10-Q 1 xtly-10q_20170430.htm 10-Q xtly-10q_20170430.htm

 

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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 April 30, 2017

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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

[  ]

Accelerated filer

[X]

 

 

 

 

Non-accelerated filer

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

Smaller reporting company

[  ]

 

 

 

 

 

 

Emerging growth company

[X]

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for

[X]

complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  

 

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 May 31, 2017, there were 32,140,812 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

 

28

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

28

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

30

 

 

 

 

 

Item 1A.

 

Risk Factors

 

30

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

49

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

49

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

50

 

 

 

 

 

Item 5.

 

Other Information

 

50

 

 

 

 

 

Item 6.

 

Exhibits

 

50

 

 

 

 

 

 

 

Signatures

 

51

 

 

 

 

 

 

 

Exhibit Index

 

52

 

 

 

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, or the potential for business or reputational harm from a cybersecurity breach;

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;

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

our pending merger discussed below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Pending Merger.”

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)

 

 

 

April 30, 2017

 

 

January 31, 2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

19,179

 

 

$

15,010

 

Short-term marketable securities

 

 

24,986

 

 

 

26,534

 

Restricted cash, short term

 

 

102

 

 

 

102

 

Accounts receivable, net

 

 

22,969

 

 

 

26,447

 

Prepaid expenses and other current assets

 

 

4,909

 

 

 

4,105

 

Total current assets

 

 

72,145

 

 

 

72,198

 

Property and equipment, net

 

 

9,430

 

 

 

9,134

 

Goodwill

 

 

6,384

 

 

 

6,384

 

Other long-term assets

 

 

288

 

 

 

280

 

Total assets

 

$

88,247

 

 

$

87,996

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

916

 

 

$

946

 

Accrued expenses

 

 

9,124

 

 

 

8,355

 

Debt, current portion

 

 

8,981

 

 

 

8,981

 

Deferred revenue, current portion

 

 

53,570

 

 

 

53,375

 

Total current liabilities

 

 

72,591

 

 

 

71,657

 

Debt, less current portion

 

 

3,726

 

 

 

4,346

 

Other long-term liabilities

 

 

3,096

 

 

 

3,329

 

Deferred revenue, less current portion

 

 

4,188

 

 

 

3,486

 

Total liabilities

 

 

83,601

 

 

 

82,818

 

Commitments and contingencies (note 6)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

   April 30, 2017 and January 31, 2017, no shares issued or outstanding as of

   April 30, 2017 and January 31, 2017

 

 

 

 

 

 

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

   April 30, 2017 and January 31, 2017; 32,007,136 and 31,519,134 shares issued

   and outstanding as of April 30, 2017 and January 31, 2017, respectively

 

 

32

 

 

 

32

 

Additional paid-in capital

 

 

166,521

 

 

 

162,781

 

Accumulated other comprehensive loss

 

 

(169

)

 

 

(243

)

Accumulated deficit

 

 

(161,738

)

 

 

(157,392

)

Total stockholders’ equity

 

 

4,646

 

 

 

5,178

 

Total liabilities and stockholders’ equity

 

$

88,247

 

 

$

87,996

 

 

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

 

 

 

April 30,

 

 

 

2017

 

 

2016

 

Revenue:

 

 

 

 

 

 

 

 

Subscription services

 

$

19,496

 

 

$

17,321

 

Professional services

 

 

5,136

 

 

 

5,933

 

Total revenue

 

 

24,632

 

 

 

23,254

 

Cost of revenue:

 

 

 

 

 

 

 

 

Subscription services

 

 

4,607

 

 

 

4,135

 

Professional services

 

 

5,127

 

 

 

5,547

 

Total cost of revenue

 

 

9,734

 

 

 

9,682

 

Gross profit

 

 

14,898

 

 

 

13,572

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

4,882

 

 

 

4,349

 

Sales and marketing

 

 

9,978

 

 

 

9,198

 

General and administrative

 

 

4,179

 

 

 

4,118

 

Total operating expenses

 

 

19,039

 

 

 

17,665

 

Operating loss

 

 

(4,141

)

 

 

(4,093

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest expense

 

 

(122

)

 

 

(133

)

Interest income and other expense, net

 

 

8

 

 

 

(12

)

Total other income (expense)

 

 

(114

)

 

 

(145

)

Loss before income taxes

 

 

(4,255

)

 

 

(4,238

)

Income tax expense

 

 

91

 

 

 

79

 

Net loss

 

$

(4,346

)

 

$

(4,317

)

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.14

)

 

$

(0.15

)

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

   share attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic and diluted

 

 

31,748

 

 

 

29,677

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

5


Xactly Corporation

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(Unaudited)

 

 

 

Three months ended

 

 

 

April 30,

 

 

 

2017

 

 

2016

 

Net loss

 

$

(4,346

)

 

$

(4,317

)

Change in fair value of marketable securities

   adjustments

 

 

2

 

 

 

 

Other comprehensive income (loss)—foreign currency translation

   adjustments

 

 

(76

)

 

 

24

 

Comprehensive loss

 

$

(4,420

)

 

$

(4,293

)

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

6


Xactly Corporation

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Three months ended

 

 

 

April 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(4,346

)

 

$

(4,317

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,062

 

 

 

866

 

Amortization of debt issuance costs

 

 

5

 

 

 

5

 

Stock-based compensation

 

 

2,661

 

 

 

1,636

 

Gain from disposal on fixed assets

 

 

(3

)

 

 

 

Amortization of investments

 

 

24

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

3,478

 

 

 

368

 

Prepaid expenses and other current assets

 

 

(804

)

 

 

(900

)

Accounts payable

 

 

(653

)

 

 

(685

)

Accrued expenses

 

 

785

 

 

 

(601

)

Deferred revenue

 

 

896

 

 

 

2,462

 

Other long-term liabilities

 

 

(250

)

 

 

(245

)

Net cash provided by (used in) operating activities

 

 

2,855

 

 

 

(1,411

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(728

)

 

 

(940

)

Proceeds from sales of property and equipment

 

 

3

 

 

 

 

Purchases of marketable securities

 

 

(5,867

)

 

 

 

Proceeds from maturities of marketable securities

 

 

7,390

 

 

 

 

Net cash provided by (used in) investing activities

 

 

798

 

 

 

(940

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payments of principal on term debt

 

 

(625

)

 

 

(625

)

Principal payments under capital lease obligations

 

 

 

 

 

(1

)

Proceeds from exercise of stock options

 

 

512

 

 

 

91

 

Proceeds from issuance of common stock for ESPP

 

 

1,127

 

 

 

891

 

Tax payments related to the vesting of restricted stock units

 

 

(559

)

 

 

 

Net cash provided by financing activities

 

 

455

 

 

 

356

 

Effect of exchange rate changes on cash and cash equivalents

 

 

61

 

 

 

15

 

Net increase (decrease) in cash and cash equivalents

 

 

4,169

 

 

 

(1,980

)

Cash and cash equivalents at beginning of period

 

 

15,010

 

 

 

48,027

 

Cash and cash equivalents at end of period

 

$

19,179

 

 

$

46,047

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

122

 

 

$

131

 

Cash paid for taxes

 

 

65

 

 

 

69

 

Supplemental disclosure of non-cash investing activities:

 

 

 

 

 

 

 

 

Property and equipment included in accounts payable and accrued liabilities

 

$

1,173

 

 

$

453

 

 

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. 

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, 2017, which was filed with the SEC on April 12, 2017.

The consolidated balance sheet as of January 31, 2017, 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, 2018.

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 short-term marketable securities, 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.

Pending Merger

On May 29, 2017, the Company entered into an Agreement and Plan of Merger (Merger Agreement) with Excalibur Parent LLC, a Delaware limited liability company (Parent), and Excalibur Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (Merger Sub), providing for the merger of Merger Sub with and into the Company (the Merger), with the Company surviving the Merger as a wholly owned subsidiary of Parent. Pursuant to the Merger Agreement, Parent and Merger Sub were formed by

 

8


affiliates of Vista Equity Partners Fund VI, L.P., a Cayman Islands exempted limited partnership. Pursuant to the Merger Agreement, Parent will acquire all outstanding shares of the Company’s common stock for a total value of approximately $564 million.

 

Consummation of the Merger is subject to certain conditions, including, but not limited to, the: (i) requisite approval by the Company’s stockholders; (ii) expiration or termination of any waiting periods applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act); and (iii) absence of any law or order restraining, enjoining or otherwise prohibiting the Merger.

The transaction is expected to close in the third quarter of the 2017 calendar year.

 

 

Note 2. Balance Sheet Components

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

 

 

 

April 30,

 

 

January 31,

 

 

 

2017

 

 

2017

 

Accounts receivable

 

$

22,365

 

 

$

25,458

 

Unbilled accounts receivable

 

 

844

 

 

 

1,229

 

Allowance for doubtful accounts

 

 

(240

)

 

 

(240

)

Accounts receivable, net

 

$

22,969

 

 

$

26,447

 

 

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

 

 

 

April 30,

 

 

January 31,

 

 

 

2017

 

 

2017

 

Computer software and equipment

 

$

17,409

 

 

$

17,238

 

Furniture and fixtures

 

 

830

 

 

 

776

 

Leasehold improvements

 

 

4,621

 

 

 

4,560

 

Construction in progress

 

 

1,070

 

 

 

36

 

Gross property and equipment

 

 

23,930

 

 

 

22,610

 

Less accumulated depreciation and amortization

 

 

(14,500

)

 

 

(13,476

)

Property and equipment, net

 

$

9,430

 

 

$

9,134

 

 

Depreciation and amortization expense for the three months ended April 30, 2017 and 2016 was $1,062,000 and $866,000, respectively.  

 

Accrued expenses consisted of the following (in thousands):

 

 

 

April 30,

 

 

January 31,

 

 

 

2017

 

 

2017

 

Accrued compensation and benefits

 

$

3,670

 

 

$

4,528

 

Accrued expenses

 

 

2,962

 

 

 

1,626

 

Deferred rent

 

 

971

 

 

 

965

 

Sales tax payable

 

 

466

 

 

 

432

 

Other

 

 

1,055

 

 

 

804

 

Total accrued expenses

 

$

9,124

 

 

$

8,355

 

 

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

 

 

 

April 30,

 

 

January 31,

 

 

 

2017

 

 

2017

 

Deferred rent

 

$

2,874

 

 

$

3,124

 

Deferred tax liabilities

 

 

222

 

 

 

205

 

Total other long-term liabilities

 

$

3,096

 

 

$

3,329

 

 

 

 

9


 

Note 3. Marketable Securities

At April 30, 2017, marketable securities consisted of the following (in thousands):

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Aggregate

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Certificates of deposit

 

$

3,800

 

 

$

 

 

$

(3

)

 

$

3,797

 

Commercial paper

 

 

1,198

 

 

 

 

 

 

(1

)

 

 

1,197

 

Corporate bonds

 

 

18,018

 

 

 

 

 

 

(26

)

 

 

17,992

 

U.S. government agencies

 

 

2,002

 

 

 

 

 

 

(2

)

 

 

2,000

 

Money market funds

 

 

3,012

 

 

 

 

 

 

 

 

 

3,012

 

 

 

$

28,030

 

 

$

 

 

$

(32

)

 

$

27,998

 

Included in cash and cash equivalents

 

$

3,012

 

 

$

 

 

$

 

 

$

3,012

 

Included in short-term marketable securities

 

$

25,018

 

 

$

 

 

$

(32

)

 

$

24,986

 

 

At January 31, 2017, marketable securities consisted of the following (in thousands):

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Aggregate

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Certificates of deposit

 

$

5,240

 

 

$

 

 

$

(3

)

 

$

5,237

 

Commercial paper

 

 

2,495

 

 

 

 

 

 

(2

)

 

 

2,493

 

Corporate bonds

 

 

16,827

 

 

 

 

 

 

(24

)

 

 

16,803

 

U.S. government agencies

 

 

2,002

 

 

 

 

 

 

(1

)

 

 

2,001

 

Money market funds

 

 

1,433

 

 

 

 

 

 

 

 

 

1,433

 

Total

 

$

27,997

 

 

$

 

 

$

(30

)

 

$

27,967

 

Included in cash and cash equivalents

 

$

1,433

 

 

$

 

 

$

 

 

$

1,433

 

Included in short-term marketable securities

 

$

26,564

 

 

$

 

 

$

(30

)

 

$

26,534

 

 

The Company considers the declines in market value of its marketable securities investment portfolio to be temporary in nature. When evaluating an investment for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates and the Company’s intent to sell, or whether it is more likely than not it will be required to sell the investment before recovery of the investment’s cost basis. As of April 30, 2017, the Company does not consider any of its investments to be other-than-temporarily impaired. The Company classifies its marketable securities as available-for-sale at the time of purchase and reevaluates such classification as of each balance sheet date. The Company may sell these securities at any time for use in current operations or for other purposes, such as consideration for acquisitions, even if they have not yet reached maturity. As a result, the Company classifies its investments, including securities with maturities beyond twelve months as “current assets” in the accompanying condensed consolidated balance sheets. Marketable securities on the condensed consolidated balance sheets consist of securities with original maturities at the time of purchase greater than three months and the remaining securities are reflected in cash and cash equivalents. During the three months ended April 30, 2017, the Company did not sell any of its marketable securities.

 

 

Note 4. 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.

 

10


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):

 

 

April 30, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents—money market funds

 

$

13,842

 

 

$

 

 

$

 

 

$

13,842

 

Restricted cash—money market funds

 

 

129

 

 

 

 

 

 

 

 

 

129

 

Restricted cash—bank certificates of deposit

 

 

102

 

 

 

 

 

 

 

 

 

102

 

Certificates of deposit

 

 

 

 

 

3,797

 

 

 

 

 

 

3,797

 

Commercial paper

 

 

 

 

 

1,197

 

 

 

 

 

 

1,197

 

Corporate bonds

 

 

 

 

 

17,992

 

 

 

 

 

 

17,992

 

U.S. government agencies

 

 

 

 

 

2,000

 

 

 

 

 

 

2,000

 

Total

 

$

14,073

 

 

$

24,986

 

 

$

 

 

$

39,059

 

 

 

 

January 31, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents—money market funds

 

$

12,260

 

 

$

 

 

$

 

 

$

12,260

 

Restricted cash—money market funds

 

 

129

 

 

 

 

 

 

 

 

 

129

 

Restricted cash—bank certificates of deposit

 

 

102

 

 

 

 

 

 

 

 

 

102

 

Certificates of deposit

 

 

 

 

 

5,236

 

 

 

 

 

 

5,236

 

Commercial paper

 

 

 

 

 

2,493

 

 

 

 

 

 

2,493

 

Corporate bonds

 

 

 

 

 

16,803

 

 

 

 

 

 

16,803

 

U.S. government agencies

 

 

 

 

 

2,002

 

 

 

 

 

 

2,002

 

Total

 

$

12,491

 

 

$

26,534

 

 

$

 

 

$

39,025

 

 

 

 

Note 5. 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 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).

The LOC provides the Company with a revolving line of credit for $15,000,000 and carries a variable interest rate equal to Prime plus 1.25% or LIBOR plus 2.5%. The LOC has a maturity date of October 2018. As of April 30, 2017 and January 31, 2017, $6,500,000 had been borrowed under the LOC, leaving $8,500,000 available for borrowing. As of April 30, 2017 and January 31, 2017, the interest rate on the LOC was 3.50% and 3.28%, 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 equal quarterly principal payments and monthly interest payments through the maturity date in September 2019. As of April 30, 2017 and January 31, 2017, $6,250,000 and $6,875,000, respectively, was outstanding under the SVB Term Loan. As of April 30, 2017 and January 31, 2017, the interest rate on the SVB Term Loan was 3.49% and 3.28%, 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 April 30, 2017 and January 31, 2017.

 

 

Note 6. 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, 2017 are disclosed in the Company’s Annual Report on Form 10-K, and did not change materially during the three months ended April 30, 2017. 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.  

 

11


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.

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 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 Company’s initial public offering (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. During the three months ended April 30, 2017, the Company, automatically by the terms of the 2015 Plan, increased the shares reserved and available for issuance under the 2015 Plan by 1,575,956.

As of April 30, 2017, an aggregate of 2,916,452 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 January 31, 2017, an aggregate of 857,350 shares of common stock were reserved and are available for issuance under the ESPP. During the three months ended April 30, 2017, the Company, automatically by the terms of the ESPP, increased the shares reserved and available for issuance under the ESPP by 630,382.  The Company issued 190,143 shares under the ESPP during the three months ended April 30, 2017. As of April 30, 2017, there were 1,297,589 shares reserved and 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.

 

12


As of April 30, 2017, the Company had $563,000 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 1.0 year.

 

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, 2017

 

 

4,323,154

 

 

$

6.23

 

 

7.0 years

 

$

25,582

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

(140,109

)

 

 

3.65

 

 

 

 

 

 

 

Forfeited

 

 

(76,117

)

 

 

9.59

 

 

 

 

 

 

 

Expired

 

 

(41

)

 

 

7.73

 

 

 

 

 

 

 

Balance at April 30, 2017

 

 

4,106,887

 

 

$

6.26

 

 

6.8 years

 

$

22,006

 

Vested and expected to vest as of April 30, 2017

 

 

4,003,226

 

 

$

6.16

 

 

6.8 years

 

$

21,835

 

Exercisable as of April 30, 2017

 

 

2,483,676

 

 

$

4.18

 

 

5.6 years

 

$

18,421

 

 

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 April 30, 2017, there was $6,661,000 of unamortized stock-based compensation expense related to unvested stock options which will be recognized over a weighted average period of approximately 2.8 years.

 

Restricted stock units

A summary of RSU activity during the three months ended April 30, 2017 was as follows:

 

 

 

Number

of shares

 

 

Weighted

average

grant-date

fair value

 

Balance at January 31, 2017

 

 

1,686,095

 

 

$

11.31

 

Granted

 

 

73,398

 

 

 

11.90

 

Released

 

 

(145,671

)

 

 

8.22

 

Forfeited

 

 

(37,796

)

 

 

10.34

 

Balance at April 30, 2017

 

 

1,576,026

 

 

$

11.64

 

 

As of April 30, 2017, there was a total of $16,131,000 in unrecognized stock-based compensation expense related to RSUs, which is expected to be recognized over a weighted-average period of approximately 3.2 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.

 

13


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

 

 

 

April 30,

 

 

 

2017

 

 

2016

 

Cost of subscription services

 

$

214

 

 

$

133

 

Cost of professional services

 

 

318

 

 

 

191

 

Research and development

 

 

650

 

 

 

410

 

Sales and marketing

 

 

709

 

 

 

371

 

General and administrative

 

 

770

 

 

 

531

 

Total

 

$

2,661

 

 

$

1,636

 

 

 

Note 8. Income Taxes

For the three months ended April 30, 2017 and 2016, 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.

In March 2016, the Financial Accounting Standards Board issued ASU 2016-09 “Compensation - Stock Compensation: Topic 718” (“ASU 2016-09”) which simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification in the statement of cash flows. The Company implemented ASU 2016-09 on a prospective basis beginning in the first quarter of 2018Upon adoption, the “without” basis NOL deferred tax asset was booked up for historical excess benefits to match the “with” basis NOL deferred tax asset, offset by the full valuation allowance. Subsequent to the adoption, all stock option activities will be accounted for discretely in the quarter that occur. However, due to the full valuation allowance on our federal deferred tax assets, no excess benefits have been reported discretely.

 

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

 

 

 

April 30,

 

 

 

2017

 

 

2016

 

Numerator:

 

 

 

 

 

 

 

 

Net loss

 

$

(4,346

)

 

$

(4,317

)

Denominator:

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

31,748

 

 

 

29,677

 

Basic and diluted net loss per share

 

$

(0.14

)

 

$

(0.15

)

 

 

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

 

 

 

April 30,

 

 

 

2017

 

 

2016

 

Shares of common stock issuable upon exercise of warrants

 

 

-

 

 

 

472

 

Shares of common stock issuable under stock option plans

   outstanding

 

 

5,683

 

 

 

5,747

 

Potential common shares excluded from diluted net loss per

   share

 

 

5,683

 

 

 

6,219

 

 

 

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.

 

14


Revenue by location is determined by the billing address of the customer. Approximately 90% of the Company’s revenue was from the United States for both the three months ended April 30, 2017 and 2016. Revenue from no other individual country exceeded 10% of total revenue for the three months ended April 30, 2017 or 2016.

Property and equipment by geographic location is based on the location of the legal entity that owns the asset. As of April 30, 2017 and January 31, 2017, more than 95% of the Company’s property and equipment was located in the United States.

 

Note 11. Subsequent Events

 

On May 30, 2017, the Company announced that it has entered into a definitive agreement to be acquired by Vista Equity Partners (Vista), a leading private equity firm focused on investments in software, data and technology-enabled businesses. Under the terms of the agreement, affiliates of Vista will acquire all outstanding shares of Xactly common stock for a total value of approximately $564 million. Xactly stockholders will receive $15.65 in cash per share.

 

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 many 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 application program interface (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 32% 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 quarter ended April 30, 2017. For the three months ended April 30, 2017, approximately 90% of our revenue was from U.S. customers. 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 services 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 months ended April 30, 2017 remained relatively consistent when compared to the three months ended April 30, 2016; however, we have noticed an increase in competitive discounting in the past fiscal quarter and fiscal year. We recognize subscription ser