UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

For the quarterly period ended October 31, 2018

For the transition period from:                      to                     

Commission File Number 001-38698

ANAPLAN, INC.

(Exact name of registrant as specified in its charter)

50 Hawthorne Street

San Francisco, California 94105

(Address of principal executive offices)

(415) 742-8199

(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  ☐    No  ☒

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☒

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

As of November 30, 2018, the number of shares of the registrant’s common stock, $0.0001 par value per share, outstanding was 124,964,193.

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes forward-looking statements. All statements other than statements of historical facts contained in this report are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “design,” “intend,” “expect,” “could,” “plan,” “potential,” “predict,” “seek,” “should,” “would,” or the negative version of these words and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short- and long-term business operations and objectives, and financial needs. The forward-looking statements are contained principally in “Management’s Discussion and Analysis of Financial Condition and Result of Operations” and “Risk Factors.” Forward-looking statements contained in this report include, but are not limited to, statements about:

We caution you that the foregoing list may not contain all of the forward-looking statements made in this report.

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

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance, or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. The forward-looking statements made in this report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this report to reflect events or circumstances after the date of this report or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

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In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

You should read this report and the documents that we reference in this report and have filed with the Securities and Exchange Commission as exhibits to this report with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect.

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PART I

ITEM 1. FINANCIAL STATEMENTS

ANAPLAN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)

The information as of January 31, 2018 was derived from the Company’s audited Consolidated Balance Sheet as of January 31, 2018.

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

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ANAPLAN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands, except per share data)

(Unaudited)

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

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ANAPLAN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

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

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ANAPLAN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

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

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ANAPLAN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Summary of Business and Significant Accounting Policies

Description of Business

Anaplan, Inc. (the Company or Anaplan) was incorporated in Delaware on July 9, 2009 and is headquartered in San Francisco, California, with offices in several locations including Minneapolis, New York, the United Kingdom (U.K.), France, Japan, Australia, India, and Singapore.

The Company provides a cloud-based connected planning platform that helps connect organizations and people to make better and faster decisions. The Company delivers its application over the Internet as a subscription service using a software-as-a-service (SaaS) model. The Company also offers professional services related to implementing and supporting its application.

Fiscal Year

The Company’s fiscal year ends on January 31. References to fiscal 2019, for example, refer to the fiscal year ended January 31, 2019.

Initial Public Offering and Private Placement

In October 2018, the Company completed its initial public offering (the IPO) of 17,825,000 shares of its common stock, including the full exercise of the underwriters’ option to purchase additional shares, at a public offering price of $17.00 per share. The Company received net proceeds of $281.8 million after deducting underwriting discounts and commissions. In connection with the IPO:

JOBS Act Accounting Election

The Company is an emerging growth company (EGC), as defined in the Jumpstart Our Business Startups Act of 2012 (the JOBS Act). Under the JOBS Act, EGCs can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has irrevocably elected not to avail itself of this exemption from new or revised accounting standards and, therefore, it will be subject to the same new or revised accounting standards as other public companies that are not EGCs. The Company also adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, effective February 1, 2018, using the full retrospective method.

Basis of Presentation and Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and all its wholly owned subsidiaries, after elimination of intercompany transactions and balances.

The unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (U.S. GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. The unaudited condensed consolidated balance sheet as of January 31, 2018 included herein was derived from the audited financial statements as of that date, but does not include all disclosures including certain notes required by U.S. GAAP on an annual reporting basis. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the balance sheets, statements of comprehensive loss, statements of cash flows, and statements of stockholders’ equity for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full fiscal year or any future period.

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The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s final prospectus dated October 11, 2018 (Prospectus) filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates include, but are not limited to, the determination of revenue recognition, the fair value of stock awards issued, and the allowance for doubtful accounts. Actual results could differ from those estimates.

Summary of Significant Accounting Policies

The Company’s significant accounting policies are discussed in “Index to Consolidated Financial Statements, Note 1. Summary of Business and Significant Accounting Policies” in the Prospectus. There have been no significant changes to these policies during the three and nine months ended October 31, 2018, except as noted below.

Concentration of Risk and Significant Customers

Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, and accounts receivable. The Company maintains its cash, cash equivalents, and restricted cash with high-quality financial institutions with investment-grade ratings. A majority of the cash balances are with U.S. banks and are insured to the extent defined by the Federal Deposit Insurance Corporation.

The Company markets its subscription and services in the United States and in foreign countries through its direct sales force and partners. No customer accounted for more than 10% of total revenue for the three or nine months ended October 31, 2018 or 2017, or more than 10% of total accounts receivable as of October 31, 2018, or January 31, 2018.

Revenue Recognition

The Company adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, effective February 1, 2018, using the full retrospective transition method. Accordingly, the Company has presented the consolidated financial statements for fiscal 2016, 2017, and 2018 in the Prospectus as if this guidance had been effective as of the beginning of fiscal 2016. The adoption of the new guidance did not have a significant change on the Company’s revenue during all periods presented. However, the adoption of the new guidance did impact the Company’s commission expense recognized during each period presented, resulting in decreases from $6.3 million, $9.5 million, and $10.7 million to $3.2 million, $4.8 million, and $7.4 million during fiscal 2016, 2017, and 2018, respectively, which was recognized in sales and marketing expense. The cumulative effect of the adoption of the new guidance on the Company’s opening accumulated deficit as of February 1, 2015 resulted in a change from $72.4 million to $70.2 million.

The Company derives revenue primarily from sales of subscription services and, to a lesser degree, from professional services. Revenue is recognized when a customer obtains access to the platform and receives the related professional services. The amount of revenue recognized reflects the consideration that the Company expects to be entitled to receive in exchange for these services.

To achieve the core principle of this new standard, the Company applies the following steps:

1. Identification of the contract, or contracts, with the customer

The Company considers the terms and conditions of the contract in identifying the contracts. The Company determines a contract with a customer to exist when the contract is approved, each party’s rights regarding the services to be transferred can be identified, the payment terms for the services can be identified, it has been determined the customer has the ability and intent to pay, and the contract has commercial substance. At contract inception, the Company will evaluate whether two or more contracts should be combined and accounted for as a single contract and whether the combined or single contract includes more than one performance obligation. The Company applies judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, credit, and financial information pertaining to the customer.

2. Identification of the performance obligations in the contract

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

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3. Determination of the transaction price

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

4. Allocation of the transaction price to the performance obligations in the contract

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

5. Recognition of the revenue when, or as, a performance obligation is satisfied

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

Subscription Revenue

The Company generates revenue primarily from sales of subscriptions to access its cloud-based business and execution planning platform. Subscription arrangements with customers do not provide the customer with the right to take possession of the software operating the platform. Instead, customers are granted continuous access to the platform over the contractual period. A time-elapsed method is used to measure progress because the Company’s obligation is to provide continuous service over the contractual period. Accordingly, the fixed consideration related to subscription revenue is recognized ratably over the contract term beginning on the date access to the platform is provided.

The typical subscription term is two to three years and customers are generally invoiced in annual installments at the beginning of each year within the subscription period. Most contracts are non-cancelable over the contractual term. Some customers have the option to purchase additional subscription services at a stated price. These options are evaluated on a case-by-case basis but generally do not provide a material right as they are priced within a range of prices provided to other customers for the same products and, as such, would not result in a separate performance obligation.

Professional Services Revenue

Professional services revenue consists of fees associated with implementation or consultation services, and training. Professional services do not result in significant customization of the subscription service and are considered distinct. A substantial majority of the professional service contracts are recognized on a time and materials basis and the related revenue is recognized as the service hours are performed. For time and materials projects, the Company invoices for professional services as the work is incurred and in arrears.

Contracts with Multiple Performance Obligations

Most contracts with customers contain multiple performance obligations that are distinct and accounted for separately. The transaction price is allocated to the separate performance obligations on a relative SSP basis. The Company determines SSP for all performance obligations using observable inputs, such as standalone sales and historical contract pricing. SSP is consistent with the Company’s overall pricing objectives, taking into consideration the type of subscription services and professional and other services. SSP also reflects the amount the Company would charge for that performance obligation if it were sold separately in a standalone sale, and the price the Company would sell to similar customers in similar circumstances.

Variable Consideration

Revenue from sales is recorded based on the transaction price, which includes estimates of variable consideration.

Variable consideration may exist where a customer has purchased professional services that are sold on a time and materials basis. The Company estimates the number of hours expected to be incurred based on an expected values approach that considers historical hours incurred for similar projects based on the types and sizes of customers.

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Contract Balances

Contract assets represent revenue recognized for contracts that have not yet been invoiced to customers, typically for multi-year arrangements. Total contract assets were $0.2 million and $0.1 million as of October 31, 2018 and January 31, 2018, respectively, which were included within prepaid expenses and other current assets on the condensed consolidated balance sheets.

Contract liabilities consist of deferred revenue. Revenue is deferred when the Company has the right to invoice in advance of performance under a contract. The current portion of deferred revenue balances are recognized over the following 12-month period. The amount of revenue recognized in fiscal 2016, 2017, and 2018 that was included in deferred revenue at the beginning of each period was $24.3 million, $41.6 million, and $65.6 million, respectively. The amount of revenue recognized in the three and nine months ended October 31, 2018 that was included in deferred revenue at the beginning of each period was $43.9 million and $84.4 million, respectively.

Deferred Commissions

The Company capitalizes sales commissions that are incremental due to the acquisition of customer contracts. These costs are recorded as deferred commissions on the consolidated balance sheets. The Company determines whether costs should be deferred based on its sales compensation plans, if the commissions are in fact incremental and would not have occurred absent the customer contract.

Sales commissions for renewal of a subscription contract are not considered commensurate with the commissions paid for the acquisition of the initial subscription contract given the substantive difference in commission rates between new and renewal contracts. Commissions paid upon the initial acquisition of a contract are amortized over an estimated period of benefit of five years, which is the estimated customer life, while commissions paid related to renewal contracts are amortized over the renewal term. Amortization is recognized on a straight-line basis commensurate with the pattern of revenue recognition. Commissions paid on professional services are typically recognized over the same period as the associated revenue. The Company determines the period of benefit for commissions paid for the acquisition of the initial subscription contract by taking into consideration the initial estimated customer life and the technological life of the platform and related significant features. The Company determines the period of benefit for renewal subscription contracts by considering the average contractual term for renewal contracts. Amortization of deferred commissions is included in sales and marketing expense in the consolidated statements of comprehensive loss.

The Company periodically reviews these deferred commissions to determine whether events or changes in circumstances have occurred that could impact the period of benefit. There were no impairment losses recorded during the periods presented.

The following table represents a rollforward of the Company’s deferred commissions from the prior fiscal year end:

Remaining Performance Obligation

As of October 31, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was $381.1 million, which consists of both billed consideration in the amount of $118.7 million and unbilled consideration in the amount of $262.4 million that the Company expects to recognize as subscription revenue. The Company expects to recognize 15% of this amount as revenue in the remainder of fiscal year ending January 31, 2019 and 89% over the three-year period ending January 31, 2021.

As of January 31, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was $304.6 million, which consists of both billed consideration in the amount of $101.3 million and unbilled consideration in the amount of $203.3 million that the Company expects to recognize as subscription revenue. The Company expects to recognize 53% of this amount as revenue in the fiscal year ending January 31, 2019 and 98% over the three-year period ending January 31, 2021.

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The Company applied a practical expedient allowing it not to disclose the amount of the transaction price allocated to the remaining performance obligations for contracts with an original expected duration of one year or less.

Stock-Based Compensation

Prior to the IPO, the Company’s board of directors determined the fair value of its common stock using various valuation methodologies, including valuation analyses performed by third-party valuation firms. After the IPO, the Company uses the publicly quoted price as reported on the New York Stock Exchange as the fair value of its common stock.

The Company measures the cost of employee services received in exchange for an award of equity instruments, including stock options, stock purchase rights (SPRs), restricted stock units (RSUs), and shares of common stock to be issued under the 2018 Employee Stock Purchase Plan (ESPP) based on the estimated grant-date fair value of the award. The Company calculates the fair value of options, SPRs, and shares of common stock to be issued under ESPP using the Black-Scholes option-pricing model and the related expense is recognized using the straight-line attribution approach. The vesting period is the period the employee is required to provide service in exchange for the award.

The Company’s RSUs granted under the 2012 Stock Plan (2012 Plan) vest upon the satisfaction of both a service condition and a liquidity condition. Both the service and liquidity conditions must be met for the expense to be recognized. The liquidity condition was satisfied upon the IPO, and the Company recognized an expense of $16.7 million for the portion of the RSUs that had met the service condition as of that date, using the straight-line attribution method.

The Company’s RSUs to be granted under the 2018 Equity Incentive Plan (2018 Plan) vest upon the satisfaction of a service condition and do not have a corresponding liquidity condition.

Stock-based compensation expense includes the impact of estimated forfeitures, and has been allocated between cost of revenue and operating expense lines based on the cost category of the respective award holders.

Deferred Offering Costs

Deferred offering costs consist primarily of accounting, legal, and other fees related to the Company’s IPO. Prior to the IPO, all deferred offering costs were capitalized in other noncurrent assets in the condensed consolidated balance sheets. After the IPO, all deferred offering costs were reclassified into stockholders’ equity as a reduction of the IPO proceeds in the condensed consolidated balance sheets. As of October 31, 2018 and January 31, 2018, there were $6.5 million and $1.1 million of offering costs, respectively.

Recently Issued Accounting Pronouncements

In February 2016 and July 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02 “Leases”, ASU 2018-10 “Codification Improvements to Topic 842, Leases”, and ASU 2018-11 “Leases (Topic 842): Targeted Improvements”, which requires lessees to put most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. The new guidance requires 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. The Company will adopt the guidance starting February 1, 2019 and is currently evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact.

In August 2018, the FASB issued ASC 2018-15 “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”. The new guidance amends the definition of a hosting arrangement and requires a customer in a hosting arrangement that is a service contract to capitalize certain costs as if the arrangement were an internal-use software project. The guidance will be effective for fiscal year beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact.

Recently Adopted Accounting Pronouncements

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted the guidance starting February 1, 2018 and retrospectively revised the prior period cash flow from investing activities, beginning cash balance, and ending cash balance to reflect the change in presentation of restricted cash. Other than the change in the presentation in the accompanying condensed consolidated statements of cash flows, the adoption of this standard had no effect on the Company’s condensed consolidated financial statements.

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In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The standard provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted the guidance using the full retrospective transition method starting February 1, 2018. The adoption of the new standard resulted in changes to the Company’s accounting policies for revenue recognition and deferred commissions and resulted in additional disclosures as noted in the revenue recognition section.

In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting. The standard simplifies the accounting for share-based payments granted to nonemployees for goods and services and aligns most of the guidance on such payments to nonemployees with the requirements for share-based payments granted to employees. The Company adopted the guidance starting February 1, 2018. The adoption of the new standard had no material impact on the Company’s condensed consolidated financial statements and disclosures.

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718) Scope of Modification Accounting, which clarifies which changes to the terms or conditions of a share-based payment award are subject to the guidance on modification accounting. Entities would apply the modification accounting guidance unless the value, vesting requirements and classification of a share-based payment award are the same immediately before and after a change to the terms or conditions of the award. The Company adopted the guidance on February 1, 2018. The adoption of this standard had no material impact on the Company’s condensed consolidated financial statements and disclosures.

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which changes several aspects of the accounting for share-based payment award transactions, including the accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, minimum statutory tax withholding requirements, classification of employee taxes paid on the statement of cash flows when the employer withholds shares for tax-withholding purposes, as well as expected term and intrinsic value estimates for nonpublic entities. The Company adopted the guidance on February 1, 2018, and elected to continue to estimate its forfeiture rate. The adoption of this standard had no material impact on the Company’s condensed consolidated financial statements and disclosures.

(2) Balance Sheet Components

Property and Equipment, net

Property and equipment consisted of the following:

Depreciation expense was $3.4 million and $8.8 million for the three and nine months ended October 31, 2018, respectively, and $1.9 million and $5.0 million for the three and nine months ended October 31, 2017, respectively.

As of October 31, 2018, total property and equipment financed under capital leases was $12.3 million, net of accumulated amortization of $0.8 million. For the three and nine months ended October 31, 2018, amortization expense related to property and equipment financed under capital leases was $0.5 million and $0.8 million, respectively. No property and equipment was financed under capital leases during the fiscal year ended January 31, 2018.

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Accrued Expenses

Accrued expenses consisted of the following:

(3) Bank Borrowing

In April 2018, the Company entered into a syndicated loan agreement with Wells Fargo to provide a secured revolving credit facility that allows the Company to borrow up to $40.0 million, subject to an accounts receivable borrowing base, for general corporate purposes through April 2020. Any advances drawn on the credit facility will incur interest at a rate equal to (i) the highest of (A) the prime rate, (B) the federal funds rate plus 0.5%, and (C) the one-month LIBOR plus 1% less (ii) 0.5%. Interest is payable monthly in arrears with the principal and any accrued and unpaid interest due on April 30, 2020. There was a $6.0 million reduction of the available credit facility in April 2018 related to letters of credits for certain facility leases which resulted in the simultaneous release of $6.0 million in restricted cash. As of October 31, 2018, the Company had not drawn down any amounts under this agreement. The Company was in compliance with the financial covenants contained in the agreement as of October 31, 2018.

In conjunction with entering into the Wells Fargo loan agreement, the Company granted Wells Fargo a first priority lien in its accounts receivable and other corporate assets, agreed not to pledge its intellectual property to other parties and became subject to certain reporting and financial covenants.

(4) Employee Stock Plans

2012 Stock Plan

In March 2012, the Company adopted the 2012 Plan, under which officers, employees, and consultants may be granted various forms of equity incentive compensation at the discretion of the Board of Directors, including stock options, RSUs, and SPRs. The awards have varying terms, but generally vest over four years, and are issued at the fair value of the shares of common stock on the date of grant.

In connection with the IPO, the 2012 Plan was terminated and the number of shares of common stock reserved under the 2012 Plan that were not issued or subject to outstanding awards under the 2012 Plan on the IPO date were transferred to the 2018 Plan. As of October 31, 2018, options to purchase and RSUs to convert to a total of 27,385,809 shares of common stock were outstanding under the 2012 Plan pursuant to their original terms and no shares were available for future grant.

2018 Stock Plan

In October 2018, the Company adopted the 2018 Equity Incentive Plan (the 2018 Plan), which became effective on October 11, 2018 and serves as the successor to the Company’s 2012 Plan, and provides various forms of equity incentive awards to the Company’s officers, employees and consultants at the discretion of the Board of Directors. The awards have varying terms, but generally vest over four years, and are issued at the fair value of the shares of common stock on the date of grant.

As of October 31, 2018, the Board of Director authorized 13,544,211 shares of common stock to be reserved for future issuance. On the first day of each fiscal year of the Company during the term of the 2018 Plan, commencing on February 1, 2019 and ending on (and including) February 1, 2028, the aggregate number of common shares that may be issued under the 2018 Plan shall automatically increase by a number equal to the least of (a) 5% of the total number of common shares issued and outstanding on the last day of the preceding fiscal year, (b) 7,500,000 of common shares, or (c) a number of common shares determined by the Company’s board of directors. As of October 31, 2018, there were no equity awards outstanding under the 2018 Plan.

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Employee Stock Purchase Plan

In September 2018, the Company adopted the 2018 Employee Stock Purchase Plan (the ESPP), which became effective on October 12, 2018. The ESPP initially authorizes the issuance of 2,700,000 shares of the Company’s common stock pursuant to purchase rights granted to eligible employees. The number of shares of common stock available for sale under the ESPP also includes an annual increase on the first day of each fiscal year beginning on February 1, 2019, equal to the least of: (i) 1% of the outstanding shares of common stock as of the last day of the preceding fiscal year, (ii) 1,500,000 shares of stock subject to anti-dilution adjustments or (iii) such other amount as the board of directors may determine.

Except for the initial offering period, the ESPP provides for 12-month offering periods beginning June 21 and December 21 of each year, and each offering period will consist of two six-month purchase periods. The initial offering period began October 12, 2018 and will end on December 20, 2019. On each purchase date, eligible employees will purchase the shares at a price per share equal to 85% of the lesser of (1) the fair market value of the Company’s stock on the offering date or (2) the fair market value of our stock on the purchase date.

Stock-Based Compensation

Stock-based compensation expense was recorded in the following cost and expense categories in the Company’s condensed consolidated statements of comprehensive loss:

The Company capitalized stock-based compensation included within research and development expense in the amounts of $0.2 million for the three and nine months ended October 31, 2018, and $44,000 and $0.1 million for the three and nine months ended October 31, 2017, respectively.

(5) Fair Value Measurements

The Company did not hold any assets or liabilities that are measured at fair value on a recurring basis as of October 31, 2018 or January 31, 2018.

(6) Income Taxes

The Company computed its interim provision using the actual year-to-date method. The Company’s income tax expense was $0.6 million and $2.1 million for the three and nine months ended October 31, 2018, respectively, and $0.5 million and $0.9 million for the three and nine months ended October 31, 2017, respectively.

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(7) Net Loss Per Share Attributable to Common Stockholders

The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders:

The potential shares of common stock that were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented because including them would have been antidilutive are as follows:

(8) Segments

The Company operates in one operating segment. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker, who is the chief executive officer, in deciding how to allocate resources and assessing performance. The Company’s chief operating decision maker allocates resources and assesses performance based upon discrete financial information at the consolidated level.

The following table summarizes the revenue by geographical region based on the shipping address of customers who have contracted to use the Company’s cloud-based application:

(9) Subsequent Events

Office Lease

In November 2018, the Company amended one of its operating lease agreements for extension of three years and additional 16,768 square feet of office space located in Minneapolis, Minnesota. Total incremental lease payments are approximately $5.0 million over a contractual term of eight years.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties as discussed in “Cautionary Note Regarding Forward-Looking Statements” included in this Quarterly Report on Form 10-Q. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in “Risk Factors” under Part II, Item 1A in this Quarterly Report on Form 10-Q. Our fiscal year ends January 31.

Overview

Anaplan is pioneering the category of Connected Planning, which allows organizations to transform their businesses by making better and faster decisions.

We believe Connected Planning is the next essential cloud category. It fundamentally transforms planning by connecting all of the people, data, and plans needed to accelerate business value and enable real-time planning and decision-making in rapidly changing business environments. Connected Planning accelerates business value by transforming the way organizations make decisions and placing the power of planning in the hands of every individual at every level within and between organizations.

Connected Planning represents a fundamental shift from the legacy approach to planning, which is typically confined to the finance department and uses a patchwork of outdated and disconnected tools and manual processes that are often overly complex, slow, inefficient, and static. Connected Planning enables dynamic, collaborative, and intelligent planning across all areas of an organization, including finance, sales, and supply chain, and other corporate functions such as marketing, human resources, and operations.

We sell subscriptions to our cloud-based planning platform primarily through our direct sales team. We also have strategic partnerships that provide us with a significant source of lead generation and implementation leverage. Our global partners, including global strategic consulting firms and global systems integrators, often promote our platform as part of the large-scale transformation projects they drive by identifying opportunities in which our platform can help companies maximize the effectiveness of their business processes. We also partner with leading regional consulting firms and implementation partners. These highly skilled regional partners not only provide subject-matter expertise in the implementation of specific use cases, but they also act as an extension of our direct sales force by identifying and referring opportunities to us. We and our partners create pre-packaged applications that are available on our App Hub marketplace to further accelerate the adoption and expansion of our platform.

We focus our selling efforts on executives of large enterprises, who are often making a strategic purchase of our platform with the potential for broad use throughout their organizations. With an emphasis on post-purchase support for customer success with the platform, we use a “land and expand” sales strategy to capitalize on this potential. Our platform is often initially adopted within a specific line of business, including in finance, sales, and supply chain, and other corporate functions such as marketing, human resources, and operations, for one or more planning use cases. Once customers see the benefits of our platform for their initial use cases, they often increase the number of users, add new use cases, and expand to additional lines of business, divisions, and geographies. We see a greenfield opportunity to help over 70 million knowledge workers around the world plan more efficiently using Anaplan.

We derive the substantial majority of our revenue from subscriptions for users on our platform. Our initial subscription term is typically two to three years, although some customers commit for shorter periods. We generally bill our customers annually in advance. We also offer professional services, including consulting, implementation, and training, but are increasingly leveraging our partners to provide these services. Subscription revenue increased from $38.2 million to $54.4 million in the three months ended October 31, 2017 and 2018, respectively, representing a period-over-period subscription revenue growth rate of 42%. Services revenue increased from $6.0 million to $7.6 million in the three months ended October 31, 2017 and 2018, respectively. Our subscription revenue as a percentage of total revenue increased from 86% to 88% in the three months ended October 31, 2017 and 2018, respectively. Our services revenue increased from $20.0 million to $22.5 million in the nine months ended October 31, 2017 and 2018, respectively, while subscription revenue increased from $102.0 million to $148.9 million during the same periods, representing a period-over-period subscription revenue growth rate of 46%. As a result of this strategy, our subscription revenue as a percentage of total revenue increased from 84% in the nine months ended October 31, 2017 to 87% in the nine months ended October 31, 2018.

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During the three months ended October 31, 2017 and 2018, our revenue was $44.2 million and $62.0 million, respectively, and during the nine months ended October 31, 2017 and 2018, our revenue was $122.0 million and $171.4 million, respectively. Approximately 42% and 44% of our revenue was generated from outside of the United States in the three months ended October 31, 2017 and 2018, respectively, and approximately 41% and 43% of our revenue was generated from outside of the United States in the nine months ended October 31, 2017 and 2018, respectively. Our net loss was $11.8 million and $27.7 million for the three and nine months ended October 31, 2017, respectively, and $38.0 million and $85.2 million for the three and nine months ended October 31, 2018, respectively.

We believe that our focus on customer success allows us to retain and expand the subscription revenue generated from our existing customers, and is an indicator of the long-term value of our customer relationships for Anaplan as a whole. We track our performance in this area by measuring our dollar-based net expansion rate, which compares our annual recurring revenue from the same set of customers across comparable periods. The dollar-based net expansion rate was 124% and 122% as of October 31, 2018 and January 31, 2018, respectively.

Our dollar-based net expansion rate equals the annual recurring revenue at the end of a period for a base set of customers from which we generated annual recurring revenue in the year prior to the date of calculation, divided by the annual recurring revenue one year prior to the date of the calculation for that same set of customers. Annual recurring revenue is calculated as subscription revenue already booked and in backlog that will be recorded over the next 12 months, assuming any contract expiring in those 12 months is renewed and continues on its existing terms and at its prevailing rate of utilization.

Factors Affecting Our Performance

We believe that our future performance will depend on many factors, including those described below. While these areas present significant opportunity, they also present risks that we must manage to achieve successful results. See the section titled “Risk Factors”. If we are unable to address these challenges, our business and operating results could be adversely affected.

Market adoption of our platform.    Even though we believe Connected Planning is a strategic imperative for enterprises in today’s rapidly changing business environment, it is at an early stage of adoption. Our long-term success will depend on widespread adoption of Connected Planning by enterprises for numerous planning applications with broad use of those applications within their organizations. While we believe that we are still in the early stages of penetrating our addressable market, we have benefited from rapid customer growth.

Customer First strategy.    We put the success of our customers at the center of our culture, strategy, and investments. We view our Customer First strategy as core to capturing our Connected Planning vision and driving the continued adoption and expansion in the use of our platform. By aligning our thought leadership, worldwide development and delivery capabilities, and local sales and service resources, our Customer First strategy drives exceptional value throughout our customers’ Connected Planning journeys. Our continued success depends in part on our ability to continue to put customers at the center of our strategy.

Expansion of existing customers.    We employ a “land and expand” approach, with many of our customers initially deploying our product for a specific use case and group of users, and, once they realize the benefits and wide applicability of our platform, subsequently renewing subscriptions and expanding the number of users or use cases within and across lines of business and geographies. As a result, we are able to generate a significant increase in revenue from the expanded use of our platform across the enterprise. Going forward we are focused on our large customers where the opportunity for expansion and need for our planning solutions are greatest. Our future revenue growth and our ability to achieve and maintain profitability is dependent upon our ability to maintain existing customer relationships and to continue to expand our customers’ use of our platform.

Scaling our sales team.    Our ability to achieve significant growth in revenue in the future will depend, in large part, upon the effectiveness of our sales efforts, both domestically and internationally. We have invested and intend to continue to invest aggressively in expanding our direct sales force, particularly in attracting and retaining sales personnel with experience selling to larger enterprises. A substantial portion of our sales force joined us over the last 12 months, and our ability to increase our revenue will depend on the new members of our sales force becoming fully productive. In the enterprise market, a customer’s decision to use our platform may be an enterprise-wide decision. These types of sales require us to provide greater levels of education regarding the use and benefits of our platform, which involves substantial time, effort, and costs. We anticipate that our headcount will continue to increase as a result of these investments.

International sales.    Our revenue generated outside of the United States during the three and nine months ended October 31, 2018, was approximately 44% and 43%, respectively, and the three and nine months ended October 31, 2017, was approximately 42% and 41%, respectively, of our total revenue. We believe global demand for our platform will continue to increase as organizations experience the benefits that our platform can provide to international enterprises with complex planning needs spanning multiple geographies. Accordingly, we believe there is significant opportunity to grow our international business. We have invested, and plan to continue to invest, ahead of this potential demand in personnel, marketing, and access to data center capacity to support our international growth.

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Partner ecosystem.    Our partner ecosystem extends our geographic coverage, accelerates the usage and adoption of our platform, and enables more efficient delivery of service solutions. We intend to augment and deepen our partnerships with global and regional partners, which include consulting firms, systems integrators, and implementation partners. We believe our partners’ scale and route to market can significantly contribute to our ability to penetrate our addressable market, extend our geographic coverage, and extend usage and adoption of our platform.

Product velocity.    We have invested and intend to continue to invest significantly in research and development in an effort to enhance and expand the functionality of our platform, to attract and retain development personnel, and to protect our market-leading technology advantage. We have a well-defined technology roadmap to introduce new features and functionality to our platform that we believe will improve our ability to generate revenue by broadening the appeal of our platform to potential new customers as well as increasing the opportunities for further expanding the use of our platform by existing customers. We are also investing to further enhance the user interface, functionality, and usability of our platform, including in machine learning and other artificial intelligence technologies, to further enhance the predictive capabilities of our platform. We will need to continue to focus on bringing cutting-edge technology to market in order to remain competitive.

Components of Results of Operations

Revenue

We offer subscriptions to our cloud-based planning platform. We derive our revenue primarily from subscription fees and, to a lesser degree, from professional services fees. Subscription revenue consists primarily of fees to provide our customers access to our cloud-based platform. Professional services revenue includes fees from assisting customers in implementing and optimizing the use of our cloud-based platform. These services include implementation, consulting, and training.

Subscription Revenue

Subscription revenue accounted for 88% and 87% during the three and nine months ended October 31, 2018, respectively, and 86% and 84% during the three and nine months ended October 31, 2017, respectively. Subscription revenue is driven primarily by the number of customers, the number of users at each customer, the price of user subscriptions, and renewal rates.

Subscription fees are recognized ratably as revenue over the contract term beginning on the date the platform is made available to the customer. Our new business subscriptions typically have a term of two to three years. We generally invoice our customers in annual installments at the beginning of each year within the subscription period. Amounts that have been invoiced are initially recorded as deferred revenue and are recognized ratably over the subscription period.

Most of our contracts are non-cancellable over the contract term. We had a remaining performance obligation, or backlog, in the amount of $381.1 million as of October 31, 2018, consisting of both billed and unbilled consideration.

Because we recognize revenue from subscription fees ratably over the term of the contract, changes in our contracting activity in the near term may not impact our reported revenue until future periods.

Professional Services Revenue

Professional services revenue is generally recognized as the services are rendered for time and material contracts, or on a proportional performance basis for fixed price contracts. The substantial majority of our professional service contracts are on a time and materials basis. Implementations generally take one to six months to complete depending upon the scope of engagement with the customer. Our professional services revenue fluctuates from quarter to quarter as a result of the achievement of payment milestones in our professional services arrangements, and the requirements, complexity, and timing of our customers’ implementation projects.

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Cost of Revenue

Cost of Subscription Revenue

Cost of subscription revenue primarily consists of costs related to hosting our service. Significant expenses include data center capacity costs, personnel-related costs directly associated with our cloud infrastructure, including total compensation, customer support, equipment depreciation, and amortization of internal-use software.

Cost of Professional Services Revenue

Cost of professional services revenue primarily consists of costs related to providing implementation and configuration services, optimization services and training services, personnel-related costs directly associated with our professional services and training departments, including salaries and bonuses, benefits, and stock-based compensation, the costs of contracted third-party vendors, and travel.

Professional services associated with the implementation and configuration of our subscription platform are performed directly by our services team, as well as by contracted third-party vendors. When third-party vendors invoice us for services performed for our customers, those fees are recognized as expense over the requisite service period.

Operating Expenses

Research and Development

Research and development expenses consist primarily of personnel-related costs for our development team, including salaries and bonuses, benefits, stock-based compensation expense, and allocated overhead costs. We have invested, and intend to continue to invest, in developing technology to support our growth. 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 incremental functionality, which is two years. We plan to increase our investment in research and development for the foreseeable future as we focus on further developing our platform and enhancing its use cases. However, we expect our research and development expenses to decrease as a percentage of our total revenue over time, although they may fluctuate as a percentage of our total revenue from period to period.

Sales and Marketing

Sales and marketing expenses consist primarily of personnel-related costs directly associated with our sales and marketing staff, including salaries and bonuses, benefits, commissions, and stock-based compensation. Other sales and marketing costs include promotional events to promote our brand, including our Anaplan Connected Planning Xperience (CPX) user conference, previously known as our Hub conferences, advertising, and allocated overhead. We plan to increase our investment in sales and marketing over the foreseeable future, primarily stemming from increased headcount in sales and marketing, and investment in brand- and product-marketing efforts. However, we expect our sales and marketing expenses to decrease as a percentage of our total revenue over time, although they may fluctuate as a percentage of our total revenue from period to period.

General and Administrative

General and administrative expenses consist of personnel-related costs associated with our executive, finance, legal, and human resources personnel, including salaries and bonuses, benefits, and stock-based compensation expense, professional fees for external legal, accounting and other consulting services, and allocated overhead costs. We expect to increase the size of our general and administrative function to support the growth of our business and to take advantage of the large opportunity in front of us. We expect to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a U.S. securities exchange and costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC. In addition, as a public company, we expect to incur increased expenses such as insurance, investor relations, and professional services. As a result, we expect the dollar amount of our general and administrative expenses to increase for the foreseeable future. However, we expect our general and administrative expenses to decrease as a percentage of our total revenue over time, although they may fluctuate from as a percentage of our total revenue from period to period.

Interest Income, Net

Interest income, net consists primarily of interest income earned on our cash and cash equivalents.

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Other Expense, Net

Other expense, net consists primarily of the effect of exchange rates on our foreign currency-denominated asset and liability balances.

Provision for Income Taxes

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

Results of Operations

The following tables set forth selected condensed consolidated statements of operations data for each of the periods indicated:

Three and Nine Months Ended October 31, 2018 and 2017

Revenue

Total revenue was $62.0 million for the three months ended October 31, 2018 compared to $44.2 million for the three months ended October 31, 2017, an increase of $17.8 million, or 40%. Total revenue was $171.4 million for the nine months ended October 31, 2018 compared to $122.0 million for the nine months ended October 31, 2017, an increase of $49.4 million, or 40%.

Subscription revenue was $54.4 million, or 88% of total revenue, for the three months ended October 31, 2018, compared to $38.2 million, or 86% of total revenue, for the three months ended October 31, 2017. The increase of $16.2 million, or 42%, in subscription revenue was due to additional sales to existing customers, which accounted for approximately 58% of the increase, and a significant increase in sales to new customers, which accounted for approximately 42% of the increase.

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Subscription revenue was $148.9 million, or 87% of total revenue, for the nine months ended October 31, 2018, compared to $102.0 million, or 84% of total revenue, for the nine months ended October 31, 2017. The increase of $46.9 million, or 46%, in subscription revenue was due to additional sales to existing customers, which accounted for approximately 72% of the increase, and a significant increase in sales to new customers, which accounted for approximately 28% of the increase.

Professional services revenue was $7.6 million for the three months ended October 31, 2018 compared to $6.0 million for the three months ended October 31, 2017. The increase of $1.7 million, or 28%, in professional services revenue was primarily due to the higher revenue generated from implementations performed by partners in the three months ended October 31, 2018. This also represents a continued decline in professional services revenue as a percentage of total revenue from 14% to 12% due to a growing partner network and our strategy of shifting professional services revenue to our partners.

Professional services revenue was $22.5 million for the nine months ended October 31, 2018 compared to $20.0 million for the nine months ended October 31, 2017. The increase of $2.5 million, or 12%, in professional services revenue was primarily due to the higher revenue generated from partners and utilization of our professional services employees in the nine months ended October 31, 2018. This also represents a continued decline in professional services revenue as a percentage of total revenue from 16% to 14% due to a growing partner network and our strategy of shifting professional services revenue to our partners.

Cost of Revenue

Total cost of revenue was $17.2 million for the three months ended October 31, 2018 compared to $15.2 million for the three months ended October 31, 2017, an increase of $2.0 million, or 13%. Total cost of revenue was $47.2 million for the nine months ended October 31, 2018 compared to $39.4 million for the nine months ended October 31, 2017, an increase of $7.8 million, or 20%.

Cost of subscription revenue was $9.3 million for the three months ended October 31, 2018 compared to $5.7 million for the three months ended October 31, 2017, an increase of $3.7 million, or 65%. The increase in cost of subscription revenue was primarily due to an increase in salary and bonuses, and benefits costs related to an increase in headcount of $1.8 million, including stock-based compensation, an increase in hosting fees of $0.4 million due primarily to additional servers, an increase in software licenses to produce additional functionality of our platform of $0.4 million, an increase in allocated facilities and IT of $0.4 million due to our growth, and an increase in amortization of capitalized software development costs and intangible assets of $0.3 million.

Cost of subscription revenue was $25.9 million for the nine months ended October 31, 2018 compared to $12.4 million for the nine months ended October 31, 2017, an increase of $13.5 million, or 108%. The increase in cost of subscription revenue was primarily due to an increase in salary and bonuses, and benefits costs related to an increase in headcount of $6.1 million, including stock-based compensation, an increase in allocated facilities and IT of $1.4 million due to additional leases signed in the nine months ended October 31, 2018, an increase in amortization of capitalized software development costs and intangible assets of $1.2 million, an increase in software licenses to produce additional functionality of our platform of $1.2 million, an increase in hosting fees of $1.0 million due primarily to additional servers, and an increase in depreciation of our servers placed in service in the nine months ended October 31, 2018 of $1.0 million.

Cost of professional services revenue was $7.9 million for the three months ended October 31, 2018 compared to $9.6 million for the three months ended October 31, 2017, a decrease of $1.7 million, or 18%. The decrease in cost of professional services revenue was primarily due to our strategy of shifting professional services to our partners.

Cost of professional services revenue was $21.3 million for the nine months ended October 31, 2018 compared to $27.0 million for the nine months ended October 31, 2017, a decrease of $5.7 million, or 21%. The decrease in cost of professional services revenue was primarily due to our strategy of shifting professional services to our partners.

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Gross Profit and Gross Margin

Gross profit was $44.8 million for the three months ended October 31, 2018 compared to $28.9 million for the three months ended October 31, 2017, an increase of $15.8 million, or 55%. Gross profit was $124.2 million for the nine months ended October 31, 2018 compared to $82.6 million for the nine months ended October 31, 2017, an increase of $41.6 million, or 50%. The increase in gross profit for both periods was the result of the increases in our subscription revenue due primarily to additional sales to existing customers and the addition of new customers in the three and nine months ended October 31, 2018.

Gross margin was 72% for the three months ended October 31, 2018 compared to 66% for the three months ended October 31, 2017. Gross margin was 72% for the nine months ended October 31, 2018 compared to 68% for the nine months ended October 31, 2017. The increase for both periods was due primarily to the increase in subscription revenue as a percentage of total revenue, which generates a significantly higher gross margin than our professional services revenue, and increase in our professional services gross margins. Beginning in three months ended January 31, 2018, we redeployed certain employees from our Customer Support to Sales and Marketing as part of our overall strategy to transition more services to partners. Our gross margins can fluctuate from quarter to quarter as a result of the achievement of payment milestones in our professional services arrangements, and the requirements, complexity, and timing of our customers’ implementation projects.

Operating Expenses

Research and Development

Research and development expenses were $11.7 million for the three months ended October 31, 2018 compared to $7.6 million for the three months ended October 31, 2017, an increase of $4.1 million, or 54%. The increase was primarily due to an increase in salary and bonuses, and benefits costs related to an increase in headcount of $3.3 million, including an increase in stock-based compensation of $0.9 million mainly related to our RSUs being recognized upon the IPO, and an increase in allocated facilities and IT of $0.6 million due to our growth.

Research and development expenses were $35.5 million for the nine months ended October 31, 2018 compared to $22.8 million for the nine months ended October 31, 2017, an increase of $12.7 million, or 56%. The increase was primarily due to an increase in salary and bonuses, and benefits costs related to an increase in headcount of $7.5 million, including an increase in stock-based compensation of $1.1 million mainly related to our RSUs being recognized upon the IPO, an increase in consulting and contractor spend of $2.1 million to support our anticipated growth, and an increase in allocated facilities and IT of $1.3 million due to additional leases signed in the nine months ended October 31, 2018.

Sales and Marketing

Sales and marketing expenses were $45.7 million for the three months ended October 31, 2018 compared to $24.2 million for the three months ended October 31, 2017, an increase of $21.5 million, or 89%. The increase was primarily due to an increase in salary and bonuses, and benefits costs related to an increase in headcount of $15.2 million, including an increase in stock-based compensation of $3.1 million mainly related to our RSUs being recognized upon the IPO, an increase in commission expenses of $2.1 million, and an increase in allocated facilities and IT of $1.7 million due to our growth.

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Sales and marketing expenses were $123.6 million for the nine months ended October 31, 2018 compared to $66.5 million for the nine months ended October 31, 2017, an increase of $57.1 million, or 86%. The increase was primarily due to an increase in salary and bonuses, and benefits costs related to an increase in headcount of $37.4 million, including an increase in stock-based compensation of $3.5 million mainly related to our RSUs being recognized upon the IPO, an increase in allocated facilities and IT of $6.0 million due primarily to new facility leases in the nine months ended October 31, 2018, an increase in commission expenses of $4.6 million, and an increase in travel and entertainment related expenses of $2.5 million.

General and Administrative

General and administrative expenses were $24.5 million for the three months ended October 31, 2018 compared to $7.4 million for the three months ended October 31, 2017, an increase of $17.1 million, or 230%. The increase was primarily due to an increase in salary and bonuses, and benefits costs related to an increase in headcount of $15.7 million, including an increase in stock-based compensation of $12.5 million mainly related to our RSUs being recognized upon the IPO, an increase in consulting and contractors spend of $0.5 million, and an increase in legal expense of $0.4 million.

General and administrative expenses were $47.3 million for the nine months ended October 31, 2018 compared to $19.4 million for the nine months ended October 31, 2017, an increase of $27.9 million, or 143%. The increase was primarily due to an increase in salary and bonuses, and benefits costs related to an increase in headcount of $23.3 million, including an increase in stock-based compensation of $13.5 million mainly related to our RSUs being recognized upon the IPO, and an increase in consulting and contractor spend of $1.7 million.

Other Income and Expenses, Net

Interest Income, net

Interest income, net increased by $0.3 million, or 947%, in the three months ended October 31, 2018. Interest income, net increased by $0.4 million, or 485%, in the nine months ended October 31, 2018. The increase in interest income, net was primarily due to higher average cash and cash equivalents balances during the three and nine months ended October 31, 2018 compared to the three and nine months ended October 31, 2017.

Other Expenses, net

Other expenses, net was a loss of $0.6 million in the three months ended October 31, 2018 compared to a loss of $1.0 million in the three months ended October 31, 2017, a decrease of $0.4 million, or 43%. Other expense, net was a loss of $1.2 million in the nine months ended October 31, 2018 compared to a loss of $0.8 million in the nine months ended October 31, 2017, an increase of $0.4 million, or 64%. The change was primarily due to foreign currencies decreasing in value to the U.S. dollar and the related remeasurements during the periods, primarily related to our U.K. operations.

Provision for Income Taxes

The provision for income taxes was $0.6 million for the three months ended October 31, 2018 compared to $0.5 million for the three months ended October 31, 2017, an increase of $0.1 million, or 20%. The provision for income taxes was $2.1 million for the nine months ended October 31, 2018 compared to $0.9 million for the nine months ended October 31, 2017, an increase of $1.2 million, or 125%. The increase in provision for income taxes was primarily related to income generated from statutory intercompany cost plus arrangements in certain European and Asian countries.

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Liquidity and Capital Resources

As of October 31, 2018, our principal sources of liquidity were cash and cash equivalents totaling $374.2 million, which were held for working capital purposes. Our cash equivalents are comprised primarily of bank deposits and money market funds.

In October 2018, we completed our IPO and received aggregate net proceeds of $281.8 million, after underwriting discounts and commissions, and before deducting offering costs of $6.5 million. We also received aggregate proceeds of $20.0 million related to the concurrent private placement, and did not pay any underwriting discounts or commissions with respect to the shares that were sold in this private placement.

We believe our existing cash and cash equivalents will be sufficient to meet our projected operating requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our pace of growth, subscription renewal activity, the timing and extent of spend to support research and development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced platform offerings, and the continuing market acceptance of the platform. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, and intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results, and financial condition would be adversely affected.

All of our restricted stock units, or RSUs, vest upon the satisfaction of a service-based vesting condition. The first vesting event for our RSUs will occur no later than April 15, 2019, by which time approximately 2.8 million shares underlying RSUs held by our officers and employees will have vested and settled into shares of our common stock. We currently expect that the average withholding tax rate for such individuals will be approximately 50%. We have established a policy to require individuals to sell-to-cover to satisfy our tax withholding obligations for such individuals due at settlement, subject to the discretion of our board of directors; except for certain contractual obligations that require settlement by withhold to cover of vested shares. If we were to require individuals to sell-to-cover, approximately 50%, or approximately 1.4 million, of the vested shares would need to be sold on the settlement date with the actual percentage dependent upon the price of our common stock received at settlement.

Loan and Credit Facility Agreements

In April 2018, we entered into a syndicated loan agreement with Wells Fargo to provide a secured revolving credit facility that allows us to borrow up to $40.0 million, subject to an accounts receivable borrowing base, for general corporate purposes through April 2020. Any advances drawn on the credit facility will incur interest at a rate equal to (i) the highest of (A) the prime rate, (B) the federal funds rate plus 0.5% and (C) one-month LIBOR plus 1% less (ii) 0.5%. Interest is payable monthly in arrears with the principal and any accrued and unpaid interest due on April 30, 2020. There was a $6.0 million reduction of the available credit facility in April 2018 related to letters of credit for certain of our facility leases, which resulted in the simultaneous release of $6.0 million in restricted cash.

We granted Wells Fargo a first priority lien in our accounts receivable, all of the issued shares of capital stock and equity interests of our subsidiaries, and other corporate assets and agreed not to pledge our intellectual property to other parties. The loan agreement includes affirmative and negative covenants, including financial covenants requiring: (i) maintenance at all times of minimum tangible net worth, defined as assets, excluding intangible assets, less liabilities of not less than $1; and (ii) maintenance at all times of a ratio of (A) the aggregate of our cash, cash equivalents and net accounts receivable to (B) total current liabilities less current deferred revenue plus revolving credit loans drawn under the loan agreement of not less than $1.50 to $1.00. As of October 31, 2018, we were in compliance with all covenants associated with the credit facility.

Cash Flows

The following table summarizes our cash flows for the periods presented:

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Operating Activities

Net cash used in operating activities of $29.9 million for the nine months ended October 31, 2018 was primarily due to a net loss of $85.2 million, partially offset by non-cash charges for stock-based compensation of $23.6 million, depreciation and amortization of $8.9 million, amortization of deferred commissions of $8.1 million, and loss on disposal of property and equipment of $0.5 million. Changes in working capital were favorable to cash flows from operations by $14.1 million primarily due to an increase in the deferred revenue balance of $21.7 million due to increases in sales, an increase in accounts payable and accrued expenses of $7.5 million due to our growth, a decrease in accounts receivable, net of $3.2 million due to increased customer collections, a decrease in prepaid expenses and other current assets of $1.8 million, and an increase in other noncurrent liabilities of $0.9 million due to our growth, partially offset by an increase in deferred commissions of $21.4 million related to increases in our sales.

Net cash used in operating activities of $18.0 million for the nine months ended October 31, 2017 was primarily due to a net loss of $27.7 million, partially offset by non-cash charges for stock-based compensation of $5.3 million, amortization of deferred commissions of $5.3 million, and depreciation and amortization of $5.2 million. Changes in working capital were unfavorable to cash flows from operations by $6.0 million primarily due to increases in deferred commissions of $10.1 million and in accounts receivable, net of $6.0 million due to increases in sales, and increases in prepaid expenses and other current assets of $2.6 million and in other noncurrent assets of $1.3 million due to our growth, partially offset by an increase in deferred revenue of $15.0 million due to increases in sales.

Investing Activities

Net cash used in investing activities for the nine months ended October 31, 2018 of $18.9 million was related to purchases of property and equipment of $13.5 million related to our growth and the capitalization of internal-use software of $5.4 million as we expanded the platform and increased our development efforts.