10-Q 1 impv-10q_20180930.htm 10-Q impv-10q_20180930.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the Quarterly Period Ended September 30, 2018

OR

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

For the Transition Period from                      to                     

Commission File Number 001-35338

 

Imperva, Inc.

(Exact name of the Registrant as Specified in its Charter)

 

 

Delaware

03-0460133

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

3400 Bridge Parkway

Redwood Shores, California 94065

(Address of Principal Executive Offices, including Zip Code)

(650) 345-9000

(Registrant’s Telephone Number, including Area Code)

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES      NO  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one):

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  

Smaller reporting company

Emerging growth company

 

 

 

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

 

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

 

Shares of Imperva, Inc. common stock, $0.0001 par value per share, outstanding as of October 31, 2018: 35,197,514 shares.

 

 

 

 

 


IMPERVA, INC.

FORM 10-Q

Quarterly Period Ended September 30, 2018

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

3

 

Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

 

3

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017

 

4

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2018 and 2017

 

5

 

Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2018 and 2017

 

6

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017

 

7

 

Notes to Condensed Consolidated Financial Statements

 

8

Item 2.

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

 

34

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

49

Item 4.

Controls and Procedures

 

49

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

50

Item 1A.

Risk Factors

 

50

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

70

Item 3.

Defaults Upon Senior Securities

 

70

Item 4.

Mine Safety Disclosures

 

70

Item 5.

Other Information

 

70

Item 6.

Exhibits

 

71

Signatures

 

72

 

 

 

 


PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

IMPERVA, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

Unaudited

 

 

Audited

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

155,932

 

 

$

192,538

 

Short-term investments

 

 

148,487

 

 

 

166,993

 

Restricted cash

 

 

30

 

 

 

52

 

Accounts receivable, net of allowance of $1,139 and $936 as of September 30, 2018 and

   December 31, 2017, respectively

 

 

68,261

 

 

 

75,535

 

Deferred costs, current

 

 

6,647

 

 

 

-

 

Inventory

 

 

189

 

 

 

617

 

Prepaid expenses and other current assets

 

 

9,191

 

 

 

14,894

 

Total current assets

 

 

388,737

 

 

 

450,629

 

Property and equipment, net

 

 

22,600

 

 

 

25,407

 

Goodwill

 

 

149,445

 

 

 

36,389

 

Intangible assets, net

 

 

14,376

 

 

 

3,184

 

Severance pay fund

 

 

5,799

 

 

 

6,554

 

Restricted cash

 

 

2,603

 

 

 

2,284

 

Deferred tax assets

 

 

995

 

 

 

2,022

 

Other assets including non-current deferred costs

 

 

21,388

 

 

 

1,593

 

TOTAL ASSETS

 

$

605,943

 

 

$

528,062

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,372

 

 

$

5,869

 

Income taxes

 

 

8,916

 

 

$

319

 

Accrued compensation and benefits

 

 

23,422

 

 

 

22,913

 

Accrued and other current liabilities

 

 

15,327

 

 

 

11,098

 

Deferred revenue, current

 

 

137,814

 

 

 

126,174

 

Total current liabilities

 

 

190,851

 

 

 

166,373

 

Long-term accrued severance pay

 

 

6,564

 

 

 

7,238

 

Other non-current liabilities

 

 

12,887

 

 

 

6,253

 

Deferred revenue

 

 

54,022

 

 

 

33,081

 

TOTAL LIABILITIES

 

 

264,324

 

 

 

212,945

 

Commitments and contingencies (See note 7)

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value - 145,000,000 shares authorized, 35,151,159

   and 34,233,888 shares issued and outstanding as of September 30, 2018

   and December 31, 2017, respectively

 

 

3

 

 

 

3

 

Additional paid-in capital

 

 

612,249

 

 

 

572,106

 

Accumulated deficit

 

 

(268,846

)

 

 

(256,537

)

Accumulated other comprehensive loss

 

 

(1,787

)

 

 

(455

)

TOTAL STOCKHOLDERS' EQUITY

 

 

341,619

 

 

 

315,117

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

605,943

 

 

$

528,062

 

 

See Notes to Condensed Consolidated Financial Statements.

 

3


IMPERVA, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

 

 

 

Three months ended

September 30,

 

 

Nine months ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products and license

 

$

23,241

 

 

$

26,627

 

 

$

62,971

 

 

$

66,217

 

Services

 

 

68,392

 

 

 

57,265

 

 

 

197,706

 

 

 

164,418

 

Total net revenue

 

 

91,633

 

 

 

83,892

 

 

 

260,677

 

 

 

230,635

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products and license

 

 

1,985

 

 

 

1,883

 

 

 

5,623

 

 

 

5,638

 

Services

 

 

16,997

 

 

 

14,684

 

 

 

49,634

 

 

 

41,455

 

Total cost of revenue

 

 

18,982

 

 

 

16,567

 

 

 

55,257

 

 

 

47,093

 

Gross profit

 

 

72,651

 

 

 

67,325

 

 

 

205,420

 

 

 

183,542

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

18,618

 

 

 

15,515

 

 

 

56,219

 

 

 

47,493

 

Sales and marketing

 

 

39,051

 

 

 

38,245

 

 

 

119,098

 

 

 

111,757

 

General and administrative

 

 

13,872

 

 

 

13,645

 

 

 

41,789

 

 

 

39,556

 

Restructuring charges

 

 

-

 

 

 

-

 

 

 

2,551

 

 

 

667

 

Amortization of intangible assets

 

 

644

 

 

 

133

 

 

 

908

 

 

 

582

 

Total operating expenses

 

 

72,185

 

 

 

67,538

 

 

 

220,565

 

 

 

200,055

 

Income (loss) from operations

 

 

466

 

 

 

(213

)

 

 

(15,145

)

 

 

(16,513

)

Gain on sale of business

 

 

-

 

 

 

-

 

 

 

-

 

 

 

35,871

 

Other income, net

 

 

1,034

 

 

 

567

 

 

 

2,983

 

 

 

633

 

Income (loss) before provision for income taxes

 

 

1,500

 

 

 

354

 

 

 

(12,162

)

 

 

19,991

 

Income tax expense

 

 

442

 

 

 

724

 

 

 

19,620

 

 

 

768

 

Net income (loss)

 

$

1,058

 

 

$

(370

)

 

$

(31,782

)

 

$

19,223

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.03

 

 

$

(0.01

)

 

$

(0.91

)

 

$

0.57

 

Diluted

 

$

0.03

 

 

$

(0.01

)

 

$

(0.91

)

 

$

0.56

 

Shares used in computing earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

35,066

 

 

 

33,907

 

 

 

34,782

 

 

 

33,590

 

Diluted

 

 

35,745

 

 

 

33,907

 

 

 

34,782

 

 

 

34,118

 

 

See Notes to Condensed Consolidated Financial Statements

 

4


IMPERVA, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

 

 

Three months ended

September 30,

 

 

Nine months ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income (loss)

 

$

1,058

 

 

$

(370

)

 

$

(31,782

)

 

$

19,223

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in net unrealized gain (loss) on investments

 

 

284

 

 

 

55

 

 

 

55

 

 

 

105

 

Net change in unrealized gain (loss) on hedging instruments

 

 

891

 

 

 

(987

)

 

 

(1,387

)

 

 

1,161

 

Total other comprehensive (loss) income, net of tax

 

 

1,175

 

 

 

(932

)

 

 

(1,332

)

 

 

1,266

 

Comprehensive income (loss)

 

$

2,233

 

 

$

(1,302

)

 

$

(33,114

)

 

$

20,489

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

5


IMPERVA, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands, except share data)

(Unaudited) 

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Shareholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income (Loss)

 

 

Equity

 

For the nine months ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as at January 1, 2018

 

 

34,233,888

 

 

$

3

 

 

$

572,106

 

 

$

(256,537

)

 

$

(455

)

 

$

315,117

 

Cumulative effect of a change in accounting principle

 

 

-

 

 

 

-

 

 

 

-

 

 

 

19,473

 

 

 

-

 

 

 

19,473

 

Issuance of common stock under employee equity

   plans, net of repurchases

 

 

917,271

 

 

 

-

 

 

 

10,799

 

 

 

-

 

 

 

-

 

 

 

10,799

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

37,931

 

 

 

-

 

 

 

-

 

 

 

37,931

 

Shares withheld for tax withholding on vesting of

   restricted stock units

 

 

-

 

 

 

-

 

 

 

(9,151

)

 

 

-

 

 

 

-

 

 

 

(9,151

)

Assumed equity awards in acquisitions

 

 

 

 

 

 

 

 

 

 

564

 

 

 

 

 

 

 

 

 

 

 

564

 

Component of other comprehensive income (loss),

   net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gain on investments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

55

 

 

 

55

 

Change in unrealized loss on hedging instruments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,387

)

 

 

(1,387

)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(31,782

)

 

 

 

 

 

 

(31,782

)

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(33,114

)

Balance as at September 30, 2018

 

 

35,151,159

 

 

$

3

 

 

$

612,249

 

 

$

(268,846

)

 

$

(1,787

)

 

$

341,619

 

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Shareholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income (Loss)

 

 

Equity

 

For the nine months ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as at January 1, 2017

 

 

33,088,990

 

 

 

3

 

 

 

510,257

 

 

 

(276,819

)

 

 

(1,478

)

 

 

231,963

 

Cumulative effect of a change in accounting principle

 

 

 

 

 

 

 

 

 

 

2,601

 

 

 

(2,587

)

 

 

-

 

 

 

14

 

Issuance of common stock under employee equity

   plans, net of repurchases

 

 

924,350

 

 

 

-

 

 

 

17,915

 

 

 

-

 

 

 

-

 

 

 

17,915

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

36,588

 

 

 

-

 

 

 

-

 

 

 

36,588

 

Shares withheld for tax withholding on vesting of

   restricted stock units

 

 

-

 

 

 

-

 

 

 

(8,217

)

 

 

-

 

 

 

-

 

 

 

(8,217

)

Components of other comprehensive income,

   net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gain on investments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

105

 

 

 

105

 

Change in unrealized gain on hedging

   instruments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,161

 

 

 

1,161

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

19,223

 

 

 

-

 

 

 

19,223

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20,489

 

Balance as at September 30, 2017

 

 

34,013,340

 

 

$

3

 

 

$

559,144

 

 

$

(260,183

)

 

$

(212

)

 

$

298,752

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

6


IMPERVA, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine months ended September 30

 

 

 

2018

 

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(31,782

)

 

$

19,223

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

8,709

 

 

 

7,780

 

Amortization of deferred costs

 

 

3,864

 

 

 

-

 

Stock-based compensation

 

 

37,931

 

 

 

36,588

 

Amortization of acquired intangibles

 

 

908

 

 

 

582

 

Loss on disposals

 

 

-

 

 

 

48

 

Amortization of premiums/accretion of discounts on short-term investments

 

 

163

 

 

 

56

 

Gain on sale of business

 

 

-

 

 

 

(35,871

)

Facilities exit costs

 

 

559

 

 

 

-

 

Other adjustments

 

 

668

 

 

 

(1,090

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

8,741

 

 

 

2,767

 

Inventory

 

 

355

 

 

 

61

 

Deferred costs

 

 

(14,541

)

 

 

-

 

Prepaid expenses and other assets

 

 

558

 

 

 

(794

)

Accounts payable

 

 

(653

)

 

 

(628

)

Income tax payable

 

 

8,597

 

 

 

707

 

Accrued compensation and benefits

 

 

509

 

 

 

3,981

 

Accrued and other liabilities

 

 

9,033

 

 

 

4,229

 

Severance pay (net)

 

 

81

 

 

 

256

 

Deferred revenue

 

 

33,848

 

 

 

13,253

 

Deferred tax assets

 

 

1,027

 

 

 

(1,682

)

Net cash provided by operating activities

 

 

68,575

 

 

 

49,466

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from sales/maturities of short-term investments

 

 

71,736

 

 

 

66,463

 

Purchase of short-term investments

 

 

(53,339

)

 

 

(91,878

)

Proceeds from sale of business

 

 

-

 

 

 

35,015

 

Receipt of cash in escrow from sale of business

 

 

5,000

 

 

 

-

 

Net purchases of property and equipment

 

 

(5,724

)

 

 

(9,835

)

Acquisitions, net of cash acquired

 

 

(123,507

)

 

 

-

 

Net cash used in investing activities

 

 

(105,834

)

 

 

(235

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of repurchases

 

 

10,799

 

 

 

14,790

 

Shares withheld for tax withholding on vesting of restricted stock units

 

 

(9,151

)

 

 

(8,217

)

Net cash provided by financing activities

 

 

1,648

 

 

 

6,573

 

Effect of exchange rate changes on cash, cash equivalents, and restricted cash

 

 

(698

)

 

 

1,090

 

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED

   CASH

 

 

(36,309

)

 

 

56,894

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH - Beginning of period

 

 

194,874

 

 

 

109,295

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH - End of period

 

$

158,565

 

 

$

166,189

 

NONCASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Property and equipment acquired but not yet paid

 

$

1,691

 

 

$

3,120

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

7


IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation and Summary of Significant Accounting Policies

Business

Imperva, Inc. (together with its subsidiaries, the “Company”) was incorporated in April 2002 in Delaware. The Company is headquartered in Redwood Shores, California and has subsidiaries located throughout the world including Israel, Asia and Europe. The Company is engaged in the development, marketing, sales, service and support of cyber-security solutions that protect business-critical data and applications whether in the cloud or on-premises.

On October 10, 2018, the Company announced it entered into a definitive agreement (the “Merger Agreement”) to be acquired by leading private equity technology investment firm Thoma Bravo, LLC (the “Transaction”). See Note 15 for more information.

Basis of Presentation

The Company has prepared the accompanying Condensed Consolidated Financial Statements in accordance with Article 10 of Regulation S-X and pursuant to the rules and regulations for Form 10-Q of the Securities and Exchange Commission (the “SEC”). Pursuant to those rules and regulations, the Company has condensed or omitted certain information and footnote disclosures it normally includes in its annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). In management’s opinion, the Company has made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present its condensed consolidated financial position, results of operations, and cash flows. The Company’s interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These condensed consolidated financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the SEC on February 23, 2018 (the “Annual Report”).

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Concentration of Revenue and Accounts Receivable

Significant customers are those which represent 10% or more of the Company’s total revenue or gross accounts receivable balance at each respective balance sheet date. The Company primarily sells products and services through channel partners, including distributors and resellers, which sell to end-user customers. For the three months ended September 30, 2018, there was one channel partner that represented more than 10% of the Company’s total revenue. For the nine months ended September 30, 2018, no channel partner represented more than 10% of the Company’s total revenue. For the three and nine months ended September 30, 2017, there was one significant channel partner that represented more than 10% of the Company’s total revenue. As of September 30, 2018, one channel partner represented 16% of the Company’s total accounts receivable balance. As of December 31, 2017, one channel partner represented 18% of the Company’s total accounts receivable balance.

 

Significant Accounting Policies

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-09, Revenue from Contracts with Customers (Accounting Standards Codification or ASC 606). ASC 606 supersedes the revenue recognition requirements in Revenue Recognition (ASC 605), and requires the recognition of revenue as promised goods or services are transferred to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. ASC 606 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer. Collectively, we refer to ASC 606 and Subtopic 340-40 as the “new standard”.

The Company adopted the new standard as of January 1, 2018, utilizing the modified retrospective method for all contracts not completed as of the date of adoption. For contracts that were modified before the effective date, the Company reflected the aggregate effect of all modifications when identifying performance obligations and allocating transaction price in accordance with practical expedient ASC 606-10-65-1-(f)-4, which did not have a material effect on the adjustment to accumulated deficit. As a result, the Company recognized the cumulative effect of initially applying the new standard as an adjustment to the opening balance of equity on January 1, 2018. The comparative information has not been adjusted and continues to be reported under ASC 605. The details of the

8


new policy with significant changes and quantitative impact of the changes are described in below under “Revenue from Contracts with Customers.”

In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation—Scope of Modification Accounting.” This guidance was issued in an effort to reduce diversity in practice as it relates to applying modification accounting for changes to the terms and conditions of share-based payment awards. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company has adopted this guidance in the first quarter of 2018. The Company noted the application of this ASU did not have any material impact on the condensed consolidated financial statements in the current period and is not expected to have material impacts in future periods as well.

The Company adopted ASU 2016-18, “Restricted Cash,” and ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” on January 1, 2018 using the modified retrospective method as of the date of adoption. ASU 2016-18 requires an entity to reconcile and explain the period over period change in total cash, cash equivalents and restricted cash within its condensed consolidated statement of cash flows and ASU 2016-15 provides guidance clarifying how certain cash receipts and cash payments should be classified. The Company adopted this accounting standard update retrospectively and, accordingly, certain line items in the condensed consolidated statement of cash flows have been reclassified to conform to the current presentation. The following table summarizes the change in cash flows as reported and as previously reported prior to the adoption of these standards (in thousands):

 

 

 

Nine months ended

 

 

 

September 30, 2018

 

 

September 30, 2017

 

 

 

As Reported

 

 

As Reported

 

 

As Previously

Reported

 

Change in restricted cash

 

 

 

 

 

 

 

 

 

$

(302

)

Net cash used in investing activities

 

 

(105,834

)

 

$

(235

)

 

 

(537

)

Net increase (decrease)

 

 

(36,309

)

 

 

56,894

 

 

 

56,592

 

Balance at beginning of period*

 

 

194,874

 

 

 

109,295

 

 

 

107,343

 

Balance at end of period*

 

 

158,565

 

 

 

166,189

 

 

 

163,935

 

 

* Amounts in As Reported column include cash, cash equivalents and restricted cash as required. Amounts in the As Previously Reported column reflect only cash and cash equivalents.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The new standard clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and should be applied prospectively with early adoption permitted under certain scenarios. The adoption of ASU No. 2017-01 did not have a material impact on the accompanying condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

In February 2018 the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, that gives entities the option to reclassify to retained earnings tax effects related to items that have been stranded in accumulated other comprehensive income as a result of the Tax Cuts and Jobs Act (the Act). An entity that elects to reclassify these amounts must reclassify stranded tax effects related to the Act’s change in U.S. federal tax rate for all items accounted for in other comprehensive income. These entities can also elect to reclassify other stranded effects that relate to the Act but do not directly relate to the change in the federal rate. Entities can choose whether to apply the amendments retrospectively to each period in which the effect of the Act is recognized or to apply the amendments in the period of adoption. The standard is effective for the Company on January 1, 2019, with early adoption permitted. The Company is evaluating the impact of adopting this new accounting guidance on its condensed consolidated financial statements.

In August 2017, FASB issued ASU 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. Under the new guidance, more hedging strategies will be eligible for hedge accounting and the application of hedge accounting is simplified. The new guidance amends presentation and disclosure requirements, and how effectiveness is assessed. The standard is effective for the Company on January 1, 2019, with early adoption permitted. The Company is evaluating the impact of adopting this new accounting guidance on its condensed consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350), which simplifies the measurement of goodwill impairment by removing the second step of the goodwill impairment test, which requires the determination of the fair value of individual assets and liabilities of a reporting unit. Under this guidance, goodwill impairment is to be measured as the amount by which a reporting unit’s carrying value exceeds its fair value with the loss recognized not to exceed the total amount of goodwill allocated to the reporting unit. The guidance is effective beginning January 1, 2020 on a prospective basis, with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The standard is to be

9


applied on a prospective basis. The Company does not anticipate a material impact to the condensed consolidated financial statements once implemented.

In June 2016, the FASB Issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new standard requires financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The standard will be effective for the Company beginning January 1, 2020, with early application permitted. The Company is evaluating the impact of adopting this new accounting guidance on its condensed consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02 regarding ASC 842 Leases. The amendments in this guidance require balance sheet recognition of lease assets and lease liabilities by lessees for leases classified as operating leases, with an optional policy election to not recognize lease assets and lease liabilities for leases with a term of 12 months or less. The amendments also require new disclosures, including qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The standard will be effective for the Company beginning January 1, 2019. The amendments require a modified retrospective approach with optional practical expedients. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. ASU 2018-11 provides entities another option for transition, allowing entities to not apply the new standard in the comparative periods they present in their financial statements in the year of adoption. While the Company continues to evaluate the effect of the standard on its ongoing financial reporting, the Company currently believes that the adoption of the ASU may materially affect its Balance Sheet.

Change in Accounting Estimate

In Q3 2018, the Company reviewed the estimated useful lives of its certain property and equipment. This review indicated that the actual lives of certain equipment were longer than the estimated useful lives used for depreciation purposes in the Company’s financial statements. As a result, effective in August 2018, the Company changed its estimates of the useful lives of the relevant equipment to better reflect the estimated periods during which these assets will remain in service. The estimated useful lives of the relevant equipment were increased from 3 years to 5 years. The effect of this change in accounting estimate was to reduce depreciation expense by $0.7 million, increase net income by $0.7 million, and increase basic and diluted earnings per share by $0.02 for the three months ended September 30, 2018. The Company also evaluated the impact of the change in future depreciation and estimated that this change in accounting estimate will result in decreases of depreciation expenses of $1.7 million and $2.6 million for the years ended December 31, 2018 and 2019, respectively.

Revenue from Contracts with Customers

The reported results for three and nine month period ended September 30, 2018 reflect the application of the new revenue standard while the reported results for three and nine months period ended September 30, 2017 were prepared under the guidance of ASC 605, which is also referred to herein as “legacy GAAP” or the “previous guidance”. The adoption of the new revenue standard represents a change in accounting principle with the intent to align revenue recognition with the delivery of products and services and provide financial statement readers with enhanced disclosures. In accordance with the new revenue standard, revenue is recognized when a customer obtains control of promised products and services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these products and services. To achieve this core principle, the Company applies the following five steps:

 

1)

Identify the contract with a customer

A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the products and services to be transferred and identifies the payment terms related to these products and services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for products and services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.

 

2)

Identify the performance obligations in the contract

Performance obligations promised in a contract are identified based on the products and services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the products and services either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the products and services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised products and services, the Company must apply judgment to determine whether promised products and services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised products and services are accounted for as a combined performance obligation.

10


 

3)

Determine the transaction price

The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring products and services to the customer. None of the Company's contracts contained a significant financing component. Determining the transaction price requires significant judgment, which is discussed by revenue category in further detail below.

 

4)

Allocate the transaction price to performance obligations in the contract

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past standalone transactions, the Company estimates the standalone selling price taking into account available information such as past transactions, market conditions and internally approved pricing guidelines related to the performance obligations.

 

5)

Recognize revenue when or as the Company satisfies a performance obligation

The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring promised products and services to a customer.

Revenue Recognition

The Company derives revenue from two sources: (i) products and license revenue, which includes hardware and on-premise software license revenue and (ii) services revenue, which includes subscription arrangements, maintenance and support, professional services and training. Licenses for on-premises software are either perpetual or term licenses and provide the customer with a right to use the software. Substantially all of the Company’s products and license sales have been sold in combination with maintenance and support services.

At contract inception, the Company assesses the products and services promised in its contracts with customers and identifies a performance obligation for each promise to transfer to the customer a product or service (or bundle of products or services) that is distinct – i.e., if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The Company recognizes revenue when or as it satisfies a performance obligation by transferring control of a product or service to a customer.

In rare situations, the Company may agree to accept a lower consideration than the contractual price. The Company accounts for such situations as variable consideration and estimate future price reductions based on the Company’s historical experience. The impact of such price reductions on the Company’s revenue for the three and nine month period ended September 30, 2018 was not significant.

Once the Company has determined the transaction price, the total transaction price is allocated to each performance obligation in a manner depicting the amount of consideration to which the Company expects to be entitled in exchange for transferring the good(s) or service(s) to the customer (the “allocation objective”). If the allocation objective is met at contractual prices, no further allocations are made. Otherwise, the Company allocates the transaction price to each performance obligation identified in the contract on a relative standalone selling price basis.

In order to determine the standalone selling price of its promised goods or services, the Company conducts a regular analysis to determine whether its goods or services have an observable standalone selling price. In determining observable standalone selling price, the Company requires that a substantial majority of the standalone selling prices for a good or service fall within a reasonably narrow pricing range. If the Company does not have a directly observable standalone selling price for a particular goods or service, then the Company estimates a standalone selling price by reviewing external and internal market factors including, but not limited to, pricing practices including historical discounting, major service groups, and the geographies in which the Company offers its products and services. The determination of standalone selling price is made through consultation with and approval by the Company’s management. Selling prices are analyzed on a quarterly basis to identify if the Company has experienced significant changes in its selling prices.

The upfront payment pattern relative to the delivery of subscription, maintenance and services and associated revenue recognition generates significant deferred revenue. The Company refers to contract liabilities as “deferred revenue” on the condensed consolidated financial statements and related disclosures.

The revenue and revenue recognition policies for the different types of revenue are described below:

11


Products and License Revenue

Products and license revenue consists of hardware and on-premise software license sales. Hardware revenue is recognized at a point in time upon delivery.

The Company’s on-premise software licenses sold without hardware generally have significant stand-alone functionality to the customer upon delivery and are considered functional intellectual property (“IP”). Revenue allocated to on-premise software licenses is typically recognized at a point in time upon delivery of the license.

Services Revenue

Services revenue consists of subscription arrangements, maintenance and support, professional services, and training. Subscription services are offered under renewable, fee-based contracts, which provide access to the Incapsula service and certain functionality within SecureSphere platform. Payments for subscription services are typically due monthly/quarterly/annually in advance. Subscription services are viewed as a stand-ready performance obligation that is satisfied over time and typically have a term of one to three years. Unearned subscription revenue is included in deferred revenue.

Maintenance and support arrangements are offered under renewable, fee-based contracts, which include technical support, hardware repair and replacement parts, bug fixes, patches and unspecified upgrades on a when-and-if-available basis. Payments for maintenance and support are typically due annually in advance. Maintenance and support services are viewed as a stand-ready performance obligation that is satisfied over time and typically have a term of one to three years. Unearned maintenance and support revenue is included in deferred revenue.

Professional services revenue consists of fees related to implementation and consulting services. The Company’s professional services typically are considered distinct from the related software or subscription services as the promise to transfer the software or subscription can be fulfilled independently from the promise to deliver the implementation and consulting services (i.e., customer receives standalone functionality from the license or subscription and the customer obtains the intended benefit of the license or subscription without the professional services). Professional services revenue is typically recognized over time as the services are rendered, using an efforts-expended (labor hours) input method. Professional service arrangements are typically short term in nature and are largely completed within 90 days from the start of service.

Training services revenue consists of fees related to training customers and partners on the use of its products. Training services are distinct performance obligations recognized upon delivery of the training.

Taxes collected from customers and remitted to governmental authorities are not included in revenue. Shipping and handling costs associated with outbound freight are accounted for as a fulfillment cost and are included in cost of revenues.

Deferred Costs

The Company capitalizes contract origination costs that are incremental and recoverable costs of obtaining a contract with a customer. These costs are deferred and amortized over a benefit period of 5 years. The Company determined the period of benefit by taking into consideration of customer contracts, the Company’s technology and other factors. The Company applies the practical expedient to expense costs as incurred if the expected benefit period was 1 year or less. This applies to sales commissions for renewal of annual contracts which would be deferred and then amortized over the related contractual renewal period. Amortization expense is included in sales and marketing expenses in the accompanying condensed consolidated statements of operations.

Allocating the Transaction Price to Performance Obligations

For certain arrangements with multiple deliverables, the Company previously allocated the arrangement fee to the non-software element based upon the relative selling price of such element and, if software and software-related elements (e.g., maintenance and support for the software element) were also included in the arrangement, the Company allocated the arrangement fee to each of those software and software-related elements as a group. After such allocations were made, the amount of the arrangement fee allocated to the software and software-related elements was accounted for using the residual method. Under the new standard, the total transaction price is allocated to each performance obligation on a relative standalone selling price basis, irrespective of whether the performance obligations would have been previously categorized as software or non-software elements.

12


Deferred Revenue and Contingent Revenue

The Company previously limited the amount of revenue recognized for delivered elements to the amount that was not contingent on the future delivery of products or services, or subject to the Company’s future performance obligation. Under the new standard, there is no requirement to limit the allocated transaction price to non-contingent amounts.

There have been no other material changes to the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Adoption Date Impact

The following tables summarize the impacts of adopting the new standard on the Company’s condensed consolidated financial statements as of adoption on January 1, 2018. Select condensed consolidated balance sheet line items that reflect the adoption of the new standard are as follows (in thousands):

 

 

 

As reported on

December 31, 2017

 

 

Impact of

adoption

 

 

As adjusted on

January 1, 2018

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Deferred costs, current

 

 

-

 

 

$

3,755

 

 

$

3,755

 

Other assets including non-current deferred costs

 

 

1,593

 

 

 

12,156

 

 

 

13,749

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue, current

 

 

126,174

 

 

 

(4,159

)

 

 

122,015

 

Deferred revenue

 

 

33,081

 

 

 

597

 

 

 

33,678

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

$

(256,537

)

 

$

19,473

 

 

$

(237,064

)

 

The deferred cost balance as of January 1, 2018 represents the incremental cost to obtain contracts which were not complete as of the adoption date, that were expensed pursuant to the previous accounting policy, but require capitalization under the new standard.

The deferred revenue balance decreased as of January 1, 2018 primarily due to impacts from application of revised standalone selling price methodologies, and due to certain hybrid pricing models, more specifically our FlexProtect hybrid licensing program, which was delivered prior to January 1, 2018. Under the previous guidance the entire transaction fee was recognized ratably, however, the new standard requires upfront recognition of a portion of the transaction price allocated to the functional license delivered at the inception of the arrangement.

Current Period Impact

The following tables summarize the impacts of adopting the new standard on the Company’s condensed consolidated financial statements for the nine months ended September 30, 2018. Select consolidated balance sheet line items that reflect the adoption of the new standard are as follows (in thousands):

 

 

 

As of September 30, 2018

 

 

 

As reported

 

 

Adjustments

 

 

Balances without

adoption of Topic

606

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Deferred cost, current

 

$

6,647

 

 

$

(6,647

)

 

 

-

 

Other assets including non-current deferred costs

 

 

21,388

 

 

 

(19,941

)

 

 

1,447