing basis. Upon the occurrence of an event of default, such as non-compliance with covenants, any outstanding principal, interest and fees become due immediately. The Company was in compliance with the covenant terms of the credit facility at January 31, 2018 and July 31, 2018.
Under the amended credit facility, the Company is required to pay a $2.0 million fee upon the earlier of (1) the closing of a transaction in which the Company is acquired by a third party and (2) December 4, 2027. The obligation to pay this $2.0 million fee terminated upon the closing of the IPO.
The Company incurred interest expense of $43,000 and $3.1 million for the three months ended July 31, 2017 and 2018, respectively, and $85,000 and $4.8 million for the six months ended July 31, 2017 and 2018, respectively.
Series D-2 Convertible Preferred Stock Warrants
In connection with the $80.0 million credit facility described above, in December 2017 the Company issued fully vested warrants to purchase 28,462 shares of Series D-2 convertible preferred stock (Series D-2 warrants) with an exercise price of $126.47 per share, which warrants are exercisable at any time prior to expiration, which was to occur on the earlier of the third anniversary of an IPO or December 2027. The fair value of the Series D-2 warrants at the time of issuance was $0.3 million and was recorded as an increase to debt issuance costs and will be amortized as interest expense over the term of the credit facility using the effective interest rate method. The Series D-2 warrants to purchase convertible preferred stock were accounted for as a liability award and recorded at fair value on the initial issuance date and were adjusted to fair value at each reporting period, with the change in fair value being recorded as interest expense in other income (expense), net in the condensed consolidated statements of operations. As of January 31, 2018, the fair value of the warrants was $0.2 million and was included in other liabilities, noncurrent on the accompanying condensed consolidated balance sheets.
In connection with the April 2018 amendment to the credit facility, the warrants to purchase 28,462 shares of Series D-2 convertible preferred stock were amended to warrants to purchase 66,664 shares of Class B common stock (see Note 11 for further details). Upon execution of the amendment, the convertible preferred stock warrant liability was adjusted to fair value and the remaining balance was written off against the related debt issuance costs.

18


Domo, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

10. Commitments and Contingencies
Litigation
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
The Company is involved in legal proceedings from time to time arising in the normal course of business. As of January 31, 2018 and July 31, 2018, there were no significant outstanding claims against the Company.
Warranties and Indemnification
The Company’s subscription services are generally warranted to perform materially in accordance with the terms of the applicable customer service order under normal use and circumstances. Additionally, the Company’s arrangements generally include provisions for indemnifying customers against liabilities if its subscription services infringe a third party’s intellectual property rights. Furthermore, the Company may also incur liabilities if it breaches the security or confidentiality obligations in its arrangements. To date, the Company has not incurred significant costs and has not accrued a liability in the accompanying condensed consolidated financial statements as a result of these obligations.
The Company has entered into service-level agreements with some of its customers defining levels of uptime reliability and performance and permitting those customers to receive credits for prepaid amounts related to unused subscription services if the Company fails to meet certain of the defined service levels. In very limited instances, the Company allows customers to early terminate their agreements if the Company repeatedly or significantly fails to meet those levels. If the Company repeatedly or significantly fails to meet contracted upon service levels, a contract may require a refund of prepaid unused subscription fees. To date, the Company has not experienced any significant failures to meet defined levels of uptime reliability and performance as set forth in its agreements and, as a result, the Company has not accrued any liabilities related to these agreements in the condensed consolidated financial statements.
Operating Leases
The Company has entered into noncancelable operating lease arrangements primarily for office space with various expiration dates through 2027. Certain of the leases include periods of free rent beginning with the lease effective date and increasing rental rates over the term of the leases. The Company recognizes rent expense on a straight-line basis over the lease period and has accrued for rent expense incurred but not paid. Rent expense under operating leases totaled $1.3 million and $1.6 million for the three months ended July 31, 2017 and 2018, respectively, and $2.3 million and $3.2 million for the six months ended July 31, 2017 and 2018, respectively.
There have been no material changes in future minimum lease payments under noncancelable operating leases as disclosed in the Prospectus.
Other Purchase Commitments
The Company has also entered into certain noncancelable contractual commitments related to cloud infrastructure services in the ordinary course of business. There have been no material changes in these commitments as disclosed in the Prospectus.
11. Stockholders' (Deficit) Equity
Convertible Preferred Stock
The Company previously issued several series of convertible preferred stock, each with such designations, rights, qualifications, limitations, and restrictions as set forth in the Company’s certificate of incorporation, as in effect prior to the IPO. Immediately prior to the completion of the IPO, as described in Note 1, all shares of convertible preferred stock then outstanding were automatically converted into 3,263,659 shares of Class A common stock and 10,835,278 shares of Class B common stock.

19


Domo, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
11. Stockholders' (Deficit) Equity (Continued)

Preferred Stock
The Company's Board of Directors has the authority, without further action by the Company's stockholders, to issue up to 10,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, and privileges thereof, including voting rights. As of January 31, 2018 and July 31, 2018, no shares of preferred stock were issued and outstanding.
Common Stock
The Company has two classes of common stock, Class A and Class B. Each share of Class A common stock is entitled to 40 votes per share and is convertible at any time into one share of Class B common stock. Each share of Class A common stock will convert automatically into one share of Class B common stock upon any transfer, whether or not for value. Each share of Class B common stock is entitled to one vote per share. Holders of Class A common stock and Class B common stock vote together as a single class on all matters (including the election of directors) submitted to a vote of stockholders, unless otherwise required by law or the Company's certificate of incorporation. Subject to preferences that may be applicable to any then-outstanding preferred stock, holders of Class A common stock and Class B common stock are entitled to receive dividends, if any, as may be declared by the Company's board of directors.
At January 31, 2018 and July 31, 2018, there were 3,700,000 shares of Class A common stock authorized. There were no shares of Class A common stock issued and outstanding at January 31, 2018 and 3,263,659 shares of Class A common stock issued and outstanding at July 31, 2018.
At January 31, 2018 and July 31, 2018, there were 21,200,000 and 500,000,000 shares of Class B common stock authorized, respectively, and 1,638,648 and 23,073,611 shares of Class B common stock issued and outstanding, respectively.
Class B Common Stock Warrants
In connection with the amendment to the credit facility that occurred in April 2018, the warrants to purchase 28,462 shares of Series D-2 convertible preferred stock described in Note 9 were amended to warrants to purchase 66,664 shares of Class B common stock at an exercise price equal to the lesser of (1) $45.00 per share and (2) the lowest price the Company received for equity securities in a qualifying private placement, if any, prior to the closing of the IPO. The warrants are exercisable at any time prior to expiration, which occurs on the earlier of the third anniversary of the IPO or December 2027. Due to the exercise price-related contingency that existed with these warrants, the fair value upon issuance was recorded as an increase to other liabilities, noncurrent and debt issuance costs and is being amortized over the term of the credit facility as interest expense. The liability was revalued each reporting period until the contingency was resolved and the change in fair value was recorded in other income (expense), net. The contingency was resolved on the effective date of the Company's IPO, at which time the liability was remeasured to fair value and the remaining liability balance was reclassified to additional paid-in capital within stockholders' equity.
In connection with the line of credit signed in July 2016, the Company issued a warrant to purchase 3,333 shares of Class B common stock with a strike price of $34.35 per share. The warrant expires ten years from the date of issuance.
In connection with a loan signed in November 2011 and for which the last principal payment was made in September 2015, the Company issued a warrant to purchase 3,729 shares of Class B common stock with a strike price of $4.80 per share. The warrant expires ten years from the date of issuance.
At January 31, 2018 and July 31, 2018, all warrants were outstanding and exercisable.
12. Equity Incentive Plans
In April 2011, Domo established the 2011 Equity Incentive Plan (2011 Plan), which was amended in September 2011 to provide for the issuance of stock options and other stock-based awards. In June 2018, the Company adopted the 2018 Equity Incentive Plan (2018 Plan). The 2018 Plan provides for the grant of incentive and nonstatutory stock options, restricted stock, RSUs, stock appreciation rights, performance units, and performance shares to employees, consultants, and members of the Company's board of directors.

20


Domo, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
12. Equity Incentive Plans (Continued)

A total of 5,238,423 shares of Class B common stock are reserved for issuance under the 2018 Plan. The number of shares available for issuance under the 2018 Plan also includes an annual increase on the first day of each fiscal year beginning in 2019, equal to the lesser of: 1) 3,500,000 shares; 2) 5% of the outstanding shares of Class A and Class B common stock as of the last day of the immediately preceding fiscal year; and 3) such other amount as the Company's board of directors may determine no later than the last day of the immediately preceding year.
In connection with the IPO, the 2011 Plan was terminated. With the establishment of the 2018 Plan, the Company no longer grants equity-based awards under the 2011 Plan and any shares that expire, terminate, are forfeited or repurchased by the Company, or are withheld by the Company to cover tax withholding obligations, under the 2011 Plan, will become available for future grant under the 2018 Plan. As of July 31, 2018, there were 5,315,812 shares available for grant under the 2018 Plan.
The Company recognized stock-based compensation expense related to its equity incentive plans as follows (in thousands):
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2018
 
2017
 
2018
Cost of revenue:
 
 
 
 
 
 
 
Subscription
$
12

 
$
55

 
$
23

 
$
70

Professional services and other
11

 
70

 
21

 
78

Sales and marketing
462

 
3,744

 
1,052

 
4,049

Research and development
595

 
2,993

 
1,117

 
3,476

General and administrative
1,276

 
3,330

 
2,547

 
4,595

Interest expense
9

 
(26
)
 
17

 
(9
)
Total
$
2,365

 
$
10,166

 
$
4,777

 
$
12,259

Stock Options
Stock options typically vest over a four year period and have a term of ten years from the date of grant. The weighted-average grant-date fair value of stock options granted was $13.20 per share for the three and six months ended July 31, 2017. No stock options were granted during the three and six months ended July 31, 2018. The grant-date fair value of stock options was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:
Expected stock price volatility
47 %
Expected life of options
6 years
Risk-free interest rate
1.83 %
Expected dividend yield
Fair value of common stock
$28.20

21


Domo, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
12. Equity Incentive Plans (Continued)

The following table sets forth the outstanding common stock options and related activity for the six months ended July 31, 2018:
 
Shares
Subject to Outstanding Options
 
Weighted- Average Exercise
Price per Share
 
Weighted-Average Remaining Contractual Term (years)
 
Aggregate Intrinsic Value (in thousands)
Balance at January 31, 2018
2,465,242

 
$
21.90

 
6.4
 
$
12,185

Exercised
(19,685
)
 
13.34

 
 
 
 
Forfeited
(89,545
)
 
30.75

 
 
 
 
Expired
(33,689
)
 
43.05

 
 
 
 
Balance at July 31, 2018
2,322,323

 
$
21.33

 
5.7
 
$
7,321

Vested and exercisable at July 31, 2018
2,050,935

 
$
20.31

 
5.4
 
$
7,321

The aggregate intrinsic value of options exercised was $21,000 and $27,000 for the three months ended July 31, 2017 and 2018, respectively, and $2.0 million and $0.2 million for the six months ended July 31, 2017 and 2018, respectively. The intrinsic value represents the excess of the estimated fair value of the Company's common stock on the date of exercise over the exercise price of each option. The intrinsic value of vested options as of July 31, 2018 is based on the market closing price of the Company's Class B common stock on that date.
As of July 31, 2018, there was $3.3 million of unrecognized stock-based compensation expense related to outstanding stock options which is expected to be recognized over a weighted-average period of 1.3 years.
Restricted Stock Units
Restricted stock units (RSUs) granted under the Plan vest and settle upon the satisfaction of both a service-based condition and a liquidity event-related performance vesting condition. The service-based condition for these awards is generally satisfied over three or four years with a cliff vesting period of one or two years and quarterly vesting thereafter. Upon the effectiveness of the registration statement for the Company's IPO, which was June 28, 2018, the liquidity event-related performance vesting condition associated with the Company's RSUs was deemed probable of being satisfied. As a result, the Company recognized cumulative unrecognized stock-based compensation related to its RSUs using the accelerated attribution method of $6.6 million attributable to service prior to such effective date.
The following table sets forth the outstanding RSUs and related activity for the six months ended July 31, 2018:
 
Number of Shares
 
Weighted- Average Grant Date Fair Value
Outstanding as of January 31, 2018
1,001,226

 
$
23.40

Granted
428,338

 
22.76

Canceled
(55,439
)
 
23.40

Outstanding as of July 31, 2018
1,374,125

 
$
23.24

As of July 31, 2018, there was $23.7 million of unrecognized stock-based compensation expense related to outstanding RSUs which is expected to be recognized over a weighted-average period of 1.9 years.
Employee Stock Purchase Plan
In June 2018, the Company's board of directors adopted the ESPP and a total of 1,047,684 shares of Class B common stock were initially reserved for issuance under the ESPP. The number of shares of Class B common stock available for issuance under the ESPP will be increased on the first day of each fiscal year beginning in 2019 equal to the lesser of: 1) 1,050,000 shares of Class B common stock, 2) 1.5% of the outstanding shares of Class A and Class B common stock of the Company on the last

22


Domo, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
12. Equity Incentive Plans (Continued)

day of the immediately preceding fiscal year, or 3) such other amount as the administrator of the ESPP may determine on or before the last day of the immediately preceding year.
The ESPP generally provides for consecutive overlapping 24-month offering periods comprised of four six-month purchase periods; provided, however, that the first purchase period in the first offering period will have a duration of approximately nine months. The offering periods are scheduled to start on the first trading day on or after April 1 and October 1 of each year. The first offering period commenced on June 29, 2018 and is scheduled to end on the first trading day on or after October 1, 2020. The ESPP permits participants to elect to purchase shares of Class B common stock through through payroll deductions of up to 15% of their eligible compensation or $25,000 per calendar year. A participant may purchase a maximum of 2,000 shares during each purchase period.
Amounts deducted and accumulated by the participant will be used to purchase shares of Class B common stock at the end of each purchase period. The purchase price of the shares will be 85% of the lower of the fair market value of Class B common stock on the first trading day of each offering period or the fair market value of Class B common stock on the applicable exercise date. If the fair market value of a share of Class B common stock on the exercise date of an offering period is less than it was on the first trading day of that offering period, participants automatically will be withdrawn from that offering period following their purchase of shares on the exercise date and will be re-enrolled in a new offering period. Participants may end their participation at any time during an offering period and will be paid their accrued contributions that have not yet been used to purchase shares of Class B common stock. Participation ends automatically upon termination of employment.
As of July 31, 2018, a total of 911,762 shares were issuable to employees based on contribution elections made under the ESPP and no shares had yet been purchased. As of July 31, 2018, total unrecognized stock-based compensation related to the ESPP was $5.8 million, which is expected to be recognized over a weighted-average period of 2.2 years.
The fair value of the purchase rights for the ESPP are estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
Expected stock price volatility
31% - 36%
Expected term
0.75 - 2.25 years
Risk-free interest rate
2.22% - 2.54%
Expected dividend yield
13. Income Taxes
The Company calculated the year-to-date income tax provision by applying the estimated annual effective tax rate to the year-to-date pre-tax loss and adjusted for discrete tax items in the period. The Company's income tax expense was $0.1 million and $0.1 million for the three months ended July 31, 2017 and 2018, respectively, and $0.2 million and $0.7 million for the six months ended July 31, 2017 and 2018, respectively. The income tax expense for these periods was primarily attributable to foreign taxes.
For the periods presented, the difference between the U.S. statutory rate and the Company's effective tax rate is primarily due to the full valuation allowance on its U.S. tax assets. The effective tax rate is also impacted by earnings realized in foreign jurisdictions with statutory tax rates lower than the federal statutory tax rate.
In December 2017, the Tax Cuts and Jobs Act (Tax Act) was enacted, which resulted in widespread changes to the U.S. tax code. One such change was establishing a flat corporate income tax rate of 21% to replace previous rates that ranged from 15% to 35%. As a result, the Company remeasured its U.S. deferred tax assets and liabilities as of January 31, 2018 to reflect the lower rate expected to apply when these temporary differences reverse.
The remeasurement resulted in a provisional reduction in deferred tax assets, which was fully offset by a corresponding change to the Company’s valuation allowance. The impact will likely be subject to ongoing technical guidance and accounting interpretation, which the Company will continue to monitor and assess. There have not been material changes to the provisional amounts recorded related to the Tax Act as of July 31, 2018.

23


Domo, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
13. Income Taxes (Continued)

The Tax Act contains a number of additional provisions which may impact the Company in future years. However, since the Tax Act was recently finalized and ongoing guidance and accounting interpretation is expected to continue to be released, the Company has not yet elected any changes to accounting policies and the Company’s analysis is ongoing. Provisional accounting impacts may change in future reporting periods until the accounting analysis is finalized, which will occur no later than one year from the date the Tax Act was enacted.
14. Net Loss Per Share
The Company computes net loss per share using the two-class method required for multiple classes of common stock and participating securities. The rights, including the liquidation and dividend rights, of the Class A common stock and Class B common stock are substantially identical, other than voting rights. Accordingly, the Class A common stock and Class B common stock share equally in the Company’s net losses. Before the IPO, the Company’s participating securities also included convertible preferred stock. The holders of convertible preferred stock did not have a contractual obligation to share in the Company’s losses, and as a result net losses were not allocated to these participating securities.
The following tables set forth the calculation of basic and diluted net loss per share during the periods presented. The shares issued in the IPO and the shares of Class A and Class B common stock issued upon conversion of the outstanding shares of convertible preferred stock in the IPO are included in the table below weighted for the period outstanding in the three and six months ended July 31, 2017 and 2018 (in thousands, except per share amounts):
 
Three Months Ended July 31,
 
2017
 
2018
 
Class A
 
Class B
 
Class A
 
Class B
Numerator:
 
 
 
 
 
 
 
Net loss
$

 
$
(43,493
)
 
$
(5,182
)
 
$
(41,202
)
Denominator:
 
 
 
 
 
 
 
Weighted-average number of shares used in
computing net loss per share, basic and diluted

 
1,595

 
1,174

 
9,335

Net loss per share, basic and diluted
$

 
$
(27.27
)
 
$
(4.41
)
 
$
(4.41
)
 
Six Months Ended July 31,
 
2017
 
2018
 
Class A
 
Class B
 
Class A
 
Class B
Numerator:
 
 
 
 
 
 
 
Net loss
$

 
$
(91,471
)
 
$
(8,889
)
 
$
(83,002
)
Denominator:
 
 
 
 
 
 
 
Weighted-average number of shares used in
computing net loss per share, basic and diluted

 
1,571

 
595

 
5,556

Net loss per share, basic and diluted
$

 
$
(58.22
)
 
$
(14.94
)
 
$
(14.94
)

24


Domo, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
14. Net Loss Per Share (Continued)

Since the Company was in a loss position for all periods presented, basic net loss per share 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. The weighted-average impact of potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive was as follows:
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2018
 
2017
 
2018
Convertible preferred stock on an if-converted basis
14,092,749

 
9,041,710

 
13,776,317

 
11,528,413

Options to purchase common stock
555,279

 
500,943

 
575,658

 
508,340

Restricted stock units

 
106,017

 

 
144,499

Common stock warrants
3,031

 
2,925

 
3,048

 
2,946

 
14,651,059

 
9,651,595

 
14,355,023

 
12,184,198

15. Related Party Transactions
Certain members of the Company's board of directors serve as directors of and/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. As of January 31, 2018 and July 31, 2018, the Company had $0.6 million and $0.1 million receivable from these customers, respectively. As of January 31, 2018 and July 31, 2018, amounts payable to these vendors were immaterial. During the three months ended July 31, 2017 and 2018 and the six months ended July 31, 2017 and 2018, the Company recognized revenue of $0.4 million, $0.5 million, $0.8 million and $0.9 million, respectively, related to these customers. During the three months ended July 31, 2017 and 2018 and the six months ended July 31, 2017 and 2018, the Company recognized expense of $0.1 million, $0.2 million, $0.3 million and $0.4 million, respectively, related to these vendors.
The Company previously utilized an aircraft owned by one of the Company's executive officers on an as-needed basis. This arrangement was terminated in June 2018. The Company recorded expenses related to usage of the aircraft of $0.1 million, $0.1 million, $0.2 million and $0.3 million during the three months ended July 31, 2017 and 2018 and the six months ended July 31, 2017 and 2018, respectively.

25


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements containing words such as “may,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “project,” “projections,” “business outlook,” “estimate,” or similar expressions constitute forward-looking statements. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition or state other “forward-looking” information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. They include, but are not limited to, statements about:
our ability to attract new customers and retain and expand our relationships with existing customers;
our future financial performance, including our expectations regarding our revenue, cost of revenue, gross profit, operating expenses, key metrics, ability to generate cash flow and ability to achieve and maintain future profitability;
the anticipated trends, market opportunity, growth rates and challenges in our business and in the business intelligence software market;
the efficacy of our sales and marketing efforts;
our ability to compete successfully in competitive markets;
our ability to respond to rapid technological changes;
our expectations and management of future growth;
our ability to enter new markets and manage our expansion efforts, particularly internationally;
our ability to develop new product features;
our ability to attract and retain key employees and qualified technical and sales personnel;
our ability to effectively and efficiently protect our brand;
our ability to timely scale and adapt our infrastructure; and
our ability to maintain, protect, and enhance our intellectual property and not infringe upon others’ intellectual property.
Our actual results may differ materially from those contained in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, including those factors discussed in Part II, Item 1A (Risk Factors).
In light of the significant uncertainties and risks inherent in these forward-looking statements, you should not regard these statements as a representation or warranty by us or anyone else that we will achieve our objectives and plans in any specified time frame, or at all, or as predictions of future events. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Overview
We founded Domo in 2010 with the vision of digitally connecting everyone within the enterprise with real-time, rich, relevant data and then encouraging all employees to collaborate and act. We realized that many organizations were unable to access the massive amounts of data that they were collecting in siloed cloud applications and on-premise databases. Furthermore, even for organizations that were capable of accessing their data, the process for doing so was time-consuming, costly, and often resulted in the data being out-of-date by the time it reached decision makers. The delivery format, including alert functionality, and devices were not adequate for the connected and real-time mobile workforce. Based on these observations, it was apparent that all organizations, regardless of size or industry, were failing to unlock the power of all of their people, data and systems. To address these challenges, we provide a cloud-based platform that digitally connects everyone from the CEO to the frontline

26



employee with all the people, data and systems in an organization, giving them access to real-time data and insights and allowing them to manage their business from their smartphones.
We offer our platform to our customers as a subscription-based service. Subscription fees are based on the number of users and the tier of package deployed. Business leaders and managers are typically the initial subscribers to our platform, deploying it for a specific use case or department. Over time, as customers recognize the value of our platform, we increasingly engage with CIOs and other executives to facilitate broad enterprise adoption. A majority of our customers subscribe to our services through one-year contracts, but recently a growing percentage of new and existing customers have entered into multi-year contracts. This transition to a higher percentage of multi-year contracts, among both new and existing customers, has enhanced the predictability of our subscription revenue. We typically invoice our customers annually in advance. Given the higher average annual contract value (ACV) and renewal rates we experience with larger customers, we are focused on customers with over $100 million in revenue, with a particular emphasis on enterprise customers with over $1 billion in revenue.
We had total revenue of $25.9 million and $34.3 million for the three months ended July 31, 2017 and 2018, respectively, reflecting a year-over-year increase of 32%. For the six months ended July 31, 2017 and 2018, we had total revenue of $50.1 million and $66.2 million, respectively, representing year-over-year growth of 32%. For the three and six months ended July 31, 2017 and 2018, no single customer accounted for more than 10% of our total revenue, nor did any single organization when accounting for multiple subsidiaries or divisions which may have been invoiced separately. Revenue from customers with billing addresses in the United States comprised 83% and 77% or our total revenue for the three months ended July 31, 2017 and 2018, respectively, and 83% and 78% of our total revenue for the six months ended July 31, 2017 and 2018, respectively; however, we are focused on growing our international business and will continue to invest in sales operations outside the United States.
We have incurred significant net losses since our inception, including net losses of $43.5 million and $46.4 million for the three months ended July 31, 2017 and 2018, respectively, and $91.5 million and $91.9 million for the six months ended July 31, 2017 and 2018, respectively, and had an accumulated deficit of $849.7 million at July 31, 2018. We expect to incur losses for the foreseeable future and may not be able to achieve or sustain profitability.
Recent Developments
On July 3, 2018, we closed our initial public offering, or IPO, in which we issued and sold 10,580,000 shares (inclusive of the underwriters' over-allotment option to purchase 1,380,000 shares, which was exercised on June 29, 2018) of Class B common stock at $21.00 per share. We received aggregate proceeds of $206.6 million, net of underwriters' discounts and commissions, before deducting offering costs of $4.2 million.
Factors Affecting Performance
Continue to Attract New Customers
We believe that our ability to expand our customer base is an important indicator of market penetration, the growth of our business, and future business opportunities. We define a customer at the end of any particular quarter as an entity that generated revenue greater than $2,500 during that quarter. In situations where an organization has multiple subsidiaries or divisions, each entity that is invoiced at a separate billing address is treated as a separate customer. In cases where customers purchase through a reseller, each end customer is counted separately.
As of July 31, 2018, we had over 1,600 customers. In order to accelerate customer growth, we intend to further develop our partner ecosystem by establishing agreements with more software resellers, systems integrators and implementation partners to provide broader customer and geographic coverage. We believe we are underpenetrated in the overall market and have significant opportunity to expand our customer base over time.
Customer Upsell and Retention
We employ a land and expand sales model, and our performance depends on our ability to retain customers and expand the number of users and use cases at existing customers over time. It currently takes multiple years for our customers to fully embrace the power of our platform. We believe that as customers deploy greater volumes and sources of data for multiple use cases, the unique features of our platform can address the needs of everyone within their organization. We are still in the early stages of expanding within many of our customers.
We have invested in platform capabilities and online support resources that allow our customers to expand the use of our platform in a self-guided manner. Our professional services, customer support and customer success functions also support our sales force by helping customers to successfully deploy our platform and implement additional use cases. In addition, we believe

27



our partner ecosystem will become increasingly important over time. We work closely with our customers to drive increased engagement with our platform by identifying new use cases through our customer success teams, as well as in-platform, self-guided experiences. We actively engage with our customers to assess whether they are satisfied and fully realizing the benefits of our platform. While these efforts often require a substantial commitment and upfront costs, we believe our investment in product, customer support, customer success and professional services will create opportunities to expand our customer relationships over time.
Our ability to drive growth and generate incremental revenue depends heavily on our ability to retain our customers and increase their usage of our platform. With that objective in mind, we allocate our customer success and customer support resources to align with maximizing the retention and expansion of our subscription revenue.
As we continue to enhance our product and develop methods to encourage wider and more strategic adoptions, including shifting our sales and marketing activities towards enterprise customers, we expect that customer retention will continue to improve; however, our ability to successfully upsell and the impact of cancellations may vary from period to period. The extent of this variability depends on a number of factors including the size and timing of upsells and cancellations relative to the initial subscriptions.
Sales and Marketing Efficiency
We are focused on increasing the efficiency of our sales force and marketing activities by enhancing account targeting, messaging, field sales operations and sales training in order to reduce our sales and marketing expense as a percentage of revenue and accelerate the adoption of our platform. Our sales strategy depends on our ability to continue to attract top talent, increasing our pipeline of business, and enhancing sales productivity. We focus on productivity per quota-carrying sales representative and the time it takes our sales representatives to reach full productivity. We manage our pipeline by sales representative to ensure sufficient coverage of our sales targets. Our ability to manage our sales productivity and pipeline are important factors to the success of our business. We also intend to shift marketing spending from broad based initiatives that are better suited to attracting smaller organizations towards enterprise-targeted marketing campaigns and user events that we believe will result in larger initial new customer ACV and more upsell ACV potential.
Leverage Research and Development Investments for Future Growth
We plan to continue to make investments in areas of our business to continue to expand our platform functionality. However, the amount of new investments required to achieve our plans is expected to decrease as a percentage of revenue compared to historical years.
Key Business Metric
Billings
Billings represent our total revenue plus the change in deferred revenue in a period. Billings reflect sales to new customers plus subscription renewals and upsells to existing customers, and represent amounts invoiced for subscription, support and professional services. We typically invoice customers in advance in annual installments for subscriptions to our platform. Because we generate most of our revenue from customers who are invoiced on an annual basis and have a wide range of annual contract values, we may experience variability due to typical enterprise buying patterns and timing of large renewals.
The following table sets forth our billings for the three and six months ended July 31, 2017 and 2018:
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2018
 
2017
 
2018
Billings (in thousands)
$
26,464

 
$
35,664

 
$
54,127

 
$
69,378

Components of Results of Operations
Revenue
We offer subscriptions to our cloud-based platform. We derive our revenue primarily from subscriptions and professional services. Subscription revenue consists primarily of fees to provide our customers access to our cloud-based platform, which

28



includes online customer support resources at no additional cost. Professional service fees include implementation services, optimization services, and training.
Subscription revenue is a function of the number of customers, the number of users at each customer, and the price per user. Subscription revenue is recognized ratably over the related contractual term beginning on the date the platform is made available to the customer. Our new business subscriptions typically have a term of one to three years, and 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.
Professional services revenue consists of implementation services sold with new subscriptions, as well as professional services sold separately, including training and education. Professional services are generally billed in advance and revenue from these arrangements is recognized as the services are performed. Our professional services engagements typically span from a few weeks to several months.
Cost of Revenue
Cost of subscription revenue consists primarily of third-party hosting services and data center capacity; salaries, benefits, bonuses and stock-based compensation, or employee-related costs, directly associated with cloud infrastructure and customer support personnel; amortization expense associated with capitalized software development costs; depreciation expense associated with computer equipment and software; certain fees paid to various third parties for the use of their technology and services; and allocated overhead. Allocated overhead includes items such as information technology infrastructure, rent, and certain employee benefit costs.
Cost of professional services and other revenue consists primarily of employee-related costs directly associated with these services, third-party consultant fees related to implementations, and allocated overhead.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of employee-related costs directly associated with our sales and marketing staff and commissions. Other sales and marketing costs include digital marketing programs and promotional events to promote our brand, including Domopalooza, our annual user conference, as well as tradeshows, advertising and allocated overhead. Contract acquisition costs, including sales commissions, are deferred and then amortized on a straight-line basis over the period of benefit, which we have determined to be approximately four years for initial contracts. Contract acquisition costs related to renewal contracts and professional services are recorded as expense when incurred if the period of benefit is one year or less.
Research and Development. Research and development expenses consist primarily of employee-related costs for the design and development of our platform, contractor costs to supplement staff levels, third-party web services, consulting services, and allocated overhead. Our cycle of frequent updates has facilitated rapid innovation and the introduction of new product features throughout our history. We capitalize certain software development costs that are attributable to developing new features and adding incremental functionality to our platform, and amortize such costs as costs of subscription revenue over the estimated life of the new feature or incremental functionality, which is generally three years.
General and Administrative. General and administrative expenses consist of employee-related costs for executive, finance, legal, human resources, recruiting and administrative personnel; professional fees for external legal, accounting, recruiting and other consulting services; and allocated overhead costs.
Other Income (Expense), Net. Other income (expense), net consists primarily of interest expense related to long-term debt. It also includes the effect of exchange rates on foreign currency transaction gains and losses, foreign currency gains and losses upon remeasurement of intercompany balances and interest income earned on our cash and cash equivalents. The transactional impacts of foreign currency are recorded as foreign currency losses (gains) in the condensed consolidated statements of operations.
Provision for Income Taxes. Provision for income taxes consists primarily of income taxes related to foreign and state jurisdictions in which we conduct business. Because of the uncertainty of the realization of the deferred tax assets, we have a full valuation allowance for domestic net deferred tax assets, including net operating loss carryforwards and tax credits related primarily to research and development.

29



Results of Operations
The following tables set forth selected condensed consolidated statements of operations data and such data as a percentage of total revenue for each of the periods indicated:
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2018
 
2017
 
2018
 
(in thousands)
Revenue:
 
 
 
 
 
 
 
Subscription
$
21,052

 
$
28,166

 
$
40,155

 
$
54,829

Professional services and other
4,851

 
6,101

 
9,994

 
11,383

Total revenue
25,903

 
34,267

 
50,149

 
66,212

Cost of revenue:
 
 
 
 
 
 
 
Subscription(1)
7,570

 
8,265

 
14,506

 
16,321

Professional services and other(1)
3,083

 
4,253

 
5,885

 
7,763

Total cost of revenue
10,653

 
12,518

 
20,391

 
24,084

Gross profit
15,250

 
21,749

 
29,758

 
42,128

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing(1)
31,413

 
34,002

 
66,930

 
73,658

Research and development(1)
20,191

 
20,919

 
39,894

 
39,983

General and administrative(1)(2)
7,288

 
10,207

 
14,533

 
14,851

Total operating expenses
58,892

 
65,128

 
121,357

 
128,492

Loss from operations
(43,642
)
 
(43,379
)
 
(91,599
)
 
(86,364
)
Other income (expense), net(1)
243

 
(2,898
)
 
325

 
(4,817
)
Loss before income taxes
(43,399
)
 
(46,277
)
 
(91,274
)
 
(91,181
)
Provision for income taxes
94

 
107

 
197

 
710

Net loss
$
(43,493
)
 
$
(46,384
)
 
$
(91,471
)
 
$
(91,891
)
________________
(1)
Includes stock-based compensation expense as follows:
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2018
 
2017
 
2018
 
(in thousands)
Cost of revenue:
 
 
 
 
 
 
 
Subscription
$
12

 
$
55

 
$
23

 
$
70

Professional services and other
11

 
70

 
21

 
78

Sales and marketing
462

 
3,744

 
1,052

 
4,049

Research and development
595

 
2,993

 
1,117

 
3,476

General and administrative
1,276

 
3,330

 
2,547

 
4,595

Other income (expense), net
9

 
(26
)
 
17

 
(9
)
Total
$
2,365

 
$
10,166

 
$
4,777

 
$
12,259


(2)
Includes amortization of intangible assets of $20,000 and $20,000 for the three months ended July 31, 2017 and 2018, respectively, and $40,000 and $40,000 for the six months ended July 31, 2017 and 2018, respectively.

30



 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2017
 
2018
 
2017
 
2018
Revenue:
 
 
 
 
 
 
 
Subscription
81
 %
 
82
 %
 
80
 %
 
83
 %
Professional services and other
19

 
18

 
20

 
17

Total revenue
100

 
100

 
100

 
100

Cost of revenue:
 
 
 
 
 
 
 
Subscription
29

 
24

 
29

 
24

Professional services and other
12

 
13

 
12

 
12

Total cost of revenue
41

 
37

 
41

 
36

Gross margin
59

 
63

 
59

 
64

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
121

 
99

 
133

 
111

Research and development
78

 
61

 
80

 
60

General and administrative
28

 
30

 
29

 
23

Total operating expenses
227

 
190

 
242

 
194

Loss from operations
(169
)
 
(127
)
 
(183
)
 
(130
)
Other income (expense), net
1

 
(8
)
 
1

 
(8
)
Loss before income taxes
(168
)
 
(135
)
 
(182
)
 
(138
)
Provision for income taxes

 

 

 
1

Net loss
(168
)%
 
(135
)%
 
(182
)%
 
(139
)%
Discussion of the Three Months Ended July 31, 2017 and 2018
Revenue
 
Three Months Ended July 31,
 
 
 
 
 
2017
 
2018
 
$ Change
 
% Change
 
(in thousands)
 
 
Revenue:
 
 
 
 
 
 
 
Subscription
$
21,052

 
$
28,166

 
$
7,114

 
34
%
Professional services and other
4,851

 
6,101

 
1,250

 
26

Total revenue
$
25,903

 
$
34,267

 
$
8,364

 
32

Percentage of revenue:
 
 
 
 
 
 
 
Subscription
81
%
 
82
%
 
 
 
 
Professional services and other
19

 
18

 
 
 
 
Total
100
%
 
100
%
 
 
 
 
Total revenue was $34.3 million for the three months ended July 31, 2018, compared to $25.9 million for the three months ended July 31, 2017, an increase of $8.4 million, or 32%. Subscription revenue was $28.2 million, or 82% of total revenue, for the three months ended July 31, 2018, compared to $21.1 million, or 81% of total revenue, for the three months ended July 31, 2017. The increase in subscription revenue was primarily due to a $5.5 million increase from new customers and a $1.6 million increase from existing customers. Our customer count increased 19% from July 31, 2017 to July 31, 2018. We anticipate that as we continue to close new business and retain our customers that subscription revenue will continue to increase as a percent of total revenue.
Professional services and other revenue was $6.1 million, or 18% of total revenue, for the three months ended July 31, 2018, compared to $4.9 million, or 19% of total revenue, for the three months ended July 31, 2017. This increase is due to a higher volume of implementation and training services provided to our customers.

31



Cost of Revenue, Gross Profit and Gross Margin
 
Three Months Ended July 31,
 
 
 
 
 
2017
 
2018
 
$ Change
 
% Change
 
(in thousands)
 
 
Cost of revenue:
 
 
 
 
 
 
 
Subscription
$
7,570

 
$
8,265

 
$
695

 
9
%
Professional services and other
3,083

 
4,253

 
1,170

 
38

Total cost of revenue
$
10,653

 
$
12,518

 
$
1,865

 
18

Gross profit
$
15,250

 
$
21,749

 
$
6,499

 
43

Gross margin:
 
 
 
 
 
 
 
Subscription
64
%
 
71
%
 
 
 
 
Professional services and other
36

 
30

 
 
 
 
Total gross margin
59

 
63

 
 
 
 
Cost of subscription revenue was $8.3 million for the three months ended July 31, 2018, compared to $7.6 million for the three months ended July 31, 2017, an increase of $0.7 million, or 9%. The increase in cost of subscription revenue was primarily due to an increase of $0.6 million in employee-related costs related to increased international customer support headcount.
Cost of professional services and other revenue was $4.3 million for the three months ended July 31, 2018, compared to $3.1 million for the three months ended July 31, 2017. This increase is primarily due to a higher volume of services provided and increased rates from third-party consultants related to implementation and training.
Subscription gross margin improved due to economies of scale driven by increased subscription revenue and cost improvements due to more proactive management and optimization of our third-party hosting services. Services gross margin declined due to heavier use of third-party implementation consultants. In addition, rates for these consultants have increased from the prior year.
Since inception, we have invested in our professional services organization to help ensure that customers successfully deploy and expand usage of our platform. While we expect the cost of professional services will decline as a percentage of total revenue over the long term as our business scales and as we continue to develop our partner ecosystem, including outside partners who provide professional services currently on our behalf or directly for our small and medium-sized customers, such costs could fluctuate from period to period depending on the mix of our customer base, particularly if in a given period we have a concentration of large professional services projects that we delivered, typically associated with enterprise customers.
Operating Expenses
 
Three Months Ended July 31,
 
 
 
 
 
2017
 
2018
 
$ Change
 
% Change
 
(in thousands)
 
 
Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
$
31,413

 
$
34,002

 
$
2,589

 
8
%
Research and development
20,191

 
20,919

 
728

 
4

General and administrative
7,288

 
10,207

 
2,919

 
40

Total operating expenses
$
58,892

 
$
65,128

 
$
6,236

 
11

Percentage of revenue:
 
 
 
 
 
 
 
Sales and marketing
121
%
 
99
%
 
 
 
 
Research and development
78

 
61

 
 
 
 
General and administrative
28

 
30

 
 
 
 
Sales and marketing expenses were $34.0 million for the three months ended July 31, 2018, compared to $31.4 million for the three months ended July 31, 2017, an increase of $2.6 million, or 8%. The increase was primarily due to an increase of $4.0

32



million in employee-related costs, including $3.3 million of stock-based compensation related to the performance vesting condition of certain restricted stock units (RSUs), which was deemed probable of being satisfied upon the effectiveness of the registration statement related to our IPO, and $0.7 million attributable to salary increases. Other increases included a $0.5 million increase in travel costs due to increased sales activity and a $0.4 million increase in commission expense due to a higher proportion of non-recurring services, for which commissions are not capitalized. These increases were partially offset by a $2.7 million decrease in marketing programs and event costs.
Sales and marketing expense as a percentage of total revenue decreased from 121% in the three months ended July 31, 2017 to 99% in the three months ended July 31, 2018. We expect sales and marketing expense to continue to decline as a percentage of total revenue in the long term.
Research and development expenses were $20.9 million for the three months ended July 31, 2018, compared to $20.2 million for the three months ended July 31, 2017, an increase of $0.7 million, or 4%. The increase was primarily due to an increase of $2.6 million in employee-related costs, most of which related to the performance vesting condition of certain RSUs, which was deemed probable of being satisfied upon the effectiveness of the registration statement related to our IPO. This increase was offset by decreases of $0.9 million in third-party web services for internal use and $0.9 million due to an increase in capitalized software development costs (resulting in decreased expense).
Research and development expense as a percentage of revenue decreased from 78% in the three months ended July 31, 2017 to 61% in the three months ended July 31, 2018. We expect research and development expense to continue to decline as a percentage of total revenue in the long term as we leverage our research and development organization.
General and administrative expenses were $10.2 million for the three months ended July 31, 2018, compared to $7.3 million for the three months ended July 31, 2017, an increase of $2.9 million, or 40%. The increase was primarily due to an increase of $2.6 million in employee-related costs, including $2.1 million of stock-based compensation related to the performance vesting condition of certain RSUs, which was deemed probable of being satisfied upon the effectiveness of the registration statement related to our IPO, and $0.5 million attributable to higher headcount and salary increases. In addition, there was an increase of $0.4 million related to costs associated with operating as a public company.
General and administrative expenses as a percent of revenue increased from 28% in the three months ended July 31, 2017 to 30% in the three months ended July 31, 2018 due to cumulative stock-based compensation expense related to certain RSUs that was recognized in connection with our IPO. In the long term, we expect general and administrative expense to decline as a percentage of total revenue as we leverage our general and administrative organization; however, we expect general and administrative expense to increase in absolute dollars due to additional costs associated with operating as a public company including incremental costs for accounting, compliance, insurance, and investor relations.
Other Income (Expense), Net
 
Three Months Ended July 31,
 
 
 
 
 
2017
 
2018
 
$ Change
 
% Change
 
(in thousands)
 
 
Other income (expense), net
$
243

 
$
(2,898
)
 
$
(3,141
)
 
(1,293
)%
Other income (expense), net increased by $3.1 million primarily due to an increase in interest expense of $3.1 million due to the credit facility entered into in December 2017 and amended in April 2018. Other activity included an increase in interest income of $0.3 million from interest earned on IPO proceeds and an offsetting $0.3 million due to the impacts of foreign exchange rates. In the short term, we expect interest expense to increase due to the outstanding balance under the credit facility and higher interest rates.

33



Provision for Income Taxes
 
Three Months Ended July 31,
 
 
 
 
 
2017
 
2018
 
$ Change
 
% Change
 
(in thousands)
 
 
Provision for income taxes
$
94