Warrants to Purchase Shares of Common Stock

9 Months Ended

Oct. 31, 2024

Other Liabilities Disclosure [Abstract]

Warrants to Purchase Shares of Common Stock

Note 10. Warrants to Purchase Shares of Common Stock

In connection with the issuance of the 2029 Notes (discussed Note 9. Debt), we issued to Silver Lake Warrants to acquire up to 7.5 million shares of Class A Common Stock, exercisable for a period of approximately seven years from the Initial Closing Date, which are comprised of (i) Warrants to purchase up to 2.5 million shares of Class A Common Stock, exercisable at $20.00 per share, (ii) Warrants to purchase up to 2.5 million shares of Class A Common Stock, exercisable at $22.00 per share, and (iii) Warrants to purchase up to 2.5 million shares of Class A Common Stock, exercisable at $24.00 per share. In addition, Silver Lake can elect to exercise the Warrants on a net-exercise basis. In the event of a "Make-Whole Fundamental Change" (as defined in the Form of Warrant, which has a similar definition as in the Convertible Notes Indenture, described above in Note 9. Debt), the number of shares issuable by Zuora upon exercise of the Warrants may be increased, and the exercise price for the Warrants adjusted. Immediately prior to the Effective Time, each Warrant that is outstanding and unexercised immediately prior to the Effective Time will cease to represent a warrant exercisable for shares of our Common Stock, and the holder thereof will have the right to receive, upon exercise of the Warrant, the same amount of cash as it would have been entitled to receive pursuant to the terms of the applicable Warrant Agreement (as defined in the Proxy Statement) if such holder had, immediately after the Effective Time, exercised such Warrant for cash. Because the Per Share Price is less than the exercise price of the Warrants, no payments will be made in respect of the Warrants to holders thereof in the Proposed Merger, and the Warrants will be canceled. As of October 31, 2024, all 7.5 million Warrants were outstanding.

On the Initial Closing Date, we classified a portion of the Warrants as a current liability due to certain settlement provisions in the Warrants. Under certain make-whole fundamental change scenarios, we would be required to, at our option, either (i) obtain shareholder approval prior to issuing 20% or more of our outstanding common stock or (ii) pay cash in lieu of delivering any shares at or above such 20% threshold. As a result, we concluded that approximately 2.8 million Warrants valued at $12.0 million as of the Initial Closing Date did not qualify for equity classification under ASC 815-40, pursuant to our sequencing policy. As a result of the issuance of the Additional Notes, we reassessed the classification of the Warrants and concluded that no Warrants qualified for equity classification under ASC 815-40. Accordingly, we reclassified 4.7 million Warrants valued at $7.7 million from equity to liability as of the Subsequent Closing Date. On the Stockholder Approval Date, our stockholders approved the issuance of the maximum number of shares of Class A Common Stock upon exercise of the Warrants and therefore there is no longer a potential requirement to pay cash in lieu of delivering any shares at or above the 20% threshold. On the Stockholder Approval Date, we reassessed the classification of the Warrants and concluded that all Warrants fully qualified for a scope exception from derivative accounting as of the Stockholder Approval Date. Accordingly, we reclassified the Warrants valued at $21.4 million as of the Stockholder Approval Date to equity. We will reassess the classification of the Warrant liability in future reporting periods to determine if any change is required.

The liability-classified warrants' fair value was measured using a combination of Black-Scholes option pricing and Monte Carlo Simulation models that take into consideration probability factors of the various outcomes related to the exercise terms of the warrants using the following inputs:


	June 27, 20241			January 31, 2024
Fair value of common stock	$	9.62		$	9.14
Exercise price	$20.00 - $24.00			$20.00 - $24.00
Expected volatility2	55.0		%	41.8		%
Expected term (in years)	4.4			5.2
Risk-free interest rate	4.2		%	3.9		%
Expected dividend yield	—			—

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(1) On the Stockholder Approval Date of June 27, 2024, the warrant liability was reclassified to equity.

(2) During the quarter ended April 30, 2024, we changed our approach for estimating our stock price volatility to use only Zuora's historical stock price trading data. Zuora now has sufficient historical trading data to fair value its financial instruments and we believe it better reflects the expected future trading volatility of the Company's outstanding common stock. In previous periods, we used an average volatility based on historical trading data of Zuora and a group of similar publicly traded companies.

We recognized losses on the revaluation of the liability-classified Warrants, summarized in the table below (in thousands), which are included in Change in fair value of debt derivative and warrant liabilities in the accompanying unaudited condensed consolidated statements of comprehensive loss. Refer to Note 4. Fair Value Measurements for the fair value of the liability-classified Warrants.


	Three Months Ended October 31,			Nine Months Ended October 31,
	2024	2023		2024		2023
Gain (loss) on change in fair value of warrant liability	N/A	$	6,710	$	(9,369)	$	1,954

ZUORA INC 10-Q