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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q/A

Amendment No. 1

 

 

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 2015

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-37346

 

 

APIGEE CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware		20-1367539
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

10 S. Almaden Blvd., 16^th Floor

San Jose, California 95113

(Address of principal executive offices, including zip code)

(408) 343-7300

(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  x

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

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

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		x  (do not check if a smaller reporting company)		Smaller reporting company		¨

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

As of June 1, 2015, the registrant had 29,359,954 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

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EXPLANATORY NOTE

Apigee Corporation is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2015 as filed with the Securities and Exchange Commission on June 11, 2015, to correct an administrative error in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” While the Company correctly stated gross billings for the nine months ended April 30, 2015 as $60,094 thousand in the reconciliation of non-GAAP measures in another location in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the reconciliation of non-GAAP measures attached to its earnings press release as filed with the Securities and Exchange Commission as Exhibit 99.1 to Form 8-K on June 9, 2015, the Company incorrectly stated the gross billings for the nine months ended April 30, 2015 as $69.4 million and as $69,368 thousand and as a result also incorrectly stated its gross billings growth rate for the nine months ended April 30, 2015 as 66%.

Specifically, page 20 of the initial filing included the following sentence: “Our gross billings were $22.5 million and $18.1 million in the three months ended April 30, 2015 and 2014, respectively, representing a growth rate of 24% and $69.4 million and $41.8 million in the nine months ended April 30, 2015 and 2014, respectively, representing a growth rate of 66%.” The sentence has been amended to state the following: “Our gross billings were $22.5 million and $18.1 million in the three months ended April 30, 2015 and 2014, respectively, representing a growth rate of 24% and $60.1 million and $41.8 million in the nine months ended April 30, 2015 and 2014, respectively, representing a growth rate of 44%.” Additionally, the summary table on page 22 has also been amended to state gross billings of $60,094 thousand for the nine months ended April 30, 2015.

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INDEX TO QUARTERLY REPORT ON FORM 10-Q/A

For the Quarter Ended April 30, 2015

EXPLANATORY NOTE

 

				Page No.
		PART I. FINANCIAL INFORMATION
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			3
		PART II. OTHER INFORMATION
Item 6.		Exhibits			20
Signatures					21

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PART I. FINANCIAL INFORMATION

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

You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”) with the SEC on April 24, 2015 (the “IPO Prospectus”). The last day of our fiscal year is July 31. Our fiscal quarters end on October 31, January 31, April 30 and July 31. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. See “Special Note Regarding Forward-Looking Statements” above.

Overview

At Apigee, our mission is to make every business a digital business.

Unprecedented growth in mobile technologies, big data, cloud services and the connected devices that comprise the Internet of Things, or IoT, has disrupted or transformed the dynamics of business, changed consumer behavior and eroded the divide between the physical and digital worlds. To fully embrace the digital world, businesses must provide seamless customer experiences across a myriad of devices and channels, respond quickly to fast-changing customer expectations and market conditions, drive revenue through new business models and create or participate in digital ecosystems. A digital business creates value by unlocking its data and services to better serve customers in a real-time, anywhere-anytime fashion and uses data to continually improve the customer experience and drive additional revenue.

We believe that application programming interfaces, or APIs, are a critical enabling technology for the shifts in mobile, cloud computing, big data and the IoT and that APIs are a foundational technology on which digital business operates. We believe that a new and expansive market opportunity exists to help enterprises adopt digital strategies and navigate the digitally driven economy.

We provide an innovative software platform that allows businesses to design, deploy, and scale APIs as a connection layer between their core IT systems and data and the applications with which their customers, partners, employees and other users engage with their business. The foundations of our platform are Apigee Edge, a robust API management solution, and Apigee Insights, our predictive analytics software solution. Our platform enables a comprehensive view of the enterprise data the user is consuming and generating, and data about the context in which the customer is using the digital product or service, or contextual data. In addition, our platform provides tools for businesses to drive usage and adoption of APIs by their business partners and developers. Using our platform, businesses in any industry can easily and securely connect their core services and data to developers to enable them to develop applications and experiences for customers, partners, employees and other users. Using our platform, businesses can forge new partnerships, build partner ecosystems, and participate fully in emerging digital business networks.

We believe that in order to build, manage and extract valuable insights from APIs and data needed for digital business, nearly all businesses will require a new layer within their core application software stack to achieve this. To enable this new layer, we provide a purpose-built, self-service, scalable platform that can be deployed either in the cloud or on-premises to securely expose a business’ data and services needed to enable users to engage and transact with the business. Because we provide API publishing, operations, and data visibility in our integrated solution, our platform enables more informed predictive analytics to help the business anticipate and adjust to customer behavior.

We were incorporated in fiscal 2004. From fiscal 2004 to fiscal 2007, our activities were focused on research and development that resulted in the first commercial release of our software in fiscal 2007—our Apigee Edge on-premises platform. In fiscal 2009, we extended our Apigee Edge solution to a cloud offering to enable deployment flexibility for our customers. In fiscal 2012, we further extended our platform with the release of our first predictive analytics solution, Apigee Insights. In December 2013, we acquired InsightsOne Systems, Inc., or InsightsOne, to further advance predictive analytics as part of our platform strategy and to bolster our developer adoption strategy. In fiscal 2013, we expanded our network of channel partners by entering into a master alliance agreement with Accenture, under which either we co-sell or they resell our solutions as part of larger installations. In fiscal 2014, we announced an OEM and reseller partnership with SAP under which SAP will deliver a comprehensive API management application built on our Apigee Edge product on SAP’s Hana Cloud to SAP’s cloud customers, and sell our Apigee Edge product on a standalone basis to its on-premises customers.

We generate our revenue primarily from licenses and subscriptions for our Apigee Edge products and from professional services. We also generate revenue from licenses of and subscriptions to our Apigee Insights product, although such revenue has been immaterial to date because we re-released our Apigee Insights product in fiscal year 2014 and currently have few active customers. We also offer a free trial version of Apigee Developer to the developer community. We provide our customers the flexibility to deploy our software as a cloud service or on-premises. For those customers that deploy our products as a cloud service, we license our software on a subscription basis. For those customers that deploy our products on premises, we offer two licensing options, a time-based license or a perpetual license. We recognize revenue from subscription fees ratably over the service period, and have been

 

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increasing the proportion of our revenue mix that we derive from subscriptions. We therefore believe that gross billings provides valuable insight into the performance of our business. We expect professional services and other revenue to account for a decreasing percentage of our total revenue over the long term as we continue to increase our subscriptions and as our customers increase their use of professional services provided by our channel partners and other third parties. However, we expect to continue to provide professional services as an important part of our solution to our customers because digital infrastructure transformation frequently involves core business strategy.

We sell our products through direct field sales, direct inside sales and indirect channel sales. We utilize a wide range of online and offline marketing activities to drive brand awareness, thought leadership, developer trials and lead volume. Our software sales pricing is based on the customer’s usage. Our on premises license sales are based on the number of computer server cores, while our cloud-based services sales are based on API traffic. Many of our customers initially use our product as a free trial by visiting our website, creating an account and testing the free cloud version of our platform. In addition, we offer open source solutions that introduce developers to the key technical concepts and technologies of APIs and mobile app development, and that allow their APIs and applications to be migrated or deployed to our paid products. After signing up, developers are able to experience the power of our platform and learn how to interact with our solutions, enabling them to understand the benefits of our paid products. We use the trial program as a source of lead volume for our direct sales team.

Our customers include many leading businesses: 20 of the Fortune 100, six of the top 10 Global 2000 retail brands and six of the top 10 global telecommunications companies as of April 30, 2015. Our solution has been sold to customers in over 30 countries around the world. Our current focus is on acquiring new customers and increasing revenue from our existing customers as they realize the value of our platform and expand the use of our software through additional use cases and broader deployment within their organizations. We are also focused on increasing adoption of our platform through our Apigee developer program.

We have experienced rapid growth in recent periods. Our gross billings were $22.5 million and $18.1 million in the three months ended April 30, 2015 and 2014, respectively, representing a growth rate of 24% and $60.1 million and $41.8 million in the nine months ended April 30, 2015 and 2014, respectively, representing a growth rate of 44%. Our total revenue was $17.3 million and $14.4 million in the three months ended April 30, 2015 and 2014, and $49.9 million and $37.8 million in the nine months ended April 30, 2015 and 2014. For the three months ended April 30, 2015 and 2014, respectively, AT&T accounted for 5% and 14% of our total revenue. For the nine months ended April 30, 2015 and 2014, respectively, AT&T accounted for 6% and 16% of our total revenue. Excluding our revenue from AT&T, our total revenue was $16.5 million and $12.3 million in the three months ended April 30, 2015 and 2014, respectively, and $47.0 million and $31.8 million in the nine months ended April 30, 2015 and 2014, respectively. One other customer accounted for 15% of our total revenue in the three months ended April 30, 2014, and no other customer accounted for more than 10% of our total revenue in the three months ended April 30, 2015 or nine months ended April 30, 2015 and 2014. Our revenue derived from sales to customers located outside the United States was approximately 42% and 23% in the three months ended April 30, 2015 and 2014, respectively, and 39% and 29% in the nine months ended April 30, 2015 and 2014, respectively. We expect that sales to customers located outside the United States will continue to comprise a significant portion of our total revenue for the foreseeable future.

We have made substantial investments in developing and improving our platform and solutions, in expanding our sales and marketing capabilities and geographic coverage, and in providing general and administrative resources to support our growth. As a result, we have incurred net losses of $11.0 and $13.0 million in the three months ended April 30, 2015 and 2014, respectively and $37.8 and $45.2 million in the nine months ended April 30, 2015 and 2014, respectively. We had an accumulated deficit of $183.7 and $145.9 million as of April 30, 2015 and July 31, 2014, respectively, and we expect to continue to incur net losses for the foreseeable future. We expect that continued investments will drive further growth in our gross billings and total revenue. While increases in our gross billings and total revenue may trail the increases in our operating expenses in the near term, we expect to realize operating leverage in our business model over the long term.

Key Opportunities and Challenges Affecting Our Performance

Market Adoption of Our Platform

We are affected by the pace at which enterprises adopt APIs, mobile apps and cloud computing, and make the transition to become digital businesses. We believe that the transformation to digital business, enabled by APIs and powerful analytics, is an emerging trend. We believe that we have established a leadership position in this new market, both as a provider of API management and data analytics and also as a thought leader helping to define the architecture and vision of API-enabled and data-driven businesses. We intend to extend our leadership position by continuing to innovate, bringing new technologies to market, and honing best practices and thought leadership by working closely with our global customer base, both at a technology level and with senior executives. The degree to which prospective customers recognize the need to transform their businesses into digital businesses will determine the rate at which we are able to sell our platform to new and existing customers.

 

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Investment in Our API and Predictive Analytics Solutions

We have invested, and intend to continue to invest, in expanding the breadth and depth of our platform to enable organizations to deploy robust APIs, big data, predictive analytics and IoT solutions. We intend to continue to invest in research and development to enhance the application development and technology capabilities of our platform. We had four significant product releases or enhancements in calendar 2014. We typically provide our customers with updates to our solution twice a month in the cloud and on premises.

Ability to Grow Our Worldwide Sales Capacity

We have invested, and intend to continue to invest, in expanding our sales capacity and improving our sales operations to drive additional revenue and support the growth of our global customer base. We sell our platform through direct field sales, direct inside sales and indirect channel sales. Our sales to date have been primarily through our direct field sales force, which grew nearly 300% from July 31, 2012 to July 31, 2014. We are continuing to develop and expand a partner community to supplement our sales and support operations through system integrators, OEM partners, resellers and other partners to further influence customer decision making and drive adoption of our solutions. Our partners may also co-sell with our direct field sales organization. Our channel partners provide us with additional sales leverage by sourcing new prospects, providing professional services and technical support to existing customers and upselling additional use cases. These channel partners expand our geographic sales reach worldwide, particularly in key international markets in EMEA and APAC. All of these factors will influence timing and overall levels of sales capacity, impacting the rate at which we will be able to acquire customers to drive revenue growth. In fiscal 2014, we derived very limited revenue through our channel partners.

Expansion and Upsell Within Our Existing Customer Base

After the initial sale to and successful deployment by a new customer, we focus on expanding our relationship with the customer to sell additional software licenses and add-on features of our current platform. Historically, we have often realized sales of additional software licenses and add-on features on prior versions of our Apigee Edge platform as well. However, upon the introduction of our current platform in August 2012, there was no viable migration path for transitioning existing customers to the current Apigee Edge platform. Accordingly, we believe our upsell opportunities with customers who initially licensed our prior platforms to be limited. We expect our opportunity to expand our customer relationships through additional sales to increase as we add new customers to the current Apigee Edge platform, broaden our product portfolio to meet additional mobile IT requirements, increase the benefits provided to both users and the enterprise and enhance platform functionality. Additional sales over the lifecycle of a customer relationship can significantly increase the return on our sales and marketing investments. Accordingly, our financial performance will depend in part on the degree to which our expansion and upsell sales strategy is successful.

Mix of Products Sold as Subscription and Perpetual Licenses

We offer our customers the flexibility to use our software as a cloud service or on premises. For those customers that use our platform as a cloud service, we license our software on a subscription basis. For those customers that use our platform on premises, we offer two licensing options, a time-based license or a perpetual license. In addition, we also offer our customers software support and professional services. We expect the proportion of our subscription and support revenue to our total revenue to increase over time. However, because we recognize subscription and term revenue ratably over the duration of the related contracts, increases in total revenue will lag any increase in subscription arrangements. Furthermore, the unpredictability of the timing of our receipt of orders for perpetual licenses, the revenue for which we typically recognize upfront, may cause fluctuations in our quarterly financial results.

Future Investment in Growth and Product Development

We intend to extend our leadership position by continuing to innovate, bringing new technologies to market, and honing best practices and thought leadership by working closely with our global customer base, both at a technology level and with senior executives. We intend to continue building innovative software products that extend the value of our existing offering and further help enterprises realize digital business success, through new growth and operational efficiencies. We develop technology to address emerging technology markets such as the IoT. We have steadily increased our focus on partner and channel development efforts to drive efficient new customer acquisition across geographies and industries. We believe that there is substantial opportunity to grow our international business. We plan to continue to aggressively market to customers located outside the United States by building partnerships that help us add customers internationally and by expanding our direct and indirect sales channels outside the United States and EMEA.

 

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Certain Key Non-GAAP Financial Metrics

To supplement our financial results presented on a GAAP basis, we provide investors with certain non-GAAP financial measures, including gross billings, non-GAAP gross profit, non-GAAP gross margin, and non-GAAP operating loss.

There are limitations in using non-GAAP financial measures because the non-GAAP financial measures are not prepared in accordance with GAAP, may be different from non-GAAP financial measures used by other companies, and exclude expenses that may have a material impact on our reported financial results. Further, stock-based compensation expense has been and will continue to be for the foreseeable future a significant recurring expense in our business and an important part of the compensation provided to our employees. The presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with GAAP. We urge our investors to review the reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures included below, and not to rely on any single financial measure to evaluate our business.

Gross Billings. We define gross billings as our total revenue plus the change in our deferred revenue in a period. Gross billings in any period consists of sales to new customers plus renewals by and additional sales to existing customers. Our management uses gross billings as a performance measurement because we generally bill our customers at the time of sale of our solutions and recognize revenue either upon delivery or ratably over subsequent periods, and a portion of our revenue may be recognized over a period of more than 12 months. We believe that gross billings provides valuable insight into the sales of our solutions and the performance of our business.

Non-GAAP Gross Profit and Gross Margin. We define non-GAAP gross profit as our total revenue less our total cost of revenue, adjusted to exclude stock-based compensation associated with equity awards granted to professional services and maintenance personnel and amortization of acquired intangible assets. We define non-GAAP gross margin as our non-GAAP gross profit as a percentage of our total revenue. Non-GAAP gross profit and gross margin are key measures used by our management to understand and evaluate our operating performance and trends. In particular, non-GAAP gross profit and gross margin exclude certain non-cash expenses and can provide useful measures for period-to-period comparisons of our business.

Non-GAAP Operating Loss. We define non-GAAP operating loss as our operating loss excluding stock-based compensation expense and amortization of acquired intangibles assets. Our management uses non-GAAP operating loss to understand and evaluate our operating performance and trends. In particular, non-GAAP operating loss excludes certain non-cash expenses and can provide useful measures for period-to-period comparisons of our business.

The following table summarizes certain of our key non-GAAP financial metrics:

 

		Three Months Ended April 30,								Nine Months Ended April 30,
		2015				2014				2015				2014
		(dollar amounts in thousands)
Gross billings		$	22,476			$	18,119			$	60,094			$	41,803
Non-GAAP gross profit		$	11,539			$	8,693			$	32,044			$	16,926
Non-GAAP gross margin			66.7	%			60.4	%			64.2	%			44.8	%
Non-GAAP operating loss		$	(9,662	)		$	(11,738	)		$	(33,931	)		$	(41,064	)

The following table reflects the reconciliation of the most directly comparable GAAP financial measure to each of the non-GAAP financial measures discussed above:

 

		Three Months Ended April 30,								Nine Months Ended April 30,
		2015				2014				2015				2014
		(in thousands)
Gross billings:
Total revenue		$	17,290			$	14,388			$	49,905			$	37,805
Total deferred revenue, end of period			38,379				21,122				38,379				21,122
Less: Total deferred revenue, beginning of period			(33,193	)			(17,391	)			(28,190	)			(17,124	)
Total change in deferred revenue			5,186				3,731				10,189				3,998
Gross billings		$	22,476			$	18,119			$	60,094			$	41,803

 

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		Three Months Ended April 30,								Nine Months Ended April 30,
		2015				2014				2015				2014
		(in thousands)
Non-GAAP gross profit:
Gross profit		$	11,250			$	8,393			$	31,197			$	16,450
Add: Stock-based compensation expense			62				47				166				106
Add: Amortization of intangible assets			227				253				681				370
Non-GAAP gross profit		$	11,539			$	8,693			$	32,044			$	16,926
Non-GAAP operating loss:
Operating loss		$	(10,755	)		$	(12,764	)		$	(37,071	)		$	(43,082	)
Add: Stock-based compensation expense			822				691				2,269				1,461
Add: Amortization of intangible assets			271				335				871				557
Non-GAAP operating loss		$	(9,662	)		$	(11,738	)		$	(33,931	)		$	(41,064	)

Components of Our Operating Results

Revenue

License Revenue. License revenue reflects the revenue recognized from sales of on-premises software licenses. A substantial majority of our license revenue consists of revenue from perpetual licenses, under which we generally recognize the license fee portion of the arrangement upfront, assuming all revenue recognition criteria are satisfied. Customers can also purchase time-based licenses, under which we typically recognize the license fee ratably over the term of the license after all other revenue recognition criteria are met. Due to the differing revenue recognition criteria applicable to perpetual and time-based licenses, shifts in the mix between perpetual and time-based licenses from quarter to quarter could produce substantial variation in the license revenue we recognize.

Subscription Revenue. We generate subscription revenue primarily from subscription fees from the customer accessing our software in the cloud. We typically recognize subscription revenue ratably over the term of the arrangement after all other revenue recognition criteria are met.

Support Revenue. We generate support revenue from maintenance and support agreements with customers for on-premises licenses, which represented 13% and 10% of our total revenue for the nine months ended April 30, 2015 and 2014, respectively. Going forward, we expect our maintenance and support revenue to remain flat or to account for a decreasing percentage of our total revenue over the long term. We typically recognize support revenue ratably over the term of the arrangement after all other revenue recognition criteria are met.

Professional Services and Other Revenue. Professional services and other revenue consists of fees recognized from consulting services. We recognize fees from consulting services as revenue as the services are performed. We recognize fees from time and material services as revenue as services are rendered based on inputs to the project, such as billable hours incurred, after all other revenue recognition criteria are met. For fixed-fee professional service arrangements, we recognize revenue under the proportional performance method of accounting and estimate the proportional performance on a monthly basis, utilizing hours incurred to date as a percentage of the total estimated hours to complete the project. If we do not have a sufficient basis to measure progress towards completion, we recognize revenue upon completion of the arrangement.

Our professional services and other revenue represented 26% of our total revenue for the nine months ended April 30, 2015 compared to 42% of our total revenue for the nine months ended April 30, 2014. Historically, we experienced growth in our professional services and other revenue primarily due to the deployment of our software with some customers that have large, highly complex IT environments. However, in fiscal 2015 and going forward, we expect our professional services and other revenue to account for a decreasing percentage of our total revenue over the long term as our customers increase their use of professional services provided by our channel partners and other third parties. We have started to refer professional services opportunities to our partners and have started to field requests from customers to use their current third-party service providers for professional services engagements.

Cost of Revenue

Cost of License Revenue. Cost of license revenue consists primarily of the cost of third-party software royalties and amortization of acquired intangible assets.

 

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Cost of Subscription and Support Revenue. Cost of subscription and support revenue includes all direct costs to deliver our cloud-based solution and software support, including salaries, benefits and stock-based compensation for our customer support organization, third-party hosting costs, third-party software royalties, allocated overhead for facilities and IT, and amortization of acquired intangible assets.

Cost of Professional Services and Other Revenue. Cost of professional services and other revenue includes salaries, benefits and stock-based compensation for our professional services organization, consulting services and allocated overhead for facilities and IT.

Gross Profit and Gross Margin

Gross profit, or total revenue less total cost of revenue, and gross margin, or gross profit as a percentage of total revenue, has been and will continue to be affected by various factors, including the mix among our license, subscription and professional services and other revenue, the costs associated with third-party hosting facilities and the extent to which we expand our customer support and professional services organizations. Our gross margin on license revenue and subscription and support revenue is significantly higher than our gross margin on professional services and other revenue, and our gross margin on license revenue is significantly higher than our gross margin on subscription and support revenue.

Operating Expenses

We classify our operating expenses into three categories: research and development, sales and marketing, and general and administrative. For each category, the largest component is personnel costs, which include salaries and bonuses, employee benefits costs, stock-based compensation and, in the case of sales and marketing expenses, sales commissions. Operating expenses also include allocated overhead costs for facilities and IT, which include compensation of personnel and costs associated with our facilities and IT infrastructure.

Research and Development. Research and development expenses primarily consist of personnel costs and allocated overhead attributable to our research and development personnel. We have devoted our product development efforts primarily to enhancing the functionality and expanding the capabilities of our software platform. We intend to continue to make significant investments in research and development to enhance and further develop our platform. As a result, we expect our research and development expenses to continue to increase in dollar amount for the foreseeable future.

Sales and Marketing. Sales and marketing expenses primarily consist of personnel costs and allocated overhead for our sales, marketing and business development personnel, commissions earned by our sales personnel, and the cost of marketing and business development programs. We intend to continue to make significant investments in sales and marketing to drive additional revenue and grow our global customer base. As a result, we expect our sales and marketing expenses to increase in dollar amount and to continue to be our largest operating expenses category as we continue to grow our global customer base and expand our geographic coverage.

General and Administrative. General and administrative expenses primarily consist of personnel costs and allocated overhead for our executive and administrative personnel, legal, accounting and other professional services fees, and other corporate expenses. We have recently incurred, and expect to continue to incur, additional general and administrative expenses to support the growth of our operations and to prepare to operate, and to operate, as a public company. As a result, we expect our general and administrative expenses to increase in dollar amount for the foreseeable future.

Other Income (Expense), Net

Other income (expense), net consists primarily of the changes in the fair value of common stock warrants, foreign currency exchange gains or losses, interest expense on outstanding debt and interest income earned on our cash and cash equivalents balances.

Provision for Income Taxes

Provision for income taxes is based on the amount of taxable earnings and enacted federal, state and foreign tax rates and is adjusted for allowable credits and deductions. Our provision for income taxes consists mainly of foreign taxes.

Because of our history of U.S. net operating losses, we have established a full valuation allowance against potential future benefits for our U.S. deferred tax assets. Our income tax provision could be significantly impacted by estimates surrounding our uncertain tax positions and changes to our valuation allowance in future periods. We reevaluate the judgments surrounding our estimates and make adjustments as appropriate each reporting period. See Note 6 of our audited consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q for more information concerning our provision for income taxes.

Results of Operations

The following tables set forth our results of operations for the periods presented and as a percentage of our total revenue for those periods. The period-to-period comparison of financial results are not necessarily indicative of financial results to be achieved in future periods.

 

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		Three Months Ended April 30,								Nine Months Ended April 30,
		2015				2014				2015				2014
		(in thousands)
Consolidated Statement of Operations Data:
Revenue
License		$	5,697			$	3,739			$	15,219			$	7,305
Subscription			5,368				3,644				15,362				10,754
Support			2,326				1,399				6,496				3,940
Professional services and other			3,899				5,606				12,828				15,806
Total revenue			17,290				14,388				49,905				37,805
Cost of revenue
License			129				142				386				230
Subscription and support(1)			2,808				2,255				8,175				9,680
Professional services and other(1)			3,103				3,598				10,147				11,445
Total cost of revenue			6,040				5,995				18,708				21,355
Gross profit			11,250				8,393				31,197				16,450
Operating expenses
Research and development(1)			7,567				6,229				21,952				15,381
Sales and marketing(1)			11,139				11,571				36,313				34,027
General and administrative(1)			3,299				3,357				10,003				10,124
Total operating expenses			22,005				21,157				68,268				59,532
Operating loss			(10,755	)			(12,764	)			(37,071	)			(43,082	)
Other income (expense), net			(93	)			(123	)			(383	)			(1,880	)
Loss before income taxes			(10,848	)			(12,887	)			(37,454	)			(44,962	)
Provision for income taxes			140				128				343				265
Net loss		$	(10,988	)		$	(13,015	)		$	(37,797	)		$	(45,227	)

 

(1)	Includes stock-based compensation expense as follows:

 

		Three Months Ended April 30,								Nine Months Ended April 30,
		2015				2014				2015				2014
		(in thousands)
Cost of subscription and support revenue		$	8			$	5			$	21			$	17
Cost of professional services and other revenue			54				42				145				89
Research and development			306				174				759				309
Sales and marketing			173				115				492				261
General and administrative			281				355				852				785
Total stock-based compensation expense		$	822			$	691			$	2,269			$	1,461

 

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		Three Months Ended April 30,								Nine Months Ended April 30,
		2015				2014				2015				2014
		(as a percentage of total revenue)
Consolidated Statement of Operations Data:
Revenue
License			33.0	%			26.0	%			30.5	%			19.3	%
Subscription			31.0				25.3				30.8				28.5
Support			13.5				9.7				13.0				10.4
Professional services and other			22.5				39.0				25.7				41.8
Total revenue			100.0				100.0				100.0				100.0
Cost of revenue
License			0.7				1.0				0.8				0.6
Subscription and support			16.2				15.7				16.3				25.6
Professional services and other			17.9				25.0				20.3				30.3
Total cost of revenue			34.8				41.7				37.4				56.5
Gross profit			65.2				58.3				62.6				43.5
Operating expenses
Research and development			43.8				43.3				44.0				40.7
Sales and marketing			64.4				80.4				72.8				90.0
General and administrative			19.1				23.3				20.0				26.8
Total operating expenses			127.3				147.0				136.8				157.5
Operating loss			(62.1	)			(88.7	)			(74.2	)			(114.0	)
Other income (expense), net			(0.5	)			(0.9	)			(0.8	)			(4.9	)
Loss before income taxes			(62.6	)			(89.6	)			(75.0	)			(118.9	)
Provision for income taxes			0.9				0.9				0.7				0.7
Net loss			(63.5	)%			(90.5	)%			(75.7	)%			(119.6	)%

 

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Three Months Ended April 30, 2015 and 2014

Revenue

 

		Three Months Ended April 30,								% Change
		2015				2014
		(dollar amounts in thousands)
Revenue
License		$	5,697			$	3,739				52.4	%
Subscription			5,368				3,644				47.3	%
Support			2,326				1,399				66.2	%
Professional services and other			3,899				5,606				(30.5	)%
Total revenue		$	17,290			$	14,388				20.2	%
Percentage of revenue
License			33.0	%			26.0	%
Subscription			31.0	%			25.3	%
Support			13.5	%			9.7	%
Professional services and other			22.5	%			39.0	%
Total			100.0	%			100.0	%

Total revenue increased $2.9 million, or 20%, in the three months ended April 30, 2015, compared to three months ended April 30, 2014, primarily due to an increase in license revenue of $2.0 million, or 52%, growth in subscription revenue of $1.7 million, or 47% and increase in support revenue of $0.9 million or 66%, partially offset by a decrease in professional services and other revenue of $1.7 million or 31%. The increase in license revenue of $2.0 million was driven primarily by growth in our on-premises deployments with new and existing customers. The increase in subscription revenue of $1.7 million was primarily due to the growth in the number of customers adopting our cloud-based solution. Additionally, revenue from software support increased $0.9 million as a result of on-premises software licenses that increased our cumulative installed base of customers that pay for recurring software support fees. The decline in professional services and other revenue of $1.7 million, or 31%, was primarily due to professional services and other revenue we recognized from AT&T in the three months ended April 30, 2014. AT&T accounted for 5% of our total revenue in the three months ended April 30, 2015, and 14% of total revenue in the three months ended April 30, 2014. No customer accounted for more than 10% of our total revenue in the three months ended April 30, 2015. One other customer accounted for 15% of our total revenue in the three months ended April 30, 2014. Excluding revenue from AT&T, our total revenue increased $4.2 million, or 34%, in the three months ended April 30, 2015, compared to the three months ended April 30, 2014. Excluding our license revenue from AT&T, our license revenue increased $2.0 million, or 52%, in the three months ended April 30, 2015, compared to the three months ended April 30, 2014. Excluding our support revenue from AT&T, our support revenue increased $1.0 million, or 99%, in the three months ended April 30, 2015, compared to the three months ended April 30, 2014. Excluding our professional services and other revenue from AT&T, our professional services and other revenue decreased $0.5 million, or 14%, in the three months ended April 30, 2015, compared to the three months ended April 30, 2014 as a result of increased referrals of professional services opportunities to our partners. We also experienced an increase in the proportion of our total revenue that we derive from customers located outside the United States, rising to 42% in the three months ended April 30, 2015 from 23% in the three months ended April 30, 2014.

 

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Cost of Revenue and Gross Margin

 

		Three Months Ended April 30,								% Change
		2015				2014
		(dollar amounts in thousands)
Cost of revenue
License		$	129			$	142				(9.2	)%
Subscription and support			2,808				2,255				24.5	%
Professional services and other			3,103				3,598				(13.8	)%
Total cost of revenue		$	6,040			$	5,995				0.8	%
Gross margin
License			97.7	%			96.2	%
Subscription and support			63.5	%			55.3	%
Professional services and other			20.4	%			35.8	%
Total gross margin			65.1	%			58.3	%

Total cost of revenue remained flat in the three months ended April 30, 2015, compared to the three months ended April 30, 2014, primarily due to an increase in cost of subscription and support revenue of $0.6 million, or 25%, largely offset by a decrease in cost of professional services and other revenue of $0.5 million, or 14%. The increase in cost of subscription and support revenue primarily reflected a $0.7 million increase in third-party hosting and consulting costs as we substantially completed the migration of existing customers to our current digital platform and added new customers on to our platform. The decrease in cost of professional services and other revenue reflected a $0.3 million decrease in third-party consulting costs and a $0.2 million decrease in salaries and benefits and stock-based compensation expense as we gained efficiencies in our professional services organization and began to refer professional service opportunities to our partners. Cost of license revenue was nominal in both periods.

Total gross margin increased due to the impact of revenue mix between our license, subscription and support, and professional services and other revenue. More specifically, our license and subscription and support revenue accounted for 77% of our total revenue in the three months ended April 30, 2015, compared to 61% of our total revenue the three months ended April 30, 2014. The increase in total gross margin also reflected increased efficiencies in our customer support organization and substantial completion of customer migration to our current digital platform. In addition, the increase was partially offset by a decline in gross margin realized on our professional services and other revenue for the three months ended April 30, 2015 due to higher professional services and other revenue we recognized from AT&T in the three months ended April 30, 2014.

 

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Operating Expenses

 

		Three Months Ended April 30,								% Change
		2015				2014
		(dollar amounts in thousands)
Operating expenses
Research and development		$	7,567			$	6,229			21.5%
Sales and marketing			11,139				11,571			(3.7)%
General and administrative			3,299				3,357			(1.7)%
Total operating expenses		$	22,005			$	21,157			4.0%
Percentage of revenue
Research and development			43.8	%			43.3	%
Sales and marketing			64.4	%			80.4	%
General and administrative			19.1	%			23.3	%
Total operating expenses			127.3	%			147.0	%

Research and Development Expense

Research and development expense increased $1.3 million, or 21%, in the three months ended April 30, 2015, compared to the three months ended April 30, 2014, primarily due to a $1.4 million increase in salaries, benefits and stock-based compensation expense as we increased engineering headcount to support ongoing development and enhancement of our product offerings.

Sales and Marketing Expense

Sales and marketing expense decreased $0.4 million, or 4%, in the three months ended April 30, 2015, compared to the three months ended April 30, 2014, primarily due to a $0.3 million decrease in professional services expense.

General and Administrative Expense

General and administrative expense was relatively flat in the three months ended April 30, 2015, compared to the three months ended April 30, 2014, primarily related to a decrease of $0.3 million in corporate charges which was partially offset by a $0.1 million increase in salaries and benefits and stock-based compensation expense to support our overall growth.

Other Income (Expense), Net

 

		Three Months Ended April 30,								% Change
		2015				2014
		(dollar amounts in thousands)
Other income (expense), net		$	(93	)		$	(123	)		(24.4)%
Percentage of revenue
Other income (expense), net			(0.5	)%			(0.9	)%

 

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Other income (expense), net remained flat during the three months ended April 30, 2015, compared to the three months ended April 30, 2014.

 

		Three Months Ended April 30,								% Change
		2015				2014
		(dollar amounts in thousands)
Provision for income taxes		$	140			$	128			9.4%
Percentage of revenue
Provision for income taxes			0.9	%			0.9	%

Provision for income taxes remained flat in the three months ended April 30, 2015, compared to the three months ended April 30, 2014, and primarily relates to foreign taxes.

Nine Months Ended April 30, 2015 and 2014

Revenue

 

		Nine Months Ended April 30,								% Change
		2015				2014
		(dollar amounts in thousands)
Revenue
License		$	15,219			$	7,305			108.3%
Subscription			15,362				10,754			42.8%
Support			6,496				3,940			64.9%
Professional services and other			12,828				15,806			(18.8)%
Total revenue		$	49,905			$	37,805			32.0%
Percentage of revenue
License			30.5	%			19.3	%
Subscription			30.8	%			28.5	%
Support			13.0	%			10.4	%
Professional services and other			25.7	%			41.8	%
Total			100.0	%			100.0	%

Total revenue increased $12.1 million, or 32%, in the nine months ended April 30, 2015, compared to nine months ended April 30, 2014, primarily due to an increase in license revenue of $7.9 million, or 108%, growth in subscription revenue of $4.6 million or 43% and an increase in support revenue of $2.6 million, or 65%. The increase in license revenue of $7.9 million was driven primarily by growth in our on-premises deployments with new and existing customers. The increase in subscription revenue of $4.6 million was primarily due to the growth in the number of customers adopting our cloud-based solution. Additionally, revenue from software support increased $2.6 million as a result of on-premises software licenses that increased our cumulative installed base of customers that pay for recurring software support fees. The decline in professional services and other revenue of $3.0 million, or 19%, was primarily due to professional services and other revenue we recognized from AT&T in the nine months ended April 30, 2014. AT&T accounted for 6% of our total revenue in the nine months ended April 30, 2015, and 16% of total revenue in the nine months ended April 30, 2014. No other customers accounted for more than 10% of our total revenue in the nine months ended April 30, 2015 or 2014. Excluding revenue from AT&T, our total revenue increased $15.3 million, or 48%, in the nine months ended April 30, 2015, compared to the nine months ended April 30, 2014. Excluding our license revenue from AT&T, our license revenue increased $7.9 million, or 108%, in the nine months ended April 30, 2015, compared to the nine months ended April 30, 2014. Excluding our support revenue from AT&T, our support revenue increased $2.7 million, or 96%, in the nine months ended April 30, 2015, compared to the nine months ended April 30, 2014. Excluding our professional services and other revenue from AT&T, our professional services and other revenue increased $0.1 million, or 1%, in the nine months ended April 30, 2015, compared to the nine months ended April 30, 2014 as a result of increased referrals of professional services opportunities to our partners. We also experienced an increase in the proportion of our total revenue that we derive from customers located outside the United States, rising to 39% in the nine months ended April 30, 2015 from 29% in the nine months ended April 30, 2014.

 

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Cost of Revenue and Gross Margin

 

		Nine Months Ended April 30,								% Change
		2015				2014
		(dollar amounts in thousands)
Cost of revenue
License		$	386			$	230			67.8%
Subscription and support			8,175				9,680			(15.5)%
Professional services and other			10,147				11,445			(11.3)%
Total cost of revenue		$	18,708			$	21,355			(12.4)%
Gross margin
License			97.5	%			96.9	%
Subscription and support			62.6	%			34.1	%
Professional services and other			20.9	%			27.6	%
Total gross margin			62.5	%			43.5	%

Total cost of revenue decreased $2.6 million, or 12%, in the nine months ended April 30, 2015, compared to the nine months ended April 30, 2014, primarily due to a decrease in cost of subscription and support revenue of $1.5 million, or 16%, and a decrease in cost of professional services and other revenue of $1.3 million, or 11%. The decrease in cost of subscription and support revenue primarily reflected $1.2 million in decreased salaries and benefits and stock-based compensation expense due to decreased headcount in our customer support organization and a $0.1 million decrease in third-party hosting and consulting costs as we gained efficiencies in our customer support organization and substantially completed the migration of existing customers to our current digital platform and added new customers on to our platform. The decrease in cost of professional services and other revenue primarily reflected a $1.2 million decrease in third-party consulting costs and a $0.1 million decrease in salaries, benefits and stock-based compensation expense as we gained efficiencies in our professional services organization and began to refer professional service opportunities to our partners. Cost of license revenue was nominal in both periods.

Total gross margin increased due to the impact of revenue mix between our license, subscription and support, and professional services and other revenue. More specifically, our license and subscription and support revenue accounted for 74% of our total revenue in the nine months ended April 30, 2015, compared to 58% of our total revenue in the nine months ended April 30, 2014. This increase in total gross margin also reflected increased efficiencies in our customer support organization and substantial completion of customer migration to our current digital platform. In addition, this increase was partially offset by a decline in gross margin realized on our professional services and other revenue due to professional services and other revenue we recognized from AT&T in the nine months ended April 30, 2014.

Operating Expenses

 

		Nine Months Ended April 30,								% Change
		2015				2014
		(dollar amounts in thousands)
Operating expenses
Research and development		$	21,952			$	15,381			42.7%
Sales and marketing			36,313				34,027			6.7%
General and administrative			10,003				10,124			(1.2)%
Total operating expenses		$	68,268			$	59,532			14.7%
Percentage of revenue
Research and development			44.0	%			40.7	%
Sales and marketing			72.8	%			90.0	%
General and administrative			20.0	%			26.8	%
Total operating expenses			136.8	%			157.5	%

 

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Research and Development Expense

Research and development expense increased $6.6 million, or 43%, in the nine months ended April 30, 2015, compared to the nine months ended April 30, 2014, primarily due to a $6.6 million increase in salaries and benefits and stock-based compensation expense as we increased engineering headcount to support ongoing development and enhancement of our product offerings.

Sales and Marketing Expense

Sales and marketing expense increased $2.3 million, or 7%, in the nine months ended April 30, 2015, compared to the nine months ended April 30, 2014, primarily due to a $2.6 million increase in salaries and benefits and stock-based compensation expense as we increased head count to expand our sales operations as well as increased commissions reflecting our higher sales levels.

General and Administrative Expense

General and administrative expense was relatively flat in the nine months ended April 30, 2015, compared to the nine months ended April 30, 2014, and primarily related to a $0.7 million decrease in corporate charges and a $0.7 million decrease in professional services primarily related to accounting and legal activities, partially offset by a $1.3 million increase in personnel-related expenses to support our overall growth.

Other Income (Expense), Net

 

		Nine Months Ended April 30,								% Change
		2015				2014
		(dollar amounts in thousands)
Other income (expense), net		$	(383	)		$	(1,880	)		(79.6)%
Percentage of revenue
Other income (expense), net			(0.8	)%			(4.9	)%

Other income (expense), net decreased primarily due to $1.6 million of expense associated with the revaluation of our common stock warrants during the nine months ended April 30, 2014, that did not recur in the nine months ended April 30, 2015.

 

		Nine Months Ended April 30,								% Change
		2015				2014
		(dollar amounts in thousands)
Provision for income taxes		$	343			$	265			29.4%
Percentage of revenue
Provision for income taxes			0.7	%			0.7	%

Provision for income taxes remained flat in the nine months ended April 30, 2015, compared to the nine months ended April 30, 2014, and primarily relates to foreign taxes.

Liquidity and Capital Resources

 

		As of April 30, 2015				As of July 31, 2014
		(in thousands)
Cash and cash equivalents		$	105,245			$	51,759
		Nine Months Ended April 30,
		2015				2014
		(in thousands)
Cash used in operating activities		$	(23,494	)		$	(42,266	)
Cash used in investing activities			(835	)			(2,032	)
Cash provided by financing activities			77,815				65,203
Net increase in cash and cash equivalents		$	53,486			$	20,905

 

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Prior to our IPO, we funded our operations primarily through private sales of equity securities. In April 2015, we raised aggregate net proceeds of $76.8 million in our IPO, after deducting underwriting discounts and commissions and offering expenses payable by us from the gross proceeds, but before deducting approximately $1.4 million of unpaid offering costs, which are expected to be paid by the end of the Company’s fourth fiscal quarter. We believe that our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, our needs for increased data center capacity to support our expanding customer base, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced software and services offerings, and the continuing market acceptance of our solutions. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, if at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition would be adversely affected.

Operating Activities

For the nine months ended April 30, 2015, we used $23.5 million of cash in our operating activities, which reflects our net loss of $37.8 million, adjusted by non-cash charges of $4.2 million consisting primarily of $2.3 million for stock-based compensation and $1.8 million for depreciation and amortization. Additional sources of cash inflows were from changes in our working capital, including a $10.2 million increase in deferred revenue and $1.1 million increase in accrued expenses and other liabilities, which was partially offset by a $1.4 million decrease in accounts payable.

For the nine months ended April 30, 2014, we used $42.3 million of cash in our operating activities, which reflects our net loss of $45.2 million, adjusted by non-cash charges of $4.7 million consisting primarily of $1.6 million associated with changes in the fair value of our common stock warrants, $1.5 million for stock-based compensation and $1.4 million for depreciation and amortization. Additional sources of cash were from changes in our working capital, including a $4.0 million increase in deferred revenue and a $3.2 million increase in accrued expenses and other liabilities, which were partially offset by a $7.7 million increase in accounts receivable and a $1.2 million increase in prepaid expenses and other assets.

Investing Activities

During the nine months ended April 30, 2015, cash used in investing activities of $0.8 million was primarily attributable to capital expenditures for technology and software to support the growth of our business. During the nine months ended April 30, 2014, cash used in investing activities of $2.0 million was primarily attributable to capital expenditures of $2.5 million for technology and software to support the growth of our business, as well as leasehold improvements on our corporate headquarters, partially offset by $0.4 million net of cash acquired in our acquisition of InsightsOne.

Financing Activities

During the nine months ended April 30, 2015, cash provided by financing activities was primarily due to $78.3 million net proceeds from our IPO, $4.0 million proceeds from the issuance of debt and $0.8 million proceeds from exercise of stock options, partially offset by $4.9 million of repayments on our outstanding debt obligations and $0.4 million of withholding taxes paid related to net settlement of equity awards. During the nine months ended April 30, 2014, cash provided by financing activities was primarily due to $59.8 million proceeds from the issuance of convertible preferred stock, $6.5 million proceeds from the issuance of debt and $0.2 million proceeds from exercise of stock options, partially offset by $1.4 million of repayments on our outstanding debt obligations.

Long-term Debt

In May 2012, we entered into a Loan and Security Agreement with Silicon Valley Bank (“SVB”), which was amended and restated in November 2014 (“Loan Agreement”). The Loan Agreement provides us with the ability to borrow up to $25.0 million through a $12.5 million revolving line of credit subject to an accounts receivable borrowing base, which refinanced and replaced the existing revolving line in its entirety and $12.5 million term loan. We can draw upon the revolving line of credit through October 31, 2017, and the revolving loans bear interest at a rate equal to prime plus 1.5% per annum (4.75% at April 30, 2015). Outstanding revolving loans are limited to the lesser of $12.5 million or 80% of the balance of certain eligible customer accounts receivable. The term loan is available in two tranches. The first tranche, Tranche A, in an aggregate principal amount of $4.0 million, refinanced and replaced the existing term loan and existing growth capital loan in their entirety. The principal amount of Tranche A is payable in equal monthly installments over a 30-month period with the last payment due no later than May 31, 2017. The second tranche, Tranche B, in an aggregate principal amount of up to $8.5 million, is available to borrow through May 31, 2016. Tranche B has interest only payments during such draw period and then the principal is payable in equal monthly installments thereafter over a 24-month period. The term loan bears interest at a rate equal to prime plus 0.75% per annum (4.0% at April 30, 2015). An end-of-term payment of $156,250 will become due upon the final payment of Tranche A, or Tranche B, if applicable. We are permitted to prepay all term loans without premium or penalty. An existing equipment term loan provided under the Loan Agreement is fully funded and not available for further draws under the amendment and we will continue to repay the outstanding principal in monthly installments, plus interest at a rate equal to prime plus 2.0% per annum (5.25% at April 30, 2015 and 5.25% at July 31, 2014), with the last payment due in June 2017.

 

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In connection with the Loan Agreement, we issued warrants (“SVB warrants”) to purchase 39,473, 26,315, and 3,495 shares of common stock during the years ended July 31, 2012 and 2013, and the nine months ended April 30, 2015, respectively. Warrants to purchase 41,446 shares have an exercise price of $0.69 per share and expire in May 2022. Warrants to purchase 24,342 shares have an exercise price of $3.65 per share and expire in May 2022. Warrants to purchase 3,495 shares have an exercise price of $13.68 and expire in November 2024. Upon funding of Tranche B, we will issue warrants to purchase 10,485 shares of common stock with an exercise price of $13.68 per share and expiration in November 2024. The fair value of the SVB warrants was determined using the Black-Scholes option valuation model. As of April 30, 2015 and July 31, 2014, 69,283 and 65,788 of these warrants to purchase shares of common stock remained outstanding and exercisable.

The Loan Agreement contains customary affirmative covenants and certain financial and negative covenants, including restrictions on disposing of assets, entering into change of control transactions, mergers or acquisitions, incurring additional indebtedness, granting liens on our assets and paying dividends. We are required to maintain a minimum liquidity ratio and minimum total revenue on a rolling two quarter basis that is not less than 80% of our projected revenues for each period. We have pledged substantially all of our assets, other than our intellectual property, as collateral under the Loan and Security Agreement. As of April 30, 2015 and July 31, 2014, we were in compliance with all loan covenants.

The Loan Agreement contains customary events of default that include, among others, payment defaults, covenant defaults, bankruptcy defaults, cross-defaults to certain other obligations, judgment defaults and inaccuracy of representations and warranties. Upon the occurrence of an event of default, SVB may elect to declare all amounts outstanding under the Loan Agreement to be immediately due and payable and terminate all commitments to extend further credit. If we are unable to repay those amounts, SVB can proceed against the collateral granted to them to secure such indebtedness. In addition, the occurrence of an event of default will increase the applicable rate of interest by 3.0%.

Contractual Payment Obligations

There were no material changes in our commitments under contractual obligations except for scheduled payments from the ongoing business, as disclosed in our IPO prospectus.

Off-Balance Sheet Arrangements

During the nine months ended April 30, 2015, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Indemnification Arrangements

In the ordinary course of business, we enter into contractual arrangements under which we agree to provide indemnification of varying scope and terms to customers, business partners and other parties with respect to certain matters, including losses arising out of the breach of such agreements, intellectual property infringement claims made by third parties, and other liabilities with respect to our products and services and our business. In these circumstances, payment may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract.

We include service level commitments to our cloud customers warranting certain levels of uptime reliability and performance and permitting those customers to receive credits in the event that we fail to meet those levels. To date, we have not incurred any material costs as a result of these commitments and we expect the time between any potential claims and issuance of the credits to be short. As a result, we have not accrued any liabilities related to these commitments in our consolidated financial statements.

In addition, we have indemnification agreements with our directors and certain of our executive officers that require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers.

Critical Accounting Policies and Estimates

We prepare our condensed consolidated financial statements in accordance with GAAP in the United States. The preparation of condensed consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We refer to accounting estimates of this type as critical accounting policies and estimates.

 

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There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our IPO prospectus.

JOBS Act Accounting Election

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies 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. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards, and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Recent Accounting Pronouncements

Fees paid in a cloud computing arrangement: In April 2015, the FASB issued ASU 2015-05 related to a customer’s accounting for fees paid in a cloud computing arrangement. The new guidance requires that management evaluate each cloud computing arrangement in order to determine whether it includes a software license that must be accounted for separately from hosted services. ASU 2015-05 applies the same guidance cloud service providers use to make this determination and also eliminates the existing requirement for customers to account for software licenses they acquire by analogizing to the guidance on leases. ASU 2015-05 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015 and provides the option of applying the guidance prospectively to all arrangements entered into or materially modified after the effective date or on a retrospective basis. Early adoption is permitted. We are still evaluating the impact this standard will have on our consolidated financial statements.

Debt Issuance Costs: In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this ASU. Early adoption is permitted. This guidance is effective for the Company on a retrospective basis beginning in the first quarter of 2017 and is not expected to have a material impact on the Company’s consolidated financial statements.

Going Concern: In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern, which requires an entity to evaluate whether there is substantial doubt about its ability to continue as a going concern, and to provide related footnote disclosures. The new standard is effective for us in our fiscal year ending July 31, 2017. We are evaluating the effect of our pending adoption of ASU 2014-15 on our consolidated financial statements and related disclosures.

Revenue Recognition: In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for us in its first quarter of fiscal 2018. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. Certain aspects of ASU 2014-09 are currently under re-deliberation, and in April 2015, the FASB issued an exposure draft proposing a one-year deferral of the effective date of the standard and allowing early adoption as of the original effective date. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

See also “Recently Adopted Accounting Standards” in Note 1 to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

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PART II. OTHER INFORMATION

Item 6. Exhibits

See the Exhibit Index following the signature page to this Amendment No. 1 to the Quarterly Report on Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in San Jose, California, on June 22, 2015.

 

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EXHIBIT INDEX

 

				Incorporated by Reference
Number		Exhibit Title		Form		File No.		Filing Date		Filed Herewith
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.								X
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.								X
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*								X
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*								X

 

*

These exhibits are furnished with this Amendment No. 1 to the Quarterly Report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and are not incorporated by reference in any filing of Apigee Corporation under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filings.