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EX-23.1 - EX-23.1 - MOBILEIRON, INC.mobl-20191231ex2314a3ca3.htm
EX-32.1 - EX-32.1 - MOBILEIRON, INC.mobl-20191231ex3213ced3b.htm
EX-31.2 - EX-31.2 - MOBILEIRON, INC.mobl-20191231ex3127d27c2.htm
EX-31.1 - EX-31.1 - MOBILEIRON, INC.mobl-20191231ex3119687c1.htm
EX-21.1 - EX-21.1 - MOBILEIRON, INC.mobl-20191231ex2115187ea.htm
EX-4.3 - EX-4.3 - MOBILEIRON, INC.mobl-20191231ex4320a058d.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549


 

FORM 10-K


 

(Mark One)

 

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

 

For the fiscal year ended December 31, 2019 

 

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 Number)

 

490 East Middlefield Road

Mountain View, CA 94043

(650) 919-8100


 

 Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

MOBL

The Nasdaq Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☐ No ☒ 

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

 

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

 

Large accelerated filer

 

 

 

 

Accelerated filer

 

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

 

 

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 Act). Yes ☐  No ☒ 

 

As of June 30, 2019, the aggregate market value of shares of common stock held by non-affiliates of the registrant was $498 million based on the number of shares held by non-affiliates as of June 30, 2019 and based on the closing sale price of the registrant's common stock as reported on the Nasdaq Stock Market on June 30, 2019 of $6.20 per share. Shares of common stock held by officers, directors and holders of more than 5% of the outstanding common stock have been excluded from this calculation because such person may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

The number of outstanding shares of the registrant’s common stock was 115,578,904 as of February 28, 2020. 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the information called for by Part III of this Annual Report on Form 10-K, to the extent not set forth herein, are hereby incorporated by reference from registrant’s definitive proxy statement for the 2020 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year ended December 31, 2019.

 

 

 

 

Table of Contents

 

 

 

    

Page
No.

 

 

 

 

 

 

 

PART I

 

 

 

 

 

 

 

Item 1. 

 

Business

 

4

Item 1A. 

 

Risk Factors

 

11

Item 1B.  

 

Unresolved Staff Comments

 

36

Item 2. 

 

Properties

 

36

Item 3. 

 

Legal Proceedings

 

36

Item 4. 

 

Mine and Safety Disclosures

 

37

 

 

 

 

 

 

 

PART II

 

 

 

 

 

 

 

Item 5. 

 

Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

38

Item 6. 

 

Selected Financial Data

 

40

Item 7. 

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

43

Item 7A. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

63

Item 8. 

 

Financial Statements and Supplementary Data

 

64

Item 9. 

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

94

Item 9A. 

 

Controls and Procedures

 

94

Item 9B. 

 

Other Information

 

96

 

 

 

 

 

 

 

PART III

 

 

 

 

 

 

 

Item 10. 

 

Directors, Executive Officers and Corporate Governance

 

97

Item 11.  

 

Executive Compensation

 

97

Item 12. 

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

97

Item 13. 

 

Certain Relationships and Related Transactions, and Director Independence

 

97

Item 14. 

 

Principal Accountant Fees and Services

 

97

 

 

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

Item 15. 

 

Exhibits and Financial Statement Schedules

 

98

 

 

Exhibit Index

 

99

Item 16 

 

Form 10-K Summary

 

103

 

 

Signatures

 

104

 

 

 

 

 

 

 

“MobileIron,” the MobileIron logos and other trademark or service marks of MobileIron, Inc. appearing in this Annual Report on Form 10-K are the property of MobileIron, Inc. Trade names, trademarks and service marks of other companies appearing in this report are the property of their respective holders.

 

 

 

 

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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K 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, results 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 cloud and on-premise subscriptions and perpetual licenses, including the financial impact of the discontinuation of sales of 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 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.

In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject.  These statements are based upon information available to us as of the date of this Annual Report on Form 10-K, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information.  These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

 

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 Annual Report on Form 10-K 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 Annual Report on Form 10-K. 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 I, Item 1A, entitled “Risk Factors,” and in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K. 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.

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Item 1. Business

Overview

 

Mobile and cloud computing are the catalysts for modern work and the digital workplace. Mobile empowers employees to make better decisions and take faster actions because the information and tools they need to do their jobs are always available from anywhere. Cloud is transforming IT, Security and DevOps and has accelerated how the developer ecosystem builds and rolls out innovative services enabling unparalleled user experience.

 

However, this comes with new risks. The traditional, locked-down, perimeter-based approach to security no longer applies to mobile endpoints and cloud services that operate outside the corporate network. Data no longer resides behind the firewall on locked-down PCs and servers, and so it cannot be secured by legacy firewall-based solutions. Instead, data is spread across a wide variety of modern endpoints including Android, iOS, macOS, Chrome OS and Windows 10, as well as cloud services such as Box, Concur, Microsoft Office 365, Netsuite, Salesforce, Workday and custom cloud applications that are hosted on cloud infrastructure providers like AWS or on-premise.  

 

This shift to mobile and cloud technologies introduces three main challenges that CIOs and CISOs need to address to realize their secure digital workplace:  

 

1.

Drive business innovation by allowing employees to securely use mobile, cloud, services and on-premises apps from any device, anywhere;

2.

Enforce corporate security without impacting the user experience;

3.

Redefine enterprise security strategies to address a perimeter-less environment.

 

To solve these challenges, many organizations are in the early stages of investigating a zero trust security framework for their enterprise. Zero trust assumes that bad actors are already in the network and secure access is determined by a “never trust, always verify” approach.

 

MobileIron is an established player in the zero trust market, and a leader in mobile-centric, zero trust solutions that go beyond traditional approaches to security by utilizing a more comprehensive set of attributes to grant secure access. MobileIron products and services validate the device, establish user context, check application authorization, verify the network, and detect and mitigate threats before granting secure access to a device or user. We believe traditional identity-based and gateway approaches to zero trust fall short because they provide only limited visibility into devices, applications, and threats.

 

We are redefining how customers build a secure foundation in a perimeter-less world. Our security platform is built on the foundation of unified endpoint management (UEM) with additional zero trust capabilities including zero sign-on (ZSO), multifactor authentication (MFA), and mobile threat defense (MTD). Together these products and services create a more seamless mobile experience by automating access control decisions across users, endpoints, operating systems, clouds, networks, threats, and vulnerabilities so that only trusted resources can access corporate data.

 

Our Business Model

 

Our customers can deploy MobileIron solutions as either cloud services or on-premise software. They have historically been able to choose to purchase our on-premise software priced as a subscription or perpetual license.  However, we plan to discontinue the sale of on-premise software priced as a  perpetual license beginning the third quarter of 2020.  We target midsize and large enterprises around the world across a broad range of industries including financial services, government, healthcare, legal, manufacturing, professional services, retail, technology, and telecommunications.

 

Our business model is based on winning new customers, growing existing customers through seat expansion and product upsell, and renewing subscriptions and software support agreements. Our channel partners include distributors, resellers, service providers, and system integrators. Our revenue grew to $205.2 million in 2019 and we have

4

experienced growth in our customer base, having sold our platform to over 20,000 cumulative customers since 2009. In 2019, we generated over 80% of our revenue from recurring sources (subscriptions and software support agreements).

 

Our Products 

 

The MobileIron zero trust security platform includes:

 

·

MobileIron Unified Endpoint Management (UEM) is a comprehensive security platform that provides the fundamental visibility and IT controls needed to secure, manage, and monitor any corporate or employee-owned mobile device or desktop that accesses business-critical data. UEM is a proven, secure, scalable, and enterprise-ready architecture that puts the user experience first while also maintaining the highest quality security standards. MobileIron’s partner ecosystem extends our policy engine through a set of APIs that enable other security and infrastructure solutions to either pull data from or trigger actions in the MobileIron UEM solution. MobileIron’s UEM solution can be deployed as either a cloud service (MobileIron Cloud) or as on-premises software (MobileIron Core), and supports Android, iOS, macOS, and Windows 10 mobile device end points.

 

·

MobileIron Access provides conditional access for a range of use cases including blocking untrusted devices and applications from accessing cloud services based on security posture and compliance. Access also provides zero sign-on (ZSO), a passwordless authentication solution for applications using mobile as their primary ID.  With ZSO, users do not have to repeatedly enter their passwords – enabling superior experience and reducing helpdesk IT costs. In addition, MobileIron Tunnel provides secure connectivity through a per-app VPN to connect applications to back-end services.

 

·

MobileIron Threat Defense (MTD) uses machine learning-based analytics to identify zero-day threats on a device, across networks, and within client applications,  and then initiates a security response, from notification to remediation of the threat.

 

·

MobileIron Secure Applications for End-user Productivity include Apps@Work (enterprise app store), Docs@Work (secure content), Email+ (secure email and PIM), Help@Work (remote troubleshooting), and Web@Work (secure browsing). In addition, MobileIron AppConnect is an SDK and wrapper that third-party developers can integrate into their applications to provide a higher level of security through additional encryption and advanced security controls.

 

Our Competitive Strengths

 

Customers buy the MobileIron solution when security, user experience, and unified endpoint management are priorities. Our strengths are:

 

·

Government-grade security. We protect data on the device and across the network and enforce secure access to back-end business services. This end-to-end approach simplifies the deployment of security policies for our customers. We were the first company to receive Common Criteria certification against Version 2.0 of the Protection Profile for Mobile Device Management. Common Criteria is an internationally recognized set of guidelines (ISO/IEC 15408) used by governments, banks, and other organizations to assess the security capabilities of technology products. We have been positioned in the Leaders Quadrant of the Gartner Magic Quadrant for Unified Endpoint Management (UEM), Enterprise Mobility Management (EMM), and Mobile Device Management (MDM) for nine years in a row because of our strength in modern security.   We have also been recognized for our zero trust solutions as the only UEM vendor and as a Strong Performer in the Forrester Wave: Zero Turst eXtended Ecosystem Providers. We have been granted 94 patents in our solution category as of December 31, 2019.  

 

·

Cross-stack architecture. We have extensive support for Android, iOS, macOS, and Windows 10 endpoints. Our standards-based, adaptive access architecture allows us to protect cloud services across vendors such as Box, Concur, Google G Suite, Microsoft Office 365, Netsuite, Salesforce, ServiceNow, Tableau, and Workday. Our cross-stack architecture lets our customers securely deploy best-of-breed cloud services and endpoints.

 

5

·

Global customer support organization. The capability and quality of our solution, combined with the strength of our global customer support organization, have been competitive differentiators.  We were named a 2019 Gartner Peer Insights Customers’ Choice for Unified Endpoint Management Tools for the third year in a row, scoring a higher customer satisfaction rating than all other UEM vendors. In 2018, we received our second straight year of the Service Capability & Performance (SCP) Standards certification for our customer support operations.

 

·

Platform extensibility and ecosystem breadth. We provide extensive product support across the OS ecosystem (Apple, Google, and Microsoft) with zero-day compatibility for new releases. Our AppConnect technology allows customers and independent software vendors (ISVs) to build applications that can be secured by MobileIron. Our ServiceConnect technology allows customers to deploy integrated workflows between MobileIron and their existing security and infrastructure solutions. We believe that our best-of-breed ecosystem is a competitive advantage over the single-stack lock-in of some of our competitors. As of December 31, 2019, our set of over 380 technology partners is the largest UEM ecosystem of secure applications and infrastructure.   

 

 

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Customers

Our customers include leading enterprises in a broad range of industries, including financial services, government, healthcare, legal, manufacturing, professional services, retail, technology and telecommunications. No single industry verticals accounted for more than 20% of our billings in the three year period ended 2019. Medium to large enterprises accounted for a majority of our billings. We have sold our products to over 20,000 customers globally, including more than 500 companies on the Forbes Global 2000 Leading Companies list. Our channel partners include resellers, service providers, and system integrators. We recognized 42%, 42% and 47% of total revenue from customers with a billing address in the United States in 2019, 2018 and 2017, respectively. We recognized 16%, 16% and 13% of total revenue from customers with a billing address in Germany in 2019, 2018 and 2017, respectively. No other country exceeded 10% of the total revenue in 2019, 2018  or 2017.  AT&T, Inc., as a reseller, accounted for approximately 9%, 10% and 13% of our total revenue in 2019, 2018 and 2017, respectively. No end user of our products accounted for more than 5% of our total revenue in 2019,  2018 or 2017.

Backlog

As is typical in the software industry, we expect a significant portion of our software license orders to be received in the last month of each quarter. We do not believe that our backlog at any particular time is meaningful because it has historically been immaterial relative to our total revenue and is not necessarily indicative of future revenue in any given period.

Sales and Marketing

We sell the substantial majority of our products through indirect sales channels and, as a result, maintain a salesforce that works closely with our channel partners to develop sales opportunities. We have an outside salesforce focused on large organizations and an inside salesforce focused on mid-sized organizations. Our channel team works with our service providers to address small to mid-sized organizations. Our marketing team focuses on driving customer demand, building brand reputation, expanding market awareness, and enabling our internal and extended (channel) sales teams.

Our sales organization is supported by sales engineers with deep technical expertise and responsibility for pre-sales technical support and the technical training of our channel partners. Our sales organization is closely aligned with our customer success organization. Our sales cycle ranges from a few weeks for small businesses to many months for large enterprises.

We work with mobile and security focused channel partners to sell our platform to customers. We focus on building in-depth relationships with a number of solutions-oriented partners that have strong industry expertise. These channel partners include both traditional IT resellers as well as service providers. We operate a formal accreditation program for the sales and technical professionals of our channel partners.

Research and Development

We have invested significant time and financial resources in the development of our platform and believe that continued research and development is critical to our ongoing success. Research and development investments drive innovation and keep pace with the rapidly evolving mobile and cloud ecosystem. We believe that innovation and timely development of new features and products are essential to meeting the needs of our customers and channel partners and improving our competitive position.

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Competition

We operate in a highly competitive industry that is characterized by constant change and innovation. Changes in the devices, operating systems, applications and technology landscape result in evolving customer requirements.

Our competitors fall into three primary categories:

·

diversified technology companies such as Microsoft, VMware and IBM;

·

mobile specialists such as BlackBerry; and 

·

mobile security vendors such as Lookout.

The principal competitive factors in our market include:

·

product features, reliability, performance and effectiveness;

·

price and total cost of ownership;

·

depth of customer relationships;

·

product extensibility and ability to integrate with other technology infrastructures;

·

flexibility between cloud and on-premise deployment;

·

mobile IT expertise and focus; 

·

channel depth and breadth;

·

strength of sales and marketing efforts;

·

brand awareness and reputation; and

·

focus on customer service and success.

We believe that we compare favorably with our competitors on the basis of these factors. However, many of our competitors have substantially greater financial and technical resources, stronger name recognition, larger sales and marketing budgets, broader distribution and more entrenched relationships. Some of them embed their competitive solutions into broader software and services bundles. For more information about the competitive risks we face, refer to Item 1A. “Risk Factors” included elsewhere in this Annual Report on Form 10-K.

 

Intellectual Property

We protect our core technology and intellectual property by relying on federal, state, common law and international intellectual property rights, including patents, trade secrets, copyrights and trademarks. We also rely on confidentiality and contractual restrictions, including confidentiality and invention assignment agreements with our employees and contractors and confidentiality agreements with third parties.

We pursue registration of our patents, trademarks and domain names in the United States and certain locations outside the United States. We actively seek patent protection covering inventions originating from the Company and acquire patents we believe may be useful or relevant to our business. As of December 31, 2019, we owned 94 patents worldwide covering various innovations of our modern unified endpoint management (UEM) and zero sign-on (ZSO) technology. The U.S. patents have expiration dates ranging from July 28, 2028 to September 3, 2039.

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Circumstances outside our control could pose a threat to our intellectual property rights. For example, effective intellectual property protection may not be available outside the United States. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective.

Companies in the mobile and other technology industries or non-practicing entities may own large numbers of patents, copyrights and trademarks and may frequently request license agreements, threaten litigation or file suit against us based on allegations of infringement or other violations of intellectual property rights. We have faced, currently face, and expect to face in the future, suits or allegations that we have infringed the trademarks, copyrights, patents and other intellectual property rights of third parties, including those of our competitors and non-practicing entities.

Employees

As of December 31, 2019, we had 870 full-time employees, 318 of whom were primarily engaged in research and development, 276 of whom were primarily engaged in sales and marketing, 166 of whom were primarily engaged in customer success and 110 of whom were primarily engaged in administration and finance. Of our full-time employees, 399 employees were located outside of the United States. None of our United States employees are represented by a labor organization or are party to any collective bargaining arrangement. Employees in certain European countries have the benefits of collective bargaining arrangements at the national level. We have never had a work stoppage, and we consider our relationship with our employees to be good.

Facilities

Our principal executive office is located in Mountain View, California and includes one building totaling approximately 43,000 square feet under a  lease expiring in May 2023. We have additional office locations in the United States and in various international locations, including offices in the United Kingdom, Netherlands, Germany, Japan, Singapore and India.

We may add new facilities or expand existing facilities as we add employees, and we believe that suitable additional or substitute space will be available on commercially reasonable terms to meet our future needs.

Legal Proceedings

We continually evaluate uncertainties associated with litigation and record an accrual equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and (ii) the loss or range of loss can be reasonably estimated. If we determine that a loss is possible and a range of the loss can be reasonably estimated, we disclose the range of the possible loss in the Notes to the Consolidated Financial Statements. We evaluate, on a quarterly basis, developments in our legal matters that could affect the amount of liability that has been previously accrued, if any, and the matters and related ranges of possible losses disclosed, and make adjustments and changes to our disclosures as appropriate. Significant judgment is required to determine both likelihood of there being and the estimated amount of a loss related to such matters. Until the final resolution of such matters, there may be an exposure to loss, and such amounts could be material. We record litigation accruals for legal matters which are both probable and estimable. For legal proceedings for which there is a reasonable possibility of loss (meaning those losses for which the likelihood is more than remote but less than probable), we have determined we do not have material exposure on an aggregate basis.

 

Indemnification

Under the indemnification provisions of our standard sales related contracts, we agree to defend and/or settle claims brought by third parties against our customers and channel partners alleging that our software or the customer’s use thereof infringes the third party’s intellectual property right, such as a patent right. These indemnification obligations are typically not subject to limitation; however if we believe such a claim is reasonably likely to occur and if it is commercially impractical for us to either procure the right for the customer to continue to use our software or modify our software so that it is not infringing, we can terminate the customer agreement and refund the customer a portion of the license fees paid (prorated over the three year period from initial delivery for software licensed on a perpetual basis). We

9

also on occasion indemnify our customers for other types of third party claims. In addition, we indemnify our officers, directors, and certain key employees while they are serving in such capacities in good faith. Through December 31, 2019, we have not received any material written claim for indemnification.

Corporate Information

Our principal executive offices are located at 490 East Middlefield Road, Mountain View, CA 94043, and our telephone number is (650) 919-8100. Our website is www.mobileiron.com. The information posted on our website is not incorporated into this Annual Report on Form 10-K. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our investor relations website as soon as reasonably practicable after we electronically file such material with or furnish it to the SEC. 

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Item 1A. Risk Factors

You should carefully consider the following risk factors, in addition to the other information contained in this Annual Report on Form 10-K, including the section of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes. If any of the events described in the following risk factors and the risk described elsewhere in this report occur, our business, operating results and financial condition could be seriously harmed and the trading price of our common stock could decline. This Annual Report on Form 10-K also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this report.

Risks Related to Our Business and Industry

We operate in an industry that is rapidly evolving, and we may be unsuccessful in response to these changes.

Our ability to forecast our future operating results is limited and subject to a number of uncertainties, including our ability to plan for and model future growth. We have encountered and expect to continue to encounter risks and uncertainties frequently experienced by growing companies in rapidly changing markets. If our assumptions regarding these uncertainties are incorrect or change in reaction to changes in our markets, or if we do not manage or address these risks successfully, our results of operations could differ materially from our expectations, and our business could suffer. Any success that we may experience in the future will depend, in large part, on our ability to, among other things:

 

 

 

             

retain and expand our customer base on a cost-effective basis;

 

increase revenues from existing customers as they add users or devices;

 

increase revenues from existing customers as they purchase additional solutions;

 

successfully compete in our markets;

 

continue to add features and functionality to our solutions to meet customer demand;

 

gain market traction with our MobileIron Cloud platform and our more recently introduced products and services such as MobileIron Access and MobileIron Threat Defense;

 

continue to invest in research and development and bring new products to market;

 

scale our engineering and internal business operations in an efficient and cost-effective manner;

 

scale our global Customer Success organization to make our customers successful in their mobile IT deployments;

 

continue to expand our solutions across mobile and modern operating systems and device platforms;

 

hire, integrate and retain professional and technical talent;

 

make our service provider partners successful in their deployments of our solutions and technology;

 

successfully expand our business domestically and internationally; and

 

successfully protect our intellectual property and defend against intellectual property infringement claims.

 

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We have had net losses each year since our inception and may not achieve or maintain profitability in the future.

We have incurred net losses each year since our inception, including net losses of $48.8 million, $43.1 million and $53.4 million in 2019, 2018 and 2017, respectively. As of December  31, 2019, our accumulated deficit was $452.9 million. Our revenue growth rate has slowed and we may not be able to sustain or increase our growth rate or achieve or sustain profitability in the future. The revenue growth rate has slowed, and may additionally slow or revenue may decline, for a number of reasons, including, but not limited to our customers’ and/or prospective customers’ failure to widely deploy mobile apps within their businesses, increasing and entrenched competition, changes in pricing model, customers’ failure to renew or expand their deployments of our software, product and billing model mix shift, a decrease in size or growth of the mobile IT market, or any failure to capitalize on market opportunities. We plan to continue to invest for future growth, in part by making additional investments in research and development, and as a result, we do not expect to be profitable for the foreseeable future. In addition, we will need to increase operating efficiency, which may be challenging given our operational complexity, the expenses outlined above, expenses associated with being a public company, and increasing sales of subscriptions that bear royalties. As a result of these increased expenditures, we will have to generate and sustain increased revenues to achieve future profitability. We may incur significant losses in the future for a number of reasons, including without limitation the other risks and uncertainties described in this Annual Report on Form 10-K. Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays and other unknown factors that may result in losses in future periods. If these losses exceed our expectations or our revenue growth expectations are not met in future periods, our financial performance will be harmed.

Our operating results may fluctuate significantly, which makes our future results difficult to predict and could cause our operating results to fall below expectations or our guidance.

Our quarterly operating results have fluctuated in the past and may fluctuate significantly in the future. The timing and size of sales of our solutions makes our revenue highly variable and difficult to predict and can result in significant fluctuations in our revenue from period to period. Historically, a substantial portion of our bookings and revenue has been generated from sales of software solutions sold as perpetual licenses or on-premise subscriptions that generate up-front revenue, which tend to close near the end of a given quarter. Further, our customers’ and prospective customers’ buying patterns and sales cycles can vary significantly from quarter to quarter and are not subject to an established pattern over the course of a quarter. Accordingly, at the beginning of a quarter, we have limited visibility into the level of sales that will be made in that quarter. Further, we plan to discontinue the sale of on-premise software priced as a perpetual license beginning the third quarter of 2020, which will result in a short-term decline in license revenue and may make total revenue difficult to predict for a period of time. If expected revenue at the end of any quarter is reduced or delayed for any reason, we may not be able to reduce our costs sufficiently to compensate for an unexpected shortfall in revenue, and even a small shortfall in revenue could disproportionately and adversely affect our operating margin, operating results or other key metrics for a given quarter.

Our operating results may fluctuate due to a variety of factors, many of which are outside of our control, and any of which may cause our stock price to fluctuate. In addition to other risks listed in this “Risk Factors” section, factors that may affect our operating results include, but are not limited to:

 

 

 

             

the inherent complexity, length and associated unpredictability of our sales cycles for our solutions;

 

 

 

 

the extent to which our customers and prospective customers delay or defer purchase decisions in a quarter, particularly in the last few weeks of the quarter, which is when we typically complete a large portion of our sales for a quarter;

 

 

 

 

our ability to develop and release in a timely manner new solutions, features and functionality that meet customer requirements;

 

 

 

 

changes in pricing due to competitive pricing pressure or other factors;

 

 

 

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reductions and reprioritizations in customers’ IT budgets and delays in the purchasing cycles of our customers and prospective customers;

 

 

 

 

variation in sales channels or in mix of solutions sold, including the mix of solutions sold on a perpetual license basis versus a subscription or monthly recurring contract, or MRC, basis1; considering the anticipated discontinuance of the sale of on-premise software priced as a perpetual license beginning in the third quarter of 2020;

 

 

 

 

the timing of recognizing revenue in any given quarter as a result of revenue recognition accounting rules, including the extent to which revenue from sales transactions in a given period may not be recognized until a future period or, conversely, the satisfaction of revenue recognition rules in a given period resulting in the recognition of revenue from transactions initiated in prior periods;

 

 

 

 

changes in our mix of revenue as a result of our different deployment options and licensing models and the ensuing revenue recognition effects;

 

 

 

 

the effect of litigation;

 

 

 

 

changes in foreign currency exchange rates; and

 

 

 

 

general economic conditions in our domestic and international markets.

 

1In the MRC model, revenue is based on active devices or users of the service provider’s customer based on billings reported to us by the service provider on a monthly basis over time and billed by us one month in arrears. Under the usage-based MRC model, we receive no revenue for MRC at the time the deal is booked, but instead the MRC is billed and revenue is recognized each month based on active usage. Unlike one-year and other term subscriptions, MRC is not reflected in unearned revenue unless the customer commits for a longer period of time.

The cumulative effects of these factors could result in large fluctuations and unpredictability in our quarterly operating results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance.

If our customers do not place significant follow-on orders to deploy our solutions widely throughout their companies, or if they do not renew with us or if they do not purchase additional solutions, our future revenue and operating results will be harmed.

In order to increase our revenues we must continually grow our customer base and increase the depth and breadth of the deployments of our solutions with our existing customers. While customers may initially purchase a relatively modest number of licenses, it is important to our revenue growth that they later expand the use of our software on substantially more devices or for more users throughout their business. We also need to upsell—to sell additional solutions—to the same customers. Our strategy also depends on our existing customers renewing their software support or subscription agreements with us. Because of the number of participants, consolidation in the mobile IT market and competing priorities within customers’ IT budgets, customers may delay making initial purchase orders or expanding orders as they take into account the evolving mobile IT landscape. Also, if we do not successfully develop and market new solutions, features and functionality that meet our customers’ needs, they may not place upsell orders or expand orders. The rate at which our customers purchase additional solutions depends on a number of factors, including the relative prioritization of the IT budget allocated to mobile projects versus other IT projects, perceived need for additional solutions, features or functionality, the reliability of our solutions and other competitive factors, such as pricing and competitors’ offerings. If our efforts to sell additional licenses to our customers and to upsell additional solutions to our customers are not successful, our business may suffer. In addition, we have entered into enterprise license arrangements with certain large customers under which they pay an amount up front and in turn can deploy an unlimited number of devices in a certain period, thereby lowering potential future additional orders from those customers.

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Further, existing customers that purchase our solutions have no contractual obligation to purchase additional solutions after the initial subscription or contract period, and it is difficult to accurately predict our customer expansion or renewal rates. Our customers’ expansion and renewal rates may decline or fluctuate as a result of a number of factors, including the level of their satisfaction with our solutions or our customer support, customer budgets, the pricing and breadth of our solutions compared with the solutions offered by our competitors, and the impact of our competitors’ selling UEM or mobile security as a component of a broader suite, any of which may cause our revenue to grow more slowly than expected, if at all. Competition from larger companies has in the past and may in the future lengthen the renewal process and require us to recompete for renewal business.

For smaller or simpler deployments, the switching costs and time are relatively minor compared to traditional enterprise software deployments and a customer may decide not to renew with us and switch to a competitor’s offerings. Accordingly, we must invest significant time and resources in providing ongoing value to our customers. If these efforts fail, or if our customers do not renew for other reasons, or if they renew on terms less favorable to us, our revenue may decline and our business will suffer.

We are in a highly competitive market, and competitive pressures from existing and new companies may harm our business, revenues, growth rates and market share. In addition, there has been consolidation in our market, and a number of our current or potential competitors have longer operating histories, greater brand recognition, larger customer bases and significantly greater resources than we do.

Our market is intensely competitive, and we expect competition to increase in the future from established competitors, consolidations and new market entrants. Our major competitors include BlackBerry, Citrix, IBM, Lookout, Microsoft, Symantec and VMware. A number of our historical competitors have been purchased by large corporations. For example, AirWatch was acquired by VMware,  Good Technology was acquired by BlackBerry, and Skycure was acquired by Symantec. These large corporations have longer operating histories, greater name recognition, larger and better established customer bases, more channel partners, and significantly greater financial, technical, sales, marketing and other resources than we have. Because these competitors possess greater resources, they may be able to adapt more quickly to new technologies and changes in customer requirements, devote greater resources to the promotion and sale of their solutions, purchase companies or new technologies, initiate or withstand substantial price competition, and/or develop and expand their products and features more quickly than we can. In addition, certain of our competitors may be able to leverage their relationships with customers based on an installed base of solutions or to incorporate functionality into existing solutions to gain business in a manner that discourages customers from including us in competitive bidding processes, evaluating and/or purchasing our solutions. They have done this in the past, and may in the future do this, by selling at zero or negative margins, through solution bundling or through enterprise license deals. Some potential customers, especially Forbes Global 2000 Leading Companies, have already made investments in, or may make investments in, substantial personnel and financial resources and established deep relationships with these much larger enterprise IT vendors, which may make them reluctant to evaluate our solutions or work with us regardless of solution performance or features. Potential customers may prefer to purchase a broad suite of solutions from a single provider, or may prefer to purchase mobile IT solutions from an existing supplier rather than a new supplier, regardless of performance or features.

We expect competition to intensify in the future as new and existing competitors introduce new solutions into our market. In addition, some of our competitors have entered into partnerships or other strategic relationships or purchased companies to offer a more comprehensive solution than they individually had offered. We expect this trend to continue as companies attempt to strengthen or maintain their market positions in an evolving industry. This competition has resulted in the past and could in the future result in increased pressure on pricing and renewals, increased sales and marketing expenses, or harm to our market share, any of which could harm our business. Competitors’ offerings may in the future have better performance or features, lower prices and/or broader acceptance than our solutions. Competitors’ products could also include new technologies, which could render our existing solutions obsolete or less attractive to customers, or be bundled with legacy enterprise security and management products as a “one-stop-shop” offering, which certain customers with large installed bases of those legacy products may prefer. If we fail to keep up with technological changes or to convince our customers and potential customers of the value of our solutions, our business, operating results and financial condition could be materially and adversely affected.

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We compete in rapidly evolving markets and must develop new solutions and enhancements to our existing solutions. If we fail to predict and respond rapidly to emerging technological trends and our customers’ changing needs, we may not be able to remain competitive. In addition, we may not generate positive returns on our research and development investments, which may harm our operating results.

Our markets are characterized by rapidly changing technology, changing customer needs, evolving operating system standards and frequent introductions of new offerings. To succeed, we must effectively anticipate, and adapt in a timely manner to, customer and multiple operating system requirements and continue to develop or acquire new solutions and features that meet market demands and technology trends. Likewise, if our competitors introduce new offerings that compete with ours or incorporate features that are not available in our solutions, we may be required to reposition our solutions or introduce new solutions in response to such competitive pressure. We may not have access to or have adequate notice of new operating system developments, and we may experience unanticipated delays in developing new solutions and cloud services or fail to meet customer expectations for such solutions. If we fail to timely develop and introduce new solutions or enhancements that respond adequately to new challenges in the mobile IT market, our business could be adversely affected, especially if our competitors are able to more timely introduce solutions with such increased functionality.

We have invested significant time and financial resources in the development of our platforms and infrastructure and believe that we must continue to dedicate substantial resources to our research and development efforts to maintain our competitive position.  Developing our products is expensive, and the investment in product development may not generate additional revenue in the near-term or at all. The research and development of new technologically advanced products is also a complex and uncertain process requiring high levels of innovation and investment, as well as the accurate forecasts of technology, market trends and consumer needs. Our failure to successfully develop new and improved products, services and technologies may reduce our future growth and profitability and may adversely affect our business, results and financial condition.

We have invested in MobileIron Access and MobileIron Threat Defense but have not yet gained significant market traction in these product lines. Should our MobileIron Access or MobileIron Threat Defense fail to achieve significant market traction, we would lose the value of our investment and our business and operating results may be harmed.

Further, we may be required to commit significant resources to developing new solutions before knowing whether our investments will result in solutions that the market will accept. We are in the process of phasing out our older cloud-based product in favor of MobileIron Cloud, our newer and more scalable cloud-only platform. The failure to successfully market MobileIron Cloud as a replacement and improvement to our older cloud-based product or the failure of our current on-premise customers and prospective customers to adopt MobileIron Cloud for any reason could result in a decline in our revenue.

These risks are greater in the mobile IT market because our software is deployed on endpoints (e.g., phones, tablets or laptops) that run on different operating systems, and these multiple operating systems change frequently in response to consumer demand. As a result, we may need to release new software updates at a much greater pace than a traditional enterprise software company that supports only traditional PCs. We may experience technical design, engineering, marketing and other difficulties that could delay or prevent the development, introduction or marketing of new solutions and enhancements on both of our technology platforms. As a result, we may not be successful in modifying our current solutions or introducing new ones in a timely or appropriately responsive manner, or at all. If we fail to address these changes successfully, our business and operating results could be materially harmed.

Finally, all of our additional solutions require customers to use our MobileIron platform, whether deployed on-premise or through our cloud service. As such, virtually all of our revenue depends on the continued adoption and use of the MobileIron platform. If customers and prospective customers decided to stop using or purchasing the MobileIron platform, our product strategy and business would be harmed.

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An increasing portion of our sales has been generated from subscription licenses, which involves certain risks.

An increasing portion of our sales has been generated from subscription licenses, and we plan to discontinue the sale of on-premise software priced as a perpetual license beginning in the third quarter of 2020. This shift towards subscription licensing, and differing revenue recognition patterns between the different types of subscriptions that we offer under the new revenue accounting guidelines, present a number of risks to us. We recognize a substantial portion of our subscription revenues over the term of the subscription agreement as compared to sales of perpetual licenses, which are recognized up-front at the time of delivery. Under the new revenue accounting guidelines, a portion of subscriptions to on-premises software is recognized up-front, while the remainder of the subscription is recognized over the subscription term. That revenue recognition pattern is different from subscriptions to cloud offerings, for which all revenue is recognized ratably over the term of the subscription. Customers in a subscription arrangement may elect not to renew their contractual arrangement with us upon expiration, or they may attempt to renegotiate pricing or other contract provisions on terms that are less favorable to us. MRC revenue, which is currently included in subscription revenue in our statements of operations, is recognized monthly on the basis of active users or devices and thus will fluctuate from month to month. Service providers that operate on an MRC billing model typically report to us in arrears on a monthly basis the number of actual users or devices deployed, and then we generate invoices based on those reports. Therefore, invoicing and collection logistics often result in a longer collection cycle. In addition, service providers may bundle our solution with their offerings and price aggressively, which could result in a decrease in MRC billings. These factors could negatively affect our cash flow to the extent subscription revenue includes MRC revenue.

 

Changes in features and functionality by operating system providers and mobile device manufacturers could cause us to make short-term changes in engineering focus or product development or otherwise impair our product development efforts or strategy, increase our costs, and harm our business.

Our platform depends on interoperability with operating systems, such as those provided by Apple, Google and Microsoft, as well as device manufacturers. Because mobile and other modern operating systems are released more frequently than legacy PC operating systems, and we typically have limited advance notice of changes in features and functionality of operating systems and mobile devices, we may be forced to divert resources from our preexisting product roadmap in order to accommodate these changes. As a result of this limited advance notice, we also have a short time to implement and test changes to our product to accommodate these new features, which increases the risk of product defects. In addition, if we fail to enable IT departments to support operating system upgrades upon release, our business and reputation could suffer. This could disrupt our product roadmap and cause us to delay introduction of planned solutions, features and functionality, which could harm our business.

Operating system providers have included, and may continue to include, features and functionality in their operating systems that are comparable to certain of our solutions, features and/or functionality, thereby making our platform less valuable. The inclusion of, or the announcement of an intent to include, functionality perceived to be similar to that offered by our mobile IT solutions in mobile or other modern operating systems may have an adverse effect on our ability to market and sell our solutions. Even if the functionality offered by mobile operating system providers is more limited than our solutions, a significant number of potential customers may elect to accept such limited functionality in lieu of purchasing our solutions. Furthermore, some of the features and functionality in our solutions require interoperability with operating system APIs, and if operating system providers decide to restrict our access to their APIs, that functionality would be lost and our business could be impaired. Finally, we have entered into contractual arrangements with operating systems providers and/or mobile device manufactures, under which we are obligated to certain development priorities, which can further limit our engineering flexibility.

 

We have experienced substantial turnover, and the loss of key personnel or an inability to attract, retain and motivate qualified personnel may impair our ability to expand our business.

Our success is substantially dependent upon the continued service and performance of our senior management team and key technical, marketing, sales and operations personnel. Over the last five years, we have experienced substantial turnover in our sales, engineering and executive teams, and this could continue in the future. The replacement of any members of our senior management team or other key personnel likely would involve significant time and costs

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and may harm our business, operating results and financial condition. Our future success also depends, in part, on our ability to continue to attract, integrate and retain highly skilled personnel, in particular engineers and sales personnel. Competition for highly skilled personnel is frequently intense, especially in the San Francisco Bay Area, where we have a substantial presence and need for highly skilled personnel, including, in particular, engineers. We must offer competitive compensation and opportunities for professional growth in order to attract and retain these highly skilled employees. Failure to successfully attract, integrate or retain qualified personnel to fulfill our current or future needs may negatively impact our growth.

A failure of our product strategy could harm our business.

Our product and business strategy is highly dependent on current and future customers continuing to adopt our solutions, features, and functionality, including expanding to newer products, such as MobileIron Access and MobileIron Threat Defense, and with existing on-premise customers migrating to MobileIron Cloud. Slow adoption by enterprises of mobile business applications may slow the adoption of our platform, because customers who are not deploying business apps other than email may not see value in our more advanced application security and management capabilities. If customers shift from client-side apps to web apps as the preferred interface for end-users, it would reduce the value of our security solution because less confidential data would reside on the endpoint. Operating system providers and larger software companies could harm our strategy by creating competitive solutions and/or bundling those solutions in a broader portfolio of products. For example, Microsoft bundled certain UEM capabilities into Microsoft 365 in an attempt to dissuade customers from using solutions like MobileIron. If our product strategy is not successful for these or other reasons, the value of our investment would be lost and our results of operations would be harmed.

If we are not able to scale our business and manage our expenses, our operating results may suffer.

We have expanded, decreased and/or relocated specific functions over time in order to scale efficiently, including restructurings in 2016, 2017 and 2019 to improve our cost structure and help scale our business. Our need to scale our business has placed, and will continue to place, a significant strain on our administrative and operational business processes, infrastructure, facilities and other resources. Our ability to manage our operations will require significant expenditures and allocation of valuable management resources to improve internal business processes and systems, including investments in automation. Further international expansion may also be required for our continued business growth, and managing any international expansion will require additional resources and controls. If our operations infrastructure and business processes fail to keep pace with our business and customer requirements, customers may experience disruptions in service or support or we may not scale the business efficiently, which could adversely affect our reputation and adversely affect our revenues. There is no guarantee that we will be able to continue to develop and expand our infrastructure and business processes at the pace necessary to scale the business, and our failure to do so may have an adverse effect on our business. If we fail to efficiently expand our engineering, operations, customer support, professional services, cloud infrastructure, IT and financial organizations and systems, or if we fail to implement or maintain effective internal business processes, controls and procedures, our costs and expenses may increase more than we planned or we may fail to execute on our product roadmap or our business plan, any of which would likely seriously harm our business, operating results and financial condition.

A security breach of our cloud service infrastructure or a disruption of our cloud service availability for any reason could result in liabilities, lost business and reputational harm.

In connection with providing our cloud service to customers, we obtain access to certain data, such as employees’ names, registration credentials, mobile device ID, geolocation of last device check-in, business email addresses, mobile phone numbers, business contact information and the list of applications installed on the mobile devices. Any security breach of the systems used to provide the cloud service, whether through third-party action or employee error or malfeasance, could result in damage, loss, misuse or theft of such data. A breach could also give rise to litigation or require us to incur financial and operational expenses in connection with fulfillment of certain indemnity obligations to our cloud service customers, settling or defending claims made against us, or complying with specific laws or regulations such as breach notification requirements.  Techniques used to sabotage or obtain unauthorized access to information processing systems change frequently and are generally not recognized until launched against a target. As a result, we may be unable to anticipate these techniques or to implement adequate preventative or mitigation measures in a timely manner. Because our software is designed to enable IT administrators to secure and manage customers’ data

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transmitted to or stored on employees’ mobile devices, the publicity associated with an actual or perceived breach of our cloud service infrastructure would likely result in reputational damage, as well as loss of potential sales and existing customers. In addition, unexpected increases in demand at one customer may affect the overall service in unanticipated ways and may cause a disruption in service for other customers of this platform. We have experienced, and may in the future experience, disruptions, outages and other performance problems with our cloud service. These problems may be caused by a variety of factors, including, but not limited to, infrastructure changes, human or software errors, viruses, malicious code, denial of service or other security attacks, fraud, spikes in customer usage and interruption or loss of critical third party hosting, power or Internet connectivity services. If we sustain disruptions of our cloud services for any reason, our reputation, business and results of operations would be seriously harmed.

Defects in our solutions could harm our business, including as a result of customer dissatisfaction, data breaches or other disruption, and subject us to substantial liability.

Because the mobile IT market involves multiple operating platforms, we provide frequent incremental releases of solution updates and functional enhancements. Such new versions frequently contain undetected errors when first introduced or released. We have found defects in new releases of our solutions, and new errors in our existing solutions may be detected in the future. Defects in our solutions may also result in vulnerability to security attacks, which could result in claims by customers and users for losses that they sustain. 

Because our customers use our solutions for important aspects of their business, any errors, defects, disruptions in service or other performance problems with our solutions could hurt our reputation and may damage our customers’ businesses. In certain instances, our customers have stopped using or failed to expand use of, our solutions as a result of defects, and this may happen in the future.  In addition, customers may delay or withhold payment to us, elect not to renew and make warranty claims or other claims against us. In addition, we rely on positive customer experiences in order to sell additional products to other customers or sell to new customers. Defects or disruptions in our solutions could result in reputational harm and loss of future sales. In addition, regardless of the party at fault, errors of these kinds divert the attention of our engineering personnel from our development efforts, damage our reputation and the reputation of our solutions, cause significant customer relations problems can result in product liability claims, and negatively impact our stock price.

Security breaches and other disruptions of our information systems could significantly impair our operations, compromise our ability to conduct our business and deliver our products and services, and result in significant data losses, theft of our intellectual property, significant liability, damage to our reputation, and loss of current and future business.

We rely on our IT systems for almost all of our business operations, including internal operations, product development, sales and marketing, and communications with customers and other business partners. The secure processing, maintenance and transmission of both our own sensitive information and our customers’ data is critical to our operations and business strategy. Despite our security measures, our information technology systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, compromised networks of our third party service providers, malfeasance or other disruptions. While we have incurred no material cyber-attacks or security breaches to date, any cyber security attack could result in the damage, loss, theft or misappropriation of our proprietary information or our customers’ data and/or cause interruptions of our internal business operations or the delivery of our solutions to customers. Because the techniques used by unauthorized persons to access or sabotage networks change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques or readily detect or take remedial action against an attack. Further, if unauthorized access or sabotage remains undetected for an extended period of time, the effects of such breach could be exacerbated. We also depend on our employees to handle confidential data appropriately and deploy our information resources in a secure fashion that does not expose our network systems to security breaches and the loss of data. Any breach as a result of cyber criminals or employee malfeasance or error could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Our insurance may not be sufficient to cover all of our losses from any future breaches of our systems. We have also outsourced a number of our business functions to third parties, and we rely on distributors, resellers, system vendors, and system integrators to sell our products and services. Thus our business operations also depend, in part, on their cybersecurity measures. Any material cyber-related incident, including unauthorized access, disclosure or other loss of information, could result in legal claims or proceedings, investigations by law enforcement or

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regulatory bodies, liability under laws that protect the confidentiality of personal information, regulatory penalties, could disrupt our operations and the solutions we provide to customers, could compromise our ability to protect our intellectual property rights, could damage our reputation, which could adversely affect our business, financial condition, and operating results, and could negatively impact our stock price.

We depend and rely upon technologies from third parties to operate our products, and interruptions or performance problems with these technologies may adversely affect our business and results of operations.

We rely on applications from third parties in order to operate critical functions of our products. If these services become unavailable due to extended outages, interruptions, errors or defects or because they are no longer available on commercially reasonable terms, our expenses could increase, our ability to manage finances could be interrupted and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and implemented, all of which could adversely affect our business.

Real or perceived errors, failures or bugs in our software could adversely affect our business, results of operations, financial condition, and growth prospects.

Our software is complex, and therefore, undetected errors, failures or bugs may occur in the future. Our software is used in IT environments with different operating systems, system management software, applications, devices, databases, servers, storage, middleware, custom and third-party applications and equipment and networking configurations, which may cause errors or failures in the IT environment into which our software is deployed. This diversity increases the likelihood of errors or failures in those IT environments. Despite testing by us, real or perceived errors, failures or bugs may not be found until our customers use our software. Real or perceived errors, failures or bugs in our products could result in negative publicity, loss of or delay in market acceptance of our software and harm our brand, weakening of our competitive position, claims by customers for losses sustained by them or failure to meet the stated service level commitments in our customer agreements. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend significant additional resources in order to help correct the problem. Any errors, failures or bugs in our software could impair our ability to attract new customers, retain existing customers or expand their use of our software, which would adversely affect our business, results of operations and financial condition.

Disruptions of the third-party data centers that host our cloud service could result in delays or outages of our cloud service and harm our business.

We currently host our cloud service from third-party data center facilities operated by providers such as AWS, which are located around the world. Any damage to, or failure of, our cloud service that is hosted by these third parties, whether as a result of our actions, actions by the third-party data centers, actions by other third parties, or acts of God, could result in interruptions in our cloud service and/or the loss of data. While the third-party data centers host the server infrastructure, we manage the cloud services through our site reliability engineering team and need to support version control, changes in cloud software parameters and the evolution of our solutions, all in a multi-OS environment. As we continue to add data centers and capacity in our existing data centers, we may move or transfer our data and our customers’ data. Despite precautions taken during this process, any unsuccessful data transfers may impair the delivery of our service. In some cases, we have entered into contractual service level commitments to maintain uptime of at least 99.9% for our cloud services platform and if we or our third-party data center facilities fail to meet these service level commitments, we may have to issue credits to these customers. Impairment of, or interruptions in, our cloud services may reduce our subscription revenues, subject us to claims and litigation, cause our customers to terminate their subscriptions and adversely affect our subscription renewal rates and our ability to attract new customers. Our business will also be harmed if our customers and potential customers believe our services are unreliable.

We do not control, or in some cases have limited control over, the operation of the data center facilities we use, and they are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures and similar events. They may also be subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct, and to adverse events caused by operator error. We may not be able to rapidly switch to new data centers or move customers from one data center to another in the event of any adverse event. Despite precautions taken at these

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facilities, the occurrence of a natural disaster, an act of terrorism or other act of malfeasance, a decision to close the facilities without adequate notice, or other unanticipated problems at these facilities could result in lengthy interruptions in our service and the loss of customer data and business.

The prices of our solutions may decrease or we may change our licensing and subscription programs, renewal programs or bundling arrangements, which may reduce our revenue and adversely impact our financial results.

The prices for our solutions may decline for a variety of reasons, including competitive pricing pressures, discounts, a change in our mix of solutions toward subscription, enterprise-wide licensing arrangements, bundling of solutions, features and functionality by us or our competitors, potential changes in our pricing, anticipation of the introduction of new solutions, or promotional programs for customers or channel partners. Competition and consolidation continue to increase in the markets in which we participate, and we expect competition to further increase in the future, leading to increased pricing pressures. Larger competitors with more diverse product lines may reduce the price of solutions or services that compete with ours or may bundle their solutions with other solutions and services. Furthermore, we anticipate that the sales prices and gross profits for our solutions will decrease over product life cycles. If we are unable to increase sales to offset any decline in our prices, our business and results of operations would be harmed.

We continually re-evaluate our licensing and subscription programs and renewal programs, including specific license and subscription models and terms and conditions. We have in the past implemented, and could in the future implement, new licensing and subscription programs, renewal programs or bundling arrangements, including promotional programs or specified enhancements to our current and future solutions, enterprise licensing arrangements, discounted pricing and/or conversion of service providers or customers from one billing model to another. Such billing model, renewal programs or licensing and subscription arrangement changes may result in delayed revenue recognition.

Our ability to sell our solutions is highly dependent on the quality of our support, which is made complex by the requirements of mobile IT. Our failure to deliver high quality support would have a material adverse effect on our sales and results of operations.

Once our solutions are deployed, our customers depend on our support organization or that of our channel partners to resolve any issues relating to our solutions. Our failure to provide effective support has in the past, and could in the future, adversely affect our ability to sell our solutions or increase the number of licenses sold to existing customers. Our customer support is especially critical because the mobile IT market requires relatively frequent software releases. Mobile IT requires a complex set of features, functionality and controls, which makes support critical and difficult. In addition, we target companies on the Forbes Global 2000 Leading Companies list, many of whom have complex networks and require higher levels of support than smaller customers. As customers deploy more licenses and purchase a broader array of our solutions, the complexity and difficulty of our support obligations increase. If we fail to meet the requirements of the larger customers, it may be more difficult to increase our deployments either within our existing Forbes Global 2000 Leading Companies list or other customers or with new Forbes Global 2000 Leading Companies list customers. We face additional challenges in supporting our non-U.S. customers, including the employment and retention of qualified support personnel and the need to rely on channel partners to provide support.

We rely substantially on channel partners for the sale and distribution of our solutions and, in some instances, for the support of our solutions. A loss of certain channel partners, a decrease in revenues from certain of these channel partners or any failure in our channel strategy could adversely affect our business.

A substantial portion of our sales are through channel partners – either telecommunications carriers, which we call service providers, or other resellers – and thus we depend on our channel partners and on our channel partner strategy for the vast majority of our revenue. Our international resellers often enter into agreements directly with our mutual customers to host our software and provide other value-added services, such as IT administration.

Our service provider partners often provide support to our customers and enter into similar agreements directly with our mutual customers to host our software and/or provide other value-added services. Our agreements and operating relationships with our service provider partners are complex and require a significant commitment of internal time and resources. In addition, our service provider partners are large corporations with multiple strategic businesses and

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relationships, and thus our business may not be significant to them in the overall context of their much larger enterprise. These partnerships may require us to adhere to outside policies, which may be administratively challenging and could result in a decrease in our ability to complete sales. Even if the service provider partner considers us to be an important strategic relationship, internal processes at these large partners are sometimes difficult and time-consuming to navigate. Thus, any loss of a major channel partner or failure of our channel strategy could adversely affect our business. AT&T, as a reseller, is our largest service provider partner and was responsible for 9% of our total revenue in 2019.

Our agreements with AT&T and our other channel partners are non-exclusive and most of our channel partners have entered, and may continue to enter, into strategic relationships with our competitors. Our channel partners may terminate their respective relationships with us with limited or no notice and with limited or no penalty, pursue other partnerships or relationships, or attempt to develop or acquire solutions or services that compete with our solutions. If our channel partners do not effectively market and sell our solutions, if they choose to place greater emphasis on solutions of their own or those offered by our competitors, or if they fail to provide adequate support or otherwise meet the needs of our customers, our ability to grow our business and sell our solutions may be adversely affected. The loss of our channel partners, in particular AT&T, the failure to recruit additional channel partners, or any reduction or delay in sales of our solutions by our channel partners could materially and adversely affect our results of operations.

In addition, we have sold and will sell directly to end-user customers, which may adversely affect our relationship with our channel partners.

Our sales cycles for large enterprises are often long, unpredictable and expensive. As a result, our sales and revenue are difficult to predict and may vary substantially from period to period, which may cause our operating results to fluctuate significantly.

Our sales efforts involve educating our customers about the use and benefits of our solutions, including the technical capabilities of our solutions and the business value of our solutions. Many of our large customers have very complex IT systems, mobile environments and data privacy and security requirements. Accordingly, many of these customers undertake a significant evaluation process, which frequently involves not only our solutions, but also those of our competitors, and has resulted in lengthy sales cycles. We spend substantial time, money and effort on our sales activities without any assurance that our efforts will produce any sales. In addition, purchases of our solutions are frequently subject to budget constraints, multiple purchase approvals, lengthy contract negotiations and unplanned administrative, processing and other delays. Moreover, the evolving nature of the mobile IT market may lead prospective customers to postpone their purchasing decisions pending adoption of technology by others or pending potential consolidation in the market, and may require evaluation of our product my multiple functions within their company. As a result of our lengthy sales cycle, it is difficult to predict whether and when a sale will be completed, and our operating results may vary significantly from quarter to quarter. Even if sales are completed, the revenues we receive from these customers may not be sufficient to offset our upfront investments.

We seek to sell our solutions to large enterprises. Sales to and support of these types of enterprises involve risks that could harm our business, financial position and results of operations.

Our growth strategy is dependent, in part, upon increasing sales of our solutions to large enterprises. Sales to large customers involve risks that may not be present (or that are present to a lesser extent) with sales to smaller entities. These risks include:

 

 

 

             

more complicated network requirements, which result in more difficult and time-consuming implementation processes;

 

 

 

 

more intense and time-consuming customer support practices;

 

 

 

 

increased purchasing power and leverage held by large customers in negotiating contractual arrangements with us;

 

 

 

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more customer-favorable contractual terms, including penalties;

 

 

 

 

longer sales cycles and the associated risk that substantial time and resources may be spent on a potential customer that ultimately elects not to purchase our solution or purchases fewer licenses than we had anticipated;

 

 

 

 

closer relationships with, and dependence upon, large technology companies that offer competitive solutions;

 

 

 

 

an RFP process that may favor incumbent or larger technology companies;

 

 

 

 

increased reputational risk as a result of data breaches or other problems involving high profile customers; and

 

 

 

 

more pressure for discounts.

 

If we are unable to increase sales of our solutions to large enterprises while mitigating the risks associated with serving such customers, our business, financial position and results of operations may suffer.

Our failure to comply with privacy and data protection laws could have a material adverse effect on our business.

Personal privacy and data protection have become significant issues in the United States, Europe and elsewhere where we offer our solutions. We collect contact and other personal or identifying information from our customers, and our customers increasingly use our cloud services to store and process personal information and other regulated data. We also maintain personal data of our employees in connection with our HR and benefits administration and share that information with third party payroll and benefits providers.

 Many federal, state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, use, disclosure and retention of personal information, with which we must comply. The variety, complexity and changing nature of the privacy law landscape worldwide is challenging. If our solutions fail to adequately separate personal information and to maintain the security of enterprise applications and data, the market perception of the effectiveness of our solutions could be harmed, employee adoption of mobile initiatives could be slowed, we could lose potential sales and existing customers, and we could incur significant liabilities.  

If any of our customers or prospective customers decide not to purchase our software as a result of this regulatory uncertainty, our revenues could decline and our business could suffer. Any inability to adequately address privacy concerns, whether valid or not, or to comply with applicable privacy or data protection laws, regulations and privacy standards, could result in additional cost and liability to us, damage our reputation, inhibit sales of our solutions and harm our business. Furthermore, the attention garnered by the National Security Agency’s bulk intelligence collection programs may result in further concerns surrounding privacy and technology products, which could harm our business.

The European Union data protection law, the General Data Protection Regulation (“GDPR”), which became enforceable in May 2018, is wide-ranging in scope. To adapt to these new requirements, we have invested and will continue to invest resources necessary to enhance our policies and controls across our business units, products and services relating to how we collect and use personal data relating to customers, distributors, resellers, personnel and suppliers. Additionally, we expect that the international transfer of personal data will present ongoing compliance challenges and complicate our business transactions as we negotiate and implement suitable arrangements with international customers and international and domestic suppliers. Failure to comply may lead to fines of up to €20 million or up to 4% of the annual global revenues of the infringer, whichever is greater. EU data protection laws and their interpretations continue to develop, and may be inconsistent from jurisdiction to jurisdiction, which may further impact our information processing activities. Further, laws such as the EU’s proposed e-Privacy Regulation are increasingly aimed at the use of personal information for marketing purposes, and the tracking of individuals’ online activities. In addition, certain countries outside the EU are considering or have passed legislation that requires local

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storage and processing of data, which could increase the cost and complexity of delivering our products and services. Our current arrangements for the transfer of personal data will need to continue to adapt to future judicial decisions and regulatory activity as laws on privacy and the protection of personal data continue to evolve in the countries in which we and our customers do business. If we do not adapt to such changes in the laws or regulations, our business and reputation could be harmed.

 

The implementation of GDPR has led other jurisdictions to enact, amend, or propose legislation to amend their existing data privacy and cybersecurity laws to resemble the requirements of GDPR.  For example, the California Consumer Privacy Act of 2018 (“CCPA”) came into effect on January 1, 2020.  The CCPA has been characterized as the first “GDPR-like” privacy statute to be enacted in the United States because it mirrors a number of the key provisions in the GDPR. California Attorney General (“AG”) Xavier Becerra issued draft regulations on October 11, 2019 and February 10, 2020 to guide covered businesses’ implementation of the CCPA. The regulations address several CCPA provisions that explicitly call for the AG’s input, as well as others that have been the subject of confusion, criticism, or discussion.  Because of this, we will need to engage in additional, ongoing compliance efforts, including data mapping to identify the personal information we are collecting and the purposes for which such information is collected and enhanced consumer rights with respect to their data. If we are unable to meet these standards, our business could be harmed.

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The failure of third parties to comply with privacy and data security laws could harm our business.

The regulatory framework for privacy and data security issues worldwide is currently evolving and is likely to remain uncertain for the foreseeable future, in particular as it relates to cloud computing vendors. Our existing contractual provisions may not protect us from claims for data loss or regulatory noncompliance made against cloud computing providers with whom we contract. Any failure by us or our channel partners or cloud computing vendors to comply with posted privacy policies, other privacy-related or data protection laws and regulations, or the privacy and security commitments contained in contracts could result in legal or regulatory proceedings and/or fines, our business and reputation could be harmed.  Our implementation of, and ongoing compliance with, the GDPR, the CCPA and other legislation that has been or may be enacted in the future, may be costly and distracting to management.

Employee adoption of mobile initiatives depends on the credible and clear separation of enterprise applications and data and personal information on the device, as well as the employee’s data privacy. For our customers, it is also essential to maintain the security of enterprise data properly while retaining the native experience users expect. While we contractually obligate our customers to make the required disclosures, gain the required consents from their employees and otherwise comply with applicable law regarding the processing of personally identifiable information that the employer may access, we do not control whether they in fact do so. Any claim by an employee that his or her employer had not complied with applicable privacy and data security laws in connection with the deployment and use of our software on the employee’s mobile device could harm our reputation and business and subject us to liability, whether or not warranted.

 

We may acquire other businesses which could require significant management attention, disrupt our business, dilute stockholder value and adversely affect our operating results.

As part of our business strategy, we may make investments in complementary companies, solutions or technologies. We may not be able to find suitable acquisition candidates, and we may not be able to complete such acquisitions on favorable terms, if at all. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals. In addition, if we are unsuccessful at integrating such acquisitions, fail to properly identify issues or liabilities in the business and assets we may acquire or are unsuccessful in developing the acquired technologies, the revenue and operating results of the combined company could be adversely affected. We have in the past and could in the future record impairment losses in connection with acquisitions. Further, the integration of an acquired company typically requires significant time and resources, and we may not be able to manage the process successfully and such activities could be distracting to management. We may not successfully evaluate or utilize the acquired technology or personnel or accurately forecast the financial impact of an acquisition transaction, including accounting charges. We may have to pay cash, incur debt or issue equity securities to pay for any such acquisition, each of which could adversely affect our financial condition or the value of our common stock. The sale of equity to finance

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any such acquisition could result in dilution to our stockholders. The incurrence of indebtedness would result in increased fixed obligations and could also include covenants or other restrictions that would impede our ability to manage our operations.

We have indemnity obligations under our contracts with our customers and channel partners, which could have a material adverse effect on our business.

In our agreements with customers and channel partners, in the indemnification provisions we typically agree to defend and settle claims by third parties of intellectual property infringement and sometimes other third party claims. If any such indemnification obligations are triggered, we could face substantial liabilities or be forced to make changes to our solutions or terminate our customer agreements and refund monies. In addition, provisions regarding limitation of liability in our agreements with customers or channel partners may not be enforceable in some circumstances or jurisdictions or may not protect us from claims and related liabilities and costs. We maintain insurance to protect against certain types of claims associated with the use of our solutions, but our insurance may not adequately cover any such claims. In addition, even claims that ultimately are unsuccessful could result in expenditures of and divert management’s time and other resources. Furthermore, any legal claims from customers and channel partners could result in reputational harm and the delay or loss of market acceptance of our solutions.

A portion of our revenues are generated by sales to heavily regulated organizations and governmental entities, which are subject to a number of challenges and risks.

Some of our customers are either in highly regulated industries or are governmental entities and may be required to comply with more stringent regulations in connection with the implementation and use of our solutions. Selling to these entities can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that we will successfully complete a sale or that the organization will deploy our solution at scale. Highly regulated and governmental entities often require contract terms that differ from our standard arrangements and impose compliance requirements that are complicated, require preferential pricing or “most favored nation” terms and conditions, or are otherwise time-consuming and expensive to satisfy. If we are unable to gain any required federal clearance or certificate in a timely manner, or at all, we would likely be prohibited from selling to particular federal customers. In addition, government demand and payment for our solutions and services may be impacted by public sector budgetary cycles and funding authorizations, particularly in light of U.S. budgetary challenges, with funding reductions or delays adversely affecting public sector demand for our solutions. The additional costs associated with providing our solutions to governmental entities and highly regulated customers could harm our margins. Moreover, changes in the underlying regulatory conditions that affect these types of customers could harm our ability to efficiently provide our solutions to them and to grow or maintain our customer base.

If our solutions do not interoperate with our customers’ IT infrastructures, sales of our solutions could be negatively affected.

Our solutions need to interoperate with our customers’ existing IT infrastructures, which have varied and complex specifications. As a result, we must attempt to ensure that our solutions interoperate effectively with these different, complex and varied back-end environments. To meet these requirements, we have and must continue to undertake development and testing efforts that require significant capital and employee resources. We may not accomplish these development efforts quickly or cost-effectively, or at all. If our solutions do not interoperate effectively, orders for our solutions could be delayed or cancelled, which would harm our revenues, gross margins and reputation, potentially resulting in the loss of existing and potential customers. The failure of our solutions to interoperate effectively within the enterprise environment may divert the attention of our engineering personnel from our development efforts and cause significant customer relations problems. In addition, if our customers are unable to implement our solutions successfully, they may not renew or expand their deployments of our solutions, customer perceptions of our solutions may be impaired and our reputation and brand may suffer.

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Although technical problems experienced by users may not be caused by our solutions, our business and reputation may be harmed if users perceive our solutions as the cause of a device failure.

The ability of our solutions to operate effectively can be negatively impacted by many different elements unrelated to our solutions. For example, a user’s experience may suffer from an incorrect setting in his or her mobile device, an issue relating to his or her employer’s corporate network or an issue relating to the underlying mobile operating system, none of which we control. Even though technical problems experienced by users may not be caused by our solutions, users often perceive the underlying cause to be a result of poor performance of our solution. This perception, even if incorrect, could harm our business and reputation.

Our customers may exceed their licensed device or user count, and it is sometimes difficult to collect payments as a result of channel logistics, which could harm our business, financial position and results of operations.

Our customers license our solutions on either a per-device or per-user basis. Because the vast majority of the sales of our solutions are through channel partners, and in some cases multiple tiers of channel partners, the logistics of collecting payments for excess usage can sometimes be time-consuming. We may also encounter difficulty collecting accounts receivable and could be exposed to risks associated with uncollectible accounts receivable. Economic conditions may impact some of our customers’ ability to pay their accounts payable. If we are unable to collect from our customers for their excess usage or otherwise or if we have to write down our accounts receivable, our revenues and operating results would suffer.

If the market for our solutions shrinks or does not continue to develop as we expect, our growth prospects may be harmed.

The success of our business depends on the continued growth and proliferation of mobile and other modern IT infrastructure as an increasingly important computing platform for businesses. Our business plan assumes that the demand for mobile and other modern IT solutions and the deployment of business apps on mobile devices will increase. However, the mobile IT market has slowed and may not develop as quickly as we expect, or at all, and businesses may not continue to elect to utilize mobile IT solutions as an advanced business platform. This market for our solutions may not develop for a variety of reasons, including that larger, more established companies will enter the market or that mobile operating system companies will offer substantially similar functionality or that companies may not deploy business apps at scale and thus may be satisfied with less advanced technologies. Accordingly, demand for our solutions may not continue to develop as we anticipate, or at all, and the growth of our business and results of operations may be adversely affected. In addition, because we derive substantially all of our revenue from the adoption and use of our platform, a decline or slowing growth in the mobile IT market would harm the results of our business operations more seriously than if we derived significant revenue from a variety of other products and services.

Our estimates of market opportunity and forecasts of market growth may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, we cannot assure you our business will grow at similar rates, if at all.

Growth forecasts are subject to significant uncertainty and are based on assumptions and estimates, which may not prove to be accurate. Forecasts relating to our market opportunity and the expected growth in the mobile IT market and other markets may prove to be inaccurate. Even if these markets experience the forecasted growth, we may not grow our business at similar rates, or at all. Our growth will be affected by many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties.

Seasonality may cause fluctuations in our revenue.

We believe there are significant seasonal factors that may cause us to record higher revenue in some quarters compared with others. We believe this variability is largely due to our customers’ budgetary and spending patterns, as many customers spend the unused portions of their discretionary budgets prior to the end of their fiscal years. For example, we have historically recorded our highest level of total revenue in our fourth quarter, which we believe corresponds to the fourth quarter of a majority of our customers. In addition, the type of budget (operating versus capital) available to a customer has affected its decision to purchase a perpetual license or a subscription license but we expect

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the type of budget available to be a less significant factor going forward as we plan to discontinue our sales of perpetual licenses beginning the third quarter of 2020. As our rate of growth has slowed, seasonal or cyclical variations in our operations may become more pronounced, and our business, results of operations and financial position may be adversely affected.

Economic or political uncertainties or downturns could materially adversely affect our business.

Economic downturns or uncertainty could adversely affect our business operations or financial results. Negative conditions in the general economy and political sphere both in the United States and abroad, including conditions resulting from changing tariff and trade policies, financial and credit market fluctuations and terrorist attacks on the United States, Europe, Asia Pacific or elsewhere, could cause a decrease in corporate spending on enterprise software in general and negatively affect the rate of growth of our business. Economic downturns or economic and/or political uncertainty make it difficult for our customers and us to forecast and plan future business activities accurately, and they could cause our customers to reevaluate their decision to purchase our products, which could delay and lengthen our sales cycles, or to deprioritize the portion of their IT budget focused on mobility. We cannot predict the timing, strength or duration of any economic slowdown, economic or political instability or recovery, generally or within any particular industry or geography. If the economic conditions of the general economy or industries in which we operate worsen from present levels, our business operations and financial results could be adversely affected.

The UK’s exit from the EU may have a negative effect on global economic conditions, financial markets and our business.

The United Kingdom’s (UK) formal exit from the European Union (EU) on January 31, 2020, commonly referred to as “Brexit,” has created significant uncertainty concerning the future relationship between the UK and the EU and the impact on global markets. It is unclear what financial, trade, regulatory and legal implications the withdrawal of the UK from the EU will have and how such withdrawal will affect us. Economic and political uncertainty stemming from Brexit may cause our enterprise customers to freeze or decrease their spending on our products. Brexit may also adversely affect and delay our ability to market and sell our products in the UK or may increase our costs of doing business in the UK due to risks such as regulatory uncertainty. In particular, for UK personal data we process, we remain subject to the requirements of the GDPR during the post-Brexit transition period under the EU Withdrawal Agreement. Subsequently, we will be subject to UK data protection legislation. The UK is expected to transpose the protections of the GDPR into UK law after the Brexit transition period, which will end on December 31, 2020. Furthermore, withdrawal of the UK from the EU may also adversely affect European and global economic and market conditions, which may cause our customers outside of the UK to closely monitor their costs and reduce their spending budgets. Any of these effects of Brexit, among others, could have a material adverse impact on our business, financial condition and results of operations.

Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, and to interruption by manmade problems such as network security breaches, computer viruses or terrorism.

Our corporate headquarters are located in the San Francisco Bay Area, a region known for seismic activity. A significant natural disaster, such as an earthquake, fire or flood, occurring near our headquarters could have a material adverse impact on our business, operating results and financial condition. Despite the implementation of network security measures, our networks also may be vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering. In addition, natural disasters, acts of terrorism or war could cause disruptions in our or our customers’ businesses or the economy as a whole. We also rely on information technology systems to communicate among our workforce and with third parties. Any disruption to our communications or systems, whether caused by a natural disaster or by manmade problems, such as power disruptions, could adversely affect our business.

If we are unable to maintain effective internal controls over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.

As a public company, we are required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act)

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requires that we furnish a report by management on, among other things, the effectiveness of our internal controls over financial reporting. Management’s assessment needs to include disclosure of any material weaknesses identified in our internal controls over financial reporting. As of December 31, 2019 and in future periods, our independent registered public accounting firm is required to attest to the effectiveness of our internal controls over financial reporting. Maintenance of internal controls over financial reporting can be time-consuming and costly. If we have a material weakness in our internal controls over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. If we identify material weaknesses in our internal controls over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner, if we are unable to assert that our internal controls over financial reporting are effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, and the market price of our common stock could be negatively affected. In addition, we could become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.

If our estimates relating to our critical accounting policies are based on assumptions or judgments that change or prove to be incorrect, our operating results could fall below expectations of financial analysts and investors, resulting in a decline in our stock price.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent from other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of financial analysts and investors, resulting in a decline in our stock price. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, stock-based compensation and income taxes. Moreover, the revenue recognition guidance, Topic 606 – Revenue from Contracts with Customers, requires significant judgments that we must apply when accounting for revenue.

Impairment of goodwill and other intangible assets would result in a decrease in earnings.

We have in the past and may in the future acquire intangible assets. Current accounting rules require that goodwill and other intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. These rules also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events and circumstances considered in determining whether the carrying value of amortizable intangible assets and goodwill may not be recoverable include, but are not limited to, significant changes in performance relative to expected operating results, significant changes in the use of the assets, significant negative industry or economic trends, or a significant decline in our stock price and/or market capitalization for a sustained period of time. To the extent such evaluation indicates that the useful lives of intangible assets are different than originally estimated, the amortization period is reduced or extended and the quarterly amortization expense is increased or decreased. Any impairment charges or changes to estimated amortization periods could have a material adverse effect on our financial results.

Risks Related to Our Intellectual Property

We have been sued by third parties for alleged infringement of their proprietary rights and may be sued in the future.

There is considerable patent and other intellectual property development activity in our industry. Our success depends in part on not infringing the intellectual property rights of others. From time to time, our competitors or other third parties have claimed, and we expect they will continue in the future to claim, that we are infringing their intellectual property rights, and we may be found to be infringing such rights.

 

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We may be unaware of the intellectual property rights of others that may cover some or all of our solutions. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our solutions, or require that we comply with other unfavorable terms. If any of our customers are sued, we would in general be required to defend and/or settle the litigation on their behalf. In addition, if we are unable to obtain licenses or modify our solutions to make them non-infringing, we might have to refund a portion of perpetual license fees paid to us and terminate those agreements, which could further exhaust our resources. In addition, we may pay substantial settlement amounts or royalties on future solution sales to resolve claims or litigation, whether or not legitimately or successfully asserted against us. Even if we were to prevail in the actual or potential claims or litigation against us, any claim or litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations. Such disputes, with or without merit, could also cause potential customers to refrain from purchasing our solutions or otherwise cause us reputational harm.

We have been sued by non-practicing entities, or NPEs, for patent infringement in the past and may be sued by NPEs in the future. While we have settled such litigation in the past, these lawsuits, with or without merit, require management attention and can be expensive. In addition, we received a letter in August 2019 from BlackBerry Ltd. asserting that our products and software infringe BlackBerry’s patents, and that we should take a license to its portfolio. We have retained counsel and are evaluating BlackBerry’s letter, as well as potential counterclaims against BlackBerry. BlackBerry did not specify any amount of damages in its August 2019 letter, and the parties are negotiating a potential resolution of the dispute. Should any lawsuit be filed by BlackBerry, we intend to defend ourselves vigorously.

If we are unable to protect our intellectual property rights, our competitive position could be harmed or we could be required to incur significant expenses to enforce our rights.

Our ability to compete effectively is dependent in part upon our ability to protect our proprietary technology. We protect our proprietary information and technology through licensing agreements, third-party nondisclosure agreements and other contractual provisions, as well as through patent, trademark, copyright and trade secret laws in the United States and similar laws in other countries. There can be no assurance that these protections will be available in all cases or will be adequate to prevent our competitors from copying, reverse engineering or otherwise obtaining and using our technology, proprietary rights or solutions. The laws of some foreign countries, including countries in which our solutions are sold, may not be as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may be inadequate. In addition, third parties may seek to challenge, invalidate or circumvent our patents, trademarks, copyrights and trade secrets, or applications for any of the foregoing. There can be no assurance that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology or design around our proprietary rights. In each case, our ability to compete could be significantly impaired.

To prevent substantial unauthorized use of our intellectual property rights, it may be necessary to prosecute actions for infringement and/or misappropriation of our proprietary rights against third parties. Any such action could result in significant costs and diversion of our resources and management’s attention, and there can be no assurance that we will be successful in such action.

Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater resources to enforce their intellectual property rights than we do. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.

We rely on third party software and intellectual property licenses and if we are unable to obtain or renew software or licenses on commercially reasonable terms, it could harm our business.

Our solutions are designed to include software and other intellectual property licensed from third parties.  While it may be necessary in the future to seek or renew licenses relating to various aspects of our solutions, we have the expectation, based on experience and standard industry practice, that such licenses generally can be obtained on commercially reasonable terms.  However, there can be no assurance that the necessary licenses would be available on commercially reasonable terms, if at all.  Our inability to obtain certain licenses or other rights or to obtain such licenses or rights on favorable terms could have a material adverse effect on our business, operating results, and financial

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conditions.  Moreover, inclusion in our products or software or other intellectual property licenses from third parties on a nonexclusive basis could limit our ability to protect our proprietary rights in our products.

Our use of open source software could impose limitations on our ability to commercialize our solutions.

Our solutions contain software modules licensed for use from third-party authors under open source licenses, including the GNU Public License, the GNU Lesser Public License, the Apache License and others. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source licenses contain requirements that we make available source code for modifications or derivative works we create based upon the type of open source software we use. If we combine our proprietary solutions with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our proprietary solutions to the public or offer our solutions to users at no cost. This could allow our competitors to create similar solutions with lower development effort and time and ultimately could result in a loss of sales for us.

The terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our solutions. In such event, we could be required to seek licenses from third parties in order to continue offering our solutions, to re-engineer our solutions or to discontinue the sale of our solutions in the event re-engineering cannot be accomplished on a timely basis, any of which could materially and adversely affect our business and operating results.

Risks Related to Our International Operations

Our international operations expose us to additional business risks, and failure to manage these risks may adversely affect our international revenue.

We derive a significant portion of our revenues from customers outside the United States. In 2019,  2018 and 2017,  58%, 58%, and 53% of our revenue, respectively, was attributable to our international customers, primarily those located in Europe. As of December 31, 2019, approximately 46% of our employees were located abroad.

We expect that our international activities will be dynamic over the foreseeable future as we continue to pursue opportunities in international markets, which will require significant management attention and financial resources. Therefore, we are subject to risks associated with having worldwide operations.

We have a limited history of marketing, selling and supporting our solutions internationally. As a result, we must hire and train experienced personnel to staff and manage our foreign operations. To the extent that we experience difficulties in recruiting, training, managing and retaining an international staff, and specifically staff related to sales and engineering, we may experience difficulties in foreign markets. In addition, business practices in the international markets that we serve may differ from those in the United States and may require us to include non-standard terms in customer contracts, such as extended warranty terms. To the extent that we may enter into customer contracts in the future that include non-standard terms related to payment, warranties or performance obligations, our operating results may be adversely affected. International operations are subject to other inherent risks, and our future results could be adversely affected by a number of factors, including:

 

 

 

 

difficulties in executing an international channel partners strategy;

 

 

 

 

burdens of complying with a wide variety of foreign laws, including heightened concerns and legal requirements relating to data security and privacy;

 

 

 

 

economic or political instability and security concerns in countries outside the United States in which we operate or have customers;

 

 

 

29

 

unfavorable contractual terms or difficulties in negotiating contracts with foreign customers or channel partners as a result of varying and complex laws and contractual norms;

 

 

 

 

difficulties in providing support and training to channel partners and customers in foreign countries and languages;

 

 

 

 

heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results or result in fines and penalties;

 

 

 

 

difficulties and costs of attracting and retaining employees and managing foreign operations;

 

 

 

 

import restrictions and the need to comply with export laws;

 

 

 

 

difficulties in protecting intellectual property;

 

 

 

 

difficulties in enforcing contracts and longer accounts receivable payment cycles;

 

 

 

 

the effect of foreign exchange fluctuations on the competitiveness of our prices;

 

 

 

 

potentially adverse tax consequences;

 

 

 

 

the increased cost of terminating employees in some countries;

 

 

 

 

variability of foreign economic, political and labor conditions; and

 

 

 

 

the impact of natural disasters and public health epidemics on our employees, channel partners and the global economy, such as the recent outbreak of coronavirus, first identitified in China.

 

As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and manage effectively these and other risks associated with our international operations. Our failure to manage any of these risks successfully could harm our international operations and reduce our international sales, adversely affecting our business, operating results and financial condition.

We rely on channel partners to sell our solutions in international markets, the loss of which could materially reduce our revenue.

We sell our solutions in international markets almost entirely through channel partners. We believe that establishing and maintaining successful relationships with these channel partners is, and will continue to be, critical to our financial success. Recruiting and retaining qualified channel partners and training them to be knowledgeable about our solutions requires significant time and resources. In some countries, we rely on a sole or very few channel partners and thus the loss of the channel partner could have a significant impact on our sales and support in those countries. To develop and expand our distribution channel, we must continue to scale and improve our processes and procedures that support our channel, including investment in systems and training. In particular, foreign-based service provider partners are large and complex businesses, and we may have difficulty negotiating and building successful business relationships with them.

In addition, existing and future channel partners will only partner with us if we are able to provide them with competitive offerings on terms that are commercially reasonable to them. If we fail to maintain the quality of our solutions or to update and enhance them or to offer them at competitive discounts, existing and future channel partners may elect to partner with one or more of our competitors. In addition, the terms of our arrangements with our channel partners must be commercially reasonable for both parties. If we are unable to reach agreements that are beneficial to

30

both parties, then our channel partner relationships will not succeed. In addition, international channel partners often rely on business models that favor our on premises product over our cloud product because in the former, the channel partner may host and manage the software for, and provide additional administrative, support, training and other services to, the mutual customer for additional fees. This situation could impede sales of our cloud product in certain international markets.

If we fail to maintain relationships with our channel partners, fail to develop new relationships with other channel partners in new markets, fail to manage, train or incentivize existing channel partners effectively, or fail to provide channel partners with competitive solutions on terms acceptable to them, or if these partners are not successful in their sales efforts, our revenue may decrease and our operating results could suffer.

We have no long-term contracts or minimum purchase commitments with any of our channel partners, and our contracts with channel partners do not prohibit them from offering solutions that compete with ours, including solutions they currently offer or may develop in the future and incorporate into their own systems. Some of our competitors may have stronger relationships with our channel partners than we do, and we have limited control, if any, as to whether those partners sell our solutions, rather than our competitors’ solutions, or whether they devote resources to market and support our competitors’ solutions, rather than our solutions. Our failure to establish and maintain successful relationships with channel partners could materially adversely affect our business, operating results and financial condition.

Failure to comply with the U.S. Foreign Corrupt Practices Act and similar laws associated with our activities outside the United States could subject us to penalties and other adverse consequences.

A significant portion of our revenues is and will continue to be from jurisdictions outside of the United States. As a result, we are subject to the U.S. Foreign Corrupt Practices Act, or FCPA, which generally prohibits U.S. companies and their intermediaries from making payments to foreign officials for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment, and requires companies to maintain adequate record-keeping and internal accounting practices to accurately reflect the transactions of the company. The FCPA applies to companies, individual directors, officers, employees and agents. Under the FCPA, we may be held liable for actions taken by strategic or local partners or representatives. In addition, the government may seek to hold us liable for successor liability FCPA violations committed by companies that we acquire.

In many foreign countries, particularly in countries with developing economies, including many countries in which we operate, it may be a local custom that businesses operating in such countries engage in business practices that are prohibited by the FCPA or other similar laws and regulations. Although we have contractual provisions in our agreements with channel partners that require them to comply with the FCPA and similar laws, we have not engaged in formal FCPA training of our channel partners. Our channel partners could take actions in violation of our policies, for which we may be ultimately held responsible. Our development of infrastructure designed to identify FCPA matters and monitor compliance is at an early stage. If we or our intermediaries fail to comply with the requirements of the FCPA or other anti-corruption laws, governmental authorities in the U.S. or elsewhere could seek to impose civil and/or criminal penalties, which could have a material adverse effect on our business, results of operations, financial conditions and cash flows.

We are subject to export controls, and our customers and channel partners are subject to import controls.

Certain of our solutions are subject to U.S. export controls and may be exported to certain countries outside the U.S. only by first obtaining an export license from the U.S. government, or by utilizing an existing export license exception, or after clearing U.S. government agency review. Obtaining the necessary export license or accomplishing a U.S. government review for a particular export may be time-consuming and may result in the delay or loss of sales opportunities. Furthermore, U.S. export control laws and economic sanctions prohibit the shipment of certain solutions to U.S. embargoed or sanctioned countries, governments and persons. If we were to fail to comply with U.S. export law requirements, U.S. customs regulations, U.S. economic sanctions or other applicable U.S. laws, we could be subject to substantial civil and criminal penalties, including fines, incarceration for responsible employees and managers and the possible loss of export or import privileges. U.S. export controls, sanctions and regulations apply to our channel partners

31

as well as to us. Any failure by our channel partners to comply with such laws, regulations or sanctions could have negative consequences, including reputational harm, government investigations and penalties.

In addition, various countries regulate the import of certain encryption and other technology by requiring an import permit, authorization, pre-classification, import certification and/or an import license. Some countries have enacted laws that could limit our customers’ ability to implement our solutions in those countries.

Changes in our solutions or changes in export and import regulations may create delays in the introduction of our solutions into international markets, prevent our customers with international operations from deploying our solutions globally or, in some cases, prevent the export or import of our solutions to certain countries, governments or persons altogether. In addition, any change in export or import regulations, economic sanctions or related legislation, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our solutions by, or in our decreased ability to export or sell our solutions to, existing or potential customers with international operations. Any decreased use of our solutions or limitation on our ability to export or sell our solutions would likely adversely affect our business, financial condition and operating results.

Risks Related to Ownership of Our Common Stock

Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.

In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses, or NOLs, to offset future taxable income. Our existing NOLs may be subject to limitations arising from previous ownership changes. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change. Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. For these reasons, we may not be able to utilize a material portion of the NOLs reflected on our balance sheet, even if we attain profitability.

The price of our common stock has been and may continue to be weak, and you could lose all or part of your investment.

The trading price of our common stock has declined since our Initial Public Offering, and the shares are thinly traded. The trading price of our common stock depends on a number of factors, including those described in this “Risk Factors” section, many of which are beyond our control and may not be related to our operating performance.

Since shares of our common stock were sold at our initial public offering, our stock price has ranged from as low as $2.56 to as high as $12.96 through December 31, 2019.  These fluctuations could cause you to lose all or part of your investment in our common stock, because you might be unable to sell your shares at or above the price you paid. Factors that could cause fluctuations in the trading price of our common stock include the following:

 

 

 

             

failure to meet quarterly guidance with regard to revenue, ARR, cash flow or other key metrics;

 

 

 

 

price and volume fluctuations in the overall stock market from time to time;

 

 

 

 

volatility in the market prices and trading volumes of high technology stocks;

 

 

 

 

changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;

 

 

 

 

sales of shares of our common stock by us or our stockholders;

 

 

 

32

 

failure of financial analysts to maintain coverage of us, changes in financial estimates by any analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

 

 

 

announcements by us or our competitors of new products or new or terminated significant contracts, commercial relationships or capital commitments;

 

 

 

 

the public’s reaction to our press releases, other public announcements and filings with the SEC;

 

 

 

 

rumors and market speculation involving us or other companies in our industry;

 

 

 

 

actual or anticipated changes in our results of operations or fluctuations in our operating results;

 

 

 

 

actual or anticipated developments in our business or our competitors’ businesses or the competitive landscape generally;

 

 

 

 

litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;

 

 

 

 

developments or disputes concerning our intellectual property or other proprietary rights;

 

 

 

 

announced or completed acquisitions of businesses or technologies by us or our competitors;

 

 

 

 

new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

 

 

 

 

changes in accounting standards, policies, guidelines, interpretations or principles;

 

 

 

 

any major change in our management;

 

 

 

 

general economic conditions and slow or negative growth of our markets; and

 

 

 

 

other events or factors, including those resulting from war, incidents of terrorism or responses to these events.

 

In addition, broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market prices of particular companies’ securities, securities class action litigation has often been instituted against these companies. Litigation of this type has been instituted against us, and could result in substantial costs and a diversion of our management’s attention and resources.

If financial or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts or the content and opinions included in their reports. If any of the analysts who cover us issue an adverse or misleading opinion regarding our stock price, our stock price would likely decline. Financial analysts have in the past ceased coverage of our stock or published adverse reports, and this may recur in the future. Any cessation of coverage or adverse reports would likely cause our stock price or trading volume to decline. 

33

Insiders continue to have substantial control over our company, which could limit your ability to influence the outcome of key transactions, including a change of control.

Our directors, executive officers and each of our stockholders who own greater than 5% of our outstanding common stock and their affiliates, in the aggregate, own approximately 35% of the outstanding shares of our common stock as of December  31, 2019. As a result, these stockholders, if acting together, will be able to influence or control matters requiring approval by our stockholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. This concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deter certain public investors from purchasing our common stock and might ultimately affect the market price of our common stock.

We have in the past failed, and may in the future fail, to meet our publicly announced guidance or other expectations about our business and future operating results, which has in the past caused, and would in the future cause, our stock price to decline.

We have provided and may continue to provide guidance about our business and future operating results as part of our press releases, conference calls or otherwise. In developing this guidance, our management must make certain assumptions and judgments about our future performance. Our business results may vary significantly from such guidance due to a number of factors, many of which are outside of our control, and which could adversely affect our operations and operating results. Furthermore, if our publicly announced guidance of future operating results fails to meet expectations of securities analysts, investors or other interested parties, the price of our common stock would decline.

Our future capital needs are uncertain, and we may need to raise additional funds in the future. If we require additional funds in the future, those funds may not be available on acceptable terms, or at all.

We may need to raise substantial additional capital in the future to:

 

 

 

             

fund our operations;

 

 

 

 

continue our research and development;

 

 

 

 

develop and commercialize new solutions; or

 

 

 

 

acquire companies, in-licensed solutions or intellectual property.

 

Our future funding requirements will depend on many factors, including:

 

 

 

             

market acceptance of our solutions;

 

 

 

 

the cost of our research and development activities;

 

 

 

 

the cost of defending and resolving litigation or other legal disputes;

 

 

 

 

the cost and timing of establishing additional sales, marketing and distribution capabilities;

 

 

 

 

the cost and timing of establishing additional technical support capabilities;

 

 

 

 

the effect of competing technological and market developments; and

 

 

 

 

the market for different types of funding and overall economic conditions.

34

 

 

 

 

We may require additional funds in the future, and we may not be able to obtain those funds on acceptable terms, or at all. If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or additional equity financing that we raise may contain terms that are not favorable to us or our stockholders.

If we do not have, or are not able to obtain, sufficient funds, we may have to delay development or commercialization of our solutions. If we are unable to raise adequate funds, we may have to liquidate some or all of our assets, or delay, reduce the scope of or eliminate some or all of our development programs. We also may have to reduce marketing, customer support or other resources devoted to our solutions or cease operations. Any of these actions could harm our operating results.

Sales of substantial amounts of our common stock in the public markets, or the perception that these sales might occur, could reduce the price that our common stock might otherwise attain and may dilute your voting power and your ownership interest in us.

Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales could occur, could adversely affect the market price of our common stock and may make it more difficult for you to sell your common stock at a time and price that you deem appropriate. At December  31, 2019, we have 112,725,391 shares of common stock outstanding, excluding any potential exercises of our outstanding stock options and vesting of restricted stock units (“RSUs”).

In the future, we may issue additional shares of common stock, or securities with convertible features into our common stock, from time to time in connection with our employee equity plans, financings, acquisitions and investments or otherwise. 

On June 14, 2017, our shareholders approved in a proxy vote the amendment of our 2014 Employee Stock Purchase Plan, or ESPP, to provide for a one-time increase of 1,200,000 shares of common stock available for issuance under the ESPP. In February of 2018, we issued 1,220,822 shares of common stock under our 2017 Executive and Non-Executive Bonus Plans.  In February of 2019, we issued 1,338,220 shares of common stock under our 2018 Executive and Non-Executive Bonus Plans. In February 2020, we issued 1,061,165 shares of common stock under our 2019 Non-Executive Bonus Plan. The issuance of shares of common stock under RSUs, future bonus programs, or our ESPP could result in substantial dilution to our existing stockholders and cause the trading price of our common stock to decline.

Certain provisions in our charter documents and Delaware law could limit attempts by our stockholders to replace or remove our board of directors or current management and limit the market price of our common stock.

Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:

 

 

 

             

our board of directors has the right to elect directors to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

 

 

 

 

our stockholders may not act by written consent or call special stockholders’ meetings; as a result, a holder, or holders, controlling a majority of our capital stock would not be able to take certain actions other than at annual stockholders’ meetings or special stockholders’ meetings called by the board of directors, the chairman of the board, the chief executive officer or the president;

 

 

 

 

our certificate of incorporation prohibits cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;

35

 

 

 

 

 

 

stockholders must provide advance notice and additional disclosures in order to nominate individuals for election to the board of directors or to propose matters that can be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of our company; and

 

 

 

 

our board of directors may issue, without stockholder approval, shares of undesignated preferred stock; the ability to issue undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us.

 

As a Delaware corporation, we are also subject to certain Delaware anti-takeover provisions. Under Delaware law, a corporation may not engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. Our board of directors could rely on Delaware law to prevent or delay an acquisition of our company.

Our executive officers are entitled to accelerated vesting of their stock options pursuant to the terms of their employment arrangements under certain conditions following a change of control of the Company. In addition to the arrangements currently in place with some of our executive officers, we may enter into similar arrangements in the future with other officers. Such arrangements could delay or discourage a potential acquisition of the Company.

Our financial results may be adversely affected by changes in accounting principles applicable to us.

U.S. GAAP are subject to interpretation by the Financial Accounting Standards Board (“FASB”), the SEC, and other various bodies formed to promulgate and interpret appropriate accounting principles. For example, in the first quarter of our fiscal year 2018, we adopted accounting standards update No. 2014-09 (Topic 606), Revenue from Contracts with Customers, which most significantly changed the timing of revenue recognition for on-premise subscriptions. There could be additional changes to accounting principles in the future. Any difficulties in adequately accounting new accounting standards could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm investors’ confidence in us.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our principal executive offices are located in Mountain View, California and include one building totaling approximately 43,000 square feet under a  lease expiring in May 2023. We have additional office locations in the United States and in various international locations, including offices in the United Kingdom, Germany, Netherlands, Japan, Singapore and India.

We may add new facilities or expand existing facilities as we add employees, and we believe that suitable additional or substitute space will be available on commercially reasonable terms to meet our future needs.

Item 3. Legal Proceedings

We continually evaluate uncertainties associated with litigation and record an accrual equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and (ii) the loss or range of loss can be reasonably estimated. If we determine that a loss is possible and a range of the loss can be reasonably estimated, we disclose the range of the possible loss in the Notes to the Consolidated Financial Statements. We evaluate, on a quarterly basis, developments in our legal matters that could affect the amount of liability that has been previously accrued, if any, and the matters and related ranges of possible

36

losses disclosed, and make adjustments and changes to our disclosures as appropriate. Significant judgment is required to determine both likelihood of there being and the estimated amount of a loss related to such matters. Until the final resolution of such matters, there may be an exposure to loss, and such amounts could be material. We record litigation accruals for legal matters which are both probable and estimable. For legal proceedings for which there is a reasonable possibility of loss (meaning those losses for which the likelihood is more than remote but less than probable), we have determined we do not have material exposure on an aggregate basis.

Indemnification

Under the indemnification provisions of our standard sales related contracts, we agree to defend and/or settle claims brought by third parties against our customers and channel partners alleging that our software or the customer’s use thereof infringes the third party’s intellectual property right, such as a patent right. These indemnification obligations are typically not subject to limitation; however if we believe such a claim is reasonably likely to occur and if it is commercially impractical for us to either procure the right for the customer to continue to use our software or modify our software so that it’s not infringing, we can terminate the customer agreement and refund the customer a portion of the license fees paid (prorated over the three year period from initial delivery for software licensed on a perpetual basis). We also on occasion indemnify our customers for other types of third party claims. In addition, we indemnify our officers, directors, and certain key employees while they are serving in such capacities in good faith. Through December 31, 2019, we have not received any material written claim for indemnification.

In addition, the information set forth under “Litigation” in Note 12 contained in the “Notes to Consolidated Financial Statements” in Item 8, “Financial Statements and Supplementary Data,” of Part II of this Annual Report on Form 10-K is incorporated herein by reference.

Item 4. Mine Safety Disclosures

Not applicable.

37

Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock, $0.0001 par value per share, is listed on the Nasdaq Global Select Market under the symbol “MOBL”.

Holders of Record and Dividends

As of February 15, 2020, there were 17 holders of record of our common stock. Because many of our shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. We have never declared or paid, and do not anticipate declaring or paying in the foreseeable future, any cash dividends on our capital stock. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors, subject to applicable laws, and will depend on then existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects, and other factors our board of directors may deem relevant.

Stock Performance Graph and Cumulative Total Return

The following graph compares the cumulative total return attained by stockholders on our common stock relative to the cumulative total returns of the Nasdaq Composite Index (^IXIC) and Nasdaq Computer Index (^IXCO). The graph tracks the performance of a $100 investment in our common stock and in each of the indices (with the reinvestment of

38

all dividends) from December 31, 2014 to December 31, 2019.  The stock price performance on the following graph is not necessarily indicative of future stock price performance.

MobileIron, Inc. Comparison of Total Return Performance

Picture 5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Base Period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company/Index

 

 

12/31/14

12/31/15

 

12/31/16

 

12/31/17

 

12/31/18

 

12/31/19

MobileIron, Inc.

 

$

100.00

 

$

36.24

 

$

37.65

 

$

39.16

 

$

46.08

 

$

48.80

Nasdaq Computer Index

 

 

100.00

 

 

106.24

 

 

119.28

 

 

165.52

 

 

159.43

 

 

239.67

Nasdaq Composite Index

 

 

100.00

 

 

105.73

 

 

113.66

 

 

145.76

 

 

140.10

 

 

189.45

 

Repurchases of Common Stock during the Three Months Ended December 31, 2019

Repurchase Program

In October 2018, the Company’s Board of Directors approved a common stock repurchase program (“Repurchase Program”) whereby the Company is authorized to purchase up to a maximum of $25 million of its common stock, subject to compliance with applicable law and the limitations in the Company’s credit facilities on stock repurchases.

The authorization allows repurchases from time to time in the open market or in privately negotiated transactions. The amount and timing of future repurchases made under the Repurchase Program will depend on a variety of factors, including available liquidity, cash flow and market conditions. Shares can be purchased through the Repurchase Program through October 2020, unless extended or shortened by the Company’s Board of Directors. The Repurchase Program does not obligate the Company to acquire any particular amount of common stock and the program may be modified or suspended at any time at the Company’s discretion. The repurchases will continue to be funded from available working capital and are subject to compliance with the terms and limitations of the Company’s credit facilities.

39

All shares repurchased under the Repurchase Program have been made in the open market.

 

Net Settlement of Equity Awards

 

The majority of restricted stock units are subject to vesting. The underlying shares of common stock are issued when the restricted stock units vest. The majority of participants choose to participate in a  broker-assisted automatic sales program to satisfy their applicable tax withholding requirements. We do not treat the shares sold pursuant to this automatic sales program as common stock repurchases.  

 

In the fourth quarter of 2019, we withheld 83,327 shares through net settlements (where the award holder receives the net of the shares vested, after surrendering a portion of the shares back to the Company for tax withholding) for restricted stock units that vested for some of our executive officers.

 

The following table provides a summary of the Company’s repurchase of common stock under the Repurchase Program and shares surrendered back to the Company for tax withholding on restricted stock units that vested under our equity incentive programs in the three months ended December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

 

 

 

Period

 

Total Number of Shares  Repurchased

 

 

Average Price Paid per Share

 

Total Number of Shares Purchased As Part of a Publicly Announced Program

 

Maximum Dollar Value of Shares that May Yet Be Purchased Under the Repurchase Program

October 1, 2019 through October 31, 2019

 

 —

 

$

 —

 

 —

$

12,544,543

November 1, 2019 through November 30, 2019

 

274,681

 

$

4.82

 

191,354

$

11,620,641

December 1, 2019 through December 31, 2019

 

374,490

 

$

4.70

 

374,490

$

9,859,153

Total shares repurchased

 

649,171

 

$

4.75

 

565,844

$

9,859,153

 

Securities Authorized for Issuance under Equity Compensation Plans

See Item 12 of Part III of this Annual Report on Form 10-K regarding information about securities authorized for issuance under our equity compensation plan.

Item 6. Selected Financial Data

The following selected historical financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our financial statements, and the related notes appearing in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K to fully understand factors that may affect the comparability of the information presented below.

The consolidated statement of operations data for 2019, 2018 and 2017 and the balance sheet data as of December 31, 2019 and 2018 are derived from our audited financial statements appearing in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K. See Note 1 – Description of Business and Significant Accounting Policies of the Notes to the Consolidated Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion. The statement of operations data for 2016 and 2015 and the balance sheet data as of December 31, 2017, 2016 and 2015 is derived from audited financial statements not included in this Annual Report on Form 10-K. The statement of operations data for 2019, 2018, 2017 and 2016 and the balance sheet data as of December 31, 2019, 2018, 2017 and 2016 are based on the new accounting standards related to revenue recognition that we adopted in 2018. The

40

balance sheet data as of December 31, 2019 reflects the new accounting standards related to lease accounting that we adopted in 2019. Our historical results are not necessarily indicative of the results to be expected in the future.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

(in thousands, except per share data)

 

2019

 

2018

 

2017

 

2016

 

2015

Consolidated Statement of Operations Data:

 

 

 

 

 

Revenue

    

  

 

    

  

 

    

  

 

 

  

 

 

  

 

Cloud services

 

$

67,034

 

$

50,714

 

$

38,728

 

$

31,093

 

$

48,080

License

 

 

49,469

 

 

59,338

 

 

64,035

 

 

66,347

 

 

53,512

Software support and services

 

 

88,733

 

 

83,140

 

 

76,995

 

 

68,742

 

 

47,706

Total revenue

 

 

205,236

 

 

193,192

 

 

179,758

 

 

166,182

 

 

149,298

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cloud services

 

 

21,370

 

 

12,719

 

 

8,847

 

 

8,374

 

 

7,181

License

 

 

2,004

 

 

3,270

 

 

2,203

 

 

2,896

 

 

2,881

Software support and services

 

 

18,715

 

 

18,933

 

 

19,176

 

 

19,097

 

 

18,115

Restructuring charge(2)

 

 

300

 

 

 —

 

 

311

 

 

181

 

 

 —

Total cost of revenue(1)

 

 

42,389

 

 

34,922

 

 

30,537

 

 

30,548

 

 

28,177

Gross profit

 

 

162,847

 

 

158,270

 

 

149,221

 

 

135,634

 

 

121,121

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development(1)

 

 

79,556

 

 

78,047

 

 

75,350

 

 

67,398

 

 

61,871

Sales and marketing(1)

 

 

97,519

 

 

94,204

 

 

96,807

 

 

102,327

 

 

105,520

General and administrative(1)

 

 

30,565

 

 

28,880

 

 

28,091

 

 

29,695

 

 

36,037

Litigation settlement charge

 

 

 —

 

 

 —

 

 

1,143

 

 

 —

 

 

 —

Restructuring charge(2)

 

 

3,282

 

 

 —

 

 

1,038

 

 

871

 

 

1,049

Total operating expenses

 

 

210,922

 

 

201,131

 

 

202,429

 

 

200,291

 

 

204,477

Operating loss

 

 

(48,075)

 

 

(42,861)

 

 

(53,208)

 

 

(64,657)

 

 

(83,356)

Other income (expense) - net

 

 

1,361

 

 

1,124

 

 

988

 

 

145

 

 

(274)

Loss before income taxes

 

 

(46,714)

 

 

(41,737)

 

 

(52,220)

 

 

(64,512)

 

 

(83,630)

Income tax expense

 

 

2,132

 

 

1,347

 

 

1,142

 

 

982

 

 

852

Net loss

 

$

(48,846)

 

$

(43,084)

 

$

(53,362)

 

$

(65,494)

 

$

(84,482)

Net loss per share, basic and diluted

 

$

(0.44)

 

$

(0.42)

 

$

(0.57)

 

$

(0.76)

 

$

(1.07)

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

 

 

109,973

 

 

102,527

 

 

93,770

 

 

85,845

 

 

78,755


(1)

Amounts include stock-based compensation expense as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

(in thousands)

 

2019

  

2018

  

2017

  

2016

 

2015

Stock-Based Compensation Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

$

5,095

 

$

5,006

 

$

3,772

 

$

3,043

 

$

2,774

Research and development

 

 

14,610

 

 

15,981

 

 

14,520

 

 

11,728

 

 

10,607

Sales and marketing

 

 

8,663

 

 

9,464

 

 

8,659

 

 

10,474

 

 

9,508

General and administrative

 

 

7,436

 

 

7,985

 

 

6,780

 

 

9,144

 

 

5,902

Total stock-based compensation expense

 

$

35,804

 

$

38,436

 

$

33,731

 

$

34,389

 

$

28,791

 

41

(2)  Restructuring charges included in cost of sales are related to actions taken in our Customer Success and data center operations organizations and charges included in operating expenses are related to actions taken in research and development, sales and marketing, and general and administrative functions.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31,

(in thousands)

 

2019

    

2018

    

2017

 

2016

 

2015

Consolidated Balance Sheet Data:

 

 

 

 

 

Cash and cash equivalents

    

$

94,415

 

$

104,613

 

$

85,833

    

$

54,043

    

$

47,234

Short-term and long-term investments

 

 

 —

 

 

1,000

 

 

6,797

 

 

36,184

 

 

51,670

Working capital

 

 

41,971

 

 

60,194

 

 

56,964

 

 

68,222

 

 

66,568

Total assets

 

 

212,430

 

 

210,387

 

 

184,440

 

 

174,655

 

 

161,114

Unearned revenue

 

 

118,211

 

 

105,837

 

 

77,022

 

 

60,588

 

 

69,875

Customer arrangements with termination rights

 

 

16,130

 

 

19,367

 

 

19,546

 

 

14,198

 

 

 —

Accumulated deficit

 

 

(452,913)

 

 

(404,067)

 

 

(360,983)

 

 

(307,621)

 

 

(275,205)

Total stockholders' equity

 

$

35,998

 

$

54,117

 

$

59,552

 

$

75,581

 

$

68,139

 

 

42

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those contained in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those under “Risk Factors” included in Part I, Item 1A or in other parts of this report.

Mobile and cloud computing are the catalysts for modern work and the digital workplace. Mobile empowers employees to make better decisions and take faster actions because the information and tools they need to do their jobs are always available from anywhere. Cloud is transforming IT, Security and DevOps and has accelerated how the developer ecosystem builds and rolls out innovative services enabling unparalleled user experience.

 

However, this comes with new risks. The traditional, locked-down, perimeter-based approach to security no longer applies to mobile endpoints and cloud services that operate outside the corporate network. Data no longer resides behind the firewall on locked-down PCs and servers, and so it cannot be secured by legacy firewall-based solutions. Instead, data is spread across a wide variety of modern endpoints including Android, iOS, macOS, Chrome OS and Windows 10, as well as cloud services such as Box, Concur, Microsoft Office 365, Netsuite, Salesforce, Workday and custom cloud applications that are hosted on cloud infrastructure providers like AWS or on-premise.

 

This shift to mobile and cloud technologies introduces three main challenges that CIOs and CISOs need to address to realize their secure digital workplace:

 

1.

Drive business innovation by allowing employees to securely use mobile, cloud, services and on-premises apps from any device, anywhere;

2.

Enforce corporate security without impacting the user experience;

3.

Redefine enterprise security strategies to address a perimeter-less environment.

 

To solve these challenges, many organizations are in the early stages of investigating a zero trust security framework for their enterprise. Zero trust assumes that bad actors are already in the network and secure access is determined by a “never trust, always verify” approach.

 

MobileIron is an established player in the zero trust market, and a leader in mobile-centric, zero trust solutions that go beyond traditional approaches to security by utilizing a more comprehensive set of attributes to grant secure access. MobileIron products and services validate the device, establish user context, check application authorization, verify the network, and detect and mitigate threats before granting secure access to a device or user. We believe traditional identity-based and gateway approaches to zero trust fall short because they provide only limited visibility into devices, applications, and threats.

 

We are redefining how customers build a secure foundation in a perimeter-less world. Our security platform is built on the foundation of unified endpoint management (UEM) with additional zero trust capabilities including zero sign-on (ZSO), multifactor authentication (MFA), and mobile threat defense (MTD). Together these products and services create a more seamless mobile experience by automating access control decisions across users, endpoints, operating systems, clouds, networks, threats, and vulnerabilities so that only trusted resources can access corporate data.

 

Our customers can deploy MobileIron solutions as either cloud services or on-premise software. They have historically been able to choose to purchase our on-premise software priced as a subscription or perpetual license.  However, we plan to discontinue the sale of on-premise software priced as a  perpetual license beginning the third quarter of 2020. We target midsize and large enterprises around the world across a broad range of industries including financial services, government, healthcare, legal, manufacturing, professional services, retail, technology, and telecommunications. 

43

Our total revenue in 2019, 2018 and 2017 was $205.2 million, $193.2 million and $179.8 million, respectively, representing an increase of 6% from 2018 to 2019 and 7% from 2017 to 2018.

Revenue from cloud services, licenses and software support and services represented 33%, 24%  and 43% of total revenue, respectively, in 2019,  26%, 31% and 43% of total revenue, respectively, in 2018, and 22%, 35% and 43% of total revenue, respectively, in 2017. This represents a continuing mix shift in our business. Revenue from recurring sources, which includes revenue from the license component of on-premise term subscriptions, cloud services, and software support on perpetual and on-premise term licenses, was 84%, 78% and 72% of total revenue in 2019,  2018 and 2017, respectively.

Our cloud services revenue in 2019, 2018 and 2017 was $67.0 million, $50.7 million and $38.7 million, respectively, representing an increase of 32% from 2018 to 2019 and 31% from 2017 to 2018. This growth reflects our customers’ preference to purchase cloud services, and contributions from MobileIron Threat Defense and Access.  When we sell our cloud solutions on a subscription basis, we typically offer 12 months or longer terms and bill in advance.

 

Our license revenue in 2019, 2018 and 2017 was $49.5 million, $59.3 million and $64.0 million, respectively, representing a decrease of 17% from 2018 to 2019 and 7% from 2017 to 2018. The decline in license revenue was primarily due to a decrease in revenue from perpetual licenses, partially offset by an increase in license fees recognized from on-premise subscriptions. We have generally seen a decrease in demand for our perpetual licenses and a mix shift in favor of subscriptions rather than perpetual licenses.  License fees recognized from on-premise subscription do not generate as much revenue as perpetual licenses. After we discontinue the sale of perpetual licenses beginning the third quarter of 2020, license revenue may decrease more dramatically for a period of time.

 

Our software support and services revenue in 2019, 2018 and 2017 was $88.7 million, $83.1 million and $77.0 million, respectively, representing an increase of 7% from 2018 to 2019 and 8% from 2017 to 2018. Software support and services revenue includes support of perpetual license customers, the support component of on-premise subscriptions, and professional services. The growth rate of software support and services revenue is primarily dependent on growth in our installed base of customers that purchase perpetual licenses or on-premise subscriptions, renewals of on-premise subscriptions and software support on perpetual licenses, and purchases of professional services as part of our solutions.

Our Annual Recurring Revenue (or “Total ARR”) at December 31, 2019 was $179.5 million compared to $162.6 million at December 31, 2018, representing a growth rate of 10%. See “Key Metrics and Non-GAAP Financial Information” for more information about ARR.

We sell a significant portion of our products through our channel partners, including resellers, service providers and system integrators.  Our sales force develops sales opportunities and works closely with our channel partners to sell our solutions. We have a high touch sales force focused on large organizations, inside sales teams focused on mid-sized enterprises and sales teams that work with service providers that focus on smaller businesses. We prioritize our internal sales and marketing efforts on mid-sized to large organizations because we believe that they represent the largest potential opportunity.

 

We believe that our market opportunity is large, and sales to customers outside of the United States will remain a significant opportunity for future growth. In 2019, 2018 and 2017,  58%, 58% and 53%, respectively, of our total revenue was generated from customers located outside of the United States, primarily those located in Europe. International market trends that may affect sales of our products and services include heightened concerns and legal requirements relating to data security and privacy, the importance of execution on our international channel partner strategy, the importance of recruiting and retaining sufficient international personnel, the effect of exchange rates, and political and financial market instability.

 

Since 2016, we have focused on driving more efficiency in our business. However, we have continued to incur net losses. We incurred net losses of $48.8 million, $43.1 million and $53.4 million in 2019, 2018 and 2017, respectively. As a result of this, we do not expect to be profitable for the foreseeable future under our current operating plan. Future profitability is primarily dependent on revenue growth, which may be challenging for a number of reasons including

44

likely continued mix shift towards cloud subscription licensing, discontinuation of perpetual licenses sales for our on-premise solution beginning the third quarter of 2020, increasing and entrenched competition, product features, changes in our pricing model, the amount of revenue we generate from sales of partner solutions that bear royalties,  our ability to continue to develop and evolve our products, any failure to capitalize on market opportunities, and the ability of our sales organization to retain its key employees and leadership team. Future profitability is also dependent on our ability to drive efficiencies into our business and to manage our expenses, which continue to be impacted by stock-based compensation charges from RSU grants and stock-settled bonuses. We will also need to increase operating efficiency, which may be challenging given our operational complexity. Further, because our licensing models have different revenue recognition patterns, changes in our licensing model mix make our financial results difficult to predict.    

Key Metrics and Non-GAAP Financial Information

To supplement our financial results presented on a GAAP basis, we provide investors with certain non-GAAP financial measures, including non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating loss, non-GAAP operating margin, non-GAAP net loss, non-GAAP net loss per share, and free cash flow. Non-GAAP financial measures exclude stock-based compensation, the amortization of intangible assets, a litigation settlement charge, and restructuring charges.

Stock-based compensation expenses

In our non-GAAP financial measures, we have excluded the effect of stock-based compensation expenses. Stock-based compensation expenses will recur in future periods.

Amortization of intangible assets

 

In our non-GAAP financial measures, we have excluded the effect of the amortization of intangible assets. Amortization of intangible assets can be significantly affected by the timing and size of acquisitions of companies or technology. Beginning with the second quarter of 2018, we no longer had amortizing intangible assets.

 

Litigation settlement charge

 

In our non-GAAP financial measures, we have excluded a charge for the cost of the settlement of certain shareholder litigation. While it is possible that we will have material litigation-related charges in the future, we do not expect it to be a consistently recurring expense.

 

Restructuring charges

In our non-GAAP financial measures, we have excluded the effect of the severance and other expenses related to reductions in our workforce, contract termination costs, and costs associated with the exit of office facilities. Restructuring charges may recur in the future; however, the timing and amounts are difficult to predict.

Non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating loss, non-GAAP operating margin, non-GAAP net loss, and non-GAAP net loss per share

We believe that the exclusion of stock-based compensation expense, the amortization of intangible assets, the litigation settlement charge, and restructuring charges from gross profit, gross margin, operating loss, operating margin, net loss, and net loss per share provides useful measures for management and investors because stock-based compensation, the amortization of intangible assets and restructuring charges have been and can continue to be inconsistent in amount from period to period. Other than in 2017, we have not historically had a material litigation-related settlement charge. While it is possible that we will have material litigation settlement charges in the future, we do not expect such charges to be a consistently recurring expense. We believe the inclusion of these items makes it difficult to compare periods and understand the growth and performance of our business. In addition, we evaluate our business performance and compensate management based in part on these non-GAAP measures. 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 our competitors and exclude expenses that may have a material impact on our reported financial results. Further, stock-based compensation expense has been and will continue

45

to be for the foreseeable future a significant recurring expense in our business and an important part of the compensation provided to our employees.

Free cash flow

Our non-GAAP financial measures also include free cash flow, which we define as cash provided by (used in) operating activities less the amount of property and equipment purchased. Management believes that information regarding free cash flow provides investors with an important perspective on the cash available to invest in our business and fund ongoing operations. However, our calculation of free cash flow may not be comparable to similar measures used by other companies.

 

We believe these non-GAAP financial measures are helpful in understanding our past financial performance and our future results. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. Our management regularly uses our supplemental non-GAAP financial measures internally to understand, manage and evaluate our business, and make operating decisions. These non-GAAP measures are among the primary factors management uses in planning for and forecasting future periods. Compensation of our executives is based in part on the performance of our business based on certain of these non-GAAP measures.

We monitor the following non-GAAP financial measures:

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

    

 

 

    

 

 

For the year ended December 31,

 

(in thousands, except percentages and per share data)

    

2019

    

2018

    

2017

    

Non-GAAP gross profit

 

$

168,242

 

$

163,376

 

$

153,849

 

Non-GAAP gross margin

 

 

82.0

%  

 

84.6

%  

 

85.6

%  

Non-GAAP operating loss

 

$

(8,689)

 

$

(4,325)

 

$

(16,440)

 

Non-GAAP operating margin

 

 

(4.2)

%  

 

(2.2)

%  

 

(9.1)

%  

Non-GAAP net loss

 

$

(9,460)

 

$

(4,548)

 

$

(16,594)

 

Non-GAAP net loss per share

 

$

(0.09)

 

$

(0.04)

 

$

(0.18)

 

Free cash flow

 

$

(3,924)

 

$

12,201

 

$

(3,418)

 

 

46

 

Reconciliation of Non-GAAP Financial Measures

The following tables reconcile the most directly comparable GAAP financial measure to each of the non-GAAP financial measures discussed above.

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

 

 

For the year ended December 31,

 

 

 

2019

 

2018

 

2017

 

(in thousands, except percentages and per share data)

 

 

 

 

 

 

 

 

 

 

Non-GAAP gross profit reconciliation:

 

 

 

 

 

 

 

 

 

 

Gross profit

 

$

162,847

 

$

158,270

 

$

149,221

 

Add: Stock-based compensation expense

 

 

5,095

 

 

5,006

 

 

3,772

 

Add: Amortization of intangible assets

 

 

 —

 

 

100

 

 

545

 

Add: Restructuring charge

 

 

300

 

 

 —

 

 

311

 

Non-GAAP gross profit

 

$

168,242

 

$

163,376

 

$

153,849

 

Non-GAAP gross margin reconciliation:

 

 

 

 

 

 

 

 

 

 

GAAP gross margin: GAAP gross profit over GAAP total revenue

 

 

79.3

%  

 

81.9

%  

 

83.0

%  

GAAP to non-GAAP gross margin adjustments

 

 

2.7

 

 

2.7

 

 

2.6

 

Non-GAAP gross margin

 

 

82.0

%  

 

84.6

%  

 

85.6

%  

Non-GAAP operating loss reconciliation:

 

 

 

 

 

 

 

 

 

 

GAAP operating loss

 

$

(48,075)

 

$

(42,861)

 

$

(53,208)

 

Add: Stock-based compensation expense

 

 

35,804

 

 

38,436

 

 

33,731

 

Add: Amortization of intangible assets

 

 

 —

 

 

100

 

 

545

 

Add: Litigation settlement charge

 

 

 —

 

 

 —

 

 

1,143

 

Add: Restructuring charge

 

 

3,582

 

 

 —

 

 

1,349

 

Non-GAAP operating loss

 

$

(8,689)

 

$

(4,325)

 

$

(16,440)

 

Non-GAAP operating margin reconciliation:

 

 

 

 

 

 

 

 

 

 

GAAP operating margin: GAAP operating profit over GAAP total revenue

 

 

(23.4)

%

 

(22.2)

%

 

(29.6)

%

GAAP to non-GAAP operating margin adjustments

 

 

19.2

 

 

20.0

 

 

20.5

 

Non-GAAP operating margin

 

 

(4.2)

%

 

(2.2)

%

 

(9.1)

%

Non-GAAP net loss reconciliation:

 

 

 

 

 

 

 

 

 

 

GAAP net loss

 

$

(48,846)

 

$

(43,084)

 

$

(53,362)

 

Add: Stock-based compensation expense

 

 

35,804

 

 

38,436

 

 

33,731

 

Add: Amortization of intangible assets

 

 

 —

 

 

100

 

 

545

 

Add: Litigation settlement charge

 

 

 —

 

 

 —

 

 

1,143

 

Add: Restructuring charge

 

 

3,582

 

 

 —

 

 

1,349

 

Non-GAAP net loss

 

$

(9,460)

 

$

(4,548)

 

$

(16,594)

 

Non-GAAP net loss per share reconciliation:

 

 

 

 

 

 

 

 

 

 

GAAP net loss per share

 

$

(0.44)

 

$

(0.42)

 

$

(0.57)

 

Add: Stock-based compensation expense per share

 

 

0.32

 

 

0.38

 

 

0.36

 

Add: Amortization of intangible assets per share

 

 

 —

 

 

 —

 

 

0.01

 

Add: Litigation settlement charge per share

 

 

 —

 

 

 —

 

 

0.01

 

Add: Restructuring charge per share

 

 

0.03

 

 

 —

 

 

0.01

 

Non-GAAP net loss per share

 

$

(0.09)

 

$

(0.04)

 

$

(0.18)

 

Free cash flow:

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

(2,406)

 

$

14,157

 

$

3,036

 

Purchase of property and equipment

 

 

(1,518)

 

 

(1,956)

 

 

(6,454)

 

Free cash flow

 

$

(3,924)

 

$

12,201

 

$

(3,418)

 

 

 

Annual Recurring Revenue

Beginning with the fourth quarter of 2018, we began monitoring a new operating metric, total annual recurring revenue (“Total ARR”), which is defined as the annualized value of all recurring revenue contracts active at the end of a reporting period. Total ARR includes the annualized value of subscriptions (“Subscription ARR”) and the annualized value of software support contracts related to perpetual licenses (“Perpetual license support ARR”) active at the end of a reporting period and does not include revenue reported as perpetual license or professional services in our consolidated statement of operations. We are monitoring these metrics because they align with how our customers are increasingly purchasing our solutions and how we are managing our business. These ARR measures should be viewed independently of revenue, unearned revenue, and customer arrangements with termination rights as ARR is an operating metric and is not intended to be combined with or replace those items. ARR is not an indicator of future revenue and can be impacted by contract start and end dates and renewal rates. 

 

47

ARR metrics as of December 31, 2019 and 2018 were as follows (unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 

 

(in millions, except percentages)

    

2019

    

2018

    

Total ARR

 

$

179.5

 

$

162.6

 

Year-over-year percentage increase

 

 

10

%  

 

20

%  

Subscription ARR

 

$

113.9

 

$

95.9

 

Year-over-year percentage increase

 

 

19

%  

 

32

%  

Perpetual license support ARR

 

$

65.6

 

$

66.7

 

Year-over-year percentage increase (decrease)

 

 

(2)

%  

 

 6

%  

 

Factors Affecting our Performance

Market Adoption of Enterprise Mobility

We are affected by the pace at which enterprises adopt mobility into their business processes and purchase and expand a mobile security platform. Because our prospective customers often do not have a separate budget for mobile security products, we invest in marketing efforts to increase market awareness, educate prospective customers and drive adoption of our platform. The degree to which prospective customers recognize the mission-critical need for mobile security solutions and deploy mobile applications to enhance employee productivity will determine the customer demand for our solutions. We believe our rate of growth will also be positively correlated to the importance prospective customers place on securing their mobile data.

Customer Preference for Best-of-Breed vs. Suite

While we believe we are the best-of-breed platform in our industry, our market is intensely competitive and we expect competition to increase in the future from established competitors that have greater resources, customer bases and brand recognition, and new market entrants. Many of our competitors sell enterprise mobility management or mobile security as a component of a broader suite. We believe the degree to which prospective customers view our value proposition as differentiated will determine the customer demand for our solutions. For example, the level of security desired, the preservation of the native experience on end user devices, and the ability of the solution to work with multiple cloud offerings are evaluated by our prospective customers as they make buying decisions.

Investment in our Ecosystem

We have invested, and intend to continue to invest, in expanding the breadth and depth of our ecosystem and partnerships. We expect to invest in research and development to enhance the application and technology integration capabilities of our platform. We are also enhancing our solution to allow native applications written to operating systems specifications to be seamlessly integrated. The degree to which we expand our base of ecosystem partners will increase the value of our platform for our customers, which could lead to an increased number of new customers as well as renewals and follow-on sales opportunities. 

Ability to Improve and Grow Our Worldwide Sales Channels

We have invested, and intend to continue to invest, in improving our sales operations to drive additional revenue and support the growth of our customer base. We work with our channel partners to identify and acquire new customers as well as pursue follow-on sales opportunities. We need to further leverage our channel by training existing and new partners to independently sell and support our products. Newly-hired sales personnel typically require several months to become productive and turnover of productive sales personnel can inhibit our revenue growth. All of these factors will influence timing and overall levels of sales productivity, impacting the rate at which we will be able to acquire customers to drive revenue growth.

48

Expansion,  Upsell and Renewal within Existing Customer Base

After the initial sale to a new customer, we focus on providing increased value expanding our relationship with such customer by selling additional licenses and subscriptions. To increase our revenue, in addition to customers’ renewing their subscriptions or support contracts with us, it is important that our customers expand device license count and purchase additional products, including products such as MobileIron Threat Defense and Access. Additional sales lead to increased revenue over the lifecycle of a customer relationship and can significantly increase the return on our sales and marketing investments. Accordingly, our revenue growth will depend in part on customers’ renewing their existing agreements with us and the degree to which and our expansion and upsell sales strategy is successful. Our customers’ expansion and renewal rates may decline or fluctuate as a result of a number of factors, including the level of their satisfaction with our solutions or our customer support, customer budgets, the pricing and breadth of our solutions compared with the solutions offered by our competitors, and the impact of our competitors’ selling UEM or mobile security as a component of a broader suite, any of which may cause our revenue to grow more slowly than expected.

Mix of Cloud Subscription, On-premise Subscription and Perpetual License Revenue

We have historically offered our solutions priced as subscriptions and perpetual licenses and we are seeing broader market acceptance of our subscription licensing model from new customers. Beginning the third quarter of 2020, we plan to discontinue sales of perpetual licenses.  We expect the proportion of subscription revenue to our total revenue to continue to increase over time and we would expect the transition to accelerate in the second half of 2020 after discontinuing sales of perpetual licenses. We have also seen our cloud subscriptions increase as a proportion of our total revenue and expect this trend to continue. Under the current revenue accounting standard, revenue associated with the license portion of on-premise term subscriptions is recognized up-front with the remainder being recognized over the subscription term whereas all cloud subscription revenue is recognized ratably over the subscription term. Such differences in accounting treatment for on-premise and cloud subscriptions may cause revenue to fluctuate and to be less predictable on a quarterly basis. 

Ability to Scale Operations

We plan to continue to invest for future growth, in part by making selective investments in research and development, and, to a lesser degree, in sales and marketing. We will continue to incur significant accounting, legal and other expenses in order to comply with rules and regulations associated with being a public company, which included,  starting in 2019, our independent registered public accounting firm attesting to the effectiveness of our internal controls over financial reporting and, beginning 2020, enhanced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.   At the same time, we will need to increase our operating efficiency, which may be challenging given our rate of technology change, operational complexity, and expenses associated with being a public company. In addition, if we generate an increasing proportion of our revenue from cloud subscriptions and from sales of royalty-bearing products such as our MobileIron Threat Defense, it will continue to put pressure on our gross margin.

Components of Operating Results

Revenue

Cloud Services

 

Cloud services include sales of cloud-based solutions that allow customers to use hosted software over a contract period without taking possession of our software and are typically provided on a subscription or usage basis. We recognize revenue from cloud-based subscriptions ratably over the term of the subscriptions or, if usage based, as the usage is billed.

 

License

 

License revenue consists primarily of revenue from on-premises perpetual licenses and the license portion of on-premises subscriptions. From time to time, we enter into multiple element arrangements with customers in which a

49

customer purchases our software with an appliance. Appliance revenues are also included in license revenue and constituted less than  2% of total revenue in each of 2019, 2018 and 2017.

 

 

Software support and services

 

Software support and services revenue consists of revenue from agreements to provide software upgrades and updates, as well as technical support, to customers with perpetual software licenses, on-premises subscriptions, and professional services. Revenue from software support for both perpetual and on-premises subscriptions is recognized ratably over the support or subscription term. Revenue from professional services is recognized as work is performed.

 

Cost of Revenue

Cloud Services

 

Our cloud services cost of revenue consists of cloud service data center operations expense, the portion of our global Customer Success organization (See Software support and services below) associated with our cloud services business, and third-party royalties. Cloud service data center operations expenses primarily consist of personnel costs, stock-based compensation, third-party hosting facilities, telecommunication and information technology costs. We expect cloud services cost of revenue to increase if we continue to increase sales of MobileIron Threat Defense or other royalty-bearing cloud solutions and as we scale our data center operations team and infrastructure to support our growing cloud business. 

 

License

 

Our cost of license revenue consists of the cost of third-party software royalties, appliances and, until March 31, 2018, amortization of intangible assets.

 

Software support and services

 

Our software support and services cost of revenue consists of the portion of our global Customer Success organization expenses associated with our software support business and third-party royalties. Costs associated with our global Customer Success organization include our customer support, professional services, customer advocacy and training teams. These costs consist of personnel costs, stock-based compensation, depreciation, facilities and information technology costs.

 

Gross Margin

Gross margin, or gross profit as a percentage of total revenue, has been and will continue to be affected by various factors, including mix between large and small customers, mix of products sold, including our MobileIron Threat Defense which bears a royalty, mix between perpetual, on-premises and cloud subscription licenses, timing of revenue recognition and the extent to which we expand our global Customer Success organization and data center operations, including costs associated with third-party hosting facilities and stock-based compensation expense associated with grants of equity awards. We expect our gross margins to decline somewhat over the short term based on the factors described above.

 

Operating Expenses

Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation and, in sales and marketing expense, sales commissions. While operating expenses, exclusive of stock-based compensation expense, may fluctuate as a percentage of total revenue from period to period, we expect them to decrease over the long term as a percentage of total revenue. Stock-based compensation expense may fluctuate depending on the size and timing of RSU grants and achievement under stock-settled bonus plans.

50

Research and Development Expenses

Research and development costs are expensed as incurred. Research and development expense consists primarily of personnel costs. Research and development expense also includes costs associated with contractors and consultants, equipment and software to support our development and quality assurance teams, facilities and information technology. While our research and development expense, exclusive of stock-based compensation expense, may fluctuate as a percentage of total revenue from period to period, we expect it to decrease as a percentage of total revenue over the long term.

Sales and Marketing Expenses

Sales and marketing expense consists primarily of personnel costs, including sales commissions. Sales and marketing expense also includes costs associated with third-party events, lead generation campaigns, promotional and other marketing activities, as well as travel, equipment and software depreciation, consulting, information technology and facilities. While our sales and marketing expense, exclusive of stock-based compensation expense, may fluctuate as a percentage of total revenue from period to period, we expect it to decrease as a percentage of total revenue over the long term.

General and Administrative Expenses

General and administrative expense consists of personnel costs, travel, information technology, facilities and professional services fees. General and administrative personnel include our executive, finance, human resources and legal organizations. Professional services fees consist primarily of litigation, other legal, accounting and consulting costs. While our general and administrative expense, exclusive of stock-based compensation expense, may fluctuate as a percentage of total revenue from period to period, we expect it to decrease as a percentage of total revenue over the long term.

Litigation Settlement Charge

 

The 2017 litigation settlement charge was expense associated with the settlement of shareholder litigation.

 

Restructuring Charges

Restructuring charges consist of severance,  severance-related costs, contract termination costs, and costs to exit facilities.  Our restructuring actions were designed to align our cost structure with our expected growth rate. Restructuring charges may recur in the future; however, the timing and amounts are difficult to predict.

 

Other Income (Expense)Net

Other income (expense), net consists primarily of interest income earned on our cash and cash equivalents and fixed income securities and the effect of exchange rates on our foreign currency-denominated asset and liability balances and foreign currency transactions. All translation adjustments are recorded as foreign currency gains (losses) in the consolidated statements of operations.

Income Tax Expense

Income tax expense consists primarily of income taxes in foreign jurisdictions in which we conduct business. Due to our history of losses, we maintain a full valuation allowance for deferred tax assets including net operating loss carry-forwards, research and development tax credits, capitalized research and development and other book versus tax differences.

Consolidated Results of Operations

This section of this Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of

51

Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

 

The following tables summarize 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 results is not necessarily indicative of results for future periods.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

    

2019

 

2018

 

2017

Revenue

 

 

 

 

 

 

 

 

 

Cloud services

 

$

67,034

 

$

50,714

 

$

38,728

License

 

 

49,469

 

 

59,338

 

 

64,035

Software support and services

 

 

88,733

 

 

83,140

 

 

76,995

Total revenue

 

 

205,236

 

 

193,192

 

 

179,758

Cost of revenue (1)

 

 

 

 

 

 

 

 

 

Cloud services

 

 

21,370

 

 

12,719

 

 

8,847

License

 

 

2,004

 

 

3,270

 

 

2,203

Software support and services

 

 

18,715

 

 

18,933

 

 

19,176

Restructuring charge

 

 

300

 

 

 —

 

 

311

Total cost of revenue

 

 

42,389

 

 

34,922

 

 

30,537

Gross profit

 

 

162,847

 

 

158,270

 

 

149,221

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development (1)

 

 

79,556

 

 

78,047

 

 

75,350

Sales and marketing (1)

 

 

97,519

 

 

94,204

 

 

96,807

General and administrative (1)

 

 

30,565

 

 

28,880

 

 

28,091

Litigation settlement charge

 

 

 —

 

 

 —

 

 

1,143

Restructuring charge

 

 

3,282

 

 

 —

 

 

1,038

Total operating expenses

 

 

210,922

 

 

201,131

 

 

202,429

Operating loss

 

 

(48,075)

 

 

(42,861)

 

 

(53,208)

Other income (expense) - net

 

 

1,361

 

 

1,124

 

 

988

Loss before income taxes

 

 

(46,714)

 

 

(41,737)

 

 

(52,220)

Income tax expense

 

 

2,132

 

 

1,347

 

 

1,142

Net loss

 

$

(48,846)

 

$

(43,084)

 

$

(53,362)

Net loss per share, basic and diluted

 

$

(0.44)

 

$

(0.42)

 

$

(0.57)

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

 

 

109,973

 

 

102,527

 

 

93,770


(1)

Amounts include stock-based compensation expense as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

    

2019

 

2018

 

2017

Cost of revenue

 

$

5,095

 

$

5,006

 

$

3,772

Research and development

 

 

14,610

 

 

15,981

 

 

14,520

Sales and marketing

 

 

8,663

 

 

9,464

 

 

8,659

General and administrative

 

 

7,436

 

 

7,985

 

 

6,780

Total

 

$

35,804

 

$

38,436

 

$

33,731

 

52

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December  31,

 

 

    

2019

    

2018

    

2017

    

Revenue

 

 

 

 

 

 

 

Cloud services

 

33

%  

26

%  

22

%  

License

 

24

 

31

 

35

 

Software support and services

 

43

 

43

 

43

 

Total revenue

 

100

 

100

 

100

 

Cost of revenue

 

 

 

 

 

 

 

Cloud services

 

10

 

 7

 

 5

 

License

 

 1

 

 1

 

 1

 

Software support and services

 

 9

 

10

 

11

 

Restructuring charge

 

 0

 

 —

 

 0

 

Total cost of revenue

 

20

 

18

 

17

 

Gross profit

 

80

 

82

 

83

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

39

 

40

 

42

 

Sales and marketing

 

48

 

49

 

54

 

General and administrative

 

15

 

15

 

16

 

Litigation settlement charge

 

 —

 

 —

 

 1

 

Restructuring charge

 

 2

 

(0)

 

 0

 

Total operating expenses

 

103

 

104

 

113

 

Operating loss

 

(23)

  

(22)

 

(30)

 

Other income (expense) - net

 

 1

 

 1

 

 1

 

Loss before income taxes

 

(22)

 

(21)

  

(29)

  

Income tax expense

 

 1

 

 1

 

 1

 

Net loss

 

(23)

%

(22)

%

(30)

%

 

Years ended December 31, 2019 and 2018

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change

 

(in thousands, 

 

For the year ended December 31,

 

 

2019 vs 2018

 

except percentages)

    

2019

 

2018

 

 

Amount

 

%

 

Cloud services

 

$

67,034

 

$

50,714

 

 

$

16,320

 

32

%

License

 

 

49,469

 

 

59,338

 

 

 

(9,869)

 

(17)

 

Software support and services

 

 

88,733

 

 

83,140

 

 

 

5,593

 

 7

 

Total revenue

 

$

205,236

 

$

193,192

 

 

$

12,044

 

 6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of total revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

Cloud services

 

 

33

%

 

26

%

 

 

 

 

 

 

License

 

 

24

 

 

31

 

 

 

 

 

 

 

Software support and services

 

 

43

 

 

43

 

 

 

 

 

 

 

 

 

 

100

%

 

100

%

 

 

 

 

 

 

 

 

 

53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

Change

 

 

 

2019

 

2018

 

2019 vs 2018

 

 

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

 

 

(in thousands,

 

 

 

 

Total

 

 

 

 

Total

 

 

 

 

 

 

except percentages)

 

Amount

 

Revenue

 

Amount

 

Revenue

 

Amount

 

%

 

Revenue

    

 

    

    

    

    

 

    

    

    

    

 

    

    

    

    

United States

 

$

86,715

 

42

%  

$

82,033

 

42

%  

$

4,682

 

 6

%  

International

 

 

118,521

 

58

 

 

111,159

 

58

 

 

7,362

 

 7

 

Total revenue

 

$

205,236

 

100

%  

$

193,192

 

100

%  

$

12,044

 

 6

%  

 

Comparison of 2019 and 2018

Cloud services revenue increased $16.3 million, or 32%, in 2019 compared to 2018, which we believe was attributable to our customer’ preference for solutions sold under a cloud-based delivery model and contributions from sales of Access and MobileIron Threat Defense.

 

License revenue decreased $9.9 million, or 17%, in 2019 compared to 2018 primarily due to a continued slowdown in perpetual license orders and a shift in favor of cloud or on-premise subscription services. Revenue from perpetual licenses decreased $10.9 million, or 29%, and revenue from the license component of on-premise subscriptions increased $1.1 million, or 5%, in 2019 compared to 2018. License revenue from on-premise subscriptions is impacted by the timing, size and contract length of on-premise subscription sales in a given period.

 

Software support and services revenue increased $5.6 million, or 7%, in 2019 compared to 2018, primarily as a result of growth in our installed base of customers that purchase perpetual licenses and new and renewed on-premise subscriptions and software support on perpetual licenses. Professional services revenue was $4.8 million in 2019 compared to $3.7 million in 2018. Professional services revenue in 2019 included revenue of $1.1 million from one professional services engagement whereas in 2018 there was no comparable revenue contribution from a single professional services engagement. Support for perpetual licenses increased $1.8 million, or 3%, and support for on-premise subscriptions increased $2.6 million, or 16%, in 2019 compared to 2018.

 

Revenue from international and U.S. sales increased 7%  and 6%, respectively, in 2019 compared to 2018 due to an increase in the adoption of our products and an increased cumulative installed base of customers.

 

Revenue from AT&T, was 10% in 2019 compared to 11% of total revenue in 2018. No other customer accounted for 10% or more of total revenue in 2019 or 2018

 

Cost of Revenue and Gross Margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

Change

 

 

 

2019

 

2018

 

2019 vs 2018

 

 

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

 

 

(in thousands, 

 

 

 

 

Total

 

 

 

 

Total

 

 

 

 

 

 

except percentages)

    

Amount

    

Revenue

    

Amount

    

Revenue

    

Amount

    

%

    

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cloud services

 

$

21,370

 

10

%  

$

12,719

 

 7

%  

$

8,651

 

68

%  

License

 

 

2,004

 

 1

 

 

3,270

 

 1

 

 

(1,266)

 

(39)

 

Software support and services

 

 

18,715

 

 9

 

 

18,933

 

10

 

 

(218)

 

(1)

 

Restructuring charge

 

 

300

 

 0

 

 

 —

 

 —

 

 

300

 

100

 

Total cost of revenue

 

$

42,389

 

20

%  

$

34,922

 

18

%  

$

7,467

 

21

%  

Gross profit

 

$

162,847

 

 

 

$

158,270

 

 

 

$

4,577

 

 3

%  

Gross margin

 

 

 

 

80

%  

 

 

 

82

%  

 

 

 

 

 

 

Comparison of 2019 and 2018

Total cost of revenue increased $7.5 million, or 21%, in 2019 compared to 2018 due primarily to increases in cloud services cost of revenue.

 

54

Cloud services cost of revenue increased $8.7 million, or 68%, in 2019 compared to 2018. Within cloud services cost of revenue, data center operations expense increased $3.4 million, third-party royalties increased $4.3 million, and customer success expense increased $883,000 in 2019 compared to 2018. Payroll-related expense in data center operations increased $1.9 million in 2019 compared to 2018 due to increased headcount, which increased salaries, stock-based compensation and other payroll-related expense. Infrastructure costs such as third-party hosting, facilities, and IT costs in data center operations increased by $1.4 million in 2019 compared 2018 to support and improve the growing cloud services business. Royalty expense in cloud services cost of revenue increased due to greater sales of partner solutions that bear royalties, in particular MobileIron Threat Defense. Customer success expense, which includes expenses from our customer support and customer advocacy teams, increased as we hired additional support personnel to support the growing cloud services business.

 

License cost of revenue decreased $1.3 million, or 39%, in 2019 compared to 2018 due to a $744,000 decrease in royalties associated with our on-premise software sales, a  $422,000 decrease in appliance cost of sales, and a $100,000 decrease in amortization expense from intangible assets which became fully amortized in the first quarter of 2018. The higher royalty expense in 2018 was primarily associated with a single sales transaction in the fourth quarter of 2018. We  did not have a similar single royalty-bearing on-premise subscription sales transaction of such magnitude in 2019.

 

In cost of software support and services, customer success expense decreased $218,000, or 1%, in 2019 compared to 2018 as our growing cloud services business increasingly absorbed our Customer Success resources relative to support of our on-premise offerings.

 

In 2019, we incurred $300,000 of restructuring expense due to a reduction in our workforce. Additional restructuring expense was recorded in operating expenses.

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

Change

 

 

 

2019

 

2018

 

2019 vs 2018

 

 

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

 

 

(in thousands, 

 

 

 

 

Total

 

 

 

 

Total

 

 

 

 

 

 

except percentages)

    

Amount

    

Revenue

    

Amount

    

Revenue

    

Amount

    

%

    

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

79,556

 

39

%  

$

78,047

 

40

%  

$

1,509

 

 2

%

Sales and marketing

 

 

97,519

 

48

 

 

94,204

 

49

 

 

3,315

 

 4

 

General and administrative

 

 

30,565

 

15

 

 

28,880

 

15

 

 

1,685

 

 6

 

Restructuring charge

 

 

3,282

 

 2

 

 

 —

 

(0)

 

 

3,282

 

NM

 

Total operating expenses

 

$

210,922

 

103

%  

$

201,131

 

104

%  

$

9,791

 

 5

%

 

Comparison of 2019 and 2018

Research and development expense increased $1.5 million, or 2%, in 2019 compared to 2018. Facilities and infrastructure expense increased $1.2 million primarily due to higher telecommunications costs incurred to enhance our cloud platform. Other outside services expense increased $1.5 million as we used more third-party resources to supplement our development efforts. Payroll-related expense, excluding stock-based compensation, increased $784,000. While headcount decreased, the payroll-related expense increased due to merit increases and changes in employee geographic mix. Partially offsetting the increases, stock-based compensation expense decreased by $1.4 million primarily because of lower expense associated with our stock-settled bonus program and travel-related expense decreased by $559,000 due to spending controls and somewhat lower headcount.

 

Sales and marketing expense increased $3.3 million, or 4%, in 2019 compared to 2018. Marketing program expense increased $1.3 million as we spent more on events, including for our annual MobileLive user conference and smaller events to communicate the benefits of our solution to potential buyers. Payroll-related expense increased $2.4 million due primarily to an increase in headcount and commission expense but partially offset by a decrease in stock-based compensation expense, as we had lower expense associated with RSU grants and our stock-settled bonus program.  

55

Travel-related expense increased $329,000 due to the timing and size of sales and marketing events and an increase in sales headcount. The increases were partially offset by $474,000 lower professional fees, primarily associated with recruiting.

 

General and administrative expense increased $1.7 million, or 6%, in 2019 compared to 2018. Outside services expense increased $1.6 million due to increased accounting fees, the majority of which was associated with Sarbanes-Oxley compliance, and legal fees, and included legal expenses and a reserve associated with the Blackberry patent claim, partially offset by lower recruiting fees. Payroll-related expense, excluding stock-based compensation expense, increased $495,000 primarily because of an increase in headcount. Partially offsetting the increases, stock-based compensation expense decreased $385,000 as we had lower expense associated with our stock-settled bonus program.

 

We incurred $3.3 million of restructuring expense in operating expenses in 2019 due to expenses associated with a reduction in our workforce,  the exit of an office building, and contract terminations. The restructuring activity was designed to align our spending with our expected revenue growth rate.

 

Other Income (Expense)—Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

Change

 

(in thousands, 

 

 

 

 

 

 

 

2019 vs 2018

 

except percentages)

    

2019

 

2018

 

Amount

 

%

 

Other income (expense)—net

 

$

1,361

 

$

1,124

 

$

237

 

21

%  

 

Other income (expense)—net was primarily comprised of interest income and gains or losses from foreign currency transactions and the translation of foreign-denominated balances to the U.S. dollar. Interest income was $2.0 million and  $1.5 million in 2019 and 2018, respectively. We recorded a foreign currency loss of $594,000 and  $471,000 in 2019 and 2018,  respectively. Interest income has increased due to a general rise in interest rates. Our foreign exchange gains and losses follow the strength of the U.S. dollar relative to other currencies, particularly the Euro and Indian Rupee. The strengthening of the U.S. dollar relative to the Euro and Indian Rupee resulted in losses on cash and accounts receivable denominated in foreign currencies in 2019 and 2018.

 

Income Tax Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

Change

 

(in thousands, 

 

 

 

 

 

 

 

2019 vs 2018

 

except percentages)

    

2019

 

2018

 

Amount

 

%

 

Income tax expense

 

$

2,132

 

$

1,347

 

$

785

 

58

%  

 

Income tax expense was $2.1 million and $1.3 million in 2019 and 2018, respectively. The increase in income tax expense was due to an increase in foreign income taxes on profits realized by our foreign subsidiaries. In 2019, income tax expense included increases in income tax expense at certain of our foreign jurisdictions. We have a full valuation allowance on our deferred tax assets.

Quarterly Results of Operations

The following table presents our operating results for each of the eight fiscal quarters in the period ended December 31, 2019. The information for each of these quarters is derived from our unaudited interim financial statements and should be read in conjunction with our audited consolidated financial statements included in this Annual Report. In our opinion, all necessary adjustments, which consist only of normal and recurring accruals, have been included to fairly present our unaudited quarterly results. These quarterly operating results are not necessarily indicative of our operating results for any future period.

56

We do not believe that inflation had a material effect on our business, financial condition or results of operations in the last three fiscal years. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months ended

 

(in thousands, except share and per share data)

    

December

31, 2019

    

September

30, 2019

    

June 30,

2019

    

March 31,

2019

 

December

31, 2018

    

September

30, 2018

    

June 30,

2018

    

March 31,

2018

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cloud services

 

$

17,871

 

$

17,591

 

$

16,311

 

$

15,261

 

$

14,533

 

$

13,199

 

$

11,832

 

$

11,150

 

License

 

 

13,655

 

 

12,216

 

 

12,227

 

 

11,371

 

 

18,011

 

 

15,006

 

 

13,880

 

 

12,441

 

Software support and services

 

 

22,562

 

 

22,394

 

 

22,327

 

 

21,450

 

 

21,579

 

 

21,046

 

 

20,417

 

 

20,098

 

Total revenue(1)

 

 

54,088

 

 

52,201

 

 

50,865

 

 

48,082

 

 

54,123

 

 

49,251

 

 

46,129

 

 

43,689

 

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cloud services

 

 

5,957

 

 

5,557

 

 

5,146

 

 

4,710

 

 

4,095

 

 

3,331

 

 

2,722

 

 

2,571

 

License

 

 

581

 

 

436

 

 

433

 

 

554

 

 

1,795

 

 

529

 

 

515

 

 

431

 

Software support and services

 

 

4,382

 

 

4,466

 

 

4,844

 

 

5,023

 

 

4,673

 

 

4,613

 

 

4,672

 

 

4,975

 

Restructuring charges

 

 

 —

 

 

 —

 

 

224

 

 

76

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total cost of revenue(1)

 

 

10,920

 

 

10,459

 

 

10,647

 

 

10,363

 

 

10,563

 

 

8,473

 

 

7,909

 

 

7,977

 

Gross profit

 

 

43,168

 

 

41,742

 

 

40,218

 

 

37,719

 

 

43,560

 

 

40,778

 

 

38,220

 

 

35,712

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development(1)

 

 

18,667

 

 

19,072

 

 

19,988

 

 

21,829

 

 

19,975

 

 

18,465

 

 

18,272

 

 

21,335

 

Sales and marketing(1)

 

 

23,420

 

 

23,577

 

 

26,035

 

 

24,487

 

 

23,335

 

 

22,867

 

 

24,321

 

 

23,681

 

General and administrative(1)

 

 

8,088

 

 

6,932

 

 

7,626

 

 

7,919

 

 

7,800

 

 

6,806

 

 

7,052

 

 

7,222

 

Litigation settlement charge

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Restructuring charges

 

 

524

 

 

 —

 

 

2,219

 

 

539

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total operating expenses

 

 

50,699

 

 

49,581

 

 

55,868

 

 

54,774

 

 

51,110

 

 

48,138

 

 

49,645

 

 

52,238

 

Operating loss

 

 

(7,531)

 

 

(7,839)

 

 

(15,650)

 

 

(17,055)

 

 

(7,550)

 

 

(7,360)

 

 

(11,425)

 

 

(16,526)

 

Other income (expense) - net

 

 

374

 

 

35

 

 

540

 

 

412

 

 

645

 

 

181

 

 

(205)

 

 

503

 

Loss before income taxes

 

 

(7,157)

 

 

(7,804)

 

 

(15,110)

 

 

(16,643)

 

 

(6,905)

 

 

(7,179)

 

 

(11,630)

 

 

(16,023)

 

Income tax expense

 

 

797

 

 

399

 

 

479

 

 

457

 

 

304

 

 

319

 

 

377

 

 

347

 

Net loss

 

$

(7,954)

 

$

(8,203)

 

$

(15,589)

 

$

(17,100)

 

$

(7,209)

 

$

(7,498)

 

$

(12,007)

 

$

(16,370)

 

Net loss per share, basic and diluted

 

$

(0.07)

 

$

(0.07)

 

$

(0.14)

 

$

(0.16)

 

$

(0.07)

 

$

(0.07)

 

$

(0.12)

 

$

(0.17)

 

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

 

 

112,424

 

 

110,831

 

 

109,245

 

 

107,352

 

 

105,967

 

 

104,032

 

 

101,313

 

 

98,645

 


(1)

Amounts include stock-based compensation expense as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months ended

(in thousands)

 

December 31,

2019

    

September 30,

2019

    

June 30,

2019

    

March 31,

2019

 

December 31,

2018

    

September 30,

2018

    

June 30,

2018

    

March 31,

2018

Stock-Based Compensation Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

$

1,236

 

$

1,052

 

$

1,266

 

$

1,541

 

$

1,334

 

$

1,223

 

$

1,067

 

$

1,382

Research and development

 

 

3,595

 

 

3,279

 

 

3,625

 

 

4,111

 

 

4,201

 

 

3,670

 

 

3,343

 

 

4,767

Sales and marketing

 

 

2,296

 

 

2,029

 

 

2,064

 

 

2,274

 

 

2,123

 

 

2,653

 

 

2,159

 

 

2,529

General and administrative

 

 

1,518

 

 

1,652

 

 

1,902

 

 

2,364

 

 

2,285

 

 

1,834

 

 

1,851

 

 

2,015

Total stock-based compensation

expense

 

$

8,645

 

$

8,012

 

$

8,857

 

$

10,290

 

$

9,943

 

$

9,380

 

$

8,420

 

$

10,693

 

Seasonality

There are seasonal factors that may cause us to record higher revenue in some quarters compared to others. We believe this variability is largely due to our customers’ budgetary and spending patterns, as many customers spend the unused portions of their discretionary budgets prior to the end of their fiscal years. For example, we have historically recorded our highest level of revenue in our fourth quarter, which we believe corresponds to the fourth quarter of a majority of our customers. We expect this trend to continue to be be somewhat less pronounced due to our transition from perpetual license to subscription sales. First quarter stock-based compensation expense is generally higher than second through fourth quarter stock-based compensation expense due to the first quarter overlap of our annual stock-settled bonus programs as we record expense for the programs from the beginning of the year through the share release

57

date, which is near the end of the second month of the first quarter of the following year. First and second quarter operating expenses are also typically higher than third and fourth quarter operating expenses due to seasonality in U.S. payroll taxes and expenses associated with our annual sales kickoff, achiever’s club and MobileLive annual user conferences which all take place in the first half of the year. 

Liquidity and Capital Resources

 

 

 

 

 

 

 

 

 

As of December 31,

(in thousands)

    

2019

    

2018

Cash and cash equivalents

 

$

94,415

 

$

104,613

Short term-investments

 

 

 —

 

 

1,000

Total cash, cash equivalents and investments

 

$

94,415

 

$

105,613

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change

 

 

 

For the year ended December 31,

 

2019 vs 2018

 

(in thousands, except percentages)

    

2019

    

2018

 

Amount

    

%

 

Net cash provided by (used in) operating activities

 

$

(2,406)

 

$

14,157

 

$

(16,563)

 

(117)

%  

Net cash provided by (used in) investing activities

 

 

(494)

 

 

3,891

 

 

(4,385)

 

(113)

 

Net cash provided by (used in) financing activities

 

$

(7,298)

 

$

732

 

$

(8,030)

 

(1,097)

%  

 

At December 31, 2019, we had cash and cash equivalents of $94.4 million, the significant majority of which are held in the United States.

In addition, we have a $20.0 million revolving line of credit with a financial institution that expires in June 2020 which, after issuing a $1.5 million letter of credit and a $3.0 million bank guarantee, has borrowing capacity of approximately $15.5 million as of December 31, 2019. 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. As of December 31, 2019, we had no borrowings outstanding under this revolving loan facility and we were in compliance with our loan covenants. 

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 revenue growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products and services offerings, the continuing market acceptance of our products, any future acquisition and similar transactions, and unforeseen expenses. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating results and financial condition may be adversely affected.

Cash Provided by (Used in) Operating Activities

Our primary source of cash from operating activities has been from cash collections from our customers. We expect cash inflows from operating activities to be affected by increases in sales and the timing of collections. Our primary use of cash from operating activities has been for personnel costs. We expect future variability in cash from operating activities to be most impacted by the size and timing of billings, changes in personnel costs and, to lesser extent, consulting and royalty expense.

In 2019, we used  $2.4 million of cash in operating activities compared to $14.2 million provided by operating activities in 2018. We incurred a net loss of $48.8 million in 2019 compared to a net loss of $43.1 million in 2018 as we increased our revenue by 6% and increased our combined cost of revenue and operating expenses by 7%. The net loss included non-cash charges of $40.7 million, primarily due to stock-based compensation and depreciation expense, compared to $42.6 million in 2018. Changes in operating assets and liabilities, as sources of cash, consisted of a $12.4 million increase in unearned revenue and a $2.2 million decrease in accounts receivable partially offset by a $3.7 million decrease in accrued expenses and other long-term liabilities and a $3.2 million decrease in customer arrangements with termination rights. 

58

In 2018, we generated $14.2 million of cash from operating activities. We incurred a net loss of $43.1 million in 2018 compared to a net loss of $53.4 million in 2017. The net loss included non-cash charges of $42.6 million, primarily due to stock-based compensation and depreciation expense. Changes in operating assets and liabilities, as sources of cash, consisted of a $28.8 million increase in unearned revenue and a $1.1 million decrease in deferred commissions partially offset by a $10.6 million increase in accounts receivable and a $5.5 million increase in other current and noncurrent assets.

Cash Provided by (Used in) Investing Activities

Our investing activities have consisted of the purchase and maturities of investment securities and purchases of property and equipment. We expect to continue to make such purchases to support the growth of our business.

Cash used in investing activities was $494,000 in 2019. We received $5.2 million from maturities of investment securities and invested $4.1 million in new investment securities. Cash paid for the purchase of property and equipment was $1.5 million in 2019.

Cash provided by investing activities was $3.9 million in 2018.  We received $15.9 million from maturities of investment securities and invested $10.1 million in new investment securities. Cash paid for the purchase of property and equipment was $2.0 million in 2018 as we equipped a new India office facility and upgraded our network.    

Cash Provided by (Used in) Financing Activities

Our financing activities have consisted of proceeds from the exercise of stock options and contributions to our ESPP. Beginning in 2017, our financing activities have included cash used to pay employee payroll taxes as part of the net settlement of our equity awards. Beginning in 2018, our financing activities also include cash outflows associated with the repurchase of shares of our common stock under a repurchase program approved by our Board of Directors in October 2018.

In 2019, our financing activities used  $7.3 million of cash. We received $5.5 million from the exercise of stock options and $4.4 million from ESPP contributions. We used $5.9 million to pay employee payroll taxes as part of the net settlement of our stock-settled bonuses and RSUs.  We used $11.3 million for the repurchase of common stock.

In 2018, our financing activities provided $732,000 of cash. We received $6.5 million from the exercise of stock options and $4.4 million from ESPP contributions. We used $4.9 million to pay employee payroll taxes as part of the net settlement of our stock-settled bonuses, certain stock options and RSUs. In addition, we surrendered $1.5 million of exercise proceeds for the net settlement of certain stock options. We used $3.8 million for the repurchase of common stock.

Contractual Obligations and Commitments

The following table summarizes our contractual commitments and obligations as of December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 1

 

 

 

 

 

 

 

More than 5

 

(In thousands)

    

Total

 

year

 

1-3 years

 

3-5 years

 

years

 

Operating lease obligations

 

$

17,200

 

$

6,350

 

$

8,473

 

$

1,822

 

$

555

 

Purchase obligations

 

 

19,893

 

 

10,318

 

 

9,575

 

 

 —

 

 

 —

 

Total

 

$

37,093

 

$

16,668

 

$

18,048

 

$

1,822

 

$

555

 

 

We lease our office facilities under noncancelable operating lease agreements expiring between 2020 and 2027.

As of December 31, 2019, our net unrecognized tax benefits including interest and penalties were $10.3 million, $10.0 million of which are netted against deferred tax assets. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years in connection with these tax liabilities; therefore, such amounts are not included in the above contractual obligation table. 

59

Off-Balance-Sheet Arrangements

Through December 31, 2019, we have no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

Segment and Geographic information

We conduct business globally. Our chief operating decision maker (Chief Executive Officer) reviews financial information presented on a consolidated basis accompanied by information about revenue by geographic region for purposes of allocating resources and evaluating financial performance. We have one business activity, and there are no segment managers who are held accountable for operations, operating results or plans for levels, components or types of products or services below the consolidated company level. Accordingly, we are considered to be a single reportable segment and operating unit structure.

We sell our products primarily through indirect sales channels. In both 2019 and 2018,  58% of our total revenue was generated from customers located outside of the United States, primarily those located in Europe.

We have employees and facilities globally. Outside of the United States, we primarily have sales, marketing and support functions except in India, where we have significant research and development operations. As of December 31, 2019 and 2018, $2.0 million and $2.5 million, or 42% and 35%, respectively, of our net Property and Equipment was attributable to our operations located in India. Substantially all other long-lived assets were attributable to operations in the United States.

Concentration

In 2019 and 2018, AT&T accounted for approximately 10% and 11% of our revenue (including 1% as an end customer for both periods), respectively. Our agreements with this reseller were made in the ordinary course of our business and may be terminated with or without cause by either party with advance notice. Although we believe we would experience some short term disruption in the distribution of our products, subscriptions and services if these agreements were terminated, we believe such termination would not have a material adverse effect on our financial results and alternative resellers and other channel partners exist to deliver our products to our end customers.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected. 

The critical accounting policies requiring estimates, assumption and judgments that we believe have the most significant impact on our consolidated financial statements as described below. Our senior management has discussed the development, selection and disclosure of these estimates, assumptions and judgments with our audit committee. For further information on all of our significant accounting policies, see Note 1 entitled “Description of Business and Significant Accounting Policies” in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

Revenue Recognition

We derive revenue 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

60

professional services such as consulting and training services. We also offer our software as term subscriptions and cloud-based arrangements.

Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.

Judgment is also required to determine the stand-alone selling price (“SSP") for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately, including on-premises licenses sold with software support. We use a range of amounts to estimate SSP when we sell our products and services separately and need to determine whether there is a discount that needs to be allocated based on the relative SSP of the various products and services.  

We typically have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer in determining the SSP.  

Our products are sometimes sold with a right of refund which we have to consider when estimating the amount of revenue to recognize.

See Note 1 – Description of Business and Significant Accounting Policies in the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion.

 

Commissions

 

Current accounting principles require us to defer commission costs and amortize them in a manner consistent with how we recognize revenue. Key judgments that impact our commission expense include estimating our customer life and the determination of the impairment of commission assets we deem to be unrecoverable.

 

Goodwill

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 evaluated our goodwill for impairment in 2019 and 2018 and observed no impairment indicators. As part of this, we observed that the fair value of the Company as a whole is substantially in excess of its carrying value, including goodwill. 

Stock-Based Compensation

Stock-based compensation costs related to restricted stock and stock options granted to employees are measured at the date of grant based on the estimated fair value of the award, net of estimated forfeitures. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. We recognize compensation costs for awards with service and performance vesting conditions on an accelerated method under the graded vesting method over the requisite service period of the award. For stock awards 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.

Key assumptions used in determining the fair value of our stock option grants are estimated as follows:

·

Risk-Free Interest Rate. We base the risk-free interest rate used in the Black-Scholes valuation model on the implied yield available on U.S. Treasury zero-coupon issues with a term equivalent to the options for each option group.

61

·

Expected Term. The expected term represents the period that our stock-based awards are expected to be outstanding. We have opted to use the simplified method for estimating the expected term, which calculates the expected term as the average time-to-vesting and the contractual life of the options.

·

Volatility. When we did not have a sufficient trading history for our common stock, the expected stock price volatility assumption was determined by examining the historical volatilities of a group of industry peers. As more historical data for our common stock became available, we began to use our own historical stock price volatility to determine expected stock price volatility.

·

Dividend Yield. The expected dividend assumption is based on our current expectations about our dividend policy. We currently do not expect to issue any dividends.

·

Forfeiture Rate. The forfeiture rate is calculated based on expected employee turnover. We have applied the same forfeiture rate to our entire employee population.

The fair value of the employee stock options was estimated using the following assumptions for the periods presented:

 

 

 

 

 

 

 

Year ended December 31,

 

 

2019

 

2018

Expected dividend yield

    

 

Risk-free interest rate

 

2.5%

 

2.7%

Expected volatility

 

50%

 

51%

Expected life (in years)

 

6.1

 

6.1

 

The fair value of the rights to acquire stock under our ESPP was estimated using the following assumptions for the periods presented:

 

 

 

 

 

 

 

Year ended December 31,

 

 

2019

 

2018

Expected dividend yield

 

 

Risk-free interest rate

 

1.5% - 2.5%

 

1.8% - 2.6%

Expected volatility

 

39% - 45%

 

34% - 54%

Expected life (in years)

 

0.5 - 2.0

 

0.5 - 2.0

 

We estimate the fair value of the rights to acquire stock under our ESPP using the Black-Scholes option pricing formula. Our ESPP typically provides for consecutive 24 month offering periods, consisting of four tranches. We recognize compensation expense on an accelerated-graded basis over the employee’s requisite service period. We account for the fair value of RSUs using the closing market price of our common stock on the date of grant. RSUs typically vest ratably on a quarterly basis over one to four years.

Stock-based compensation expense associated with our stock-settled bonus program is recognized on a straight-line basis over the required service period and the expense is evaluated each quarter based on our company’s performance relative to the metrics that determine the bonus pool.

In 2019 and 2018, stock-based compensation expense was $35.8 million and $38.4 million, respectively. As of December 31, 2019, we had approximately $50.5 million of total unrecognized stock-based compensation expense, net of related forfeiture estimates.

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.

62

We currently have a full valuation allowance against our U.S. net deferred tax assets of $117.7 million as of December 31, 2019. We continue to monitor the relative weight of positive and negative evidence of future profitability in relevant jurisdictions. When evidence indicating that it becomes more likely than not that the tax asset may be utilized, the allowance will be released.

See Note 17 – Income Taxes in the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion.

Recent Accounting Pronouncements

For discussion on recent accounting pronouncements, see “Summary of Significant Accounting Policies” under Note 1 “Description of Business and Significant Accounting Policies” included in Item 8, “Financial Statements and Supplementary Data” of Part II of this Annual Report on Form 10-K.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Exchange Risk

Our sales contracts are currently primarily denominated in U.S. dollars. A portion of our operating expenses are incurred outside the United States and are denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the British Pound, Indian Rupee and Euro. In 2017, our operating expenses were adversely impacted by the decrease in the value of the U.S. dollar versus the Euro, Indian Rupee and other foreign currencies while in 2019 and 2018, our operating expenses decreased as a result of the depreciation of foreign currencies versus the U.S. dollar. Approximately 22% of our 2019 expenses were denominated in foreign currencies. If, in 2020 or future years, the U.S. dollar declines in value versus the Euro, British Pound, Indian Rupee or other currencies, our operating expenses will increase. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would have a material impact on our consolidated financial statements. To date, we have not engaged in any hedging strategies. As our international operations grow or if we more frequently enter into sales contracts denominated in foreign currencies, we will reassess our approach to managing our risk related to fluctuations in currency rates.

Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statement of operations. To date, foreign currency transaction gains and losses have not been material to our financial statements.

Interest Rate Risk

We had cash, cash equivalents and fixed income investments of $94.4 million and $105.6 million as of December 31, 2019 and 2018, respectively. At December 31, 2019, cash and cash equivalents consisted of bank deposits and money market funds. At December 31, 2018, cash, cash equivalents and fixed income investments consisted of bank deposits, money market funds, corporate debt securities, and commercial paper.

We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. By policy, we limit the amount of credit exposure to any one issuer and our investments are held with capital preservation as the primary objective.

Our cash equivalents and investments are subject to market risk due to changes in interest rates.

Due to increases in interest rates, we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates.  However, because we classify our investments as “held-to-maturity”, no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in value are determined to be other-than-temporary.  We believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income, if any. For instance the effect of a hypothetical 50 basis point increase or decrease in interest rates would result in a change of approximately $420,000 to our annual interest income. 

63

 

Item 8. Financial Statements and Supplementary Data

The Selected Financial Data information contained in Item 6 of Part II hereof is hereby incorporated by reference into this Item 8 of Part II of this Form 10-K.

MobileIron, Inc.

Index to Consolidated Financial Statements

64

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of MobileIron, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of MobileIron, Inc. and subsidiaries (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of operations, stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 6, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.

Change in Accounting Principle

 

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for leases in fiscal year 2019 due to the adoption of Accounting Standards Update (ASU) 2016-02, Leases (Topic 842) and related amendments.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Deloitte & Touche LLP

 

San Jose, California  

March 6, 2020

We have served as the Company's auditor since 2011.

 

65

MOBILEIRON, INC.

CONSOLIDATED BALANCE SHEETS 

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

December 31, 

 

    

 

2019

    

2018

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

94,415

 

$

104,613

 

Short-term investments

 

 

 —

 

 

1,000

 

Accounts receivable, net of allowance for doubtful accounts of $412 and $425 at December 31, 2019 and December 31, 2018, respectively

 

 

58,815

 

 

60,994

 

Deferred commissions - current

 

 

9,825

 

 

8,265

 

Prepaid expenses and other current assets

 

 

11,965

 

 

8,367

 

TOTAL CURRENT ASSETS

 

 

175,020

 

 

183,239

 

Property and equipment—net

 

 

4,804

 

 

7,046

 

Operating lease right-of-use assets

 

 

13,683

 

 

 —

 

Deferred commissions - noncurrent

 

 

8,077

 

 

9,066

 

Goodwill

 

 

5,475

 

 

5,475

 

Other assets

 

 

5,371

 

 

5,561

 

TOTAL ASSETS

 

$

212,430

 

$

210,387

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

1,310

 

$

2,154

 

Accrued expenses

 

 

24,792

 

 

27,347

 

Lease liabilities - current

 

 

5,664

 

 

 —

 

Unearned revenue - current

 

 

85,153

 

 

74,177

 

Customer arrangements with termination rights

 

 

16,130

 

 

19,367

 

TOTAL CURRENT LIABILITIES

 

 

133,049

 

 

123,045

 

Long-term liabilities:

 

 

 

 

 

 

 

Lease liabilities - noncurrent

 

 

10,088

 

 

 —

 

Unearned revenue - noncurrent

 

 

33,058

 

 

31,660

 

Other long-term liabilities

 

 

237

 

 

1,565

 

TOTAL LIABILITIES

 

 

176,432

 

 

156,270

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.0001 par value, 300,000,000 shares authorized, 115,685,153 and 107,028,433 shares issued, and 112,725,391 and 106,206,545 shares outstanding, at December 31, 2019 and 2018, respectively

 

 

11

 

 

11

 

Additional paid-in capital

 

 

504,041

 

 

462,004

 

Treasury stock

 

 

(15,141)

 

 

(3,831)

 

Accumulated deficit

 

 

(452,913)

 

 

(404,067)

 

TOTAL STOCKHOLDERS’ EQUITY

 

 

35,998

 

 

54,117

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

212,430

 

$

210,387

 

 

See accompanying notes to the consolidated financial statements

66

 

MOBILEIRON, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS 

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

    

2019

    

2018

 

2017

Revenue

 

 

 

 

 

 

 

 

 

Cloud services

 

$

67,034

 

$

50,714

 

$

38,728

License

 

 

49,469

 

 

59,338

 

 

64,035

Software support and services

 

 

88,733

 

 

83,140

 

 

76,995

Total revenue

 

 

205,236

 

 

193,192

 

 

179,758

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

 

 

 

 

 

 

 

Cloud services

 

 

21,370

 

 

12,719

 

 

8,847

License

 

 

2,004

 

 

3,270

 

 

2,203

Software support and services

 

 

18,715

 

 

18,933

 

 

19,176

Restructuring charge

 

 

300

 

 

 —

 

 

311

Total cost of revenue

 

 

42,389

 

 

34,922

 

 

30,537

Gross profit

 

 

162,847

 

 

158,270

 

 

149,221

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

 

79,556

 

 

78,047

 

 

75,350

Sales and marketing

 

 

97,519

 

 

94,204

 

 

96,807

General and administrative

 

 

30,565

 

 

28,880

 

 

28,091

Litigation settlement charge

 

 

 —

 

 

 —

 

 

1,143

Restructuring charge

 

 

3,282

 

 

 —

 

 

1,038

Total operating expenses

 

 

210,922

 

 

201,131

 

 

202,429

Operating loss

 

 

(48,075)

 

 

(42,861)

 

 

(53,208)

Other income (expense) - net

 

 

1,361

 

 

1,124

 

 

988

Loss before income taxes

 

 

(46,714)

 

 

(41,737)

 

 

(52,220)

Income tax expense

 

 

2,132

 

 

1,347

 

 

1,142

Net loss

 

$

(48,846)

 

$

(43,084)

 

$

(53,362)

Net loss per share, basic and diluted

 

$

(0.44)

 

$

(0.42)

 

$

(0.57)

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

 

 

109,973

 

 

102,527

 

 

93,770

 

See accompanying notes to the consolidated financial statements

67

 

 

MOBILEIRON, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

Paid-in

 

 

 

 

Accumulated

 

Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

 

Treasury Stock

 

Deficit

 

Equity

 

BALANCE—December 31, 2016

 

89,066,031

 

$

 9

 

 

383,193

 

$

 —

 

$

(307,621)

 

$

75,581

 

Issuance of common stock for stock option exercises, net of repurchases

 

1,172,409

 

 

 —

 

 

3,287

 

 

 —

 

 

 —

 

 

3,287

 

Vesting of early exercised stock options

 

2,477

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Issuance of common stock pursuant to the Employee Stock Purchase Plan

 

1,676,158

 

 

 —

 

 

4,562

 

 

 —

 

 

 —

 

 

4,562

 

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 Stock-Settled Bonus Plans

 

(677,547)

 

 

 —

 

 

(3,149)

 

 

 —

 

 

 —

 

 

(3,149)

 

Vesting of restricted stock units

 

4,276,325

 

 

 1

 

 

 —

 

 

 —

 

 

 —

 

 

 1

 

Stock-based compensation

 

 —

 

 

 —

 

 

24,360

 

 

 —

 

 

 —

 

 

24,360

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(53,362)

 

 

(53,362)

 

BALANCE—December 31, 2017

 

97,203,950

 

 

10

 

 

420,525

 

 

 —

 

 

(360,983)

 

 

59,552

 

Issuance of common stock for stock option exercises, net of repurchases

 

2,488,544

 

 

 —

 

 

6,520

 

 

 —

 

 

 —

 

 

6,520

 

Issuance of common stock pursuant to the Employee Stock Purchase Plan

 

1,597,778

 

 

 —

 

 

4,548

 

 

 —

 

 

 —

 

 

4,548

 

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

 

1,973,386

 

 

 1

 

 

9,621

 

 

 —

 

 

 —

 

 

9,622

 

Shares withheld for net settlement of equity awards

 

(1,294,360)

 

 

 —

 

 

(6,376)

 

 

 —

 

 

 —

 

 

(6,376)

 

Repurchase of common stock

 

(821,888)

 

 

 —

 

 

 —

 

 

(3,831)

 

 

 —

 

 

(3,831)

 

Vesting of restricted stock units

 

5,059,135

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Stock-based compensation

 

 —

 

 

 —

 

 

27,166

 

 

 —

 

 

 —

 

 

27,166

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(43,084)

 

 

(43,084)

 

BALANCE—December 31, 2018

 

106,206,545

 

 

11

 

 

462,004

 

 

(3,831)

 

 

(404,067)

 

 

54,117

 

Issuance of common stock for stock option exercises, net of repurchases

 

1,349,694

 

 

 —

 

 

5,513

 

 

 —

 

 

 —

 

 

5,513

 

Issuance of common stock pursuant to the Employee Stock Purchase Plan

 

1,048,302

 

 

 —

 

 

4,132

 

 

 —

 

 

 —

 

 

4,132

 

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

 

2,170,855

 

 

 —

 

 

10,485

 

 

 —

 

 

 —

 

 

10,485

 

Shares withheld for net settlement of equity awards

 

(1,147,904)

 

 

 —

 

 

(5,892)

 

 

 —

 

 

 —

 

 

(5,892)

 

Repurchase of common stock

 

(2,137,874)

 

 

 —

 

 

 —

 

 

(11,310)

 

 

 —

 

 

(11,310)

 

Vesting of restricted stock units

 

5,235,773

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Stock-based compensation

 

 —

 

 

 —

 

 

27,799

 

 

 —

 

 

 —

 

 

27,799

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(48,846)

 

 

(48,846)

 

BALANCE—December 31, 2019

 

112,725,391

 

$

11

 

$

504,041

 

$

(15,141)

 

$

(452,913)

 

$

35,998

 

 

See accompanying notes to the consolidated financial statements

68

 

 

MOBILEIRON, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS 

(In thousands)  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

    

2019

    

2018

 

2017

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(48,846)

 

$

(43,084)

 

$

(53,362)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

35,804

 

 

38,436

 

 

33,731

Depreciation

 

 

3,426

 

 

3,846

 

 

3,389

Amortization of intangible assets

 

 

 —

 

 

100

 

 

545

Accretion of premium of investment securities

 

 

(24)

 

 

(50)

 

 

(57)

Provision for doubtful accounts

 

 

 —

 

 

199

 

 

149

Impairment of ROU assets

 

 

1,328

 

 

 —

 

 

 —

Loss (gain) on disposal of equipment

 

 

185

 

 

25

 

 

(16)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,179

 

 

(10,564)

 

 

(4,916)

Deferred commissions

 

 

(572)

 

 

1,078

 

 

329

Other current and noncurrent assets

 

 

(582)

 

 

(5,535)

 

 

(1,006)

Accounts payable

 

 

(775)

 

 

715

 

 

439

Unearned revenue

 

 

12,374

 

 

28,815

 

 

16,434

Customer arrangements with termination rights

 

 

(3,237)

 

 

(179)

 

 

5,348

Accrued expenses and other long-term liabilities

 

 

(3,666)

 

 

355

 

 

2,029

Net cash provided by (used in) operating activities

 

 

(2,406)

 

 

14,157

 

 

3,036

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(1,518)

 

 

(1,956)

 

 

(6,454)

Proceeds from maturities of investment securities

 

 

5,150

 

 

15,900

 

 

38,015

Purchase of investment securities

 

 

(4,126)

 

 

(10,053)

 

 

(8,570)

Net cash provided by (used in) investing activities

 

 

(494)

 

 

3,891

 

 

22,991

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Proceeds from Employee Stock Purchase Plan

 

 

4,396

 

 

4,424

 

 

4,798

Proceeds from exercise of stock options

 

 

5,508

 

 

6,514

 

 

4,114

Taxes paid for net settlement of equity awards

 

 

(5,892)

 

 

(4,862)

 

 

(3,149)

Amounts withheld for net settlement of equity awards

 

 

 —

 

 

(1,513)

 

 

 —

Repurchases of common stock

 

 

(11,310)

 

 

(3,831)

 

 

 —

Net cash provided by (used in) financing activities

 

 

(7,298)

 

 

732

 

 

5,763

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

(10,198)

 

 

18,780

 

 

31,790

CASH AND CASH EQUIVALENTS—Beginning of period

 

 

104,613

 

 

85,833

 

 

54,043

CASH AND CASH EQUIVALENTS—End of period

 

$

94,415

 

$

104,613

 

$

85,833

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

1,813

 

$

1,419

 

$

1,189

Lease payments for amounts included in the measurement of lease liabilities

 

$

7,281

 

$

7,213

 

$

6,786

SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Value of shares issued under Bonus Plans

 

$

6,374

 

$

5,898

 

$

5,123

Value of shares issued under the Employee Stock Purchase Plan

 

$

4,132

 

$

4,548

 

$

4,562

Unpaid property and equipment purchases

 

$

 —

 

$

148

 

$

228

See accompanying notes to the consolidated financial statements

 

 

69

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 and employees in India primarily focused on research and development.

 

Basis of Presentation and Consolidation

The accompanying audited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, and include the accounts of our wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

 

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 arising are recorded as foreign currency gains (losses) in the consolidated statements of operations. We recognized a foreign currency loss of $594,000 in 2019, a foreign currency loss of $471,000 in 2018, and a foreign currency gain of $242,000 in 2017, in other income (expense)—net in our consolidated statements of operations.

 

Use of Estimates

The preparation of 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. These estimates include, but are not limited to, revenue recognition, stock-based compensation, commissions, goodwill 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 $82.4 million, are held in five 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 in 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. Activity in our allowance for doubtful accounts was as follow (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at

 

Bad

 

Write-offs,

 

Balance at

 

 

Beginning

 

Debt

 

Net of

 

End

 

    

of Period

 

Expense

 

Recoveries

 

of Period

Balance as of December 31, 2019

 

$

425

 

 

 —

 

 

(13)

 

$

412

Balance as of December 31, 2018

 

$

475

 

 

199

 

 

(249)

 

$

425

Balance as of December 31, 2017

 

$

433

 

 

149

 

 

(107)

 

$

475

70

 

One reseller accounted for 10%  (1% as an end customer), 11%  (1% as an end customer) and 14%  (1% as an end customer) of total revenue in 2019, 2018 and 2017, respectively. The same reseller accounted for 5% and 7% of net accounts receivable as of December 31, 2019 and 2018, 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

Revenue Presentation

Cloud services include sales of cloud-based solutions that allow customers to use hosted software over a contract period without taking possession of our software and are typically provided on a subscription or usage basis.

License revenue includes sales of perpetual software licenses, software licenses sold as part of on-premises term subscriptions, and appliances.

Software support and services revenue includes sales of software support sold as part of on-premises term subscriptions, software support for perpetual licenses, and professional services.

Revenue Recognition

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.

Nature of Products and Services

Cloud services, which allow customers to use hosted software over a contract period without taking possession of our software, are provided on a subscription or usage basis. Revenue related to cloud services provided on a subscription basis is recognized ratably over the contract period and revenue related to cloud services based on usage is generally recognized as the usage occurs.

Licenses for on-premises software provide the customer with a right to use the software as it exists when made available to the customer. Customers may purchase on-premises software licenses as perpetual licenses or as part of subscriptions. On-premises licenses are considered distinct performance obligations and revenue from the licenses is recognized upfront when the software is made available to the customer.

Software support and services convey rights to the upgrades released over the contract period and provide support and tools to help customers deploy and use our products more efficiently. Revenue allocated to software support and services is generally recognized ratably over the contract period as customers simultaneously consume and receive benefits, given that the software support and services comprises a distinct performance obligation that is satisfied over time.  

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On-premises subscriptions and software support and services occasionally contain termination rights. We recognize revenue from those arrangements, including the distinct licenses contained therein, as the termination rights for the performance obligation expire. See also Unearned Revenue and Customer Arrangements with Termination Rights below.

Professional services include consulting, deployment and training services. Our professional services represent distinct performance obligations as our customers benefit from the services separately or together with other readily available resources. Professional services revenue is recognized as services are delivered.

Appliance revenue was less than 2% of total revenue for all periods presented and is included as a component of license revenue within the consolidated statements of operations.

Refer to Note 15 – Segment and Disaggregated Revenue Information for further information.

Significant Judgments

Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Judgment is required to determine whether a software license is considered distinct and accounted for separately, or not distinct and accounted for together with the software support and services and recognized over time.

Judgment is required to determine the standalone selling price (“SSP”) for each distinct performance obligation. We use a range of amounts to estimate the SSP for items that are not sold separately, including on-premises licenses sold with software support and services. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customer classes and circumstances. In these instances, we may use information such as the size and type of customer in determining the SSP.

Contract Balances  

Timing of revenue recognition may differ from the timing of invoicing customers. We record a receivable when revenue is recognized prior to invoicing, or unearned revenue when revenue will be recognized after invoicing. For multi-year agreements, we either invoice our customer in full at the inception of the contract or annually at the beginning of each annual period. We record an unbilled receivable related to revenue recognized for multi-year on-premises licenses invoiced annually when we have an unconditional right to invoice and receive payment in the future for those licenses or when we have the right to invoice future monthly periods under committed monthly recurring charge (“MRC”) agreements. The majority of our MRC agreements are for a month to month term (“non-committed”) or usage-based.

Payment terms and conditions vary by contract type, although terms generally include a requirement to pay within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing. This includes invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period or multi-year on-premises licenses that are invoiced annually with a portion of the revenue recognized upfront.

As of December 31, 2019 and 2018, the balance of accounts receivable, net of the allowance for doubtful accounts, included $2.0 million and $1.4 million, respectively, of unbilled receivables from upfront recognition of

72

revenue for certain multi-period on-premises software subscriptions that include both distinct software licenses and software support and services.

As of December 31, 2019 and 2018, unbilled receivables included in other assets on our consolidated balance sheets were $795,000 and $592,000, respectively.

Unearned Revenue and Customer Arrangements with Termination Rights

We generally invoice our customers upfront for subscriptions and software support and services associated with perpetual licenses. Unearned revenue from those upfront billings is comprised of unearned revenue from cloud-based subscriptions, software support and services for on-premises subscriptions, software support and services associated with perpetual licenses, and professional services to be performed in the future.

Because some of our arrangements with customers contain termination rights, the arrangements do not meet the definition of a contract under Accounting Standard Codification, or ASC, Topic 606, Revenue Recognition from Contracts with Customers, or ASC 606, and are not recorded as unearned revenue and instead are recorded as “customer arrangements with termination rights” on our consolidated balance sheets. 

Refer to Note 14 – Unearned Revenue for further information on unearned revenue, changes in unearned revenue during the period, and customer arrangements with termination rights.

Deferred Commissions

We recognize an asset for the incremental costs of obtaining a contract with a customer. We have determined that certain sales incentive programs meet the requirements to be capitalized and we include those costs in current and non-current deferred commissions on our consolidated balance sheets.

Deferred commissions are amortized over the period commensurate with revenue recognition.

 

Changes in deferred commissions were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

Year ended

 

 

December 31, 

 

    

2019

    

2018

Balance, beginning of the period

 

$

17,331

 

$

18,408

Deferral of commissions earned

 

 

18,333

 

 

15,312

Recognition of commission expense

 

 

(17,364)

 

 

(16,240)

Impairment of deferred commissions

 

 

(398)

 

 

(149)

Balance, end of the period

 

$

17,902

 

$

17,331

 

Cash Equivalents

We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. At December 31, 2019, cash and cash equivalents consisted of bank deposits and money market funds.  At December 31, 2018, cash, cash equivalents and fixed income investments consisted of bank deposits, money market funds, corporate debt securities, and commercial paper 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

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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. In 2019, 2018 and 2017, 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, convertible preferred stock, unvested restricted stock, restricted stock units and stock options are considered to be potentially dilutive securities. Because we have reported a net loss for 2019, 2018 and 2017, 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.

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 consolidated statements of operations.

 

Leases

 

We determine if an arrangement is a lease conveying the right to control identified property, plant, or equipment and whether the lease is operating or financing at the lease’s inception. We have determined that all of our leases are

74

operating leases. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments under the lease arrangements. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at the lease commencement date to determine the present value of lease payments. The operating lease ROU asset also includes any advance lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term. We have adopted the practical expedient as permitted by the new leasing standard to not recognize lease assets and lease liabilities for leases with a term of 12 months or less. Our leases generally separate lease components from nonlease components. However, where lease and nonlease components are combined in our lease arrangements, we have adopted the practical expedient to not separate the lease from the nonlease components. Refer to Note 13 - Leases for further information about our leases.

 

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 were amortized using the straight-line method over their remaining estimated useful lives, which ranged from three to five years.  The net book value of intangible assets subject to amortization was zero at December 31, 2019.

We have determined that our intangible assets were not impaired during the years ended December 31, 2019, 2018 and 2017.

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 property and equipment, by comparison of its carrying amount to the future discounted 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 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. We estimated the forfeiture rate in 2019, 2018 and 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 in 2019, 2018 and 2017 was $313,000,  $204,000 and $102,000, respectively.

 

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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.

Recently Adopted Accounting Guidance

ASU 2016-02, Leases, requires lessees to record current and noncurrent lease liabilities and a right-of-use (“ROU”) asset on their consolidated balance sheet for contractual arrangements that convey the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration and to continue to recognize rent expense on a straight-line basis over the lease term. It also requires disclosure designed to give financial statement users information on the amount, timing, and uncertainly of cash flows arising from leases. The guidance was effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years. We adopted ASU 2016-02 effective January 1, 2019 and, as permitted by ASU 2018-11, we did not restate our prior periods. As a result of this new standard, we recorded current and noncurrent lease commitment liabilities of approximately $6.3 million and $11.8 million, respectively, and corresponding right-of-use asset of approximately $16.3 million at March 31, 2019 for our operating leases.

 

Accounting Guidance Not Yet Adopted

Financial Instruments – Credit Losses

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 do not expect the adoption of this ASU to have a material impact on our consolidated balance sheet, results of operations, cash flows and disclosures. We intend to adopt ASU No. 2016-13 effective January 1, 2020.

 

Simplifying the Test for Goodwill Impairment

 

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.” This ASU simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the

76

reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. This ASU should be applied on a prospective basis. The ASU is effective for annual and interim reporting periods beginning after December 15, 2021. Early adoption is permitted. We do not expect the adoption of this ASU to have a material impact on our consolidated financial position, results of operations, or cash flows.

 

Intangibles—Goodwill and Other—Internal-Use Software

 

In August 2018, the FASB issued ASU 2018-15 “Intangibles—Goodwill and Other—Internal-Use Software.” The amendments in this Update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The standard is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. We do not expect the adoption of this ASU to have a material impact on our consolidated financial position, results of operations, or cash flows.

 

 

 

 

 

2. Significant Balance Sheet Components

Accounts Receivable, Net  —Accounts receivable, net at December 31, 2019 and 2018 consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

    

December 31, 2019

    

December 31, 2018

Accounts receivable - billed

 

$

57,184

 

$

60,037

Accounts receivable - unbilled

 

 

2,043

 

 

1,382

Allowance for doubtful accounts

 

 

(412)

 

 

(425)

Accounts receivable, net

 

$

58,815

 

$

60,994

 

Prepaid Expenses and Other Current Assets and Other Assets

 

Prepaid expenses and other current assets at December 31, 2019 and 2018 included $6.3 million and $3.8 million of prepaid royalties, respectively. Other assets at December 31, 2019 and 2018 included $3.0 million and $3.4 million of prepaid royalties, respectively. The prepaid royalties were primarily associated with MobileIron Threat Defense.

77

 

Property and Equipment—Property and equipment at December 31, 2019 and 2018 consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

    

As of December 31,

 

 

 

2019

 

2018

 

Computers and appliances

 

$

13,300

 

$

13,517

 

Purchased software

 

 

4,235

 

 

4,711

 

Furniture and fixtures

 

 

1,745

 

 

1,695

 

Leasehold improvements

 

 

3,403

 

 

3,503

 

Total property and equipment

 

 

22,683

 

 

23,426

 

Accumulated depreciation and amortization

 

 

(17,879)

 

 

(16,380)

 

Total property and equipment—net

 

$

4,804

 

$

7,046

 

 

Accrued Expenses—Accrued expenses at December 31, 2019 and 2018 consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

    

As of December 31,

 

 

 

2019

 

2018

 

Accrued commissions

 

$

4,810

 

$

4,398

 

Accrued stock-settled bonus

 

 

6,875

 

 

9,355

 

Employee Stock Purchase Plan liability

 

 

2,187

 

 

1,923

 

Other accrued payroll-related expenses

 

 

2,839

 

 

3,630

 

Accrued royalties

 

 

2,386

 

 

3,596

 

Other accrued liabilities

 

 

5,695

 

 

4,445

 

Total accrued expenses

 

$

24,792

 

$

27,347

 

 

 

 

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 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.

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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 December 31, 2019 or 2018.  

Our financial instruments measured at fair market value as of December 31, 2019 and 2018 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2019

 

(in thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

 

Money market funds

 

$

82,411

 

$

 —

 

$

 —

 

$

82,411

 

Total

 

$

82,411

 

$

 —

 

$

 —

 

$

82,411

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

As of December 31, 2018

 

(in thousands)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Money market funds

 

$

36,617

 

$

 —

 

$

 —

 

$

36,617

 

Corporate debt securities

 

 

 —

 

 

6,555

 

 

 —

 

 

6,555

 

Commercial paper

 

 

 —

 

 

53,598

 

 

 —

 

 

53,598

 

Total

 

$

36,617

 

$

60,153

 

$

 —

 

$

96,770

 

 

 

 

 

 

4. Investments

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

We had no investments in fixed income securities as of December 31, 2019.

Our investments in fixed income securities as of December 31, 2018 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

    

Amortized

    

    

 

    

    

 

    

Fair

(in thousands)

 

cost

 

Gains

 

Losses

 

Value

Corporate debt securities

 

$

6,556

 

$

 —

 

$

(1)

 

$

6,555

Commercial paper

 

 

53,600

 

 

 1

 

 

(3)

 

 

53,598

Total

 

$

60,156

 

$

 1

 

$

(4)

 

$

60,153

 

The following table summarizes the balance sheet classification of our investments as of December 31, 2018:

 

 

 

 

 

 

As of December 31,

(in thousands)

 

2018

Cash equivalents

 

$

59,156

Short-term investments

 

 

1,000

Total investments

 

$

60,156

 

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The gross amortized cost and estimated fair value of our held-to-maturity investments at December 31, 2018 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 December 31,

 

 

2018

 

 

Gross

    

 

 

 

Amortized

 

Fair

(in thousands)

 

Cost

 

Value

Due in one year or less

 

$

60,156

 

$

60,153

Due after one year through five years

 

 

 —

 

 

 —

Total

 

$

60,156

 

$

60,153

 

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 2019, we had an insignificant amount of unrealized gains or losses, and we did not recognize any other-than-temporary impairments.

 

5. Goodwill and Intangibles

The net book value of intangible assets subject to amortization was zero at December 31, 2019 and 2018.

Amortization of the technology intangible assets of zero,  $100,000 and $545,000 in 2019, 2018 and 2017, respectively, was recorded in cost of revenue.

At December 31, 2019 and 2018, the carrying value of goodwill was $5.5 million.

6. Restructuring Charges

We initiated business restructuring plans in 2019 and 2017 to reduce our cost structure through workforce reductions,  the exit of office facilities, and termination of contracts.

 

The following table summarizes the activity in accrued restructuring expense, included in accrued expenses, for the years ended December 31, 2019, 2018 and 2017 (in thousands):

 

 

 

 

 

 

Severance and

 

    

Other Restructuring Costs

Accrued restructuring, December 31, 2016

 

$

15

Provision for restructuring expense

 

 

1,349

Cash payments

 

 

(867)

Accrued restructuring, December 31, 2017

 

$

497

Provision for restructuring expense

 

 

 —

Cash payments

 

 

(497)

Accrued restructuring, December 31, 2018

 

$

 —

Provision for restructuring expense

 

 

2,085

Cash payments

 

 

(1,803)

Accrued restructuring, December 31, 2019

 

$

282

 

We expect to pay the remaining accrued restructuring balance by June 30, 2020.

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In connection with the exit of an office facility, we also recorded a $1.3 million charge for the impairment of right-of-use assets and $170,000 of expense for the write-off of fixed assets in restructuring expense in 2019.

 

 

7. 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, but does allow for the repurchase of a limited amount of our common stock as contemplated by a share repurchase program approved by the Board of Directors (the “Board”) in October 2018, 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 lease for office space in a building in Mountain View, California, and in November 2017 we issued a bank guarantee to a customer of approximately $3.0 million that can be drawn if we become insolvent or bankrupt. The issuances of the letter of credit and bank guarantee reduced the borrowing capacity under our line of credit to approximately $15.5 million.

In June 2019, we extended our revolving line of credit which currently matures in June 2020.

There were no outstanding amounts under the line of credit at December 31, 2019 and 2018 and we were in compliance with all financial covenants.

8. Preferred Stock

We were authorized to issue up to 10,000,000 shares of convertible preferred stock as of December 31, 2019 and 2018.  No shares of convertible preferred stock were issued and outstanding as of December 31, 2019 and 2018. 

 

 

9. Common Stock

We were authorized to issue 300,000,000 shares of common stock with a par value of $0.0001 per share as of December 31, 2019 and 2018. Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends from funds available, when and if declared by the board of directors, subject to the approval and priority rights of holders of all classes of preferred stock outstanding.

As of December 31, 2019 and 2018, we reserved shares of common stock for issuance as follows:

 

 

 

 

 

 

    

 

    

 

 

    

As of December 31,

 

 

2019

 

2018

Options outstanding

 

2,898,977

 

4,496,557

Unvested restricted stock units outstanding

 

12,639,066

 

12,303,913

Shares available for grant under the 2014 equity plan and 2015 inducement plan

 

1,301,881

 

2,337,545

Shares available for purchase under the Employee Stock Purchase Plan

 

378,525

 

364,762

Total

    

17,218,449

    

19,502,777

 

 

 

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Repurchase Program

 

In October 2018, our Board of Directors approved a common stock repurchase program (“Repurchase Program”) whereby the Company is authorized to purchase up to a maximum of $25.0  million of its common stock, subject to compliance with applicable law and the limitations in the Company’s credit facilities on stock repurchases.

The authorization allows repurchases from time to time in the open market or in privately negotiated transactions. The amount and timing of repurchases made under the Repurchase Program will depend on a variety of factors, including available liquidity, cash flow and market conditions. Shares can be purchased through the Repurchase Program through October 2020, unless extended or shortened by our Board of Directors. The Repurchase Program does not obligate us to acquire any particular amount of common stock and the program may be modified or suspended at any time at our discretion. The repurchases would be funded from available working capital and are subject to compliance with the terms and limitations of the Company’s credit facilities.

In 2019, we repurchased 2,137,874 shares of common stock at an average price of $5.29 per share for a total cost of $11.3 million under the Repurchase Program. In 2018, we repurchased 821,888 shares of common stock at an average price of $4.66 per share for a total cost of $3.8 million under the Repurchase Program. The maximum remaining dollar value of shares yet to be purchased under the Repurchase Program was $9.9 million at December  31, 2019. This excludes shares repurchased to settle employee tax withholding related to the vesting of our stock-settled bonus and RSUs.

 

10. Share Based Awards

2008 Plan

The 2008 Stock Plan, or 2008 Plan, which expired on June 12, 2014, provided for the grant of incentive and nonstatutory stock options to employees, nonemployee directors and consultants of the Company. Options granted under the 2008 Plan generally become exercisable within three to four years following the date of grant and expire 10 years from the date of grant.

Our 2008 Plan was terminated following the date our 2014 Equity Incentive Plan, or the 2014 Plan, became effective. Any outstanding stock awards under our 2008 Plan will continue to be governed by the terms of our 2008 Plan and applicable award agreements.

2014 Equity Incentive Plan

Our 2014 Plan provides for the grant of incentive stock options, or ISOs, within the meaning of Section 422 of the Internal Revenue Code, or the Code, to our employees and our parent and subsidiary corporations’ employees, and for the grant of nonstatutory stock options, or NSOs, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance-based stock awards, and other forms of equity compensation to our employees, directors and consultants. Additionally, our 2014 Plan provides for the grant of performance cash awards to our employees, directors and consultants.

The initial number of shares of our common stock available to be issued under our 2014 Plan was 8,142,857, which number of shares will be increased by any shares subject to stock options or other stock awards granted under the 2008 Plan that would have otherwise returned to our 2008 Plan (such as upon the expiration or termination of a stock award prior to vesting), not to exceed 16,312,202.

The number of shares of our common stock reserved for issuance under our 2014 Plan automatically increase on January 1 of each year, beginning on January 1, 2015 and continuing through and including January 1, 2024, by 5% of the total number of shares of our capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by our board of directors. On January 1, 2020, we increased the number of shares of common stock reserved for issuance under our 2014 Plan by 5,636,269 shares, which was 5% of the total number of shares of capital stock outstanding at December 31, 2019.

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Amended and Restated 2015 Inducement Plan

On December 20, 2015, our board of directors adopted our 2015 Inducement Plan, or the Inducement Plan, to reserve 1,600,000 shares of our common stock to be used exclusively for grants of awards to individuals that were not previously employees or directors of the Company. The terms and conditions of the Inducement Plan are substantially similar to our stockholder-approved 2014 Plan. On January 5, 2016 our board of directors approved the amendment and restatement of the Inducement Plan to increase the share reserve under the 2015 Inducement Plan to 1,970,000 shares of our common stock. As of December 31, 2019 there were 734,376 options and restricted stock units outstanding under the Amended and Restated 2015 Inducement Plan.

2014 Employee Stock Purchase Plan

The purpose of the ESPP is to secure the services of new employees, to retain the services of existing employees and to provide incentives for such individuals to exert maximum efforts toward our success and that of our affiliates. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Code. The ESPP permits eligible employees to purchase our common stock through payroll deductions, which may not exceed 15% of the employee’s base compensation. Stock may be purchased under the plan at a price equal to 85% of the fair market value of our common stock on either the first day of the offering or the last day of the applicable purchase period, whichever is lower.

As of December 31, 2019 and 2018,  378,525 and 364,762 shares of common stock were available for future issuance under our ESPP, respectively. The number of shares of our common stock reserved for issuance under our ESPP increase automatically each year, beginning on January 1, 2015 and continuing through and including January 1, 2024, by the lesser of (i) 1% of the total number of shares of our common stock outstanding on December 31 of the preceding calendar year; (ii) 2,142,857 shares of common stock; or (iii) such lesser number as determined by our board of directors. Shares subject to purchase rights granted under our ESPP that terminate without having been exercised in full will not reduce the number of shares available for issuance under our ESPP. On January 1, 2020, we increased the number of shares available for issuance under the ESPP by 1,127,253 shares, which was 1% of the total number of shares of common stock outstanding at December 31, 2019.

Restricted Stock Units

In 2014 we began granting restricted stock units under our 2014 Plan. For stock-based compensation expense, we measure the value of the restricted stock units based on the fair value of our common stock on the date of grant. Our restricted stock unit grants are subject to service conditions and we expense the fair value of those shares on a straight-line basis over their vesting periods.

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Our restricted stock unit activity for 2017, 2018 and 2019 was as follows:

 

 

 

 

 

 

 

 

 

Restricted Stock Units

 

 

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

 

Number of

 

Grant Date

 

 

    

Shares

    

Fair Value

 

Unvested, December 31, 2016

 

10,474,975

 

$

4.45

 

Granted

 

11,017,278

 

 

5.04

 

Vested

 

(5,964,422)

 

 

4.70

 

Cancelled/Forfeited

 

(2,621,801)

 

 

5.01

 

Unvested, December 31, 2017

 

12,906,030

 

$

4.72

 

Granted

 

10,224,832

 

 

4.63

 

Vested

 

(7,032,521)

 

 

4.88

 

Cancelled/Forfeited

 

(3,794,428)

 

 

4.48

 

Unvested, December 31, 2018

 

12,303,913

 

$

4.63

 

Granted

 

10,403,571

 

 

5.45

 

Vested

 

(7,406,628)

 

 

4.75

 

Cancelled/Forfeited

 

(2,661,790)

 

 

4.79

 

Unvested, December 31, 2019

 

12,639,066

 

$

5.20

 

 

Bonus Plans

In 2016, our compensation committee approved the 2016 Executive Bonus Plan and 2016 Non-Executive Bonus Plan, or collectively, the 2016 Bonus Plans, each effective as of January 1, 2016, which provided for the issuance of shares of unrestricted common stock to employees based on meeting certain Company metrics. We issued 1,010,550 shares of unrestricted common stock in the first quarter of 2017, after withholding 677,547 shares to cover employee payroll taxes which we paid in cash totaling $3.1 million.

 

In April 2017, the Compensation Committee of our board of directors approved the 2017 Executive Bonus Plan and 2017 Non-executive Bonus Plan, or collectively, the 2017 Bonus Plans. The 2017 Bonus Plans provided for the issuance of shares of unrestricted common stock to employees based on achievement of certain 2017 Company metrics.  We issued 1,220,822 shares of unrestricted common stock in the first quarter of 2018, after withholding 752,564 shares to cover employee payroll taxes which we paid in cash totaling $3.7 million. 

 

In March 2018, the Compensation Committee of our board of directors approved the 2018 Non-executive Bonus Plan and in April 2018, the Compensation Committee of our board of directors approved the 2018 Executive Bonus Plan, or collectively, the 2018 Bonus Plans. The 2018 Bonus Plans provided for the issuance of shares of unrestricted common stock to employees based on the achievement of certain 2018 Company metrics. We issued 1,338,220 shares of unrestricted common stock in the first quarter of 2019, after withholding 832,635 shares to cover employee payroll taxes which we paid in cash totaling $4.1 million.

 

In March 2019, the Compensation Committee of our board of directors approved the 2019 Non-Executive Bonus Plan and the 2019 Executive Bonus Plan, or collectively, the 2019 Bonus Plans. The 2019 Bonus Plans provided for the issuance of shares of unrestricted common stock to employees based on the achievement of certain 2019 Company metrics. We issued 1,061,165 shares of unrestricted common stock in the first quarter of 2020, after withholding 669,517 shares to cover employee payroll taxes which we paid in cash totaling $2.9 million.

 

Shares issued under the aforementioned Bonus Plans are issued from our 2014 Plan and reduce the 2014 Plan shares available for issuance.

 

We record stock-based compensation expense related to the Bonus Plans over the service period of eligible employees based on forecasted performance relative to the Company metrics. To the extent that updated estimates of bonus expense differ from original estimates, the cumulative effect on current and prior periods of those changes is recorded in the period those estimates are revised.

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In 2017, we recorded $7.7 million of stock-based compensation expense under the 2017 Bonus Plans and $1.7 million under the 2016 Bonus Plans. In 2018, we recorded $9.4 million of stock-based compensation expense under the 2018 Bonus Plans and $1.9 million under the 2017 Bonus Plans. In 2019, we recorded $6.9 million of stock-based compensation expense under the 2019 Bonus Plans and $1.1 million under the 2018 Bonus Plans.

Stock Options

Stock option activity under the 2008 Plan, 2014 Plan and the 2015 Inducement Plan in 2017, 2018 and 2019 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Options Outstanding

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

Number of

 

 

 

 

 

 

Average

 

Aggregate

 

 

 

Shares

 

 

 

Weighted-

 

Remaining

 

Intrinsic

 

 

 

Available

 

Number of

 

Average

Contractual

 

Value

 

 

 

for Issuance

 

Shares

    

Exercise Price

    

Term (Years)

    

(In thousands)

  

Balance—December 31, 2016

    

4,199,415

 

9,835,992

 

$

4.39

 

6.23

 

$

5,734

 

Authorized

 

4,453,425

 

 —

 

 

 

 

 

 

 

 

 

Stock options granted

 

(300,000)

 

300,000

 

 

4.20

 

 

 

 

 

 

Issuance of shares under 2016 Bonus Plans

 

(1,688,097)

 

 —

 

 

 

 

 

 

 

 

 

Shares withheld from net settlement of restricted stock units

 

677,547

 

 —

 

 

 

 

 

 

 

 

 

Restricted stock units granted

 

(9,329,181)

 

 —

 

 

 

 

 

 

 

 

 

Exercised

 

 —

 

(1,172,409)

 

 

2.80

 

 

 

 

 

 

Stock options canceled

 

1,225,087

 

(1,225,087)

 

 

6.24

 

 

 

 

 

 

Restricted stock units canceled

 

2,621,801

 

 —

 

 

 

 

 

 

 

 

 

Balance—December 31, 2017

 

1,859,997

 

7,738,496

 

$

4.34

 

3.96

 

$

4,897

 

Authorized

 

4,860,197

 

 —

 

 

 

 

 

 

 

 

 

Stock options granted

 

(400,000)

 

400,000

 

 

4.71

 

 

 

 

 

 

Issuance of shares under 2017 Bonus Plans

 

(1,974,771)

 

 —

 

 

 

 

 

 

 

 

 

Shares withheld from net settlement of restricted stock units

 

1,294,360

 

 —

 

 

 

 

 

 

 

 

 

Restricted stock units granted

 

(8,250,061)

 

 —

 

 

 

 

 

 

 

 

 

Exercised

 

 —

 

(2,488,544)

 

 

2.62

 

 

 

 

 

 

Stock options canceled

 

1,153,395

 

(1,153,395)

 

 

5.49

 

 

 

 

 

 

Restricted stock units canceled

 

3,794,428

 

 —

 

 

 

 

 

 

 

 

 

Balance—December 31, 2018

 

2,337,545

 

4,496,557

 

$

5.02

 

4.98

 

$

2,446

 

Authorized

 

5,310,327

 

 —

 

 

 

 

 

 

 

 

 

Stock options granted

 

(125,000)

 

125,000

 

 

4.52

 

 

 

 

 

 

Issuance of shares under 2018 Bonus Plans

 

(2,170,855)

 

 —

 

 

 

 

 

 

 

 

 

Shares withheld from net settlement of restricted stock units

 

1,147,904

 

 —

 

 

 

 

 

 

 

 

 

Restricted stock units granted

 

(8,232,716)

 

 —

 

 

 

 

 

 

 

 

 

Exercised

 

 —

 

(1,349,694)

 

 

4.09

 

 

 

 

 

 

Stock options canceled

 

372,886

 

(372,886)

 

 

7.07

 

 

 

 

 

 

Restricted stock units canceled

 

2,661,790

 

 —

 

 

 

 

 

 

 

 

 

Balance—December 31, 2019

 

1,301,881

 

2,898,977

 

$

5.17

 

4.89

 

$

1,556

 

Vested and exercisable—December 31, 2019

 

 

 

2,410,434

 

$

5.32

 

4.17

 

$

1,353

 

Vested and expected to vest(1)—December 31, 2019

 

 

 

2,823,917

 

$

5.19

 

4.79

 

$

1,530

 


 

(1)

Options expected to vest are net of an estimated forfeiture rate.

 

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Additional information regarding options outstanding at December 31, 2019 is as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options Outstanding

 

Options Exercisable

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

Weighted-

 

 

 

Weighted-

 

 

 

Number of

 

Contractual

 

Average

 

Number of

 

Average

 

Range of exercises

    

Shares

    

Term (Years)

    

Exercise Price

    

Shares

    

Exercise Price

    

$0.55 — $3.85

 

753,487

 

3.85

 

$

3.18

 

646,194

 

$

3.09

 

$4.06 — $4.66

 

650,522

 

5.58

 

 

4.48

 

450,522

 

 

4.44

 

$4.70—  $5.77

 

694,723

 

5.54

 

 

5.32

 

513,473

 

 

5.53

 

$6.20 — $8.39

 

590,810

 

4.83

 

 

6.76

 

590,810

 

 

6.76

 

$8.80 — $12.05

 

209,435

 

4.39

 

 

9.54

 

209,435

 

 

9.54

 

Outstanding at December 31, 2019

 

2,898,977

 

4.89

 

$

5.17

 

2,410,434

 

$

5.32

 

 

The aggregate pretax intrinsic value of vested options exercised in 2019, 2018 and 2017 was $3.0 million, $5.7 million and $2.3 million, respectively. The intrinsic value is the difference between the estimated fair value of the Company’s common stock at the date of exercise and the exercise price for in-the-money options. The weighted-average grant-date fair value of options granted in 2019, 2018 and 2017 was $2.28,  $2.43 and $1.74 per share, respectively.

Our stock-based compensation expense was recorded in the following cost and expense categories (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

    

2019

    

2018

 

2017

Cost of revenue

 

$

5,095

 

$

5,006

 

$

3,772

Research and development

 

 

14,610

 

 

15,981

 

 

14,520

Sales and marketing

 

 

8,663

 

 

9,464

 

 

8,659

General and administrative

 

 

7,436

 

 

7,985

 

 

6,780

Total

 

$

35,804

 

$

38,436

 

$

33,731

 

Determining Fair Value of Stock Options and ESPP

The fair value of each grant of stock options was determined by us using the methods and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment to determine.

Expected Term—The expected term of stock options represents the weighted-average period the stock options are expected to be outstanding. For option grants that are considered to be “plain vanilla”, we have opted to use the simplified method for estimating the expected term as provided by the Securities and Exchange Commission. The simplified method calculates the expected term as the average of time-to-vesting and the contractual life of the options. For ESPP, the expected term is based on the offering period and purchase periods within the offering period.

Expected Volatility—When we did not have a sufficient trading history for our common stock, the expected stock price volatility assumption was determined by examining the historical volatilities of a group of industry peers. As more historical data for our common stock became available, we began to use our own historical stock price volatility to determine expected stock price volatility.

Risk-Free Interest Rate—The risk free rate assumption was based on the U.S. Treasury instruments with terms that were consistent with the expected term of our stock options and ESPP.

Expected Dividend—The expected dividend assumption was based on our history and expectation of dividend payouts.

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Forfeiture Rate—Forfeitures were estimated based on historical experience.

Fair Value of Common Stock—Since our IPO, the fair value of our common stock has been determined based on the closing price of our common stock on the Nasdaq Global Select Market.

We used the Black-Scholes Model to estimate the fair value of our stock options granted to employees with the following weighted-average assumptions:

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

 

2019

 

2018

 

2017

 

Expected dividend yield

    

 

    

 

Risk-free interest rate

 

2.5%

 

2.7%

 

2.1%

 

Expected volatility

 

50%

 

51%

 

40%

 

Expected life (in years)

 

6.1

 

6.1

 

6.1

 

 

We used the Black-Scholes model to estimate the fair value of our Employee Stock Purchase Plan awards with the following assumptions:

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

2019

 

2018

 

2017

Expected dividend yield

    

 

 

Risk-free interest rate

 

1.5% - 2.5%

 

1.8% - 2.6%

 

0.9% - 1.3%

Expected volatility

 

39% - 45%

 

34% - 54%

 

34% - 54%

Expected life (in years)

 

0.5 - 2.0

 

0.5 - 2.0

 

0.5 - 2.0

 

As required by Topic 718 Compensation—Stock Compensation, we estimate expected forfeitures and recognize compensation costs only for those equity awards expected to vest. Our stock options granted are typically granted with vesting terms of 48 months.

The following table summarizes our unrecognized stock-based compensation expense as of December 31, 2019 net of estimated forfeitures:

 

 

 

 

 

 

 

 

Unrecognized

 

Remaining

 

 

Stock-based

 

Weighted-Average

 

 

Compensation

 

Recognition

 

 

Expense

 

Period

 

   

(in millions)

   

(in years)

Stock options

 

$

0.8

 

2.5

Restricted stock units

 

 

48.2

 

2.8

ESPP

 

 

1.5

 

1.4

Total

 

$

50.5

 

 

 

 

11. Employee Benefit Plan

We maintain a defined contribution 401(k) plan. The plan covers all full-time U.S. employees over the age of 21. Each employee can contribute up to $19,000 annually (with a $6,000 catch up contribution limit for employees aged 50 or older). We have the option to provide matching contributions, but have not done so through December 31, 2019.  

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12. Commitments and Contingencies

Litigation

We continually evaluate uncertainties associated with litigation and record a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and (ii) the loss or range of loss can be reasonably estimated. If we determine that a loss is possible and a range of the loss can be reasonably estimated, we disclose the range of the possible loss in the Notes to the Consolidated Financial Statements. We evaluate, on a quarterly basis, developments in our legal matters that could affect the amount of liability that has been previously accrued, if any, and the matters and related ranges of possible losses disclosed, and make adjustments and changes to our disclosures as appropriate. Significant judgment is required to determine both likelihood of there being and the estimated amount of a loss related to such matters. Until the final resolution of such matters, there may be an exposure to loss, and such amounts could be material. For legal proceedings for which there is a reasonable possibility of loss (meaning those losses for which the likelihood is more than remote but less than probable), we have determined we do not have material exposure on an aggregate basis.

 

Indemnification

Under the indemnification provisions of our standard sales related contracts, we agree to defend and/or settle claims brought by third parties against our customers and channel partners alleging that our software or the customer’s use thereof infringes the third party’s intellectual property right, such as a patent right. These indemnification obligations are typically not subject to limitation; however if we believe such a claim is reasonably likely to occur and if it is commercially impractical for us to either procure the right for the customer to continue to use our software or modify our software so that it’s not infringing, we can terminate the customer agreement and refund the customer a portion of the license fees paid (prorated over the three year period from initial delivery for software licensed on a perpetual basis). We also on occasion indemnify our customers for other types of third party claims. In addition, we indemnify our officers, directors, and certain key employees while they are serving in such capacities in good faith. Through December 31, 2019, we have not received any material written claim for indemnification.

Patent Claim

 

We received a letter in August 2019 from BlackBerry Ltd. asserting that our products and software infringe BlackBerry’s patents, and that we should take a license to its portfolio. We have retained counsel and are evaluating BlackBerry’s letter, as well as potential counterclaims against BlackBerry. BlackBerry did not specify any amount of damages in its August 2019 letter, the parties are negotiating a potential resolution of the dispute, and we have accrued an immaterial amount related to the matter as of December 31, 2019. Should any lawsuit be filed by BlackBerry, we intend to defend ourselves vigorously.

13. Leases

We have operating leases for office facilities and data centers. Our leases have remaining lease terms of less than one year to approximately seven years, some of which include options to extend the leases for up to five years, and some of which include options to terminate the leases within one year.

 

On our balance sheet, we have current and noncurrent lease commitment liabilities of approximately $5.7 million and $10.1 million, respectively, and corresponding right-of-use assets of approximately $13.7 million at December 31, 2019 for our operating leases.

 

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The operating lease cost for 2019, 2018 and 2017 was $6.0 million, $6.8 million and $7.2 million, respectively. The future maturities of lease liabilities as of December 31, 2019 are as follows (in thousands):

 

 

 

 

 

Year

    

 

    

2020

 

$

6,350

2021

 

 

4,960

2022

 

 

3,513

2023

 

 

1,492

2024

 

 

330

Thereafter

 

 

555

Total lease payments

 

 

17,200

Less: imputed interest

 

 

(1,448)

Total lease liability

 

$

15,752

 

All of our leases are classified as operating leases. In 2019, the weighted average discount rate used to determine the lease liabilities was 5.3% and the weighted average remaining lease term was 39 months at December 31, 2019. Variable costs, short-term lease costs and sublease income were immaterial in the year ended December 31, 2019.

 

As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting standard, future minimum lease payments for operating leases having initial or remaining noncancellable lease terms in excess of one year were as follows as of December 31, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

Year

    

 

    

2019

 

$

7,144

2020

 

 

5,553

2021

 

 

4,083

2022

 

 

3,074

2023

 

 

1,163

Total

 

$

21,017

 

14. Unearned Revenue

Changes in unearned revenue were as follows for the years ended December 31, 2019 and 2018:

 

 

 

 

 

 

 

 

 

Year ended December 31,

(in thousands)

 

2019

    

2018

Balance, beginning of period

 

$

105,837

 

$

77,022

Billings, excluding billings for customer arrangements with termination rights

 

 

196,351

 

 

205,816

Additions to unearned revenue upon expiration of termination rights

 

 

20,395

 

 

17,651

Recognition of revenue, net of change in unbilled accounts receivable*

 

 

(204,372)

 

 

(194,652)

Balance, end of period

 

$

118,211

 

$

105,837

 

 

 

 

 

 

 

* Reconciliation to Revenue Reported in Consolidated Statement of Operations:

 

 

 

 

Year ended December 31,

(in thousands)

 

2019

    

2018

Revenue billed as of the end of period

 

$

204,372

 

$

194,652

Increase (decrease) in total unbilled accounts receivable

 

 

864

 

 

(1,460)

Revenue Reported in Consolidated Statement of Operations

 

$

205,236

 

$

193,192

 

Revenue allocated to remaining performance obligations includes unearned revenue plus contractually committed amounts that will be invoiced and recognized as revenue in future periods, but excludes amounts invoiced and not recognized as revenue under customer arrangements that contain termination rights. Remaining performance

89

obligations were $129.4 million as of December 31, 2019, of which we expect to recognize approximately 72% as revenue over the next 12 months and the remainder thereafter.

 

As of December 31, 2019 and 2018, the balance of customer arrangements that contain termination rights was $16.1 million and $19.4 million, respectively.

 

15. Segment and Disaggregated Revenue Information

We conduct business globally. Our chief operating decision maker (Chief Executive Officer) reviews financial information presented on a consolidated basis accompanied by information about revenue by geographic region for purposes of allocating resources and evaluating financial performance. We have one business activity, software and services to manage and secure mobile devices, applications and content, and there are no segment managers who are held accountable for operations, operating results and plans for levels, components or types of products or services below the consolidated unit level. Accordingly, we are considered to be in a single reportable segment and operating unit structure.

Revenue by geographic region based on the billing address was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

(in thousands)

   

2019

   

2018

   

2017

 

Revenue

 

 

 

 

 

 

 

 

 

 

United States

 

$

86,715

 

$

82,033

 

$

83,625

 

International

 

 

118,521

 

 

111,159

 

 

96,133

 

Total

 

$

205,236

 

$

193,192

 

$

179,758

 

 

We recognized $32.7 million, or 16% of total revenue, $30.7 million, or 16% of total revenue, and $22.6 million, or 13% of total revenue, from customers with a billing address in Germany in 2019, 2018 and 2017, respectively. No other country, outside of the United States, exceeded 10% of the total revenue in 2019, 2018 or 2017.  

 

Revenue from recurring and nonrecurring contractual arrangements was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended

 

 

December 31, 

(in thousands)

 

2019

    

2018

    

2017

Cloud subscriptions - ratable

 

$

67,034

 

$

50,714

 

$

38,728

On-premise subscriptions - point-in-time

 

 

22,022

 

 

20,948

 

 

15,994

On-premise subscriptions - ratable

 

 

18,909

 

 

16,275

 

 

14,779

Software support on perpetual licenses - ratable

 

 

64,983

 

 

63,211

 

 

59,076

Recurring revenue

 

 

172,948

 

 

151,148

 

 

128,577

Perpetual license - point-in-time

 

 

27,447

 

 

38,390

 

 

48,041

Professional services - point-in-time

 

 

4,841

 

 

3,654

 

 

3,140

Non-recurring revenue

 

 

32,288

 

 

42,044

 

 

51,181

Total revenue

 

$

205,236

 

$

193,192

 

$

179,758

 

As of December 31, 2019 and 2018,  $2.0 million and $2.5 million, or 42% and 35%, respectively, of our net Property and Equipment was attributable to our operations located in India. Substantially all other long-lived assets were attributable to operations in the United States.

90

16. Net Loss per Share

The following table sets forth the computation of basic and diluted net loss per share for 2019, 2018 and 2017 (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

    

2019

    

2018

    

2017

Numerator:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(48,846)

 

$

(43,084)

 

$

(53,362)

Denominator:

 

 

 

 

 

 

 

 

 

Weighted–average shares outstanding

 

 

109,973

 

 

102,527

 

 

93,771

Less: weighted average shares subject to repurchase

 

 

 —

 

 

 —

 

 

(1)

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

 

 

109,973

 

 

102,527

 

 

93,770

Basic and diluted net loss per share

 

$

(0.44)

 

$

(0.42)

 

$

(0.57)

 

Basic net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding for the period. Because we have reported a net loss for 2019, 2018 and 2017, 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.

The following potentially dilutive securities outstanding have been excluded from the computation of diluted weighted-average shares outstanding because such securities have an antidilutive impact due to losses reported (in common stock equivalent shares):

 

 

 

 

 

 

 

 

 

December 31, 

 

    

2019

    

2018

    

2017

Stock options outstanding, net of unvested exercised stock options

 

2,898,977

 

4,496,557

 

7,738,496

Unvested restricted stock units

 

12,639,066

 

12,303,913

 

12,906,030

ESPP shares

 

478,917

 

478,026

 

726,643

Stock-settled bonus shares

 

871,391

 

1,234,474

 

1,185,373

    Total potentially dilutive securities

 

16,888,351

 

18,512,970

 

22,556,542

 

 

 

 

 

 

 

 

 

17. Income Taxes

Loss before income taxes consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

2019

 

2018

 

2017

 

United States

$

(48,898)

 

$

(44,137)

 

$

(56,852)

 

International

 

2,184

 

 

2,400

 

 

1,695

 

Total

$

(46,714)

 

$

(41,737)

 

$

(55,157)

 

 

A significant portion of our international income is earned by foreign branches of our United States parent corporation.  The income of our foreign branches has been included as part of the United States jurisdiction in the table above.

91

Income tax expense for 2019, 2018 and 2017, was composed of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

    

2019

    

2018

    

2017

    

Current:

 

 

 

 

 

 

 

 

 

 

Federal

 

$

 

$

 

$

 

State

 

 

32

 

 

26

 

 

36

 

Foreign

 

 

2,144

 

 

1,454

 

 

1,196

 

Total current income tax expense

 

 

2,176

 

 

1,480

 

 

1,232

 

Foreign

 

 

(44)

 

 

(133)

 

 

(90)

 

Total deferred income tax benefit

 

 

(44)

 

 

(133)

 

 

(90)

 

Total income tax expense

 

$

2,132

 

$

1,347

 

$

1,142

 

 

For 2019, 2018 and 2017, our effective tax rate differs from the amount computed by applying the statutory federal and state income tax rates to net loss before income tax, primarily as the result of changes in our valuation allowance.

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

   

2019

   

2018

   

2017

   

Federal tax benefit at statutory rate

 

21.0

%  

21.0

%  

34.0

%  

State tax benefit net of federal effect

 

6.0

 

6.3

 

8.8

 

Foreign taxes

 

(2.9)

 

(1.7)

 

(0.7)

 

Change in valuation allowance

 

(29.0)

 

(29.8)

 

42.8

 

Change in federal tax rate

 

 —

 

 —

 

(86.1)

 

Compensation limitation 162(m)

 

(1.5)

 

 —

 

 —

 

Credits

 

4.6

 

3.7

 

3.4

 

Stock-based compensation

 

(1.6)

 

(2.3)

 

(3.9)

 

Non-deductible expenses and other

 

(1.2)

 

(0.4)

 

(0.4)

 

Effective tax rate

 

(4.6)

%  

(3.2)

%  

(2.1)

%  

 

Income tax expense for 2019, 2018 and 2017 relates to state minimum income tax, income tax on our earnings in foreign jurisdictions and withholding taxes on sales to customers in certain jurisdictions. A significant portion of our international income is earned by foreign branches of our United States parent corporation and thus is already subject to United States taxation. The income of our foreign branches has been included as part of the United States jurisdiction in the table above.

The components of net deferred tax assets at December 31, 2019 and 2018 consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

As of December 31,

 

 

    

2019

 

2018

 

Deferred tax assets / liabilities:

 

 

 

 

 

 

 

Accruals and allowances

 

$

7,331

 

$

6,037

 

Lease liabilities

 

 

3,176

 

 

 —

 

Loss (Gains) on foreign exchange

 

 

110

 

 

(72)

 

Net operating loss carryforwards

 

 

86,912

 

 

76,648

 

Depreciation and amortization

 

 

1,739

 

 

2,345

 

R&D tax credits

 

 

21,474

 

 

17,536

 

Stock-based compensation

 

 

4,038

 

 

5,755

 

Capitalized commissions

 

 

(4,118)

 

 

(3,915)

 

Right-of-use assets

 

 

(2,764)

 

 

 —

 

Valuation allowance

 

 

(117,721)

 

 

(104,201)

 

Net deferred tax assets

 

$

177

 

$

133

 

 

92

Our accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of our net deferred tax assets. We primarily considered such factors as our history of operating losses, the nature of our deferred tax assets and the timing, likelihood and amount, if any, of future taxable income during the periods in which those temporary differences and carryforwards become deductible. At present, we do not believe that it is more likely than not that the deferred tax assets will be realized; accordingly, a full valuation allowance has been established and no deferred tax asset is shown in the accompanying consolidated balance sheets.

As of December 31, 2019, we had net operating loss carryforwards of approximately $365.3 million and $173.4 million available to reduce future taxable income, if any, for both federal and state income tax purposes, respectively. The federal and state net operating loss carryforwards will expire at various dates beginning 2027 and 2028, respectively. Approximately $74.1 million of the federal net operating loss included above, can be carried forward indefinitely.

As of December 31, 2019, we had federal and California R&D tax credit carryforwards at December 31, 2019 of approximately $16.4 million and $17.8 million, respectively. If not utilized, the federal R&D tax credit carryforward will expire in various portions beginning 2027. The California R&D tax credit can be carried forward indefinitely.

A limitation may apply to the use of the net operating loss and credit carryforwards, under provisions of the Internal Revenue Code that are applicable if we experience an “ownership change”. That may occur, for example, as a result of trading in our stock by significant investors as well as issuance of new equity. Should these limitations apply, the carryforwards would be subject to an annual limitation, resulting in a substantial reduction in the gross deferred tax assets before considering the valuation allowance. Further, a portion of the carryforwards may expire before being applied to reduce future earnings.  

We follow the provisions of ASC 740-10, Accounting for Uncertainty in Income Taxes. ASC 740-10 prescribes a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of uncertain tax positions that have been taken or expected to be taken on a tax return. No non-current liability related to uncertain tax positions is recorded in the financial statements as the deferred tax assets have been presented net of these unrecognized tax benefits. At December 31, 2019 and 2018, our reserve for unrecognized tax benefits was approximately $10.3 million and $8.3 million, respectively. Due to the full valuation allowance at December 31, 2019, current adjustments to the unrecognized tax benefit will have no impact on our effective income tax rate; any adjustments made after the valuation allowance is released will have an impact on the tax rate. We do not anticipate any significant change in our uncertain tax positions within 12 months of this reporting date. We include penalties and interest expense related to income taxes as a component of other expense and interest expense, respectively, as necessary.

A reconciliation of the gross unrealized tax benefits is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

   

2019

   

2018

   

2017

   

Unrecognized tax benefits, beginning of year

 

$

8,340

 

$

6,839

 

$

5,306

 

Gross increases—tax positions from prior periods

 

 

(40)

 

 

(31)

 

 

34

 

Gross increases—tax positions from current period

 

 

2,004

 

 

1,532

 

 

1,499

 

Unrecognized tax benefits, end of year

 

$

10,304

 

$

8,340

 

$

6,839

 

 

We are subject to taxation in the United States and various states and foreign jurisdictions. As of December 31, 2019, the statute of limitations is open for all tax years from inception, that is, for the period from July 23, 2007 (date of inception) to December 31, 2019 and forward for federal and state tax purposes. The foreign statutes of limitation are generally two to four years.

It is our intention to reinvest the earnings of our non-U.S. subsidiaries in their operations. As of December 31, 2019, the Company had not made a provision for any incremental foreign withholding taxes or dividend distribution taxes on approximately $10.8 million of the excess of the amount of net income for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. If these earnings were repatriated to the U.S., the deferred tax liability associated with these temporary differences would result in a nominal amount of withholding taxes.

93

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Limitations on Effectiveness of Controls

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of December 31, 2019. The term “disclosure controls and procedures,” as defined in Rule 13a-15 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide a reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2019, our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act were (i) recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) accumulated and reported to our management, including our Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure.

Management’s Report on Internal Controls

Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal controls over financial reporting are designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements in accordance with the GAAP, including those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the Company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with  GAAP and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our internal control over financial reporting as of December 31, 2019 based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO framework).

94

Based on our assessment, we concluded that our internal control over financial reporting was effective as of December 31, 2019.  

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of MobileIron, Inc.

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of MobileIron, Inc. and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019, of the Company and our report dated March 6, 2020, expressed an unqualified opinion on those financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

95

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ Deloitte & Touche LLP

 

San Jose, California  

March 6, 2020

 

We have served as the Company’s auditors since 2011.

 

Item 9B. Other Information

None.

96

PART III

Certain information required by Part III is omitted from this Annual Report on Form 10-K since we intend to file our definitive proxy statement for our 2020 annual meeting of stockholders, or the Definitive Proxy Statement, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, not later than 120 days after December 31, 2019, and certain information to be included in the Definitive Proxy Statement is incorporated herein by reference

Item 10. Directors, Executive Officers and Corporate Governance

Executive Officers and Directors

Information responsive to this Item with respect to executive officers and directors is incorporated herein by reference to the information from our 2019 Proxy Statement under the sections titled “Executive Officers,” “Election of Directors,” “Delinquent Section 16(a) Reports” and “Information Regarding the Board of Directors and Corporate Governance.”

Code of Conduct

As part of our system of corporate governance, our board of directors has adopted a code of business conduct and ethics. The code applies to all of our employees, officers (including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions), agents and representatives, including our independent directors and consultants, who are not employees of ours, with regard to their MobileIron-related activities. Our code of business conduct and ethics is available on our website at www.mobileiron.com. We will post on our website any amendment to our code of business conduct and ethics, as well as any waivers of our code of business conduct and ethics, that are required to be disclosed by the rules of the SEC or the Nasdaq Stock Market.

Item 11. Executive Compensation

Information responsive to this Item with respect to executive compensation is incorporated herein by reference to the information from our 2020 Proxy Statement under the section titled “Executive Compensation,” “Director Compensation,” “Summary Compensation Table,” “Outstanding Equity Awards at Fiscal Year-End,” and “Compensation Committee.”

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information responsive to this Item with respect to security ownership of certain beneficial owners and management is incorporated herein by reference to the information from our 2020 Proxy Statement under the section titled “Security Ownership of Certain Beneficial Owners and Management” and “Potential Payments and Acceleration of Equity upon Termination or Termination in Connection with a Change in Control.” Information regarding our stockholder approved and non-approved equity compensation plans are incorporated by reference to the section entitled “Equity Compensation Plan Information.”

Item 13. Certain Relationships and Related Transactions, and Director Independence

Information responsive to this item with respect to certain relationships and related transactions, and director independence is incorporated herein by reference to the information from our 2020 Proxy Statement under the section titled “Transactions with Related Persons and Indemnification” and “Independence of the Board of Directors.”

Item 14. Principal Accountant Fees and Services

Information responsive to this item with respect to principal accountant fees and services is incorporated herein by reference to the information from our 2020 Proxy Statement under the section titled “Principal Accountant Fees and Services.”

97

PART IV

Item 15. Exhibits and Financial Statement Schedules

Documents filed as part of this report are as follows:

1.

Consolidated Financial Statements:

 

 

 

Our Consolidated Financial Statements are listed in the “Index to Consolidated Financial Statements” Under Part II, Item 8 of this report.

 

 

2.

Financial Statement Schedules:

 

 

 

Financial statement schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes to Consolidated Financial Statements included in Part II, Item 8 “Financial Statements and Supplementary Data” of this report.

 

 

3.

Exhibits:

 

98

 

 

 

EXHIBIT INDEX

 

 

Incorporated by Reference

 

 

 

 

Exhibit

 

Exhibit

 

Filing

 

Filed

Number

Description

Number

Filing

Date

File No.

Herewith

3.1 

Amended and Restated Certificate of Incorporation of MobileIron, Inc.

3.1

8-K

June 17, 2014

001-36471

 

3.2 

Amended and Restated Bylaws of MobileIron, Inc.

3.4

S-1/A

May 29, 2014

333-195089

 

4.1

Reference is made to Exhibits 3.1 and 3.2 above

 

 

 

 

 

4.2 

Amended and Restated Investors’ Rights Agreement, dated August 29, 2013

4.2

S-1

April 7, 2014

333-195089

 

4.3 

Description of Registrant’s Securities

 

 

 

 

X

10.1(1)

Amended and Restated MobileIron, Inc. 2014 Equity Incentive Plan

10.2

10-Q

July 29, 2016

001-36471

 

10.2(1)

Form of Option Agreement and Option Grant Notice for MobileIron, Inc. 2008 Stock Plan

10.2

S-1/A

May 29, 2014

333-195089

 

10.3(1)

Current Form of Option Agreement, Option Grant Notice, Notice of Option Exercise, Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement for MobileIron, Inc. 2014 Equity Incentive Plan

10.1

10-Q

October 31, 2014

001-36471

 

10.4(1) 

MobileIron, Inc. 2014 Amended Employee Stock Purchase Plan

Appendix A

DEF 14A

April 28, 2017

001-36471

 

10.5(1) 

Amended and Restated MobileIron, Inc. 2015 Inducement Plan

10.1

8-K

January 6, 2016

001-36471

 

 

99

 

10.6(1)

Form of Stock Option Grant Notice and Option Agreement under the MobileIron, Inc. 2015 Inducement Plan

10.2

8-K

January 6, 2016

001-36471

 

10.7(1)

Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement under the MobileIron, Inc. 2015 Inducement Plan

10.3

8-K

January 6, 2016

001-36471

 

10.8

Resale Agreement between MobileIron, Inc. and AT&T Services, Inc., dated April 22, 2010, as amended and supplemented

10.17

S-1/A

May 7, 2014

333-195089

 

10.9 

Amendment to Resale Agreement between MobileIron, Inc. and AT&T Services, Inc., dated April 4, 2016

10.6

10-Q

July 29, 2016

001-36471

 

10.10 

Lease between MobileIron, Inc., and WTA Middlefield LLC, dated May 14, 2015

10.1

8-K

May 20, 2015

001-36471

 

10.11(1)

Form of Indemnity Agreement entered into between MobileIron, Inc. and each of its directors and its executive officers

10.6

S-1

April 7, 2014

333-195089

 

10.12(1)

Amended and Restated Severance Benefit Plan Participation Notice between MobileIron, Inc. and Simon Biddiscombe, dated August 28, 2015

10.18

10-K

February 14, 2017

001-36471

 

10.13(1)

MobileIron, Inc. Severance Benefit Plan and Participation Notice

10.4

10-Q

May 4, 2015

001-36471

 

10.14(1)

MobileIron, Inc. Amended and Restated Non-Employee Director Compensation Policy

10.3

10-Q

July 29, 2016

001-36471

 

 

100

 

10.15 

Sublease, effective March 1, 2017, between MobileIron, Inc. and Vendavo, Inc.

10.1

8-K

March 3, 2017

001-36471

 

10.16(1)

MobileIron, Inc. 2018 Executive Bonus Plan

10.1

8-K

April 25, 2018

001-36471

 

10.17 

MobileIron, Inc. 2018 Non-Executive Bonus Plan

10.2

10-Q

May 4, 2018

001-36471

 

10.18 

Lease Deed between MobileIron, Inc. and RMZ Ecoworld Infrastructure Private Limited, dated July 27, 2017

10.1

10-Q

November 3, 2017

001-36471

 

10.19(1)

Offer Letter between the Company and Greg Randolph, dated October 29, 2017

10.2

10-Q

November 3, 2017

001-36471

 

10.20(1)

Offer Letter between the Company and Simon Biddiscombe, dated November 2, 2017

10.3

10-Q

November 3, 2017

001-36471

 

10.21 

Attornment Agreement between Middlefield Realty Property Holdings LLC, Vendavo, Inc. and MobileIron, Inc., dated December 18, 2017

10.29

10-K

March 12, 2018

001-36471

 

10.22(1) 

Offer Letter between the Company and Sohail Parekh, dated March 12, 2018

10.3

10-Q

May 4, 2018

001-36471

 

10.23(1) 

Offer Letter between the Company and Scott Hill, dated June 12, 2018

10.1

8-K

July 10, 2018

001-36471

 

10.24 

Amendment to Resale Agreement between MobileIron, Inc. and AT&T Services, Inc. dated April 3, 2019

10.1

10-Q

August 2, 2019

001-36471

 

10.25 

Amendment to Resale Agreement between MobileIron, Inc. and AT&T Services, Inc. dated April 3, 2019

10.2

10-Q

August 2, 2019

001-36471

 

 

101

 

10.26 

AT&T Cybersecurity Supplier Go-To-Market Agreement Supplement between MobileIron, Inc. and AT&T Services, Inc. dated July 8, 2019 β 

10.1

10-Q

November 1, 2019

001-36471

 

10.27(1) 

MobileIron, Inc. Severance Plan and Participation Notice dated October 30, 2019

10.2

10-Q

November 1, 2019

001-36471

 

21.1 

Subsidiaries of Registrant

 

 

 

 

X

23.1 

Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm

 

 

 

 

X

24.1 

Power of Attorney (contained in signature page hereto)

 

 

 

 

X

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(2) 

Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

X

99.1

Amendments to Resale Agreement between MobileIron, Inc. and AT&T Services, Inc., various dates

99.1

8-K

February 6, 2017

 

 

99.2*

Amendments to Resale Agreement between MobileIron, Inc. and AT&T Services, Inc., various dates

99.1

8-K

February 21, 2019

 

 

 

102

 

 

 

EX—101.INS

    

XBRL Instance Document

EX—101.SCH

    

XBRL Taxonomy Extension Schema

EX—101.CAL

    

XBRL Taxonomy Extension Calculation Linkbase

EX—101.DEF

    

XBRL Taxonomy Extension Definition Linkbase

EX—101.LAB

    

XBRL Taxonomy Extension Label Linkbase

EX—101.PRE

    

XBRL Taxonomy Extension Presentation Linkbase


 

 

Certain portions of this exhibit are subject to a confidential treatment order. Omitted portions have been filed separately with the Securities and Exchange Commission.

*

Confidential treatment requested as to certain portions of this exhibit, which portions are omitted and filed separately with the Securities and Exchange Commission.

β

Confidential portions of this Exhibit were redacted pursuant to Item 601(b)(10) of Regulation S-K and the Company agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omissions upon request.

(1)

Management contract or compensation plan or arrangement.

(2)

The certifications attached as Exhibit 32.1 accompany this Annual Report on Form 10-K pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

 

 

 

Item 16. Form 10-K Summary

The Company has elected not to include summary information.

 

103

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

 

MOBILEIRON, INC.

 

 

 

 

 

 

 

By:

/s/ Simon Biddiscombe

 

 

Simon Biddiscombe

 

 

President and Chief Executive Officer

(Principal Executive Officer) and Director

 

 

 

 

By:

/s/ Scott D. Hill

 

 

Scott D. Hill

 

 

Chief Financial Officer

(Principal Financial Officer and Accounting Officer)

 

Dated: March 6, 2020

The undersigned directors and officers of MobileIron, Inc. (the “Company”), a Delaware corporation, hereby constitute and appoint Simon Biddiscombe and Scott D. Hill, and each of them with full power to act without the other, the undersigned’s true and lawful attorney-in-fact, with full power of substitution and re-substitution, for the undersigned and in the undersigned’s name, place and stead in the undersigned’s capacity as an officer and/or director of the Company, to execute in the name and on behalf of the undersigned this Report and to file such Report, with exhibits thereto and other documents in connection therewith and any and all amendments thereto, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing necessary or desirable to be done and to take any other action of any type whatsoever in connection with the foregoing which, in the opinion of such attorney-in-fact, may be of benefit to, in the best interest of, or legally required of, the undersigned, it being understood that the documents executed by such attorney-in-fact on behalf of the undersigned pursuant to this Power of Attorney shall be in such form and shall contain such terms and conditions as such attorney-in-fact may approve in such attorney-in-fact’s discretion.

104

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below (and the above Powers of Attorney granted) by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature

    

Title

    

Date

 

 

 

 

 

 

 

 

 

 

/s/ Simon Biddiscombe

 

 

 

March 6, 2020

Simon Biddiscombe

 

President and Chief Executive Officer (Principal Executive Officer) and Director

 

 

 

 

 

 

 

/s/ Scott D. Hill

 

 

 

March 6, 2020

Scott D. Hill

 

Chief Financial Officer (Principal Financial Officer and Accounting Officer)

 

 

 

 

 

 

 

/s/ Jessica Denecour

 

 

 

March 6, 2020

Jessica Denecour

 

Director

 

 

 

 

 

 

 

/s/ Anjali Joshi

 

 

 

March 6, 2020

Anjali Joshi

 

Director

 

 

 

 

 

 

 

/s/ Kenneth Klein

 

 

 

March 6, 2020

Kenneth Klein

 

Director

 

 

 

 

 

 

 

/s/ Tae Hea Nahm

 

 

 

March 6, 2020

Tae Hea Nahm

 

Director

 

 

 

 

 

 

 

/s/ James Tolonen

 

 

 

March 6, 2020

James Tolonen

 

Director

 

 

 

 

 

 

 

 

105