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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


FORM 10-Q


(Mark One)

 

 

 

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

 

For the quarterly period ended June 30, 2018

OR

 

 

 

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

 

For the transition period from______to_____.

Commission File Number: 001-38478


CARBON BLACK, INC.

(Exact Name of Registrant as Specified in its Charter)


 

 

 

Delaware

    

55-0810166

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

1100 Winter Street

 

 

Waltham, MA

 

02451

(Address of principal executive offices)

 

(Zip Code)

 

(617) 393-7400

(Registrant’s telephone number, including area code)


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

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       No   

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

Large accelerated filer

    

 

    

Accelerated filer

Non-accelerated filer

 

(Do not check if a small reporting company)

 

Small reporting company

Emerging growth company

 

 

 

 

 

 

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

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

There were 67,833,191 shares of the registrant’s common stock with a par value of $0.001 per share, outstanding as of August 3, 2018.

 

 

 

 

 

 


 

Table of Contents

CARBON BLACK, INC.

FORM 10-Q

For the Quarter Ended June 30, 2018

TABLE OF CONTENTS

 

 

 

 

PART I  — FINANCIAL INFORMATION 

 

 

 

 

 

 

Item 1. 

Financial Statements

 

 

 

Unaudited Condensed Consolidated Balance Sheets

 

2

 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss

 

3

 

Unaudited Condensed Consolidated Statement of Redeemable Convertible and Convertible Preferred Stock and Stockholders’ Deficit

 

4

 

Unaudited Condensed Consolidated Statements of Cash Flows

 

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

6

 

 

 

 

Item 2.  

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

 

22

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

 

35

Item 4.  

Controls and Procedures

 

35

 

 

 

 

PART II — OTHER INFORMATION 

 

 

 

 

 

 

Item 1.  

Legal Proceedings

 

37

Item 1A.  

Risk Factors

 

37

Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

 

66

Item 6.  

Exhibits

 

67

 

Signatures

 

68

 

 

1

 


 

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CARBON BLACK, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

(In thousands, except share and per share amounts)

    

2018

    

2017

Assets

 

 

  

 

 

 

Current assets:

 

 

  

 

 

  

Cash and cash equivalents

 

$

178,497

 

$

36,073

Accounts receivable, net of allowances of $192 and $124 as of June 30, 2018 and December 31, 2017, respectively

 

 

43,631

 

 

60,850

Prepaid expenses and other current assets

 

 

8,488

 

 

6,040

Deferred commissions

 

 

10,093

 

 

9,551

Total current assets

 

 

240,709

 

 

112,514

Deferred commissions, net of current portion

 

 

21,825

 

 

20,404

Property and equipment, net

 

 

14,514

 

 

12,459

Intangible assets, net

 

 

3,310

 

 

4,092

Goodwill

 

 

119,656

 

 

119,656

Other-long term assets

 

 

395

 

 

2,436

Total assets

 

$

400,409

 

$

271,561

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

 

 

  

 

 

  

Current liabilities:

 

 

  

 

 

  

Accounts payable

 

$

4,228

 

$

2,481

Accrued expenses

 

 

16,073

 

 

18,846

Deferred revenue

 

 

129,927

 

 

130,165

Deferred rent

 

 

1,147

 

 

944

Total current liabilities

 

 

151,375

 

 

152,436

Deferred revenue, net of current portion

 

 

39,344

 

 

38,535

Warrant liability

 

 

 —

 

 

2,766

Deferred rent, net of current portion

 

 

2,934

 

 

3,114

Deferred tax liability

 

 

37

 

 

33

Other long-term liabilities

 

 

42

 

 

42

Total liabilities

 

 

193,732

 

 

196,926

Commitments and contingencies (Note 10)

 

 

  

 

 

  

Redeemable convertible preferred stock (Series B, C, D, E, E-1 and F), $0.001 par value, 94,101,207 authorized, 88,741,194 shares issued and outstanding with aggregate liquidation preference of $272,506 as of December 31, 2017. No shares authorized, issued or outstanding as of June 30, 2018

 

 

 —

 

 

333,204

Series A convertible preferred stock, $0.001 par value, 8,800,000 shares authorized, 3,851,806 shares issued and outstanding as of December 31, 2017. No shares authorized, issued or outstanding as of June 30, 2018

 

 

 —

 

 

1,510

Stockholders' equity (deficit):

 

 

  

 

 

  

Common stock, $0.001 par value, 500,000,000 shares and 156,650,000 shares authorized as of June 30, 2018 and December 31, 2017; 67,809,071 shares and 11,193,366 shares issued and 67,753,667 and 11,139,690 shares outstanding as of June 30, 2018 and December 31, 2017, respectively

 

 

68

 

 

11

Treasury stock, at cost, 55,404 and 53,676 shares as of June 30, 2018 and December 31, 2017, respectively

 

 

(6)

 

 

(6)

Additional-paid in capital

 

 

707,945

 

 

13,429

Accumulated deficit

 

 

(501,330)

 

 

(273,513)

Total stockholders' equity (deficit)

 

 

206,677

 

 

(260,079)

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

 

$

400,409

 

$

271,561

See notes to unaudited condensed consolidated financial statements.

2


 

Table of Contents

CARBON BLACK, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

(In thousands, except share and per share amounts)

    

    

2018

    

2017

    

2018

    

2017

Revenue:

 

 

 

  

 

 

  

 

 

  

 

 

  

Subscription, license and support

 

 

$

47,891

 

$

35,749

 

$

93,282

 

$

68,754

Services

 

 

 

3,101

 

 

2,942

 

 

6,144

 

 

5,882

Total revenue

 

 

 

50,992

 

 

38,691

 

 

99,426

 

 

74,636

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription, license and support

 

 

 

8,051

 

 

5,744

 

 

15,263

 

 

10,575

Services

 

 

 

3,053

 

 

2,647

 

 

6,056

 

 

5,417

Total cost of revenue

 

 

 

11,104

 

 

8,391

 

 

21,319

 

 

15,992

Gross profit

 

 

 

39,888

 

 

30,300

 

 

78,107

 

 

58,644

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

 

35,161

 

 

24,731

 

 

65,839

 

 

49,090

Research and development

 

 

 

16,084

 

 

12,572

 

 

31,006

 

 

24,119

General and administrative

 

 

 

7,850

 

 

5,414

 

 

18,276

 

 

10,343

Total operating expenses

 

 

 

59,095

 

 

42,717

 

 

115,121

 

 

83,552

Loss from operations

 

 

 

(19,207)

 

 

(12,417)

 

 

(37,014)

 

 

(24,908)

Interest income (expense), net

 

 

 

411

 

 

14

 

 

456

 

 

(17)

Change in fair value of warrant liability

 

 

 

(5,957)

 

 

(2)

 

 

(8,838)

 

 

124

Other income (expense), net

 

 

 

(494)

 

 

139

 

 

(374)

 

 

113

Loss before income taxes

 

 

 

(25,247)

 

 

(12,266)

 

 

(45,770)

 

 

(24,688)

Provision for income taxes

 

 

 

34

 

 

69

 

 

105

 

 

86

Net loss and comprehensive loss

 

 

 

(25,281)

 

 

(12,335)

 

 

(45,875)

 

 

(24,774)

Accretion of preferred stock to redemption value

 

 

 

(159,453)

 

 

3,323

 

 

(199,492)

 

 

(8,324)

Net loss attributable to common stockholders

 

 

$

(184,734)

 

$

(9,012)

 

$

(245,367)

 

$

(33,098)

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

 

 

$

(4.13)

 

$

(0.88)

 

$

(8.73)

 

$

(3.27)

Weighted-average common shares outstanding—basic and diluted

 

 

 

44,759,435

 

 

10,255,078

 

 

28,104,372

 

 

10,116,021

 

See notes to unaudited condensed consolidated financial statements.

 

 

3


 

Table of Contents

CARBON BLACK, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE AND CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible

 

Convertible

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Total

 

 

Preferred Stock

 

Preferred Stock

 

 

Common Stock

 

Treasury Stock

 

Paidin

 

Accumulated

 

Stockholders'

(In thousands, except share amounts)

    

Shares

    

Amount

    

Shares

    

Amount

  

  

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Deficit

    

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

 

 

 —

 

 

 —

 

360,385

 

 

211

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Accretion of redeemable convertible preferred stock to redemption value

 

 

 —

 

 

199,492

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(17,550)

 

 

(181,942)

 

 

(199,492)

Conversion of redeemable convertible preferred stock upon initial public offering

 

 

(88,741,194)

 

 

(532,696)

 

 —

 

 

 —

 

 

44,370,560

 

 

44

 

 —

 

 

 —

 

 

532,652

 

 

 —

 

 

532,696

Conversion of convertible preferred stock upon initial public offering

 

 

 —

 

 

 —

 

(4,212,191)

 

 

(1,721)

 

 

1,709,063

 

 

 2

 

 —

 

 

 —

 

 

1,719

 

 

 —

 

 

1,721

Issuance of common stock upon initial public offering, net of underwriting discounts and commissions and offering costs incurred of $4,858

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

9,200,000

 

 

 9

 

 —

 

 

 —

 

 

157,697

 

 

 —

 

 

157,706

Issuance of common stock upon exercise of common stock warrants

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

712,063

 

 

 1

 

 —

 

 

 —

 

 

11,603

 

 

 —

 

 

11,604

Repurchase of common stock

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(1,728)

 

 

 —

 

1,728

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Exercise of common stock options

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

624,019

 

 

 1

 

 —

 

 

 —

 

 

2,519

 

 

 —

 

 

2,520

Stock-based compensation expense

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

5,876

 

 

 —

 

 

5,876

Net loss

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(45,875)

 

 

(45,875)

Balances at June 30, 2018

 

 

 —

 

$

 —

 

 —

 

$

 —

 

 

67,753,667

 

$

68

 

55,404

 

$

(6)

 

$

707,945

 

$

(501,330)

 

$

206,677

 

See notes to unaudited condensed consolidated financial statements.

 

 

4


 

Table of Contents

CARBON BLACK, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

(In thousands)

 

    

2018

    

2017

Cash flows from operating activities:

 

 

 

  

 

 

  

Net loss

 

 

$

(45,875)

 

$

(24,774)

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

 

 

 

 

 

 

  

Depreciation and amortization expense

 

 

 

3,875

 

 

3,397

Stock-based compensation expense

 

 

 

5,876

 

 

4,367

Provisions for doubtful accounts

 

 

 

118

 

 

(178)

Non-cash interest expense

 

 

 

22

 

 

 8

Change in fair value of warrant liability

 

 

 

8,838

 

 

(124)

Deferred income taxes

 

 

 

 4

 

 

 —

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

 

17,100

 

 

(89)

Prepaid expenses and other assets

 

 

 

(2,293)

 

 

(1,720)

Deferred commissions

 

 

 

(1,962)

 

 

(2,109)

Accounts payable

 

 

 

1,787

 

 

1,241

Accrued expenses

 

 

 

(2,773)

 

 

(3,535)

Deferred revenue

 

 

 

572

 

 

9,898

Deferred rent

 

 

 

23

 

 

(74)

Other long-term liabilities

 

 

 

(1)

 

 

(55)

Net cash used in operating activities

 

 

 

(14,689)

 

 

(13,747)

Cash flows from investing activities:

 

 

 

  

 

 

  

Purchases of property and equipment

 

 

 

(4,197)

 

 

(3,124)

Capitalization of internal-use software costs

 

 

 

(991)

 

 

(478)

Net cash used in investing activities

 

 

 

(5,188)

 

 

(3,602)

Cash flows from financing activities:

 

 

 

  

 

 

  

Proceeds from exercise of stock options

 

 

 

2,731

 

 

1,729

Repayments of line of credit

 

 

 

 —

 

 

(5,500)

Proceeds from initial public offering, net of offering costs of $2,947

 

 

 

159,617

 

 

 —

Payments of deferred financing costs

 

 

 

(47)

 

 

(84)

Net cash provided by (used in) financing activities

 

 

 

162,301

 

 

(3,855)

Net increase (decrease) in cash and cash equivalents

 

 

 

142,424

 

 

(21,204)

Cash and cash equivalents at beginning of period

 

 

 

36,073

 

 

51,503

Cash and cash equivalents at end of period

 

 

$

178,497

 

$

30,299

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

  

Conversion of redeemable convertible preferred stock upon initial public offering

 

 

$

532,696

 

$

 —

Conversion of convertible preferred stock upon initial public offering

 

 

$

1,721

 

$

 —

Issuance of common stock upon exercise of common stock warrants

 

 

$

11,604

 

$

 —

Deferred IPO costs paid in prior periods

 

 

$

1,911

 

$

 —

Accretion of preferred stock to redemption value

 

 

$

199,492

 

$

8,324

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

 

 

$

249

 

$

216

Series B preferred stock issued upon exercise of Series B Warrant

 

 

$

 —

 

$

225

Series F preferred stock and common stock issued upon termination of customer warrant in connection with acquisition of Confer Technologies, Inc.

 

 

$

 —

 

$

1,347

 

See notes to unaudited condensed consolidated financial statements.

5


 

Table of Contents

CARBON BLACK, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

1. OVERVIEW AND BASIS OF PRESENTATION

Overview

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.

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.

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 to the public was $19 per share. 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 $4.9 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.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting standards (“GAAP”) for interim financial information and include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The Company’s condensed consolidated financial statements are unaudited, but include all adjustments of a normal recurring nature necessary for a fair presentation of the quarterly results. The Company has made estimates and judgments affecting the amounts reported in the condensed consolidated financial statements and the accompanying notes. The actual results that the Company experiences may differ materially from the Company’s estimates.

The Company’s condensed 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.

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.

The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, permits an “emerging growth company” such as the Company to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. The Company has irrevocably elected to “opt out” of this provision and, as a result, the Company will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies.

6


 

Table of Contents

2. NEW ACCOUNTING PRONOUNCEMENTS

Leases

In February 2016, the Financial Accounting Standards Board (“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.

Comprehensive Income

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.

Stock Compensation

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718) (“ASU 2018-07”). ASU 2018-07 was issued in order to expand the guidance for stock-based compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of this pronouncement on its consolidated financial statements.

Revenue

In May 2014, the 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.

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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.

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.

For additional information on the Company’s accounting policies as a result of the adoption of ASC 606 see Note 12 “Revenue”.

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

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

 

 

 

Adjustments for

 

 

 

 

 

As Previously

 

ASC 606

 

 

 

    

Reported

    

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)

 

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Three Months Ended June 30, 2017

 

Six Months Ended June 30, 2017

 

 

As Prepared
under
ASC 605

    

Adjustments
for
ASC 606 Adoption

    

As Adjusted

    

As Prepared
under
ASC 605

    

Adjustments
for
ASC 606 Adoption

    

As Adjusted

Consolidated Statement of Operations

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Subscription, license and support

 

$

35,828

 

$

(79)

 

$

35,749

 

$

69,567

 

$

(813)

 

$

68,754

Services

 

 

3,231

 

 

(289)

 

 

2,942

 

 

6,254

 

 

(372)

 

 

5,882

Total revenue

 

 

39,059

 

 

(368)

 

 

38,691

 

 

75,821

 

 

(1,185)

 

 

74,636

Gross profit

 

 

30,668

 

 

(368)

 

 

30,300

 

 

59,829

 

 

(1,185)

 

 

58,644

Sales and marketing

 

 

25,727

 

 

(996)

 

 

24,731

 

 

51,024

 

 

(1,934)

 

 

49,090

Total operating expenses

 

 

43,713

 

 

(996)

 

 

42,717

 

 

85,486

 

 

(1,934)

 

 

83,552

Loss from operations

 

 

(13,045)

 

 

628

 

 

(12,417)

 

 

(25,657)

 

 

749

 

 

(24,908)

Loss before income taxes

 

 

(12,894)

 

 

628

 

 

(12,266)

 

 

(25,437)

 

 

749

 

 

(24,688)

Net loss and comprehensive loss

 

 

(12,963)

 

 

628

 

 

(12,335)

 

 

(25,523)

 

 

749

 

 

(24,774)

Net loss attributable to common stockholders

 

 

(9,640)

 

 

628

 

 

(9,012)

 

 

(33,847)

 

 

749

 

 

(33,098)

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

 

$

(0.94)

 

$

0.06

 

$

(0.88)

 

$

(3.35)

 

$

0.07

 

$

(3.27)

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2017

 

 

 

 

 

Adjustments for

 

 

 

 

 

As Prepared

 

ASC 606

 

 

 

 

    

under ASC 605

    

Adoption

    

As Adjusted

Consolidated Statement of Cash Flows

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(25,523)

 

$

749

 

$

(24,774)

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

 

 

 

 

 

 

 

 

 

Deferred commissions

 

 

(175)

 

 

(1,934)

 

 

(2,109)

Deferred revenue

 

$

8,713

 

$

1,185

 

$

9,898

 

   

3. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company categorizes assets and liabilities recorded or disclosed at fair value on our condensed consolidated balance sheets based upon the level of judgment associated with inputs used to measure their fair value. The categories are as follows:

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

Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly.

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

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

 

  

 

 

  

 

 

  

 

 

  

Cash equivalents

 

$

166,173

 

$

 —

 

$

 —

 

$

166,173

 

 

$

166,173

 

$

 —

 

$

 —

 

$

166,173

Liabilities:

 

 

  

 

 

  

 

 

  

 

 

  

Series D preferred stock warrant liability

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Common stock warrant liability

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

$

 —

 

$

 —

 

$

 —

 

$

 —

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

    

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 June 30, 2018 and December 31, 2017, the Company's cash equivalents, which were invested in money market funds, were valued based on Level 1 inputs.

Changes in the fair values of the Company's preferred stock warrant liabilities and common stock warrant liability for the six months ended June 30, 2018 were as follows:

 

 

 

 

 

 

 

 

 

Series D

 

 

 

 

 

Preferred Stock

 

Common Stock

 

    

Warrant Liability

    

Warrant Liability

Fair value at December 31, 2017

 

 

992

 

 

1,774

Change in fair value

 

 

1,378

 

 

7,460

Exercise of common stock warrant

 

 

 —

 

 

(9,234)

Conversion to common stock warrant

 

 

(2,370)

 

 

 —

Fair value at June 30, 2018

 

$

 —

 

$

 —

 

Upon the closing of the IPO, the warrants for the purchase of Series D preferred stock became warrants to purchase common stock. The Company valued the Series D preferred stock liability as of the IPO closing date using the Black-Scholes option pricing-model and recorded a change in the fair value of the preferred stock warrants through that date. The Series D preferred stock warrant liability was then reclassified to additional paid-in capital. Additionally, the warrants for the purchase of common stock were exercised to purchase 485,985 shares of common stock upon the closing of the IPO. The Company valued the common stock warrant liability as of the IPO date using the $19 per share offering price and recorded a change in the fair value of the common stock warrants through that date. The common stock warrant liability was then reclassified to common stock and additional paid-in capital.

4. PROPERTY AND EQUIPMENT, NET

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

    

2018

    

2017

Computer equipment

 

$

14,928

 

$

12,349

Computer software

 

 

3,401

 

 

3,048

Leasehold improvements

 

 

6,628

 

 

6,327

Furniture and fixtures

 

 

3,333

 

 

2,870

Office equipment

 

 

104

 

 

99

Construction in progress

 

 

456

 

 

Internal-use software

 

 

2,970

 

 

1,979

 

 

 

31,820

 

 

26,672

Less: Accumulated depreciation and amortization

 

 

(17,306)

 

 

(14,213)

 

 

$

14,514

 

$

12,459

For the three months ended June 30, 2018 and 2017, depreciation and amortization expense related to property and equipment, including internal-use software, was $1,579 and $1,347.  

For the six months ended June 30, 2018 and 2017, depreciation and amortization expense related to property and equipment, including internal-use software, was $3,093 and $2,615.  

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During the three month ended June 30, 2018 and 2017, the Company capitalized $698 and $274 of costs related to the development of internal-use software and recorded amortization expense of capitalized internal-use software of $133 and $97.

During the six months ended June 30, 2018 and 2017, the Company capitalized $991 and $478 of costs related to the development of internal-use software and recorded amortization expense of capitalized internal-use software of $290 and $185.

5. GOODWILL AND INTANGIBLE ASSETS

Goodwill was $119,656 as of June 30, 2018 and December 31, 2017.

Identifiable intangible assets consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

December 31, 2017

 

    

Gross

    

Accumulated

    

Carrying

    

Gross

    

Accumulated

    

Carrying

 

 

Amount

 

Amortization

 

Value

 

Amount

 

Amortization

 

Value

License agreement

 

$

150

 

$

(120)

 

$

30

 

$

150

 

$

(113)

 

$

37

Developed technology

 

 

7,301

 

 

(4,075)

 

 

3,226

 

 

7,301

 

 

(3,344)

 

 

3,957

Trade name

 

 

440

 

 

(386)

 

 

54

 

 

440

 

 

(342)

 

 

98

Customer relationships

 

 

2,950

 

 

(2,950)

 

 

 —

 

 

2,950