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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2018

 

OR

 

o         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: 001-38478

 


 

CARBON BLACK, INC.

(Exact Name of Registrant as Specified in its Charter)

 


 

Delaware

 

55-0810166

(State or other jurisdiction of
incorporation or organization)

 

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

 

 

 

 

1100 Winter Street
Waltham, MA

 

02451

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (617) 393-7400

 

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   o     No   x

 

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

 

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

o

 

 

Accelerated filer

o

 

Non-accelerated filer

x

(Do not check if a small reporting company)

 

Small reporting company

o

 

Emerging growth company

x

 

 

 

 

 

 

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.  x

 

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

 

As of June 5, 2018, there were 67,545,281 shares of the registrant’s common stock with a par value of $0.001 per share, outstanding.

 

 

 



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CARBON BLACK, INC.

 

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements (unaudited):

 

 

 

Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017

 

3

 

Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2018 and 2017

 

4

 

Consolidated Statement of Redeemable Convertible and Convertible Preferred Stock and Stockholders’ Deficit for the Three Months Ended March 31, 2018

 

5

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017

 

6

 

Notes to Consolidated Financial Statements

 

7

 

 

 

 

 

 

 

 

Item 2.

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

 

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

37

Item 4.

Controls and Procedures

 

37

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

38

Item 1A.

Risk Factors

 

38

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

66

Item 3.

Defaults Upon Senior Securities

 

66

Item 4.

Mine Safety Disclosures

 

67

Item 5.

Other Information

 

67

Item 6.

Exhibits

 

67

 

Signatures

 

68

 



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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “predict,” “project,” “will,” “would,” or the negative of these words or other similar terms or expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements about:

 

·                  the growth in the market for next-generation endpoint security solutions and future cyber security spending;

 

·                  changes in the nature and quantity of advanced cyber attacks facing our customers and prospects;

 

·                  our predictions about the market transition from legacy antivirus solutions to next-generation endpoint security solutions;

 

·                  our ability to acquire new customers, retain customers and grow revenue from existing customers;

 

·                  our ability to maintain and expand relationships with our channel and strategic partners;

 

·                  our ability to train support personnel;

 

·                  our ability to grow our business, both domestically and internationally;

 

·                  our ability to continue to innovate and enhance our technology platform and product functionality;

 

·                  our ability to acquire complementary businesses, technology and assets;

 

·                  the effects of increased competition and our ability to compete effectively;

 

·                  our ability to adapt to technological change and effectively enhance, innovate and scale our solutions;

 

·                  our ability to maintain, protect and enhance our intellectual property;

 

·                  costs associated with defending intellectual property infringement and other claims;

 

·                  our ability to effectively manage or sustain our growth and to attain and sustain profitability;

 

·                  our ability to diversify our sources of revenue;

 

·                  our future financial and operating results, including our revenue, cost of revenue, gross profit or gross margin, operating expenses (including changes in sales and marketing, research and development and general and administrative expenses) and backlog;

 

·                  our future revenue, hiring plans, expenses, capital expenditures, capital requirements and stock performance;

 

·                  our future products and product features;

 

·                  our expectations concerning our customer retention rates;

 

·                  our ability to maintain, or strengthen awareness of, our brand;

 

·                  perceived or actual security, integrity, reliability, quality or compatibility problems with our solutions, including related to security breaches in our or our customers’ systems, unscheduled downtime or outages;

 

·                  our ability to attract and retain qualified employees and key personnel and expand our overall headcount;

 

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·                  our ability to stay abreast of new or modified laws and regulations faced by our customers and that currently apply or become applicable to our business both in the United States (“U.S.”) and internationally, including laws and regulations related to export compliance; and

 

·                  the future trading prices of our common stock and the impact of securities analysts’ reports on these prices.

 

We might not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the section titled “Risk Factors,” which could cause actual results or events to differ materially from the forward-looking statements that we make. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q.

 

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits completely and with the understanding that our actual future results may be materially different from what we expect. The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

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PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CARBON BLACK, INC.

 

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

March 31, 2018

 

December 31, 2017

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

33,686

 

$

36,073

 

Accounts receivable, net of allowances of $147 and $124 as of March 31, 2018 and December 31, 2017, respectively

 

36,800

 

60,850

 

Prepaid expenses and other current assets

 

7,857

 

6,040

 

Deferred commissions

 

10,440

 

9,551

 

Total current assets

 

88,783

 

112,514

 

Deferred commissions, net of current portion

 

20,008

 

20,404

 

Property and equipment, net

 

12,796

 

12,459

 

Intangible assets, net

 

3,701

 

4,092

 

Goodwill

 

119,656

 

119,656

 

Other long-term assets

 

3,649

 

2,436

 

Total assets

 

$

248,593

 

$

271,561

 

Liabilities, Redeemable Convertible and Convertible Preferred Stock and Stockholders’ Equity (Deficit)

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

2,858

 

$

2,481

 

Accrued expenses

 

16,542

 

18,846

 

Deferred revenue

 

123,746

 

130,165

 

Deferred rent

 

1,041

 

944

 

Total current liabilities

 

144,187

 

152,436

 

Deferred revenue, net of current portion

 

38,250

 

38,535

 

Warrant liability

 

5,647

 

2,766

 

Deferred rent, net of current portion

 

2,935

 

3,114

 

Deferred tax liability

 

37

 

33

 

Other long-term liabilities

 

42

 

42

 

Total liabilities

 

191,098

 

196,926

 

Commitments and contingencies (Note 9)

 

 

 

 

 

Redeemable convertible preferred stock (Series B, C, D, E, E-1 and F), $0.001 par value; 94,101,207 shares authorized as of March 31, 2018 and December 31, 2017; 88,741,194 shares issued and outstanding as of March 31, 2018 and December 31, 2017; aggregate liquidation preference of $272,506 as of March 31, 2018

 

373,243

 

333,204

 

Series A convertible preferred stock, $0.001 par value; 8,800,000 shares authorized as of March 31, 2018 and December 31, 2017; 4,036,869 and 3,851,806 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively

 

1,599

 

1,510

 

Stockholders’ equity (deficit):

 

 

 

 

 

Common stock, $0.001 par value; 156,650,000 shares authorized as of March 31, 2018 and December 31, 2017; 11,468,206 and 11,193,366 shares issued and 11,412,802 and 11,139,690 shares outstanding as of March 31, 2018 and December 31, 2017, respectively

 

11

 

11

 

Treasury stock, at cost, 55,404 and 53,676 shares as of March 31, 2018 and December 31, 2017, respectively

 

(6

)

(6

)

Additional paid-in capital

 

 

13,429

 

Accumulated deficit

 

(317,352

)

(273,513

)

Total stockholders’ equity (deficit)

 

(317,347

)

(260,079

)

Total liabilities, redeemable convertible and convertible preferred stock and stockholders’ equity (deficit)

 

$

248,593

 

$

271,561

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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CARBON BLACK, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2018

 

2017

 

Revenue:

 

 

 

 

 

Subscription, license and support

 

$

45,391

 

$

33,005

 

Services

 

3,043

 

2,940

 

Total revenue

 

48,434

 

35,945

 

Cost of revenue:

 

 

 

 

 

Subscription, license and support

 

7,212

 

4,831

 

Services

 

3,003

 

2,770

 

Total cost of revenue

 

10,215

 

7,601

 

Gross profit

 

38,219

 

28,344

 

Operating expenses:

 

 

 

 

 

Sales and marketing

 

30,678

 

24,359

 

Research and development

 

14,922

 

11,547

 

General and administrative

 

10,426

 

4,929

 

Total operating expenses

 

56,026

 

40,835

 

Loss from operations

 

(17,807

)

(12,491

)

Interest income

 

68

 

42

 

Interest expense

 

(23

)

(73

)

Change in fair value of warrant liability

 

(2,881

)

126

 

Other income (expense), net

 

120

 

(26

)

Loss before income taxes

 

(20,523

)

(12,422

)

Provision for income taxes

 

71

 

17

 

Net loss and comprehensive loss

 

(20,594

)

(12,439

)

Accretion of preferred stock to redemption value

 

(40,039

)

(11,647

)

Net loss attributable to common stockholders

 

$

(60,633

)

$

(24,086

)

Net loss per share attributable to common stockholders—basic and diluted

 

$

(5.38

)

$

(2.40

)

Weighted-average common shares outstanding—basic and diluted

 

11,264,252

 

10,039,592

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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CARBON BLACK, INC.

 

CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE AND CONVERTIBLE PREFERRED STOCK AND

STOCKHOLDERS’ DEFICIT

(In thousands, except share amounts)

(Unaudited)

 

 

 

Redeemable
Convertible
Preferred Stock

 

Convertible
Preferred Stock

 

 

Common Stock

 

Treasury Stock

 

 

 

 

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Additional
Paid-in
Capital

 

Accumulated
Deficit

 

Total
Stockholders’
Deficit

 

Balances at December 31, 2017

 

88,741,194

 

$

333,204

 

3,851,806

 

$

1,510

 

 

11,139,690

 

$

11

 

53,676

 

$

(6

)

$

13,429

 

$

(273,513

)

$

(260,079

)

Exercise of Series A stock options

 

 

 

185,063

 

89

 

 

 

 

 

 

 

 

 

Exercise of common stock options

 

 

 

 

 

 

274,840

 

 

 

 

976

 

 

976

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

2,389

 

 

2,389

 

Accretion of redeemable convertible preferred stock to redemption value

 

 

40,039

 

 

 

 

 

 

 

 

(16,794

)

(23,245

)

(40,039

)

Repurchase of common stock

 

 

 

 

 

 

(1,728

)

 

1,728

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(20,594

)

(20,594

)

Balances at March 31, 2018

 

 

88,741,194

 

$

373,243

 

4,036,869

 

$

1,599

 

 

11,412,802

 

$

11

 

55,404

 

$

(6

)

$

 

$

(317,352

)

$

(317,347

)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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CARBON BLACK, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2018

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(20,594

)

$

(12,439

)

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

 

 

 

 

 

Depreciation and amortization expense

 

1,905

 

1,658

 

Stock-based compensation expense

 

2,389

 

2,207

 

Provisions for doubtful accounts

 

19

 

(155

)

Non-cash interest expense

 

9

 

1

 

Change in fair value of warrant liability

 

2,881

 

(126

)

Deferred income taxes

 

4

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

24,031

 

14,314

 

Prepaid expenses and other assets

 

(1,861

)

(2,469

)

Deferred commissions

 

(494

)

(154

)

Accounts payable

 

25

 

1,050

 

Accrued expenses

 

(2,305

)

(6,060

)

Deferred revenue

 

(6,703

)

(4,596

)

Deferred rent

 

(82

)

(206

)

Other long-term liabilities

 

(1

)

(67

)

Net cash used in operating activities

 

(777

)

(7,042

)

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(1,495

)

(828

)

Capitalization of internal-use software costs

 

(293

)

(204

)

Net cash used in investing activities

 

(1,788

)

(1,032

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from exercise of stock options

 

1,065

 

557

 

Payments of deferred financing costs

 

(47

)

(76

)

Payments of initial public offering costs

 

(840

)

(2

)

Net cash provided by financing activities

 

178

 

479

 

Net decrease in cash and cash equivalents

 

(2,387

)

(7,595

)

Cash and cash equivalents at beginning of period

 

36,073

 

51,503

 

Cash and cash equivalents at end of period

 

$

33,686

 

$

43,908

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

Accretion of preferred stock to redemption value

 

$

40,039

 

$

11,647

 

Additions to property and equipment included in accounts payable at period end

 

$

353

 

$

1,267

 

Deferred offering costs included in accounts payable at period end

 

$

546

 

$

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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CARBON BLACK, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except share and per share amounts)

 

1. Nature of Business and Basis of Presentation

 

Nature of Business

 

Carbon Black, Inc. (the “Company”) is a leading provider of next-generation endpoint security solutions. The Company’s solutions enable customers to predict, prevent, detect, respond to and remediate cyber attacks before they cause a damaging incident or data breach.

 

The Company was incorporated under the laws of the State of Delaware in December 2002 as Bit 9, Inc. and in April 2005 changed its name to Bit9, Inc. In January 2016, the Company amended its certificate of incorporation to change its name to Carbon Black, Inc. The Company is headquartered in Waltham, Massachusetts.

 

Reverse Stock Split

 

On April 20, 2018, the Company effected a 1-for-2 reverse stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios of Company’s Series B, Series C, Series D, Series E, Series E-1 and Series F preferred stock. Accordingly, all share and per share amounts for all periods presented in the accompanying unaudited consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratios.

 

Initial Public Offering

 

On May 8, 2018, the Company closed its initial public offering (“IPO”), in which it issued and sold 9,200,000 shares of common stock inclusive of the underwriters’ option to purchase additional shares that was exercised in full. The price per share to the public was $19.00. The Company received aggregate proceeds of $162.6 million from the IPO, net of underwriters’ discounts and commissions, and before deducting offering costs of approximately $4.6 million. Upon closing of the IPO, all shares of the Company’s outstanding redeemable convertible and convertible preferred stock automatically converted into 46,079,623 shares of common stock. Additionally, an outstanding warrant which became exercisable upon the closing of the IPO was exercised to purchase 485,985 shares of common stock. Total outstanding shares after closing of the IPO and after conversion of all shares of the Company’s outstanding redeemable convertible preferred stock and the exercise of the common stock warrant was 67,339,488 at May 8, 2018.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, necessary for a fair statement of its financial position as of March 31, 2018, and its results of operations for the three months ended March 31, 2018 and 2017, its statement of redeemable convertible and convertible preferred stock and stockholders’ deficit for the three months ended March 31, 2018, and cash flows for the three months ended March 31, 2018 and 2017. The condensed consolidated balance sheet as of December 31, 2017, was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Therefore, these unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s final prospectus for its IPO dated as of May 4, 2018 and filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended. The results for the three months ended March 31, 2018 are not necessarily indicative of the operating results expected for the full year 2018 or any future period.

 

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Effective January 1, 2018, the Company adopted the requirements of Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”) on a full retrospective basis as discussed in detail in Note 2. All amounts and disclosures set forth in this Quarterly Report on Form 10-Q have been updated to comply with ASC 606.

 

2. Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting periods. Significant estimates and assumptions reflected in these unaudited consolidated financial statements include, but are not limited to, revenue recognition, allowances for doubtful accounts, stock-based compensation, valuation allowances for deferred tax assets, the valuation of common stock and preferred stock and the valuation of preferred stock and common stock warrant liabilities. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ materially from the Company’s estimates.

 

Concentrations of Risk

 

As of March 31, 2018, two channel partners accounted for 23.5% and 14.8% of outstanding accounts receivable, respectively. As of December 31, 2017, two channel partners accounted for 20.2% and 16.2% of outstanding accounts receivable, respectively. For the three months ended March 31, 2018, two channel partners represented 23.1% and 16.1%, respectively, of total revenue. During the three months ended March 31, 2017, one channel partner represented 27.0% of total revenue.

 

Impact of Recently Adopted Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASC 606, which supersedes existing revenue recognition guidance under GAAP. The Company adopted ASC 606 effective January 1, 2018 using the full retrospective method, which required the Company to restate each prior reporting period presented for the impact of adoption of the standard.

 

The Company’s recognition of total revenue related to subscription (i.e., term-based) licenses, cloud-based subscriptions, access to the threat intelligence capabilities of the Cb Predictive Security Cloud, maintenance services and customer support, and stand-alone professional services remain substantially unchanged under the new standard. However, as further discussed herein, the timing of recognition related to certain aspects of subscription (i.e. term-based) licenses, perpetual licenses and associated professional services is different under the new standard.

 

For subscription license sales of Cb Protection and Cb Response, under the new standard, the Company considers the software license and the access to the threat intelligence capabilities of the Cb Predictive Security Cloud, which provides continuous updates of real-time threat intelligence, to be a single performance obligation. As a result, the arrangement consideration allocated to the software license is deferred on the Company’s balance sheet and recognized ratably over the term of the subscription as the performance obligation is satisfied. However, under the new standard, the Company is no longer required to delay the commencement of revenue recognition of subscription licenses until the commencement of any professional services and training sold with the subscription license due to the lack of vendor-specific objective evidence (“VSOE”) of its longest delivered service elements, maintenance and support. While under the new standard, maintenance services and customer support related to subscription licenses are a stand-alone performance obligation, the related revenue continues to be recognized ratably over the term of the maintenance and support arrangement as the performance obligation is satisfied.

 

For its infrequent sales of perpetual licenses of Cb Protection and Cb Response, prior to the adoption of ASC 606, the Company recognized revenue ratably over the longest service period of any deliverable in the arrangement, which was generally the maintenance and support term, due to the lack of VSOE of fair value for its maintenance and support offerings. Under the new standard, the Company is no longer required to delay revenue recognition of perpetual licenses until the commencement of any bundled professional services and training sold with the perpetual license. Further, the Company recognizes the revenue related to the sale of perpetual software licenses ratably over the customer’s estimated economic life, which the Company has estimated to be five years, rather than over the initially committed period of maintenance and support.

 

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In addition, under the new standard, for subscription and perpetual licenses that are sold with professional services in a combined arrangement, the professional services represent a separate performance obligation and the Company recognizes revenue associated with the professional services as such services are performed. Revenue associated with professional services sold in a combined arrangement with subscription and perpetual licenses was previously recognized ratably over the longest service period of any deliverable in the arrangement, which was generally the maintenance and support term, due to the lack of VSOE of fair value for the Company’s maintenance and support offerings.

 

Another significant provision of the new standard requires the capitalization and amortization of costs associated with obtaining a contract, such as sales commissions. Under the new standard, all incremental costs to acquire a contract are capitalized and amortized using a systematic basis over the pattern of transfer of the goods and services to which the asset relates. Under the previous standard, the Company capitalized commission costs that were incremental and directly related to the acquisition of a customer arrangement. The commission costs were capitalized when earned and were amortized as expense over the period that the revenue was recognized for the related non-cancelable customer arrangement in proportion to the recognition of revenue, without regard to anticipated customer renewals. Under the new standard, the Company continues to capitalize all incremental commission costs to obtain a customer arrangement, but now amortizes the capitalized costs on a straight-line basis over the estimated customer relationship period, which includes anticipated customer renewals, because the Company anticipates that a majority of customers will renew their license and cloud-based subscriptions and the commissions paid by the Company for such renewals are not commensurate with the commissions paid for new sales. Accordingly, this has resulted in the Company’s capitalized commission costs being amortized to expense over a longer period under the new standard than under the prior guidance. The Company has estimated the customer relationship period to be five years.

 

The Company adjusted its consolidated financial statements due to the adoption of ASC 606. Select unaudited consolidated balance sheet line items, which reflect the adoption of ASC 606 are as follows:

 

 

 

As of December 31, 2017

 

 

 

As Previously
Reported

 

Adjustments for
ASC 606
Adoption

 

As Adjusted

 

Balance Sheet:

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Deferred commissions, current portion

 

$

15,195

 

$

(5,644

)

$

9,551

 

Deferred commissions, net of current portion

 

3,811

 

16,593

 

20,404

 

Liabilities, redeemable convertible and convertible preferred stock and stockholders’ equity (deficit)

 

 

 

 

 

 

 

Deferred revenue, current portion

 

$

132,278

 

$

(2,113

)

$

130,165

 

Deferred revenue, net of current portion

 

31,902

 

6,633

 

38,535

 

Accumulated deficit

 

$

(279,942

)

$

6,429

 

$

(273,513

)

 

Select unaudited consolidated statement of operations line items, which reflect the adoption of ASC 606 are as follows:

 

 

 

Three Months Ended March 31, 2017

 

 

 

As Prepared
under ASC 605

 

Adjustments for
ASC 606
Adoption

 

As Adjusted

 

Consolidated Statement of Operations

 

 

 

 

 

 

 

Subscription, license and support

 

$

33,739

 

$

(734

)

$

33,005

 

Services

 

3,023

 

(83

)

2,940

 

Total revenue

 

36,762

 

(817

)

35,945

 

Gross profit

 

29,161

 

(817

)

28,344

 

Sales and marketing

 

25,297

 

(938

)

24,359

 

Total operating expenses

 

41,773

 

(938

)

40,835

 

Loss from operations

 

(12,612

)

121

 

(12,491

)

Loss before income taxes

 

(12,543

)

121

 

(12,422

)

Net loss and comprehensive loss

 

$

(12,560

)

$

121

 

$

(12,439

)

 

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Select unaudited consolidated statement of cash flow line items, which reflect the adoption of ASC 606 are as follows:

 

 

 

Three Months Ended March 31, 2017

 

 

 

As Prepared
under ASC 605

 

Adjustments for
ASC 606
Adoption

 

As Adjusted

 

Consolidated Statement of Cash Flows

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(12,560

)

$

121

 

$

(12,439

)

Changes in operating assets and liabilities, excluding the impact of acquisition of businesses:

 

 

 

 

 

 

 

Deferred commissions

 

784

 

(938

)

(154

)

Deferred revenue

 

$

(5,413

)

$

817

 

$

(4,596

)

 

Summary of Significant Accounting Policies

 

Excluding the impact of the adoption of ASC 606, there have been no changes to the Company’s significant accounting policies described in the Company’s final prospectus for its IPO dated as of May 4, 2018 and filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended.

 

Revenue Recognition

 

The Company generates revenue through relationships with channel partners and through its direct sales force primarily from three sources: (i) the sale of subscription (i.e., term-based) and perpetual licenses for the Company’s Cb Protection and Cb Response software products along with access to and the right to utilize the threat intelligence capabilities of the Cb Predictive Security Cloud, as well as maintenance services and customer support (collectively, “support”), (ii) cloud-based software-as-a-service (“SaaS”) subscriptions for access to the Company’s Cb Response and Cb Defense software products, and (iii) professional services and training (collectively, “services”).

 

In accordance with ASC 606, revenue is recognized when a customer obtains control of promised products or services. The amount of revenue recognized reflects the consideration that the Company expects to be entitled to receive in exchange for these products or services. The Company applies the following five steps to recognize revenue:

 

1)             Identification of the contract, or contracts, with a customer

 

The Company considers the terms and conditions of its contracts and its customary business practices to identify contracts under ASC 606. The Company considers that it has a contract with a customer when the contract is approved, the Company can identify each party’s rights regarding the products or services to be transferred, the Company can identify the payment terms for the products or services to be transferred, the Company has determined that the customer has the ability and intent to pay, and the contract has commercial substance. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, credit and financial information pertaining to the customer.

 

2)             Identification of the performance obligation(s) in the contract

 

Performance obligations promised in a contract are identified based on the products or services that will be transferred to the customer that are capable of being distinct, whereby the customer can benefit from the product or services either on their own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the products or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised products or services, the Company applies judgment to determine whether promised products or services are capable of being distinct, and are distinct in the context of the contract. If these criteria are not met, the promised products or services are accounted for as a combined performance obligation.

 

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3)             Determination of the transaction price

 

The transaction price is determined based on the consideration that the Company will be entitled to in exchange for transferring products or services to the customer. Variable consideration is included in the transaction price, if, in the Company’s judgment, it is probable that no significant future reversal of cumulative revenue under the contract will occur.

 

In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that its contracts generally do not include a significant financing component. The primary purpose of the Company’s invoicing terms is to provide customers with simplified and predictable ways of purchasing its products and services, not to receive financing from its customers or to provide customers with financing. An example is invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period.

 

4)             Allocation of the transaction price to performance obligations in the contract

 

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on relative standalone selling price (“SSP”) basis. The Company determines SSP based on the price at which the performance obligation is sold separately. If the SSP is not observable through past transactions, the Company estimates the SSP taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligation.

 

5)             Recognition of revenue when, or as, a performance obligation is satisfied

 

Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised product or service to a customer. The Company recognizes revenue when it transfers control of the products or services to the customer for an amount that reflects the consideration that the Company expects to receive in exchange for those products or services.

 

Subscription, License and Support Revenue

 

Substantially all of the Company’s software arrangements contain multiple performance obligations that include a combination of software licenses, cloud-based subscriptions, support, professional services and training.

 

The Company’s Cb Protection and Cb Response products are offered through subscription or perpetual software licenses, with a substantial majority of its customers selecting a subscription license. Subscription licenses include access to and the right to utilize the threat intelligence capabilities of the Cb Predictive Security Cloud as well as ongoing support, which provides customers with telephone and web-based support, bug fixes and repairs and software updates on a when-and-if-available basis. The Cb Predictive Security Cloud automatically distributes real-time threat intelligence, such as detection algorithms, reputation scores and attack classifications, to the Company’s customers. Substantially all customers who purchase licenses on a perpetual basis also purchase an agreement for support and an agreement for access to and the right to utilize the threat intelligence capabilities of the Cb Predictive Security Cloud. For subscription or perpetual license sales of Cb Protection and Cb Response, the Company considers the software license and access to the threat intelligence capabilities of the Cb Predictive Security Cloud, to be a single performance obligation.

 

Subscription (i.e. term-based) revenue is recognized on a ratable basis over the contract term beginning on the date the software is delivered to the customer. Revenue for cloud-based subscriptions is recognized on a ratable basis over the term of the subscription beginning on the date the customer is given access to the platform. Maintenance services and customer support revenue related to subscription licenses is recognized ratably over the term of the maintenance and support arrangement as this performance obligation is satisfied. Revenue from the infrequent sales of perpetual software licenses is recognized ratably over the customer’s estimated economic life, which the Company has estimated to be five years, beginning on the date the software is delivered to the customer. Maintenance services and customer support revenue related to perpetual licenses is recognized ratably over the term of the maintenance and support arrangement as this performance obligation is satisfied.

 

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Table of Contents

 

Services Revenue

 

The Company provides professional services to customers, primarily in the form of deployment, and training services. Services are typically sold together with licenses of the Company’s software products and, to a lesser extent, on a stand-alone basis. Services are priced separately and are considered distinct from the Company’s software license. The professional services can be performed by a third party and have a history of consistent pricing by the Company. Professional services are sold as time-and-materials contracts based on the number of hours worked and at contractually agreed-upon hourly rates, and also on a fixed-fee basis. Revenue from professional services and training sold on a stand-alone basis or in a combined arrangement is recognized as those services are rendered as control of the services passes to the customer over time.

 

The Company’s employees may incur out-of-pocket expenses when providing services to customers that are reimbursable from the customer under the terms of the service contract. The Company bills any out-of-pocket expenses incurred in the performance of these services to the customer. The expenses are classified on a gross basis as revenue and costs of revenue in the unaudited consolidated statements of operations and comprehensive loss. The Company’s determination of a gross presentation is based on an assessment of the relevant facts and circumstances, including the fact that the Company’s customers, rather than the Company, benefit from the expenditures and the Company bears the credit risk of the reimbursement until it receives reimbursement from the customer.

 

Variable Consideration

 

Revenue is recorded at the net sales price, which is the transaction price. The Company does not offer refunds, rebates or credits to customers in the normal course of business. The impact of variable consideration has not been material.

 

Contract Costs

 

The Company capitalizes commission costs that are incremental and directly related to the acquisition of customer agreements. Commissions are earned by the Company’s sales force and paid in full upon the receipt of customer orders for new arrangements or renewals. Commission costs are capitalized when earned and are amortized as expense over an estimated customer relationship period of 5 years. The Company determined the estimated customer relationship period by taking into consideration the contractual term and expected renewals of customer contracts, its technology and other factors, including the fact that commissions paid on renewals are not commensurate with commissions paid on new sales.

 

Commissions paid relating to contract renewals are deferred and amortized over the related renewal period. Costs to obtain a contract for service arrangements are expensed as incurred in accordance with the practical expedient as the contractual period for services is one year or less.

 

As of March 31, 2018 and December 31, 2017, the Company recorded $30,448 and $29,955, respectively, of deferred commission costs in the consolidated balance sheet. As of March 31, 2017 and December 31, 2016, the Company recorded $21,847 and $21,693 of deferred commission costs in the consolidated balance sheet. Commission costs capitalized as deferred commissions during the three months ended March 31, 2018 and 2017 totaled $3,544 and $2,328, respectively. Amortization of deferred commissions during the three months ended March 31, 2018 and 2017 totaled $3,051 and $2,174, respectively, and is included in sales and marketing expense in the unaudited consolidated statements of operations and comprehensive loss. The Company periodically reviews these deferred costs to determine whether events or changes in circumstances have occurred that could impact the period of benefit of these deferred sales commissions.

 

The Company does not incur any material costs to fulfill customer contracts.

 

Deferred Revenue

 

Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract. Such amounts are recognized as revenue over the contractual period. During the three months ended March 31, 2018, the Company recognized revenue of $44,021 which was included in the deferred revenue balance as of December 31, 2017.

 

The Company receives payments from customers based upon contractual billing schedules; accounts receivable are recorded when the right to consideration becomes unconditional. The Company generally bills its customers in advance, and payment terms on invoiced amounts are typically 30 to 90 days. Contract costs include amounts related to our contractual right to consideration for completed and partially completed performance obligations that may not have been invoiced; such amounts have been insignificant to date.

 

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Table of Contents

 

Disaggregation of Revenue

 

The following table summarizes revenue from contracts with customers for the three months ended March 31, 2018 and 2017:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

2017

 

 

 

(Unaudited)

 

Subscription and support revenue

 

$

32,095

 

$

27,434

 

Cloud-based subscription revenue

 

11,692

 

3,969

 

Perpetual license revenue

 

1,604

 

1,602

 

Services revenue

 

3,043

 

2,940

 

Total revenue

 

$

48,434

 

$

35,945

 

 

The following table summarizes the revenue by region based on the billing address of customers who have contracted to use our products or services for the three months ended March 31, 2018 and 2017:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

2017

 

United States

 

$

40,493

 

$

31,730

 

All other

 

7,941

 

$

4,215

 

Total revenue

 

$

48,434

 

$

35,945

 

 

Transaction price allocated to remaining performance obligations

 

Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and backlog. The Company defines backlog as contractually committed orders for subscriptions and support services for which the associated revenue has not been recognized and the customer has not been invoiced. As of March 31, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was $161,996 in deferred revenue and $41,763 in backlog.

 

The Company expects to recognize these remaining performance obligations as follows (in percentages):

 

 

 

Total

 

Less than 1 year

 

1-2 Years

 

More than
2 years

 

Deferred revenue

 

100

%

76

%

15

%

9

%

Backlog

 

100

%

42

%

44

%

14

%

 

Impact of Recently Issued Accounting Standards

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This guidance is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The Company plans to adopt this standard as of January 1, 2019. This standard requires a modified retrospective transition approach for all leases existing at or entered into after, the date of initial application, with an option to use certain transition relief. The Company is in the process of identifying the population of potential lease arrangements and evaluating these arrangements in the context of the new guidance. While the Company continues to evaluate the effect of adoption on its consolidated financial statements, the Company expects the adoption will result in the recognition of right-of-use assets and lease liabilities that were not previously recognized, which will increase total assets and liabilities on the Company’s consolidated balance sheet.

 

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (“ASU 2018-02”), which provides for the reclassification of the effect of remeasuring deferred tax balances related to items within accumulated other comprehensive income to retained earnings resulting from the Tax Cuts and Jobs Act, or Tax Act. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2018-02 will have on its consolidated financial statements.

 

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Table of Contents

 

3. Fair Value of Financial Instruments

 

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:

 

 

 

Fair Value Measurements as of
March 31, 2018 Using:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

21,941

 

$

 

$

 

$

21,941

 

 

 

$

21,941

 

$

 

$

 

$

21,941

 

Liabilities:

 

 

 

 

 

 

 

 

 

Series D preferred stock warrant liability

 

$

 

$

 

$

1,320

 

$

1,320

 

Common stock warrant liability

 

 

 

4,327

 

4,327

 

 

 

$

 

$

 

$

5,647

 

$

5,647

 

 

 

 

Fair Value Measurements as of
December 31, 2017 Using:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

21,597

 

$

 

$

 

$

21,597

 

 

 

$

21,597

 

$

 

$

 

$

21,597

 

Liabilities:

 

 

 

 

 

 

 

 

 

Series D preferred stock warrant liability

 

$

 

$

 

$

992

 

$

992

 

Common stock warrant liability

 

 

 

1,774

 

1,774

 

 

 

$

 

$

 

$

2,766

 

$

2,766

 

 

As of March 31, 2018 and December 31, 2017, the Company’s cash equivalents, which were invested in money market funds, were valued based on Level 1 inputs. During the three months ended March 31, 2018 and 2017, there were no transfers between Level 1, Level 2 and Level 3.

 

The warrant liabilities in the tables above consisted of the fair values of warrants for the purchase of preferred stock and common stock and are based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The Company’s valuation of the liabilities for preferred stock warrants and the common stock warrant utilized the Black-Scholes option-pricing model, which incorporates assumptions and estimates to value the preferred stock warrants and the common stock warrant. The Company assesses these assumptions and estimates on a quarterly basis as additional information impacting the assumptions is obtained. Changes in the fair value of the preferred stock warrants and the common stock warrant are recognized in the unaudited consolidated statements of operations and comprehensive loss.

 

Changes in the fair values of the Company’s preferred stock warrant liabilities and common stock warrant liability for the three months ended March 31, 2018 were as follows:

 

 

 

Series D
Preferred Stock
Warrant Liability

 

Common Stock
Warrant Liability

 

Fair value at December 31, 2017

 

$

992

 

$

1,774

 

Change in fair value

 

328

 

2,553

 

Fair value at March 31, 2018

 

$

1,320

 

$

4,327

 

 

Valuation Assumptions

 

Inputs used in the Black-Scholes option-pricing model to estimate the fair value of the Company’s common stock and Series D preferred stock warrant liabilities include unobservable inputs and assumptions, such as expected volatility, expected term, and the value of the underlying common or preferred stock.

 

The following tables summarize the Company’s valuation assumptions used in determining the fair value of the common and preferred stock warrants at March 31, 2018 and December 31, 2017:

 

 

 

March 31, 2018

 

 

 

Series D
Preferred Stock
Warrants

 

Common Stock
Warrants

 

Risk-free interest rate

 

2.57

%

0.19

%

Expected term (in years)

 

5.39

 

0.09

 

Expected volatility

 

40.00

%

28.30

%

Expected dividend yield

 

0.0

%

0.0

%

 

 

 

December 31, 2017

 

 

 

Series D
Preferred Stock
Warrants

 

Common Stock
Warrants

 

Risk-free interest rate

 

2.23

%

1.03

%

Expected term (in years)

 

5.64

 

0.58

 

Expected volatility

 

40.00

%

29.24

%

Expected dividend yield

 

0.0

%

0.0

%

 

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Table of Contents

 

4. Property and Equipment, Net

 

Property and equipment, net consisted of the following:

 

 

 

March 31,
2018

 

December 31,
2017

 

Computer equipment

 

$

13,120

 

$

12,349

 

Computer software

 

3,149

 

3,048

 

Leasehold improvements

 

6,417

 

6,327

 

Furniture and fixtures

 

3,093

 

2,870

 

Office equipment

 

104

 

99

 

Construction in progress

 

368

 

 

Internal-use software

 

2,272

 

1,979

 

 

 

28,523

 

26,672

 

Less: Accumulated depreciation and amortization

 

(15,727

)

(14,213

)

 

 

$

12,796

 

$

12,459

 

 

Depreciation and amortization expense related to property and equipment, including internal-use software, was $1,514 and $1,267 for the three months ended March 31, 2018 and 2017, respectively.

 

During the three months ended March 31, 2018 and 2017, the Company capitalized $293 and $204, respectively, of costs related to the development of internal-use software and recorded amortization expense of capitalized internal-use software of $157 and $88, respectively.

 

5. Goodwill and Intangible Assets

 

Goodwill was $119,656 as of March 31, 2018 and December 31, 2017.

 

Identifiable intangible assets consisted of the following:

 

 

 

March 31, 2018

 

December 31, 2017

 

 

 

Gross
Amount

 

Accumulated
Amortization

 

Carrying
Value

 

Gross
Amount

 

Accumulated
Amortization

 

Carrying
Value

 

License agreement

 

$

150

 

$

(116

)

$

34

 

$

150

 

$

(113

)

$

37

 

Developed technology

 

7,301

 

(3,710

)

3,591

 

7,301

 

(3,344

)

3,957

 

Trade name

 

440

 

(364

)

76

 

440

 

(342

)

98

 

Customer relationships

 

2,950

 

(2,950

)

 

2,950

 

(2,950

)

 

 

 

$

10,841

 

$

(7,140

)

$

3,701

 

$

10,841

 

$

(6,749

)

$

4,092

 

 

Amortization expense related to intangible assets was $391 for both the three months ended March 31, 2018 and 2017.

 

Estimated future amortization expense of the identifiable intangible assets as of March 31, 2018 is as follows:

 

Year Ending December 31,

 

 

 

2018 (remaining nine months)

 

$

1,172

 

2019

 

1,130

 

2020

 

1,015

 

2021

 

384

 

 

 

$

3,701

 

 

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Table of Contents

 

6. Debt

 

As of March 31, 2018 and December 31, 2017, the Company had $0 of outstanding borrowings under its line of credit with a financial institution (the “Line of Credit”).

 

7. Preferred Stock

 

During the three months ended March 31, 2018, certain employees exercised options to purchase 185,063 of Series A preferred stock in exchange for cash proceeds of $89.

 

During three months ended March 31, 2018 and 2017, the Company adjusted the carrying value of each series of redeemable convertible preferred stock by $40,039 and $11,647 respectively. These adjustments resulted in an increase to the net loss attributable to common stockholders for each period.

 

As of March 31, 2018 and December 31, 2017, the liquidation preference of the redeemable convertible preferred stock was $272,506.

 

8. Equity Award Plans

 

Options to Purchase Series A Preferred Stock

 

The following table summarizes the Company’s Series A preferred stock option activity since December 31, 2017:

 

 

 

Number of
Shares

 

Weighted-
Average
Exercise Price

 

Weighted-
Average Remaining
Contractual Term

 

Aggregate
Intrinsic
Value

 

 

 

 

 

 

 

(in years)

 

 

 

Outstanding at December 31, 2017

 

4,689,576

 

$

0.98

 

5.18

 

$

10,539

 

Granted

 

195,312

 

3.60

 

 

 

 

 

Exercised

 

(185,063

)

0.48

 

 

 

 

 

Forfeited

 

(32,010

)

2.27

 

 

 

 

 

Outstanding at March 31, 2018

 

4,667,815

 

$

1.10

 

5.23

 

$

16,322

 

Vested and expected to vest at March 31, 2018

 

4,561,079

 

$

1.06

 

5.14

 

$

16,167

 

Options vested and exercisable at March 31, 2018

 

3,936,150

 

$

0.75

 

4.57

 

$

15,145

 

 

The assumptions that the Company used to determine the fair value of the Series A preferred stock options granted to employees and directors were as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

2017

 

Risk-free interest rate

 

2.74%

 

2.17%

 

Expected term (in years)

 

6.25

 

6.25

 

Expected volatility

 

43.85%

 

47.42%

 

Expected dividend yield

 

0.0%

 

0.0%

 

 

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Table of Contents

 

Options to Purchase Common Stock

 

The following table summarizes the Company’s common stock option activity since December 31, 2017 under all common stock option plans:

 

 

 

Number of
Shares

 

Weighted-
Average
Exercise Price

 

Weighted-
Average Remaining
Contractual Term

 

Aggregate
Intrinsic
Value

 

 

 

 

 

 

 

(in years)

 

 

 

Outstanding at December 31, 2017

 

14,183,221

 

$

4.89

 

7.16

 

$

17,626

 

Granted

 

1,804,105

 

7.46

 

 

 

 

 

Exercised

 

(274,840

)

3.55

 

 

 

 

 

Forfeited

 

(343,697

)

5.68

 

 

 

 

 

Outstanding at March 31, 2018

 

15,368,789

 

$

5.19

 

7.32

 

$

90,459

 

Vested and expected to vest at March 31, 2018

 

14,698,656

 

$

5.14

 

7.25

 

$

87,329

 

Options vested and exercisable at March 31, 2018

 

7,986,329

 

$

4.27

 

5.98

 

$

54,358

 

 

The assumptions that the Company used to determine the fair value of the common stock options granted to employees and directors were as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

2017

 

Risk-free interest rate

 

2.74%

 

2.17%

 

Expected term (in years)

 

6.25

 

6.25

 

Expected volatility

 

43.85%

 

47.42%

 

Expected dividend yield

 

0.0%

 

0.0%

 

 

Restricted Stock Unit (“RSU”) Activity

 

The following table summarizes the Company’s RSU activity since December 31, 2017 under all common stock option plans:

 

 

 

Number of
Shares

 

Weighted-
Average
Grant Date Fair
Value Per Share

 

Weighted-
Average Remaining
Contractual Term

 

Aggregate
Intrinsic
Value

 

 

 

 

 

 

 

(in years)

 

 

 

Outstanding at December 31, 2017

 

 

$

 

 

$

 

Granted

 

394,500

 

7.46

 

 

 

 

 

Vested

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

Outstanding at March 31, 2018

 

394,500

 

$

7.46

 

1.86

 

$

4,371

 

RSUs vested and expected to vest at March 31, 2018

 

345,131

 

$

 

1.78

 

$

3,824

 

RSUs vested and exercisable at March 31, 2018

 

 

$

 

 

$

 

 

In January 2018, the Company granted restricted stock units that may be settled for an aggregate of 394,500 shares of common stock to employees and directors as compensation for future services to the Company. The restricted stock units vest over terms of one to four years from date of grant, subject to the closing of the IPO of the Company’s common stock.

 

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Stock-Based Compensation

 

Stock-based compensation expense was classified in the unaudited consolidated statements of operations and comprehensive loss as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

2017

 

Cost of subscription, license and support revenue

 

$

136

 

$

75

 

Cost of services revenue

 

57

 

54

 

Sales and marketing expense

 

936

 

873

 

Research and development expense

 

564

 

619

 

General and administrative expense

 

696

 

586

 

 

 

$

2,389

 

$

2,207

 

 

As of March 31, 2018, total unrecognized compensation cost related to the unvested Series A preferred stock-based awards was $1,110, which is expected to be recognized over weighted-average periods of 2.34 years.

 

As of March 31, 2018, total unrecognized compensation cost related to the unvested common stock-based awards was $24,239, which is expected to be recognized over weighted-average periods of 2.70 years.

 

As of March 31, 2018, the Company had a total of 394,500 RSUs with a performance condition dependent upon the completion of an IPO. If an IPO had occurred as of March 31, 2018, the Company would have recorded stock-based compensation expense of $190 and the unrecognized compensation cost related to these performance-based RSUs would have been $2,740 to be amortized over a weighted-average period of approximately 3.36 years.

 

9. Commitments and Contingencies

 

Operating Leases

 

The Company leases office facilities under various non-cancelable operating leases that expire at various dates through June 2027. Rent expense for non-cancelable operating leases with free rental periods or scheduled rent increases is recognized using the straight-line method over the term of the lease. Improvement reimbursements from landlords are amortized on a straight-line basis into rent expense over the terms of the leases. The difference between required lease payments and straight-lined rent expense is recorded as deferred rent. Rent expense related to the Company’s leased office space was $1,043 and $823 for the three months ended March 31, 2018 and 2017, respectively.

 

The following table summarizes the future minimum lease payments due under operating leases as of March 31, 2018:

 

Year Ending December 31,

 

 

 

2018 (remaining nine months)

 

$

3,821

 

2019

 

5,093

 

2020

 

5,135

 

2021

 

4,973

 

2022

 

2,191

 

Thereafter

 

1,704

 

 

 

$

22,917

 

 

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Hosting Services Agreement

 

In September 2017, the Company entered a non-cancelable contractual agreement related to the hosting of its data processing, storage and other computing services. The agreement, as amended, expires in November 2020. The following table summarizes the future minimum payments committed under the hosting agreement as of March 31, 2018:

 

Year Ending December 31,

 

 

 

2018 (remaining nine months)

 

$

13,052

 

2019

 

15,333

 

2020

 

10,667

 

 

 

$

39,052

 

 

Indemnifications

 

Under the indemnification provisions of the Company’s standard sales-related contracts, the Company agreed to defend end-customers against third-party claims asserting infringement of certain intellectual property rights, which may include patents, copyrights, trademarks, or trade secrets, and to pay judgments entered on such claims. The Company’s exposure under these indemnification provisions is generally limited to the total amount paid by the end-customer under the agreement. However, certain agreements include indemnification provisions that could potentially expose the Company to losses in excess of the amount received under the agreement. In addition, the Company indemnifies its officers, directors and certain key employees while they are serving in good faith in their capacities. Through March 31, 2018, there have been no claims under any indemnification provisions.

 

Litigation

 

On March 21, 2018, Finjan, Inc. (“Finjan”) filed a complaint in the U.S. District Court for the Northern District of California alleging that the Company’s products and services infringe at least four U.S. patents purportedly owned by Finjan, seeking, among other things, a judgment holding that the Company has infringed four asserted patents, a preliminary and permanent injunction preventing alleged continued infringement of one of the asserted patents, past damages not less than a reasonable royalty, enhanced damages for alleged willful infringement, costs and reasonable attorneys’ fees, and pre- and post-judgment interest. While the Company does not believe the complaint has merit, on April 6, 2018, the Company entered into a settlement agreement with Finjan, resolving all claims made pursuant to the complaint. In connection with the settlement agreement, the Company accrued a liability of $3,900 as of March 31, 2018, which is reflected in general and administrative expenses on the Company’s unaudited consolidated statements of operations and comprehensive loss and accrued expenses on the Company’s unaudited consolidated balance sheet, reflecting the aggregate amount of payments to be made to Finjan pursuant to the settlement, all of which will be paid in 2018. In April 2018, the complaint was dismissed and the Company made the first payment of $1,300.

 

10. Income Taxes

 

During the three months ended March 31, 2018 and 2017, the Company recorded an income tax provision of $71 and $17, respectively, primarily due to foreign income taxes.

 

In connection with the Tax Cuts and Jobs Act (the “Act”) enacted in December 2017, the Company made provisional estimates of the effects of the Act on its existing deferred tax balances and the one-time transition tax for the year end December 31, 2017. The Act did not have significant impact on the Company’s consolidated financial statements for the year ended December 31, 2017 as a result of the valuation allowance maintained against the Company’s U.S. deferred tax assets. However, the Company’s provisional estimate associated with the reduction in the U.S. federal corporate tax rate from 35% to 21% impacted the change in valuation allowance and tax rate change components of the Company’s effective tax rate reconciliation as well as its ending deferred tax assets, deferred tax liabilities and valuation allowance. The income tax provision for the three months ended March 31, 2018 did not reflect any adjustment to the provisional amounts previously recorded. The ultimate impact of the Act may differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made and additional regulatory guidance that may be issued. The Company’s accounting treatment is expected to be complete in the fourth quarter of 2018.

 

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11. Net Loss per Share

 

Net Loss per Share

 

Basic and diluted net loss per share attributable to common stockholders was calculated as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

2017

 

Numerator:

 

 

 

 

 

Net loss

 

$

(20,594

)

$

(12,439

)

Accretion of preferred stock to redemption value

 

(40,039

)

(11,647

)

Net loss attributable to common stockholders

 

$

(60,633

)

$

(24,086

)

Denominator:

 

 

 

 

 

Weighted-average number of common shares outstanding—basic and diluted

 

11,264,252

 

10,039,592

 

Net loss per share attributable to common stockholders—basic and diluted

 

$

(5.38

)

$

(2.40

)

 

The Company’s potential dilutive securities, which include stock options, redeemable convertible and convertible preferred stock, and warrants to purchase common stock and preferred stock, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted-average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect:

 

 

 

As of March 31,

 

 

 

2018

 

2017

 

Options to purchase common stock

 

15,368,789

 

13,295,581

 

Unvested restricted stock units

 

394,500

 

 

Options to purchase Series E-1 preferred stock (as converted to common stock)

 

837,835

 

837,835

 

Warrants to purchase common stock

 

106,250

 

106,250

 

Warrants to purchase redeemable convertible preferred stock (as converted to common stock)

 

167,500

 

202,628

 

Redeemable convertible preferred stock (as converted to common stock)

 

44,370,560

 

44,225,108

 

 

 

61,245,434

 

58,667,402

 

 

The table above excludes shares of common stock issuable upon the conversion of Series A preferred stock and upon the exercise of options to purchase shares of Series A preferred stock as such shares are only convertible into common stock upon the closing of an IPO. The table also excludes shares of common stock issuable upon the exercise of the Company’s liability-classified common stock warrant as the warrant is only exercisable upon the closing of an IPO.

 

12. Subsequent Events

 

2018 Stock Option and Incentive Plan

 

On April 17, 2018, the Company’s board of directors adopted, and on April 19, 2018, the Company’s stockholders approved, the 2018 Stock Option and Incentive Plan (the “2018 Plan”), which became effective on May 2, 2018, the date immediately preceding the effectiveness of the registration statement for the Company’s IPO. The 2018 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock units, restricted stock awards, unrestricted stock awards and dividend equivalent rights. The number of shares initially reserved for issuance under the 2018 Plan is 6,075,051, plus the shares of common stock remaining available for issuance under the Company’s 2012 Stock Option and Grant Plan (the “2012 Plan”), which will be automatically increased on January 1, 2019 and each January 1 thereafter by 5% of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31 or a lesser number of shares determined by the Company’s board of directors or the compensation committee of the board of directors. The shares of common stock underlying any awards that are forfeited, canceled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, reacquired

 

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by the Company prior to vesting, satisfied without any issuance of stock, expire or are otherwise terminated by the Company under the 2018 Plan, the 2012 Plan and the Company’s Amended and Restated Equity Incentive Plan will be added back to the shares of common stock available for issuance under the 2018 Plan.

 

2018 Employee Stock Purchase Plan

 

On April 17, 2018, the Company’s board of directors adopted, and on April 19, 2018, the Company’s stockholders approved, the 2018 Employee Stock Purchase Plan (the “ESPP”), which became effective on May 2, 2018, the date immediately preceding the effectiveness of the registration statement for the Company’s initial public offering. A total of 1,735,729 shares of common stock were reserved for issuance under this plan. In addition, the number of shares of common stock that may be issued under the ESPP will be cumulatively increased on January 1, 2019 and each January 1 thereafter through January 1, 2028, by the lesser of (i) 1% of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31, (ii) 1,735,729 shares of common stock or (iii) such lesser number of shares as determined by the compensation committee of the board of directors.

 

Grants of Stock Options and Restricted Stock Units

 

In May 2018, the Company granted options to purchase an aggregate of 885,820 and 216,950 shares of common stock, at an exercise price of $19.00 and $24.97 per share, respectively, to employees as compensation for future services to the Company. The options vest over a term of four years.

 

In May 2018, the Company granted restricted stock units that may be settled for an aggregate of 18,021 shares of common stock to directors as compensation for future services to the Company. The restricted stock units vest on the earlier of (i) one year from the date of grant or (ii) the next annual meeting of the Company stockholders, subject to the grantee maintaining a continuous service relationship with the Company.

 

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

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our consolidated financial statements and related notes included in our final prospectus for our IPO dated as of May 4, 2018 and filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended. In addition to historical consolidated financial information, the following discussion and analysis and information set forth elsewhere in this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this Quarterly Report on Form 10-Q, including those set forth under “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”

 

Overview

 

Carbon Black is a leading provider of next-generation endpoint security solutions. We believe the depth, breadth and real-time nature of our endpoint data, combined with the strength of our analytics platform, provides customers with the most robust and data-intensive solution to address the complete endpoint security lifecycle. Our solutions enable customers to predict, prevent, detect, respond to and remediate cyber attacks before they cause a damaging incident or data breach.

 

We have a strong heritage of innovative technology leadership in multiple endpoint security categories: application control, through our Cb Protection solution; endpoint detection and response, or EDR, through our Cb Response solution; and next-generation antivirus, or NGAV, through our Cb Defense solution.

 

We began selling our initial product in 2005, which was the precursor to Cb Protection. Our initial product focused on delivering endpoint protection for desktops and servers through application control. In February 2014, we acquired Carbon Black, whose solution was the precursor to Cb Response. In 2015, we acquired Objective Logistics Inc., or Objective Logistics, and VisiTrend, Inc., or VisiTrend, primarily to acquire the technical expertise of their employees and certain intellectual property assets. The acquisition of Carbon Black strengthened our position as a leader in advanced threat detection and incident response management solutions, and was an important event for us as it enabled us to provide our customers with solutions designed to address the full endpoint security lifecycle. We believe that our ability to address the full lifecycle of an attack is a critical differentiator versus other endpoint security technologies that address only a portion of the attack lifecycle.

 

In more recent periods, we have focused on satisfying the increasing demand for cloud-based software from our customers and prospects and intend to continue to expand our cloud-based product offerings. In August 2015, we released a cloud-based version of Cb Response to our customers under a software-as-a-service, or SaaS, model. In June 2016, we acquired Confer Technologies, Inc., or Confer, whose solution is currently sold to customers as Cb Defense. The acquisition of Confer was an important event for us as it added key capabilities in the areas of cloud-based, multi-tenant, big-data processing and streaming detection and prevention. With this acquisition, we also entered the next-generation antivirus market. The technology that we acquired in this acquisition is foundational to our predictive security cloud platform, which is designed to address the full endpoint security lifecycle, and to our strategy. The percentage of our total revenue generated by sales of our cloud-based solutions was 24% and 11% in the three months ended March 31, 2018 and 2017, respectively. We have experienced strong growth in the number of customers who purchase our cloud-based solutions, with 1,870 customers as of March 31, 2018 compared to 552 customers as of March 31, 2017.

 

We primarily sell our products through a channel partner go-to-market model, which significantly extends our global market reach and ability to rapidly scale our sales efforts. Our inside sales and field sales representatives work alongside an extensive network of value-added resellers, or VARs, distributors, managed security service providers, or MSSPs, and incident response, or IR, firms. Our MSSP and IR firm channel partners both use and recommend our products to their clients. We have established significant relationships with leading channel partners, including Optiv Security, Inc., a leading VAR and MSSP; CDW Corporation, one of the world’s largest software VARs; Arrow Electronics, Inc., a major global distributor; SecureWorks, Inc., a leading MSSP; and Kroll, a leading IR firm. In addition, we have technology and go-to-market partnerships with both IBM and VMware, enabling us to leverage their sales organizations to reach their large customer bases. In the three months ended March 31, 2018, 95% of our new and add-on business was closed in collaboration with a channel partner. We expect to continue to focus on generating sales to new and existing customers through our channel partners as a part of our growth strategy. When we transact with a channel partner, our contractual arrangement is with the channel partner and not with the end-use customer. However, whether we receive the order from a channel

 

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partner or directly from an end-use customer, our revenue recognition policy and resulting pattern of revenue recognition for the order are the same.

 

Our sales team works closely with our end-use customer prospects at every stage of the sales cycle regardless of whether the prospect is sourced directly or indirectly—from initial information meetings through the implementation of our products with our end-use customers. We believe this coordinated approach to sales allows us to leverage the benefits of channel partners as well as maintain face-to-face connectivity and build long-term, trusted relationships with our customers.

 

Our customers include many of the world’s largest, security-focused enterprises and government agencies that are among the most heavily targeted by cyber adversaries, as well as mid-sized organizations. As of March 31, 2018, we serve over 4,000 customers globally across multiple industries, including 33 of the Fortune 100.

 

We have experienced strong revenue growth, with revenue increasing from $35.9 million in the three months ended March 31, 2017 to $48.4 million for the same period in 2018, representing a 35% annual growth rate. We have a subscription-based revenue model that provides visibility into future revenue. Recurring revenue represented 90% and 87% of our total revenue in the three months ended March 31, 2018 and 2017, respectively. Annual recurring revenue, or ARR, was $182.8 million and $133.3 million as of March 31, 2018 and 2017, respectively, representing a 37% annual growth rate. We define ARR as the annualized value of all active subscription contracts as of the end of the period. ARR excludes revenue from perpetual licenses and services. The percentage of our total recurring revenue generated by sales of our cloud-based solutions was 27% and 13% in the three months ended March 31, 2018 and 2017, respectively. We incurred net losses of $20.6 million and $12.4 million in the three months ended March 31, 2018 and 2017, respectively, as we continued to invest for growth to address the large market opportunity for our platform.

 

Recent Developments

 

Effective January 1, 2018, we adopted the requirements of Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”) on a full retrospective basis as discussed in detail in Note 2 to our unaudited consolidated financial statements. All amounts and disclosures set forth in this Quarterly Report on Form 10-Q have been updated to comply with ASC 606.

 

In May 2018, we closed our initial public offering, or IPO, of 9,200,000 shares of common stock inclusive of the underwriters’ option to purchase additional shares that was exercised in full. The price per share to the public was $19.00 per share. We received aggregate proceeds of $162.6 million from the IPO, net of underwriters’ discounts and commissions, and before deducting offering costs of approximately $4.6 million.

 

On March 21, 2018, Finjan, Inc. (“Finjan”) filed a complaint in the U.S. District Court for the Northern District of California alleging that our products and services infringe at least four U.S. patents purportedly owned by Finjan, seeking, among other things, a judgment holding that we have infringed four asserted patents, a preliminary and permanent injunction preventing alleged continued infringement of one of the asserted patents, past damages not less than a reasonable royalty, enhanced damages for alleged willful infringement, costs and reasonable attorneys’ fees, and pre- and post-judgment interest. While we do not believe the complaint has merit, on April 6, 2018, we entered into a settlement agreement with Finjan, resolving all claims made pursuant to the complaint. In connection with the settlement agreement, we accrued a liability of $3.9 million as of March 31, 2018, which is reflected in general and administrative expenses on our unaudited consolidated statements of operations and comprehensive loss and accrued expenses on our unaudited consolidated balance sheet, reflecting the aggregate amount of payments to be made to Finjan pursuant to the settlement, all of which will be paid in 2018. In April 2018, the complaint was dismissed and we made the first payment of $1.3 million.

 

Key Factors Affecting Our Performance

 

Our historical financial performance has been, and we expect our financial performance in the future to be, primarily driven by the following factors:

 

Market Adoption.  We believe our future success will depend in large part on the growth in the market for next-generation endpoint security. Because network-centric security is no longer adequate, organizations must focus on securing the endpoint. However, while organizations have made significant investments in upgrading to advanced network security solutions, the majority of endpoint security technology in use today relies on multiple agents and uses the same ineffective, traditional signature-based antivirus software originally designed more than 20 years ago. As a result, organizations are increasingly shifting their security budgets toward next-generation endpoint security solutions. We believe that we are well positioned as a market leader to capitalize on this investment cycle and that our ability to address the full lifecycle of a cyber attack will help to drive our market adoption. Additionally, the number

 

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of security professionals has not kept pace with total demand. As the number of threats multiplies, legacy solutions either miss threats or produce more alerts than security teams are able to process and investigate. Organizations are increasingly turning to next-generation solutions, advanced analytics and automation tools to empower their security professionals to increase their efficiency and focus on the highest value cyber security tasks, thereby reducing the need for additional security headcount. Organizations are also addressing the talent gap by relying more on security-focused VARs and trusted partners to augment their internal teams of security experts.

 

Add New Customers.  Our ability to add new customers is a key indicator of our increasing market adoption and future revenue potential. Our customer count, which includes both direct sale customers and customers with one or more subscriptions to our platform through channel partners, grew from 2,648 as of March 31, 2017 to 4,006 as of March 31, 2018, representing a year-over-year increase of 51%. We are focused on continuing to grow our customer base. We have continuously enhanced our endpoint security platform and product offerings, and we have expanded both our domestic and international sales force to drive new customer acquisition. However, our ability to continue to grow our customer base is dependent on a number of factors, including our ability to compete within the increasingly competitive markets in which we participate.

 

Retain our Existing Customers.  A substantial majority of our customers purchase our solutions under a subscription agreement with a term of one or three years. An important component of our revenue growth strategy is to have our existing customers renew their agreements with us. Our ability to retain these customers upon the renewal of their subscription agreement will depend on a number of factors, including customers’ satisfaction or dissatisfaction with our solutions, our ability to enhance our platform and product offerings, competing technologies and trends in corporate spending.

 

Increase Sales to Existing Customers.  Our current customer base provides us with a significant opportunity to drive incremental sales. Our extensible platform allows us to develop new solutions rapidly and at lower cost over time. As we develop and deploy additional security offerings on the Cb Predictive Security Cloud platform, we see significant additional opportunity to cross-sell as customers benefit by addressing multiple security requirements through a single platform. Our ability to increase sales to existing customers will depend on a number of factors, including customers’ satisfaction or dissatisfaction with our solutions, our ability to develop new products, pricing, economic conditions or overall reductions in our customers’ spending levels.

 

Invest in Growth.  We will continue to focus on long-term revenue growth. We believe that our market opportunity is large and we will continue to invest significantly in sales and marketing to grow our customer base, both domestically and internationally. We also expect to continue to invest in research and development to enhance our technology platform and product functionality. In addition to our ongoing investment in research and development, we may also pursue acquisitions of businesses, technologies and assets that complement and expand the functionality of our products and services, expand the functionality of our solutions, add to our technology or security expertise, or bolster our leadership position by gaining access to new customers or markets.

 

Key Metrics

 

We regularly monitor a number of financial and operating metrics, including the following key metrics, in order to measure our current performance and estimate our future performance, as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

2017

 

 

 

(dollar amounts in thousands)

 

Billings

 

$

41,730

 

$

31,349

 

Year-over-year growth

 

33

%

26

%

Short-term billings

 

$

42,015

 

$

31,087

 

Year-over-year growth

 

35

%

27

%

Total revenue

 

$

48,434

 

$

35,945

 

Year-over-year growth

 

35

%

49

%

Recurring revenue

 

$

43,787

 

$

31,403

 

Year-over-year growth

 

39

%

60

%

Recurring revenue as a percentage of total revenue

 

90

%

87

%

Number of customers

 

4,006

 

2,648

 

 

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Billings.  We define billings, a non-GAAP financial measure, as total revenue plus the change in deferred revenue during the period, excluding acquired deferred revenue. Our deferred revenue consists of amounts that have been invoiced to customers but that have not yet been recognized as revenue. Our deferred revenue balance primarily consists of the portion of products and support revenue that will be recognized ratably over the term of the subscription as the performance obligation is satisfied.

 

Most of our revenue is derived from subscriptions to our products with a duration of one or three years. For our subscription arrangements, we typically bill our customers the fee on an annual basis for the upcoming year. For 2017, we changed our policy to require customers with multi-year contract commitments to agree to multi-year upfront billing for the total contract fee. Beginning in 2018, we have reverted to our former policy and will offer customers who make a multi-year contract commitment the option to be billed the total contract fee upfront or to be billed on an annual basis. We expect that many customers who make a multi-year contract commitment will select to be billed on an annual basis, which could result in a lower growth rate for our billings in 2018 compared to 2017.

 

Some of our revenue is derived from perpetual licenses of our products sold with a maintenance and support agreement. For our perpetual licenses, we bill our customers the entire license fee upon delivery of the software, and for support, we typically bill our customers the support fee on an annual basis for the upcoming year.

 

For services sold on a fixed-price basis, we bill customers in advance. For services sold on a time-and-materials basis, we bill customers as such services are performed.

 

We use billings as one factor to evaluate our business because billings is an indicator of current period sales activity and provides visibility into corresponding future revenue growth due to our subscription-based revenue model. Accordingly, we believe that billings provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management. However, it is important to note that billings, in any period, may be impacted by the timing of customer renewals, including early renewals, and customers’ preferences for multi-year upfront or annual billing terms, which could favorably or unfavorably impact year-over-year comparisons. While we believe that billings is useful in evaluating our business, billings is a non-GAAP financial measure that has limitations as an analytical tool, and billings should not be considered as an alternative to, or substitute for, total revenue recognized in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate billings differently or not at all, which reduces the usefulness of billings as a tool for comparison. We recommend that you review the reconciliation of billings to total revenue, the most directly comparable GAAP financial measure, provided below, and that you not rely on billings or any single financial measure to evaluate our business.

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

2017

 

 

 

(in thousands)

 

Total revenue

 

$

48,434

 

$

35,945

 

Deferred revenue, end of period

 

161,996

 

112,087

 

Deferred revenue, beginning of period

 

(168,700

)

(116,683

)

Billings

 

$

41,730

 

$

31,349

 

 

Short-term billings.  We define short-term billings, a non-GAAP financial measure, as total revenue plus the change in current deferred revenue during the period, excluding acquired deferred revenue. We believe that short-term billings provides useful information to investors and others in evaluating our operating performance because it excludes the impact of upfront multi-year billings, which can vary from period to period depending on the timing of large, multi-year customer contracts and customer preferences for annual billing versus multi-year upfront billing. However, it is important to note that short-term billings, in any period, may be impacted by the timing of customer renewals, including early renewals, which could favorably or unfavorably impact year-over-year comparisons. While we believe that short-term billings is useful in evaluating our business, short-term billings is a non-GAAP financial measure that has limitations as an analytical tool, and short-term billings should not be considered as an alternative to, or substitute for, total revenue recognized in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate short-term billings differently or not at all, which reduces the usefulness of short-term billings as a tool for comparison. We recommend that you review the reconciliation of short-term billings to total revenue, the most directly comparable GAAP financial measure, provided below, and that you not rely on short-term billings or any single financial measure to evaluate our business.

 

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Table of Contents

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

2017

 

 

 

(in thousands)

 

Total revenue

 

$

48,434

 

$

35,945

 

Deferred revenue, current, end of period

 

123,746

 

92,397

 

Deferred revenue, current, beginning of period

 

(130,165

)

(97,255

)

Short-term billings

 

$

42,015

 

$

31,087

 

 

Recurring revenue.  We define recurring revenue, a non-GAAP financial measure, as subscription, license and support revenue (which includes revenue relating to support for perpetual licenses) less perpetual license revenue for the period. We use recurring revenue as one factor to evaluate our business because we believe that recurring revenue provides visibility into the revenue expected to be recognized in the current and future periods. Accordingly, we believe that recurring revenue provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management. While we believe that recurring revenue is useful in evaluating our business, recurring revenue is a non-GAAP financial measure that has limitations as an analytical tool, and recurring revenue should not be considered as an alternative to, or substitute for, subscription, license and support revenue recognized in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate recurring revenue differently or not at all, which reduces the usefulness of recurring revenue as a tool for comparison. We recommend that you review the reconciliation of recurring revenue to subscription, license and support revenue, the most directly comparable GAAP financial measure, provided below, and that you not rely on recurring revenue or any single financial measure to evaluate our business.

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

2017

 

 

 

(in thousands, except percentages)

 

Subscription, license and support revenue

 

$

45,391

 

$

33,005

 

Perpetual license revenue

 

(1,604

)

(1,602

)

Recurring revenue

 

$

43,787

 

$

31,403

 

Recurring revenue as a percentage of total revenue

 

90

%

87

%

 

Free cash flow and free cash flow margin.  We define free cash flow, a non-GAAP financial measure, as net cash used in operating activities less purchases of property and equipment and capitalized internal-use software. We define free cash flow margin as free cash flow divided by total revenue. We monitor free cash flow as one measure of our overall business performance, which enables us to analyze our future performance without the effects of non-cash items and allow us to better understand the cash needs of our business. While we believe that free cash flow is useful in evaluating our business, free cash flow is a non-GAAP financial measure that has limitations as an analytical tool, and free cash flow should not be considered as an alternative to, or substitute for, net cash used in operating activities in accordance with GAAP. The utility of free cash flow as a measure of our liquidity is further limited as it does not represent the total increase or decrease in our cash balance for any given period. In addition, other companies, including companies in our industry, may calculate free cash flow differently or not at all, which reduces the usefulness of free cash flow as a tool for comparison.  A summary of our cash flows from operating, investing and financing activities is provided below. We recommend that you review the reconciliation of free cash flow to net cash used in operating activities, the most directly comparable GAAP financial measure, and the reconciliation of free cash flow margin to net cash used in operating activities (as a percentage of revenue), the most directly comparable GAAP financial measure, provided below, and that you not rely on free cash flow, free cash flow margin or any single financial measure to evaluate our business.

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

2017

 

 

 

(in thousands)

 

Net cash used in operating activities

 

$

(777

)

$

(7,042

)

Net cash used in investing activities

 

(1,788

)

(1,032

)

Net cash provided by financing activities

 

178

 

479

 

Net decrease in cash and cash equivalents

 

$

(2,387

)

$

(7,595

)

 

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Three Months Ended March 31,

 

 

 

2018

 

2017

 

 

 

(in thousands)

 

Net cash used in operating activities

 

$

(777

)

$

(7,042

)

Purchases of property and equipment

 

(1,495

)

(828

)

Capitalization of internal-use software costs

 

(293

)

(204

)

Free cash flow

 

$

(2,565

)

$

(8,074

)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

2017

 

Net cash used in operating activities (as a percentage of revenue)

 

(1.6

)%

(19.6

)%

Purchases of property and equipment (as a percentage of revenue)

 

(3.1

)%

(2.3

)%

Capitalization of internal-use software costs (as a percentage of revenue)

 

(0.6

)%

(0.6

)%

Free cash flow margin

 

(5.3

)%

(22.5

)%

 

As discussed above, beginning in 2018, we have reverted to our former policy of offering customers who make multi-year contract commitments the option to be billed the total contract fee upfront or to be billed on an annual basis.  We expect that many customers who make a multi-year contract commitment will select to be billed on an annual basis, which could result in less benefit to free cash flow in 2018 compared to 2017.

 

Non-GAAP operating loss.  We define non-GAAP operating loss as loss from operations excluding stock-based compensation and amortization of acquired intangible assets. For the three months ended March 31, 2018, we have also excluded from non-GAAP operating loss the $3.9 million expense related to the payments we agreed to make in 2018 pursuant to the Finjan legal settlement. We consider non-GAAP operating loss to be a useful metric for investors and other users of our financial information in evaluating our operating performance because it excludes the impact of stock-based compensation and amortization of acquired intangible assets, each of which is a non-cash charge that can vary from period to period for reasons that are unrelated to our core operating performance, and expense recorded by us pursuant to the legal settlement because it is a non-recurring item. While we believe that non-GAAP operating loss is useful in evaluating our business, non-GAAP operating loss is a non-GAAP financial measure that has limitations as an analytical tool, and non-GAAP operating loss should not be considered as an alternative to, or substitute for, loss from operations in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate non-GAAP operating loss differently or not at all, which reduces the usefulness of non-GAAP operating loss as a tool for comparison. We recommend that you review the reconciliation of non-GAAP operating loss to loss from operations, the most directly comparable GAAP financial measure, provided below, and that you not rely on non-GAAP operating loss or any single financial measure to evaluate our business.

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

2017

 

 

 

(in thousands)

 

Loss from operations

 

$

(17,807

)

$

(12,491

)

Stock-based compensation

 

2,389

 

2,207

 

Amortization of acquired intangible assets

 

391

 

391

 

Legal settlement

 

3,900

 

 

Non-GAAP operating loss

 

$

(11,127

)

$

(9,893

)

 

Number of customers.  We believe that the size of our customer base is an indicator of our market penetration and that net customer additions are an indicator of the growth of our business. We define our total customers at the end of a period as the number of organizations with one or more contractual agreements to use our solutions, either licensed directly by us or through a channel partner.

 

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Table of Contents

 

Components of Results of Operations

 

Revenue

 

We generate revenue through relationships with channel partners and through our direct sales force primarily from three sources: (1) the sale of subscription (i.e., term-based) and perpetual licenses for software products along with access to and the right to utilize the threat intelligence capabilities of the Cb Predictive Security Cloud, as well as maintenance services and customer support, which we refer to collectively as support, (2) cloud-based SaaS subscriptions for access to our Cb Response and Cb Defense software products, and (3) professional services and training, which we refer to collectively as services.

 

Subscription, License and Support

 

Our Cb Protection and Cb Response products are offered through subscription or perpetual software licenses, with a substantial majority of our customers selecting a subscription license. Subscription licenses include access to and the right to utilize the threat intelligence capabilities of the Cb Predictive Security Cloud as well as ongoing support, which provides our customers with telephone and web-based support, bug fixes and repairs and software updates on a when-and-if-available basis. Substantially all customers who purchase licenses on a perpetual basis also purchase an agreement for access to and the right to utilize the threat intelligence capabilities of the Cb Predictive Security Cloud.

 

Subscription (i.e. term-based) revenue is recognized on a ratable basis over the contract term beginning on the date the software is delivered to the customer. Maintenance services and customer support revenue related to subscription licenses is recognized ratably over the term of the maintenance and support arrangement as the performance obligation is satisfied. Revenue from the infrequent sales of perpetual software licenses is recognized ratably over the customer’s estimated economic life, which the Company has estimated to be five years, beginning on the date the software is delivered to the customer. Maintenance services and customer support revenue related to perpetual licenses is recognized ratably over the term of the maintenance and support arrangement as the performance obligation is satisfied.

 

Revenue for cloud-based subscriptions is deferred on our balance sheet and subsequently recognized as revenue ratably over the term of the subscription.

 

Our subscription and support agreements typically have one- or three-year terms. For multi-year arrangements, we typically bill on an annual basis. Prior to 2017, we typically billed multi-year arrangements on an annual basis. For 2017, we changed our policy to require customers with multi-year contract commitments to agree to multi-year upfront billing for the total contract fee. Beginning in 2018, we have reverted to our former policy and will offer customers who make a multi-year contract commitment the option to be billed the total contract fee upfront or to be billed on an annual basis.

 

Services

 

We generate services revenue from the sale of professional services related to deployment and training services. Customers primarily purchase our professional services together with our product offerings and, to a lesser extent, on a stand-alone basis. Revenue from professional services and training sold on a stand-alone basis or in a combined arrangement is recognized as those services are rendered. As more customers select our cloud-based offerings, we expect customers to reduce their purchases of deployment services as our cloud-based offerings are typically easier to deploy. Accordingly, we expect our services revenue to increase in absolute dollars but decrease as a percentage of total revenue over time.

 

Cost of Revenue

 

Our total cost of revenue consists of the costs of subscription, license and support revenue as well as the costs of services revenue.

 

Cost of Subscription, License and Support Revenue

 

Cost of subscription, license and support revenue consists of hosting costs associated with our cloud-based offerings, personnel-related costs for our support personnel, including salaries, benefits, bonuses, payroll taxes, stock-based compensation and allocated overhead costs. Also included in cost of subscription, license and support revenue are costs associated with amortization of capitalized software development costs for internal-use software and amortization of developed technology intangible assets related to our prior acquisitions.

 

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Table of Contents

 

We expect cost of subscription, license and support revenue to increase significantly on an absolute dollar basis in the near term due to the acceleration of our cloud-based offerings. We expect to incur additional personnel-related costs, including salaries, benefits, bonuses, payroll taxes, stock-based compensation and allocated overhead costs, for employees who support our cloud-based subscriptions and hosting services. The hosting costs for our cloud-based offerings will also increase as the number of customers who purchase our cloud-based offerings increases.

 

We expect gross margin on our subscription, license and support revenue to decline as more customers purchase our cloud-based offerings.

 

Cost of Services Revenue

 

Cost of services revenue consists of personnel-related costs for our professional services team, including salaries, benefits, bonuses, payroll taxes, stock-based compensation, travel expenses and allocated overhead costs. We recognize the costs of providing services when we incur them.

 

We expect cost of services revenue to increase as we increase our sales.

 

Operating Expenses

 

Operating expenses consist of sales and marketing, research and development, and general and administrative expenses.

 

Sales and Marketing Expense

 

Sales and marketing expense consists of personnel-related costs for our sales and marketing teams, including salaries, benefits, amortization of deferred commissions, bonuses, payroll taxes, stock-based compensation and other related costs. Additional expenses include costs of marketing activities and promotional events, travel, and allocated overhead costs. We capitalize commission costs that are incremental and directly related to the acquisition of customer agreements. Commissions are earned by our sales force and paid in full upon the receipt of customer orders, or bookings, for new and add-on arrangements or renewals. Commission costs are capitalized when earned and are amortized as expense over an estimated customer relationship period of 5 years.

 

We expect sales and marketing expense to increase on an absolute dollar basis in the near term as we continue to increase investments to drive our market adoption and revenue growth.

 

Research and Development Expense

 

Research and development expense consists of personnel-related costs for our research and development team, including salaries, benefits, bonuses, payroll taxes, stock-based compensation and other related costs. Additional expenses include subcontracting for third-party engineering resources as well as allocated overhead costs.

 

We expect research and development expense to increase on an absolute dollar basis in the near term as we continue to increase investments in our technology architecture and software platform.

 

General and Administrative Expense

 

General and administrative expense consists of personnel-related costs for our executive, administrative, legal, human resources, security, finance and accounting personnel, including salaries, benefits, bonuses, payroll taxes, stock-based compensation and other related costs. Additional expenses include bad debt expense related to customer receivables, recruiting costs, professional fees, travel, insurance and allocated overhead costs.

 

For the three months ended March 31, 2018, we recorded the $3.9 million expense related to the payments we agreed to make in 2018 pursuant to the Finjan settlement as general and administrative expense.

 

We expect general and administrative expense to increase on an absolute dollar basis in the near term as we continue to increase investments to support our anticipated growth and as a result of our becoming a public company.

 

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Table of Contents

 

Interest Expense, Net

 

Interest expense, net consists of interest expense related to our outstanding debt obligations and the amortization of deferred financing costs and debt discount associated with such arrangements, as well as interest income related to our invested balances of cash and cash equivalents.

 

Other Income (Expense), Net

 

Other income (expense), net consists primarily of gains and losses related to the revaluation of certain of our outstanding warrant liabilities at each reporting date and foreign currency transactions gains and losses.

 

Provision for Income Taxes

 

Provision for income taxes consists primarily of foreign income taxes. We maintain a full valuation allowance for our net deferred tax assets.

 

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Table of Contents

 

Results of Operations

 

The following table sets forth our consolidated statements of operations in dollar amounts and as a percentage of revenue for the periods indicated:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

2017

 

 

 

(in thousands)

 

Consolidated Statement of Operations Data:

 

 

 

 

 

Revenue:

 

 

 

 

 

Subscription, license and support

 

$

45,391

 

$

33,005

 

Services

 

3,043

 

2,940

 

Total revenue

 

48,434

 

35,945

 

Cost of revenue:

 

 

 

 

 

Subscription, license and support(1)

 

7,212

 

4,831

 

Services(1)

 

3,003

 

2,770

 

Total cost of revenue

 

10,215

 

7,601

 

Gross profit

 

38,219

 

28,344

 

Operating expenses:

 

 

 

 

 

Sales and marketing(1)

 

30,678

 

24,359

 

Research and development(1)

 

14,922

 

11,547

 

General and administrative(1)

 

10,426

 

4,929

 

Total operating expenses

 

56,026

 

40,835

 

Loss from operations

 

(17,807

)

(12,491

)

Interest income (expense), net

 

45

 

(31

)

Other income (expense), net

 

(2,761

)

100

 

Loss before income taxes

 

(20,523

)

(12,422

)

Provision for income taxes

 

71

 

17

 

Net loss

 

$

(20,594

)

$

(12,439

)

 


(1)                                 The following table summarizes the classification of stock-based compensation expense in our consolidated statements of operations:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

2017

 

 

 

(in thousands)

 

Cost of subscription, license and support revenue

 

$

136

 

$

75

 

Cost of services revenue

 

57

 

54

 

Sales and marketing expense

 

936

 

873

 

Research and development expense

 

564

 

619

 

General and administrative expense

 

696

 

586

 

Total stock-based compensation expense

 

$

2,389

 

$

2,207

 

 

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Table of Contents

 

 

 

Three Months Ended
March 31,

 

 

 

2018

 

2017

 

Percentage of Revenue:

 

 

 

 

 

Revenue:

 

 

 

 

 

Subscription, license and support

 

94

%

92

%

Services

 

6

 

8

 

Total revenue

 

100

 

100

 

Cost of revenue:

 

 

 

 

 

Subscription, license and support

 

15

 

13

 

Services

 

6

 

8

 

Total cost of revenue

 

21

 

21

 

Gross profit

 

79

 

79

 

Operating expenses:

 

 

 

 

 

Sales and marketing

 

63

 

68

 

Research and development

 

31

 

32

 

General and administrative

 

22

 

14

 

Total operating expenses

 

116

 

114

 

Loss from operations

 

(37

)

(35

)

Interest income (expense), net

 

 

 

Other expense, net

 

(6

)

 

Loss before income taxes

 

(43

)

(35

)

Provision for income taxes

 

 

 

Net loss

 

(43

)%

(35

)%

 

Revenue

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

2017

 

$ Change

 

% Change

 

 

 

(in thousands, except percentages)

 

Revenue:

 

 

 

 

 

 

 

 

 

Subscription, license and support

&