S-1/A 1 d520327ds1a.htm AMENDMENT NO. 5 TO FORM S-1 Amendment No. 5 to Form S-1
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Index to Financial Statements

As filed with the Securities and Exchange Commission on March 5, 2015

Registration No. 333-195944

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 5

TO

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

GOOD TECHNOLOGY CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   7372   94-3248938

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

430 N. Mary Avenue, Suite 200

Sunnyvale, California 94085

(408) 212-7500

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Christy Wyatt

President, Chief Executive Officer and Chairperson

Good Technology Corporation

430 N. Mary Avenue, Suite 200

Sunnyvale, California 94085

(408) 212-7500

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Steven E. Bochner

Jon C. Avina

Calise Y. Cheng

Wilson Sonsini Goodrich & Rosati

Professional Corporation

650 Page Mill Road

Palo Alto, California 94304

(650) 493-9300

 

Ronald S. Vaisbort

Senior Vice President and

General Counsel

Good Technology Corporation

430 N. Mary Avenue, Suite 200

Sunnyvale, California 94085

(408) 212-7500

 

Gordon K. Davidson

Theodore G. Wang

James D. Evans

Fenwick & West LLP

801 California Street

Mountain View, California 94041

(650) 988-8500

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 (the “Securities Act”), check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one).  ¨

 

Large accelerated filer  ¨   Accelerated filer  ¨    Non-accelerated filer  x   Smaller reporting company  ¨
    

(Do not check if a smaller

reporting company)

 

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a) may determine.

 

 

 


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LOGO

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to completion, dated March 5, 2015
shares
Good
Common stock
This is an initial public offering of common stock by Good Technology Corporation. We are selling shares of common stock. The estimated initial public offering price is expected to be between $ and $ per share.
Prior to this offering, there has been no public market for our common stock. We have applied to list our common stock on The NASDAQ Stock Market under the symbol “GDTC.”
We are an “emerging growth company” as defined under the federal securities laws. Investing in our common stock involves risks. See “Risk Factors” beginning on page 15.
Per share Total
Initial public offering price $ $
Underwriting discounts and commissions(1) $ $
Proceeds to Good Technology, before expenses $ $
(1) See “Underwriters” for a description of the compensation payable to the underwriters.
We have granted the underwriters an option for a period of 30 days to purchase up to an additional shares of common stock.
The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares of common stock to purchasers on , 2015.
J.P. Morgan BofA Merrill Lynch Barclays Citigroup
Oppenheimer & Co.
, 2015


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LOGO

 

2.6 BILLION1 MESSAGES SENT SECURELY PER WEEK

15.3+ MILLION LICENSES SOLD2

6200+ ACTIVE CUSTOMERS

189 COUNTRIES

90%+ CUSTOMER RENEWALS RATE

1600+1 GOOD DYNAMICS APPLICATIONS

278 PATENTS GRANTED AND PENDING

13000+ GOOD DYNAMICS DEVELOPERS

100% F100 COMMERCIAL BANKS

100% F100 AEROSPACE & DEFENSE FIRMS

FORTUNE 100 CLIENTS

9/11 F100 INSURANCE COMPANIES

6/7 F100 HEALTHCARE PROVIDERS

1. Good Technology, as of February 28, 2015 | 2. Cumulative total of licenses sold from Q1 2010 through Q4 2014

All other data as of December 31, 2014


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LOGO

WE ARE THE LEADING SECURE MOBILITY PLATFORM FOR ENTERPRISES AND GOVERNMENTS WORLDWIDE We enable businesses to securely support the entire mobility life cycle Central Control Proactive Monitoring End To End Security Rapid Development BUILD MANAGE SUPPORT SECURE


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Table of contents

 

     Page  

Prospectus summary

     1   

Summary consolidated financial and other data

     11   

Risk factors

     15   

Special note regarding forward-looking statements

     46   

Market and industry data

     48   

Use of proceeds

     50   

Dividend policy

     50   

Capitalization

     51   

Dilution

     53   

Selected consolidated financial and other data

     55   

Management’s discussion and analysis of financial condition and results of operations

     60   

Business

     96   

Management

     122   

Executive compensation

     132   

Certain relationships and related party transactions

     145   

Principal stockholders

     148   

Description of capital stock

     151   

Shares eligible for future sale

     156   

Material United States federal income tax consequences to non-U.S. holders

     158   

Underwriters

     162   

Legal matters

     169   

Experts

     169   

Where you can find additional information

     169   

Index to consolidated financial statements

     F-1   

Index to unaudited pro forma condensed combined financial information

     P-1   

You should rely only on the information contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. Neither we nor any of the underwriters have authorized anyone to provide you with information different from, or in addition to, that contained in this prospectus or any related free writing prospectus. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of its date, regardless of its time of delivery or of any sale of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

Through and including                     , 2015 (25 days after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

For investors outside the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus outside of the United States.

 

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Prospectus summary

This summary highlights information contained in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider in making your investment decision. You should read the entire prospectus carefully before making an investment in our common stock. You should carefully consider, among other things, our consolidated financial statements and the related notes and the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

Good Technology Corporation

Overview

We are the leading secure mobility platform for enterprises and governments worldwide. Our platform enables secure access to applications and data across devices and operating systems and delivers comprehensive mobile lifecycle management capabilities to build, deploy, manage and support these applications. We pioneered the category of secure mobility by being the first to combine applications with end-to-end security, device management, mobile application development and mobile service management across multiple operating systems.

We alone provide a complete solution that includes proven cross-platform enterprise-grade security, a suite of collaboration applications, integrated device, application and service management, analytics tools, comprehensive rapid application development capabilities, and a third-party application and partner ecosystem. Our platform protects data at rest, in use, and in motion between applications across a mix of devices and can be deployed in the cloud, on premise or as a hybrid solution. We have achieved industry validation of our security architecture through independent third parties and are the only cross-platform mobile collaboration solution to receive the highest level of certifications, such as Common Criteria for Information Technology Security Evaluation Assurance Level 4+, or Common Criteria EAL-4+, for both iOS and Android. Our solution empowers businesses to create and manage secure interactions across a mix of data and applications, and secures over 2.6 billion messages worldwide per week.

As of December 31, 2014, we had over 6,200 active customers in 189 countries, approximately 50% of which operate within regulated industries with some of the most stringent security requirements, such as financial services, healthcare and government. Today, our solution is employed by 100% of the Fortune 100 commercial banks, 100% of the Fortune 100 aerospace and defense firms, nine out of 11 of the Fortune 100 insurance companies, and six out of seven of the Fortune 100 healthcare providers. Our government customers include military and civilian agencies in 16 countries around the world, including the United Kingdom, France, Germany, Malaysia and the United States, such as the U.S. Department of Defense, U.S. Department of Homeland Security and U.S. Air Force.

According to IDC, 1.29 billion mobile devices were in use at work worldwide by the end of 2014, and that number is expected to reach 1.87 billion by 2018. The proliferation of mobile devices and applications is generating some of the greatest opportunities and challenges in software today. Today’s users demand to be as productive while they are mobile as they are while in the office. Organizations need to deliver both existing and new applications and services to mobile devices to drive revenue, improve efficiency, and increase customer loyalty. At the same time, the risk of cybercrime is growing exponentially for organizations of all types and sizes, making CIOs increasingly uncomfortable about allowing corporate data on mobile devices. In 2014, cybersecurity incidents grew 48% from 2013, according to PwC’s The Global State of Information Security

 

 

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Survey 2015. Despite the vulnerability associated with these devices, only 54% of companies surveyed by PwC reported having a mobile security strategy in place. The challenge for organizations today is balancing the need for enterprise-grade security and compliance while offering users the flexibility and personalization that they already enjoy on their personal mobile devices. We provide a solution for organizations that supports enterprise-grade security and an uncompromised user experience across a wide range of heterogeneous devices and applications.

Good Technology has been recognized as a market leader in Gartner Inc. “Magic Quadrant for Enterprise Mobility Management Suites” for four consecutive years. We believe our unique and proven security architecture and comprehensive mobile lifecycle management capabilities are core differentiators. Our unique platform provides IT departments with the ability to support any Good-secured application across devices and users, in the cloud, on premise, or as a hybrid solution.

We offer a range of Good Enterprise Mobility Management (EMM) Suites, each one tailored to address the different stages of an organization’s mobility strategy. An organization’s first mobility strategy is typically to securely mobilize basic productivity. As its strategy matures, it often looks to add additional collaboration capabilities. An organization fully embracing mobility seeks to create unique business processes with new custom mobile applications and more sophisticated operations management capabilities. The Good EMM Suites are designed around these stages and are built on our Good Dynamics secure mobility platform. Our platform simplifies the creation of mobile applications and the ongoing management of applications, data and devices without compromising on security or compliance requirements. As a result, our customers, no matter where they may be in the implementation of their own mobility strategy, have access to a secure, flexible and enterprise-grade foundation that is designed to respond to their growing mobility needs.

We have been an innovator in secure mobility solutions since our inception in 1996. As of December 31, 2014, we had 164 issued patents and 114 patent applications globally and had sold more than 15.3 million licenses. Further, we had over 1,600 customer-developed Good-secured applications on our platform as of February 28, 2015. We also have an ecosystem of leading independent software vendors, or ISVs, system integrators, device makers and mobile operating system platform providers to support our secure mobility platform.

In 2012, 2013 and 2014, our recurring billings, a non-GAAP financial measure, were $71.8 million, $85.5 million and $128.1 million, respectively, representing 37% of total billings for 2012, 44% of total billings for 2013 and 58% of total billings for 2014. In 2012, 2013 and 2014, we generated recurring revenues of $19.8 million, $46.7 million and $81.4 million, respectively, representing year-over-year growth of 178% for 2012, 136% for 2013 and 74% for 2014. In 2012, 2013 and 2014, we generated total revenues of $116.6 million, $160.4 million and $211.9 million, respectively, representing year-over-year growth of 37% for 2012, 38% for 2013 and 32% for 2014. Our net losses were $90.4 million, $118.4 million and $95.4 million in 2012, 2013 and 2014, respectively. See “Selected Consolidated Financial and Other Data—Key Financial and Performance Metrics” for more information and a reconciliation of recurring billings and total billings to recurring revenues and total revenues, respectively, the most directly comparable financial measure calculated and presented in accordance with GAAP.

 

 

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Industry background

Proliferation of mobile devices and applications is one of the most significant technological shifts in the enterprise since the Internet

Rapid proliferation of mobile devices and applications is transforming the enterprise platform into a mobile platform. Amid a backdrop of steep increases in smartphone and tablet shipments, desktop and portable PC shipments began to decline in 2013. IDC estimates that in 2014, shipments of business use smartphones outpaced PC shipments by a ratio of 2:1. According to IDC, there were 339.1 million business-use smartphones and tablets shipped worldwide in 2014. As demonstrated by the trends in device shipments, the mobile platform is becoming the primary computing platform in the enterprise, and, as a result, IT needs to shift its focus to view mobility as a key element in the core foundation of enterprise technology.

Mobile platforms present a host of new challenges for IT departments. Mobile devices and applications have become mission critical to users, and in response, IT departments must provide 24/7 availability of applications and features, as well as seamless scalability for new devices, applications and users.

The cybersecurity risk has expanded to include mobile

Cybercriminals are expending significant resources to exploit sensitive intellectual property and personal data, causing financial and reputational damage while nation states are pursuing cyber espionage that could threaten national security. In 2014, there were many large and pervasive incidents that affected retailers, financial institutions, governments and others. PwC’s The Global State of Information Security Survey 2015 reported that global security incidents increased by 48% from 2013 to 2014. Furthermore, in the same report, respondents from companies with greater than $1 billion in revenue reported an average of 13,138 incidents in 2014, an increase of 44% year over year. Compounding cybersecurity challenges, criminals and nation states are increasingly targeting mobile devices and leveraging personal applications as a conduit for malware designed to steal corporate data. As both mobility and cybercrime continue to grow, the need for robust security solutions on mobile devices becomes increasingly critical to the enterprise.

Enterprises are adopting diverse strategies to benefit from mobility

Enterprises are adopting a variety of mobility strategies across multiple audiences:

Enabling employees with mobility.    Employees are often the first audience a business addresses within its mobile strategy. Employees utilize a wide variety of mobile devices from multiple manufacturers. Businesses are adopting multiple strategies to enable mobility for their employees, including corporate-owned and employee-owned devices (also known as “Bring Your Own Device,” or BYOD). Organizations also leverage mobile devices into fixed-function applications, such as terminals for policing and nursing. The total number of employees being given access to mobile solutions continues to grow with an October 2014 Dimensional Research and Check Point study of IT professionals reporting that over 75% of respondents allowed personal devices to connect to their corporate network, and 72% of respondents reporting that the number of personal devices in their network had more than doubled over the past two years.

Enabling mobile business processes with business partners.    Enterprises are seeking ways to utilize mobility to enable business activity and collaboration with partners to improve productivity, responsiveness and transparency. These partners can range from suppliers and distributors to board members, legal and financial service providers, and independent agencies. A traditional mobile device management solution is often insufficient as it requires the participating organization to assume control of the entire device and not just the specific application being shared and cannot add policy or security at an application level.

 

 

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Enabling mobile business processes with customers.    Enterprises are also seeking to utilize mobility to enable interactions with customers and consumers to provide a more personalized experience, convenience of access and opportunities for marketing outreach. Mobile applications that support business processes of this kind are already becoming established in banking, retail, healthcare and insurance. As enterprises build mobility solutions for customers and consumers, security and privacy are increasingly important to maintaining client relationships and ensuring trusted interactions.

Legal, HR and privacy complexities have evolved as more employees are using personal devices for corporate uses

Enterprises traditionally provided corporate-owned devices where the voice and data plans were fully paid for by the organization. With the rise of BYOD, legal, HR and privacy complexities have evolved around mobility, including issues such as billing, data accountability and privacy concerns. Companies implementing BYOD policies are faced with the choice of providing a stipend to the employee, without any true understanding of the actual corporate use of the device, or implementing complex expense reporting that costs the company and the employee significant time and potentially infringes upon employee privacy. Adding to the complexity, wireless carriers are moving from unlimited data and limited voice offerings, to limited data and unlimited voice offerings. Technologies such as split billing allow IT to separate business and personal cellular data usage on the same device and automatically bill this data usage to either the company or the employee, without compromising user privacy. By 2020, organizations expect over half of their employees to participate in a BYOD program with no resistance, according to a recent Gartner survey. We feel this will only increase the need and opportunity for organizations to utilize split billing solutions.

Given these trends, we believe it is critical for enterprises to be able to easily and rapidly secure, build, manage and support mobile applications and processes across this wider range of use cases as the business demands.

Our opportunity

IDC has defined the mobile enterprise software and services market as the convergence of several emerging markets that in aggregate are estimated to be approximately $5.3 billion in 2013, growing to approximately $10.4 billion by 2017, representing a compounded annual growth rate of 18.3%. These markets include the enterprise mobility management, mobile lifecycle management, mobile enterprise applications and mobile enterprise security markets.

As enterprises increasingly adopt mobility as a primary work environment, we believe that the market for secure mobility solutions will take an increasing share of IT spend from commercial, non-mobile, software markets. These markets include the security software, application development software, collaborative applications, quality and lifecycle tools, and system management software and network software markets, which totaled $63.2 billion in 2013, according to IDC. In an April 2014 survey by IDC, 59% of respondents identified mobility integration and management as a high or essential investment priority for the next 12 months. Further, almost half (48%) of respondents to PwC’s 2014 Global Economic Crime Survey said the perception of cybercrime risk to their organization had increased in the past year, up from 39% in 2011.

Additionally, the Internet of Things is creating new connected autonomous devices and “wearables” out of traditionally non-connected objects such as watches, home security, fitness bands, vehicles and home appliances. Employees have already begun bringing wearables into the workplace causing companies to face the same challenges they face today with smartphones and tablets in their workforces. IDC estimates that there will be 30 billion “connected (autonomous) things” in 2020 and PwC’s The Global State of Information Security

 

 

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Survey 2015 cited a recent Hewlett-Packard Company review of 10 of the most commonly used connected devices and found that 70% contain serious vulnerabilities.

We believe that upgrades in mobile infrastructure, increases in computing power and subsequent decreases in technology costs, combined with the proliferation of applications, are unlocking new opportunities for enterprises to deploy secure mobile computing to a larger portion of the workforce. Additionally, we believe the extension of mobility to formerly stationary or manual processes will further increase the market for secure mobility solutions.

The rise of mobility presents several key challenges for major constituents

In order to be successful, a secure mobility solution must address a number of key challenges across all constituents:

 

 

for the user, delivering uncompromised user experience and privacy; and

 

 

for IT:

 

   

for the chief security officer, a platform that provides robust security and protects sensitive data and enables compliance at every point in the end-to-end data flow at scale;

 

   

for developers, rapid development of mobile applications compliant with policies;

 

   

for IT operations personnel, securely deploying and managing mobile applications and data across an increasingly complex and diverse network of devices at scale to employees, business partners and customers; and

 

   

for IT support personnel, supporting a large and growing population of active users with heterogeneous devices and applications with the quality service levels and uptime expected of mission-critical business systems.

A successful solution for organizations must provide both enterprise-grade security and an uncompromised user experience across a wide range of heterogeneous devices and applications. It also must enable the entire mobility lifecycle to secure, build, manage and support any application, user and device across an organization’s employees, business partners, and customers while delivering enterprise-grade scalability and availability.

Key benefits of our solution

We are the leading secure mobility platform for enterprises and governments worldwide. We provide a complete solution that includes proven cross-platform enterprise-grade security, a suite of collaboration applications, integrated device, application and service management, analytics tools, comprehensive rapid application development capabilities, and a third-party application and partner ecosystem.

Key benefits of our solution include:

Enterprise-grade security and compliance.    First and foremost, our solution provides a security approach that addresses the key aspects of secure mobility, including the ability to deploy security on devices or in applications using enterprise data. Our products are architected to enable our customers to comply with the most stringent security and data protection standards and regulations in the industry. Our government

 

 

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customers include military and civilian agencies in the United States, the United Kingdom, France, Germany, the Netherlands, Sweden, Canada and Australia. Good is the only cross-platform mobile collaboration solution to achieve Common Criteria EAL4+ certification, and the only solution to meet this level of certification on either iOS or Android.

Flexible, comprehensive end-to-end solution.    We provide line of business leaders with a single platform to secure, build, manage and support mobile applications and processes across all of their mobility strategies. Our solution provides a secure mobility platform that solves for a mix of legacy and mobile-optimized applications, cloud and on-premise deployment models, a variety of devices and operating systems, and multiple mobility strategies across employees, business partners and customers.

Enterprise-scale availability.    Our secure mobility solution includes comprehensive mobile service management for monitoring operations and analytics support, allowing IT to deliver mission-critical service level agreements for mobility at scale.

Rich user experience and privacy.    Our solution provides an intuitive, integrated user experience, without compromising employees’ privacy or corporate security. We accomplish this by separating enterprise data from personal data, enabling IT to deploy security policies on business applications and data independently from the device without violating user privacy.

Rapid application development.    Our Good Dynamics platform provides independent software vendors and internal enterprise development organizations with security and application services that enable them to rapidly develop robust business applications that meet the highest standards of security across a variety of devices and operating systems, without having to learn or code many aspects of enterprise security themselves.

Fast, large scale deployment.    Our secure mobility solution has been architected to scale reliably to hundreds of thousands of devices, allowing IT to rapidly deploy secure mobile applications to devices that are both managed or unmanaged by the enterprise.

Centralized management.    Our secure mobility solution provides management capabilities that allow IT to manage hundreds of thousands of devices and users, within a single business and between multiple enterprises.

Competitive strengths

We pioneered the category of secure mobility by being the first to combine applications with end-to-end security, device management, mobile application development and mobile service management across multiple operating systems. Our solution has been deployed at scale by a number of the largest global enterprises with some of the most stringent security requirements such as financial services, healthcare and government organizations.

We believe we have a number of unique competitive advantages that position us for continued leadership and growth within the market. Our competitive strengths include:

 

 

proven and trusted security approach;

 

flexible, comprehensive end-to-end secure mobility solution;

 

industry-leading scalability and service management;

 

flexible deployment model for cloud, on premise or as a hybrid solution;

 

significant intellectual property and technology portfolio;

 

world-class customer service;

 

 

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large and diverse customer base;

 

rich customer and partner ecosystem;

 

deeply embedded secure mobility solution; and

 

strong brand in secure mobility.

Our growth strategy

Our strategy is to continue to be the leading provider of secure mobility solutions for enterprises and governments worldwide. Key elements of our strategy include:

 

 

grow the depth and breadth of deployments within our existing customer base;

 

extend our leadership through continued innovation;

 

continue to expand our sales organization and carrier and channel partner relationships to acquire new customers;

 

expand the Good Dynamics platform ecosystem;

 

selectively pursue acquisitions to expand our platform; and

 

amplify global awareness of our brand.

Selected risks associated with our business

Our business is subject to numerous risks described in the section entitled “Risk Factors” and elsewhere in this prospectus. You should carefully consider these risks before making an investment. Some of these risks include:

 

 

We have a history of losses, and we are unable to predict the extent of any future losses or when, if ever, we will achieve profitability in the future.

 

 

If the market for secure mobility shrinks or develops at a slower pace than we expect, our business could be adversely affected.

 

 

We expect our operating results to fluctuate on a quarterly and annual basis.

 

 

Because we recognize recurring and perpetual license revenues over a specified period of time, decreases or increases in sales are not immediately reflected in full in our operating results.

 

 

If we do not accurately predict, prepare for and respond promptly to rapidly evolving technological and market developments and changing customer needs, our competitive position and prospects will be harmed.

 

 

A significant amount of our billings and revenues are generated from sales of our suite of collaboration applications. Any decline in sales of these applications could seriously harm our business.

 

 

If we fail to manage future growth effectively, our business would be harmed.

 

 

If we are unable to hire, retain and integrate our senior management and other qualified personnel, our business would suffer.

 

 

Sales of our software and services are concentrated at the end of each quarter, and in particular, the last two weeks of the quarter, which makes it difficult to accurately forecast our expected billings.

 

 

Our secure mobility platform can be used to transmit personal information and other data in the ordinary course of business, which may subject us to governmental regulation and other legal obligations related to confidentiality and privacy. Privacy concerns, changes in such regulations and obligations, and our actual or perceived failure to comply with such obligations could harm our business.

 

 

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The terms of our 5% senior secured notes due 2017, or the Senior Notes, contain certain provisions that, if triggered, would require us to repurchase the Senior Notes, which, in light of our continuing net losses, outstanding debt and contractual obligations and current operating plans, could adversely affect our liquidity and financial condition.

Corporate information

We were incorporated in July 1996 as RoamPage, Inc., a Delaware corporation, and subsequently changed our name to Visto Corporation in August 1997. In February 2009, Visto Corporation acquired Good Technology, Inc. from Motorola, Inc. and began doing business as Good Technology. In September 2012, Visto Corporation changed its name to Good Technology Corporation. Unless expressly indicated or the context requires otherwise, the terms “Good,” “Good Technology,” the “Company,” “we,” “us,” and “our” in this prospectus refer to Good Technology Corporation, and, where appropriate, our wholly-owned subsidiaries. Our principal executive offices are located at 430 N. Mary Avenue, Suite 200, Sunnyvale, California 94085, and our telephone number is (408) 212-7500. Our website address is www.good.com. The information on, or that can be accessed through, our website is not part of this prospectus.

Good, the Good logo, Good Technology, Good Dynamics, Good for Enterprise, Good Connect, Good Share, Good Pro, Good Work, Good Access and other trademarks or service marks of Good appearing in this prospectus are the property of Good Technology Corporation. Trade names, trademarks and service marks of other companies appearing in this prospectus are the property of their respective holders. We have omitted the ® and ™ designations, as applicable, for the trademarks used in this prospectus.

We are an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act. We will remain an emerging growth company until the earliest to occur of: the last day of the fiscal year in which we have more than $1.0 billion in annual revenues; the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; and the last day of the fiscal year ending after the fifth anniversary of our initial public offering.

 

 

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The offering

 

Common stock offered

             shares

 

Over-allotment option

             shares

Common stock to be

outstanding after this

offering

             shares

 

Use of proceeds

The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our stock and thereby enable access to the public equity markets by our employees and stockholders, obtain additional capital and increase our visibility in the marketplace. As of the date of this prospectus, we have no specific plans for the use of the net proceeds we receive from this offering. However, we currently intend to use the net proceeds we receive from this offering primarily for working capital and other general corporate purposes. We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses that complement our business. See “Use of Proceeds.”

 

Concentration of ownership

Upon completion of this offering, our executive officers, directors, principal stockholders and their affiliates will beneficially own approximately     % of our outstanding common stock.

 

Proposed NASDAQ symbol

“GDTC”

The number of shares of our common stock to be outstanding after this offering is based on 219,119,190 shares of our common stock outstanding as of December 31, 2014, which includes 145,763,243 shares of common stock resulting from the automatic conversion, upon the closing of this offering, of all shares of our redeemable convertible preferred stock that were outstanding as of December 31, 2014, and excludes:

 

 

options to purchase 56,522,914 shares of our common stock with a weighted-average exercise price of $2.23 per share that were outstanding as of December 31, 2014;

 

 

549,624 shares of our common stock subject to restricted stock units outstanding as of December 31, 2014;

 

 

options to purchase 56,160 shares of our common stock granted from January 1, 2015 through February 28, 2015, with an exercise price of $4.26 per share;

 

 

115,000 shares of our common stock subject to restricted stock units granted from January 1, 2015 through February 28, 2015;

 

 

warrants to purchase 162,246 shares of our Series C-2 redeemable convertible preferred stock with a weighted-average exercise price of $1.93 per share that were outstanding as of December 31, 2014;

 

 

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warrants to purchase 5,497,961 shares of our common stock with a weighted-average exercise price of $2.10 per share that were outstanding as of December 31, 2014, which include the Net Exercise Warrant described below;

 

 

warrants to purchase 16,260,160 shares of our common stock with an initial exercise price of $4.92 per share (subject to adjustment) that were issued pursuant to our senior notes and warrant offering in September 2014; and

 

 

             shares of our common stock reserved for future issuance under our stock-based compensation plans, consisting of 2,281,241 shares of common stock reserved for future issuance under our 2006 Stock Plan as of December 31, 2014, which shares will be added to the shares to be reserved under our 2015 Equity Incentive Plan, and              shares of our common stock reserved for future issuance under our 2015 Equity Incentive Plan, which will become effective in connection with this offering, and shares that become available under our 2015 Equity Incentive Plan, pursuant to provisions thereof that automatically increase the share reserves under the plan each year, as more fully described in “Executive Compensation—Employee Benefit Plans.”

Except as otherwise indicated, all information in this prospectus assumes:

 

 

the automatic conversion of all outstanding shares of our redeemable convertible preferred stock (other than Series C-1 and C-2 redeemable convertible preferred stock) as of December 31, 2014, into an aggregate of 114,371,043 shares of common stock immediately prior to the completion of this offering;

 

 

the automatic conversion of all outstanding shares of our Series C-1 and C-2 redeemable convertible preferred stock as of December 31, 2014, into an aggregate of 31,392,200 shares of common stock immediately prior to the completion of this offering, based on an assumed initial public offering price of $         per share, the midpoint of the price range reflected on the cover page of this prospectus;

 

 

the effectiveness of our amended and restated certificate of incorporation in connection with the completion of this offering;

 

 

no exercise of options or warrants outstanding as of December 31, 2014, other than the issuance of              shares of our common stock immediately prior to the completion of this offering upon the assumed net exercise of a warrant to purchase up to 4,432,961 shares of our common stock outstanding as of December 31, 2014, or Net Exercise Warrant, at an exercise price of $1.83 per share, based upon the assumed initial public offering price of $         per share, the midpoint of the price range reflected on the cover page of this prospectus; and

 

 

no exercise of the underwriters’ over-allotment option.

 

 

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Summary consolidated financial and other data

You should read the following summary consolidated financial and other data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, all included elsewhere in this prospectus. We derived the consolidated statements of operations data for the years ended December 31, 2012, 2013 and 2014 and our consolidated balance sheet data as of December 31, 2014 from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future.

 

      Year ended December 31,  
(in thousands, except per share data)    2012     2013     2014  

Consolidated Statements of Operations Data:

      

Revenues:

      

Recurring

   $ 19,784      $ 46,709      $ 81,444   

Perpetual license

     40,649        52,210        62,290   

Intellectual property

     23,077        23,286        20,219   

Other

     33,095        38,179        47,901   
  

 

 

 

Total revenues

     116,605        160,384        211,854   

Cost of revenues(1)

     32,016        45,147        53,705   
  

 

 

 

Gross profit

     84,589        115,237        158,149   
  

 

 

 

Operating expenses:

      

Research and development(1)

     50,881        75,875        88,152   

Sales and marketing(1)

     88,700        112,537        109,007   

General and administrative(1)

     34,374        42,713        44,928   
  

 

 

 

Total operating expenses

     173,955        231,125        242,087   
  

 

 

 

Loss from operations

     (89,366     (115,888     (83,938

Other expense, net

     (500     (417     (3,523

Interest expense, net

     (1,028     (1,176     (5,944
  

 

 

 

Loss before benefit from (provision for) income taxes

     (90,894     (117,481     (93,405

Benefit from (provision for) income taxes

     457        (954     (1,992
  

 

 

 

Net loss

     (90,437     (118,435     (95,397

(Income) loss attributable to noncontrolling interest

     (26     9        (1
  

 

 

 

Net loss attributable to Good Technology Corporation common stockholders

   $ (90,463   $ (118,426   $ (95,398
  

 

 

 

Net loss per share attributable to Good Technology Corporation common stockholders, basic and diluted

   $ (2.75   $ (2.41   $ (1.43
  

 

 

 

Weighted-average shares used in computing net loss per share attributable to Good Technology Corporation common stockholders, basic and diluted

     32,915        49,097        66,649   
  

 

 

 

Pro forma net loss per share attributable to Good Technology Corporation common stockholders, basic and diluted(2)

       $ (0.46
      

 

 

 

Weighted-average shares used in computing pro forma net loss per share attributable to Good Technology Corporation common stockholders, basic and diluted(2)

         208,385   

 

 

(footnotes appear on the following page)

 

 

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

 

      Year ended December 31,  
(in thousands)    2012      2013      2014  

Cost of revenues

   $ 774       $ 1,018       $ 1,142   

Research and development

     2,932         5,133         5,207   

Sales and marketing

     2,860         2,841         3,750   

General and administrative

     2,635         6,731         5,596   
  

 

 

 

Total stock-based compensation expense

   $ 9,201       $ 15,723       $ 15,695   

 

 

 

(2)   See Note 18 to our consolidated financial statements appearing elsewhere in this prospectus for an explanation of our pro forma basic and diluted net loss per share calculations.

 

      As of December 31, 2014  
(in thousands)    Actual     Pro
forma(1)
     Pro forma
as adjusted(2)
 

Consolidated Balance Sheet Data:

       

Cash and cash equivalents

   $ 24,496      $ 24,496       $                

Restricted cash

     15,368        15,368      

Working capital (deficit)

     (114,277     (114,277   

Total assets

     410,401        410,401      

Deferred revenues—current and long-term

     424,964        424,964      

Notes payable, current and non-current

     56,146        56,146      

Warrant liability

     22,801        22,801      

Redeemable convertible preferred stock

     284,403             

Additional paid-in capital

     269,831        554,219      

Total Good Technology Corporation stockholders’ deficit

     (434,325     (149,922   

 

 

 

(1)   The pro forma column reflects the automatic conversion of all shares of our redeemable convertible preferred stock, which are outstanding as of December 31, 2014 into 145,763,243 shares of our common stock immediately prior to the closing of this offering and excludes the exercise of the Net Exercise Warrant.

 

(2)   The pro forma as adjusted column reflects (i) the pro forma items described immediately above plus (ii) the sale of              shares of our common stock in this offering at the assumed initial public offering price of $         per share, the midpoint of the price range reflected on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses. A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) each of cash and cash equivalents, working capital (deficit), total assets, additional paid-in capital and total Good Technology Corporation stockholders’ deficit by $        , assuming that the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions.

Key financial and performance metrics

We monitor the following key financial and performance metrics to help us evaluate growth trends in our core business, establish related budgets, forecast and manage cash flows, measure the effectiveness of our sales and marketing efforts to enterprise customers, assess our overall financial condition, allocate capital and make strategic decisions. Furthermore, our key financial and performance metrics are a leading indicator of future revenues that we recognize once we satisfy all of the revenue recognition criteria described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Revenues.”

 

 

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The following table summarizes our non-GAAP financial metrics:

 

      Year ended December 31,  
(in thousands, except percentages)    2012      2013      2014  

Recurring billings

   $ 71,788       $ 85,522       $ 128,107   

% of total billings

     36.5%         44.0%         57.9%   

Perpetual license billings

   $ 90,506       $ 67,523       $ 35,706   

% of total billings

     46.0%         34.7%         16.1%   

Total billings

   $ 196,788       $ 194,312       $ 221,249   

 

 

The following table summarizes our cumulative annualized recurring revenue:

 

      As of December 31,  
(in thousands, except percentages)            2012              2013              2014  

Cumulative annualized recurring revenue

   $ 8,892       $ 24,569       $ 60,957   

% increase over prior period

     NA         176%         148%   

 

 

Recurring billings

Because our recurring revenues are recognized over an extended period of time, we analyze the performance of the business by focusing on recurring billings, which we define as recurring revenues plus the change in deferred recurring revenues from the beginning to the end of the period. Recurring revenues are revenues associated with sales of term licenses for our secure mobility solution, as well as renewals of maintenance and support services associated with sales of perpetual licenses, which typically have a term of one to three years. We began to offer term licenses for our Good for Enterprise application in the second half of 2013.

Perpetual license billings

Historically, most of our license revenues for our secure mobility solution consisted of perpetual licenses for our Good for Enterprise application, for which we generally recognize the associated revenues over a period of five years as a result of our revenue recognition policy. Our perpetual license revenues are generally recognized over a period of five years (or 18 months for licenses that do not permit transferability of the perpetual license), we also analyze the performance of the business by focusing on perpetual license billings, which we define as perpetual license revenues plus the change in deferred perpetual license revenues from the beginning to the end of the period. Perpetual license revenues are revenues that are associated with sales of perpetual licenses for our secure mobility solution, including the initial year of maintenance and support services, as well as sales of our software and services to OEM handset manufacturers.

Total billings

Total billings are comprised of our recurring billings, perpetual license billings, billings related to sales of our Good for You consumer product, including sales through various revenue sharing arrangements with our telecommunication carrier partners, professional services and third-party applications, and billings related to our intellectual property licenses. The total billings we record in any particular period represent total revenues plus the change in total deferred revenues from the beginning to the end of the period. We began to experience a significant increase in the adoption of term licenses by new and existing customers in 2013, which has resulted in an increase in our recurring billings and a decrease in our total billings, given the subscription nature of term licenses versus the one-time, upfront invoicing related to perpetual licenses.

 

 

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Cumulative annualized recurring revenue

To assist with the understanding of the transition of our business from a perpetual license revenue model to a recurring license revenue model, we utilize a performance metric that we refer to as cumulative annualized recurring revenue (ARR). Cumulative ARR is the accumulation of the annualized contract value of all of our contracted term licenses as of a point in time and is calculated as of the end of each quarter. The metric includes the combined effects of the implied annual contract values for new, renewals of and terminations of term license agreements. We do not include any contract values from carrier and OEM software and services and revenues from intellectual property licensing in this metric. In addition, cumulative ARR does not include contract values of perpetual licenses for our products nor does it include the associated maintenance and support revenues. For these reasons, cumulative ARR should not be considered in isolation from, or as a substitute for, our total revenues or the overall performance and growth of the company over time.

See “Selected Consolidated Financial and Other Data—Key Financial and Performance Metrics” for a reconciliation of recurring billings, perpetual license billings and total billings to recurring revenues, perpetual license revenues and total revenues, respectively, the most directly comparable GAAP financial measures, and a description of why we track billings and cumulative annualized recurring revenue and why billings and cumulative annualized recurring revenue may be a useful measure for investors.

 

 

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Risk factors

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including our consolidated financial statements and related notes, before deciding whether to purchase shares of our common stock. If any of the following risks is realized, our business, financial condition, operating results and prospects could be materially and adversely affected. In that event, the price of our common stock could decline, and you could lose part or all of your investment.

Risks related to our business and industry

We have a history of losses, and we are unable to predict the extent of any future losses or when, if ever, we will achieve profitability in the future.

We have incurred net losses in recent years, including $90.4 million, $118.4 million and $95.4 million in 2012, 2013 and 2014, respectively. We had an accumulated deficit of $704.2 million as of December 31, 2014. We may not be able to achieve or sustain profitability in future periods. Achieving profitability will require us to increase revenues, manage our cost structure, and not experience unanticipated liabilities. Revenue growth may slow or revenues may decline for a number of possible reasons, including slowing demand for our secure mobility solution, failure to achieve market acceptance of our new and enhanced products, increasing competition, changes to our pricing model, a decrease in the size or growth of our overall market, or any failure to continue to capitalize on growth opportunities.

Our historical revenue growth has been inconsistent and, for a number of reasons, should not be considered indicative of our future performance. First, from 2010 through 2011, our consumer-oriented Good for You application and carrier business generated the largest portion of our revenues, but in 2013, they represented 28.2% of our revenues, and we expect this percentage to decrease further in the future as we continue to focus on marketing and selling our secure mobility solution to enterprises and governments. Second, a significant component of our revenues to date has been attributable to licensing our intellectual property, although such revenues represented 9.5% of our total revenues in 2014, and we expect this percentage to decrease further in the future. Third, we began marketing and selling our Good Dynamics secure mobility platform in late 2011, and therefore, we do not have sufficient experience marketing and selling this platform and associated applications to accurately forecast future revenues. Fourth, we began offering term licenses for sales of our Good for Enterprise application in 2013 and prior to that time, most of our license revenues from sales of our secure mobility solution consisted of perpetual licenses for our Good for Enterprise application.

Because we recognize a substantial portion of our revenues over the expected life of the customer or the term of their license agreement, as the case may be, we incur upfront costs related to acquiring such customers. Therefore, as we add customers in a particular year, our immediate costs to acquire customers may increase significantly relative to revenues recognized in that same year. In addition, we expect to incur increased research and development and sales and marketing costs as we invest for long-term growth. This, combined with the significant legal, accounting and other expenses that we will incur as a public company, will result in continued net losses in future periods. If our revenues do not increase to offset these increases in our operating expenses, we will not be profitable. Any failure by us to achieve, sustain or increase profitability on a consistent basis could cause the value of our common stock to decline.

 

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If the market for secure mobility shrinks or develops at a slower pace than we expect, our business could be adversely affected.

Our future growth depends on the increased adoption of our secure mobility solution. The rate of customer adoption and deployment of secure mobility depends on many factors, including perceived security risks, privacy, cost and the perceived value and productivity gains of adopting such technology. Many businesses, particularly large enterprises in regulated industries, may be reluctant to broadly adopt mobile computing. If we, or other providers of secure mobility, suffer from real or perceived security breaches, disruptions in service, poor performance or other problems, the rate of growth in the market for secure mobility may decrease significantly, which would adversely affect our future growth.

We expect our operating results to fluctuate on a quarterly and annual basis.

Our operating results have fluctuated significantly in the past and may continue to fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our control. Factors that may contribute to the variability of our operating results include:

 

 

fluctuations in demand for our secure mobility solution, in particular our Good Collaboration Suite and Good Dynamics platform;

 

 

variability in the renewal rates for our software and services;

 

 

fluctuations in sales cycles and prices for our software and services;

 

 

reductions in customers’ budgets for information technology purchases and delays in their purchasing cycles;

 

 

mix of products sold and whether customers license our products on a term or perpetual basis;

 

 

the rate of expansion and productivity of our sales force;

 

 

general economic conditions in our domestic and international markets;

 

 

consolidation within our existing and potential customers;

 

 

the effectiveness of our channel partners and resellers in selling our software and services, particularly in international markets, as well as channel partner concentration or consolidation;

 

 

our ability to successfully develop, introduce and expand adoption of new products;

 

 

the timing of recognizing revenues in any given quarter;

 

 

the timing of sales during the quarter, particularly given that a majority of our sales occur during the last two weeks of the quarter;

 

 

the timing of the development, introduction and shipment of new applications and enhancements by us or our competitors;

 

 

any significant changes in the competitive dynamics of our markets, including new entrants or substantial discounting of our software and services;

 

 

any decision to increase or decrease operating expenses in response to changes in the marketplace or perceived marketplace opportunities;

 

 

our ability to derive benefits from our investments in sales, marketing, engineering, support or other activities;

 

 

our ability to successfully work with independent software vendors, systems integrators and third-party application developers to develop our ecosystem and enterprise applications that strengthen the platform;

 

 

higher compensation-related expenses, including stock-based compensation expenses and employee benefits;

 

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our level of indebtedness and ability to generate sufficient cash to service our indebtedness;

 

 

royalty payments that we are required to make to third parties;

 

 

accounting charges due to impairments of goodwill or intangible assets;

 

 

changes in foreign currency exchange rates; and

 

 

unpredictable fluctuations in our effective tax rate.

Because we recognize recurring and perpetual license revenues over a specified period of time, decreases or increases in sales are not immediately reflected in full in our operating results.

Recurring and perpetual license revenues comprise a substantial majority of our total revenues. The timing of sales of such software licenses and services can be difficult to predict and can result in significant fluctuations in our billings from period to period. We recognize recurring revenues ratably over the term of the contractual period, which is typically one to three years, and we recognize perpetual license revenues over the expected life of the customer, which is approximately five years (or 18 months for licenses that do not permit transferability of the perpetual license). As a result, downturns or upturns in our business may not be immediately reflected in our operating results because most of the revenues we report each quarter are the result of sales we made to customers in prior quarters. Any such decline, however, will negatively affect our revenues in future quarters. Additionally, while we recognize a substantial portion of our software and services revenues over the expected life of the customer, we incur upfront costs related to acquiring such customers. Therefore, as we add customers in a particular year, our immediate costs to acquire customers may increase significantly relative to revenues recognized in that same year.

If we do not accurately predict, prepare for and respond promptly to rapidly evolving technological and market developments and changing customer needs, our competitive position and prospects will be harmed.

The market for secure mobility is expected to continue to evolve rapidly. Although this market expects rapid introduction of new products or enhancements that enable enterprise-grade security and compliance, high scalability and availability, and rapid application development and deployment across all mobility strategies, the development of these products is difficult and the timetable for commercial release and availability is uncertain as there can be long time periods between releases and availability of new products. We may experience unanticipated delays in the availability of new products and services and fail to meet customer expectations for such availability. If we do not quickly respond to the rapidly changing and rigorous needs of our customers by developing, releasing and making available on a timely basis new software and services or enhancements that can respond adequately to new challenges in the market for secure mobility, our competitive position and business prospects will be harmed.

Additionally, the process of developing new technology is complex and uncertain, and if we fail to accurately predict the market’s changing needs and emerging technological trends, our business could be harmed. We must commit significant resources to developing new software and services before knowing whether our investments will result in solutions that the market will accept. For example, we introduced Good Dynamics, our secure mobility platform, to the market in November 2011. We also introduced Good Pro, our cloud-based service for business professionals, in 2014. We also routinely develop and market new productivity applications, whether as part of our Good Collaboration Suite or otherwise, such as Good Work and Good for Salesforce1. New products and services may not achieve any significant degree of market acceptance or be accepted into our sales channel by our channel partners. In addition, many of our target customers may continue allocating their IT budgets for legacy products and services and may not adopt our new products. If our target customers do not adopt our secure mobility platform and recognize the value of our platform compared to legacy products and services, or if we are otherwise unable to sell our products, then our revenues may not grow or may decline,

 

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which would adversely affect our operating results and financial condition. We have limited experience marketing and selling Good Pro, and we do not expect to generate significant revenues from sales of this service in 2014.

The success of new products depends on several factors, including appropriate new product definition, component costs, timely completion and introduction of these products, differentiation of new products from those of our competitors, and market acceptance of these products. There can be no assurance that we will successfully market and sell our Good Pro services, identify new product opportunities, develop and bring new products to market in a timely manner, or achieve market acceptance of our products, or that products and technologies developed by others will not render our products or technologies obsolete or noncompetitive.

A significant amount of our billings and revenues are generated from sales of our suite of collaboration applications. Any decline in sales of these applications could seriously harm our business.

In 2012, 2013 and 2014, we generated 43%, 32% and 29%, respectively, of our billings and 20%, 27% and 30%, respectively, of our revenues from sales of our Good for Enterprise application as well as related maintenance and support services. Prior to 2012, a substantial majority of our revenues and billings were derived from sales of Good for You, our carrier business and intellectual property licensing. We continue to focus our marketing and sales efforts on our secure mobility solution, which includes Good for Enterprise and Good Dynamics, and we expect sales of these products will continue to represent an increasing portion of our billings and revenues. If we are not able to successfully market and sell our solution, in particular our Good Collaboration Suite, which includes our Good for Enterprise application, our revenues and operating results would be materially and adversely impacted.

If we fail to manage future growth effectively, our business would be harmed.

We continue to invest heavily for future growth and have significantly expanded our operations through recent technology acquisitions, increased hiring throughout the organization and in our sales and marketing and research and development organizations in particular, and international expansion of our operations. This growth has placed and will continue to place a strain on our management, IT infrastructure and other resources. Managing this growth will continue to require significant expenditures and allocation of valuable management resources. Further international expansion may be required for our continued business growth, and managing any international expansion would require additional resources and controls. If we fail to achieve the necessary level of efficiency in our organization as it grows, our business, operating results and financial condition would be harmed.

If we are unable to hire, retain and integrate our senior management and other qualified personnel, our business would suffer.

Our future success depends, in part, on our ability to attract and retain our senior management and other highly skilled personnel. The loss of the services of any of our key personnel, the inability to attract and retain additional skilled personnel or delays in hiring required personnel, particularly in engineering and sales, could seriously harm our ability to grow our business. In addition, any of our employees may terminate their employment at any time. Competition for highly skilled personnel is frequently intense, especially in the San Francisco Bay Area, where we have a substantial presence and need for highly skilled personnel. In addition, a large portion of our employee base is substantially vested in significant stock options, and the ability to exercise those options and sell their stock in a public market after the closing of this offering may result in a higher than normal turn-over rate. If we are not able to retain the services of our senior management team or integrate new members into the team effectively, our business may suffer.

 

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Sales of our software and services are concentrated at the end of each quarter, and in particular, the last two weeks of the quarter, which makes it difficult to accurately forecast our expected billings.

We do not have a long history upon which to base forecasts of future billings and revenues resulting from sales of our secure mobility solution. In addition, sales in any given quarter tend to be concentrated at the end of such quarter, and in particular, the last two weeks of the quarter. Accordingly, we may be unable to prepare accurate internal financial forecasts, replace anticipated billings that we do not ultimately recognize or actually bill all such orders that have been received in such a short period. As a result, operating results in future reporting periods may be significantly below the expectations of the public market, equity research analysts or investors, which could depress the price of our common stock.

Our secure mobility solution can be used to transmit personal information and other data in the ordinary course of business, which may subject us to governmental regulation and other legal obligations related to confidentiality and privacy. Privacy concerns, changes in such regulations and obligations, and our actual or perceived failure to comply with such obligations could harm our business.

Customers often use our secure mobility solution to transmit personal information and other sensitive data. There are numerous federal, state and local laws and policies around the world (such as the 1995 EU Data Protection Directive 95/46/EC via the U.S.-EU Safe Harbor program) regarding privacy and the storing, sharing, use, processing, disclosure and protection of personal information and other data, the scope of which are continuously evolving and developing, subject to differing interpretations, and may be inconsistent between countries or conflict with other rules. We are subject to terms of confidentiality with our customers and users. It is possible that these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. It is likely that, as our business grows and evolves and our software and services are used in a greater number of countries, we may become subject to laws and regulations in additional jurisdictions, which could increase our compliance costs, particularly as such laws, regulations and policies tend to change over time. Foreign data protection, privacy and other laws and regulations are often more restrictive than those in the United States. For example, a revision to the 1995 European Union Data Protection Directive is currently being considered by European legislative bodies that may include more stringent operational requirements for data processors and impose significant penalties for non-compliance. In addition, some countries are considering legislation requiring local storage and processing of data that could increase the cost and complexity of delivering certain of our services.

Similarly, there have been a number of recent legislative proposals in the United States, at both the federal and state levels, that would impose new obligations in areas such as privacy and liability for copyright infringement by third parties. These existing and proposed laws and regulations can be costly to comply with and can delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to claims or other remedies, including fines or demands that we modify or cease existing business practices.

Furthermore, government agencies may seek to access sensitive information belonging or related to our customers or users. Laws and regulations relating to government access and restrictions are evolving, and compliance with such laws and regulations could limit adoption of our services by customers or users and create burdens on our business. Moreover, regulatory investigations into our compliance with privacy-related laws and regulations could increase our costs and divert management attention.

It is difficult to predict how existing laws and the new laws to which we may become subject will be applied to our business. If we are not able to comply with these laws or regulations or if we become liable under these laws or regulations, we could be required to implement new measures to remediate these issues. Any failure or perceived failure by us to comply with our confidentiality obligations to customers or users, or any

 

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unauthorized release of personal information, may result in civil or government enforcement actions or litigation and could cause our customers and users to lose trust in us, which could have an adverse effect on our business.

Our customers require us to maintain specified levels of service commitments, and network disruptions or other business interruptions could cause us to fail to meet these commitments and adversely impact our customer relationships as well as our overall business.

We provide our customers with access to the Good Secure Cloud, our network operating centers. Our operations rely on the efficient and uninterrupted operation of complex technology systems and networks. Some of our customers require us to contractually commit to maintain specified levels of customer service under service level agreements. In particular, because of the importance that users of mobile computing in general attach to the reliability of a mobile network, mobile operators are especially known for their rigorous service level requirements. Our service obligations with our customers often require us to maintain uptime of at least 99.5% for our Good Secure Cloud. Good Secure Cloud is vulnerable to damage or interruption from a variety of sources, including fire, earthquake, power loss, telecommunications or computer systems failure, cyber attack, human error, terrorist acts and war. There may also be system or network interruptions if new or upgraded systems are defective or not installed properly. In addition, poor performance in, or any additional interruptions of, the services that we deliver to our customers could delay market acceptance of our products and services and expose us to costs or potential liabilities. We have in the past had service level events necessitating issuance of credits to customers as a result of our inability to fulfill our obligations under service level agreements. If we are unable to meet our contractually committed service level obligations, we could be subject to fees, penalties and civil liabilities, as well as adverse reputational consequences. Failure to operate our Good Secure Cloud in a manner that meets the high service level expectations of our customers could result in harm to our brand and reputation, which could have a material adverse effect on our sales efforts and operating results.

We face intense competition that could reduce our billings and revenues and adversely affect our financial results.

The market for our products is highly competitive, and we expect competition to intensify in the future. This competition could result, and has resulted in the past, in reduced profit margins, increased sales and marketing expenses, and failure to increase, or the loss of, market share, any of which would seriously harm our business, operating results or financial condition. Competitive products and services may in the future have better performance, better features, lower prices and broader acceptance than our software and services, or embody new technologies, which could render our existing software and services obsolete or less attractive to customers.

Many of our current or potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we do. Potential customers may prefer to purchase from their existing providers regardless of product performance or features. Our main competitors fall into four categories:

 

 

large diversified software vendors that have some product capability in mobile security and management and large existing customer bases, such as IBM, Microsoft and SAP;

 

 

IT security, management and virtualization vendors that have begun to extend their capabilities beyond the desktop to encompass mobile devices, such as Symantec, Citrix and VMware;

 

 

mobile device management and mobile application management vendors that offer a subset of the features of our overall solution, such as MobileIron; and

 

 

traditional providers of secure mobile email services integrated with devices, such as Blackberry.

 

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In addition, our customers and target customers may develop their own solutions for secure mobility, rendering our solution less valuable or obsolete. Such competition could have a material adverse effect on our operating results and financial condition.

We expect increased competition from our current competitors as well as other established and emerging companies as the market for secure mobility solutions continues to develop and expand. Furthermore, our channel partners could market products and services that compete with our products and services. In addition, some of our competitors have made acquisitions or entered into strategic relationships with one another to offer a more comprehensive product than they had offered individually. For example, VMware acquired AirWatch, one of our competitors. This acquisition may allow VMware or AirWatch to sell its technology in combination with other technology in the form of new offerings to customers, which could drive some enterprises to seek out VMware as a potential vendor for the products we provide. We expect this trend of acquisitions and strategic partnerships among our competitors to continue as companies attempt to strengthen or maintain their market positions in a rapidly evolving industry and as companies enter into strategic relationships or are acquired. Many of the companies driving this consolidation trend have significantly greater financial, technical and other resources than we do and are better positioned to acquire and offer complementary products and technologies. The companies resulting from these consolidations may create more compelling product offerings and be able to offer greater pricing flexibility, making it more difficult for us to compete effectively, including on the basis of price, technology or product functionality. Continued industry consolidation may adversely impact customers’ perceptions of the viability of smaller technology companies and consequently customers’ willingness to purchase products and services from such companies. These pressures could materially adversely affect our business, operating results and financial condition.

Additionally, platforms for which we develop or on which we offer our applications, in particular our suite of collaboration applications, such as the iOS, Android and Windows Phone platforms, are owned by companies with significant resources that could decide to expand their feature sets with products or features comparable to what we currently offer, which could make our software and services less valuable or obsolete. For example, these companies could develop features and functionality that they integrate into their platforms natively and which could provide comparable features and functionality as our solution.

We may not be able to successfully anticipate or adapt to competition, changing technology or customer requirements on a timely basis, or at all. If we fail to keep up with technological changes or to convince our customers and potential customers of the value of our products, our business, operating results and financial condition could be materially and adversely affected.

Our strategy depends on our ability to enable application developers using our Good Dynamics secure mobility platform to distribute their applications through third-party channels, including the Apple, Google and Microsoft mobile application stores. If these companies deny application developers or us access or cause significant delays in the release of new and enhanced applications from application developers and us, our business and operating results could suffer.

Our business strategy depends on our ability to enable application developers, such as independent software vendors, using our Good Dynamics platform to distribute their applications through third-party channels, including the Apple, Google and Microsoft mobile application stores. Application store owners have control over the products and services made available through their channels and may choose to remove our applications or our partners’ applications from their stores, restrict functionality or delay application releases. Although we dedicate significant resources to ensure approval of our application releases, we cannot be assured of obtaining such approval in the future, or that providers of mobile operating systems will allow us to offer new products and features through their application stores. If we or our partners fail to maintain access to these mobile application stores, are required to restrict the functionality of our or their applications, have significant delays

 

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in releasing updated applications, or are otherwise unable to distribute applications through these channels, our ability to operate our business would be materially and adversely impacted.

Additionally, as new mobile devices are released and third-party mobile operating systems and mobile application download stores are developed, it is difficult to predict the problems that may be encountered in customizing applications for these alternative devices and channels, and we may need to devote significant resources to the creation, support and maintenance of such applications. In addition, if we or our partners experience difficulties in the future in integrating our applications into mobile devices or if problems arise with our relationships with providers of mobile operating systems or mobile application download stores, or if we face increased costs to distribute our applications, our future growth, business and operating results could suffer. Furthermore, changes in these providers’ platforms could require us to make changes in our applications to ensure compatibility. If our applications or our partners’ applications cannot be made available through these third-party platforms, or the costs to make such applications available are increased substantially, our operating results and financial condition may be harmed.

If we are unable to attract new customers or to sell additional software and services to our existing customers, our revenue growth will be adversely affected, and our revenues could decline.

To increase our revenues, we must continually grow our customer base and increase the depth and breadth of the deployments of our software and services with our existing customers. In recent periods, we have been adding personnel, distributors and other resources to augment our sales organization and sales channels as we focus on growing our business, entering new geographic markets and increasing our market share. We expect to incur significant additional costs in expanding our sales and marketing, product development, professional services and customer support organizations, as well as costs associated with our international expansion and channel strategy, as we invest for future growth. The return on these and future investments may be lower, or may be realized more slowly, than we expect. If we do not achieve the benefits anticipated from these investments, or if the realization of any benefits related to these investments is delayed, our growth rates will decline and our operating results could be adversely affected.

Our business depends substantially on our customers renewing their term-based licenses and maintenance and support service agreements, and a decline in renewal rates could result in a material adverse effect on our operating results.

Today, most of our billings and revenues are derived from sales of our secure mobility solution, in particular our Good Collaboration Suite. We offer both term and perpetual licenses for our secure mobility solution, although a significant amount of our revenues from sales of our secure mobility solution, in particular, sales of our Good Collaboration Suite, consist of revenues from perpetual licenses. However, beginning in 2013, we began to experience a significant increase in the adoption of term licenses by new and existing customers, which has resulted in an increase in our recurring revenues. While our sales strategy focuses on the sale of term licenses to new customers and the conversion of existing customers from perpetual to term licenses in order to provide more predictability in our future results of operations, our customers have no obligation to enter into term licenses or renew their maintenance and support services after the expiration of the current term or service period. Our renewal rates may decline or fluctuate as a result of a number of factors, including customer usage, pricing changes, customer satisfaction and general economic conditions. The loss of a substantial amount of renewals or a decline in our overall renewal rate could have a material adverse effect on our results of operations.

 

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Failure to adequately expand our sales organization and channel partnerships to maintain our sales effectiveness will impede our growth.

We plan to continue to expand our sales organization and channel of third-party distribution and reseller partners, both domestically and internationally, in order to more effectively market and sell our secure mobility solution. Identifying and recruiting qualified personnel and training them in the use of our software and service offerings requires significant time, expense and attention. Our business may be adversely affected if our efforts to expand and train our sales organization and channel partners do not generate a corresponding increase in revenues. It generally takes approximately six months for a sales representative to become fully trained with respect to our products and tools. If we are unable to hire, develop and retain talented sales personnel or if new sales personnel or channel partners are unable to achieve desired productivity levels according to our forecast, we may not be able to realize the expected benefits of this investment or increase our revenues. For example, we experienced higher than expected turnover in our sales organization in the second quarter of 2013, which contributed to a decline in our billings growth rate and caused us to revise our forecast for the remainder of 2013 to account for the time it takes to train new hires.

If we fail to further develop and manage our distribution channels, our revenues could decline and our growth prospects could suffer.

We increasingly derive a significant portion of our revenues from sales of our software and services through channel partners, including value-added distributors, value-added resellers and managed-service providers. We also work with carrier partners that resell our secure mobility solution to their enterprise customers. Finally, we utilize partners as our primary channel to serve enterprises that have less than approximately $500 million in annual revenues and to augment our direct sales force in the U.S. and international markets. Resellers are also an important source of sales for us to customers in the U.S. public sector, such as government agencies.

We anticipate that we will continue to derive a substantial portion of our sales through channel partners and resellers, including parties with which we have only recently or not yet developed relationships. We expect that channel sales will represent most of our U.S. government and a substantial portion of our international sales for the foreseeable future, as well as a growing portion of our U.S. sales, especially with respect to sales to small- and medium-sized businesses. We may be unable to recruit additional channel partners and successfully expand our channel strategy. Additionally, our channel partners may fail to successfully market and sell our solutions, which may result in a failure to meet our operating plan. If we do not successfully execute our strategy to increase channel sales, particularly to further penetrate the mid-market, our growth prospects may be materially and adversely affected.

Our agreements with our channel partners are generally non-exclusive, and many of our channel partners may also have relationships with our competitors. If we do not invest an appropriate amount of resources to train and develop our channel partners or if our channel partners do not effectively market and sell our solution, or if they choose to place greater emphasis on products of their own or those offered by our competitors, or if they fail to meet the needs of our customers, our ability to grow our business and sell our solution may be adversely affected, particularly in the public sector, the mid-market and internationally. Similarly, the loss of a substantial number of our channel partners, which may cease marketing our software and services with limited or no notice and with little or no penalty, and any inability to timely replace them or recruit additional channel partners, or any reduction or delay in channel sales of our software and services or conflicts between channel sales and our direct sales strategy could materially and adversely affect our operating results. In addition, changes in the proportion of our revenues attributable to sales by channel partners, which involve different costs and risks than our direct sales, may cause our operating results to fluctuate from period to period.

 

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If we are unable to grow and maintain our relationships with certain third parties, including operating system vendors, original equipment manufacturers, platform providers and cellular network carriers, our business will suffer.

In order for our products to interoperate with leading mobile devices and networks, we are required to work closely with certain operating system vendors, original equipment manufacturers, platform providers and cellular network carriers in product validation, marketing, selling and support. If we are not able to work successfully with these third parties, or grow and maintain our relationships with them, our business and operating results will suffer. In addition, we have benefited from these third parties’ brand recognition, reputation and customer bases. Any losses or shifts in the market position of these third parties in general could disrupt these relationships, result in customer losses, or require us to identify or transition to other manufacturers, vendors, platform providers or carriers, any of which would negatively impact our ability to sell our solution to our existing customers and reach potential customers, which would harm our business.

If our customers experience security breaches related to their data, our reputation and business could be harmed.

While we believe that the proliferation of mobile devices and applications is generating a significant opportunity in mobile computing, enterprises and governments will not employ a mobility strategy within their organizations if it means compromising the security and compliance of their IT systems and infrastructure. Security breaches could expose our customers and us to a risk of data loss, which could result in potential liability and litigation. If we fail to identify and respond to new and increasingly complex methods of attack and update our solution to detect or prevent such threats and protect our customers’ data, our business and reputation will suffer.

In addition, an actual or perceived security breach or theft of our customers’ data, regardless of whether the breach is attributable to the failure of our software or services, could adversely affect the market’s perception of us and secure mobility in general. We cannot assure you that our software and services will be free of defects or vulnerabilities, and even if we discover these weaknesses, we may not be able to immediately correct them, if at all. Our customers may also misuse our software and services, or third-party devices or applications (including those of independent software vendors in our ecosystem), which could result in a breach or theft of business data.

Our customers, reputation and business may be harmed by security breaches of our network systems.

Unauthorized individuals, or attackers, may attempt to penetrate our network. We could be required to expend significant capital and resources to protect against, or to alleviate, problems caused by attackers. We also may not have a timely remedy against an attacker that is able to compromise our network security, resulting in disruptions and delays in providing our software and services to our customers. Any compromise of our systems or security as a result of purposeful security breaches or the inadvertent transmission of computer viruses could adversely affect our business, customers and reputation.

Real or perceived errors, failures or bugs in our software and services could impact our reputation, and as a result, adversely affect our operating results and growth prospects.

Because the technology that we develop for our software and services is complex, undetected errors, failures or bugs may occur, especially when new versions or updates of our software are released. Deployment of our software and services into complicated environments may also expose any previously undetected errors, failures or bugs in our solution despite testing by us. Any downtime in our service, for example disruptions in our Good Secure Cloud, due to correcting such errors, failures or bugs, may also cause customer dissatisfaction. Similarly, because we routinely develop and market new productivity applications, whether as part of our Good

 

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Collaboration Suite or otherwise, such applications may also contain undetected errors, failures or bugs. Real or perceived errors, failures or bugs, including installation errors or policies established by our customers, could result in negative publicity, loss of or delay in market acceptance, loss of competitive position or claims by customers for damages. In such an event, we may be required, or may choose for customer relations or other reasons, to expend additional resources in order to correct the problem. In addition, if an actual or perceived failure of our software or services occurs in a customer’s deployment, regardless of whether the failure is attributable to our software or services, the market perception of the effectiveness of our solution could be adversely affected. Alleviating any of these problems could require significant expenditures of our capital and other resources and could cause interruptions, delays or cessation of sales, which could cause us to lose existing or potential customers and could adversely affect our operating results and growth prospects.

Sales to and support of large customers may require longer lead times and greater customer support, which can strain our resources.

The lead time for sales to large customers is generally longer than that for smaller customers, which requires that our sales team devote more time and effort to make such sales. Supporting large customers could also require us to devote significant development services and support personnel and strain our personnel resources and infrastructure, particularly if such customers require rapid deployment. If we are not able to devote adequate resources to make these sales and support these customers, our revenues may not grow or may decline, adversely impacting our operating results and financial condition.

Many of our large customers, as well as some of our smaller customers, have very complex IT systems, mobile environments, data privacy and security requirements that may require specific features or functions unique to that particular business, which increase our upfront investment in sales and marketing efforts, as well as professional services and customer care. If we are not able to meet our customers’ requirements or demonstrate the scalability of our solution, these efforts may not result in an actual sale. Even if these sales efforts are successful, the revenues we receive from these customers may not be sufficient to offset these upfront investments. If prospective customers require specific features or functions that we do not offer, then the market for our solutions will be more limited and our business could suffer. If we are unable to support the needs of our customers on their schedules or demonstrate the scalability of our solution, these customers may not further expand their usage of our solution in their organization, may seek to terminate their relationship with us, or may renew on less favorable terms. If any of these were to occur, our revenues may decline and our operating results could be adversely affected. Further, the implementation and continuing maintenance of our solution require our customers’ cooperation. If our customers do not allocate sufficient internal resources to these efforts, our software may not be implemented successfully, resulting in dissatisfied customers and harm to our reputation.

Our ability to sell our solution is highly dependent on the quality of our support and services offerings, and our failure to offer high-quality support and services could have a material adverse effect on our business and operating results.

Once our solution is deployed within our customers’ networks, our customers depend on our support organization to resolve any issues relating to our software and services. As a result, high-quality support is critical for the successful marketing and sale of our software and services, including the renewal of term-based license agreements and service agreements. If we do not assist our customers in deploying our software products effectively, succeed in helping our customers resolve post-deployment issues quickly, or provide ongoing support, our existing customers may not renew their license or maintenance and support agreements with us or buy additional software and services from us. Furthermore, our failure to provide our existing customers with high-quality support could harm our reputation with potential customers. Our service organization has recently expanded substantially to address the concerns of our customers. If we fail to manage

 

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these resources correctly, our business will suffer. In addition, as we expand our operations internationally, our support organization will face additional challenges, including those associated with delivering support, training and documentation in languages other than English. Our failure to maintain high-quality support and services could have a material adverse effect on our business and operating results.

We have made and expect to continue to make acquisitions that could disrupt our operations and harm our operating results.

We have in the past and intend to continue to address the need to develop new products and enhance our existing software and services through acquisitions of other companies, product lines, technologies and personnel. For example, in March 2014, we acquired BoxTone Inc., a provider of mobile service management and mobile device management technology, in May 2014, we acquired Fixmo, Inc., a provider of mobile device integrity and security solutions, and in October 2014, we acquired Macheen, Inc., a provider of split-billing technology. Acquisitions involve numerous risks, including the following:

 

 

difficulties in integrating the operations, systems, technologies, products and personnel of the acquired companies;

 

 

diversion of management’s attention from normal daily operations of the business and the challenges of managing larger and more widespread operations resulting from acquisitions;

 

 

potential difficulties in completing projects associated with research and development of the acquired business;

 

 

difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;

 

 

in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries;

 

 

insufficient revenues to offset increased expenses associated with acquisitions; and

 

 

the potential loss of key employees, customers, distributors, vendors and other business partners of the companies we acquire following and continuing after the announcement of our acquisition plans.

Acquisitions have in the past and may also in the future cause us to:

 

 

issue capital stock that would dilute our current stockholders’ percentage ownership;

 

 

use significant portions of our cash;

 

 

assume liabilities or incur debt;

 

 

record goodwill and non-amortizable intangible assets that are subject to impairment testing on a regular basis and potential periodic impairment charges;

 

 

incur amortization expenses related to certain intangible assets;

 

 

incur tax expenses related to the effect of acquisitions;

 

 

incur large restructuring and other related expenses; and

 

 

become subject to intellectual property or other litigation.

Mergers and acquisitions of high-technology companies are inherently risky and subject to many factors outside of our control, and no assurance can be given that our previous or future acquisitions will be successful. Even if

 

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we announce a potential acquisition, there can be no assurance that we will be able to successfully complete the acquisition in a timely manner or at all. Acquisitions may also not result in the benefits to our business that we expect. Failure to manage and successfully integrate acquisitions could materially harm our business and operating results. Even when an acquired company has already developed and marketed products, there can be no assurance that product enhancements will be made in a timely fashion or that pre-acquisition due diligence will identify all possible issues that might arise.

From time to time, we have made acquisitions that resulted in accounting charges in an individual quarter. These charges may occur in any particular quarter, resulting in variability in our quarterly operating results.

Our future performance depends in part on support from our partner ecosystem of independent software vendors, system integrators and other third-party software developers.

We depend on our partner ecosystem of independent software vendors, system integrators and other third-party software vendors to create applications that will integrate with our Good Dynamics secure mobility platform. This presents certain risks to our business, including:

 

 

we cannot provide any assurance that these applications meet the same quality standards that we apply to our own development efforts, and to the extent they contain bugs or defects, they may create disruptions in our customers’ use of our software or negatively affect our brand;

 

 

we do not currently provide support for software applications developed by our partner ecosystem, and users may be left without support and potentially cease using our Good Dynamics platform if these independent software vendors, system integrators and other third-party software developers do not provide adequate support for these applications;

 

 

these independent software vendors, system integrators and third-party software developers may not possess the appropriate intellectual property rights to develop and share their applications; and

 

 

some of these independent software vendors, system integrators and third-party software developers may use the insight they gain from using our software and from documentation publicly available to develop competing products or product features.

Many of these risks are not within our control to prevent, and our brand may be damaged if these applications do not perform to our customers’ satisfaction and that dissatisfaction is attributed to us.

Adverse economic conditions may adversely impact our business.

Our business depends on the overall demand for IT and on the economic health of our current and prospective customers. In addition, the purchase of our products is often discretionary and may involve a significant commitment of capital and other resources. The global financial recession resulted in a significant weakening of the economy in the United States and Europe, in particular, more limited availability of credit, a reduction in business confidence and activity, deficit-driven austerity measures, and budgetary challenges that continue to impact enterprises and governments. In particular, our business in Europe continues to be adversely affected by weakness in current economic conditions. If economic conditions in the United States, Europe and other key markets for our products continue to remain uncertain or deteriorate further, many customers may delay or reduce their IT spending. This could result in reductions in sales of our solution, longer sales cycles, slower adoption of new technologies and increased price competition. Any of these events would likely harm our business, operating results and financial condition. In addition, there can be no assurance that IT spending levels will increase following any sustained recovery.

 

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If we are not able to maintain and enhance our brand, our business and operating results may be adversely affected.

We believe that maintaining and enhancing the “Good” brand identity is critical to our relationships with our customers and independent software vendors and to our ability to attract new customers. The successful promotion of our brand will depend largely upon our marketing efforts, our ability to continue to offer a high-quality solution and our ability to successfully differentiate our solution from those of our competitors. While we intend to increase our investment in marketing our brand, our brand promotion activities may not be successful or yield increased revenues. In addition, independent industry analysts often provide reviews of our product, as well as those of our competitors, and perception of our products in the marketplace may be significantly influenced by these reviews. If these reviews are inaccurate, negative, or less positive as compared to those of our competitors’ products and services, or if industry analysts fail to publish reports that include our software and services, our brand may be adversely affected. In addition, competitors may disseminate misinformation about us or our products, and we will need to expend resources to defend against such misinformation to protect our brand.

Failure to protect our intellectual property rights could adversely affect our business.

Our success depends, in part, on our ability to protect proprietary methods and technologies that we develop under patent and other intellectual property laws of the United States and other countries, so that we can prevent others from using our inventions and proprietary information. If we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology, and our business might be adversely affected. However, defending our intellectual property rights entails significant expenses. Any of our patent rights, copyrights, trademarks or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. Our patents, and any patents issued in the future, may not provide us with any competitive advantages or may be challenged by third parties, and our patent applications may never be granted at all. Additionally, the process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Even if issued, there can be no assurance that these patents will adequately protect our intellectual property, as the legal standards relating to the validity, enforceability and scope of protection of patent and other intellectual property rights are uncertain.

Any patents that are issued may subsequently be invalidated or otherwise limited, allowing other companies to develop offerings that compete with ours, which could adversely affect our competitive position, business prospects and financial condition. In addition, issuance of a patent does not guarantee that our patents will later be enforceable. We cannot be certain that third parties do not have blocking patents that could be used to prevent us from marketing or practicing our software or technology. Effective patent, trademark, copyright and trade secret protection may not be available to us in every country in which our products are available. The laws of some foreign countries may not be as protective of intellectual property rights as those in the United States (in particular, some foreign jurisdictions do not permit patent protection for software), and mechanisms for enforcement of intellectual property rights may be inadequate. Additional uncertainty may result from changes to intellectual property legislation enacted in the United States (including the America Invents Act) and other national governments and from interpretations of the intellectual property laws of the United States and other countries by applicable courts and agencies. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property.

We also rely in part on trade secrets, proprietary know-how and other confidential information to maintain our competitive position. Although we endeavor to enter into non-disclosure agreements with our employees, licensees and others who may have access to this information, we cannot assure you that these agreements or

 

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other steps we have taken will prevent unauthorized use, disclosure or reverse engineering of our technology. Moreover, third parties may independently develop technologies or products that compete with ours, and we may be unable to prevent this competition.

We might be required to spend significant resources to monitor and protect our intellectual property rights. We have in the past initiated and may in the future continue to initiate claims and litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. For example, we recently filed complaints against two of our competitors alleging patent infringement and settled similar litigation with a third competitor. We are also litigating patent infringement claims with other third parties. Litigation puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. We incur significant expenses in pursuing this litigation. Additionally, we may provoke third parties to assert counterclaims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially viable. Any litigation, whether or not it is resolved in our favor, could result in significant additional expense to us and divert the efforts of our technical and management personnel, which may adversely affect our business, operating results, financial condition and cash flows.

We may be subject to intellectual property rights claims by third parties, which are extremely costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies.

Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. In addition, many of these companies have the capability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. The litigation may involve patent holding companies or other adverse patent owners that have no relevant product revenues and against which our patents may therefore provide little or no deterrence. We may receive notices that claim we have misappropriated, misused, or infringed other parties’ intellectual property rights, and, to the extent we gain greater market visibility, we face a higher risk of being the subject of intellectual property infringement claims, which is not uncommon with respect to our market. Any intellectual property claims, with or without merit, could be very time-consuming, could be expensive to settle or litigate and could divert our management’s attention and other resources. These claims could also subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights. These claims could also result in our having to stop using technology found to be in violation of a third party’s rights. We might be required to seek a license for the intellectual property, which may not be available on reasonable terms or at all. Even if a license were available, we could be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require significant effort and expense. If we cannot license or develop technology for any infringing aspect of our business, we would be forced to limit or stop sales of our products and may be unable to compete effectively. Any of these results would adversely affect our business, operating results, financial condition and cash flows.

We rely on the availability of third-party licenses.

Certain aspects of our solution include or are developed using software or other intellectual property licensed from third parties. As such, we are dependent on the availability of developer licenses from third parties such as operating system vendors to develop our solution. It may be necessary in the future to renew existing licenses or seek new licenses for various aspects of our solution. There can be no assurance that the necessary licenses would be available on acceptable terms, if at all. The inability to obtain certain licenses or other rights or to obtain such licenses or rights on favorable terms, or the need to engage in litigation regarding these

 

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matters, could result in delays in product releases until equivalent technology can be identified, licensed or developed, and integrated into our solution and may have a material adverse effect on our business, operating results and financial condition. Moreover, the inclusion in our solution of software or other intellectual property licensed from third parties on a nonexclusive basis could limit our ability to differentiate our solution from those of our competitors.

During the years ended December 31, 2012, 2013 and 2014, we derived a significant portion of our revenues from a small number of customers, and we do not expect to receive a significant amount of new revenues from these customers in the future.

For the year ended December 31, 2012, RIM, LG Electronics and AT&T (formerly Cingular Wireless) accounted for 16.8%, 14.1% and 9.6% of our total revenues, respectively. For the year ended December 31, 2013, RIM and AT&T accounted for 12.2% and 9.6% of our total revenues, respectively. For the year ended December 31, 2014, RIM and AT&T accounted for 9.2% and 9.0% of our total revenues, respectively. We do not expect to derive a significant portion of new revenues from these customers in the future. Revenues from RIM represent the amortization of the $267.5 million license payment that we received from RIM in 2009, which we will continue to amortize through July 2019. Revenues from LG Electronics represent sales of our legacy consumer product, which we are no longer actively marketing and selling. If we are not successful in replacing the revenues we receive from these customers with revenues from customers of our secure mobility solution, our revenues may decrease, which could have a material adverse effect on our business, operating results and financial condition.

Some aspects of our solution incorporate “open source” software, and any failure to comply with the terms of one or more of these open source licenses could negatively affect our business.

Some aspects of our solution incorporate open source software, and we expect to continue to incorporate open source software in the future. Few of the licenses applicable to open source software have been interpreted by courts, and their application to the open source software integrated into our solution may be uncertain. If we fail to comply with these licenses, we may be subject to certain requirements, including requirements that we offer those components of our solution that incorporate the open source software for no cost, that we make available source code for modifications or derivative works we create based upon, incorporating or using the open source software, and that we license such modifications or derivative works under the terms of applicable open source licenses. If an author or other third party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations and could be subject to significant damages, enjoined from the sale of those components of our solution that contained the open source software and required to comply with the foregoing conditions, which could disrupt the distribution and sale of these components. In addition, there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products. As a result, we could be subject to suits by parties claiming infringement due to the inclusion of certain open source software in various components of our solution. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition or require us to devote additional research and development resources to change our solution.

 

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Our international sales and operations subject us to additional risks that may materially and adversely affect our business and operating results.

We market and sell our products throughout the world and have personnel in many parts of the world. In addition, we conduct, and expect to continue to conduct, a significant amount of our business with companies that are located outside the United States. Our international operations subject us to a variety of risks and challenges, including:

 

 

increased management, travel, infrastructure and legal compliance costs associated with having multiple international operations;

 

 

longer payment cycles and difficulties in collecting accounts receivable or satisfying revenue recognition criteria, especially in emerging markets;

 

 

increased financial accounting and reporting burdens and complexities;

 

 

general economic conditions in each country or region;

 

 

increased reliance on our channel partners to sell our software and services;

 

 

credit risk of our channel partners and customers;

 

 

compliance with foreign laws and regulations, in particular, laws and regulations relating to privacy, and the risks and costs of non-compliance with such laws and regulations;

 

 

compliance with laws and regulations for foreign operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell our products in certain foreign markets, and the risks and costs of non-compliance;

 

 

fluctuations in currency exchange rates and related effect on our operating results;

 

 

reduced protection for intellectual property rights in some countries and practical difficulties of enforcing rights abroad; and

 

 

compliance with the laws of numerous foreign taxing jurisdictions and overlapping of different tax regimes.

Any of these risks could adversely affect our international operations, reduce our international revenues, or increase our operating costs, any of which would adversely affect our business, operating results and financial condition and growth prospects.

A portion of our revenues is generated by sales to government entities, which are subject to a number of challenges and risks.

While historically only an insignificant portion of our revenues has been attributed to the sale of our software and services to U.S. and foreign government entities, we are increasing our sales and marketing efforts in this market. Selling to government entities can be highly competitive, expensive and time consuming, and often requires significant upfront time and expense without any assurance that such investment will result in a sale. Certain government entities, such as intelligence and law enforcement agencies, may have more stringent and lengthy product evaluation and security requirements than customers in the commercial sector. Government demand and payment for our software and services may be impacted by public sector budgetary cycles and funding authorizations, particularly in light of U.S. budgetary challenges and concerns regarding the federal government budget sequestration, with funding reductions or delays adversely affecting U.S. public sector demand for our software and services. Furthermore, foreign government challenges and concerns related to data privacy and protection may adversely affect foreign public sector demand for our software and services.

 

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Most of our sales to government entities have been indirect through our resellers. Government entities may have contractual or other legal rights to terminate contracts with our resellers for convenience or due to a default, and any such termination may adversely impact our future operating results.

Factors that could also impede our ability to maintain or increase the amount of revenues derived from government customers include:

 

 

changes in fiscal or contracting policies;

 

 

changes in government programs or applicable requirements;

 

 

the adoption of new laws or regulations or changes to existing laws or regulations;

 

 

failure to comply with laws and regulations relating to the formation, administration and performance of contracts with government entities;

 

 

potential delays or changes in the government appropriations or other funding authorization processes;

 

 

delays in payment by government payment offices; and

 

 

need to comply with pricing requirements for government sales.

The occurrence of any of the foregoing could cause governments and governmental agencies to delay or refrain from purchasing our software and services in the future or otherwise have an adverse effect on our business, operating results, financial condition and cash flows.

Governmental regulations affecting the import or export of products or affecting products containing encryption capabilities could negatively affect our revenues.

U.S. and various foreign governments have or may impose controls, export license requirements and restrictions on the import or export of some technologies, including encryption technology. In addition, from time to time, governmental agencies have proposed varying additional regulation of encryption technology, such as requiring certification, notifications, review of source code, or the escrow and governmental recovery of private encryption keys. Governmental regulation of encryption technology and regulation of imports or exports, or our failure to obtain required import or export approval for sales of our solution or make required filings, could harm our international and domestic sales and adversely affect our revenues. Complying with such regulations could also require us to devote additional research and development resources to change our software or services or alter the methods by which we make them available, which could be costly. In addition, failure to comply with such regulations could result in penalties, costs and restrictions on import or export privileges or adversely affect sales to government agencies or government funded projects.

If poor advice or misinformation is spread through our online communities, our customers who implement such advice may experience unsatisfactory results from using our solution, which could adversely affect our reputation and our ability to grow our business.

Our online communities provide us with a network of active users and developers who promote the usage of our solution and provide technical support to one another. We do not review or test the information that these users and developers, who are not our employees, provide in these online communities to ensure its accuracy or efficacy in resolving technical issues. Therefore, we cannot guarantee that all information provided in our online communities is accurate or that it will not adversely affect the performance of our solution. Furthermore, users who post such information may not have adequate rights to the information to share it publicly, and we could be the subject of intellectual property claims based on our hosting of such information. If poor advice or misinformation is spread among members of our online communities, our customers may experience unsatisfactory results from using our solution, which could adversely affect our reputation and our ability to grow our business.

 

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Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our 5% senior secured notes due 2017, or the Senior Notes.

As of December 31, 2014, we had $80.0 million of total debt outstanding, comprised of our Senior Notes issued on September 30, 2014.

Our substantial level of indebtedness could have significant effects on our business, including the following:

 

 

it may be more difficult for us to satisfy our financial obligations, including with respect to the Senior Notes;

 

 

our ability to obtain additional financing for working capital, capital expenditures, strategic acquisitions or general corporate purposes may be impaired;

 

 

we must use a substantial portion of our cash flow from operations to pay interest on the Senior Notes and our other indebtedness, which will reduce the funds available to use for operations and other purposes;

 

 

our ability to fund an offer to repurchase the Senior Notes in connection with certain change of control transactions may be limited;

 

 

if we are unable to consummate a firmly underwritten registered public offering of our common stock that results in aggregate gross proceeds to us of at least $75.0 million prior to March 1, 2016, our ability to fund an offer to repurchase the Senior Notes as required under the indenture governing the Senior Notes may be limited;

 

 

our substantial level of indebtedness could place us at a competitive disadvantage compared to our competitors that may have proportionately less debt;

 

 

our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited; and

 

 

our substantial level of indebtedness may make us more vulnerable to economic downturns and adverse developments in our business.

We expect to obtain the funds to pay our expenses and to repay our indebtedness primarily from our operations. Our ability to meet our expenses and make these payments therefore depends on our future performance, which will be affected by financial, business, economic and other factors, many of which we cannot control. Our business may not generate sufficient cash flow from operations in the future, and our currently anticipated growth in revenue and cash flow, if any, may not be realized, either or both of which could result in our being unable to repay indebtedness, including the Senior Notes, or to fund other liquidity needs. If we do not have enough funds, we may be required to refinance all or part of our existing debt, sell assets or borrow more funds, which we may not be able to accomplish on terms acceptable to us, or at all. In addition, the terms of existing or future debt agreements may restrict us from pursuing any of these alternatives.

The terms of our Senior Notes contain certain provisions that, if triggered, would require us to repurchase the Senior Notes, which, in light of our continuing net losses, outstanding debt and contractual obligations and current operating plans, could adversely affect our liquidity and financial condition and cause us to undertake actions to enable us to support our liquidity needs and continue our business plans.

We have incurred significant losses since our inception and believe that we will continue to incur losses into at least 2015, which will have a negative impact on cash flow from operations. As of December 31, 2014, we also had significant outstanding debt and contractual obligations related to operating leases. In September 2014, we entered into a purchase agreement relating to the sale of $80.0 million principal amount of Senior Notes, which are outstanding as of December 31, 2014 and are due October 1, 2017, together with a 15% premium.

 

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If we are unsuccessful in generating significant positive cash flows prior to October 1, 2017, we may have to utilize some or all of the proceeds from our initial public offering to repay the Senior Notes at that time.

Pursuant to the terms of the indenture governing the Senior Notes, if we do not consummate a firmly underwritten registered public offering of our common stock with aggregate gross proceeds to us of at least $75.0 million prior to March 1, 2016, the holders of the Senior Notes have the right to require us to immediately repurchase the Senior Notes, in whole or in part, at a repurchase price of 110% of the principal amount of Senior Notes plus accrued and unpaid interest.

In addition, if we undergo a change of control, as defined in the indenture governing the Senior Notes, the holders of the Senior Notes have the right to require us to repurchase their Senior Notes, in whole or in part, at the repurchase prices specified in the indenture governing the Senior Notes, plus accrued and unpaid interest.

Should either of these events occur, we do not expect to be able to repurchase the Senior Notes without issuing additional debt or equity securities through public or private financings. If we are unable to issue additional debt or equity securities, we may be required to refinance all or part of the existing debt, sell assets or borrow more funds, which we may not be able to accomplish on terms acceptable to us, or at all.

Our ability to satisfy our total liabilities, including the Senior Notes, and to continue as a going concern is dependent upon either the successful completion of our planned initial public offering or the timely availability of other long-term financing. Our financial statements do not include any adjustments that might result from the outcome of these uncertainties.

We believe our available financial resources are sufficient to fund our working capital and other capital requirements through December 31, 2015. Our current operating plan for 2015 contemplates significant improvement in our net cash flows, resulting from sales growth in existing and new products and reduced operating expenses compared to prior periods. In an effort to reduce 2015 operating expenses, we implemented a plan in January 2015 and reduced the number of our employee positions by approximately 15%. Our operations require careful management of cash and working capital balances. Our liquidity is affected by many factors including, among others, fluctuations in revenues, gross profit and operating expenses, as well as changes in operating assets and liabilities. We may need additional funds to support working capital requirements and operating expenses, or for other requirements.

There can be no assurance that we will be successful in executing our business plan, maintaining our existing customer base or achieving profitability. The triggering of the requirement of us to repurchase the Senior Notes or our failure to generate sufficient revenues, achieve planned gross margins, control operating costs, generate positive cash flows or raise sufficient additional funds may require us to modify, delay or abandon some of our planned future expansion or expenditures, which could have a material adverse effect on our business, operating results, financial condition and ability to achieve our intended business objectives, and therefore, we could be forced to curtail our operations, which would have a material adverse effect on our ability to continue with our business plans.

If we are unable to raise additional financing, or if other expected sources of funding are delayed or not received, we would take the following actions as early as the third quarter of 2015 to support our liquidity needs through the remainder of 2015 and into 2016:

 

 

effect significant headcount reductions in the United States, EMEA and in APAC, particularly with respect to engineering employees, general and administrative employees and other employees not connected to critical or contracted activities;

 

 

shift our focus to existing products and customers with significant reduced investment in new products and commercial development efforts;

 

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reduce our expenditures for third-party contractors, including consultants, professional advisors and other vendors; and

 

 

reduce or delay uncommitted capital expenditures.

Implementing this contingency plan could have a material negative impact on our ability to continue our business as currently contemplated, including, without limitation, delays or failures in our ability to:

 

 

achieve planned product sales;

 

 

develop and commercialize products within planned timelines or at planned scales; and

 

 

continue other core activities.

Furthermore, any inability to scale-back operations as necessary, and any unexpected liquidity needs, could create pressure to implement more severe measures. Such measures could have a material adverse effect on our ability to meet contractual requirements and increase the severity of the consequences described above.

Despite our current indebtedness level, we and any of our existing or future subsidiaries may still be able to incur substantially more debt, which could exacerbate the risks associated with our substantial leverage.

We and any of our existing and future subsidiaries may be able to incur substantial additional indebtedness in the future. Although the terms of the indenture governing the Senior Notes contain limitations on our ability to incur additional indebtedness, these restrictions are subject to a number of qualifications and exceptions. In addition, if we consummate a firmly underwritten registered public offering of our common stock that results in aggregate gross proceeds to us of at least $75.0 million prior to March 1, 2016, we may be permitted to incur a significant amount of additional indebtedness that is secured by liens that have priority over the liens securing the Senior Notes and the guarantees. If new debt is added to our or any of our subsidiaries’ current debt levels, the related risks that we now face could be exacerbated.

The indenture governing the Senior Notes imposes significant operating and financial restrictions on us, which may prevent us from pursuing certain business opportunities and taking certain actions.

The indenture governing the Senior Notes imposes, and future debt agreements may impose, operating and financial restrictions on us. These restrictions limit or prohibit, among other things, our ability to:

 

 

incur additional indebtedness or issue certain preferred stock;

 

 

pay dividends, redeem subordinated debt or make other restricted payments, including restricted investments;

 

 

grant or permit certain liens on our assets;

 

 

merge, consolidate or transfer substantially all of our assets;

 

 

prior to a firmly underwritten registered public offering of our common stock that results in aggregate gross proceeds to us of at least $75.0 million, incur dividend or other payment restrictions affecting certain of our subsidiaries;

 

 

transfer, sell or acquire assets, including capital stock of our subsidiaries; and

 

 

change the business we conduct.

In addition, the indenture governing the Senior Notes prohibits us from using our intellectual property to secure indebtedness.

 

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These covenants could adversely affect our ability to finance our future operations or capital needs, withstand a future downturn in our business or the economy in general, engage in business activities, including future opportunities that may be in our interest, and plan for or react to market conditions or otherwise execute our business strategies. A breach of any of these covenants could result in a default with respect to the related indebtedness. If a default occurs, the relevant lenders or holders of such indebtedness could elect to declare the indebtedness, together with accrued interest and other fees, to be immediately due and payable and proceed against any collateral securing that indebtedness. Acceleration of our other indebtedness could result in a default under the terms of the indenture governing the Senior Notes. There is no guarantee that we would be able to satisfy our obligations if any of our indebtedness is accelerated.

The Senior Notes are secured by substantially all of our assets and the assets of certain of our subsidiaries, other than intellectual property rights.

We have pledged substantially all of our assets and the assets of certain of our subsidiaries, other than intellectual property rights, as collateral under the Senior Notes. In the event of default with respect to the Senior Notes, the requisite holders of the Senior Notes under the indenture governing the Senior Notes could declare all the Senior Notes then outstanding to be due and payable immediately. If we are unable to pay such amounts, the holders of the Senior Notes may proceed against the collateral granted to them to secure the Senior Notes. The proceeds of any sale of collateral securing the Senior Notes following an event of default may not be sufficient to satisfy, and may be substantially less than, amounts due on the Senior Notes, and the holders of the Senior Notes (to the extent not repaid from the proceeds of the sale of the collateral) would have an unsecured claim against our remaining assets.

Our business is subject to the risks of earthquakes, fire, floods, other natural catastrophic events and man-made problems such as power disruptions or terrorism.

A significant natural disaster, such as an earthquake, tsunami, fire or a flood, or a significant power outage could have a material adverse impact on our business, operating results and financial condition. Our corporate headquarters and our Good Secure Cloud network operations centers are located in Santa Clara, California and Seattle, Washington. These regions are known for seismic or volcanic activity. Further, if a natural disaster occurs in a region from which we derive a significant portion of our revenues, customers in that region may delay or forego purchases of our software and services, which may materially and adversely impact our operating results for a particular period. In addition, acts of terrorism could cause disruptions in our business or the business of our partners, customers or the economy as a whole. All of the aforementioned risks may be augmented if our disaster recovery plans prove to be inadequate. To the extent that any of the above results in delays or cancellations of customer orders, our business, financial condition and operating results would be adversely affected.

Tax provision changes, the adoption of new tax legislation or exposure to additional tax liabilities could materially impact our financial position and results of operations.

We are subject to income and other taxes in the United States and numerous foreign jurisdictions, including jurisdictions where we have regional offices, which, as of December 31, 2014, included Australia, Canada, China, France, Germany, Italy, Japan, South Korea and the United Kingdom. Our tax liabilities are affected by the amounts we charge for services, licenses, funding and other items in intercompany transactions. We are subject to ongoing tax audits in various jurisdictions. Tax authorities may disagree with our intercompany charges, cross-jurisdictional transfer pricing or other matters and assess additional taxes. In addition, tax authorities could review our transactions or tax returns and assert, in addition to the above, various withholding requirements apply to us or our subsidiaries or that benefits of tax treaties are not available to us or our subsidiaries. We regularly assess the likely outcomes of these tax positions in order to determine the

 

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appropriateness of our tax provision. However, there can be no assurance that we will accurately predict the outcomes of these audits, and the amounts ultimately paid upon resolution of audits could be materially different from the amounts previously included in our income tax expense and therefore could have a material impact on our tax provision, net income and cash flows. In addition, our effective tax rate in the future could be adversely affected by changes to our operating structure, changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws and the discovery of new information in the course of our tax return preparation process. In particular, the carrying value of deferred tax assets, which are predominantly in the United States, is dependent on our ability to generate future taxable income in the United States. In addition, proposals for tax legislation including increased tax rates, new tax laws or revised interpretations in the jurisdictions in which we operate, primarily the United States, if adopted, could adversely impact our financial position and results of operations.

Our international operations subject us to potentially adverse tax consequences.

We generally conduct our international operations through wholly-owned subsidiaries and report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. Our intercompany relationships are subject to complex transfer pricing regulations administered by taxing authorities in various jurisdictions. The relevant taxing authorities may disagree with our determinations as to the income and expenses attributable to specific jurisdictions. If such a disagreement were to occur, and our position were not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations. We believe that our financial statements reflect adequate reserves to cover such a contingency, but there can be no assurances in that regard.

We could be subject to additional tax liabilities.

We are subject to federal, state, local and sales taxes in the United States and foreign taxes and value-added taxes in numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and our worldwide provision for taxes. During the ordinary course of business, there are many activities and transactions for which the ultimate tax determination is uncertain. In addition, our tax obligations and effective tax rates could be adversely affected by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations, including those relating to income tax nexus, by our earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates, by changes in foreign currency exchange rates, or by changes in the valuation of our deferred tax assets and liabilities. We may be audited in various jurisdictions, and such jurisdictions may assess additional taxes, sales taxes and value-added taxes against us. Although we believe our tax estimates are reasonable, the final determination of any tax audits or litigation could be materially different from our historical tax provisions and accruals, which could have a material adverse effect on our operating results or cash flows in the period or periods for which a determination is made.

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

At December 31, 2014, we had net operating loss carry forwards for federal income tax purposes of $494.2 million, which will begin to expire in 2018, and federal tax credits of $9.0 million, which will begin to expire in 2015. Additionally, we had net operating loss carry forwards for state income tax purposes of $310.8 million, which will begin to expire in 2015, and other state tax credits of $10.1 million, which will not expire.

In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net

 

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operating losses, or NOLs, to offset future taxable income. If our existing NOLs are subject to limitations arising from previous ownership changes or future ownerships changes, including but not limited to this offering, our ability to utilize NOLs could be limited by Section 382 of the Code. While we do not believe that we have experienced, or will experience in connection with this offering, an ownership change that would result in such a limitation, regulatory changes, such as suspensions on the use of NOLs, could result in the expiration of our NOLs or otherwise cause them to be unavailable to offset future income tax liabilities.

In addition, the realization of these net operating loss and tax credit carry forwards are dependent on our ability to generate sufficient taxable income before their expiration, which, since 2009, we have not done.

Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value added or similar taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our financial results.

We do not collect sales, use, value added and similar taxes in all jurisdictions in which we have sales, based on our belief that such taxes are not applicable. Sales and use, value added and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future. Such tax assessments, penalties and interest or future requirements to collect may adversely affect our financial results. State, local and foreign jurisdictions have differing rules and regulations governing sales, use, value added and other taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of such taxes to our products in various jurisdictions may differ from our current position. Further, these jurisdictions’ rules regarding tax nexus and the applicability of these taxes to our products are complex and vary significantly. As a result, we could face the possibility of tax audits and assessments, and our liability for these taxes and associated interest and penalties could exceed our original estimates. A successful assertion that we should be collecting or accruing sales, use, value-added or other taxes in those jurisdictions where we are not currently doing so, could result in substantial tax liabilities and associated interest and penalties, which could materially impact our financial position and results of operations.

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

Generally, accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the Securities Exchange Commission, or SEC, and other bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results and could affect the reporting of transactions completed before the announcement of a change. Any such change could have a significant effect on our reported financial results.

If our estimates relating to our critical accounting policies are based on assumptions or judgments that change or prove to be incorrect, our operating results could change materially.

The preparation of financial statements in conformity with generally accepted accounting principles requires our management to make estimates, assumptions and judgments that affect the amounts reported in our consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. If our assumptions change or if actual circumstances differ from those in our assumptions, our operating results may be adversely affected. Significant estimates, assumptions and judgments used in preparing our consolidated financial statements include those related to revenue recognition, including the term over which we recognize perpetual license revenues, deferred sales commissions, fair value of assets acquired and liabilities assumed in business

 

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combinations, impairment of goodwill and intangible assets and other long-lived assets, provision for income taxes and the fair value of stock options issued.

The requirements of being a public company may strain our systems and resources, divert management’s attention and be costly.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act, the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, and the rules and regulations of The NASDAQ Stock Market. Compliance with the requirements of these rules and regulations will increase our legal, accounting and finance costs, will make some activities more difficult, time-consuming and costly, and may also place undue strain on our personnel, systems and resources.

The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain internal control over financial reporting and disclosure controls and procedures. We are continuing the costly process of implementing and testing our systems to report our results as a public company, to continue to manage our growth and to implement internal control over financial reporting. We will be required to implement and maintain various other control and business systems related to our equity, finance, treasury, information technology, other recordkeeping systems and other operations. As a result of this implementation and maintenance, management’s attention may be diverted from other business concerns, which could adversely affect our business. Furthermore, we rely on third-party software and system providers for ensuring our reporting obligations and the effectiveness of certain of our internal controls, and to the extent these third parties fail to provide adequate service, including as a result of any inability to scale to handle our growth and the imposition of these increased reporting and internal controls and procedures, we could incur material costs for upgrading or switching systems, and our business could be materially affected.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.

In addition, we expect these laws, rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain appropriate levels of coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers.

As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be adversely affected, and even if the claims do not result in litigation or are resolved in

 

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our favor, these claims, and the time and resources necessary to resolve them, could divert the time and resources of our management and adversely affect our business and operating results.

Failure to comply with laws and regulations could harm our business.

Our business is subject to regulation by various federal, state, local and foreign governmental agencies, including agencies responsible for monitoring and enforcing employment and labor laws, workplace safety, environmental laws, anti-bribery laws, privacy laws, import/export controls, federal securities laws and tax laws and regulations. In certain jurisdictions, these regulatory requirements may be more stringent than those in the United States, and may continue to evolve, resulting in higher compliance costs for us. Noncompliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties or injunctions. If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, operating results and financial condition could be harmed. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in professional fees. Enforcement actions and sanctions could further harm our business, operating results and financial condition.

Risks related to this offering and ownership of our common stock

There has been no prior market for our common stock and an active market may not develop or be sustained, and you may not be able to resell your shares at or above the initial public offering price, if at all.

There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock will be determined through negotiations between the underwriters and us and may vary from the market price of our common stock following this offering. If you purchase shares of our common stock in this offering, you may not be able to resell those shares at or above the initial public offering price. An active or liquid market in our common stock may not develop upon closing of this offering or, if it does develop, it may not be sustainable, which could adversely affect your ability to sell your shares and could depress the market price of our common stock.

Our stock price may be volatile and may decline regardless of our operating performance resulting in substantial losses for investors purchasing shares in this offering.

The trading prices of the securities of technology companies have been highly volatile. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

 

announcements by us or our competitors of significant technical innovations, acquisitions, customer wins, strategic partnerships, joint ventures or capital commitments;

 

 

the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

 

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

 

 

changes in operating performance and stock market valuations of software or other technology companies, or those in our industry, including mobile device and operating system manufacturers, in particular;

 

 

price and volume fluctuations in the trading of our common stock and in the overall stock market, including as a result of trends in the economy as a whole;

 

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announcements by us with regard to the effectiveness of our internal controls and our ability to accurately report financial results;

 

 

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

 

 

lawsuits threatened or filed by or against us;

 

 

changes in key personnel; and

 

 

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

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies.

In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. If we do not establish and maintain adequate research coverage or if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business or industry, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

As a public company, we will be obligated to develop and maintain proper and effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.

We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting commencing as soon as our annual report covering the year ending December 31, 2016. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. Prior to this offering, we have never been required to test our internal controls within a specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner, particularly if material weaknesses exist.

In addition, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. If we are unable to comply with the requirements of Section 404 in a timely manner, the market price of our common stock could decline, and we could be subject to sanctions or investigations by the stock exchange on which our common stock is listed, the SEC or other regulatory authorities, which would require additional financial and

 

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management resources. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations. Any failure to implement and maintain effective internal controls also could adversely affect the results of periodic management evaluations regarding the effectiveness of our internal control over financial reporting. Ineffective disclosure controls and procedures or internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock.

Implementing any appropriate changes to our internal control over financial reporting may require specific compliance training of our directors, officers and employees, entail substantial costs in order to modify our existing accounting systems, and take a significant period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. In the event that we are not able to demonstrate compliance with Section 404 of the Sarbanes-Oxley Act in a timely manner, that our internal controls are perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and our stock price could decline.

We do not expect to pay any cash dividends for the foreseeable future.

We do not anticipate that we will pay any cash dividends on shares of our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon operating results, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. In addition, the indenture governing our Senior Notes restricts our ability to pay dividends. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.

Our failure to raise additional capital or generate the significant capital necessary to expand our operations, invest in new products and service our existing debt could reduce our ability to compete, harm our business and cause us to take actions to support our liquidity needs.

We expect that our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs for at least the next 12 months. After that, we may need to raise additional funds, and we may not be able to obtain additional debt or equity financing on favorable terms, if at all. If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests and the per share value of our common stock could decline. The holders of our Senior Notes have priority over the holders of common stock and if we engage in additional debt financings, the holders of the additional debt securities would also have priority over the holders of common stock. We may also be required to accept terms that further restrict our ability to incur additional indebtedness, and take other actions that would otherwise be in the interests of the stockholders and force us to maintain specified liquidity or other ratios, any of which could harm our business, operating results and financial condition.

If we are unable to raise additional financing, or if other expected sources of funding are delayed or not received, we would need to take further actions to support our liquidity needs. See the risk factor entitled “The terms of our Senior Notes contain certain provisions that, if triggered, would require us to repurchase the Senior Notes, which, in light of our continuing net losses, outstanding debt and contractual obligations and current operating plans, could adversely affect our liquidity and financial condition and cause us to undertake actions to enable us to support our liquidity needs and continue our business plans.” for more information.

 

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Furthermore, any unexpected liquidity needs could create pressure to implement more severe measures. Such measures could have a material adverse effect on our ability to meet contractual requirements and increase the severity of the consequences to our business, operating results and financial condition.

Concentration of ownership among our existing executive officers, directors and their affiliates may prevent new investors from influencing significant corporate decisions.

Upon completion of this offering, our executive officers, directors and their affiliates will beneficially own approximately     % of our outstanding common stock. As a result, these stockholders will be able to exercise a significant level of control over all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation and approval of significant corporate transactions. This control could have the effect of delaying or preventing a change of control of our company or changes in management and will make the approval of certain transactions difficult or impossible without the support of these stockholders.

Substantial future sales of shares of our common stock by existing stockholders could depress the market price of our common stock.

The market price for our common stock could decline as a result of the sale of substantial amounts of our common stock, particularly sales by our directors, executive officers and significant stockholders, a large number of shares of our common stock becoming available for sale or the perception in the market that holders of a large number of shares intend to sell their shares. Based on 219,119,190 shares outstanding as of December 31, 2014 (which excludes the exercise of the Net Exercise Warrant), upon completion of this offering, we will have outstanding approximately              shares of common stock, approximately              of which are subject to the 180-day contractual lock-up more fully described in “Underwriters.” J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Barclays Capital Inc. may permit our officers, directors, employees and current stockholders to sell shares prior to the expiration of the lock-up agreements.

After this offering, holders of an aggregate of 148,171,622 shares of our common stock as of December 31, 2014, will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or our stockholders. Substantially all of these shares are subject to the 180-day contractual lock-up referred to above.

In addition, the shares of common stock subject to outstanding options under our equity incentive plans, the shares reserved for future issuance under our equity incentive plans and shares issuable upon exercise of our outstanding warrants will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations. See “Shares Eligible for Future Sale” for a more detailed description of sales that may occur in the future.

If a substantial number of shares are sold, or if it is perceived that they will be sold, in the public market, before or after the expiration of the 180-day contractual lock-up period, the trading price of our common stock could decline substantially.

Anti-takeover provisions in our charter documents and Delaware law may delay or prevent an acquisition of our company.

Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that may have the effect of delaying or preventing a change in control of us or changes in our management. Our amended and restated certificate of incorporation and bylaws, which will become effective upon the closing of this offering, include provisions that:

 

 

authorize “blank check” preferred stock, which could be issued by the board without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock;

 

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create a classified board of directors whose members serve staggered three-year terms;

 

 

specify that special meetings of our stockholders can be called only by our board of directors, the chairperson of the board, the chief executive officer or the president;

 

 

prohibit stockholder action by written consent;

 

 

establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors;

 

 

provide that our directors may be removed only for cause;

 

 

provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum;

 

 

specify that no stockholder is permitted to cumulate votes at any election of directors;

 

 

authorize our board of directors to modify, alter or repeal our amended and restated bylaws; and

 

 

require supermajority votes of the holders of our common stock to amend specified provisions of our charter documents.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us in certain circumstances.

Any provision of our amended and restated certificate of incorporation or amended and restated bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution.

If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution in the pro forma net tangible book value per share after giving effect to this offering of $         per share as of December 31, 2014, based on an assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus, because the price that you pay will be substantially greater than the pro forma net tangible book value per share of the common stock that you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of our capital stock. You will experience additional dilution upon exercise of any warrant, upon exercise of options to purchase common stock under our equity incentive plans, if we issue restricted stock to our employees under our equity incentive plans or if we otherwise issue additional shares of our common stock. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.

Our management will have broad discretion to use the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not

 

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apply the net proceeds of this offering in ways that increase the value of your investment. We intend to use the net proceeds from this offering for working capital and other general corporate purposes. We may use a portion of the net proceeds to us to expand our current business through acquisitions of other businesses, products and technologies. Until we use the net proceeds from this offering, we plan to invest them, and these investments may not yield a favorable rate of return. If we do not invest or apply the net proceeds from this offering in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.

We are an “emerging growth company” and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced financial disclosure obligations, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. We may take advantage of these provisions for up to five years or such earlier time that we are no longer an “emerging growth company.” We would cease to be an “emerging growth company” upon the earliest to occur of: the last day of the fiscal year in which we have more than $1.0 billion in annual revenues; the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; and the last day of the fiscal year ending after the fifth anniversary of our initial public offering. We may choose to take advantage of some but not all of these reduced reporting burdens. If we take advantage of any of these reduced reporting burdens in future filings, the information that we provide our security holders may be different than you might receive from other public companies in which you hold equity interests. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have chosen to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

 

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Special note regarding forward-looking statements

This prospectus includes forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward looking statements. Forward-looking statements include information concerning:

 

 

our financial performance, including our revenues, cost of revenues, operating expenses, ability to generate positive cash flow and ability to attain and sustain profitability;

 

 

our liquidity, capital resources and ability to raise additional capital;

 

 

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

 

 

our ability to attract and retain customers;

 

 

our ability to drive increased use cases for our software with new and existing customers;

 

 

our ability to extend our leadership position in secure mobility and mobile applications;

 

 

our ability to increase the development by customers, partners and third-party developers of applications for our Good Dynamics platform;

 

 

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

 

 

our ability to adapt to changing market conditions;

 

 

our expectations regarding the expansion and use of mobile computing in businesses and by their employees, suppliers and customers;

 

 

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

 

 

our ability to successfully market and expand adoption of new applications, products, and services;

 

 

our ability to manage our international operations and to enter new markets internationally;

 

 

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

 

 

the effects of seasonal trends on our results of operations;

 

 

our expectations concerning relationships with third parties, including channel partners, resellers, and logistics providers;

 

 

our ability to attract and retain qualified employees and key personnel;

 

 

our ability to service our indebtedness;

 

 

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

 

 

future acquisitions of, or investments in, complementary companies, products, services, or technologies.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those

 

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described in “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing market. New risks emerge from time-to-time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward looking statements. We undertake no obligation to update publicly any forward looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations. You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity and performance, as well as other events and circumstances may be materially different from what we expect.

 

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Market and industry data

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity, and market size, is based on information from various sources, including Cisco’s Visual Networking Index, Gartner, Inc., or Gartner, and International Data Corporation, or IDC, on assumptions that we have made that are based on those data and other similar sources and on our knowledge of the markets for our products and services. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advise technology users to select only those vendors with the highest ratings or other designation. Gartner research publications consist of the opinions of Gartner’s research organization and should not be construed as statements of fact. Gartner disclaims all warranties, expressed or implied, with respect to this research, including any warranties of merchantability or fitness for a particular purpose.

The Gartner Reports described herein, or the Gartner Reports, represent data, research opinion or viewpoints published as part of a syndicated subscription service, by Gartner, and are not representations of fact. Each Gartner Report speaks as of its original publication date (and not as of the date of this prospectus) and the opinions expressed in the Gartner Reports are subject to change without notice.

The sources of industry and market data contained in this prospectus are listed below:

 

(1)   Cisco Visual Networking Index: Global Mobile Data Traffic Forecast Update, 2014-2019, February 2015

 

(2)   Dimensional Research and Check Point Software Technologies Ltd.: The Impact of Mobile Devices on Information Security: A Survey of IT and Security Professionals, October 2014

 

(3)   Gartner’s “Magic Quadrant for Mobile Device Management Software” (Authors: Phillip Redman, John Girard, Leif-Olof Wallin, Publication date: 13 April 2011)

 

(4)   Gartner’s “Magic Quadrant for Mobile Device Management Software” (Authors: Phillip Redman, John Girard, Monica Basso, Publication date: 17 May 2012, revised 21 June 2012)

 

(5)   Gartner’s “Magic Quadrant for Mobile Device Management Software” (Authors: Phillip Redman, John Girard, Terrence Cosgrove, Monica Basso, Publication date: 23 May 2013)

 

(6)   Gartner’s “Magic Quadrant for Enterprise Mobility Management Suites” (Authors: Terrence Cosgrove, Rob Smith, Chris Silva, Bryan Taylor, John Girard, Monica Basso, Publication date: 3 June 2014)

 

(7)   Gartner’s “Bring Your Own Device: The Results and the Future” (Author: David A. Willis, Publication date: 5 May 2014)

 

(8)   IDC Worldwide Business Use Smartphone 2014-2018 Forecast Update, Doc #252893, December 2014

 

(9)   IDC: “Mind the Gap!” Why LoBsters, Marketers, and Corporate Digital Folk Are Different From IT Professionals, Doc # Q04W, April 2014

 

(10)   IDC Worldwide Semiannual Software Tracker, 2014H1, November 2014

 

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(11)   IDC: “Finding Success in the New IoT Ecosystem: Market to Reach $3.04 Trillion and 30 Billion Connected “Things” in 2020, IDC Says,” November 2014

 

(12)   IDC: Worldwide Mobile Enterprise Applications 2014-2018 Forecast and Analysis, Doc #251433, October 2014

 

(13)   IDC: Worldwide and U.S. Mobile Life-Cycle Management Services 2014-2018 Forecast: The Basis of Competition Is Changing, Doc #251439, September 2014

 

(14)   IDC: Worldwide Mobile Enterprise Security Software 2014-2018 Forecast and Analysis, Doc #249434, June 2014

 

(15)   IDC: Worldwide Enterprise Mobility Management Software 2014-2018 Forecast and 2013 Vendor Shares, Doc #252063, October 2014

 

(16)   IDC: Worldwide Quarterly PC Tracker, 2014 Q4, January 2015

 

(17)   IDC: Worldwide and U.S. Tablet Plus 2-in-1 2014-2018 Forecast Update: December 2014, Doc #253099, December 2014

 

(18)   PwC: Managing cyber risks in an interconnected world—Key findings from The Global State of Information Security Survey 2015, September 30, 2014

 

(19)   PwC: 2014 Global Economic Crime Survey—Economic crime: A threat to business globally, 2014

 

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Use of proceeds

We estimate that the net proceeds from our sale of             shares of common stock in this offering at an assumed initial public offering price of $             per share, the midpoint of the price range reflected on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses, will be approximately $             million or $             million if the underwriters’ over-allotment option is exercised in full. A $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) the net proceeds to us from this offering by approximately $             million, assuming that the number of shares offered, as reflected on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. Similarly, each increase (decrease) of one million in the number of shares of common stock offered would increase (decrease) the net proceeds that we receive from this offering by approximately $             million, assuming the initial public offering price, as reflected on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions.

The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and thereby enable access to the public equity markets by our employees and stockholders, obtain additional capital and increase our visibility in the marketplace. As of the date of this prospectus, we have no specific plans for the use of the net proceeds we receive from this offering. However, we currently intend to use the net proceeds we receive from this offering primarily for working capital and other general corporate purposes. We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses that complement our business. We will have broad discretion over the uses of the net proceeds of this offering. Pending these uses, we intend to invest the net proceeds from this offering in short-term, investment-grade interest-bearing securities such as money market accounts, certificates of deposit, commercial paper, and guaranteed obligations of the U.S. government.

Dividend policy

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings and do not expect to pay any cash dividends on our common stock for the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial conditions. In addition, the indenture governing our Senior Notes restricts our ability to pay dividends.

 

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Capitalization

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2014 on:

 

 

an actual basis;

 

 

a pro forma basis to give effect to the automatic conversion of all shares of our redeemable convertible preferred stock that were outstanding as of December 31, 2014 into 145,763,243 shares of our common stock immediately prior to the completion of this offering, excluding the exercise of the Net Exercise Warrant; and

 

 

a pro forma as adjusted basis to give further effect to (i) the sale of              shares of our common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the estimated offering price range, as reflected on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses; and (ii) the effectiveness of our amended and restated certificate of incorporation in connection with this offering.

The information below is illustrative only, and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of the offering determined at the pricing of this offering. You should read this table together with our audited consolidated financial statements and related notes, “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each included elsewhere in this prospectus.

 

      As of December 31, 2014  
(in thousands, except per share data)    Actual     Pro forma    

Pro forma

as adjusted(1)

 

Cash and cash equivalents

   $ 24,496      $ 24,496      $     
  

 

 

 

Notes payable, current and non-current at face value(2)

     80,000        80,000     

Redeemable convertible preferred stock, $0.0001 par value per share: 151,423 shares authorized, 145,763 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma or pro forma as adjusted

     284,403            

Good Technology Corporation stockholders’ deficit:

      

Preferred stock, $0.0001 par value per share: no shares authorized, issued or outstanding, actual; 20,000 shares authorized, no shares issued or outstanding, pro forma or pro forma as adjusted

                

Common stock, $0.0001 par value per share: 311,000 shares authorized, 73,356 shares issued and outstanding, actual; 1,000,000 shares authorized, 219,119 shares issued and outstanding, pro forma; 1,000,000 shares authorized,              shares issued and outstanding, pro forma as adjusted

     7        22     

Additional paid in capital

     269,831        554,219     

Accumulated deficit

     (704,163     (704,163  
  

 

 

 

Total Good Technology Corporation stockholders’ deficit

     (434,325     (149,922  
  

 

 

 

Total capitalization

   $ (69,922   $ (69,922   $                

 

 

 

(1)  

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the estimated offering price range reflected on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total Good Technology Corporation stockholders’ deficit and total capitalization by approximately $         million, assuming that the

 

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number of shares offered, as reflected on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions. Similarly, each increase (decrease) of one million in the number of shares of common stock offered would increase (decrease) our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total Good Technology Corporation stockholders’ deficit and total capitalization by approximately $             million, assuming the assumed initial public offering price, as reflected on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions.

 

(2)   Notes payable does not include the debt discount due to warrant issuance and notes payable put option.

The number of shares of common stock issued and outstanding actual, pro forma and pro forma as adjusted in the table above does not include the following shares:

 

 

options to purchase 56,522,914 shares of our common stock with a weighted-average exercise price of $2.23 per share that were outstanding as of December 31, 2014;

 

 

549,624 shares of our common stock subject to restricted stock units outstanding as of December 31, 2014;

 

 

options to purchase 56,160 shares of our common stock granted from January 1, 2015 through February 28, 2015, with an exercise price of $4.26 per share;

 

 

115,000 shares of our common stock subject to restricted stock units granted from January 1, 2015 through February 28, 2015;

 

 

warrants to purchase 162,246 shares of our Series C-2 redeemable convertible preferred stock with a weighted-average exercise price of $1.93 per share that were outstanding as of December 31, 2014;

 

 

warrants to purchase 5,497,961 shares of our common stock with a weighted-average exercise price of $2.10 per share that were outstanding as of December 31, 2014, which include the Net Exercise Warrant;

 

 

warrants to purchase 16,260,160 shares of our common stock with an initial exercise price of $4.92 per share (subject to adjustment) that were issued pursuant to our senior notes and warrant offering in September 2014; and

 

 

             shares of our common stock reserved for future issuance under our stock-based compensation plans, consisting of 2,281,241 shares of common stock reserved for future issuance under our 2006 Stock Plan as of December 31, 2014, which shares will be added to the shares to be reserved under our 2015 Equity Incentive Plan, and              shares of our common stock reserved for future issuance under our 2015 Equity Incentive Plan, which will become effective in connection with this offering, and shares that become available under our 2015 Equity Incentive Plan, pursuant to provisions thereof that automatically increase the share reserves under the plan each year, as more fully described in “Executive Compensation—Employee Benefit Plans and Stock Plans.”

 

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Dilution

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the amount per share paid by purchasers of shares of common stock in this initial public offering and the pro forma as adjusted net tangible book value per share of common stock immediately after this offering. At December 31, 2014, we had net tangible book value of $(416.8) million. Net tangible book value represents the amount of our total assets, less our goodwill and other intangible assets, less our total liabilities. Our pro forma net tangible book value as of December 31, 2014, was $             million, or $         per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of shares of common stock outstanding as of December 31, 2014, after giving effect to the conversion of all outstanding shares of our redeemable convertible preferred stock into shares of our common stock immediately upon the closing of this offering, excluding the exercise of the Net Exercise Warrant.

After giving effect to our sale of shares of common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range reflected on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value as of December 31, 2014, would have been approximately $             million, or approximately $         per share of our common stock. This represents an immediate increase in pro forma net tangible book value of $         per share to our existing stockholders and an immediate dilution of $         per share to investors purchasing shares of common stock in this offering.

The following table illustrates this dilution:

 

Assumed initial public offering price per share

            $                

Pro forma net tangible book value per share as of December 31, 2014

   $                   

Increase in pro forma net tangible book value per share attributable to new investors

     
  

 

 

    

Pro forma as adjusted net tangible book value per share after this offering

     
     

 

 

 

Dilution per share to investors in this offering

      $     

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the price range reflected on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value per share to new investors by $             and would increase (decrease) dilution per share to new investors by $            , assuming that the number of shares offered, as reflected on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions. In addition, to the extent any outstanding options or warrants are exercised, you will experience further dilution.

The table below summarizes, as of December 31, 2014, on a pro forma as adjusted basis described above, the number of shares of our common stock we issued and sold, the total consideration we received and the average price per share from existing stockholders and the total consideration to be paid by new investors purchasing our common stock in this offering at the assumed initial public offering price of $         per share, the midpoint of the price range reflected on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses:

 

      Shares purchased      Total consideration      Average price
per share
 
      Number    Percent      Amount      Percent     

Existing stockholders

            %       $                          %       $                

New public investors

              
  

 

    

Total

        100.0%       $           100.0%      

 

 

 

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A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the total consideration paid by new investors by $         million and increase (decrease) the percent of total consideration paid by new investors by     %, assuming that the number of shares offered, as reflected on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions.

Assuming the underwriters’ over-allotment option is exercised in full, sales in this offering will reduce the percentage of shares held by existing stockholders to     % and will increase the number of shares held by our new investors to             , or     %.

The foregoing tables exclude:

 

 

options to purchase 56,522,914 shares of our common stock with a weighted-average exercise price of $2.23 per share that were outstanding as of December 31, 2014;

 

 

549,624 shares of our common stock subject to restricted stock units outstanding as of December 31, 2014;

 

 

options to purchase 56,160 shares of our common stock granted from January 1, 2015 through February 28, 2015, with an exercise price of $4.26 per share;

 

 

115,000 shares of our common stock subject to restricted stock units granted from January 1, 2015 through February 28, 2015;

 

 

warrants to purchase 162,246 shares of our Series C-2 redeemable convertible preferred stock with a weighted-average exercise price of $1.93 per share that were outstanding as of December 31, 2014;

 

 

warrants to purchase 5,497,961 shares of our common stock with a weighted-average exercise price of $2.10 per share that were outstanding as of December 31, 2014, which include the Net Exercise Warrant;

 

 

warrants to purchase 16,260,160 shares of our common stock with an initial exercise price of $4.92 per share (subject to adjustment) that were issued pursuant to our senior notes and warrant offering in September 2014; and

 

 

            shares of our common stock reserved for future issuance under our stock-based compensation plans, consisting of 2,281,241 shares of common stock reserved for future issuance under our 2006 Stock Plan as of December 31, 2014, which will be added to the shares to be reserved under our 2015 Equity Incentive Plan, and              shares of our common stock reserved for future issuance under our 2015 Equity Incentive Plan, which will become effective in connection with this offering, and shares that become available under our 2015 Equity Incentive Plan, pursuant to provisions thereof that automatically increase the share reserves under the plan each year, as more fully described in “Executive Compensation-Employee Benefit Plans and Stock Plans.”

 

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Selected consolidated financial and other data

The following selected consolidated financial and other data should be read together with our consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. The selected consolidated financial data in this section is not intended to replace our consolidated financial statements and the related notes. Our historical results are not necessarily indicative of our future results.

We derived the consolidated statements of operations data for the years ended December 31, 2012, 2013 and 2014 and the consolidated balance sheet data as of December 31, 2013 and 2014 from our audited consolidated financial statements appearing elsewhere in this prospectus. The consolidated statements of operations data for the year ended December 31, 2011 and the consolidated balance sheet data as of December 31, 2011 and 2012 are derived from our audited consolidated financial statements that are not included in this prospectus and have been revised to conform to the current revenue classification presentation and to reclassify expenses relating to the product management department from sales and marketing to research and development expenses, as described in Note 2 to our consolidated financial statements appearing elsewhere in this prospectus.

 

      Year ended December 31,  
(in thousands, except per share data)    2011     2012     2013     2014  

Consolidated Statements of Operations Data:

        

Revenues:

        

Recurring

   $ 7,115      $ 19,784      $ 46,709      $ 81,444   

Perpetual license

     24,924        40,649        52,210        62,290   

Intellectual property

     27,221        23,077        23,286        20,219   

Other

     26,086        33,095        38,179        47,901   
  

 

 

 

Total revenues

     85,346        116,605        160,384        211,854   

Cost of revenues(1)

     19,853        32,016        45,147        53,705   
  

 

 

 

Gross profit

     65,493        84,589        115,237        158,149   
  

 

 

 

Operating expenses:

        

Research and development(1)

     32,472        50,881        75,875        88,152   

Sales and marketing(1)

     43,822        88,700        112,537        109,007   

General and administrative(1)

     24,485        34,374        42,713        44,928   
  

 

 

 

Total operating expenses

     100,779        173,955        231,125        242,087   
  

 

 

 

Loss from operations

     (35,286     (89,366     (115,888     (83,938

Other expense, net

     (651     (500     (417     (3,523

Interest expense, net

     (675     (1,028     (1,176     (5,944
  

 

 

 

Loss before benefit from (provision for) income taxes

     (36,612     (90,894     (117,481     (93,405

Benefit from (provision for) income taxes

     (4,379     457        (954     (1,992
  

 

 

 

Net loss

     (40,991     (90,437     (118,435     (95,397

(Income) loss attributable to noncontrolling interest

     (214     (26     9        (1
  

 

 

 

Net loss attributable to Good Technology Corporation common stockholders

   $ (41,205   $ (90,463   $ (118,426   $ (95,398
  

 

 

 

Net loss per share attributable to Good Technology Corporation common stockholders, basic and diluted

   $ (2.11   $ (2.75   $ (2.41   $ (1.43
  

 

 

 

Weighted-average shares used in computing net loss per share attributable to Good Technology Corporation common stockholders, basic and diluted

     19,518        32,915        49,097        66,649   
  

 

 

 

Pro forma net loss per share attributable to Good Technology Corporation common stockholders, basic and diluted (unaudited)(2)

         $ (0.46
        

 

 

 

Weighted-average shares used in computing pro forma net loss per share attributable to Good Technology Corporation common stockholders, basic and diluted (unaudited)(2)

           208,385   

 

 

 

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

 

      Year ended December 31,  
(in thousands)    2011      2012      2013      2014  

Cost of revenues

   $ 369       $ 774       $ 1,018       $ 1,142   

Research and development

     1,162         2,932         5,133         5,207   

Sales and marketing

     1,327         2,860         2,841         3,750   

General and administrative

     1,613         2,635         6,731         5,596   
  

 

 

 

Total stock-based compensation expense

   $ 4,471       $ 9,201       $ 15,723       $ 15,695   

 

 

 

(2)   See Note 18 to our consolidated financial statements appearing elsewhere in this prospectus for an explanation of our pro forma basic and diluted net loss per share calculations.

 

     As of December 31,  
(in thousands)   2011     2012     2013     2014  

Consolidated Balance Sheet Data:

       

Cash and cash equivalents

  $ 40,544      $ 29,466      $ 42,132      $ 24,496   

Restricted cash

    1,383        610        181        15,368   

Property and equipment, net

    12,197        17,718        17,245        13,129   

Working capital (deficit)

    (13,909     (43,408     (68,044     (114,277

Total assets

    149,864        214,732        228,117        410,401   

Deferred revenues—current and long-term

    296,408        376,591        410,519        424,964   

Bank debt, current and non-current

    12,101        15,167        24,862          

Notes payable, current and non-current

                         56,146   

Warrant liability

                         22,801   

Redeemable convertible preferred stock

    88,522        121,228        184,798        284,403   

Additional paid-in capital

    117,125        142,946        165,016        269,831   

Total Good Technology Corporation stockholders’ deficit

    (282,749     (347,389     (443,744     (434,325

 

 

Key financial and performance metrics

We monitor the following key financial and performance metrics to help us evaluate growth trends in our core business, establish related budgets, forecast and manage cash flows, measure the effectiveness of our sales and marketing efforts to enterprise customers, assess our overall financial condition, allocate capital and make strategic decisions. Furthermore, our key financial and performance metrics are a leading indicator of future revenues that we recognize once we satisfy all of the revenue recognition criteria described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Revenues.”

The following table summarizes our non-GAAP financial metrics:

 

        Year ended December 31,  

(in thousands, except percentages)

     2012        2013        2014  

Recurring billings

     $ 71,788         $ 85,522         $ 128,107   

% of total billings

       36.5%           44.0%           57.9%   

Perpetual license billings

     $ 90,506         $ 67,523         $ 35,706   

% of total billings

       46.0%           34.7%           16.1%   

Total billings

     $ 196,788         $ 194,312         $ 221,249   

 

 

 

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The following table summarizes our cumulative annualized recurring revenue:

 

        As of December 31,  

(in thousands, except percentages)

     2012        2013        2014  

Cumulative annualized recurring revenue

     $ 8,892         $ 24,569         $ 60,957   

% increase over prior period

       NA           176%           148%   

 

 

Recurring billings

Because our recurring revenues are recognized over an extended period of time, we analyze the performance of the business by focusing on recurring billings, which we define as recurring revenues plus the change in deferred recurring revenues from the beginning to the end of the period. Recurring revenues are revenues associated with sales of term licenses for our secure mobility solution, as well as renewals of maintenance and support services associated with sales of perpetual licenses, which typically have a term of one to three years. We began to offer term licenses for our Good for Enterprise application in the second half of 2013.

Perpetual license billings

Historically, most of our license revenues for our secure mobility solution consisted of perpetual licenses for our Good for Enterprise application, for which we generally recognize the associated revenues over a period of five years as a result of our revenue recognition policy. Our perpetual license revenues are generally recognized over a period of five years (or 18 months for licenses that do not permit transferability of the perpetual license), we also analyze the performance of the business by focusing on perpetual license billings, which we define as perpetual license revenues plus the change in deferred perpetual license revenues from the beginning to the end of the period. Perpetual license revenues are revenues that are associated with sales of perpetual licenses for our secure mobility solution, including the initial year of maintenance and support services, as well as sales of our software and services to OEM handset manufacturers. As we increase sales of our solution to new and existing customers on a term license basis, we expect perpetual license billings to continue to decrease in absolute dollars and as a percentage of billings.

Total billings

Total billings are comprised of our recurring billings, perpetual license billings, billings related to sales of our Good for You consumer product, including sales through various revenue sharing arrangements with our telecommunication carrier partners, professional services and third-party applications, and billings related to our intellectual property licenses. The total billings we record in any particular period represent total revenues plus the change in total deferred revenues from the beginning to the end of the period. We began to experience a significant increase in the adoption of term licenses by new and existing customers in 2013, which has resulted in an increase in our recurring billings and a decrease in our total billings, given the subscription nature of term licenses versus the one-time, upfront invoicing related to perpetual licenses.

Cumulative annualized recurring revenue

To assist with the understanding of the transition of our business from a perpetual license revenue model to a recurring license revenue model, we utilize a performance metric that we refer to as cumulative annualized recurring revenue (ARR). Cumulative ARR is the accumulation of the annualized contract value of all of our contracted term licenses as of a point in time and is calculated as of the end of each quarter. The metric includes the combined effects of the implied annual contract values for new, renewals of and terminations of term license agreements. We do not include any contract values from carrier and OEM software and services and revenues from intellectual property licensing in this metric. In addition, cumulative ARR does not include

 

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contract values of perpetual licenses for our products nor does it include the associated maintenance and support revenues. For these reasons, cumulative ARR should not be considered in isolation from, or as a substitute for, our total revenues or the overall performance and growth of the company over time.

Reconciliation of non-GAAP financial measures

These non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures versus their nearest GAAP equivalent. First, recurring billings, perpetual license billings and total billings are not substitutes for GAAP recurring revenues, perpetual license revenues and total revenues, respectively. Our GAAP revenues do not closely match the timing of the related costs and expenses associated with generating our billings, such as the cost of customer support, our Good Secure Cloud infrastructure, engineering, professional services and royalties, as well as expenses related to research and development, sales and marketing, and general and administrative activities. In addition, for some of our customers, sales of our software and services include undelivered elements, such as professional services, and acceptance criteria for which revenues associated with such sales are deferred until these conditions are satisfied. Second, our peer companies may calculate non-GAAP financial measures differently or may use other financial measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison.

Set forth below is a reconciliation of total billings to total revenues calculated in accordance with GAAP:

 

      Year ended December 31,  
(in thousands)    2012      2013      2014  

Total revenues

   $ 116,605       $ 160,384       $ 211,854   

Deferred revenues, end of period

     376,591         410,519         424,964   

Less: deferred revenues, beginning of period

     (296,408      (376,591      (410,519

Less: deferred revenues acquired in the BoxTone and Fixmo acquisitions

                     (5,050
  

 

 

 

Total billings (non-GAAP)

   $ 196,788       $ 194,312       $ 221,249   

 

 

Set forth below is a reconciliation of recurring billings to recurring revenues calculated in accordance with GAAP:

 

      Year ended December 31,  
(in thousands)    2012     2013     2014  

Recurring revenues

   $ 19,784      $ 46,709      $ 81,444   

Recurring deferred revenues, end of period

     87,270        126,083        177,496   

Less: recurring deferred revenues, beginning of period

     (35,266     (87,270     (126,083

Less: recurring deferred revenues acquired in the BoxTone and Fixmo acquisitions

                   (4,750
  

 

 

 

Recurring billings (non-GAAP)

   $ 71,788      $ 85,522      $ 128,107   

 

 

 

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Set forth below is a reconciliation of perpetual license billings to perpetual license revenues calculated in accordance with GAAP:

 

      Year ended December 31,  
(in thousands)    2012     2013     2014  

Perpetual license revenues

   $ 40,649      $ 52,210      $ 62,290   

Perpetual license deferred revenues, end of period

     151,616        166,929        140,345   

Less: perpetual license deferred revenues, beginning of period

     (101,759     (151,616     (166,929
  

 

 

 

Perpetual license billings (non-GAAP)

   $ 90,506      $ 67,523      $ 35,706   

 

 

 

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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 the consolidated financial statements and notes thereto included elsewhere in this prospectus. This discussion contains forward looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this prospectus.

Overview

We provide a secure mobility platform for enterprises and governments worldwide to enable secure access to applications and data across devices and operating systems. Our solution includes cross-platform enterprise-grade security, a suite of collaboration applications, integrated device, application and service management, analytics tools, comprehensive rapid application development capabilities, and a third-party application and partner ecosystem. The Good Collaboration Suite includes Good for Enterprise, which provides secure mobile email, calendar, contacts, attachments, notes and browsing, along with Good Work, our next generation productivity solution that we make available in the cloud, on premise, or as a hybrid solution, Good Share and Good Connect for file sharing and instant messaging, Good Access, a secure mobile browser, and Good for Salesforce1, our containerized version of the standard Salesforce1 application. Our secure mobility platform, Good Dynamics, provides both security and application services to enable independent software vendors, systems integrators and internal enterprise development organizations to build applications that include our security functionality and simplify application development across devices and operating systems. In addition, our platform provides service management, which is real-time visibility into an organization’s mobile usage and operational status. We work with a broad set of third-party independent software vendors and system integrators to incorporate our security architecture and management framework into the run-time environment of many existing, popular applications. These applications can be managed and published in “app stores” to streamline their distribution and policy management.

We were founded in 1996 and launched our first commercial product, a cloud-based suite of applications, including email, to-do list, calendar, contacts, remote file storage and browser bookmarks, in 1997. Since then, we have invested a substantial amount of resources developing our solution and technology, especially with respect to providing security for business data on mobile devices. We have a portfolio of 67 issued U.S. patents, 97 issued non-U.S. patents and 114 patent applications globally as of December 31, 2014. In 2003, we began successfully protecting our intellectual property rights through legal action and private negotiations. Under the terms of litigation settlements and past license agreements, licensees have obtained nonexclusive, perpetual licenses to certain of our patents for certain of their products and services in exchange for approximately $330.0 million in royalties.

In February 2009, we purchased Good Technology, Inc., the provider of the GoodLink wireless corporate messaging system, from Motorola and began doing business as Good Technology. Shortly thereafter, we launched Good for Enterprise and branded our historical consumer product as Good for You. Since then, we have continued to offer new products and services, including the Good Dynamics platform in October 2011. In 2011, we began to focus our business primarily on marketing and selling our Good Collaboration Suite, which includes Good for Enterprise, and Good Dynamics to enterprises and governments. As a result, sales of our Good Collaboration Suite and Good Dynamics have become an increasing percentage of our overall billings and revenues compared to sales of Good for You and the licensing of our intellectual property. We expect sales of our Good Collaboration Suite and Good Dynamics platform to be the primary drivers of growth in our business versus sales of our legacy product, Good for You.

 

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We have also acquired a number of complementary businesses that have enhanced our product offerings and enabled us to provide a complete solution for secure mobility. In September 2012, we acquired Copiun, a provider of secure mobile collaboration capabilities. In October 2012, we acquired AppCentral, a provider of mobile application management and application security wrapping technology. In March 2014, we acquired BoxTone, a provider of mobile service management and mobile device management technology. In May 2014, we acquired certain assets of Fixmo, Inc., or Fixmo, a provider of mobile device integrity and security solutions. In October 2014, we acquired Macheen, Inc., or Macheen, a provider of split-billing technology. See Note 3 to our consolidated financial statements appearing elsewhere in this prospectus for further details.

We sell our solution through our direct sales force, channel partners and resellers. We focus our direct sales efforts on the Forbes Global 2000 and augment our direct coverage with extensive channel partnerships that focus on companies with approximately $500 million or more in annual revenues. Our direct field sales force is complemented by an inside sales force to enhance our coverage and both are supported by telesales representatives who are primarily responsible for qualified lead generation. Our channel partners include leading value-added distributors, value-added resellers and managed service providers such as Atea ASA, Azlan, NTT Com Security and SHI International Corp. We also work with carriers, such as AT&T, Vodafone and others, that resell our secure mobility solution to their enterprise customers. In addition to augmenting our direct sales coverage for large accounts, we utilize partners as our primary channel to serve accounts below approximately $500 million in annual revenues. This allows us to better leverage our internal resources while broadening our geographic footprint and extending our sales reach into the middle market.

As of December 31, 2014, we had over 6,200 active customers in 189 countries. For purposes of our active customer count, we define an active customer as a company, government entity or a distinct buying unit within a company or government entity from which we recognized revenues associated with their purchase of our products or services within the reporting period. We exclude channel partners and resellers, unless purchasing for their own use, and customers who have only purchased our legacy consumer products.

We intend to continue investing for long-term growth. We have invested and continue to invest heavily in our product development efforts to create new products that are complementary to our existing products, enhance our existing products, further develop security and management technologies, and expand our application development platform. We believe that our ability to enhance our product and service offerings is critical to expanding our leadership in enterprise mobility. As of December 31, 2014, we had 382 employees and 104 full-time-equivalent third-party contractors focused on research and development. In addition, we expect to continue to aggressively expand our sales and marketing organizations to market our software and brand in both the United States and internationally. We do not expect to be profitable on a U.S. generally accepted accounting principles, or GAAP, basis in the near future due to these continued investments. While we believe that these investments in our business will result in our long term growth and eventual profitability, we face a number of key challenges that will impact any future success, including our ability to increase sales of our solution to new enterprise customers and further penetrate existing customers, successfully market and sell our Good Dynamics platform, and anticipate our customers’ evolving mobility needs by continuing to provide them with solutions that address the challenges they face with making their organizations more productive in an increasingly mobile world.

In 2012, 2013 and 2014, our recurring billings, a non-GAAP financial measure, were $71.8 million, $85.5 million and $128.1 million, respectively, representing 37% of total billings for 2012, 44% of total billings for 2013 and 58% of total billings for 2014. In 2012, 2013 and 2014, we generated recurring revenues of $19.8 million, $46.7 million and $81.4 million, respectively, representing year-over-year growth of 178% for 2012, 136% for 2013 and 74% for 2014. In 2012, 2013 and 2014, we generated total revenues of $116.6 million, $160.4 million and $211.9 million, respectively, representing year-over-year growth of 37% for 2012, 38% for 2013 and 32% for

 

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2014. In 2013, 77% of our total revenues were generated from customers in North America and Latin America, 16% from customers in Europe, Middle East and Africa and 8% from customers in Asia Pacific, based on the location of the end-customer or the “deliver to” location of the OEM reseller or other channel partner. In 2014, 75% of our total revenues were generated from customers in North America and Latin America, 18% from customers in Europe, Middle East and Africa and 7% from customers in Asia Pacific, based on the location of the end-customer or the “deliver to” location of the OEM reseller or other channel partner. Our net losses were $90.4 million, $118.4 million and $95.4 million in 2012, 2013 and 2014, respectively. See “Selected Consolidated Financial and Other Data—Key Financial and Performance Metrics” for more information and a reconciliation of recurring billings and total billings to recurring revenues and total revenues, respectively, the most directly comparable financial measure calculated and presented in accordance with GAAP.

In January 2015, we implemented a plan to reduce our cost structure, align resources with our product strategy and improve efficiency, which resulted in reducing the number of our employee positions by approximately 15%. We estimate that we will recognize charges of between $2.0 million and $3.0 million through June 30, 2015, consisting primarily of severance and other one-time termination benefits and other associated costs.

Our business model

In 2011, we shifted our focus from selling our consumer-oriented Good for You application to providing a secure mobility solution for enterprises and governments, which we refer to as our enterprise software and services product line. More specifically, our enterprise software and services product line includes: our suite of collaboration applications, in particular our Good for Enterprise application; our Good Dynamics secure mobility platform; associated maintenance and support services; and third-party applications. Enterprise software and services does not include sales of our software and services to telecommunication carriers and OEM handset manufacturers. Our annualized average revenue per user for our enterprise software and services product line for the fourth quarter of 2014 was $84 based on the number of users as of December 31, 2014.

Our other product lines consist of sales of our software and services to telecommunication carriers and OEM handset manufacturers and intellectual property licensing. Carrier and OEM software and services consist of sales of Good for You and Good for Enterprise to telecommunication carriers and OEM handset manufacturers pursuant to royalty and licensing arrangements. Intellectual property licensing billings and revenues represent cash settlements with various companies for infringement of our patents, or direct licenses of our intellectual property.

We began offering term licenses for sales of our Good for Enterprise application in the second half of 2013. Prior to 2013, most of our license revenues from sales of our secure mobility solution consisted of perpetual licenses for our Good for Enterprise application. While the majority of revenues from sales of our Good Dynamics platform consist of revenues from term licenses, we introduced this product in November 2011, and as a result the related revenues did not represent a significant portion of our total revenues in 2011. We will continue to offer both term and perpetual licenses for our secure mobility solution according to our customers’ preferences.

Revenues from our perpetual licenses and associated initial maintenance and support contracts are generally recognized over a five year period, as further described in “—Critical Accounting Policies and Estimates,” and are included within perpetual license revenues. Revenues from term licenses for our software and services are recognized over the term of the agreement, which has generally been one to three years, and are included within recurring revenues. Revenues from renewals of our maintenance and support services are recognized ratably over the contract term, generally one year, and are also included within recurring revenues. When an arrangement includes both term and perpetual software licenses, revenues are recognized over the longer of

 

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the applicable term or perpetual license recognition period—generally five years (or 18 months for licenses that do not permit transferability of the perpetual license). In certain revenue sharing arrangements with our telecommunication carrier partners, we bill the carrier and recognize revenues monthly. Revenues from these arrangements, as well as revenues from sales of our legacy Good for You product, professional services and third-party applications, are included in other revenues. Finally, revenues from licensing our intellectual property are recognized ratably over periods ranging from immediate to 13.8 years and are included in intellectual property revenues. Based on our current intellectual property licensing agreements, we expect that revenues from licensing our intellectual property will continue to be recognized ratably over their terms until July 2019.

The following table sets forth our revenues by product line:

 

      Year ended December 31,  
(in thousands)    2012      2013      2014  

Enterprise software and services

   $ 44,431       $ 91,662       $ 142,944   

Carrier and OEM software and services

     49,097         45,436         48,691   

Intellectual property

     23,077         23,286         20,219   
  

 

 

 

Total revenues

   $ 116,605       $ 160,384       $ 211,854   

 

 

Key financial and performance metrics

We monitor the following key financial and performance metrics to help us evaluate growth trends in our core business, establish related budgets, forecast and manage cash flows, measure the effectiveness of our sales and marketing efforts to enterprise customers, assess our overall financial condition, allocate capital and make strategic decisions. Furthermore, they are a leading indicator of future revenues that we recognize once we satisfy all of the revenue recognition criteria described under “—Critical Accounting Policies and Estimates—Revenues.”

The following table summarizes our non-GAAP financial metrics:

 

      Year ended December 31,  
(in thousands, except percentages)    2012      2013      2014  

Recurring billings

   $ 71,788       $ 85,522       $ 128,107   

% of total billings

     36.5%         44.0%         57.9%   

Perpetual license billings

   $ 90,506       $ 67,523       $ 35,706   

% of total billings

     46.0%         34.7%         16.1%   

Total billings

   $ 196,788       $ 194,312       $ 221,249   

 

 

The following table summarizes our cumulative annualized recurring revenue:

 

      Year ended December 31,  
(in thousands, except percentages)    2012      2013      2014  

Cumulative annualized recurring revenue

   $ 8,892       $ 24,569       $ 60,957   

% increase over prior period

     NA         176%         148%   

 

 

See “Selected Consolidated Financial and Other Data—Key Financial and Performance Metrics” for a reconciliation of total billings to total revenues, the most directly comparable GAAP financial measure, and a description of why we track billings and cumulative annualized recurring revenue and why billings and cumulative annualized recurring revenue may be a useful measure for investors.

 

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Recurring billings

Because our recurring revenues are recognized over an extended period of time, we analyze the performance of the business by focusing on recurring billings, which we define as recurring revenues plus the change in deferred recurring revenues from the beginning to the end of the period. Recurring billings increased $42.6 million, or 49.8%, for the year ended December 31, 2014, compared to the year ended December 31, 2013, primarily as a result of an increase of $57.1 million in billings for sales of term licenses for our secure mobility solution by new and existing customers, partially offset by a decrease of $14.6 million in billings for our maintenance and support services as we transitioned some of our existing customers to term licenses. Accordingly, our recurring billings as a percentage of total billings increased to 57.9% in the year ended December 31, 2014 from 44.0% in the year ended December 31, 2013. We expect recurring billings to continue to increase both in absolute dollars and as a percentage of our total billings as we increase sales of term licenses for our solution and continue to sell and renew maintenance and support agreements for those customers that license our solution on a perpetual basis.

Recurring billings increased $13.7 million, or 19.1%, for the year ended December 31, 2013, compared to the year ended December 31, 2012, primarily as a result of an increase of $20.2 million in billings for sales of term licenses for our secure mobility solution by new and existing customers, partially offset by a decrease of $6.4 million in billings for maintenance and support services as we transitioned some of our existing customers to term licenses. Accordingly, our recurring billings as a percentage of total billings increased to 44.0% in 2013 from 36.5% in 2012.

Perpetual license billings

Because as a result of our revenue recognition policy, our perpetual license revenues are generally recognized over a period of five years (or 18 months for licenses that do not permit transferability of the perpetual license), we also analyze the performance of the business by focusing on perpetual license billings, which we define as perpetual license revenues plus the change in deferred perpetual license revenues from the beginning to the end of the period. Perpetual license billings decreased $31.8 million, or 47.1%, for the year ended December 31, 2014, compared to the year ended December 31, 2013, primarily as a result of a decrease of $27.4 million in billings for sales of perpetual licenses for our secure mobility solution as some of our existing customers converted to term licenses and a growing number of new customers purchased term licenses. Accordingly, our perpetual license billings as a percentage of total billings decreased to 16.1% for the year ended December 31, 2014 from 34.7% for the year ended December 31, 2013. As we increase sales of our solution to new and existing customers on a term license basis, we expect perpetual license billings to continue to decrease in absolute dollars and as a percentage of billings.

Perpetual license billings decreased $23.0 million, or 25.4%, for the year ended December 31, 2013, compared to the year ended December 31, 2012, primarily as a result of a decrease of $20.8 million in billings for sales of perpetual licenses for our secure mobility solution as some of our existing customers converted to term licenses and a growing number of new customers purchased term licenses. Accordingly, our perpetual license billings as a percentage of total billings decreased to 34.7% in 2013 from 46.0% in 2012.

Total billings

Total billings are comprised of our recurring billings, perpetual license billings, billings associated with sales of our legacy Good for You consumer product, including sales through various revenue sharing arrangements with our telecommunication carrier partners, professional services and third-party applications, and billings related to our intellectual property licenses. The total billings we record in any particular period represent total revenues plus the change in total deferred revenues from the beginning to the end of the period.

 

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Total billings increased $26.9 million, or 13.9%, for the year ended December 31, 2014, compared to the year ended December 31, 2013, due to the significant increase in the adoption of term licenses by new and existing customers for the year ended December 31, 2014, which drove the increase in our recurring billings, and increases in sales of our software and services to OEM handset manufacturers.

Total billings decreased $2.5 million, or 1.3%, for the year ended December 31, 2013, compared to the year ended December 31, 2012, due to the significant increase in the adoption of term licenses by new and existing customers in 2013, which drove the increase in our recurring billings but resulted in an overall decrease in our total billings, given the subscription nature of term licenses versus the one-time, upfront invoicing associated with perpetual licenses.

Cumulative annualized recurring revenue

To assist with the understanding of the transition of our business from a perpetual license revenue model to a recurring license revenue model, we utilize a performance metric that we refer to as cumulative ARR. Cumulative ARR is the accumulation of the annualized contract value of all of our contracted term licenses as of a point in time and is calculated as of the end of each quarter. The metric includes the combined effects of the implied annual contract values for new, renewals of and terminations of term license agreements. We do not include any contract values from carrier and OEM software and services and revenues from intellectual property licensing in this metric. In addition, cumulative ARR does not include contract values of perpetual licenses for our products nor does it include the associated maintenance and support revenues. For these reasons, cumulative ARR should not be considered in isolation from, or as a substitute for, our total revenues or the overall performance and growth of the company over time.

Factors affecting our performance

Investment in growth.    We have aggressively invested, and intend to continue to invest, in expanding our sales and marketing efforts, technology development, and customer care and operations to support our growth. We are also making capital investments in expanding our Good Secure Cloud and technology acquisitions to support our Good Dynamics platform. As a result, we have historically incurred net losses, including for the last eight quarters. While we expect our total operating expenses and capital expenditures to increase in absolute dollars for the foreseeable future, we expect that such expenditures will increase at a slower rate relative to the rate of growth of our recurring billings as we begin to see a return on these investments. Our billings and revenue growth are largely driven by the pace of adoption and penetration of mobile computing solutions in the enterprise, as well as our ability to timely develop and introduce new software and services and enhancements to our existing software and services to keep up with the rapid technological changes that continue to characterize our industry.

Revenue retention rate.    Our revenue retention rate consists solely of renewals of our maintenance and support services associated with sales of perpetual licenses. We calculate the revenue retention rate by dividing the renewable portion of the original contract value of all renewed contracts from customers in any rolling 12-month period by the renewable portion of the original contract value of all contracts from customers that were due for renewal in the same rolling 12-month period. Our revenue retention rate at December 31, 2012, 2013 and 2014 was over 90%. As existing customers convert to term licenses, our renewable portion will decrease. While only a small percentage of term licenses have come up for renewal to date, we believe that we will experience high renewal rates for such term licenses similar to the high maintenance renewal rates associated with our perpetual licenses as customers that purchase a term license for our secure mobility solution receive support and maintenance services as part of their term license. Furthermore, many customers that purchase a term license purchase a license with a term greater than one year—generally two or three years—which we believe validates the strength of our secure mobility solution. Our customers have no

 

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obligation to renew their term license after the expiration of the current term. We expect our ability to maintain high renewal rates for term licenses to have a material impact on our future financial performance.

Upsell and cross-sell opportunity.    In order for us to achieve our expected billings and revenue growth, we must sell additional software and services to our existing customers as they expand their mobile deployments. We believe that enterprises are in the early stages of embracing secure mobility solutions within their IT infrastructures. To date, many of our existing customers have provided our secure mobility solution to only a limited number of employees within their organizations. This creates a significant opportunity for us to increase the penetration of deployments in our existing customer base by upselling and cross-selling our products, delivering new applications through our Good Dynamics platform and “bundling” our applications, platform and services into new value-added offerings. In addition, our cloud-based secure mobility platform makes it easier for our existing customers to try, buy and expand their deployments without the cost or complexity of having to deploy and manage their own infrastructure. Furthermore, because customer acquisition and implementation costs are generally incurred up front, our ability to capture these opportunities will increase the profitability of the customer relationship over time.

Components of operating results

Revenues

We derive our revenues from sales of software licenses, maintenance and support services, and intellectual property licensing.

Our revenues are comprised of the following:

Recurring.    Recurring revenues consist of sales of term licenses for our Good for Enterprise application, Good Collaboration Suite and Good Dynamics platform, as well as renewals of maintenance and support services associated with sales of perpetual licenses for these products. Customers that purchase term licenses receive maintenance and support services as part of their subscription. Maintenance and support services are delivered for a single fee and can be renewed, typically for a one to three year period, upon the expiration of the initial term of the agreement. Software maintenance includes unspecified product upgrades, interim service releases and bug fixes. Customer support consists of access to live technical support technicians, online knowledge resources and on-site or dedicated remote support for premium-level customers. We recognize recurring revenues ratably over the stated contractual period, which generally ranges from one to three years.

Perpetual license.    Perpetual license revenues consist of sales of perpetual licenses to our Good for Enterprise application, Good Collaboration Suite and associated initial year of maintenance and support services, all of which we recognize over the estimated customer life, which is generally five years (or 18 months for licenses that do not permit transferability of the perpetual license). The secure connectivity service is embedded within the Good Collaboration Suite and is not sold separately. When an arrangement includes both term and perpetual licenses, all revenues are recognized ratably over the longer of the periods applicable to the term and perpetual licenses, which is generally five years. Perpetual license revenues also include revenues from sales of our software and services to OEM handset manufacturers in the form of a royalty payment that we receive based on each handset sold that includes our software. The revenues from these payments are recognized over the expected useful life of the handset, estimated to be 18 months.

Intellectual property.    Intellectual property licensing revenues represent cash settlements with various companies for infringement of our patents, or direct licenses of intellectual property. Revenues from these agreements are recognized over periods ranging from immediate to 13.8 years based on the terms of the agreements with licensees. These licensing arrangements are infrequent in nature, and such revenues are expected to decline in the future when our existing agreements expire in July 2019.

 

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Other.    Other revenues consist of sales of our Good for You consumer product, including sales through various revenue sharing arrangements with our telecommunication carrier partners, professional services and third-party applications. We receive a monthly payment from certain telecommunication carriers related to their customers’ use of our legacy Good for You product on their networks.

Cost of revenues

Our cost of revenues is comprised of the cost of customer support, operating our Good Secure Cloud, professional services, amortization of intangibles and royalties.

Cost of customer support is primarily comprised of personnel costs and third-party contracted services to provide our customers with technical support. Personnel costs includes salary, bonus and benefits costs, as well as stock-based compensation costs. In addition, cost of customer support includes supplies and allocated IT and facility-related costs. Cost of revenues also consists of costs to run our Good Secure Cloud in Seattle, Washington and Santa Clara, California, including personnel, equipment and associated depreciation, and utilities expenses. Professional services costs consist of personnel costs to perform client-specific services and resolve higher-level technical support issues. Amortization of intangibles includes the amortization of developed technology associated with our acquisitions and the amortization of our capitalized Good Secure Cloud software costs. We also pay certain third-parties software royalties to the extent that we incorporate their technologies within our products. Our cost of revenues are largely fixed, such as depreciation and amortization, or semi-fixed, such as our compensation-related expenses. Our royalty costs are variable depending on the number of software sales we make that include third-party software.

Operating expenses

Research and development.    Research and development expenses primarily consist of salaries, benefits and stock-based compensation for our engineers, product managers and developers. In addition, product development expenses include outside services and consulting, as well as allocated facilities and other supporting overhead costs. We expect that research and development expenses will increase as we continue to invest in our products and technology but will decrease as a percentage of revenues.

Sales and marketing.    Sales and marketing expenses primarily consist of salaries, benefits, stock-based compensation, amortization of deferred commissions, travel expenses, and incentive compensation for our sales and marketing employees. In addition, sales and marketing expenses include customer acquisition activities, branding, advertising, customer events and public relations costs, as well as allocated facilities and other supporting overhead costs. Amortization of certain acquisition-related costs, such as customer relationships, are also included in sales and marketing expense. We plan to continue to invest heavily in sales and marketing to expand our global operations, increase revenues from current customers, continue building brand awareness and expand both our direct and indirect sales channels. However we expect sales and marketing expenses to decrease as a percentage of revenues.

General and administrative.    General and administrative expenses primarily consist of salaries, benefits and stock-based compensation for our executive, finance, legal, human resources and other administrative employees. In addition, general and administrative expenses include outside consulting, legal and accounting services, including at times substantial litigation costs, as well as allocated facilities and other supporting overhead costs. We expect general and administrative expenses to increase in the future as we continue to grow our business and incur additional costs associated with being a public company but to decrease as a percentage of revenues.

 

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Other expense, net

Other expense, net consists primarily of loss on early extinguishment of debt, foreign exchange gains and losses and, prior to 2012, changes in the fair value of warrants to purchase Series B-1 redeemable convertible preferred stock issued in connection with an acquisition in 2009. These warrants were exercised in the first quarter of 2012. We do not expect to incur expenses related to these warrants in future periods.

Interest expense, net

Interest expense, net consists primarily of the interest expense and loan fees paid on our outstanding notes payable, offset by interest income earned on our cash and cash equivalents.

Benefit from (provision for) income taxes

We operate in a number of tax jurisdictions and are subject to taxes in each country or jurisdiction in which we conduct business. Earnings from our non-U.S. activities are subject to local country income and withholding taxes and may be subject to U.S. income tax. Our effective tax rates differ from the statutory rate primarily due to the valuation allowance on our U.S. deferred tax assets, state taxes, foreign taxes, research and development tax credits and withholding taxes on certain non-U.S. sales.

Results of operations

The following tables set forth our results of operations for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.

 

     Year ended December 31,  
(in thousands)  

2012

    2013     2014  

Revenues:

   

Recurring

  $ 19,784      $ 46,709      $ 81,444   

Perpetual license

    40,649        52,210        62,290   

Intellectual property

    23,077        23,286        20,219   

Other

    33,095        38,179        47,901   
 

 

 

 

Total revenues

    116,605        160,384        211,854   

Cost of revenues(1)

    32,016        45,147        53,705   
 

 

 

 

Gross profit

    84,589        115,237        158,149   
 

 

 

 

Operating expenses:

     

Research and development(1)

    50,881        75,875        88,152   

Sales and marketing(1)

    88,700        112,537        109,007   

General and administrative(1)

    34,374        42,713        44,928   
 

 

 

 

Total operating expenses

    173,955        231,125        242,087   
 

 

 

 

Loss from operations

    (89,366     (115,888     (83,938

Other expense, net

    (500     (417     (3,523

Interest expense, net

    (1,028     (1,176     (5,944
 

 

 

 

Loss before benefit from (provision for) income taxes

    (90,894     (117,481     (93,405

Benefit from (provision for) income taxes

    457        (954     (1,992
 

 

 

 

Net loss

    (90,437     (118,435     (95,397

Income (loss) attributable to noncontrolling interest

    (26     9        (1
 

 

 

 

Net loss attributable to Good Technology Corporation common stockholders

  $ (90,463   $ (118,426   $ (95,398

 

 

 

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

 

      Year ended December 31,  
(in thousands)    2012      2013      2014  

Cost of revenues

   $ 774       $ 1,018       $ 1,142   

Research and development

     2,932         5,133         5,207   

Sales and marketing

     2,860         2,841         3,750   

General and administrative

     2,635         6,731         5,596   
  

 

 

 

Total stock-based compensation expense

   $ 9,201       $ 15,723       $ 15,695   

 

 

Comparison of fiscal years 2014, 2013 and 2012

Revenues

 

      Year ended December 31,     

2012 to 2013

% Change

    

2013 to 2014

% Change

 
(in thousands)    2012      2013      2014        

Recurring

   $ 19,784       $ 46,709       $ 81,444         136%         74%   

Perpetual license

     40,649         52,210         62,290         28%         19%   

Intellectual property

     23,077         23,286         20,219         1%         (13)%   

Other

     33,095         38,179         47,901         15%         25%   
  

 

 

       

Total revenues

   $ 116,605       $ 160,384       $ 211,854         38%         32%   

 

 

2014 compared to 2013.    Recurring revenues increased $34.7 million, or 74%, primarily due to a $25.9 million increase in revenues from sales of term licenses for our Good Collaboration Suite and Good Dynamics platform and an $8.8 million increase in revenues from renewals of maintenance and support services for customers that license our Good Collaboration Suite on a perpetual basis. Perpetual license revenues increased $10.1 million, or 19%, primarily due to a $13.3 million increase in revenues from sales of perpetual licenses for our Good Collaboration Suite, partially offset by a $3.2 million decrease in revenues from sales of our software and services to OEM handset manufacturers through royalty and software licensing agreements. Other revenues increased $9.7 million, or 25%, primarily due to a $7.9 million increase in revenues from various revenue sharing arrangements with our telecommunication carrier partners and, to a lesser extent, a $2.6 million increase in professional services, partially offset by a $1.4 million decrease in revenues from royalty payments that we receive from various carriers for sales of our Good for You consumer product that these carriers offer to their customers, which is consistent with our focus on increasing sales of our secure mobility solution to organizations.

2013 compared to 2012.    Recurring revenues increased $26.9 million, or 136%, primarily due to a $19.2 million increase in revenues from renewals of maintenance and support services for customers that license our Good Collaboration Suite on a perpetual basis and, to a lesser extent, a $7.7 million increase in revenues from sales of term-based licenses for our Good Collaboration Suite and Good Dynamics platform. Perpetual license revenues increased $11.6 million, or 28%, primarily due to a $19.0 million increase in revenues from sales of perpetual licenses for our Good Collaboration Suite, partially offset by a $7.4 million decrease in revenues from sales of our software and services to OEM handset manufacturers through royalty and software licensing agreements. Other revenues increased $5.1 million, or 15%, primarily due to a $9.6 million increase in revenues from various revenue sharing arrangements with our telecommunication carrier partners and, to a lesser extent, a $1.3 million increase in professional services, partially offset by a $5.8 million decrease in revenues from royalty payments that we receive from various carriers for sales of our Good for You consumer product that these carriers offer to their customers, which is consistent with our focus on increasing sales of our secure mobility solution to organizations and away from sales of our legacy consumer product.

 

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Cost of revenues and gross margin

 

      Year ended December 31,      2012 to 2013
% Change
    

2013 to 2014

% Change

 
(in thousands, except percentages)    2012      2013      2014        

Cost of revenues

   $ 32,016       $ 45,147       $ 53,705         41%         19%   

Gross margin

     73%         72%         75%         (1)%         3%   

 

 

2014 compared to 2013.    Cost of revenues increased $8.6 million, or 19%, primarily due to an increase of $7.1 million in amortization expense due to intangible assets acquired in business combinations in 2014, an increase of $1.6 million in compensation-related costs due to merit-based increases in salaries, and an increase of $1.5 million in outside consulting expenses. This increase was also the result of an increase in the number of customers served. Depreciation and expensed software and hardware increased by $0.6 million and $0.2 million in 2014, respectively, as we continued to invest in our Good Secure Cloud. The total increase was partially offset by a reduction in royalties payable to BoxTone of $2.7 million due to our acquisition of BoxTone in 2014.

2013 compared to 2012.    Cost of revenues increased $13.1 million, or 41%, primarily due to a $3.0 million increase in third-party technical support costs resulting from increased business activity, which required additional call center staffing and professional services to support the increased growth in active users and increased network security audits. The increase in cost of revenues was also attributable to a $2.9 million increase in expenses for the amortization of acquired intangible assets resulting from our acquisitions of Copiun and AppCentral in the second half of 2012, a $2.5 million increase in compensation-related costs related to increased headcount to support our customers, a $2.5 million increase in royalties paid to third parties, a $1.4 million increase in depreciation and expensed computer hardware and software costs related to higher capital expenditures for our Good Secure Cloud, and a $1.1 million increase in allocated facility and IT costs, consistent with the growth in headcount. These additional costs resulted in a modest reduction in our gross margin for 2013.

Operating expenses

Research and development

 

      Year ended December 31,     

2012 to 2013

% Change

    

2013 to 2014

% Change

 
(in thousands, except percentages)    2012      2013      2014        

Research and development

   $ 50,881       $ 75,875       $ 88,152         49%         16%   

Percentage of revenues

     44%         47%         42%         

 

 

2014 compared to 2013.    Research and development expenses increased $12.3 million, or 16%, primarily due to higher compensation-related costs of $7.0 million and the write-off of the acquired BoxTone in-process research and development, or IPR&D, of $4.9 million. This increase in personnel costs was attributable to merit-based increases in salaries, as well as increases in headcount primarily as a result of our acquisition of BoxTone. In addition, expensed software and hardware increased $0.4 million due to the increase in headcount.

2013 compared to 2012.    Research and development expenses increased $25.0 million, or 49%, primarily due to an increase of $15.7 million in personnel costs due to an increase in headcount and an increase in stock-based compensation. These increased personnel costs reflect our substantial investment in the further development of our secure mobility solution, particularly our Good Dynamics platform. We increased our research and development headcount by 13% during this period. In addition, consulting costs increased $3.2 million, also to support the further development of our secure mobility solution and other development

 

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projects. Finally, allocated facility and IT costs increased $6.7 million, in line with the growth in headcount. These costs were partially offset by a modest decrease in expensed computer hardware and software costs of $0.3 million.

Sales and marketing

 

      Year ended December 31,      2012 to 2013
% Change
    

2013 to 2014

% Change

 
(in thousands, except percentages)    2012      2013      2014        

Sales and marketing

   $ 88,700       $ 112,537       $ 109,007         27%         (3)%   

Percentage of revenues

     76%         70%         51%         

 

 

2014 compared to 2013.    Sales and marketing expenses decreased $3.5 million, or 3%, primarily as a result of decreased headcount and a decrease in marketing expenses of $3.9 million related to our rebranding program, which occurred in 2013. In addition, the allocated costs decreased $1.9 million due to the decrease in headcount. These increases were partially offset by increases in outside consulting expenses of $1.5 million as compared to the prior year. In addition, amortization expense increased $1.1 million due to intangible assets acquired in business combinations in 2014.

2013 compared to 2012.    Sales and marketing expense increased $23.8 million, or 27%, primarily due to an increase of $11.9 million in compensation, commissions, and higher travel related expenses as we increased our direct sales force and marketing team in 2013. Much of the increase in commissions expense was the result of higher recognition of deferred commissions costs in 2013 related to billings in the prior years. In addition, our marketing expenses increased $6.1 million as a result of expenses associated with marketing branding campaigns as well as other demand generation activities. We have agreements with third-party providers that assist us in renewing our support agreements as well as help us generate growth in small to medium size businesses, and costs for these services increased by $2.7 million. Allocated facility and IT costs increased $2.0 million in line with the growth in headcount.

General and administrative

 

      Year ended December 31,      2012 to 2013
% Change
    

2013 to 2014

% Change

 
(in thousands, except percentages)    2012      2013      2014        

General and administrative

   $ 34,374       $ 42,713       $ 44,928         24%         5%   

Percentage of revenues

     29%         27%         21%         

 

 

2014 compared to 2013.    General and administrative expenses increased $2.2 million, or 5%, primarily due to an increase in rent and office expenses of $2.3 million due to the leases assumed in the Fixmo and BoxTone acquisitions and an increase of $3.3 million in outside consulting fees. In addition, the allocated costs increased $2.0 million due to the increase in headcount. The total increase was partially offset by a decrease in expensed software and hardware of $1.1 million due to fewer purchases, a decrease in depreciation expense of $1.2 million from the write-off of fixed assets in 2013 and a $2.3 million write-off of IPO costs in 2013. In addition, stock-based compensation expense decreased $0.9 million largely due to the accelerated vesting of stock options for a former senior officer in 2013.

2013 compared to 2012.    General and administrative expenses increased $8.3 million, or 24%, primarily due to an increase of $5.9 million in compensation-related costs, which includes $4.1 million of stock-based compensation expense as the result of a 2% increase in headcount and the hiring of senior management. The increase in stock-based compensation expense is largely due to the accelerated vesting of stock options for a former senior officer and additional stock options that we granted to our new senior officers. We also wrote off

 

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$3.0 million in fixed assets that were no longer in use and $2.3 million in legal and professional costs primarily related to the write off of initial public offering costs. General and administrative expenses also increased due to a $1.9 million increase in rent and related costs, from the Copiun and AppCentral acquisitions, a $1.5 million increase in depreciation expense, and a $1.4 million increase in expensed computer hardware and software.

Interest and other expense, net

2014 compared to 2013. Other expense, net was $0.4 million for 2013 compared to $3.5 million for 2014. The increase in other expense, net is primarily attributable to the loss on the early extinguishment of bank debt of $2.4 million, a prepayment penalty on the repayment of bank debt of $0.9 million and common stock warrant issuance costs of $0.7 million, offset by a gain of $1.5 million due to the remeasurement of the fair value of the warrant liability in 2014. Interest expense, net increased $4.8 million from 2013 to 2014, primarily due to interest expense of $3.4 million related to the issuance of Senior Notes on September 30, 2014. This expense comprises “coupon rate” interest of $1.0 million, amortization of accrued premium of $1.0 million and amortization of debt discount and debt issuance costs of $1.4 million.

2013 compared to 2012.    Interest and other expense, net was $1.5 million for 2012 compared to $1.6 million for 2013. The higher net expense was primarily due to a decrease in the mark to market loss related to the remeasurement of our Series B-1 redeemable convertible preferred stock warrants, partially offset by a release in 2012 of certain accrued transaction taxes for which the statute of limitations for assessment and collection have expired. These Series B-1 redeemable convertible preferred stock warrants were exercised in 2012. Interest expense increased $0.1 million due to higher levels of borrowings in 2013.

Benefit from (provision for) income taxes

2014 compared to 2013.    Provision for income taxes for 2013 was $1.0 million compared to $2.0 million for 2014. The increase of $1.0 million was primarily due to the non-recurrence of a release of tax reserves for uncertain tax benefits of $1.1 million recorded in 2013 and an increase in tax expense from our increased activity in our foreign operations of $0.2 million, offset by lower withholding taxes of $0.3 million due to lower revenues in tax withholding jurisdictions in 2014.

2013 compared to 2012.    Benefit from income taxes for 2012 was $0.5 million compared to a provision of $1.0 million for 2013. The change of $1.4 million was primarily due to the non recurrence of a partial valuation allowance release of $3.4 million in 2012, offset by a release of tax reserves for uncertain tax benefits of $1.1 million in 2013 and lower withholding taxes of $0.4 million due to lower revenues in tax withholding jurisdictions by $0.4 million in 2013.

 

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Quarterly results of operations data

The following tables set forth our unaudited quarterly consolidated statements of operations data and our unaudited statements of operations data as a percentage of total revenues for each of the eight quarters in the two year period ended December 31, 2014. We have prepared the quarterly data on a consistent basis with the audited consolidated financial statements included in this prospectus. In the opinion of management, the financial information reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period.

 

     Three months ended,  
(in thousands)   Mar 31,
2013
    Jun 30,
2013
    Sep 30,
2013
    Dec 31,
2013
    Mar 31,
2014
    Jun 30,
2014
    Sep 30,
2014
   

Dec 31,

2014

 

Revenues:

               

Recurring

  $ 8,109      $ 10,232      $ 13,440      $ 14,928      $ 15,933      $ 19,781      $ 21,816      $ 23,914   

Perpetual license

               

Perpetual license revenues

    7,943        9,118        11,593        12,622        12,288        13,223        14,459        14,604   

OEM revenues

    3,199        2,707        2,571        2,457        2,198        2,043        1,865        1,610   
 

 

 

 

Total perpetual license revenues

    11,142        11,825        14,164        15,079        14,486        15,266        16,324        16,214   
 

 

 

 

Intellectual property

    5,675        5,870        5,979        5,762        4,975        4,996        4,918        5,330   

Other

    8,545        9,257        9,910        10,467        11,245        11,104        11,871        13,681   
 

 

 

 

Total revenues

    33,471        37,184        43,493        46,236        46,639        51,147        54,929        59,139   

Cost of revenues(1)

    10,025        10,569        12,124        12,429        11,146        13,738        14,449        14,372   
 

 

 

 

Gross profit

    23,446        26,615        31,369        33,807        35,493        37,409        40,480        44,767   
 

 

 

 

Operating expenses:

               

Research and development(1)

    18,480        18,389        18,930        20,076        19,777        21,947        21,419        25,009   

Sales and marketing(1)

    26,572        29,429        27,173        29,363        27,920        29,447        25,838        25,802   

General and administrative(1)

    10,510        9,483        11,096        11,624        10,615        10,218        11,809        12,286   
 

 

 

 

Total operating expenses

    55,562        57,301        57,199        61,063        58,312        61,612        59,066        63,097   
 

 

 

 

Loss from operations

    (32,116     (30,686     (25,830     (27,256     (22,819     (24,203     (18,586     (18,330

Interest and other expense, net

    (427     (422     (284     (460     (711     (917     (5,161     (2,678
 

 

 

 

Loss before benefit from (provision for) income taxes

    (32,543     (31,108     (26,114     (27,716     (23,530     (25,120     (23,747     (21,008

Benefit from (provision for) income taxes

    (451     (405     (359     261        (470     (502     (620     (400
 

 

 

 

Net loss

  $ (32,994   $ (31,513   $ (26,473   $ (27,455   $ (24,000   $ (25,622   $ (24,367   $ (21,408

 

 

(footnotes appear on the following page)

 

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

 

      Three months ended,  
(in thousands)    Mar 31,
2013
     Jun 30,
2013
     Sep 30,
2013
     Dec 31,
2013
     Mar 31,
2014
     Jun 30,
2014
     Sep 30,
2014
    

Dec 31,

2014

 

Cost of revenues

   $ 282       $ 270       $ 233       $ 233       $ 401       $ 235       $ 258       $ 248   

Research and development

     1,690         1,164         1,084         1,195         2,178         997         929         1,103   

Sales and marketing

     735         754         568         784         1,413         810         757         770   

General and administrative

     1,204         1,408         2,588         1,531         1,527         1,338         1,320         1,411   
  

 

 

 

Total stock-based compensation expense

   $ 3,911       $ 3,596       $ 4,473       $ 3,743       $ 5,519       $ 3,380       $ 3,264       $ 3,532   

 

 

 

      Three months ended,  
      Mar 31,
2013
    Jun 30,
2013
    Sep 30,
2013
    Dec 31,
2013
    Mar 31,
2014
    Jun 30,
2014
    Sep 30,
2014
   

Dec 31,

2014

 

Revenues:

                

Recurring

     24     27     31     32     34     39     40     41

Perpetual license

     33        32        32        33        31        30        30        27   

Intellectual property

     17        16        14        12        11        10        9        9   

Other

     26        25        23        23        24        21        21        23   
  

 

 

 

Total revenues

     100        100        100        100        100        100        100        100   

Cost of revenues

     30        28        28        27        24        27        26        24   
  

 

 

 

Gross profit

     70        72        72        73        76        73        74        76   
  

 

 

 

Operating expenses:

                

Research and development

     55        49        44        43        42        43        39        42   

Sales and marketing

     79        79        62        64        60        57        47        44   

General and administrative

     32        26        26        25        23        20        22        21   
  

 

 

 

Total operating expenses

     166        154        132        132        125        120        108        107   
  

 

 

 

Loss from operations

     (96     (82     (60     (59     (49     (47     (34     (31

Interest and other expense, net

     (1     (2            (1     (1     (2     (10     (4
  

 

 

 

Loss before benefit from (provision for) income taxes

     (97     (84     (60     (60     (50     (49     (44     (35

Benefit from (provision for) income taxes

     (2     (1     (1     1        (1     (1     (1     (1
  

 

 

 

Net loss

     (99 )%      (85 )%      (61 )%      (59 )%      (51 )%      (50 )%      (45 )%      (36 )% 

 

 

As is typical in the enterprise software industry, we expect a significant portion of our quarterly sales of software and services to occur at the end of each quarter, and in particular, the last two weeks of the quarter, which makes it difficult to accurately forecast our expected billings and revenues.

Research and development expenses have generally trended higher in each quarter presented primarily due to increases in headcount-related expenses, except for the quarter ended March 31, 2014, which decreased as a result of a realignment in expenses. In addition, we increased our consulting expenses each quarter as we outsourced certain development projects.

Sales and marketing expenses were higher in the quarters ended March 31, 2013, June 30, 2013, December 31, 2013 and June 30, 2014, primarily due to increases in headcount-related expenses. In the quarters ended September 30, 2013 and March 31, 2014, sales and marketing expenses decreased as a result of a realignment in expenses, and in the quarter ended September 30, 2014, sales and marketing expenses decreased as a result

 

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of marketing activities and events that occurred in the quarter ended June 30, 2014. In the third and fourth quarters of 2014, sales and marketing expenses were lower as a result of lower headcount and as a result of a realignment in expenses.

General and administrative expenses have generally trended higher in each quarter presented primarily due to headcount-related expenses, as well as increased consulting and professional services fees related to legal and accounting activities to support growth in our business and additional costs related to litigation, except for the quarters ended June 30, 2013, March 31, 2014 and June 30, 2014, which decreased as a result of a realignment in expenses.

The table below set forth the reconciliation of total billings to total revenues for the periods shown (in thousands). For more details on the limitations of using non-GAAP financial measures, please see “Selected Consolidated Financial and Other Data—Key Financial and Performance Metrics.”

 

     Three months ended,  
     Mar 31,
2013
    Jun 30,
2013
    Sep 30,
2013
    Dec 31,
2013
    Mar 31,
2014
    Jun 30,
2014
    Sep 30,
2014
   

Dec 31,

2014

 

Total revenues

  $ 33,471      $ 37,184      $ 43,493      $ 46,236      $ 46,639      $ 51,147      $ 54,929      $ 59,139   

Deferred revenues, end of period

    391,455        399,720        400,949        410,519        416,122        421,931        420,347        424,964   

Less: deferred revenues, beginning of period

    (376,591     (391,455     (399,720     (400,949     (410,519     (416,122     (421,931     (420,347

Less: deferred revenues acquired in the BoxTone and Fixmo acquisitions

                                (4,800     (250              
 

 

 

 

Total billings (non-GAAP)

  $ 48,335      $ 45,449      $ 44,722      $ 55,806      $ 47,442      $ 56,706      $ 53,345      $ 63,756   

 

 

We generally experience higher billings in the second half of the year, primarily due to government-related purchases that typically occur in the third quarter, in line with the governmental fiscal year end, and in the fourth quarter primarily due to enterprise purchases that take place prior to the next budget cycle. The higher sales in the third and fourth quarters tend to result in lower sequential billings in the first quarter. We expect this seasonality to continue in 2014 and for the foreseeable future.

Liquidity and capital resources

Overview

We have incurred significant losses since our inception and we will continue to incur losses into at least 2015, which will have a negative impact on cash flow from operations. For the years ended December 31, 2012, 2013 and 2014, we incurred net losses of $90.4 million, $118.4 million and $95.4 million, respectively. We had an accumulated deficit of $704.2 million and cash and cash equivalents of $24.5 million as of December 31, 2014.

As of December 31, 2014, we had significant outstanding debt and contractual obligations related to operating leases. In September 2014, we entered into a purchase agreement relating to the sale of $80.0 million principal amount of 5% senior secured notes, or the Senior Notes. The Senior Notes are outstanding as of December 31, 2014 and are due October 1, 2017, together with a 15% premium. We expect that the cash generated from this financing will be sufficient to meet our expected cash needs for the next 12 months. See Note 6 and Note 7 to our consolidated financial statements appearing elsewhere in this prospectus for further details regarding the our debt and operating lease commitments, respectively.

If we do not consummate an initial public offering with aggregate gross proceeds greater than $75.0 million, a Qualified IPO, prior to March 1, 2016, the holders of the Senior Notes have the right to require us to immediately repurchase the Senior Notes, in whole or in part, at a repurchase price of 110% of the principal amount of Senior Notes plus accrued and unpaid interest. Should this occur, we do not expect to be able to repay the Senior Notes without issuing additional debt or equity securities through public or private financings. If we are

 

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unable to issue additional debt or equity securities, we may be required to refinance all or part of the existing debt, sell assets or borrow more funds, which we may not be able to accomplish on terms acceptable to us, or at all. In addition, the terms of existing or future debt agreements may restrict us from pursuing any of these alternatives.

In addition, assuming we do not consummate a Qualified IPO prior to publishing our quarterly results for the first quarter of 2015, we will be required to classify the Senior Notes within current liabilities.

If we undergo a change of control, the holders of the Senior Notes have the right to require us to repurchase their Senior Notes, in whole or in part, at the repurchase prices specified in the indenture governing the Senior Notes plus accrued and unpaid interest, further described in Note 6 to our consolidated financial statements appearing elsewhere in this prospectus.

The consolidated financial statements for the years ended December 31, 2014 and 2013 were prepared on the basis of a going concern which contemplates that we will be able to realize assets and discharge liabilities in the normal course of business. Accordingly, they do not give effect to adjustments that would be necessary should we be required to liquidate some of our assets. Our ability to satisfy our total liabilities at December 31, 2014 and to continue as a going concern is dependent upon either the successful completion of this offering or the timely availability of other long-term financing. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Our current operating plan for 2015 contemplates significant improvement in our net cash flows, resulting from sales growth in existing and new products and reduced operating expenses compared to prior periods. In an effort to reduce 2015 operating expenses, we implemented a plan in January 2015 and reduced the number of our employee positions by approximately 15%. See Note 19 to our consolidated financial statements appearing elsewhere in this prospectus for further details.

We believe our available financial resources are sufficient to fund our working capital and other capital requirements through December 31, 2015. Our operations require careful management of cash and working capital balances. Our liquidity is affected by many factors including, among others, fluctuations in revenues, gross profit and operating expenses, as well as changes in operating assets and liabilities. We may need additional funds to support working capital requirements and operating expenses, or for other requirements.

There can be no assurance that we will be successful in executing our business plan, maintaining our existing customer base or achieving profitability. Our failure to generate sufficient revenues, achieve planned gross margins, control operating costs, generate positive cash flows or raise sufficient additional funds may require us to modify, delay or abandon some of our planned future expansion or expenditures, which could have a material adverse effect on our business, operating results, financial condition and ability to achieve our intended business objectives, and therefore, we could be forced to curtail our operations, which would have a material adverse effect on our ability to continue with our business plans.

If we are unable to raise additional financing, or if other expected sources of funding are delayed or not received, we would take the following actions as early as the third quarter of 2015 to support our liquidity needs through the remainder of 2015 and into 2016:

 

 

effect significant headcount reductions in the United States, EMEA and in APAC, particularly with respect to engineering employees, general and administrative employees and other employees not connected to critical or contracted activities;

 

 

shift our focus to existing products and customers with significant reduced investment in new products and commercial development efforts;

 

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reduce our expenditures for third-party contractors, including consultants, professional advisors and other vendors; and

 

 

reduce or delay uncommitted capital expenditures.

Implementing this contingency plan could have a material negative impact on our ability to continue our business as currently contemplated, including, without limitation, delays or failures in our ability to:

 

 

achieve planned product sales;

 

develop and commercialize products within planned timelines or at planned scales; and

 

continue other core activities.

Furthermore, any inability to scale-back operations as necessary, and any unexpected liquidity needs, could create pressure to implement more severe measures. Such measures could have a material adverse effect on our ability to meet contractual requirements and increase the severity of the consequences described above.

Offering of senior notes and warrants

On September 30, 2014, we issued the Senior Notes and 16.3 million fully vested common stock warrants at an initial exercise price of $4.92 per share (subject to adjustment) and received proceeds of $77.0 million, net of issuance costs of $3.0 million. The Senior Notes will bear interest at a rate of 5.00% per year. In addition, on the maturity date we will make an additional cash payment to the holders of the Senior Notes outstanding on the maturity date equal to 15% of the principal amount of the Senior Notes outstanding. In the event we do not consummate a firmly underwritten registered public offering of our common stock that results in aggregate gross proceeds to us of at least $75.0 million prior to March 1, 2016, the holders of the Senior Notes will have the right to require us to repurchase the Senior Notes in whole or in part, at a repurchase price of 110% of the principal amount of the Senior Notes plus accrued and unpaid interest.

We used $31.0 million of the proceeds to repay in full and terminate our loan and security agreements with Silicon Valley Bank discussed below. In addition, we were required to deposit $12.0 million of the proceeds in an escrow account to be used for the Senior Notes’ future interest payments and provide $2.9 million of the proceeds as collateral for letters of credit and other bank services. We incurred $1.0 million in prepayment penalties and bank fees related to our termination of such agreements with Silicon Valley Bank. See Note 6 to our consolidated financial statements appearing elsewhere in this prospectus for further details.

SVB loan and security agreements

In January 2011, we entered into a loan and security agreement, or Loan Agreement, with Silicon Valley Bank, or SVB, to fund our working capital and other general corporate needs. This agreement provided for a term loan and an asset-based revolving line of credit. Since then, we have amended the terms of the agreement on various occasions. In December 2013, we entered into a mezzanine loan and security agreement, or Mezzanine Agreement, with SVB, which provided for a term loan.

Loan agreement

The amendments to the Loan Agreement allowed us to borrow up to an aggregate $22.5 million under the term loan facility. Advances were to be repaid over a period of 36 months or 48 months and carry an interest rate, fixed as of the funding date, equal to the Wall Street Journal prime rate plus 2.0%. In January 2011 and September 2011, we borrowed $6.0 million and $2.5 million, respectively, repayable in 36 monthly installments from the date of each borrowing. In December 2011, we borrowed $5.5 million repayable in 48 monthly

 

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installments. Each of these 2011 borrowings had an interest rate of 5.25%. In July 2012 and September 2012, we borrowed $6.0 million and $2.5 million, respectively, repayable in 36 monthly installments from the date of borrowing. Each of these 2012 borrowings had an interest rate of 5.0%. Each of these borrowings also had end of term payments, and as a result, the effective interest rate for the combined loans was approximately 7.0%. As part of the June 2012 amendment, we renegotiated the annual interest rate on a prospective basis on our 2011 borrowings from 5.25% to 5.0%. The aggregate principal amounts outstanding on the term loan as of December 31, 2013 was $8.5 million. No additional amounts were available for borrowing at December 31, 2013.

Credit facility

As of December 31, 2013, the Loan Agreement provided for an asset-based revolving line of credit of up to $25.0 million. The amount available on the revolving line of credit at any point in time was based on 80% of eligible receivables and was subject to a borrowing base calculation. Principal amounts outstanding under the revolving line accrued interest at a floating per annum rate equal to the Wall Street Journal prime rate plus 0.75% and were repayable monthly. We borrowed $10.0 million during 2013 and as of December 31, 2013, we had an outstanding balance of $10.0 million. As of December 2013, the available borrowing base was reduced by $1.8 million for outstanding letters of credit, bringing down the available revolving line of credit as of December 31, 2013 to $13.2 million. The revolving line of credit had a nonrefundable annual commitment fee of 0.5% on the maximum revolving line as well as an unused line charge to be paid quarterly at 0.3% per annum, depending on the average unused portion of the revolving line. Further, a letter of credit fee of 1.25% per annum of the face amount was charged to us for each letter of credit issued during the term and upon the renewal of such letter of credit.

Collateralization and loan covenants

The term loans and the revolving line of credit under the Loan Agreement and the term loan under the Mezzanine Agreement were collateralized by all our assets with the exception of intellectual property; however, the collateral did include all proceeds of all intellectual property. In addition, we had provided a negative pledge regarding our intellectual property and could not encumber it without SVB’s consent. The Loan Agreement contained financial covenants that required us to (1) maintain “minimum liquidity” of unused amounts on the borrowings or the revolving line, whichever is less, plus unrestricted cash and cash equivalents, or unrestricted cash, of at least $25.0 million; (2) maintain a minimum adjusted quick ratio of at least 0.85; (3) maintain minimum billings of at least $86 million for the trailing six months ended June 30, 2014; and (4) maintain adjusted EBITDA levels starting in the first quarter of 2015. On March 31, 2014, we were not in compliance with the adjusted quick ratio covenant. In June 2014, we obtained a waiver from the lender for a fee of $15,000, which we recorded as debt issuance cost within the bank debt and were amortizing over the remaining term of the note. SVB also agreed to reduce the minimum liquidity requirement from $25 million to $20 million for the months July 2014 through November 2014 and lower the adjusted quick ratio beginning the quarter ended June 30, 2014. As of June 30, 2014, our minimum liquidity was $32 million, our adjusted quick ratio was 0.85, our billings for the trailing six months was $109 million and we were in compliance with all of the financial covenants. SVB had the option, immediately upon the occurrence, and during the continuance of, an event of default, including the non-compliance with the above financial covenants, to increase the interest rate per annum by 3.0% above the rate that is otherwise applicable. On September 30, 2014, we paid off all outstanding balances and terminated the Loan Agreement, and therefore, the loan covenants are no longer applicable.

The Mezzanine Agreement consisted of two funding tranches of $7.5 million each. The first tranche was funded upon execution of the Mezzanine Agreement, and the second tranche was funded in the second quarter of 2014. The funding of the second tranche was contingent on our achievement of certain performance requirements

 

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related to our billings in the fourth quarter of 2013 and the first quarter of 2014. In connection with the funding of the two tranches, we issued to SVB and an associated bank warrants to purchase up to 1,065,000 shares of common stock with an exercise price of $3.22 per share.

On various dates in 2012, 2013 and 2014, we were not in compliance with certain of the financial covenants and had to seek waivers of such non-compliance from SVB, which required us to pay a penalty and agree to additional financial covenants.

Cash position

As we continue to grow the business, we expect that in any given quarter, we may experience fluctuations in our cash flows from operations. Despite the possibility of such fluctuations in operating cash outflows, management believes our current cash, cash equivalents, available borrowing capacity, funds from the issuance of Series C-1 redeemable convertible preferred stock in February and March 2014 and proceeds from the sale of the Senior Notes are sufficient to meet our operating and capital expenditure cash flow needs through December 31, 2015. However, we may elect to raise additional capital through the sale of additional equity or debt securities, obtain an additional credit facility, license our intellectual property or sell certain assets. If additional funds are raised through the issuance of additional debt or equity securities, holders of any such securities could have rights, preferences and privileges senior to holders of common stock, and the terms of any debt could impose restrictions on our operations. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders, and additional financing may not be available in amounts or on terms acceptable to us. See “—Liquidity and capital resources—Overview.”

U.S. income taxes and foreign withholding taxes associated with the repatriation of earnings of foreign subsidiaries were not provided for on a cumulative total of $8.5 million of undistributed earnings for certain foreign subsidiaries as of December 31, 2014. As of December 31, 2014, we had $6.8 million of cash and cash equivalents held outside of the United States. We intend to reinvest these earnings indefinitely in our foreign subsidiaries. If these earnings were distributed to the United States in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, we would be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.

As of December 31, 2014, we had current and non-current restricted cash of $4.0 million and $8.0 million, respectively, since we were required to deposit $12.0 million in an escrow account to be used for the Senior Notes’ future interest payments. As of this date, we had other current and non-current restricted cash balances of $2.0 million and $1.4 million, respectively, for security deposits on building leases, bank services and employee flexible spending accounts.

A summary of our cash flow activities were as follows for the periods presented (in thousands):

 

      Years ended December 31,  
      2012     2013     2014  

Net cash used in operating activities

   $ (9,059   $ (54,251   $ (41,041

Net cash used in investing activities

     (7,942     (9,116     (32,085

Net cash provided by financing activities

     5,898        76,087        54,833   

Effect of exchange rate changes on cash and cash equivalents

     25        (54     657   
  

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ (11,078   $ 12,666      $ (17,636

 

 

 

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Operating activities

We had net cash out-flows from operations of $41.0 million for the year ended December 31, 2014 compared to net cash out-flows from operations of $54.3 million for the year ended December 31, 2013. The decrease in cash out-flows from operating activities primarily resulted from a lower net loss and higher non-cash charges for stock-based compensation expense, depreciation and amortization expense as a result of our 2014 acquisitions, the write-off of the acquired BoxTone IPR&D and the revaluation of the preferred and common stock warrants for the year ended December 31, 2014 compared to the year ended December 31, 2013. The decrease in net cash out-flows was partially offset by a reduced increase in our deferred revenues in 2014 compared to 2013 as a result of an increase in recurring billings and a reduction in perpetual license billings as we transitioned our new and existing customers to term licenses.

We had net cash out-flows from operations of $54.3 million for the year ended December 31, 2013 compared to net cash out-flows from operations of $9.1 million for the year ended December 31, 2012. The change in use of cash flows from operations primarily resulted from a higher net loss and a refund in state taxes of $3.0 million that was received in the first quarter of 2012 from a tax overpayment, partially offset by substantially higher deferred revenue balances. The deferred revenue balance increased primarily due to the increase in billings from sales of our secure mobility solution. Further, higher stock-based compensation expenses from increased headcount as a result of a higher common stock price and higher depreciation and amortization expenses from capital additions and intangibles from acquisitions offset the uses of cash flows. We also recognized a non-cash loss on disposal of property and equipment related to our internal information reporting systems, offsetting the uses of cash flows.

Investing activities

We had net cash out-flows from investing activities of $32.1 million for the year ended December 31, 2014 compared to net cash out-flows from investing activities of $9.1 million for the year ended December 31, 2013. The increase in net cash out-flows from investing activities were as a result of the payment of consideration related to the BoxTone acquisition in 2014 and an increase in restricted cash, partially offset by a decrease in purchases of property and equipment from 2013 to 2014.

We had net cash out-flows from investing activities of $9.1 million for the year ended December 31, 2013 compared to net cash out-flows from investing activities of $7.9 million for the year ended December 31, 2012. In 2013, we continued to incur significant costs related to software and systems implementations to enhance the productivity of our back office functions, partially offset by lower restricted cash balance.

Financing activities

We had net cash in-flows from financing activities of $54.8 million for the year ended December 31, 2014 compared to net cash in-flows from financing activities of $76.1 million for the year ended December 31, 2013. The net cash in-flows from financing activities in 2014 consisted primarily of $77.0 million of proceeds from our issuance of the Senior Notes in September 2014, net of issuance costs, the exercise of stock options of $3.8 million, and $1.8 million from the issuance of our preferred stock. These cash in-flows were partially offset by $33.7 million related to the payoff of bank debt and the revolving line of credit and the payment of initial public offering costs of $2.3 million. In 2013, cash provided by financing activities of $76.1 million consisted primarily of proceeds from the issuance of redeemable convertible preferred stock of $63.6 million and $5.2 million from exercises of stock options and borrowings from the revolving line of credit of $9.9 million, partially offset by $2.1 million related to the payment of initial public offering costs.

We had net cash in-flows from financing activities of $76.1 million for the year ended December 31, 2013, compared to net cash in-flows from financing activities of $5.9 million for the year ended December 31, 2012.

 

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We received proceeds from the issuance of redeemable convertible preferred stock of $63.6 million in 2013. In 2013, we borrowed $17.2 million under our loan and security agreements with Silicon Valley Bank and received $5.2 million in proceeds from the issuance of our common stock. These increases were partially offset by $7.0 million in payments on our outstanding borrowings.

Off balance sheet arrangements

During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purpose.

Contractual obligations

The following table summarizes our contractual obligations and commitments as of December 31, 2014:

 

      Payments due by period  
(in thousands)    Total      Less than 1
year
     1 to 3 years      3 to 5 years      More than
5 years
 

Principal and interest debt payments

   $ 104,000       $ 4,000       $ 100,000       $       $   

Operating lease obligations

     16,759         4,931         7,495         4,333           
  

 

 

 

Total

   $ 120,759       $ 8,931       $ 107,495       $ 4,333       $   

 

 

At December 31, 2014, we had a liability for unrecognized tax benefits of $12.3 million. Due to uncertainties with respect to the timing of future cash flows associated with our unrecognized tax benefits, we are unable to make reasonably reliable estimates of the period of cash settlement with the applicable taxing authority. Therefore, the $12.3 million has been excluded from the contractual obligations table above. Also excluded from the table above is a royalty accrual of $2.7 million for use of a third party’s technology.

Our operating lease obligations primarily relate to the lease of our corporate headquarters in Sunnyvale, California and our office in London, England. Our capital lease obligations consist of equipment financing arrangements with vendors.

Critical accounting policies and estimates

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

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements, we believe that the following accounting policies involve a greater degree of judgment. Accordingly, these are the policies we believe are the most critical to the process of making significant judgments and estimates in the preparation of our consolidated financial statements.

 

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Revenues

We generate revenues from the sale of software solutions which are composed of secure mobile collaboration applications and mobile application platforms, and essential software-related connectivity services delivered through our network operating center, also referred to as our Good Secure Cloud. We also generate revenues from licensing of our intellectual property. Our customers include enterprises, governments, companies operating corporate communication networks, OEMs, and telecommunications carriers.

We recognize revenues when all of the following conditions are met:

 

 

We enter into a legally binding arrangement with a customer;

 

Products or services are delivered;

 

The fees are fixed or determinable and free of contingencies or significant uncertainties; and

 

The collection of fees is probable.

Nearly all of our enterprise software licensing arrangements are multiple element arrangements, which include licenses to use our software on the customers’ servers and mobile devices, software maintenance and customer support, and secure connectivity services. Our software is sold under term and perpetual licenses and includes an initial software maintenance and support period of one to three years. Software maintenance and customer support are delivered for a single fee and can be renewed upon contract expiration at the customer’s option. Software maintenance includes unspecified software upgrades, updates and bug fixes. Customer support consists of access to live technical support technicians, on-line knowledge resources and on-site support for premium-level customers. For time-based software license sales, the license, maintenance and support fees are bundled into a single selling unit with a defined period of use. Both perpetual and time-based licenses also include access over the entire respective license period to the Good Secure Cloud, which enables a secure connection between the customers’ servers and their mobile devices through our network operating center. Further, the delivered software elements are essential to the functionality and utility of this secure connectivity service and, as such, these services are delivered over the software license period.

Our recurring revenues consist of sales of term-based licenses for our Good for Enterprise application, Good Collaboration Suite and Good Dynamics, as well as renewals of maintenance and support services associated with sales of perpetual licenses, which are recognized ratably over the stated contractual period, which generally range from one to three years.

Revenues from our perpetual licenses consist of sales of perpetual licenses to our Good for Enterprise application and an associated initial maintenance and support contract, all of which are recognized over the estimated customer life, generally five years. When an arrangement includes both time-based and perpetual software licenses, all revenues are recognized ratably over the longer of the service delivery periods applicable to the time-based and perpetual software licenses, generally five years.

All of the deliverables are deemed to be in the scope of the software revenue recognition rules. The secure connectivity service element is essential to the functionality of the delivered software and, as such, these services are delivered over the software license period. The number of computing tasks is unspecified and the pattern of delivering the tasks is not discernible. Accordingly, proportional performance is applied by analogy to both the software and service elements included in the arrangement. We recognize the amounts allocated to software fees and the related service fees paid upfront ratably over the specified term or the estimated life of the arrangement. As the customer is purchasing an integrated solution, for which the elements are inseparable due to the essential nature of the software and service elements to one another, the associated revenues are presented in a single line item, perpetual licenses, in our consolidated statements of operations.

Since the secure connectivity service obligation is perpetual, we must estimate our service delivery period. When the customer’s software licenses can be transferred to new users, mobile devices or operating systems,

 

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our service delivery period is deemed to be the estimated average length of the customer’s relationship with us. We compute the estimated length of the customer relationship at least once each year, and more frequently if qualitative evidence exists that would indicate a possible change in estimated life. We have estimated the average length of the customer relationship to be five years based on historical trends, technological obsolescence and industry perspectives. In arrangements that do not allow for transferability of the perpetual license, such as sales to OEM handset manufacturers, we use the estimated life of the consumer’s mobile device, or 18 months. We estimate the life of the consumer’s mobile device based on industry reports and device refresh eligibility periods by mobile carriers. All elements bundled with the perpetual license are amortized over the same service delivery period.

While we believe our estimates of the average length of the customer relationship period and the life of the consumer’s device to be reasonable based on available information, we may revise such estimates in the future as the profile and behaviors of our customers and the replacement patterns of consumer devices change. Any adjustments arising from changes in the estimates would be applied prospectively on the basis that such changes are caused by new information. Any changes in our estimates of useful lives of these customer relationships or replacement patterns of consumer devices may result in revenues being recognized on a basis different from prior periods’ and may cause our operating results to fluctuate.

We recognize revenues for time-based software licenses and any bundled elements over the contractual term of the arrangement, which is generally one to three years. When an arrangement includes both time-based and perpetual software licenses, all revenues are recognized ratably over the longer of the time-based or perpetual delivery periods applicable to the arrangement.

In certain arrangements with telecommunication carriers, license, maintenance and support and secure connectivity services are billed monthly in arrears based on actual usage. We estimate and recognize revenues from carriers in the current period for those carriers who provide reliable sales data within a reasonable time frame following the end of each month, which allows us to make reasonable estimates of revenues. Determination of the appropriate amount of revenues recognized involves judgments and estimates that we believe are reasonable, but it is possible that actual results may differ from our estimates. Revenues from other carriers are recognized when billed.

Our professional services consist of deployment, consulting and training. These services can be part of software license arrangements or sold separately. When professional services are sold as part of software license arrangements, amortization of revenues for the entire transaction does not commence until completion and acceptance of these professional services, as delivery is not considered to have occurred. Revenues from professional services sold separately from software licenses are recognized upon completion of the services.

Revenues from renewals of support and maintenance contracts are recognized ratably over the contract term.

Intellectual property revenues represent cash settlements with various companies for infringement of our patents or direct licenses of our intellectual property. As part of these settlements, we have granted such companies licenses and a release from all prior damages associated with our patent assets and, in certain circumstances, rights to future intellectual property developed by us. Revenues from these agreements are recognized, based on the terms of the agreements with licensees, immediately, when we have no remaining obligations to the licensee, or amortized over performance periods of up to 13.8 years, when we have granted to licensees rights to receive future intellectual property we may develop.

Our other revenues consist of sales of our Good for You consumer product, including sales through various revenue sharing arrangements with our telecommunications carrier partners, professional services and third-party applications. We receive a monthly payment from certain telecommunication carriers related to their customers’ use of our legacy Good for You product on their networks.

 

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Deferred revenues consist of both intellectual property licensing revenues and payments received in advance of revenue recognition from software licensing and service arrangements. Such revenues are recognized as revenue recognition criteria are met. Deferred revenues that are expected to be recognized during the succeeding 12-month period are recorded as current deferred revenues, and the remaining portion is recorded as noncurrent.

Deferred commissions

We capitalize incremental and directly-related commission costs upon the execution of the sales contract by the customer. Payments to sales personnel are made shortly after the receipt of the related customer payment. The deferred commission amounts are recoverable through the future revenue streams under the related customer contracts. We believe this is preferable to expensing the commissions as incurred because the commission costs are closely related to revenues. Amortization of deferred commissions is included in sales and marketing expense in the consolidated statements of operations over the period that the revenues from the related customer contract is recognized.

Business combinations

When we acquire businesses, we allocate the purchase price to tangible assets and liabilities and identifiable intangible assets acquired. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets. These estimates are based on information obtained from management of the acquired companies and historical experience. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unpredictable and, if different estimates were used, the purchase price for the acquisition could be allocated to the acquired assets and liabilities differently from the allocation that we have made. Furthermore, a change in the estimated fair value of an asset or liability often has a direct impact on the amount we recognize as goodwill, an asset that is not amortized. In addition, unanticipated events and circumstances may occur which may affect the accuracy or validity of such estimates and, if such events occur, we may be required to record a charge against the value ascribed to an acquired asset or an increase in the amounts recorded for assumed liabilities.

In October 2014, we acquired certain assets and assumed certain liabilities from Macheen primarily with our equity as the purchase consideration. We utilized multiple approaches and methodologies to determine the value of our common stock issued in connection with the Macheen acquisition.

The fair value of our common stock per share issued in connection with the acquisition of Macheen was $4.32. In arriving at our overall equity value to be allocated to the common stock, we placed a 50% weighting on the discounted cash flow method of the income approach and a 50% weighting on the guideline public company method of the market approach.

In May 2014, we acquired certain assets and assumed certain liabilities from Fixmo primarily with our equity as the purchase consideration. We utilized multiple approaches and methodologies to determine the value of our redeemable convertible preferred stock and common stock issued in connection with the Fixmo acquisition.

The fair value of our Series C-2 redeemable convertible preferred stock per share and common stock per share issued in connection with the acquisition of Fixmo was $6.32 and $3.88, respectively. In arriving at our overall equity value to be allocated to the different classes of equity, we placed a 50% weighting on the discounted cash flow method of the income approach and a 50% weighting on the guideline public company method of the market approach.

 

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In March 2014, we acquired BoxTone primarily with our equity as the purchase consideration. We utilized multiple approaches and methodologies to determine the value of our redeemable convertible preferred stock, preferred stock warrants, common stock and stock options issued in connection with the BoxTone acquisition.

The fair value of our Series C-2 redeemable convertible preferred stock per share and common stock per share issued in connection with the acquisition of BoxTone was $6.40 and $4.92, respectively. In arriving at our overall equity value to be allocated to the different classes of equity, we placed a 40% weighting on the discounted cash flow method of the income approach, a 40% weighting on the guideline public company method of the market approach and a 20% weighting to the guideline transaction method of the market approach.

The income approach estimates our enterprise value based on the present value of future estimated cash flows. These future cash flows are discounted to their present values using a discount rate, which is derived from an analysis of the cost of capital of comparable publicly traded companies in the same industry or similar lines of business as of the valuation date. The market approaches estimate our enterprise value based on applying a multiple, which is derived from an analysis of guideline public company multiples and guideline transaction multiples, to our financial metrics. The income and market approaches were weighted based on the facts and circumstances of each valuation.

To allocate our overall equity value, determined using the income and market approaches, to the various classes of equity, we used the probability weighted expected return method, or PWERM, where it focused on two exit scenarios: an IPO scenario and a sale or merger, or M&A, scenario which were weighted 90% and 10%, respectively. Given our current stage of development and the exit strategy of our investors, we made the determination that the probabilities of a dissolution or a stay-private scenario were nominal and no indication of common stock value under these two scenarios was explicitly considered.

Under the IPO scenario, the equity value was allocated to the securities comprising our capital structure using a common stock equivalent method which treats all classes of shares as converted to common and equally weighted. Under the M&A scenario, the equity value was allocated to the securities comprising our capital structure using the Option Pricing Method, as described in “—Stock-Based Compensation.”

The IPO and M&A scenarios were weighted based on our estimation of a future liquidity event. Our considerations of the form, timing and probability of a particular future liquidity event or outcome were based on the business outlook at the time of the valuation date.

We used the Black-Scholes valuation model to value the assumed BoxTone options. For the assumed BoxTone options, the Black-Scholes weighted average assumptions were an expected term of 3.5 years, volatility of 50.0%, 0% dividend rate and a 1.34% risk-free interest rate.

The amortization period and method of acquired intangibles related to Macheen were estimated based on the following information:

Developed technology.    The remaining useful life of five years is based on the pattern of undiscounted cash flows. We calculated the life as the number of years for the development effort to recreate the existing technology and the opportunity cost associated with this investment.

In terms of estimating the developed technology amortization method, we determined that the straight-line method was appropriate. We considered whether it was possible that the asset would be consumed in a manner that was not straight-line. The associated cash flows for which the developed technology relates are more heavily weighted in the later years; however, we believe that the timing of these cash flows do not meet as high a level of confidence to determine them to be “reliably determinable” and therefore we assumed a straight-line method of amortization.

 

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Customer relationships.    We determined a five year estimated life to be reasonable. In determining the useful life, we considered the attrition rate observed in the customer base and estimated that the annual attrition rate of the current customer base is approximately 10%. We determined that it would be appropriate to amortize the relationship over the threshold for which it begins to exceed a significant majority (i.e., more than 75%) of what would be realized. This estimate, coupled with our historical experience, allowed us to determine that five years was reasonable. Absent a more reasonable method, we selected the straight-line method of amortization.

The amortization period and method of acquired intangibles related to Fixmo were estimated based on the following information:

Developed technology.    The remaining useful life of three years is based on the pattern of undiscounted cash flows. We calculated the life as the number of years for the development effort to recreate the existing technology and the opportunity cost associated with this investment.

In terms of estimating the developed technology amortization method, we determined that the straight-line method was appropriate. We considered whether it was possible that the asset would be consumed in a manner that was not straight-line. The associated cash flows for which the developed technology relates are more heavily weighted in the later years; however, we believe that the timing of these cash flows do not meet as high a level of confidence to determine them to be “reliably determinable” and therefore we assumed a straight-line method of amortization.

Customer relationships.    We determined a six year estimated life to be reasonable. In determining the useful life, we considered the attrition rate observed in the customer base and estimated that the annual attrition rate of the current customer base is approximately 10%. We determined that it would be appropriate to amortize the relationship over the threshold for which it begins to exceed a significant majority (i.e., more than 75%) of what would be realized. This estimate, coupled with our historical experience, allowed us to determine that six years was reasonable. Absent a more reasonable method, we selected the straight-line method of amortization.

The amortization period and method of acquired intangibles related to BoxTone were estimated based on the following information:

Developed technology–MSM.    The remaining useful life of four years is based on the pattern of undiscounted cash flows. We calculate the life as the number of years it takes to generate 80% of the undiscounted cash flows for the asset. In addition, the life is primarily influenced by the technology obsolescence curve which we believe is 20%. This obsolescence factor of 20% was estimated based on the technology refreshment cycles in the mobile security sector.

Developed technology–MDM.    The remaining useful life of seven years is based on the pattern of undiscounted cash flows. We calculated the life as the number of years it takes to generate 80% of the undiscounted cash flows for the asset. In addition, the life is primarily influenced by the technology obsolescence curve which we believe is 10% per year. This obsolescence factor of 10% was based on the fact that the MDM market is essentially a commoditized market at this point with little change required going forward. This led to the longer life of seven years.

In terms of estimating the developed technology amortization method, we determined that the straight-line method was appropriate. We considered whether it was possible that the asset would be consumed in a manner that was not straight-line. The associated cash flows for which the developed technology relates are more heavily weighted in the later years; however, we believe that the timing of these cash flows do not meet as high a level of confidence to determine them to be “reliably determinable” and therefore we assumed a straight-line method of amortization.

 

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Customer relationships.    We determined an eight year estimated life to be reasonable. In determining the useful life, we considered the attrition rate observed in the customer base and estimated that the annual attrition rate of the current customer base is approximately 10%. We determined that it would be appropriate to amortize the relationship over the threshold for which it begins to exceed a significant majority (i.e., more than 75%) of what would be realized. This estimate, coupled with our historical experience, allowed us to determine that eight years was reasonable. Absent a more reasonable method, we selected the straight-line method of amortization.

In-process research and development. IPR&D consisted of the in-process Open MSM project awaiting development completion at the time of the acquisition. The value assigned to IPR&D was determined by considering the importance of the product under development to the overall development plan, estimating costs to further integrate the purchased IPR&D into commercially viable products, estimating the resulting net cash flows from the project when completed and discounting the net cash flows to their present value. The acquired IPR&D was initially recognized at fair value and is classified as an indefinite-lived asset until such time the successful completion or abandonment of the associated research and development efforts. Efforts necessary to complete the in-process research and development include additional design, testing and feasibility analyses.

The value assigned to IPR&D was based upon discounted cash flows related to the future product’s projected income stream. The discount rate of 12.5% used in the present value calculations were derived from a weighted average cost of capital, adjusted upward to reflect the additional risks inherent in the development life cycle, including the useful life of the technology, profitability levels of the technology, and the uncertainty of technology advances that are known at the date of acquisition.

During 2012, we acquired two companies, Copiun and AppCentral, with our equity as the consideration. We utilized multiple approaches and methodologies to determine the value of our redeemable convertible preferred stock, common stock and stock options issued for these companies. The two primary approaches were the fundamental analysis approach, which uses generally accepted valuation methodologies to derive an indication of value and the stock transaction approach, which utilizes the indicated values from actual transactions in our common stock. The fundamental analysis and the stock transaction approach were weighted based on the facts and circumstances of each valuation. The weight assigned to the stock transaction approach was estimated based on the volume, comparability and proximity of the transactions to the valuation date. Throughout the year, the volume and size of third-party transactions increased. Accordingly, we increased our reliance and valuation weighting toward the stock transaction approach. The value difference between preferred and common stock was due to the different rights and preferences of the securities including liquidation preference.

For the fundamental analysis, we estimated the fair value of common stock using the probability-weighted expected return method, or PWERM, where we focused on two exit scenarios: an IPO scenario and a sale or merger, or M&A, scenario. Given our current stage of development and the exit strategy of our investors, we made the determination that the probabilities of a dissolution or a stay-private scenario were nominal and no indication of common stock value under these two scenarios was explicitly considered. The IPO scenario considers ranges of future equity values based on pricing multiples of comparable public companies and allocates value to our equity securities at the time of that future liquidity event, then discounts those future common stock values at an appropriate discount rate to the valuation date. To complete this analysis, we applied the guideline public company method of the market approach to value our common stock. For the M&A scenario, the valuation involved a two-step process. First, a current enterprise value was determined based on the discounted cash flow analysis and the comparable public company analysis. Second, the equity value was allocated to the securities comprising our capital structure using the Option Pricing Method, as described in

 

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“—Stock-Based Compensation.” The IPO and M&A scenarios were weighted based on our estimation of a future liquidity event. Our considerations of the form, timing and probability of a particular future liquidity event or outcome were based on the business outlook at the time of the valuation date.

We used the Black-Scholes valuation model to value the assumed Copiun and AppCentral options. As the Copiun assumed options were deep in-the-money, the value was essentially equal to their intrinsic value. For the assumed AppCentral options, the Black-Scholes assumptions were expected term ranging from 0.53 to 5.36 years, volatility of 57.6%, 0% dividend rate, and a 0.47% risk-free interest rate.

Copiun acquisition in September 2012.    The fair value of our redeemable convertible preferred stock per share and common stock per share issued in connection with the acquisition of Copiun was $4.84 and $4.61, respectively. We placed a 75% weighting on recent stock transactions of 6.7 million shares of our common stock at a weighted-average price of $5.05 per share, and the remaining 25% weighting to the fundamental analysis. Within the fundamental analysis, we assigned a 70% weighting toward an IPO outcome scenario occurring by June 2013, and the remaining 30% weighting toward a M&A outcome scenario. The IPO outcome scenario had a higher price per common share than the M&A outcome scenario.

AppCentral acquisition in October 2012.    The fair value of our redeemable convertible preferred stock per share and common stock per share issued in connection with the acquisition of AppCentral was $4.81 and $4.52, respectively. We continued to utilize the fundamental analysis and the stock transaction valuation approaches, and maintained the weighting of 75% on recent stock transactions of 7.2 million shares of our common stock at a weighted-average price of $5.05 per share, and weighting the remaining 25% on the fundamental analysis. For the fundamental analysis, we changed our weighting to 60% toward an IPO outcome scenario and the remaining 40% toward the M&A outcome scenario. During this time, management lowered its financial outlook for 2012 due to lower demand for the second half of 2012. Management lowered the weighting toward an IPO due to the lower demand and indications of a challenging economic environment particularly in Europe. In addition, we delayed our assumed IPO timing. Our lower demand was consistent with the lower price per share we estimated from our IPO outcome scenario due to the fact that our comparable company multiples during this timeframe were lower as well. The lower price per common share under the fundamental analysis was due to our lowered forecast, the lower weighting applied toward the IPO outcome scenario and the push out of the IPO timeframe.

The amortization period and method of acquired intangibles related to Copiun and AppCentral were estimated based on the following information:

Developed technology.    Our experience with technology refreshment cycles in the mobile security sector suggested that five years is a reasonable estimate of the period of amortization. In addition, based on data we monitor for estimating our customer’s life for revenue recognition purposes, we observed that five years was a reasonable estimate for our relationship with a customer; which, based on this five year technology refresh cycle, could be a reason for why a customer may decide to move to a competing or new mobile solution. In terms of estimating the amortization method, we determined that the straight-line method was appropriate. We considered whether it was possible that the asset would be consumed in a manner that was not straight-line. The associated cash flows for which the developed technology relates are more heavily weighted in the later years; however, we believe that the timing of these cash flows do not meet as high a level of confidence to determine them to be “reliably determinable” and therefore we assumed a straight-line method of amortization.

Customer relationships.    We determined a four year estimated life to be reasonable and this is consistent with what we have used in the past for customer relationships. Further, in determining the useful life, we considered the period of expected cash flows used to measure the fair value of the customer relationships. We analyzed the population and timing of the cash flows and determined that 80% of the cash flows are estimated to be realized

 

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in the next four years. If the range was expanded to 90%, the cash flows were as long as five years. We determined, however, that it would be more appropriate to amortize the relationship over the threshold for which it begins to exceed a significant majority (i.e., more than 75%) of what would be realized. This estimate, coupled with our historical experience, allowed us to determine that four years was reasonable. Absent a more reasonable method, we selected the straight-line method of amortization.

Impairment of goodwill and intangible assets and other long-lived assets

We review our goodwill for impairment annually during the third quarter of our fiscal year, as of September 30, and more frequently if an event or circumstance indicates that an impairment loss has occurred. We are required to test our goodwill for impairment at the reporting unit level, which we have concluded that we have only one reporting unit.

Our test for goodwill impairment starts with a qualitative assessment to determine whether it is necessary to perform the quantitative goodwill impairment test. The qualitative assessment considers factors such as macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events and events affecting a reporting unit. If we determine, based on the qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, then a quantitative goodwill impairment test is required.

The quantitative test for goodwill impairment is a two-step process. The first step compares the fair value of each reporting unit with its respective carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of our reporting unit is considered not impaired, thus the second step of the impairment test is unnecessary. The second step, used to measure the amount of impairment loss, compares the implied fair value of each reporting unit’s goodwill with the respective carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess.

Determining the fair value of a reporting unit is subjective and requires judgment at many points during the test including the development of future revenue and expense forecasts used to calculate future cash flows, the selection of risk-adjusted discount rates, and determination of market comparable entities.

We assess impairment of long-lived assets, such as intangible assets and property and equipment, on at least an annual basis and when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to, significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; or changes in the planned use of assets.

Recoverability is assessed based on the fair value of the asset, which is calculated as the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset. An impairment loss is recognized in the consolidated statements of operations when the carrying amount is determined to be not recoverable and exceeds fair value, which is determined on a discounted cash flow basis.

We make estimates and judgments about future undiscounted cash flows and fair value. Although our cash flow forecasts are based on assumptions that are consistent with our plans, there is significant exercise of judgment involved in determining the cash flows attributable to a long-lived asset over its estimated remaining useful life. Our estimates of anticipated future cash flows could be reduced significantly in the future. As a result, the carrying amount of our long-lived assets could be reduced through impairment charges in the future.

 

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Income taxes

We use the asset and liability method to account for income taxes, which requires the recognition of deferred tax assets and liabilities for the expected future income tax consequences of events that have been recognized in our consolidated financial statements or tax returns. Deferred tax assets and liabilities are recognized based on temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse.

A valuation allowance is recorded to reduce the recognized net deferred tax assets to an amount that will more likely than not be realized. In order for us to realize our deferred tax assets, we must be able to generate sufficient future taxable income in the jurisdiction in which the tax asset is located. We consider forecasted earnings, identified future taxable income and prudent and reasonable tax planning strategies in assessing the need for a valuation allowance.

We also provide reserves as necessary for uncertain tax positions taken on our tax filings. First, we determine if a tax position is more likely than not to be sustained upon audit solely based on technical merits, including resolution of related appeals or litigation processes, if any. Second, based on the largest amount of benefit which is more likely than not to be realized on ultimate settlement, we recognize any such differences as a liability. We include in income tax expense any interest and penalties related to uncertain tax positions.

Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences may impact the provision for income taxes in the period in which such determination is made.

Stock-based compensation

Our stock-based compensation programs consist of grants of equity-based awards to employees, certain non-employee service providers and non-employee directors, including stock options, restricted stock awards, restricted stock units and performance-based equity awards.

We measure stock-based compensation expense for grants of equity-based awards at the grant date based on the estimated fair value of the award using the Black-Scholes option pricing model. The estimated fair value, net of forfeitures, is recognized as an expense on a straight-line basis over the requisite service period, which is generally the vesting period. We estimate a forfeiture rate to calculate the stock-based compensation for our equity awards. Our forfeiture rate is based on an analysis of our actual historical forfeitures.

The fair value of performance-based equity awards is based on the estimated fair value of the award on the date of grant and assumes that the performance criteria will be met and the target payout level will be achieved. Compensation cost is adjusted for subsequent changes in the probable outcome of performance-related conditions until the award vests. Changes in the underlying factors and assumptions utilized may result in significant variability in the stock-based compensation costs we record, which makes such amounts difficult to accurately predict.

Our option-pricing model requires the input of highly-subjective assumptions, including the fair value of the underlying common stock, the expected term of the option, the expected volatility of the price of our common

 

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stock, risk-free rates, and the expected dividend yield of our common stock. The assumptions used in our option-pricing model represent management’s best estimates, and are as follows:

Fair value of our common stock.    Because our common stock is not publicly traded, we must estimate the fair value of our common stock, as discussed in “Common Stock Valuations” below.

Expected term.    The expected term represents the period that our stock-based awards are expected to be outstanding. As we do not have sufficient historical experience for determining the expected term of the stock option awards granted, we have based our expected term on the simplified method available under U.S. GAAP.

Expected volatility.    As there is no public market for our common stock prior to this offering, we have limited information on the volatility of our common stock. The expected volatility is determined based on historical volatility of the common stock of a peer group of publicly traded companies. When making the selections of our industry peer companies to be used in the volatility calculation, we considered the size, operational and economic similarities to our principal business operations.

Risk-free rate.    The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term of the awards.

Dividend yield.    We have not paid and do not expect to pay dividends.

The following assumptions were used for each respective period to calculate our stock-based compensation:

 

      Years ended December 31,  
      2012      2013      2014  

Risk-free rate

     0.82%         1.23%         1.86%   

Expected dividend yield

     0.00%         0.00%         0.00%   

Expected volatility

     58.85%         57.54%         50.92%   

Expected term (years)

     6.05         6.21         5.89   

 

 

The following table summarizes options, restricted stock units and restricted stock awards granted since January 1, 2014:

 

Grant date(1)    Number of
shares subject
to equity
awards granted
     Exercise price
per share for
options granted
     Fair value per
share of
common stock
 

January 29, 2014

     785,250         4.10         3.53   

June 12, 2014

     4,488,601         3.88         3.88   

June 25, 2014

     4,500         3.88         3.88   

July 30, 2014

     172,750         3.88         3.88   

November 5, 2014

     2,277,735         4.32         4.32   

December 15, 2014

     76,625         4.32         4.32