Description of Business and Significant Accounting Policies (Policies)

12 Months Ended

Jul. 31, 2016

On April 29, 2015 the Company completed its initial public offering (the “IPO”) in which it sold 5,115,000 shares of common stock to the public at $17.00 per share. The total gross proceeds from the offering were approximately $87.0 million. After deducting underwriting discounts and commissions and offering expenses payable by the Company, the aggregate net proceeds received totaled approximately $76.9 million.

The sale of common stock in the IPO triggered the weighted average anti-dilution provisions of the Company’s amended and restated certificate of incorporation then in effect. At the IPO price of $17.00 per share, the per share conversion rate for the Company’s Series H convertible preferred stock into common stock was approximately 1:1.0365. In connection with the completion of the IPO, and giving effect to the anti-dilution adjustment relating to the Company’s Series H convertible preferred stock, all shares of the Company’s convertible preferred stock outstanding automatically converted into 19,818,172 shares of the Company’s common stock.

Reverse Stock Split

On April 7, 2015, the Company effected a 1-for-7.6 reverse stock split of its common stock and convertible preferred stock, as approved by its Board of Directors (the “Board”) and stockholders. All information throughout these consolidated financial statements and notes to the consolidated financial statements relating to the number of shares, price per share and per share amounts have been adjusted to give effect to the 1-for-7.6 reverse stock split. All fractional shares were settled in cash.

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”). The accompanying consolidated financial statements include the accounts of Apigee Corporation and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation.

Use of Estimates

The preparation of consolidated financial statements in conformity with 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 covered by the consolidated financial statements and accompanying notes. In particular, the Company makes estimates with respect to the fair value of multiple elements in revenue recognition, uncollectible accounts receivable, assets acquired and liabilities assumed in a business combination, valuation of long-lived assets, stock-based compensation, income taxes and other contingencies. Actual results could differ from those estimates and such differences could be material to the financial statements and affect the results of operations reported in future periods.

Foreign Currency Transactions

The functional currency of the Company’s foreign subsidiaries is the U.S. dollar. Accordingly, monetary balance sheet accounts are remeasured using the current exchange rate in effect at the balance sheet date and non-monetary items are remeasured at the historical exchange rate. Expenses are remeasured at the average exchange rates for the period. The resulting gains and losses are included in other expense, net and were not material for the years ended July 31, 2016, 2015 and 2014.

Cash and Cash Equivalents

The Company considers all highly liquid instruments with original or remaining maturities of 90 days or less at the date of purchase to be cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair value. As of July 31, 2016 and 2015, $66.0 million and $86.4 million, respectively, of cash and cash equivalents were invested in money market funds.

Concentration of Risk and Significant Customers

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains the majority of its cash and money market accounts at one financial institution that management believes is a high-credit, high-quality financial institution and accordingly, subject to minimal credit risk. Deposits held with these financial institutions may be in excess the amount of insured limits provided on such deposits, if any.

The Company’s accounts receivable are subject to credit risks. The accounts receivable are unsecured and are derived from customers around the world in a variety of industries.

Accounts Receivable and Allowance for Doubtful Accounts

The Company’s accounts receivable are recorded at invoiced amounts, net of the Company’s estimated allowances for doubtful accounts. The allowance for doubtful accounts is estimated based on an assessment of the Company’s ability to collect on customer accounts receivable. The Company performs ongoing credit evaluations of its customers and regularly reviews the allowance by considering certain factors such as historical experience, industry data, credit quality, age of accounts receivable balances and current economic conditions that may affect a customer’s ability to pay. In cases where the Company is aware of circumstances that may impair a specific customer’s ability to meet their financial obligations, the Company records a specific allowance against amounts due from the customer and thereby reduces the net recognized receivable to the amount the Company reasonably believes will be collected. There is judgment involved with estimating the Company’s allowance for doubtful accounts and if the financial condition of its customers were to deteriorate, resulting in their inability to make the required payments, the Company may be required to record additional allowances or charges against revenue. The Company writes off accounts receivable against the allowance when it determines a balance is uncollectible and no longer actively pursues collection of the receivable. The Company’s accounts receivable are not collateralized by any security.

Property and Equipment, Net

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets generally ranging from three to five years. Leasehold improvements are amortized over the shorter of the estimated useful life or the remaining lease term. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in the consolidated statements of comprehensive loss. Maintenance and repairs that do not improve or extend the lives of the respective assets are expensed in the period incurred.

Fair Value of Financial Instruments

Assets and liabilities recorded at fair value in the financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels which are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets or liabilities are as follows:

Level 1—Observable inputs, such as quoted prices in active markets for identical assets or liabilities.

Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company has certain financial assets and liabilities that are measured at fair value on a recurring basis. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and considers factors specific to the asset or liability. The Company’s cash equivalents include highly liquid money market funds and are classified within the Level 1 of the fair value hierarchy. Level 3 liabilities that are measured at fair value on a recurring basis consist solely of the Company’s common stock warrant liability. The fair values of the outstanding common stock warrants are measured using the Black-Scholes option-pricing model. Inputs used to determine estimated fair value include the estimated fair value of the underlying stock at the valuation measurement date, the remaining contractual term of the warrants, risk-free interest rates, expected dividends, and the expected volatility of the underlying stock. Generally, increases (decreases) in the fair value of the underlying stock and estimated term would have a directionally similar impact to the fair value measurement.

The carrying amounts of certain of the Company’s financial instruments including cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short-term maturities. Based on borrowing rates currently available to the Company for financing obligations with similar terms and considering the Company’s credit risks, the carrying value of the Company’s long-term debt approximates fair value.

Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination. Goodwill is not amortized, but is tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the asset may be impaired. The Company’s impairment tests are based on a single operating segment and reporting unit structure. If the Company determines that it is more likely than not that the fair value of the Company’s reporting unit is less than the carrying value, it will conduct a two-step test for impairment of goodwill. The first step involves comparing the fair value of the Company’s reporting unit to its carrying value, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step of the test is performed by comparing the carrying value of the goodwill in the reporting unit to its implied fair value. An impairment charge is recognized for the excess of the carrying value of goodwill over its implied fair value. The Company’s annual goodwill impairment test resulted in no impairment charges during the years ended July 31, 2016, 2015 or 2014.

Intangible assets acquired as part of a business combination, consisting primarily of developed technology, customer relationships and backlog are capitalized at their acquisition-date fair value and amortized using the straight-line method over their estimated useful life.

Impairment of Long-lived Assets

Long-lived assets, such as property, plant, and equipment, and purchased intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by a comparison of the future undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value.

Business Combinations

The Company recognizes assets acquired, liabilities assumed and contingent consideration at their fair value on the acquisition date. The Company’s estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of comprehensive loss.

In addition, uncertainties in income tax and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date. The Company continues to gather information and evaluates these items and records any adjustments to the Company’s preliminary estimates to goodwill when the Company is within the measurement period. Subsequent to the measurement period, changes to these income tax uncertainties and tax related valuation allowances will affect the Company’s provision for income taxes in the Company’s consolidated statements of comprehensive loss.

Capitalized Software Development Costs

Software development costs are expensed as incurred until the establishment of technological feasibility, at which time those costs are capitalized until the product is available for general release to customers and amortized over the estimated life of the product. Technological feasibility is established upon completion of a working model. To date, costs incurred subsequent to the establishment of technological feasibility have not been significant, and all software development costs have been charged to research and development expense in the accompanying consolidated statements of comprehensive loss.

Revenue Recognition

The Company generates revenue from the sale of its software solutions to customers through perpetual licenses and time-based licenses for its on premises solutions, and subscription arrangements for its cloud service. The Company also generates revenue from the sale of post-contract software support for on premises licenses including when and if available updates, and professional services such as consulting and training services. The Company recognizes revenue when all of the following conditions are met:


•	persuasive evidence of an arrangement exists;


•	delivery has occurred or services have been provided;


•	sales price is fixed or determinable; and


•	collection of the related receivable is probable.

Signed agreements, including by electronic acceptance, are used as evidence of an arrangement. For the Company’s on premises solution, delivery is considered to occur when it provides the customer the ability to download the software. For the Company’s cloud service solution, delivery is considered to occur when a subscription service is provisioned and made available to a customer. The Company assesses whether a fee is fixed or determinable at the outset of the arrangement, primarily based on the payment terms associated with the sale. The Company assesses collectability of the fee based on a number of factors such as collection history and creditworthiness of the customer. If the Company determines that collectability is not probable, revenue is deferred until collectability becomes probable, generally upon receipt of payment from the customer.

The Company typically enters into multiple-element arrangements with its customers in which a customer may purchase a combination of its software (offered on premises with software support or as a cloud service) solution, and professional services. The software support and professional services are not considered essential to the functionality of the software. All of these elements are considered separate units of accounting. Typically, the Company’s agreements do not include rights for customers to cancel or terminate arrangements or to return software to obtain refunds.

The Company presents revenue on a net basis, and therefore, all sales taxes are excluded from revenue in the consolidated statements of comprehensive loss. Travel and other reimbursable costs are recorded in revenue.

License

License revenue is comprised of revenue generated from licenses of the Company’s on premises perpetual and time-based software solutions. The majority of the Company’s perpetual software license arrangements include a combination of the Company’s software downloaded on the customer’s hardware, software support, or professional services. For software elements, under the software revenue recognition guidance, the residual method is used to recognize revenue when a multiple-element arrangement includes one or more elements to be delivered at a future date and vendor-specific objective evidence (“VSOE”) of fair value of all undelivered element exists. VSOE is defined as the price charged when the same element is sold separately or for an element not yet being sold separately, the price established by management having relevant authority. In the majority of the Company’s software arrangements, the only element that remains undelivered at the time of delivery of the software product is software support or services.

The Company has established VSOE for consulting days, training and software support, except for software support bundled with time-based licenses, based on a substantial majority of separate stand-alone sales of these elements, which have been priced within a reasonably narrow range. As a result, for multiple element arrangements that include perpetual licenses, revenue is allocated to the undelivered elements based on VSOE for support or consulting days and training. Using the residual method, the difference between the total arrangement fee and amount deferred for the undelivered elements is recognized upon delivery of the perpetual license if all other revenue recognition criteria are met.

The Company does not have VSOE for software support bundled with time-based licenses. Therefore, revenue from time-based licenses to the Company’s on-premises solution is generally recognized ratably over the contractual term for all periods presented.

Subscription and Support

Subscription and support revenue includes the revenue derived from customer subscriptions to the Company’s cloud service and software support for its on premises software licenses. Cloud service arrangements generally include the Company’s cloud service solution offered on a subscription basis and professional services. The term of the arrangement allows for the customer to access the Company’s software for a specified period of time, generally one to three years. In cloud service subscription arrangements, the customer is not allowed to take possession of the Company’s software. Revenue from subscriptions to the Company’s cloud service is generally recognized ratably over the contractual term for all periods presented.

When cloud service subscription arrangements involve multiple elements that qualify as separate units of accounting (i.e., the delivered items have stand-alone value), the Company allocates arrangement consideration based on the relative selling price method using the following selling price hierarchy: (1) VSOE if available; (2) third-party evidence (“TPE”), if VSOE is not available; and (3) best estimate of selling price (“BESP”) if neither VSOE nor TPE is available.

The Company has not historically priced its cloud service solution within a narrow range and, therefore, cannot establish VSOE. The Company also believes that TPE is not readily available for its cloud service as pricing is not readily accessible and there is no comparable product offering in the market. As a result, the Company uses BESP in order to allocate the selling price to cloud deliverables. The Company determines BESP considering multiple factors including, but not limited to, the price it charges for similar offerings, market conditions, competitive landscape, and pricing practices. For cloud offerings that include consulting days and training, the Company uses BESP for cloud deliverables and VSOE for consulting days and training to allocate revenue into separate units of accounting. Revenue for the cloud service is generally recognized over the subscription period when all other revenue recognition criteria are met. Consulting days and training are recognized as the services are performed, as discussed below.

Revenue from software support for the Company’s on-premises perpetual and time-based software licenses is generally recognized ratably over the contractual term, which is typically one to three years. Software support is bundled with time-based licenses and the Company uses a consistent systematic and rational method to allocate between time-based license and support revenue for financial statement presentation purposes only.

Professional Services and Other

Generally, the Company’s professional service arrangements are short-term in nature and not considered essential to the functionality of the Company’s software. Professional services are generally offered as consulting days, time and material and fixed-fee arrangements. Consulting days are recognized as revenue as the services are performed on an hourly basis or upon expiration of the service period. Time and material services are recognized as revenue as services are rendered based on inputs to the project, such as billable hours incurred. For fixed-fee professional service arrangements, the Company recognizes revenue under the proportional performance method of accounting and estimates the proportional performance on a monthly basis, utilizing hours incurred to date as a percentage of the total estimated hours to complete the project.

In cases where the Company has on premises perpetual or time-based license and professional services arrangements requiring significant customization and implementation that are considered essential to the functionality of the software, the arrangement is accounted for using contract accounting until the essential services are complete. If the Company can make reliable estimates of total project costs and the extent of progress toward completion, it applies the percentage-of-completion method in recognizing the arrangement fee.

Deferred Revenue

Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from the Company’s product offerings described above and is recognized as the revenue recognition criteria are met. Deferred revenue that will be recognized during the following 12 months is recorded as a current liability and the remaining portion is recorded as non-current.

Deferred Cost of Revenue

Deferred cost of revenue primarily consists of direct costs for professional services from multiple-element arrangements either accounted for using the completed contract method or subject to acceptance. The direct costs are being recognized in proportion to the related revenue.

Product Warranties

The Company generally provides a warranty for its software products and services to its customers for periods ranging from one to six months. The Company’s software products are generally warranted to be free of defects in materials and workmanship under normal use and the products are also generally warranted to substantially perform as described in published documentation. The Company’s services are generally warranted to be performed in a professional manner and to materially conform to the specifications set forth in the related customer contract. In the event there is a failure of such warranties, the Company generally will correct the problem or provide a reasonable workaround or replacement product. If the Company cannot correct the problem or provide a workaround or replacement product, then the customer’s remedy is generally limited to refund of the fees paid for the nonconforming product or services. To date, the warranty expenses have been insignificant.

Sales Commissions

Sales commissions are recorded as a component of sales and marketing expenses and consist of the variable compensation paid to the Company’s sales force. Sales commissions are earned and recorded at the time that a customer has entered into a binding license, subscription or services agreement.

Research and Development

Research and development costs are expensed as incurred, except for certain internal-use software development costs, which may be capitalized as noted above.

Advertising

The Company expenses advertising costs as incurred as a component of sales and marketing expenses.

Stock-based Compensation

The Company recognizes compensation expense for all stock-based awards, including stock options, ESPP and restricted stock units (“RSUs”), based on the estimated fair value of the award on the grant date in the consolidated statements of comprehensive loss over the related vesting periods. The expense recorded is based on awards ultimately expected to vest and therefore is reduced by estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company calculates the fair value of awards using the Black-Scholes option pricing model and records expense using the straight-line attribution approach.

The determination of the grant date fair value of awards is affected by a number of complex variables, which include the Company’s fair value of common stock, expected term of the options, expected volatility, risk-free interest rates and expected dividends. Prior to the Company's IPO, the Company engaged an outside expert to assist management with the valuation of the Company's common stock grants.

The Company accounts for equity awards issued to non-employees, such as consultants, in accordance with the guidance relating to equity instruments that are issued to other than employees for acquiring, or in conjunction with selling, goods or services, using the Black-Scholes option pricing model to determine the fair value of such instruments. Awards granted to non-employees are remeasured over the vesting period, and the resulting value is recorded as an expense over the period the services are received.

Segments

The Company operates its business as one operating segment. The Company’s chief operating decision maker is its Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance and allocating resources.

Taxes

Income Taxes

The Company accounts for income taxes using the asset and liability approach. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company evaluates the realizability of its deferred income tax assets and assesses the need for a valuation allowance on an ongoing basis. In evaluating its deferred income tax assets, the Company considers all available positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized.

The Company has recorded a full valuation allowance on its U.S. deferred tax assets as of July 31, 2016 because the realization of these tax benefits through future taxable income is not more likely than not as of July 31, 2016. The valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of the valuation allowance. The Company makes estimates and judgments about its future taxable income that are based on assumptions that are consistent with the plans and estimates. Should the actual amounts differ from the estimates, the amount of the valuation allowance could be materially impacted.

The Company accounts for uncertain tax positions using a two-step approach for recognizing and measuring uncertain tax positions. Tax positions are evaluated for recognition by determining if the weight of available evidence indicates that it is probable that the position will be sustained on audit, including resolution of related appeals or litigation. Tax benefits are then measured as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.

The Company recognized potential accrued interest and penalties related to unrecognized tax benefits in tax expense.

Other Taxes

The Company conducts operations in many tax jurisdictions throughout the U.S and around the world. 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 non-compliance exposures have been identified. In accordance with 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. The Company believes that, as of July 31, 2016 and 2015, it has adequately provided for such contingencies. However, it is possible that the Company’s results of operations, cash flows, and financial position could be harmed if one or more non-compliance tax exposures are asserted by any of the jurisdictions where the Company conducts its operations.

Commitments and Contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been or will be incurred and the amount of the liability can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.

Recently Adopted Accounting Standards

Share-Based Payments with Performance Targets: In June 2014, the FASB issued Accounting Standards Update No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (ASU 2014-12). ASU 2014-12 requires that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in ASC 718, Compensation—Stock Compensation, as it relates to such awards. ASU 2014-12 is effective for the Company in its first quarter of fiscal 2017 with early adoption permitted using either of two methods: (1) prospective to all awards granted or modified after the effective date; or (2) retrospective to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter, with the cumulative effect of applying ASU 2014-12 as an adjustment to the opening retained earnings balance as of the beginning of the earliest annual period presented in the financial statements. The Company has elected to early adopt the new standard using the retrospective adoption method. The adoption of this standard did not have a material effect on its financial position.

Balance Sheet Classification of Deferred Taxes: In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, which requires that all deferred tax assets and liabilities be classified as non-current on the balance sheet. The amendments in ASU 2015-17 are intended to simplify the presentation of deferred income taxes. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted. The Company early adopted the ASU in the fourth quarter of the year ended July 31, 2016. This guidance did not have a material impact on the Company’s consolidated financial statements.