10-Q 1 xtly-10q_20160731.htm 10-Q xtly-10q_20160731.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

[X]

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended July 31, 2016

OR

[  ]

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 001-37451

 

Xactly Corporation

(Exact name of registrant as specified in its charter) 

 

 

Delaware

11-3744289

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

300 Park Avenue, Suite 1700

San Jose, California 95110

(Address of principal executive offices)

Telephone Number (408) 977-3132

(Registrant’s telephone number, including area code) 

 

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

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

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

[  ]

Accelerated filer

[X]

 

 

 

 

Non-accelerated filer

[  ]  (Do not check if a smaller reporting company)

Smaller reporting company

[  ]

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

As of August 31, 2016, there were 30,750,335 shares of the registrant’s common stock outstanding.

 

 

 

 


 

Xactly Corporation

 

 

 

 

 

Page No.

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited):

 

4

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

7

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2.

 

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

 

16

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

26

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

27

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

28

 

 

 

 

 

Item 1A.

 

Risk Factors

 

28

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

47

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

47

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

47

 

 

 

 

 

Item 5.

 

Other Information

 

47

 

 

 

 

 

Item 6.

 

Exhibits

 

47

 

 

 

 

 

 

 

Signatures

 

48

 

 

 

 

 

 

 

Exhibit Index

 

49

 

 

 

2


 

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “plan,” “intend,” “expect,” “could,” “target,” “project,” “should,” “predict,” “potential,” “would,” “seek” and similar expressions and the negative of those expressions are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements concerning the following:

·

our future financial performance, including our expectations regarding our revenue, cost of revenue, gross profit or gross margin, operating expenses, ability to generate cash flow and ability to achieve and maintain positive cash flow from operations or future profitability;

·

our ability to anticipate market needs and timely develop new and enhanced solutions and services to meet those needs, and our ability to successfully monetize them;

·

the evolution of technology affecting our solutions, services and markets;

·

the impact of competition in our industry and innovation by our competitors;

·

the anticipated trends, growth rates and challenges in our business and in the markets in which we operate;

·

the effects of seasonal trends on our operating results;

·

maintaining and expanding our customer base and our relationships with other companies;

·

our liquidity and working capital requirements;

·

our anticipated growth and growth strategies and our ability to effectively manage that growth and effect these strategies;

·

our ability to sell our solutions and expand internationally;

·

our failure to anticipate and adapt to future changes in our industry;

·

our reliance on our third-party service providers;

·

the impact of any failure of our solutions;

·

our ability to hire and retain necessary qualified employees to expand our operations;

·

our ability to adequately protect our intellectual property;

·

the anticipated effect on our business of litigation to which we are or may become a party;

·

our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business both in the U.S. and internationally;

·

the increased expenses and administrative workload associated with being a public company;

·

our ability to maintain an effective system of internal controls necessary to accurately report our financial results and prevent fraud;

·

the estimates and estimate methodologies used in preparing our consolidated financial statements; and

·

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

These forward-looking statements are subject to a number of risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results may differ materially and adversely from those expressed in any forward-looking statements. Readers are directed to risks and uncertainties identified below under “Risk Factors” and elsewhere in this report for additional detail regarding factors that may cause actual results to be different than those expressed in our forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.

 

 

 

3


 

PART I. FINANCIAL INFORMATION

 

 

ITEM 1. FINANCIAL STATEMENTS

Xactly Corporation

Condensed Consolidated Balance Sheets

(in thousands, except par value and share amounts)

(Unaudited)

 

 

 

July 31, 2016

 

 

January 31, 2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

45,163

 

 

$

48,027

 

Restricted cash, short term

 

 

102

 

 

 

286

 

Accounts receivable, net

 

 

22,591

 

 

 

20,278

 

Prepaid expenses and other current assets

 

 

3,669

 

 

 

3,219

 

Total current assets

 

 

71,525

 

 

 

71,810

 

Property and equipment, net

 

 

10,240

 

 

 

8,410

 

Goodwill

 

 

6,384

 

 

 

6,384

 

Other long-term assets

 

 

283

 

 

 

280

 

Total assets

 

$

88,432

 

 

$

86,884

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,986

 

 

$

2,362

 

Accrued expenses

 

 

8,987

 

 

 

9,512

 

Debt, current portion

 

 

8,981

 

 

 

8,981

 

Deferred revenue, current portion

 

 

44,825

 

 

 

41,183

 

Total current liabilities

 

 

67,779

 

 

 

62,038

 

Debt, less current portion

 

 

5,586

 

 

 

6,826

 

Other long-term liabilities

 

 

3,806

 

 

 

4,257

 

Deferred revenue, less current portion

 

 

3,541

 

 

 

3,327

 

Total liabilities

 

 

80,712

 

 

 

76,448

 

Commitments and contingencies (note 5)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value;  20,000,000 shares authorized as of July 31, 2016

   and January 31, 2016, no shares issued or outstanding as of July 31, 2016 and

   January 31, 2016

 

 

 

 

 

 

Common stock, $0.001 par value; 1,000,000,000 shares authorized as of July 31, 2016

   and January 31, 2016; 30,669,086 and 29,542,537 shares issued and outstanding as

   of July 31, 2016 and January 31, 2016, respectively

 

 

31

 

 

 

30

 

Additional paid-in capital

 

 

156,988

 

 

 

151,064

 

Accumulated other comprehensive loss

 

 

(183

)

 

 

(180

)

Accumulated deficit

 

 

(149,116

)

 

 

(140,478

)

Total stockholders’ equity

 

 

7,720

 

 

 

10,436

 

Total liabilities and stockholders’ equity

 

$

88,432

 

 

$

86,884

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

4


 

Xactly Corporation

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(Unaudited)

 

 

 

Three months ended

July 31,

 

 

Six months ended

July 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription services

 

$

18,167

 

 

$

14,271

 

 

$

35,488

 

 

$

27,748

 

Professional services

 

 

5,797

 

 

 

4,081

 

 

 

11,730

 

 

 

8,427

 

Total revenue

 

 

23,964

 

 

 

18,352

 

 

 

47,218

 

 

 

36,175

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription services

 

 

4,140

 

 

 

4,130

 

 

 

8,275

 

 

 

7,718

 

Professional services

 

 

5,154

 

 

 

3,743

 

 

 

10,701

 

 

 

7,424

 

Total cost of revenue

 

 

9,294

 

 

 

7,873

 

 

 

18,976

 

 

 

15,142

 

Gross profit

 

 

14,670

 

 

 

10,479

 

 

 

28,242

 

 

 

21,033

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

4,534

 

 

 

3,852

 

 

 

8,883

 

 

 

7,361

 

Sales and marketing

 

 

10,718

 

 

 

8,623

 

 

 

19,916

 

 

 

15,767

 

General and administrative

 

 

3,570

 

 

 

3,574

 

 

 

7,688

 

 

 

7,123

 

Total operating expenses

 

 

18,822

 

 

 

16,049

 

 

 

36,487

 

 

 

30,251

 

Operating loss

 

 

(4,152

)

 

 

(5,570

)

 

 

(8,245

)

 

 

(9,218

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(120

)

 

 

(1,345

)

 

 

(253

)

 

 

(2,641

)

Decrease in fair value of preferred stock warrant liabilities

 

 

 

 

 

3,487

 

 

 

 

 

 

3,542

 

Other income (expense), net

 

 

20

 

 

 

(30

)

 

 

8

 

 

 

(33

)

Total other income (expense)

 

 

(100

)

 

 

2,112

 

 

 

(245

)

 

 

868

 

Loss before income taxes

 

 

(4,252

)

 

 

(3,458

)

 

 

(8,490

)

 

 

(8,350

)

Income tax expense

 

 

69

 

 

 

17

 

 

 

148

 

 

 

119

 

Net loss

 

$

(4,321

)

 

$

(3,475

)

 

$

(8,638

)

 

$

(8,469

)

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.14

)

 

$

(0.28

)

 

$

(0.29

)

 

$

(1.10

)

Weighted-average number of shares used in computing net loss per

   share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

30,326

 

 

 

12,280

 

 

 

30,005

 

 

 

7,679

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

5


 

Xactly Corporation

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(Unaudited)

 

 

 

Three months ended

July 31,

 

 

Six months ended

July 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net loss

 

$

(4,321

)

 

$

(3,475

)

 

$

(8,638

)

 

$

(8,469

)

Other comprehensive loss—foreign currency translation

   adjustments

 

 

(27

)

 

 

(6

)

 

 

(3

)

 

 

(18

)

Comprehensive loss

 

$

(4,348

)

 

$

(3,481

)

 

$

(8,641

)

 

$

(8,487

)

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

6


 

Xactly Corporation

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Six months ended

July 31,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(8,638

)

 

$

(8,469

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,763

 

 

 

1,447

 

Amortization of debt issuance costs

 

 

12

 

 

 

925

 

Stock-based compensation

 

 

3,564

 

 

 

1,282

 

Donation of common stock to XactlyOne Foundation

 

 

 

 

 

498

 

(Income) from change in fair value of warrant liabilities

 

 

 

 

 

(3,542

)

Loss from disposal on fixed assets

 

 

1

 

 

 

245

 

Facility exit costs

 

 

 

 

 

693

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,313

)

 

 

2,896

 

Prepaid expenses and other current assets

 

 

(451

)

 

 

(3,697

)

Other long-term assets

 

 

 

 

 

5

 

Accounts payable

 

 

463

 

 

 

153

 

Accrued expenses

 

 

(493

)

 

 

901

 

Deferred revenue

 

 

3,856

 

 

 

3,254

 

Other long-term liabilities

 

 

(483

)

 

 

469

 

Net cash used in operating activities

 

 

(2,719

)

 

 

(2,940

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,437

)

 

 

(3,660

)

Restricted cash

 

 

184

 

 

 

 

Net cash used in investing activities

 

 

(1,253

)

 

 

(3,660

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payments of principal on term debt

 

 

(1,250

)

 

 

 

Principal payments under capital lease obligations

 

 

(1

)

 

 

(1

)

Proceeds from exercise of warrants to acquire convertible preferred stock, net of

   issuance costs

 

 

 

 

 

37

 

Proceeds from exercise of warrants to acquire common stock

 

 

581

 

 

 

 

Proceeds from exercise of stock options

 

 

1,377

 

 

 

554

 

Proceeds from issuance of common stock for ESPP

 

 

891

 

 

 

 

Taxes paid on exercise of options

 

 

(488

)

 

 

 

Payment of deferred initial public offering costs

 

 

 

 

 

(1,042

)

Proceeds from initial public offering, net of offering costs

 

 

 

 

 

58,844

 

Net cash provided by financing activities

 

 

1,110

 

 

 

58,392

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(2

)

 

 

(15

)

Net increase (decrease) in cash and cash equivalents

 

 

(2,864

)

 

 

51,777

 

Cash and cash equivalents at beginning of period

 

 

48,027

 

 

 

19,325

 

Cash and cash equivalents at end of period

 

$

45,163

 

 

$

71,102

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest, net

 

$

246

 

 

$

1,487

 

Income taxes

 

 

98

 

 

 

67

 

Noncash financing and investing activities:

 

 

 

 

 

 

 

 

Accrued equipment purchases

 

 

2,428

 

 

 

77

 

Leasehold improvements for deferred rent

 

 

 

 

 

2,275

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

7


 

Xactly Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 1. Overview and Basis of Presentation

Company and Background

Xactly Corporation (the Company) was incorporated in Delaware in 2005. The Company is a provider of enterprise-class, cloud-based incentive compensation solutions for employee and sales performance management. The Company’s customers leverage these solutions to optimize incentive compensation and drive behavior by automating manual processes, streamlining workflows, providing visibility to users and delivering actionable analyses and insights. The Company’s solutions are delivered through a scalable, secure cloud-based platform that allows for fast innovation benefiting all customers. The Company is headquartered in San Jose, California. The Company’s fiscal year end is January 31 and its fiscal quarters end on April 30, July 31, October 31 and January 31.

Initial Public Offering

On July 1, 2015, the Company completed its initial public offering (IPO) in which it sold 7,909,125 shares of common stock, to the public at $8.00 per share. The total gross proceeds from the offering were approximately $63,273,000. After deducting underwriting discounts and commissions and offering expenses, the aggregate net proceeds received totaled approximately $54,546,000. Upon the closing of the IPO, all shares of the Company’s then-outstanding convertible preferred stock automatically converted into an aggregate of 17,871,971 shares of common stock. In addition, upon the IPO, the Company’s outstanding convertible preferred stock warrants became warrants to purchase common stock and the Company’s outstanding preferred stock warrant liabilities became indexed to the Company's common stock and accordingly have been reclassified to additional paid-in capital. 

On June 11, 2015, a four-to-one reverse stock split of the Company's then-outstanding common stock and convertible preferred stock was effected in connection with the IPO.

Basis of Presentation

These unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Accordingly, they do not include all of the financial information and footnotes required by U.S. GAAP for complete financial statements. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2016, which was filed with the SEC on April 20, 2016.

The consolidated balance sheet as of January 31, 2016, included herein was derived from the audited financial statements as of that date. These unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, the Company’s comprehensive loss and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending January 31, 2017.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant items subject to such estimates and assumptions include, but are not limited to, revenue and sales allowances, allowance for doubtful accounts, determination of the fair value of common and preferred stock and preferred stock warrant liabilities (prior to IPO), stock-based compensation, determination of the fair value of acquired intangible assets, contingent liabilities and accounting for income taxes. These estimates and assumptions are based on management’s best judgment. Management evaluates its estimates and assumptions using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.

 

 

 

8


 

Note 2. Balance Sheet Components

Accounts receivable, net consisted of the following (in thousands):

 

 

 

July 31,

 

 

January 31,

 

 

 

2016

 

 

2016

 

Accounts receivable

 

$

21,641

 

 

$

19,378

 

Unbilled accounts receivable

 

 

990

 

 

 

940

 

Allowance for doubtful accounts

 

 

(40

)

 

 

(40

)

Accounts receivable, net

 

$

22,591

 

 

$

20,278

 

 

Accrued expenses consisted of the following (in thousands):

 

 

 

July 31,

 

 

January 31,

 

 

 

2016

 

 

2016

 

Accrued compensation and benefits

 

$

4,288

 

 

$

5,148

 

Accrued expenses

 

 

2,076

 

 

 

1,909

 

Deferred rent

 

 

954

 

 

 

948

 

Accrued legal settlement

 

 

500

 

 

 

500

 

Sales tax payable

 

 

419

 

 

 

460

 

Other

 

 

750

 

 

 

547

 

Total accrued expenses

 

$

8,987

 

 

$

9,512

 

 

Other long-term liabilities consisted of the following (in thousands):

 

 

 

July 31,

 

 

January 31,

 

 

 

2016

 

 

2016

 

Deferred rent

 

$

3,605

 

 

$

4,088

 

Deferred tax liabilities

 

 

201

 

 

 

169

 

Total other long-term liabilities

 

$

3,806

 

 

$

4,257

 

 

Property and equipment, net consisted of the following (in thousands):

 

 

 

July 31,

 

 

January 31,

 

 

 

2016

 

 

2016

 

Computer software and equipment

 

$

14,244

 

 

$

12,830

 

Furniture and fixtures

 

 

765

 

 

 

752

 

Leasehold improvements

 

 

4,365

 

 

 

4,366

 

Construction in progress

 

 

2,516

 

 

 

348

 

Gross property and equipment

 

 

21,890

 

 

 

18,296

 

Less accumulated depreciation and amortization

 

 

(11,650

)

 

 

(9,886

)

Property and equipment, net

 

$

10,240

 

 

$

8,410

 

 

Depreciation and amortization expense for the three months ended July 31, 2016 and 2015 was $897,000 and $848,000, respectively, and for the six months ended July 31, 2016 and 2015 was $1,763,000 and $1,447,000, respectively.

 

 

 

9


 

Note 3. Fair Value Measurements of Assets and Liabilities

The Company measures certain financial assets and liabilities at fair value on a recurring basis. The Company determines fair value based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy. These levels are:

Level 1

Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2

Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3

Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

Observable inputs are based on market data obtained from independent sources.

The following summarizes assets and liabilities that are measured at fair value on a recurring basis, by level, within the fair value hierarchy (in thousands):

 

 

 

July 31, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents—money market funds

 

$

41,501

 

 

$

 

 

$

 

 

$

41,501

 

Restricted cash—money market funds

 

 

129

 

 

 

 

 

 

 

 

 

129

 

Restricted cash—bank certificates of deposit

 

 

102

 

 

 

 

 

 

 

 

 

102

 

Total

 

$

41,732

 

 

$

 

 

$

 

 

$

41,732

 

 

 

 

January 31, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents—money market funds

 

$

46,387

 

 

$

 

 

$

 

 

$

46,387

 

Restricted cash—money market funds

 

 

129

 

 

 

 

 

 

 

 

 

129

 

Restricted cash—bank certificates of deposit

 

 

102

 

 

 

 

 

 

 

 

 

102

 

Total

 

$

46,618

 

 

$

 

 

$

 

 

$

46,618

 

 

In connection with the Company's IPO, all outstanding convertible preferred stock converted to common stock. As a result, as of June 26, 2015, liabilities associated with the convertible preferred stock warrants were remeasured at fair value on the IPO date and have been reclassified to additional paid-in capital because all of these warrants to purchase convertible preferred stock have become warrants to purchase common stock and will no longer be remeasured at fair value each reporting period.

 

 

Note 4. Debt

The Company has an Amended and Restated Loan and Security Agreement (Amended SVB Agreement) with Silicon Valley Bank (SVB), effective October 30, 2015. The Amended SVB Agreement amended the Company’s existing revolving line of credit (LOC) with SVB and provided the Company with a with a term loan (SVB Term Loan) to repay the Company’s existing Mezzanine Loan and Security Agreement, dated as of October 24, 2014, by and among the Company and SVB (Mezzanine Loan).

 

10


 

The LOC had provided the Company with a revolving line of credit for $11,000,000 and allowed for an increase up to $13,000,000 if the Company met certain milestones. The Amended SVB Agreement increased the LOC from $11,000,000 to $15,000,000, and extended the maturity date from August 2016 to October 2018. The LOC carries a variable interest rate equal to Prime plus 1.25% or LIBOR plus 2.5%. As of July 31, 2016 and January 31, 2016, $6,500,000 had been borrowed under the LOC, leaving $8,500,000 available for borrowing. As of July 31, 2016 and January 31, 2016, the interest rate on the LOC was 2.99% and 2.93%, respectively. The SVB Term Loan provides for a $10,000,000 term loan with a maturity date of September 2019. The SVB Term Loan carries a variable interest rate of Prime plus 1.25% or LIBOR plus 2.5% and requires quarterly principal payments and monthly interest payments through the maturity date in September 2019. The terms of the SVB Term Loan were substantially different than the Mezzanine Loan and therefore the amendment was accounted for as an extinguishment of the Mezzanine Loan. As such, the SVB Term Loan was recorded at fair value and the existing unamortized debt issuance costs were included in the calculation of any gain or loss on extinguishment.  As of July 31, 2016 and January 31, 2016, $8,125,000 and $9,375,000, respectively, was outstanding under the SVB Term Loan. As of July 31, 2016 and January 31, 2016, the interest rate on the SVB Term Loan was 2.99% and 2.93%, respectively.    

All of the Company’s agreements with SVB include various financial and non-financial covenants with which the Company was in compliance as of July 31, 2016 and January 31, 2016.

 

 

Note 5. Commitments and Contingencies

Minimum Service Commitments and Leases

The Company has certain contractual service contracts that contain non-cancellable minimum service commitments that expire on various dates through fiscal 2018 and leases office space and equipment under non-cancellable operating and capital leases that expire on various dates through fiscal 2022. These commitments as of January 31, 2016 are disclosed in the Company’s Annual Report on Form 10-K, and did not change materially during the six months ended July 31, 2016. Leases for certain office facilities include scheduled periods of abatement and escalation of rental payments. The Company recognizes minimum rental expenses and lease incentives for operating leases on a straight-line basis over the term of the leases.  

On March 30, 2015, the Company moved its headquarters to 300 Park Avenue in San Jose, CA and ceased using the leased office space at its prior headquarters. The Company was obligated to continue to make rental payments on the lease for its prior headquarters through January 2016. Therefore, the Company recorded exit costs based on the remaining lease rentals, net of estimated sublease income in the amount of $693,000 which was recognized in the Company’s consolidated statements of operations in general and administrative expense for the six months ended July 31, 2015. Also, in connection with exiting its prior headquarters, the Company wrote off abandoned leasehold improvements with a net book value of approximately $245,000 resulting in a charge included in general and administrative expenses for the six months ended July 31, 2015.  

Indemnifications

In the normal course of business, the Company provides indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of the Company’s services and the Company may be subject to claims by customers under these indemnification provisions. Historically, costs related to these indemnification provisions have not been significant and the Company is unable to estimate the maximum potential impact of these indemnification provisions on future results of operations.

To the extent permitted under Delaware law, the Company has agreements to indemnify directors and officers for certain events or occurrences while the director or officer is or was serving at the Company’s request in such capacity. The indemnification period covers all pertinent events and occurrences during the director’s or officer’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has director and officer insurance coverage that limits the Company’s exposure and enables the Company to recover a portion of any future amounts paid. The Company believes that the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.

 

11


 

Other Taxes

The Company conducts operations in many tax jurisdictions throughout the United States. In many of these jurisdictions, non-income based taxes, such as property taxes, sales and use taxes, and value-added taxes are assessed on the Company’s operations in that particular location. While the Company strives to ensure compliance with these various non-income based tax filing requirements, there have been instances where potential noncompliance exposures have been identified. In accordance with U.S. GAAP, the Company makes a provision for these exposures when it is both probable that a liability has been incurred and the amount of the exposure can be reasonably estimated.

 

 

Note 6. Stockholders’ Equity

Capital Structure

In June 2015, the Company’s board of directors and stockholders adopted an amendment to the Company’s certificate of incorporation to effect a reverse stock split of the Company’s outstanding common stock and convertible preferred stock at a ratio of four-to-one. Accordingly, on June 11, 2015, (i) each four shares of outstanding common stock and convertible preferred stock (collectively referred to as “Capital Stock”) were exchanged and combined into one share of Capital Stock of the same class and series, as applicable; (ii) the number of shares of Capital Stock into which each outstanding warrant or option to purchase Capital Stock is exercisable was proportionately reduced on a four-to-one basis; and (iii) the exercise price of each outstanding warrant or option to purchase Capital Stock was proportionately increased on a four-to-one basis.

Upon the closing of the IPO on July 1, 2015, all then-outstanding convertible preferred stock converted into 17,871,971 shares of common stock.

In connection with the Company’s IPO, the Company amended and restated its certificate of incorporation (Amended and Restated Certificate of Incorporation), pursuant to which the Company is authorized to issue 1,000,000,000 shares of common stock and 20,000,000 shares of preferred stock, both with a par value of $0.001 per share. The Amended and Restated Certificate of Incorporation was filed with the Delaware Secretary of State, and became effective on July 1, 2015.

As of July 31, 2016, there were 30,669,086 shares of common stock issued and outstanding and no shares of preferred stock issued and outstanding.

Series E Preferred Stock Options

In connection with the Company’s acquisition of Centive, Inc. (Centive) in January 2009, the Company reserved for issuance 399,960 shares of Series E convertible preferred stock related to Series E convertible preferred stock options with an exercise price of $0.9580 per share, granted to former members of Centive management as designated by the former Centive shareholders. The shares may be issued to the former members of Centive management upon exercise of the options only upon the completion of a sale event of the Company or if the shares become freely tradable in a public securities market. In either case, the proceeds from the exercise of the options, once received by the Company or, in the case of a cashless exercise, any shares tendered back to the Company to satisfy the exercise price, will be distributed to the former Centive shareholders. If the shares underlying the options are not issued to the former members of Centive management, either because they are never exercised or they terminate by their expiration date of January 22, 2019, then the shares will be distributed to the former Centive shareholders.

Upon the IPO, the Company’s outstanding convertible preferred stock options became options to purchase common stock. In December 2015 and January 2016, the former members of Centive management each exercised their options on a cashless exercise basis.  As a result, 188,744 shares of common stock were issued and 211,216 shares were tendered back to the Company to satisfy the exercise price and required tax withholdings.

Warrants

Prior to the IPO, the Company had determined that the warrants to purchase Series C, D and D-1 convertible preferred stock should be liability classified and the warrants to purchase Series F convertible preferred stock should be equity classified. Upon the IPO, the Company’s outstanding convertible preferred stock warrants became warrants to purchase common stock and the Company’s outstanding preferred stock warrant liabilities became indexed to the Company’s common stock and accordingly have been reclassified to additional paid-in capital. 

 

 

 

12


 

Note 7. Stock-based Awards and Stock-based Compensation

2005 Stock Option Plan

In 2005, the Company adopted a stock plan (2005 Plan), which was amended in September 2011 and again in March 2015. The 2005 Plan was terminated in connection with the IPO, and accordingly, no shares are available for future issuance under this plan. All shares that were available for the Company to grant under the 2005 Plan immediately prior to its termination were canceled. Awards under the 2005 Plan that expire or terminate without having been exercised subsequent to the IPO or are forfeited to or repurchased by the Company subsequent to the IPO will become available for issuance under the 2015 Equity Incentive Plan (2015 Plan), subject to the limits set forth in the 2015 Plan.

2015 Equity Incentive Plan

In June 2015, the Board adopted and the Company’s stockholders approved the 2015 Plan, which became effective upon the effectiveness of the IPO Prospectus. The 2015 Plan provides for the grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code, to the Company’s employees and any subsidiary corporations’ employees, and for the grant of nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares to the Company’s employees, directors and consultants and the Company’s subsidiary corporations’ employees and consultants.

As of July 31, 2016, an aggregate of 2,560,697 common shares were reserved and available for issuance under the 2015 Plan.

2015 Employee Stock Purchase Plan

In June 2015, the Company’s Board of Directors adopted and the Company’s stockholders approved the 2015 Employee Stock Purchase Plan (ESPP) with the first offering period under the ESPP beginning on the effectiveness of the IPO Prospectus. As of such date, an aggregate of 600,000 shares of common stock were reserved and are available for issuance under the ESPP. During the six months ended July 31, 2016, the Company increased the shares reserved available for issuance under the ESPP by 590,851.  The Company issued 168,125 shares under the ESPP during the six months ended July 31, 2016. As of July 31, 2016, there were 1,022,726 shares reserved and were available for issuance under the ESPP. The ESPP allows eligible employees to purchase shares of common stock at a discount through payroll deductions of up to 15% of their eligible compensation, at 85% of the fair market value, as defined in the ESPP, on the first day of the offering period or the last day of the purchase period, whichever is lower, and subject to any plan limitations. The ESPP provides for consecutive six-month purchase periods, starting on the first trading day on or after March 20 and September 20 of each year. The first purchase period began on the first trading day after the effective date of the registration statement and ended on March 20, 2016.

As of July 31, 2016, the Company had $716,797 in unrecognized stock-based compensation expense, net of estimated forfeitures, related to purchase rights that will be recognized over the weighted average period of approximately 1.1 years.

 

Stock option activity

Stock option activity is as follows:

 

 

 

Number

of shares

 

 

Weighted

average

exercise

price

 

 

Weighted

average

remaining

contractual

term

 

 

Aggregate

intrinsic value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Balance at January 31, 2016

 

 

4,844,592

 

 

$

4.49

 

 

6.6 years

 

 

$

14,268

 

Granted

 

 

190,100

 

 

 

10.68

 

 

 

 

 

 

 

Exercised

 

 

(736,554

)

 

 

1.88

 

 

 

 

 

 

 

Forfeited

 

 

(102,405

)

 

 

8.07

 

 

 

 

 

 

 

Expired

 

 

(6,492

)

 

 

7.65

 

 

 

 

 

 

 

Balance at July 31, 2016

 

 

4,189,241

 

 

$

5.14

 

 

6.9 years

 

 

$

30,513

 

Vested and expected to vest as of July 31, 2016

 

 

4,077,755

 

 

$

5.04

 

 

6.9 years

 

 

$

30,083

 

Exercisable as of July 31, 2016

 

 

2,460,476

 

 

$

3.07

 

 

5.6 years

 

 

$

23,002

 

 

 

13


 

The intrinsic value for options exercised represents the difference between the fair market value based on the valuation of the common stock as determined by the Company’s Board of Directors prior to the IPO, or the closing market price of the Company’s common stock, following the IPO, on the date of exercise and the exercise price of the in-the-money stock options.

 

As of July 31, 2016, there was $6,394,343 of unamortized stock-based compensation expense related to unvested stock options which will be recognized over a weighted average period of approximately 2.7 years.

 

Restricted stock units

A summary of RSU activity during the six months ended July 31, 2016 was as follows:

 

 

 

Number

of shares

 

 

Weighted

average

grant-date

fair value

 

Balance at January 31, 2016

 

 

860,472

 

 

$

8.48

 

Granted

 

 

431,358

 

 

 

9.56

 

Released

 

 

(125,451

)

 

 

8.03

 

Forfeited

 

 

(52,756

)

 

 

8.33

 

Balance at July 31, 2016

 

 

1,113,623

 

 

$

8.95

 

 

As of July 31, 2016, there was a total of $8,811,321 in unrecognized stock-based compensation expense related to RSUs, which is expected to be recognized over a weighted-average period of approximately 3.0 years.

Valuation and expense of stock-based compensation

The fair value of stock options and ESPP awards is estimated at the grant date for options and issuance date for ESPP using the Black-Scholes option valuation model. The determination of fair value of stock options on the date of grant and ESPP awards on the date of issuance using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards based on average historical volatility of comparable entities with publicly traded shares and actual employee stock option exercise behavior. We recognize the stock-based compensation expense of RSUs, net of estimated forfeitures, over the vesting term. The stock-based compensation cost for RSUs is based on the fair value of our common stock on the date of grant.

Stock-based compensation from stock options, RSUs and the ESPP included in the Company’s condensed consolidated statements of operations is as follows (in thousands):

 

 

 

Three months ended

July 31,

 

 

Six months ended

July 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Cost of subscription services

 

$

133

 

 

$

93

 

 

$

266

 

 

$

165

 

Cost of professional services

 

 

224

 

 

 

68

 

 

 

415

 

 

 

109

 

Research and development

 

 

434

 

 

 

146

 

 

 

844

 

 

 

240

 

Sales and marketing

 

 

508

 

 

 

173

 

 

 

879

 

 

 

285

 

General and administrative

 

 

629

 

 

 

253

 

 

 

1,160

 

 

 

483

 

Total

 

$

1,928

 

 

$

733

 

 

$

3,564

 

 

$

1,282

 

 

 

Note 8. Income Taxes

For the three months ended July 31, 2016 and 2015, the provision for income taxes differed from the statutory amount primarily due to state and foreign taxes currently payable, and the Company realized no benefit for current year losses due to maintaining a full valuation allowance against its domestic and foreign net deferred tax assets.

 

 

 

14


 

Note 9. Basic and Diluted Net Loss Per Share

The following table sets forth the computation of the Company’s basic and diluted net loss per share of common stock under the two-class method attributable to common stockholders (in thousands, except per share data):

 

 

 

Three months ended

July 31,

 

 

Six months ended

July 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(4,321

)

 

$

(3,475

)

 

$

(8,638

)

 

$

(8,469

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

30,326

 

 

 

12,280

 

 

 

30,005

 

 

 

7,679

 

Basic and diluted net loss per share

 

$

(0.14

)

 

$

(0.28

)

 

$

(0.29

)

 

$

(1.10

)

 

 

The following is a table summarizing the potentially dilutive common shares that were excluded from diluted weighted-average common shares outstanding because they were anti-dilutive (in thousands):

 

 

 

Three months ended

July 31,

 

 

Six months ended

July 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Shares of common stock issuable upon exercise of warrants

 

 

307

 

 

 

523

 

 

 

307

 

 

 

523

 

Shares of common stock issuable under stock option plans

   outstanding

 

 

5,303

 

 

 

4,579

 

 

 

5,303

 

 

 

4,579

 

Potential common shares excluded from diluted net loss per

   share

 

 

5,610

 

 

 

5,102

 

 

 

5,610

 

 

 

5,102

 

 

 

Note 10. Segment Information and Information About Geographic Concentrations

The Company has determined that the chief executive officer is the chief operating decision maker. The Company’s chief executive officer reviews financial information presented on a consolidated basis for purposes of assessing performance and making decisions on how to allocate resources. Accordingly, the Company has determined that it operates in a single reporting segment.

Revenue by location is determined by the billing address of the customer. Approximately 91% of the Company’s revenue was from the United States for the three months ended July 31, 2016 and 2015. Approximately 90% and 92% of the Company’s revenue was from the United States for the six months ended July 31, 2016 and 2015, respectively.  Revenue from no other individual country exceeded 10% of total revenue for the three and six months ended July 31, 2016 or 2015. Property and equipment by geographic location is based on the location of the legal entity that owns the asset. As of July 31, 2016 and January 31, 2016, more than 95% of the Company’s property and equipment was located in the United States.

 

 

 

15


 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. The last day of our fiscal year is January 31. Our fiscal quarters end on April 30, July 31, October 31 and January 31. This discussion contains forward-looking statements based upon current plans, expectations and beliefs 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” and elsewhere in this Quarterly Report on Form 10-Q. See “Special Note Regarding Forward-Looking Statements” above.

Overview

We are a leading provider of enterprise-class, cloud-based incentive compensation solutions for employee and sales performance management. We address a critical business need: to incentivize employees and align their behaviors with company goals. Our solutions allow organizations to make better strategic decisions, optimize behaviors, increase sales and employee performance, improve margins, increase operational efficiencies, mitigate risk, design better incentive compensation plans and reduce error rates in incentive compensation calculations. We were the first 100% cloud-based, multi-tenant provider focusing solely on the incentive compensation and employee and sales performance management market and we achieved our leadership position through domain expertise and innovative technology. We deliver our solutions through a Software-as-a-Service (SaaS) business model.

We were founded in March 2005 and initially we focused on providing incentive compensation solutions for sales personnel. As we have grown, we have expanded our solutions to serve all types of employees across a variety of industries and companies, ranging from FORTUNE 50 enterprises to small, emerging companies. Our initial commercially available solution was Xactly Incent Enterprise, our flagship solution, which helps large enterprise and mid-market companies manage the critical elements of incentive compensation. In 2010, we introduced Xactly Incent Express, our incentive compensation solution that provides streamlined functionality targeted to companies with fewer than 350 employees. In 2013, we introduced Xactly Objectives, a solution for both sales and non-sales personnel, allowing managers and employees to collaboratively track and achieve individual and shared goals. In August 2014, we introduced Xactly Insights, a solution which helps our customers make fact-based decisions to motivate employees and drive business performance using our empirical set of aggregated and anonymized data. In addition, over the years, we have also introduced modules that augment Xactly Incent Enterprise, such as analytics, modeling, automated workflows, quotas and approvals and credit assignment. In May 2016, we introduced Xactly Inspire, a solution for on-boarding and coaching for sales personnel and managers. Also in May 2016, we introduced Xactly Connect, an API solution for customers to leverage their own internal IT resources for managing data sources for incentive compensation.

Our customer base has been predominantly located in the U.S., and we plan to grow our customer base internationally. However, a number of our customers are U.S. companies with employees abroad. We estimate that approximately 31% of our subscribers are located outside of the U.S., based on a representative sample of our user logins during the last two months of the fiscal year ended January 31, 2016. For the three and six months ended July 31, 2016, approximately 91% and 90% of our revenue was from U.S. customers, respectively. We market our solutions and services through our direct sales force and sales support staff, and we also rely on partners to refer opportunities to our sales force.

Because we offer our solutions on a subscription basis, we have visibility into a substantial portion of our near-term subscription revenue. Subscriptions are typically sold through non-cancellable contracts with one to three year terms. Subscription fees are primarily based on the number of subscribers per customer per month. We generally invoice customers annually in advance. The prices we charge a customer per subscriber are driven, in part, by subscriber attributes and the number of subscribers for which that customer has contracted, with generally lower prices per subscriber for larger contracts consistent with industry practice. Customer attributes that impact pricing include, in no particular order, frequency of payment by the customer to its employees, complexity of the compensation plans, value of the employee’s compensation, value of the product or service that the employee is selling and the number of payees. Changes in competitive or market conditions may also cause us to reduce the prices we charge for our solutions or revise the pricing model upon which they are based. The average pricing per subscriber of our subscription services for the three and six months ended July 31, 2016 remained relatively consistent when compared to the three and six months ended July 31, 2015.  We recognize subscription services revenue ratably over the term of the contract, and amounts billed in excess of revenue recognized for the period are reported as deferred revenue on our consolidated balance sheet. Our deferred revenue does not include the unbilled portion of subscription agreements.

 

16


 

We also derive revenue from professional services. Professional services include revenue from assisting customers in implementing our solutions and optimizing their uses, such as application configuration, system integration, data transformation and automation services, education and training services and strategic services. This revenue is largely driven by the number and mix of implementations performed by us in a quarter. Professional services are billed predominantly on a time-and-materials basis, with some fixed-fee arrangements. Professional services yield lower margins than subscriptions due to the labor-intensive nature of such services. We also have partners who implement our solutions for which we do not receive professional services revenue.

As of July 31, 2016, we had approximately 281,000 subscribers, compared to approximately 216,000 subscribers at July 31, 2015, an increase of approximately 30%. No single customer accounted for more than 5% of our revenue for the three or six months ended July 31, 2016 or 2015. Within our customer base, deployments range from implementations within a single division or geography to enterprise-wide or global deployments. Our growth to date has been a function of growth in new customers, new subscribers at current customers and sales of additional modules to current customers. While approximately 56% of our customers were enterprise and mid-market companies as of July 31, 2016, we derived approximately 91% and 92% of our revenue from enterprise and mid-market customers for the three and six months ended July 31, 2016, respectively. We define our enterprise customers as those customers with a minimum of 4,000 employees and our mid-market customers as those customers with at least 350 and less than 4,000 employees. We have sold our solutions to customers in a number of industry verticals, including business & financial services, communications, high-tech manufacturing, life sciences, travel & hospitality, media & internet and SaaS & traditional software.