Attached files

file filename
EX-32.1 - EX-32.1 - MOBILEIRON, INC.c099-20170630ex3211f59c1.htm
EX-31.2 - EX-31.2 - MOBILEIRON, INC.c099-20170630ex3123d226c.htm
EX-31.1 - EX-31.1 - MOBILEIRON, INC.c099-20170630ex311a6143f.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


 

Form 10-Q


(Mark One)

 

 

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

 

For the Quarterly Period Ended June 30, 2017

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 001-36471


MobileIron, Inc.

(Exact name of Registrant as specified in its charter)


 

 

 

 

 

 

 

Delaware

 

26-0866846

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

401 East Middlefield Road

Mountain View, California

 

94043

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:

(650) 919-8100


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒      No    ◻

 

Indicate by check mark whether the registrant has submitted electronically 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ☒     No   ◻

 

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

 

 

 

 

 

 

 

Large accelerated filer   ◻                    

 

 

 

Accelerated filer   ☒

Nonaccelerated filer    ◻ (Do not check if a smaller reporting company)   

 

 

 

Smaller reporting company   ◻

Emerging growth company   ☒ 

 

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

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

 

At July 28, 2017, there were 94,135,654 shares of the registrant’s common stock, $0.0001 par value, issued and outstanding.

 

 

 

 


 

INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended June 30, 2017

 

 

 

Page

PART I FINANCIAL INFORMATION 

 

5

Item 1. Financial Statements:

 

5

Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016 

 

5

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2016 

 

6

Condensed Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2017 

 

7

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016 

 

8

Notes to Condensed Consolidated Financial Statements 

 

9

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

 

27

Item 3. Quantitative and Qualitative Disclosure About Market Risk 

 

44

Item 4. Controls and Procedures 

 

44

PART II OTHER INFORMATION 

 

45

Item 1. Legal Proceedings 

 

45

Item 1A. Risk Factors 

 

45

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

 

70

Item 3. Defaults Upon Senior Securities 

 

71

Item 4. Mine Safety Disclosures 

 

71

Item 5. Other Information 

 

71

Item 6. Exhibits 

 

71

Signatures 

 

72

 

 

 

2


 

 

 

WHERE YOU CAN FIND MORE INFORMATION

 

Investors and others should note that we announce material financial information to our investors using our investor relations website address, press releases, SEC filings and public conference calls and webcasts. We also use the following social media channels as a means of disclosing information about the company, our services and other matters and for complying with our disclosure obligations under Regulation FD:

 

MobileIron Company Blog (https://www.mobileiron.com/en/smartwork-blog)

 

MobileIron Facebook Page (https://www.facebook.com/mobileiron)

 

MobileIron Twitter Account (https://twitter.com/mobileiron); @mobileiron

 

MobileIron LinkedIn Page (https://www.linkedin.com/company/mobileiron)

 

The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these accounts and the blog, in addition to following our press releases, SEC filings and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this Quarterly Report on Form 10-Q. These channels may be updated from time to time on MobileIron’s investor relations website.

3


 

 

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases you can identify these statements by forward-looking words such as “believe,” “may,” “will,” “might,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “should,” “would,” “potentially,” “predict,” “plan,” “outlook,” “target,” “expect,” “future” or similar expressions, or the negative or plural of these words or expressions. These forward-looking statements include, but are not limited to, statements concerning the following:

 

 

 

 

 

beliefs and objectives for future operations and growth;

 

 

 

 

our business plan and our ability to effectively manage our expenses;

 

 

 

 

our ability to timely and effectively scale and adapt our existing technology;

 

 

 

 

our ability to innovate new products and bring them to market in a timely manner;

 

 

 

 

our ability to expand internationally;

 

 

 

 

our ability to attract new customers and further penetrate our existing customer base;

 

 

 

 

our expectations concerning renewal rates for subscriptions and services by existing customers;

 

 

 

 

our expectations concerning the mix of our sales of subscriptions and perpetual licenses;

 

 

 

 

cost of revenue, including changes in costs associated with hardware, royalties, customer support and data center operations;

 

 

 

 

operating expenses, including changes in research and development, sales and marketing, and general and administrative expenses;

 

 

 

 

our expectations concerning relationships with third parties, including channel and other partners;

 

 

 

 

economic and industry trends or trend analysis; and

 

 

 

 

the sufficiency of our existing cash and investments to meet our cash needs for at least the next 12 months.

 

 

 

 

These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. These risks are not exhaustive. These statements are within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements appear throughout this Quarterly Report on Form 10-Q and are statements regarding our intent, belief, or current expectations, primarily with respect to our business and related industry developments. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us and described in Part II, Item 1A, entitled “Risk Factors,” and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Quarterly Report on Form 10-Q. We undertake no obligation to update any forward-looking statements for any reason to conform these statements to actual results or to changes in our expectations.

4


 

 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

MOBILEIRON, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

    

 

2017

    

2016

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

85,871

 

$

54,043

 

Short-term investments

 

 

3,302

 

 

36,184

 

Accounts receivable, net of allowance for doubtful accounts of $405 and $433 at June 30, 2017 and December 31, 2016, respectively

 

 

41,342

 

 

43,755

 

Prepaid expenses and other current assets

 

 

11,377

 

 

6,131

 

TOTAL CURRENT ASSETS

 

 

141,892

 

 

140,113

 

Property and equipment—net

 

 

7,486

 

 

5,503

 

Intangible assets—net

 

 

336

 

 

645

 

Goodwill

 

 

5,475

 

 

5,475

 

Other assets

 

 

1,784

 

 

1,370

 

TOTAL ASSETS

 

$

156,973

 

$

153,106

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

4,553

 

$

701

 

Accrued expenses

 

 

26,210

 

 

21,674

 

Deferred revenue-current

 

 

72,525

 

 

68,153

 

TOTAL CURRENT LIABILITIES

 

 

103,288

 

 

90,528

 

Long-term liabilities:

 

 

 

 

 

 

 

Deferred revenue-noncurrent

 

 

20,851

 

 

19,923

 

Other long-term liabilities

 

 

1,896

 

 

1,838

 

TOTAL LIABILITIES

 

 

126,035

 

 

112,289

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.0001 par value, 300,000,000 shares authorized, 94,100,326 shares and 89,066,031 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively

 

 

 9

 

 

 9

 

Additional paid-in capital

 

 

404,691

 

 

383,193

 

Accumulated deficit

 

 

(373,762)

 

 

(342,385)

 

TOTAL STOCKHOLDERS’ EQUITY

 

 

30,938

 

 

40,817

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

156,973

 

$

153,106

 

See accompanying notes.

5


 

 

MOBILEIRON, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

Perpetual license

 

$

9,704

 

$

9,783

 

$

19,586

 

$

20,151

 

Subscription

 

 

17,248

 

 

14,803

 

 

34,155

 

 

29,426

 

Software support and services

 

 

15,700

 

 

14,295

 

 

31,199

 

 

27,311

 

Total revenue

 

 

42,652

 

 

38,881

 

 

84,940

 

 

76,888

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

Perpetual license

 

 

453

 

 

629

 

 

852

 

 

1,488

 

Subscription

 

 

2,182

 

 

2,199

 

 

4,075

 

 

3,982

 

Software support and services

 

 

5,396

 

 

5,289

 

 

10,374

 

 

9,917

 

Total cost of revenue

 

 

8,031

 

 

8,117

 

 

15,301

 

 

15,387

 

Gross profit

 

 

34,621

 

 

30,764

 

 

69,639

 

 

61,501

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

19,666

 

 

18,019

 

 

36,859

 

 

34,946

 

Sales and marketing

 

 

25,674

 

 

27,246

 

 

48,976

 

 

52,914

 

General and administrative

 

 

7,840

 

 

8,265

 

 

14,028

 

 

15,813

 

Litigation settlement charge

 

 

 —

 

 

 —

 

 

1,143

 

 

 —

 

Total operating expenses

 

 

53,180

 

 

53,530

 

 

101,006

 

 

103,673

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(18,559)

 

 

(22,766)

 

 

(31,367)

 

 

(42,172)

 

Other income (expense) - net

 

 

339

 

 

30

 

 

513

 

 

165

 

Loss before income taxes

 

 

(18,220)

 

 

(22,736)

 

 

(30,854)

 

 

(42,007)

 

Income tax expense

 

 

324

 

 

198

 

 

523

 

 

374

 

Net loss

 

$

(18,544)

 

$

(22,934)

 

$

(31,377)

 

$

(42,381)

 

Net loss per share, basic and diluted

 

$

(0.20)

 

$

(0.27)

 

$

(0.34)

 

$

(0.50)

 

Weighted-average shares used to compute net loss per share, basic and diluted

 

 

92,963

 

 

85,317

 

 

91,708

 

 

84,151

 

 

See accompanying notes.

 

6


 

MOBILEIRON, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

    

 

    

    

 

    

    

 

    

 

 

 

 

    

 

 

 

 

Additional

 

 

 

Total

 

 

 

Common Stock

 

Paid-in

 

Accumulated

 

Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

Deficit

 

Equity

 

BALANCE—December 31, 2016

 

89,066,031

 

$

 9

 

$

383,193

 

$

(342,385)

 

$

40,817

 

Issuance of common stock for stock option exercises

 

983,747

 

 

 —

 

 

2,892

 

 

 —

 

 

2,892

 

Vesting of early exercised stock options

 

1,881

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Issuance of common stock pursuant to the Employee Stock Purchase Plan

 

793,210

 

 

 —

 

 

2,110

 

 

 —

 

 

2,110

 

Issuance of common stock pursuant to the Employee Stock-Settled Bonus Plans

 

1,688,097

 

 

 —

 

 

8,272

 

 

 —

 

 

8,272

 

Shares withheld for net settlement of Employee Stock-Settled Bonus Plans

 

(677,547)

 

 

 —

 

 

(3,149)

 

 

 —

 

 

(3,149)

 

Vesting of restricted stock units

 

2,244,907

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Stock-based compensation

 

 —

 

 

 —

 

 

11,373

 

 

 —

 

 

11,373

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(31,377)

 

 

(31,377)

 

BALANCE—June 30, 2017

 

94,100,326

 

$

 9

 

$

404,691

 

$

(373,762)

 

$

30,938

 

 

See accompanying notes

7


 

 

 

MOBILEIRON, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

    

2017

    

2016

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net loss

 

$

(31,377)

 

$

(42,381)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

17,171

 

 

18,794

 

Depreciation

 

 

1,533

 

 

1,681

 

Amortization of intangible assets

 

 

308

 

 

308

 

Provision for doubtful accounts

 

 

50

 

 

 —

 

Amortization (accretion) of premium on investment securities

 

 

(32)

 

 

53

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

2,363

 

 

7,441

 

Other current and noncurrent assets

 

 

(6,476)

 

 

(2,188)

 

Accounts payable

 

 

1,562

 

 

453

 

Accrued expenses and other long-term liabilities

 

 

6,482

 

 

(445)

 

Deferred revenue

 

 

5,300

 

 

2,612

 

Net cash used in operating activities

 

 

(3,116)

 

 

(13,672)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(922)

 

 

(2,052)

 

Proceeds from maturities of investment securities

 

 

32,915

 

 

49,256

 

Purchase of investment securities

 

 

 —

 

 

(42,016)

 

Net cash provided by investing activities

 

 

31,993

 

 

5,188

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from Employee Stock Purchase Plan

 

 

2,391

 

 

2,342

 

Proceeds from exercise of stock options

 

 

3,709

 

 

443

 

Taxes paid for net settlement of stock-settled bonus

 

 

(3,149)

 

 

 —

 

Net cash provided by financing activities

 

 

2,951

 

 

2,785

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

31,828

 

 

(5,699)

 

CASH AND CASH EQUIVALENTS—Beginning of period

 

 

54,043

 

 

47,234

 

CASH AND CASH EQUIVALENTS—End of period

 

$

85,871

 

$

41,535

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

446

 

$

471

 

SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Value of shares issued under the 2015 Non-Executive Bonus Plan

 

$

n/a

 

$

5,638

 

Value of shares issued under the 2016 Bonus Plans

 

$

5,123

 

 

n/a

 

Value of shares issued under the Employee Stock Purchase Plan

 

$

2,110

 

$

2,579

 

Unpaid property and equipment purchases

 

$

2,596

 

$

 —

 

 

 

 

 

 

 

See accompanying notes.

 

 

8


 

MOBILEIRON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.Description of Business and Significant Accounting Policies

 

Description of Business

 

MobileIron, Inc., and its wholly owned subsidiaries collectively, the “Company”, “we”, “us” or “our”, provides a purpose-built mobile IT platform that enables enterprises to manage and secure mobile applications, content and devices while providing their employees with device choice, privacy and a native user experience. We were incorporated in Delaware in July 2007 and are headquartered in Mountain View, California, with additional sales and support presence in North America, Europe, the Middle East, Asia and Australia.

 

Basis of Presentation and Consolidation

 

The accompanying unaudited condensed consolidated financial statements as of June 30, 2017 and for the three and six months ended June 30, 2017 and 2016 have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC, and include the accounts of our wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

 

Certain information and footnote disclosures in this Quarterly Report on Form 10-Q normally included in annual financial statements prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of the SEC have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary for a fair presentation of our balance sheet as of June 30, 2017, our operating results for the three and six months ended June 30, 2017 and 2016, and our cash flows for the six months ended June 30, 2017 and 2016. Our operating results for the six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017. The condensed consolidated balance sheet as of December 31, 2016 has been derived from the audited consolidated financial statements as of that date but does not include all the footnotes required by U.S. GAAP for complete financial statements.

 

The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with our audited financial statements and related notes thereto for the year ended December 31, 2016, included in our Annual Report on Form 10-K filed with the SEC on February 14, 2017.

 

Foreign Currency Translation

 

Our reporting currency is the U.S. dollar. The functional currency of all our international operations is the U.S. dollar. All monetary asset and liability accounts are translated into U.S. dollars at the period-end rate, nonmonetary assets and liabilities are translated at historical exchange rates, and revenue and expenses are translated at the weighted-average exchange rates in effect during the period. Translation adjustments are recorded as foreign currency gains (losses) in the consolidated statements of operations. We recognized a foreign currency gain of $165,000 and a loss of $89,000 in the three months ended June 30, 2017 and 2016, respectively, and we recognized a foreign currency gain of $173,000 and a loss of $47,000 in the six months ended June 30, 2017 and 2016, respectively, in other income (expense)—net in our condensed consolidated statements of operations.

 

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.

9


 

These estimates include, but are not limited to, revenue recognition, stock-based compensation, goodwill, intangible assets and accounting for income taxes. Actual results could differ from those estimates.

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject us to a concentration of credit risk consist of cash, money market funds and fixed income investments. Although we deposit our cash with multiple financial institutions, our deposits, at times, exceed federally insured limits. We invest in fixed income securities that are of high-credit quality. Substantially all of our money market funds, or $14.4 million, are held in two funds that are rated “AAA.”

 

We generally do not require collateral or other security in support of accounts receivable. Allowances are provided for individual accounts receivable when we become aware of a customer’s inability to meet its financial obligations, such as in the case of bankruptcy, deterioration of the customer’s operating results, or change in financial position. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted. We also consider broader factors in evaluating the sufficiency of our allowances for doubtful accounts, including the length of time receivables are past due, significant one-time events and historical experience. At June 30, 2017 and December 31, 2016 we had an allowance for doubtful accounts of $405,000 and $433,000, respectively.

 

One reseller accounted for 14% of total revenue (1% as an end customer) and 15% of total revenue (1% as an end customer) for the three and six months ended June 30, 2017, respectively, and for 16% of total revenue (1% as the end customer) and 17% of total revenue (1% as an end customer) for the three and six months ended June 30, 2016. The same reseller accounted for 18% and 15% of net accounts receivable as of June 30, 2017 and December 31, 2016, respectively.

 

There were no other resellers or end-user customers that accounted for 10% or more as a percentage of our revenue or net accounts receivable for any period presented.

 

Segments

 

We have one reportable segment.

 

Summary of Significant Accounting Policies

 

Revenue Recognition

 

We derive revenue principally from software-related arrangements consisting of perpetual software licenses, post-contract customer support for such licenses, or PCS or software support, including when and if available updates, and professional services such as consulting and training services. We also offer our software as term-based licenses and cloud-based arrangements. In addition, we install our software on servers that we ship to customers.

We begin to recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been provided, (iii) the sales price is fixed or determinable, and (iv) collection of the related receivable is probable. If collection is not considered probable, revenue is recognized only upon collection.

Signed agreements, including by electronic acceptance, are used as evidence of an arrangement. Delivery is considered to occur when we provide a customer with a link and credentials to download our software. Delivery of a hardware appliance (an “appliance”) is considered to occur when title and risk of loss has transferred to the customer, which typically occurs when appliances are delivered to a common carrier. Delivery of services occurs when performed.

We established VSOE of fair value when we had a substantial majority of stand-alone sales transactions of software support and services pricing within a narrow pricing band. In our VSOE analysis, we generally include stand-alone sales transactions completed during a rolling 12 month period unless a shorter period is appropriate due to changes in our pricing structure.

10


 

We typically enter into multiple-element arrangements with our customers in which a customer may purchase a combination of software on a perpetual or subscription license, PCS, and professional services. The professional services are not considered essential to the functionality of the software. All of these elements are considered separate units of accounting. Our standard agreements do not include rights for customers to cancel or terminate arrangements or to return software to obtain refunds.

We use the residual method to recognize revenue when a perpetual license arrangement includes one or more elements to be delivered at a future date provided the following criteria are met: (i) VSOE of fair value does not exist for one or more of the delivered items but exists for all undelivered elements, (ii) all other applicable revenue recognition criteria are met and (iii) the fair value of all of the undelivered elements is less than the arrangement fee. VSOE of fair value is based on the normal pricing practices for those products and services when sold separately by us and contractual customer renewal rates for post-contract customer support services. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue in the period in which it was earned. If evidence of the fair value of one or more undelivered elements does not exist, then the revenue is deferred and recognized when delivery of those elements occurs, or when fair value can be established, or ratably over the PCS period if the only undelivered element is PCS—we refer to these deferred revenue elements as the “Deferred Portion.”

Revenue from subscriptions to our on premise term licenses, arrangements where perpetual and subscriptions to our on premise term licenses are sold together, and subscriptions to our cloud service are recognized ratably over the contractual term for all periods presented and are included as a component of subscription revenue within our consolidated statements of operations. We refer to arrangements where perpetual and subscriptions to our on premise term licenses are sold together as “Bundled Arrangements.”

Occasionally, we enter into multiple-element arrangements with our customers in which a customer may purchase a combination of software on a perpetual or term basis, PCS, professional services, and appliances. We generally provide the appliances and software upon the commencement of the arrangement and provide software-related elements throughout the support period. We account for appliance-bundled arrangements under the revised accounting standard related to multiple-element arrangements, Accounting Standard Update, or ASU, No. 2009-13, Multiple Element Arrangements, and determine the revenue to be recognized based on the standard’s fair value hierarchy and then determine the value of each element in the arrangement based on the relative selling price of the arrangement. Amounts related to appliances are generally recognized upon delivery with the remaining consideration allocated to software and software-related elements, which are recognized as described elsewhere in this policy.

Revenue from PCS is recognized ratably over the support term and is included as a component of software support and service revenue within the consolidated statements of operations.

Revenue related to professional services is recognized upon delivery and is included as a component of software support and services revenue within the consolidated statements of operations.

Appliance revenue was less than 10% of total revenue for all periods presented and is included as a component of perpetual license revenue within the consolidated statements of operations.

Sales made through resellers are typically fulfilled directly to end users, and we recognize revenue when we deliver licenses to end users and all other revenue recognition criteria are met. Some of our operators, system integrators and other resellers, however, request that we deliver licenses to them. In those instances we recognize revenue at the time that we deliver to the resellers and all other revenue recognition criteria are met; such resellers have no rights of return or exchange.

Shipping charges and sales tax billed to partners are excluded from revenue.

Sales commissions and other incremental costs to acquire contracts are also expensed as incurred and are recorded in sales and marketing expense.

For all arrangements, any revenue that has been deferred and is expected to be recognized beyond one year is classified as long-term deferred revenue in the consolidated balance sheets.

11


 

 

Cash Equivalents

 

We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. As of June 30, 2017 and December 31, 2016 cash and cash equivalents consist of cash deposited with banks, money market funds and investments that mature within three months of their purchase.

Held-To-Maturity Investments

We determine the appropriate classification of our fixed income investments at the time of purchase and reevaluate their classifications each reporting period. Investments are classified as held-to-maturity since the Company has positive intent and the ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost.

 

Comprehensive Loss

 

Comprehensive loss includes all changes in equity (net assets) during a period from non-owner sources. For the three and six months ended June 30, 2017 and 2016, there were no differences between net loss and comprehensive loss. Therefore, the consolidated statements of comprehensive loss have been omitted.

 

Net Loss per Share of Common Stock

 

Basic net loss per common share is calculated by dividing the net loss by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common shares and potentially dilutive securities outstanding for the period determined using the treasury-stock and if-converted methods. For purposes of the diluted net loss per share calculation, unvested restricted stock and stock options are considered to be potentially dilutive securities. Because we have reported a net loss for the three and six months ended June 30, 2017 and 2016, the number of shares used to calculate diluted net loss per common share is the same as the number of shares used to calculate basic net loss per common share for those periods presented because the potentially dilutive shares would have been anti-dilutive if included in the calculation.

 

Software Development Costs Incurred in Connection with Software to be Sold or Marketed

 

The costs to develop new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. We consider technological feasibility to have occurred when all planning, designing, coding and testing have been completed according to design specifications. Once technological feasibility is established, any additional costs would be capitalized. We believe our current process for developing software is essentially completed concurrent with the establishment of technological feasibility, and accordingly, no costs have been capitalized.

 

Internal Use Software

 

We capitalize costs incurred during the application development stage related to our internally used software. Such costs are primarily incurred by third party vendors and consultants. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. Amounts capitalized in all periods presented were not significant.

 

All software development costs incurred in connection with our cloud offering, or SaaS, are also sold or marketed to partners or end customers, therefore we start capitalizing costs when technological feasibility is achieved. No costs were capitalized in any periods presented as we believe that our current process for developing software is essentially completed concurrent with the establishment of technological feasibility.

 

12


 

Property and Equipment

 

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful life of the property and equipment, determined to be three years for computers and equipment and software, five years for furniture and fixtures, and the lesser of the remaining lease term or estimated useful life for leasehold improvements. Expenditures for repairs and software support are charged to expense as incurred. Upon disposition, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected as operating expenses in the condensed consolidated statements of operations.

 

Goodwill and Intangible Assets

 

We record the excess of the acquisition purchase price over the fair value of the tangible and identifiable intangible assets acquired as goodwill. We perform an impairment test of our goodwill in the third quarter of our fiscal year, or more frequently if indicators of potential impairment arise. We have a single reporting unit and consequently evaluate goodwill for impairment based on an evaluation of the fair value of the Company as a whole. We record purchased intangible assets at their respective estimated fair values at the date of acquisition. Purchased intangible assets are being amortized using the straight-line method over their remaining estimated useful lives, which range from three to five years. We evaluate the remaining useful lives of intangible assets on a periodic basis to determine whether events or circumstances warrant a revision to the remaining estimated amortization period.

Long-Lived Assets with Finite Lives

Long-lived assets are reviewed for possible impairment whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable. We evaluate the recoverability of each of our long-lived assets, including purchased intangible assets and property and equipment, by comparison of its carrying amount to the future undiscounted cash flows we expect the asset to generate. If we consider the asset to be impaired, we measure the amount of any impairment as the difference between the carrying amount and the fair value of the impaired asset.

 

Stock-Based Compensation

 

We use the estimated grant-date fair value method of accounting in accordance with Accounting Standards Codification, or ASC, Topic 718 Compensation—Stock Compensation. Fair value is determined using the Black-Scholes Model using various inputs, including our estimates of expected volatility, term and future dividends.

 

On January 1, 2017, we adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification in the statement of cash flows. The adoption of that standard did not have a material impact on our consolidated balance sheet, results of operations, cash flows or statement of stockholders’ equity because we have a full valuation allowance on our deferred tax assets. We have elected to continue to estimate the total number of awards that are expected to vest by applying a forfeiture rate to our equity awards. We estimated the forfeiture rate for the three and six months ended June 30, 2017 based on our historical experience for annual grant years where the majority of the vesting terms have been satisfied. We recognize compensation costs for awards with service and performance vesting conditions and for our Employee Stock Purchase Plan, or ESPP, on an accelerated method over the requisite service period of the award. For stock options or restricted stock grants with no performance condition, we recognize compensation costs on a straight-line basis over the requisite service period of the award, which is generally the vesting term of four years. 

 

Research and Development

 

Research and development, or R&D, costs are charged to expense as incurred.

 

Advertising

 

Advertising costs are expensed and included in sales and marketing expense when incurred. Advertising expense for the three and six months ended June 30, 2017 and 2016 was not significant.

13


 

 

Income Taxes

 

We account for income taxes in accordance with ASC Topic 740, Income Taxes, under which deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities and net operating loss and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

 

We use a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. A tax position is recognized when it is more likely than not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation processes. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority. The standard also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure and transition.

 

Recent Accounting Pronouncements

 

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies and adopted by us as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption.

 

In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses – Measurement of Credit Losses on Financial Instruments, which introduces a model based on expected losses to estimate credit losses for most financial assets and certain other instruments. In addition, for available-for-sale debt securities with unrealized losses, the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The standard is effective for annual reporting periods beginning after December 15, 2019, with early adoption permitted for annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions by recording a cumulative-effect adjustment to retained earnings. We are evaluating the impact of the adoption on our consolidated balance sheet, results of operations, cash flows and disclosures.

In May 2014, the FASB, jointly with the International Accounting Standards Board, issued a comprehensive new standard on revenue recognition from contracts with customers. The standard’s core principle is that a reporting entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying this new guidance to contracts within its scope, an entity will: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. Additionally, this new guidance will require significantly expanded disclosures about revenue recognition. As clarified by the FASB on July 9, 2015, provisions of this new standard are effective for annual reporting periods (including interim reporting periods within those annual periods) beginning after December 15, 2017. Early adoption is permitted for annual reporting periods (including interim reporting periods within those annual periods) beginning after December 15, 2016. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt this new guidance. We will adopt the new standard on January 1, 2018 and expect to use the full retrospective approach. We anticipate this standard will have a material impact on our consolidated financial statements. While we are continuing to assess all potential impacts of the standard, we believe the most significant impact relates to our accounting for subscriptions to our on-premise licenses, specifically, as under the new standard we expect to recognize revenue from those subscriptions predominantly at the time of billing rather than ratably over the license term. In addition, we expect accounting for commissions to be impacted significantly as we will capitalize and amortize most commissions under the new standard instead of expensing commissions as incurred. Due to the complexity of certain of our contracts, the revenue recognition treatment required under the new standard will be dependent on contract-specific terms.

 

In February 2016, the FASB finalized ASU 2016-02, Leases. ASU 2016-02 requires lessees to recognize the assets and liabilities on the balance sheet for the rights and obligations created by most leases (leases with the term of 12

14


 

months or longer) and continue to recognize expenses on the income statements over the lease term. It will also require disclosure designed to give financial statement users information on the amount, timing, and uncertainly of cash flows arising from leases. The guidance is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years. As a result of this new standard, we expect to record a lease commitment liability and corresponding asset for most of our leases. We will adopt ASU 2016-02 effective January 1, 2019.

 

 

2.Significant Balance Sheet Components

 

Property and Equipment —Property and equipment at June 30, 2017 and December 31, 2016 consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

    

June 30, 2017

    

December 31, 2016

 

Computers and appliances

 

$

12,481

 

$

9,754

 

Purchased software

 

 

2,873

 

 

2,297

 

Furniture and fixtures

 

 

1,503

 

 

1,477

 

Leasehold improvements

 

 

3,156

 

 

2,985

 

Total property and equipment

 

 

20,013

 

 

16,513

 

Accumulated depreciation and amortization

 

 

(12,527)

 

 

(11,010)

 

Total property and equipment—net

 

$

7,486

 

$

5,503

 

 

 

Accrued Expenses —Accrued expenses at June 30, 2017 and December 31, 2016 consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

    

June 30, 2017

    

December 31, 2016

 

Accrued commissions

 

$

4,046

 

$

5,908

 

Accrued stock-settled bonus

 

 

4,134

 

 

6,608

 

Accrued vacation

 

 

778

 

 

611

 

Employee Stock Purchase Plan liability

 

 

2,091

 

 

1,811

 

Other accrued payroll-related expenses

 

 

2,442

 

 

3,085

 

Accrued litigation settlement (1)

 

 

7,500

 

 

 —

 

Other accrued liabilities

 

 

5,219

 

 

3,651

 

Total accrued expenses

 

$

26,210

 

$

21,674

 

 

(1)

Accrued litigation settlement represents the amount due to plaintiffs to settle class action lawsuits filed against the Company, its officers, directors and other defendants. In addition, prepaid expenses and other current assets includes a $6.4 million receivable at June 30, 2017, which represents the amount that will be contributed toward the settlement by the Company’s Director & Officer liability insurance. See also Note 11.

 

Deferred Revenue —Current and non-current deferred revenue at June 30, 2017 and December 31, 2016 consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

    

June 30, 2017

    

December 31, 2016

 

Perpetual license

 

$

139

 

$

404

 

Subscription

 

 

40,012

 

 

35,495

 

Software support

 

 

50,635

 

 

50,117

 

Professional services

 

 

2,590

 

 

2,060

 

Total current and noncurrent deferred revenue

 

$

93,376

 

$

88,076

 

 

 

3.Fair Value Measurement

 

With the exception of our held-to-maturity fixed income investments, we report financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial

15


 

statements on a recurring basis in accordance with ASC 820, Fair Value Measurements. ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk.

 

ASC 820 also establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is available and significant to the fair value measurement. ASC 820 establishes and prioritizes three levels of inputs that may be used to measure fair value:

 

 

 

 

 

 

 

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

 

 

 

 

 

 

 

 

Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs other than quoted prices that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments.

 

 

 

 

 

 

 

 

Level 3—Inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. The inputs require significant management judgment or estimation.

 

Our financial assets that are carried at fair value include cash and money market funds. We had no financial liabilities, or nonfinancial assets and liabilities that were required to be measured at fair value on a recurring basis, or that were measured at fair value as of June 30, 2017 or December 31, 2016.

 

Our financial instruments measured at fair value as of June 30, 2017 and December 31, 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2017

 

(in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

 

Money market funds

 

$

14,445

 

$

 —

 

$

 —

 

$

14,445

 

Corporate debt securities

 

 

 —

 

 

6,106

 

 

 —

 

 

6,106

 

Commercial paper

 

 

 —

 

 

52,434

 

 

 —

 

 

52,434

 

Government debt securities

 

 

 —

 

 

572

 

 

 —

 

 

572

 

Total

 

$

14,445

 

$

59,112

 

$

 —

 

$

73,557

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

As of December 31, 2016

 

(in thousands)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Money market funds

 

$

15,003

 

$

 —

 

$

 —

 

$

15,003

 

Corporate debt securities

 

 

 —

 

 

10,738

 

 

 —

 

 

10,738

 

Commercial paper

 

 

 —

 

 

47,479

 

 

 —

 

 

47,479

 

Total

 

$

15,003

 

$

58,217

 

$

 —

 

$

73,220

 

 

 

4.Investments

 

Our portfolio of fixed income securities consists of commercial paper, corporate debt securities and obligations of foreign government related entities. All our investments in fixed income securities are classified as held-to-maturity. These investments are carried at amortized cost.

 

16


 

Our investments in fixed income securities as of June 30, 2017 and December 31, 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2017

 

    

Amortized

    

    

 

    

    

 

    

Fair

(in thousands)

 

cost

 

Gains

 

Losses

 

Value

Corporate debt securities

 

$

6,106

 

$

 —

 

$

 —

 

$

6,106

Commercial paper

 

 

52,436

 

 

 1

 

 

(3)

 

 

52,434

Government debt securities

 

 

572

 

 

 —

 

 

 —

 

 

572

Total

 

$

59,114

 

$

 1

 

$

(3)

 

$

59,112

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2016

 

    

Amortized

    

    

 

    

    

 

    

Fair

(in thousands)

 

cost

 

Gains

 

Losses

 

Value

Corporate debt securities

 

$

10,740

 

$

 —

 

$

(2)

 

$

10,738

Commercial paper

 

 

47,473

 

 

 8

 

 

(2)

 

 

47,479

Total

 

$

58,213

 

$

 8

 

$

(4)

 

$

58,217

 

The following table summarizes the balance sheet classification of our investments:

 

 

 

 

 

 

 

 

 

    

As of June 30, 

 

As of December 31,

(in thousands)

 

2017

 

2016

Cash equivalents

 

$

55,812

 

$

22,029

Short-term investments

 

 

3,302

 

 

36,184

Total investments

 

$

59,114

 

$

58,213

 

The gross amortized cost and estimated fair value of our held-to-maturity investments by contractual maturity are shown below. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2017

 

As of December 31, 2016

 

 

Gross

    

 

 

Gross

    

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

(in thousands)

 

Cost

 

Value

 

Cost

 

Value

Due in one year or less

 

$

59,114

 

$

59,112

 

$

58,213

 

$

58,217

Due after one year through five years

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total

 

$

59,114

 

$

59,112

 

$

58,213

 

$

58,217

 

We monitor our investment portfolio for impairment on a periodic basis. In order to determine whether a decline in fair value is other-than-temporary, we evaluate, among other factors: the duration and extent to which the fair value has been less than the carrying value; our financial condition and business outlook, including key operational and cash flow metrics, current market conditions and future trends in our industry; our relative competitive position within the industry; and our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. A decline in the fair value of the security below amortized cost that is deemed other-than-temporary is charged to earnings, resulting in the establishment of a new cost basis for the affected securities. In the three and six months ended June 30, 2017, we had an insignificant amount of unrealized gains or losses, and we did not recognize any other-than-temporary impairments. 

 

17


 

5.Goodwill and Intangibles

 

The following table reflects intangible assets subject to amortization as of June 30, 2017 and December 31, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

June 30, 2017

 

 

    

Gross Carrying

    

Accumulated

    

 

    

Net Book

 

 

 

Amount

 

Amortization

 

Impairment

 

Value

 

Technology

 

$

3,080

 

$

(2,744)

 

 

 —

 

$

336

 

Total

 

$

3,080

 

$

(2,744)

 

$

 —

 

$

336

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

December 31, 2016

 

 

    

Gross Carrying

    

Accumulated

    

    

 

Net Book

 

 

 

Amount

 

Amortization

 

Impairment

 

Value

 

Technology

 

$

3,080

 

$

(2,435)

 

 

 —

 

$

645

 

Total

 

$

3,080

 

$

(2,435)

 

$

 —

 

$

645

 

 

Amortization of the technology intangible assets was recorded in cost of revenue. The weighted average remaining life of our intangible assets on June 30, 2017 was 0.7 year.

 

Estimated remaining intangible assets amortization expense for the next five fiscal years and thereafter is as follows (in thousands):

 

 

 

 

 

 

Year

    

    

 

 

2017

 

$

236

 

2018

 

 

100

 

2019

 

 

 —

 

2020

 

 

 —

 

2021

 

 

 —

 

Total

 

$

336

 

 

At June 30, 2017 and December 31, 2016, the carrying value of goodwill was $5.5 million.

 

 

 

6. Line of Credit

 

We have a $20.0 million revolving line of credit with a financial institution that can be used to (a) borrow for working capital and general business requirements, (b) issue letters of credit, and (c) enter into foreign exchange contracts. Amounts borrowed accrue interest at a floating per annum rate equal to the prime rate. A default interest rate shall apply during an event of default at a rate per annum equal to 5% above the otherwise applicable interest rate. The line of credit is collateralized by substantially all of our assets, except intellectual property, and requires us to comply with working capital, net worth and other covenants, including limitations on indebtedness and restrictions on dividend distributions, among others, and the borrowing capacity is limited to eligible accounts receivable. We are required to maintain an adjusted quick ratio (defined as the ratio of current assets to current liabilities minus deferred revenue) of at least 1.25.

 

In May 2015, we issued a letter of credit for $1.5 million as a security deposit for a new Mountain View lease thereby reducing the borrowing capacity under our line of credit to $18.5 million.

 

In June 2017, we amended our revolving line of credit and extended its maturity date to June 2018.