Summary of Significant Accounting Policies
|3 Months Ended|
Apr. 30, 2021
|Accounting Policies [Abstract]|
|Summary of Significant Accounting Policies||
2. Summary of Significant Accounting Policies
The Company’s significant accounting policies are discussed in Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements in the Final Prospectus. There have been no significant changes to these policies during the three months ended April 30, 2021.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable regulations of the SEC regarding interim financial reporting, and include the financial statements of UiPath, Inc. and its wholly owned subsidiaries in which we hold a controlling financial interest or are the primary beneficiary. Intercompany transactions and accounts have been eliminated in consolidation.
As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for the fair statement of the Company’s financial information. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending January 31, 2022 or for any other interim period or for any other future year. The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the fiscal year ended January 31, 2021 contained in the Final Prospectus.
Our fiscal year ends on January 31. References to fiscal year 2022, for example, refer to the fiscal year ending January 31, 2022.
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 amounts of assets and liabilities at the date of the condensed consolidated financial statements and the amounts of revenue and expenses reported during the period. We evaluate estimates based on historical and anticipated results, trends, and various other assumptions. Such estimates include, but are not limited to, revenue recognition, estimated expected benefit period for deferred contract acquisition costs, allowance for doubtful accounts, fair value of financial assets and liabilities including accounting and fair value of derivatives, fair value of acquired assets and assumed liabilities, useful lives of long-lived assets, capitalized software development costs, carrying value of operating lease right-of-use (“ROU”) assets, incremental borrowing rates for operating leases, amount of stock-based compensation expense including determination of fair value of common stock prior to the IPO, timing and amount of contingencies, and valuation allowance for deferred income taxes. Actual results could differ from these estimates and assumptions.
The functional currency of our non-U.S. subsidiaries is the local currency. Asset and liability balances denominated in non-U.S. dollar currencies are translated into U.S. dollars using period-end exchange rates, while revenue and expenses are translated using the average monthly exchange rates. Differences are included in stockholders’ equity (deficit) as a component of accumulated other comprehensive income (loss). Financial assets and liabilities denominated in currencies other than the functional currency are recorded at the exchange rate at the time of the transaction and subsequent gains and losses related to changes in the foreign currency are included in other expense, net in the condensed consolidated statements of operations. For the three months ended April 30, 2021 and 2020, we recognized transaction losses of $2.9 million and $7.3 million, respectively.
Derivative Financial Instruments
Since fiscal year 2021, we use derivative financial instruments, such as foreign currency forward contracts, to manage foreign currency exposures. We account for our derivative financial instruments as either assets or liabilities and carry them at fair value. These foreign currency contracts are not designated and do not qualify as hedging instruments, as defined by Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging.
As of April 30, 2021 and January 31, 2021, derivative financial instruments with a fair value totaling $0.2 million and $0.6 million, respectively, were recorded in accrued expenses and other current liabilities in the condensed consolidated balance sheets. We record changes in the fair value of these derivatives as a component of other expense, net in the condensed consolidated statements of operations. The notional principal of foreign currency forward contracts outstanding was $123.0 million and $138.6 million as of April 30, 2021 and January 31, 2021, respectively. The net gain associated with foreign currency forward contracts was $0.6 million and none for the three months ended April 30, 2021 and 2020, respectively.
Concentration of Risks
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents, marketable securities and accounts receivable. We maintain our cash balance at financial institutions that management believes are high-credit, quality financial institutions, where deposits, at times, exceed the Federal Deposit Insurance Corporation (“FDIC”) limits. As of April 30, 2021 and January 31, 2021, 99% and 92%, respectively, of our cash, cash equivalents, and restricted cash were concentrated in the United States, European Union (“EU”) countries, and Japan.
We extend differing levels of credit to customers based on creditworthiness, do not require collateral deposits, and when necessary maintain reserves for potential credit losses based upon the expected collectability of accounts receivable. We manage credit risk related to our customers by performing periodic evaluations of credit worthiness and applying other credit risk monitoring procedures.
Significant customers are those which represent 10% or more of our total revenue for the period or accounts receivable at the balance sheet date. For the three months ended April 30, 2021 and 2020, no single customer accounted for 10% or more of our total revenue. As of April 30, 2021 and January 31, 2021, no single customer accounted for 10% or more of our accounts receivable.
We derive our revenue from the sale of licenses for use of our proprietary software, maintenance and support for licenses, right to access certain software products that we host (i.e., software as a service (“SaaS”)), and professional services. In accordance with ASC 606, Revenue from Contracts with Customers, revenue is recognized when or as a customer obtains control of the promised goods and services. The amount of revenue recognized reflects the consideration to which we expect to be entitled in exchange for those goods or services. To achieve the core principle of this ASC 606, we apply the following five steps:
Our significant performance obligations and our application of ASC 606 to each of those performance obligations are discussed in further detail below.
We primarily sell term licenses, including through our hybrid offerings, which provide customers the right to use software for a specified period of time, and perpetual licenses, which provide customers the right to use software for an indefinite period of time. For both types of licenses, revenue is recognized at the point in time at which the customer is able to use and benefit from the software, which is generally upon delivery to the customer or upon commencement of the renewal term. For licenses revenue, we generally invoice when the license(s) are provided.
Maintenance and Support
We generate maintenance and support revenue through technical support and the provision of unspecified updates and upgrades on a when-and-if-available basis for both term and perpetual license arrangements. Maintenance and support for perpetual licenses is renewable, generally on an annual basis, at the option of the customer. Maintenance and support represents a stand-ready obligation for which revenue is recognized ratably over the term of the arrangement. For maintenance and support services, we generally invoice when the associated license(s) are provided and upon renewals. Maintenance and support also includes revenue from the SaaS component of our hybrid offerings and revenue from SaaS arrangements, as such revenue was not material for the three months ended April 30, 2021 and 2020. The SaaS component of our hybrid offerings and our SaaS arrangements are stand-ready obligations to provide access to our products. Revenues from the SaaS component of our hybrid offerings and from SaaS arrangements are recognized on a ratable basis over the contractual period of the arrangement, as control of the services is transferred to the customer.
Services and Other
Revenue from services and other consists of fees associated with professional services for process automation, customer education and training services. A substantial majority of our professional services contracts are recognized on a time and materials basis, and the related revenue is recognized as the services are rendered. For professional services, we invoice as the work is incurred or in advance.
Contracts with customers may include material rights, which are also performance obligations. Material rights primarily arise when the contract gives the customer the right to renew or to receive products or services at a greater discount in the future. The revenue associated with material rights is recognized at the earlier of the time of exercise or expiration of the customer’s rights.
Contracts with Multiple Performance Obligations
Most contracts with customers contain multiple performance obligations. The transaction price is allocated to the separate performance obligations on a relative stand-alone selling price (“SSP”) basis. We determine SSP for performance obligations using observable inputs, such as standalone sales, historical contract pricing, and industry pricing data available to the public. SSP reflects the amount we would charge for that performance obligation if it were sold separately in a standalone sale, and the price we would sell to similar customers in similar circumstances.
Other Policies and Judgments
Payment terms and conditions vary by contract type, although terms generally require payment within 30 to 60 days of the invoice date. In certain arrangements, we receive payment from a customer either before or after the performance obligation has been satisfied; however, our contracts do not contain a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing. We applied the practical expedient in ASC 606 and did not evaluate payment terms of one year or less for the existence of a significant financing component. Revenue is recorded net of sales tax. We generally do not offer a right of refund in our contracts.
Contract assets consist of unbilled accounts receivable, which occur when a right to consideration for our performance under the customer contract occurs before invoicing the customer. Accounts receivable are recorded when the customer has been billed and the right to consideration is unconditional.
Contract liabilities consist of deferred revenue. Revenue is deferred when we invoice in advance of performance under a contract.
Deferred Contract Acquisition Costs
We defer sales commissions that are incremental to the acquisition of customer contracts. These costs are recorded as deferred contract acquisition costs on the condensed consolidated balance sheets. We determine whether costs should be deferred based on the terms of our sales compensation plans and based on whether the sales commissions are incremental to a customer contract and would not have occurred absent the customer contract.
During fiscal years 2020 and 2021, sales commissions for renewals of subscription contracts were commensurate with the sales commissions paid for the acquisition of the initial subscription contract because there was minimal to no difference in sales commission rates between new and renewal contracts. Sales commissions paid upon the initial acquisition of a contract were therefore amortized over the contract term, while sales commissions paid related to renewal contracts were amortized over the renewal term. In the case of costs to obtain a contract with a customer when the amortization period would have been one year or less, we applied the practical expedient ASC 340-40, Other Assets, Deferred Costs, which allows for expensing of these costs as incurred.
At the end of fiscal year 2021, we approved a new sales incentive plan for fiscal year 2022 under which sales commissions for renewals of subscription contracts are not commensurate with the commissions paid on initial contracts. Under the new sales incentive plan, we defer incremental commissions related to initial contracts and amortize such costs over the expected period of benefit, which we determined to be five years.
Amortization is recognized consistently with the pattern of revenue recognition of the respective performance obligation to which the contract costs relate. Amortization of deferred contract acquisition costs is included in sales and marketing expense in the condensed consolidated statements of operations.
We periodically review deferred contract acquisition costs 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 three months ended April 30, 2021 and 2020.
Cost of Revenue
Cost of licenses revenue consists of all direct costs to deliver our licenses to customers, amortization of software development costs, direct costs related to third party software resales, and amortization of acquired developed technology.
Maintenance and Support
Cost of maintenance and support revenue primarily consists of personnel-related expenses of our customer support and technical support teams, including salaries and bonuses, stock-based compensation expense, and employee benefit costs. Cost of maintenance and support revenue also includes third-party consulting services, hosting costs related to our hybrid and cloud-based arrangements, amortization of acquired developed technology and capitalized software development costs related to cloud products, and allocated overhead. Overhead is allocated to cost of maintenance and support revenue based on applicable headcount. We recognize these expenses as they are incurred.
Services and Other
Cost of services and other revenue primarily consists of personnel-related expenses of our professional services team, including salaries and bonuses, stock-based compensation expense, and employee benefit costs. Cost of services and other revenue also includes third-party consulting services and allocated overhead. Overhead is allocated to cost of services and other revenue based on applicable headcount. We recognize these expenses as they are incurred.
We recognize stock-based compensation expense in accordance with the provisions of ASC 718, Compensation - Stock Compensation. ASC 718 requires the measurement and recognition of compensation expense for all stock-based awards made to employees, directors, and non-employees based on the grant date fair value of the awards. The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model. The fair value of each restricted stock unit (“RSU”) and restricted stock award (“RSA”) is estimated based on the fair value of the Company’s Class A common stock on the grant date. Prior to the IPO, the Company determined the fair value of its Class A common stock for financial reporting as of each grant date based on numerous objective and subjective factors and management’s judgement. Subsequent to the IPO, the Company determines the fair value using the market closing price of its Class A common stock on the date of grant. Stock-based compensation expense is included in cost of revenue and operating expenses within our condensed consolidated statements of operations based on the expense classification of the individual earning the award. The fair value of awards with only service-based vesting conditions is recognized as expense over the requisite service period on a straight-line basis. The fair value of awards that contain both service-based and performance-based vesting conditions, such as RSUs that were granted under the UiPath, Inc. 2018 Stock Plan (the “2018 Plan”) before our IPO, are recognized as expense using the accelerated attribution method once it is probable that the performance condition will be met.
Operating segments are defined as components of an entity for which discrete financial information is available and is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in making decisions regarding resource allocation and performance assessment. The Company’s CODM is its Chief Executive Officer. The Company has determined it has one operating and reportable segment as the CODM reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.
We capitalize costs incurred to implement and develop internal-use and cloud software pursuant to ASC 350-40, Internal Use Software.
Costs incurred to implement a cloud computing arrangement that is a service contract are capitalized in our condensed consolidated financial statements in the same manner as other service costs and assets related to service contracts. These capitalized costs exclude training costs, project management costs, and data migration costs. Capitalized implementation costs are amortized on a straight-line basis over the terms of the associated hosting arrangements and are recorded under operating expenses in the same line item on the condensed consolidated statements of operations as the expense for fees for the associated hosting arrangement. Capitalized software implementation costs were $2.6 million and $2.6 million as of April 30, 2021 and January 31, 2021, respectively, and are recorded in other assets, non-current on our condensed consolidated balance sheets. Related amortization expense was $0.2 million and $0.1 million for the three months ended April 30, 2021 and 2020, respectively.
Costs incurred in the development phase of cloud offerings are capitalized and amortized on a straight-line basis over the product’s estimated useful life of five years and are included in cost of maintenance and support revenue on the condensed consolidated statements of operations. Capitalized costs include salaries, benefits, and stock-based compensation charges for employees that are directly involved in developing our cloud-based products. These capitalized costs are included in other assets, non-current on the condensed consolidated balance sheets and were $6.4 million and $4.4 million as of April 30, 2021 and January 31, 2021, respectively. Related amortization expense was $0.2 million and immaterial for the three months ended April 30, 2021 and 2020, respectively.
Software Development Costs
We account for costs incurred to develop software to be licensed in accordance with ASC 985-20, Costs of Software to be Sold, Leased or Marketed. ASC 985-20 requires all costs incurred to establish technological feasibility to be expensed as they are incurred. Technological feasibility is established when the working model is complete. Costs incurred subsequent to establishing technological feasibility are capitalized until the product is available for general release to customers, at which point they are amortized on a product by product basis. Capitalized costs are included in other assets, non-current on the condensed consolidated balance sheets. These costs are amortized on a straight-line basis over the software’s estimated useful life of five years, and are included in cost of licenses revenue in the condensed consolidated statements of operations. Management evaluates the remaining useful life 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. Capitalized software development costs were $3.4 million and $2.9 million as of April 30, 2021 and January 31, 2021, respectively. Related amortization expense was $0.1 million and $0.1 million for the three months ended April 30, 2021 and 2020, respectively.
Recently Adopted Accounting Pronouncements
As an “emerging growth company,” the Jumpstart Our Business Startups Act (“JOBS Act”) allows us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We have elected to use this extended transition period under the JOBS Act.
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, Debt—Debt with “Conversion and Other Options (Subtopic 470-20) and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). The ASU simplifies accounting for convertible instruments by removing certain separation models required under current U.S. GAAP. The ASU also removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it revises the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share for convertible instruments by using the if-converted method. We early adopted this guidance on a retrospective basis effective as of February 1, 2021. The guidance did not have a material impact on our condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. The ASU simplifies the accounting for income taxes by removing certain exceptions associated with (i) intraperiod tax allocations, (ii) recognition of deferred tax liability for equity method investments of foreign subsidiaries, and (iii) the calculation of income taxes in an interim period when in a loss position within the framework of ASC 740 and clarifies and amends existing guidance to improve consistent application. The ASU will be effective for us beginning February 1, 2022, and for interim periods in fiscal years beginning February 1, 2023. We are currently evaluating the impact of this pronouncement on our condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments to amend the current accounting guidance which requires the measurement of all expected losses to be based on historical experience, current conditions and reasonable and supportable forecasts. For trade receivables, contract assets, and other financial instruments, we will be required to use a forward-looking expected loss model that reflects probable losses rather than the incurred loss model for recognizing credit losses. The ASU will be effective for us beginning February 1, 2023. Early adoption is permitted. We are currently evaluating the impact of this pronouncement on our condensed consolidated financial statements.
The entire disclosure for all significant accounting policies of the reporting entity.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef