10-Q 1 feye-20131115x10q.htm 10-Q FEYE-2013.11.15-10Q

 
 
 
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 September 30, 2013

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 001-35594
 

FireEye, Inc.
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
20-1548921
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
1440 McCarthy Blvd.
Milpitas, CA 95035
(408) 321-6300
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 

 
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 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  x
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
x (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨   No   x
The number of shares of the registrant's common stock outstanding as of October 31, 2013 was 120,822,637.


TABLE OF CONTENTS


 
 
 
 
Page 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 4.
 
 
Item 5.
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 
 



PART I — FINANCIAL INFORMATION
Item1.    Financial Statements
FIREEYE, INC.
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
(Unaudited)
 
 
              September 30, 2013
 
              December 31, 2012
 
 
 
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
327,710

 
$
60,200

Accounts receivable
 
51,251

 
30,133

Inventories
 
7,516

 
2,340

Deferred costs of revenue, current portion
 
1,392

 
837

Prepaid expenses and other current assets
 
9,319

 
10,731

Total current assets
 
397,188

 
104,241

Deferred costs of revenue, non-current portion
 
1,024

 
674

Property and equipment, net
 
47,131

 
13,536

Goodwill
 
3,276

 
1,274

Intangible assets
 
6,809

 
4,194

Deposits and other long-term assets
 
4,877

 
1,354

TOTAL ASSETS
 
$
460,305

 
$
125,273

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
Accounts payable
 
$
32,983

 
$
15,653

Accrued liabilities
 
4,896

 
1,174

Accrued compensation
 
14,818

 
8,271

Long-term debt, current portion
 

 
1,231

Proceeds from early exercise of stock awards
 
8,623

 
2,001

Deferred revenue, current portion
 
71,450

 
43,750

Total current liabilities
 
132,770

 
72,080

Long-term debt, net of current portion
 
20,000

 
10,916

Deferred revenue, non-current portion
 
59,302

 
32,656

Preferred stock warrant liability
 

 
3,529

Other long-term liabilities
 
1,246

 
702

Total liabilities
 
213,318

 
119,883

Commitments and contingencies (NOTE 7)
 

 

Stockholders' equity:
 
 
 
 
Convertible preferred stock, par value of $0.0001 per share; no shares authorized, issued, and outstanding as September 30 2013; 65,326 shares authorized, 64,115 issued and outstanding with liquidation preference of $96,746 as of December 31, 2012
 

 
6

Common stock, par value of $0.0001 per share; 1,000,000 shares authorized, 120,517 shares issued and outstanding as of September 30, 2013; 130,000 authorized, 22,435 shares issued and outstanding as of December 31, 2012
 
12

 
2

Additional paid-in capital
 
467,964

 
109,252

Notes receivable from stockholders
 

 
(1,003
)
Accumulated deficit
 
(220,989
)
 
(102,867
)
Total stockholders’ equity
 
246,987

 
5,390

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
460,305

 
$
125,273

See accompanying notes to the condensed consolidated financial statements.  

1

FIREEYE, INC.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)


 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2013
 
2012
 
2013
 
2012
Revenue:
 
 
 
 
 
 
 
 
Product
 
$
23,729

 
$
13,754

 
$
55,957

 
$
31,955

Subscription and services
 
18,923

 
8,142

 
48,333

 
19,682

Total revenue
 
42,652

 
21,896

 
104,290

 
51,637

Cost of revenue:
 
 
 
 
 
 
 
 
Product
 
7,358

 
3,813

 
18,124

 
9,400

Subscription and services
 
6,079

 
904

 
12,481

 
2,183

Total cost of revenue
 
13,437

 
4,717

 
30,605

 
11,583

Total gross profit
 
29,215

 
17,179

 
73,685

 
40,054

Operating expenses:
 
 
 
 
 
 
 
 
Research and development
 
20,492

 
4,191

 
44,570

 
9,814

Sales and marketing
 
44,414

 
16,734

 
110,577

 
42,788

General and administrative
 
11,704

 
4,188

 
29,385

 
8,898

Total operating expenses
 
76,610

 
25,113

 
184,532

 
61,500

Operating loss
 
(47,395
)
 
(7,934
)
 
(110,847
)
 
(21,446
)
Interest income
 
1

 
2

 
53

 
5

Interest expense
 
(243
)
 
(167
)
 
(519
)
 
(377
)
Other expense, net
 
(4,206
)
 
(699
)
 
(7,129
)
 
(1,248
)
Loss before income taxes
 
(51,843
)
 
(8,798
)
 
(118,442
)
 
(23,066
)
Provision for (benefit from) income taxes
 
(917
)
 
54

 
(320
)
 
114

Net loss attributable to common stockholders
 
$
(50,926
)
 
$
(8,852
)
 
$
(118,122
)
 
$
(23,180
)
Net loss per share attributable to common stockholders, basic and diluted
 
$
(1.61
)
 
$
(0.80
)
 
$
(5.41
)
 
$
(2.33
)
Weighted average shares used in computing net loss per share attributable to common stockholders, basic and diluted
 
31,590

 
11,025

 
21,838

 
9,955

See accompanying notes to the condensed consolidated financial statements.





2

FIREEYE, INC.
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited, in thousands)

 
Convertible Preferred Stock
 
Common Stock
 
Additional Paid-In Capital
 
Notes Receivable from Stockholders
 
Accumulated Deficit
 
Total Stockholders’ Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance at December 31, 2012
64,115

 
$
6

 
22,435

 
$
2

 
$
109,252

 
$
(1,003
)
 
$
(102,867
)
 
$
5,390

Issuance of common stock in connection with initial public offering, net of offering costs
 
 
 
 
17,450

 
2

 
321,278

 
 
 
 
 
321,280

Conversion of convertible preferred stock to common stock in connection with initial public offering
(64,590
)
 
(6
)
 
74,222

 
7

 
(1
)
 
 
 
 
 

Conversion of preferred stock warrant to common stock warrant in connection with initial public offering
 
 
 
 
 
 
 
 
10,067

 
 
 
 
 
10,067

Issuance of common stock related to the acquisition of Secure DNA Managed Services, Inc.
 
 
 
 
50

 

 
800

 
 
 
 
 
800

Payment of note receivable from stockholder, net of early exercises
 
 
 
 
 
 
 
 
828

 
1,003

 
 
 
1,831

Net proceeds from issuance of Series F convertible preferred stock
475

 
 
 
 
 
 
 
4,994

 
 
 
 
 
4,994

Issuance of common stock for equity awards, net of repurchases
 
 
 
 
6,360

 
1

 
2,530

 
 
 
 
 
2,531

Vesting of early exercise of equity awards
 
 
 
 
 
 
 
 
1,872

 
 
 
 
 
1,872

Stock-based compensation
 
 
 
 
 
 
 
 
16,344

 
 
 
 
 
16,344

Net loss
 
 
 
 
 
 
 
 
 
 
 
 
(118,122
)
 
(118,122
)
Balance at September 30, 2013

 
$

 
120,517

 
$
12

 
$
467,964

 
$

 
$
(220,989
)
 
$
246,987

See accompanying notes to the condensed consolidated financial statements.


3

FIREEYE, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)


 
 
Nine Months Ended 
 September 30,
 
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net loss
 
$
(118,122
)
 
$
(23,180
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
Depreciation and amortization
 
12,344

 
4,456

Stock-based compensation
 
16,344

 
3,921

Change in fair value of preferred stock warrant liability
 
6,538

 
1,234

Loss on disposal of property and equipment
 
102

 
73

Release of deferred tax valuation allowance
 
(1,277
)
 

Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations:
 
 
 
 
Accounts receivable
 
(20,727
)
 
(5,607
)
Inventories
 
(5,174
)
 
(1,942
)
Prepaid expenses and other assets
 
(4,772
)
 
(790
)
Deferred costs of revenue
 
(904
)
 
(695
)
Accounts payable
 
6,115

 
990

Accrued liabilities
 
3,711

 
2,198

Accrued compensation
 
6,481

 
372

Deferred revenue
 
54,370

 
29,481

Other long-term liabilities
 
547

 
134

Net cash provided by (used in) operating activities
 
(44,424
)
 
10,645

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Acquisition of business, net of cash acquired
 
(3,872
)
 

Purchase of property and equipment and demonstration units
 
(35,956
)
 
(14,486
)
Lease deposits
 
(1,636
)
 
(471
)
Net cash used in investing activities
 
(41,464
)
 
(14,957
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Net proceeds from initial public offering
 
322,863

 

Borrowing from line of credit
 
10,000

 
7,619

Net proceeds from issuance of convertible preferred stock
 
9,988

 

Repayment of term loan
 
(2,147
)
 
(1,051
)
Proceeds from exercise of equity awards
 
5,400

 
1,283

Repayment of notes receivable from stockholders
 
7,294

 

Net cash provided by financing activities
 
353,398

 
7,851

Net change in cash and cash equivalents
 
267,510

 
3,539

Cash and cash equivalents, beginning of year
 
60,200

 
10,676

Cash and cash equivalents, end of year
 
$
327,710

 
$
14,215

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
 
Cash paid for interest
 
$
493

 
$
347

Cash paid for income taxes
 
$
303

 
$
22

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
 
Deferred initial public offering costs in accounts payable and accrued liabilities
 
$
1,583

 
$

Common stock issued in connection with acquisition
 
$
800

 
$

Conversion of preferred stock warrants to common stock warrants
 
$
10,067

 
$

Purchases of property and equipment and demonstration units in accounts payable
 
$
12,520

 
$
1,127


See accompanying notes to the condensed consolidated financial statements.

4

FIREEYE, INC.
Notes to Condensed Consolidated Financial Statements



1. Description of Business and Summary of Significant Accounting Policies
 
Description of Business
 
FireEye, Inc., with principal executive offices located in Milpitas, California, was incorporated as NetForts, Inc. on February 18, 2004, under the laws of the State of Delaware, and changed its name to FireEye, Inc. on September 7, 2005.
 
FireEye, Inc. and its wholly owned subsidiaries (collectively, the “Company”, “we”, “us” or “our”) is a leader in stopping advanced cyber attacks that use advanced malware, zero-day exploits, and APT (“Advances Persistent Threat”) tactics. Our solutions supplement traditional and next-generation firewalls, IPS (“Intrusion Prevention Systems”), anti-virus, and gateways, which cannot stop advanced threats, leaving security holes in networks. We offer a solution that detects and blocks attacks across both Web and email threat vectors as well as latent malware resident on file shares. It addresses all stages of an attack lifecycle with a signature-less engine utilizing stateful attack analysis to detect zero-day threats.
 
We sell the majority of our products, subscriptions and services to end-customers through distributors, resellers, and strategic partners, with a lesser percentage of sales directly to end-customers.
 
Initial Public Offering

In September 2013, we completed our initial public offering ("IPO") in which we issued and sold 17,450,000 shares of common stock (inclusive of 2,275,000 shares of common stock from the full exercise of the over-allotment option granted to the underwriters) at a price of $20.00 per share. We received aggregate proceeds of $324.6 million from the sale of shares of common stock, net of underwriters’ discounts and commissions, but before deducting paid and unpaid offering expenses of approximately $3.3 million. Upon the closing of the initial public offering, all shares of our outstanding convertible preferred stock automatically converted into 74,221,533 shares of common stock.

Basis of Presentation and Consolidation
 
The accompanying unaudited condensed consolidated financial statements include the accounts of FireEye, Inc., and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

 The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), and following the requirements of the Securities and Exchange Commission ("SEC"), for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These financial statements have been prepared on the same basis as our annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, that are necessary for a fair statement of our financial information. The results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013 or for any other interim period or for any other future year. The balance sheet as of December 31, 2012 has been derived from audited financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements.

The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2012 included in our Prospectus filed with the SEC on September 20, 2013 pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the "Securities Act").
    
Use of Estimates
 
The preparation of consolidated financial statements in conformity 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 condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Such management estimates include, but are not limited to, the best estimate of selling price for our products and services, commissions expense,
future taxable income, contract manufacturer liabilities, litigation and settlement costs and other loss contingencies, fair value of our common and preferred stock, stock options and preferred stock warrant liability, and the purchase price allocation of acquired businesses. We base our estimates on historical experience and also on assumptions that we believe are reasonable. Changes in facts or circumstances may cause us to change our assumptions and estimates in future periods and it is possible that actual results could differ from current or revised future estimates. We engaged third party consultants to assist management in the valuation of acquired assets, including other intangibles.


5


 Summary of Significant Accounting Policies

There have been no material changes to our significant accounting policies as compared to the those described in our Prospectus filed with the SEC on September 20, 2013 pursuant to Rule 424(b) under the Securities Act as disclosed below.

 
Fair Value of Financial Instruments
 
We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, we consider the principal or most advantageous market in which to transact and the market-based risk. We apply fair value accounting for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The carrying amounts reported in the condensed consolidated financial statements approximate the fair value for cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities, due to their short-term nature. The carrying amount of our preferred stock warrant liability represents their fair value and the long term debt is stated at the carrying value which approximates fair value as the stated interest rate approximates market borrowing rates currently available to us.
   
Warranties
 
We generally provide a one-year warranty on hardware. We do not accrue for potential warranty claims as a component of cost of product revenue as all product warranty claims are satisfied under our support and maintenance contracts.

Revenue Recognition
 
We generate revenue from the sales of products, subscriptions, support and maintenance, and other services primarily through our indirect relationships with our partners as well as end customers through a direct sales force. Our products include operating system software that is integrated into the appliance hardware and is deemed essential to its functionality. As a result, we account for revenue in accordance with Accounting Standards Codification 605, Revenue Recognition, and all related interpretations, as all our security appliance deliverables include proprietary operating system software, which together deliver the essential functionality of our products.
 
Revenue is recognized when all of the following criteria are met:
 
Persuasive Evidence of an Arrangement Exists. We rely upon non-cancelable sales agreements and purchase orders to determine the existence of an arrangement.

Delivery has Occurred. We use shipping documents or transmissions of service contract registration codes to verify delivery.

The Fee is Fixed or Determinable. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction.

Collectability is Reasonably Assured. We assess collectability based on credit analysis and payment history.
 
Our products include three principal security product families that address critical vectors of attack, including Web, email and file shares. Our Web MPS, File MPS, MAS and CMS appliance and subscription services qualify as separate units of accounting. Therefore, Web MPS, File MPS, MAS and CMS appliance product revenue is recognized at the time of shipment. However, our Email MPS cannot function without the use of our subscription services. As such, our Email MPS products and related services do not have stand-alone value and do not qualify as separate units of accounting. Therefore, Email MPS product revenue is recognized ratably over the longer of the contractual term of the subscription services or the estimated period the customer is expected to benefit from the product, provided that all other revenue recognition criteria have been met. Because we have only been selling our Email MPS since April 2011, we have a limited history with respect to subscription renewals for such product. As a result, revenue from all Email MPS products sold by us through September 30, 2013 has been recognized ratably over the contractual term of the subscription services.
 
At the time of shipment, product revenue meets the criteria for fixed or determinable fees. In addition, payment from our partners is not contingent on the partner’s collection from their end-customers. Our partners do not stock products and do not have any stock rotation rights. We recognize subscription and support and maintenance service revenue ratably over the contractual service period, which is typically one or three years. Other services revenue is recognized as the services are rendered and has not been significant to date.
 
Most of our arrangements, other than renewals of subscriptions and support and maintenance services, are multiple-element arrangements with a combination of product, subscriptions, support and maintenance, and other services. For multiple-element arrangements, we allocate revenue to each unit of accounting based on an estimated selling price at the arrangement inception. The estimated selling price for each element is based upon the following hierarchy: vendor-specific objective evidence (“VSOE”) of selling price, if available, third-party evidence (“TPE”) of selling price, if VSOE of selling price is not available, or best estimate of selling price (“BESP”), if neither VSOE of selling price nor TPE of selling price are available. The total arrangement consideration is allocated to

6


each separate unit of accounting using the relative estimated selling prices of each unit based on the aforementioned selling price hierarchy. We limit the amount of revenue recognized for delivered elements to an amount that is not contingent upon future delivery of additional products or services or meeting of any specified performance conditions.
 
To determine the estimated selling price in multiple-element arrangements, we seek to establish VSOE of selling price using the prices charged for a deliverable when sold separately and, for subscriptions and support and maintenance, based on the renewal rates and discounts offered to partners. If VSOE of selling price cannot be established for a deliverable, we seek to establish TPE of selling price by evaluating similar and interchangeable competitor products or services in standalone arrangements with similarly situated partners. However, as our products contain a significant element of proprietary technology and offer substantially different features and functionality from our competitors, we are unable to obtain comparable pricing of our competitors’ products with similar functionality on a standalone basis. Therefore, we have not been able to obtain reliable evidence of TPE of selling price. If neither VSOE nor TPE of selling price can be established for a deliverable, we establish BESP primarily based on historical transaction pricing. Historical transactions are segregated based on our pricing model and our go-to-market strategy, which include factors such as type of sales channel (reseller, distributor, or end-customer), the geographies in which our products and services were sold (domestic or international), offering type (products, subscriptions or services), and whether or not the opportunity was identified by our sales force or by our partners. In analyzing historical transaction pricing, we evaluate whether a majority of the prices charged for a product, as represented by a percentage of list price, fall within a reasonable range. To further support the best estimate of selling price as determined by the historical transaction pricing or when such information is unavailable, such as when there are limited sales of a new product, we consider the same factors we have established through our pricing model and go-to-market strategy. The determination of BESP is made through consultation with and approval by our management. We have established the estimated selling price of all of our deliverables using BESP.
 
Shipping charges billed to partners are included in revenue and related costs are included in cost of revenue. Sales commissions and other incremental costs to acquire contracts are also expensed as incurred and are recorded in sales and marketing expense. After receipt of a partner order, any amounts billed in excess of revenue recognized are recorded as deferred revenue.  

Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board, (“FASB”) issued authoritative guidance that addresses the presentation of comprehensive income for annual reporting of financial statements was issued. The guidance is intended to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. Such components of comprehensive income will be required to be disclosed in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance is effective for fiscal years beginning after December 15, 2011, and should be applied retrospectively for all periods presented. Early adoption is permitted. This new guidance impacts how we report comprehensive income, and did not have any effect on our results of operations, financial position or liquidity upon its required adoption on January 1, 2012.

In February 2013, the FASB issued guidance which addresses the presentation of amounts reclassified from accumulated other comprehensive income. This guidance does not change current financial reporting requirements, instead an entity is required to cross-reference to other required disclosures that provide additional detail about amounts reclassified out of accumulated other comprehensive income. In addition, the guidance requires an entity to present significant amounts reclassified out of accumulated other comprehensive income by line item of net income if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. Adoption of this standard is required for periods beginning after December 15, 2012 for public companies. This new guidance impacts how we report comprehensive income and has no material effect on our results of operations, financial position or liquidity upon its required adoption on January 1, 2013.
 

2. Fair Value Measurements 

We categorize assets and liabilities recorded at fair value on our condensed consolidated balance sheets based upon the level of judgment associated with inputs used to measure their fair value. The categories are as follows:
 
Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
 
Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs other than quoted prices that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments.

Level 3—Inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. The inputs require significant management judgment or estimation.

7


 
The following table presents the fair value of our financial assets and liabilities using the above input categories (in thousands):
 
 
As of September 30, 2013 
Description 
 
Level 1 
 
Level 2  
 
Level 3  
 
Fair Value  
Money market funds
 
$
300,000

 
$

 
$

 
$
300,000

Total assets measured at fair value
 
$
300,000

 
$

 
$

 
$
300,000

 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2012 
Description 
 
Level 1 
 
Level 2 
 
Level 3 
 
Fair Value 
Money market funds
 
$
5,893

 
$

 
$

 
$
5,893

Preferred stock warrant liability
 

 

 
3,529

 
3,529

Total assets and liabilities measured at fair value
 
$
5,893

 
$

 
$
3,529

 
$
9,422


Level 1 investments consist solely of money market funds, included in cash and cash equivalents, valued at amortized cost which approximates fair value. Level I liabilities consist of long-term debt. Level 3 instruments consist solely of our preferred stock warrant liability in which the fair value was measured upon issuance and at each period end. Inputs used to determine the estimated fair value of the warrant liability as of the valuation date included remaining contractual term of the warrants, the risk-free interest rate, volatility of our comparable public companies over the remaining term, and the fair value of underlying shares. The significant unobservable inputs used in the fair value measurement of the preferred stock warrant liability were the fair value of the underlying stock at the valuation date and the estimated term of the warrants. Generally, increases (decreases) in the fair value of the underlying stock and estimated term would result in a directionally similar impact to the fair value measurement.
 
The following table sets forth a summary of the changes in the fair value of our Level 3 financial instruments as follows
(in thousands):
 
 
Preferred Stock
Warrant
Liability
 
Balance as of December 31, 2012
 
$
3,529

Change in fair value of preferred stock warrant liability
 
6,538

Reclassification of preferred stock warrants to common stock warrants upon IPO
 
(10,067
)
Balance as of September 30, 2013
 
$

 
The gains and losses from remeasurement of Level 3 financial liabilities are recorded in other expenses, net in the Condensed Consolidated Statements of Operations.
 


8


3. Property and Equipment
 
Property and equipment, net consisted of the following (in thousands):
 
 
As of September 30,
 
As of December 31,
 
 
2013
 
2012
Computer equipment, and software
 
$
40,264

 
$
12,115

Leasehold improvements
 
11,171

 
2,668

Furniture and fixtures
 
5,357

 
1,841

Total property and equipment
 
56,792

 
16,624

Less: accumulated depreciation
 
(9,661
)
 
(3,088
)
Total property and equipment, net
 
$
47,131

 
$
13,536

 
Depreciation and amortization expense related to property and equipment and demonstration units during the three months ended September 30, 2013 and 2012 was $4.9 million and $2.3 million, respectively. Depreciation and amortization expense related to property and equipment and demonstration units during the nine months ended September 30, 2013 and 2012 was $11.5 million and $4.5 million, respectively.

4. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the nine months ended September 30, 2013 are as following (in thousands):

Balance as of December 31, 2012
 
$
1,274

Goodwill acquired
 
2,002

Balance as of September 30, 2013
 
$
3,276

    
Intangible assets consist of the following (in thousands):
 
 
As of September 30,  
 
As of December 31, 
 
 
2013
 
2012
Developed technology
 
$
5,794

 
$
4,194

Customer relationships
 
1,900

 

Less: accumulated amortization
 
(885
)
 

Net acquired intangible assets
 
$
6,809

 
$
4,194


The developed technology will be amortized to cost of sales over the economic life of the related technology asset which was estimated to be three to four years as of the acquisition date. The customer relationships will be amortized to sales and marketing expense over the economic life of the related customer relationship asset which was estimated to be three years as of the acquisition date. Amortization expense of intangible assets for the three months ended September 30, 2013 and 2012 was $0.4 million and zero, respectively. Amortization expense of intangible assets for the nine months ended September 30, 2013 and 2012 was $0.9 million and zero, respectively.

The expected annual amortization expense of intangible assets as of September 30, 2013 is presented below (in thousands):
 
Years Ending December 31, 
 
 
Intangible Assets
2013 (remaining three months)
 
 
$
553

2014
 
 
2,215

2015
 
 
2,215

2016
 
 
1,826

Total intangible assets subject to amortization
 
 
$
6,809


On September 3, 2013, we acquired all outstanding shares of Secure DNA Managed Services, Inc. and certain affiliated entities (collectively, “Secure DNA”), a security solutions provider based in Honolulu, Hawaii, focused on network monitoring and

9


management, secured hosting, cloud e-mail protection, incident response and other network security related services. The acquisition of Secure DNA provides us with the developed technology platform that will facilitate the delivery of the advanced security services for all our products.

We accounted for the acquisition of Secure DNA as a purchase of a business. We expensed the related acquisition costs, consisting primarily of legal expenses in the amount of $0.2 million, and these expenses were presented as general and administrative expenses on the condensed consolidated statements of operations for the three and nine months ended September 30, 2013. The total purchase consideration of $4.9 million consisted of $4.1 million in cash and the issuance of 50,000 shares of our common stock with a fair value of $16.00 per share on the acquisition date. We also assumed deferred tax liabilities related to the fair value of the developed technology and customer relationships we obtained in the acquisition as well as other assumed liabilities related to normal operations. Primarily as a result of the deferred tax liabilities assumed in the acquisition, we recognized goodwill of $2.0 million equal to the excess of the purchase consideration over the fair value of the assets acquired and the liabilities assumed. None of the goodwill is expected to be deductible for income tax purposes.

The acquisition also includes a contingent obligation of up to $3.0 million, consisting of 190,000 shares of our common stock with a fair value of $16.00 per share on the acquisition date, to certain employees from Secure DNA, if specified product and service milestones are met within the two years of the acquisition date. As the obligation is contingent upon their continuous employment with us, the contingent obligation is being recorded as compensation expense ratably over the respective service periods.

The following table summarizes the consideration paid and the fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands):
Consideration: 
 
Amount  
Developed technology
 
$
1,600

Customer relationships
 
1,900

Deferred tax liabilities
 
(1,290
)
Net assets acquired
 
665

Goodwill
 
2,002

Fair value of total consideration transferred
 
$
4,877

 
The results of operations of Secure DNA have been included in our condensed consolidated statements of operations from the acquisition date. Pro forma results of operations have not been presented because the acquisition was not material to our results of operations.
     
 5. Deferred Revenue
 
Deferred revenue consists of the following (in thousands):
 
 
 
As of September 30, 2013  
 
As of December 31, 2012
Product, current
 
$
11,019

 
$
6,570

Subscription and services, current
 
60,431

 
37,180

Total deferred revenue, current
 
71,450

 
43,750

Product, non-current
 
5,730

 
3,888

Subscription and services, non-current
 
53,572

 
28,768

Total deferred revenue, non-current
 
59,302

 
32,656

Total deferred revenue
 
$
130,752

 
$
76,406

 

10


6. Long-term Debt
  
In August 2005, we entered into a loan agreement (the “First Loan Agreement”) with two lenders that provided for borrowings under an equipment facility and a growth capital facility. The First Loan Agreement provided for advances under the equipment facility up to $1.0 million in $50,000 increments through the termination date on December 31, 2006 and advances under the growth capital facility up to $3.0 million in $1.0 million increments through the termination date on December 31, 2006. Outstanding borrowings under the equipment facility were due in 36 equal monthly payments of principal and interest following the month of borrowing, with a final payment on the maturity date equal to 2.5% of the drawn down principal. Outstanding borrowings under the growth capital facility were due in 36 monthly payments of principal and interest beginning January 1, 2007. There were no amounts outstanding under the First Loan Agreement as of December 31, 2011 and 2012 and September 30, 2013. We did issue certain convertible preferred stock warrants in association with these loans which are discussed in note 8.
In June 2010, the Company entered into a second loan agreement (the “Second Loan Agreement”) with a lender that provides for: (1) a revolving line of credit facility, (2) an equipment facility and (3) a term loan. In addition, this loan agreement was amended in August 2011 to provide for additional borrowings under a (4) growth facility. The Second Loan Agreement provides certain financial-related covenants. We were in compliance with all financial-related covenants under the Second Loan Agreement as of December 31, 2012 and September 30, 2013.

Line of Credit
 
In December 2012, the Second Loan Agreement was amended to increase the amounts available under the line of credit to $25.0 million, extend the maturity date to December 31, 2014 and add a supplemental equipment line of $15.0 million, which has a maturity date in September 2016. Borrowings under the line of credit were collateralized by all of the Company's assets, excluding intellectual property, and the availability of borrowings under the line of credit were subject to certain borrowing base limitations around our outstanding accounts receivable. As of September  30, 2013 and December 31, 2012, there were no amounts outstanding under the supplemental equipment line. We drew down $7.6 million under the line of credit during the year ended December 31, 2012. We drew down $10.0 million under the line of credit during the nine months ended September 30, 2013. Borrowings under the revolving line of credit consist of the following (in thousands):
 
 
 
September 30, 2013
 
 December 31, 2012 
Second Loan Agreement—revolving line of credit
 
$
20,000

 
$
10,000

Less current portion
 

 

Total
 
$
20,000

 
$
10,000

 

Term Loans
 
Outstanding borrowings under our debt agreements consist of the following (in thousands):
 
 
 
December 31, 2012
Second Loan Agreement—equipment facility
 
$
132

Second Loan Agreement—growth capital facility
 
1,832

Second Loan Agreement—term loan
 
183

 
 
2,147

Less current portion
 
(1,231
)
Total
 
$
916

 
We paid off the balances of the term loans during the nine months ended September 30, 2013.

7. Commitments and Contingencies
 
Leases
 
We lease our facilities under various non-cancelable operating leases, which expire through the year ending December 31, 2017. Rent expense is recognized using the straight-line method over the term of the lease. Rent expense was $1.0 million and $0.2 million for the three months ended September 30, 2013 and 2012; $2.5 million and $0.5 million for the nine months ended September 30, 2013 and 2012.

11


 
The aggregate future non-cancelable minimum rental payments on our operating leases, as of September 30, 2013, are as follows (in thousands):
Years Ending December 31, 
 
Amount 
2013 (remaining 3 months)
 
$
1,701

2014
 
6,762

2015
 
5,961

2016
 
3,616

2017 and thereafter
 
3,111

Total
 
$
21,151

 

Contract Manufacturer Commitments
 
Our independent contract manufacturer procures components and assembles our products based on our forecasts. These forecasts are based on estimates of future demand for our products, which are in turn based on historical trends and an analysis from our sales and product marketing organizations, adjusted for overall market conditions. In order to reduce manufacturing lead times and plan for adequate supply, we may issue forecasts and orders for components and products that are non-cancelable. As of September 30, 2013 and December 31, 2012, we had $17.7 million and $3.3 million of non-cancellable open orders, respectively. As of September 30, 2013 and December 31, 2012, we have not accrued any significant cost associated with the excess of our forecasted demand including costs for excess components or for carrying costs incurred by our independent contract manufacturer.

 
Litigation
 
We accrue for contingencies when we believe that a loss is probable and that we can reasonably estimate the amount of any such loss. We have made an assessment of the probability of incurring any such losses and whether or not those losses are estimable.
 
We are subject to legal proceedings, claims and litigation, including intellectual property litigation, arising in the ordinary course of business. Such matters are subject to many uncertainties and outcomes and are not predictable with assurance. We accrue amounts that we believe are adequate to address any liabilities related to legal proceedings and other loss contingencies that we believe will result in a probable loss that is reasonably estimable.
 
To the extent there is a reasonable possibility that a loss exceeding amounts already recognized may be incurred and the amount of such additional loss would be material, we will either disclose the estimated additional loss or state that such an estimate cannot be made. We do not currently believe that it is reasonably possible that additional losses in connection with litigation arising in the ordinary course of business would be material.
 
Indemnification
 
Under the indemnification provisions of our standard sales related contracts, we agree to defend our customers against third-party claims asserting infringement of certain intellectual property rights, which may include patents, copyrights, trademarks, or trade secrets, and to pay judgments entered on such claims. Our exposure under these indemnification provisions is generally limited to the total amount paid by our customer under the agreement. However, certain agreements include indemnification provisions that could potentially expose us to losses in excess of the amount received under the agreement. In addition, we indemnify our officers, directors, and certain key employees while they are serving in good faith in their company capacities. Through September 30, 2013, there have been no claims under any indemnification provisions.
 

12


8. Convertible Preferred Stock Warrants
 
In connection with the First Loan Agreement and Second Loan Agreement entered into or amended during the years ended December 31, 2005, 2006, 2007, 2008, 2011 and 2012 (Note 6), we issued warrants to purchase an aggregate of 525,502 shares of convertible preferred stock, all of which were exercisable upon issuance. As of September 19, 2013, the day prior to the date on which our shares began to trade publicly, and December 31, 2012, all of the convertible preferred stock warrants remained outstanding as follows (in thousands, except share and per share amounts):
 
Class of Shares 
 
Issuance Date(s) 
 
Expiration Date(s) 
 
No. of
Shares
 
 
Exercise
Price per
Share
 
 
As of 
September 19,
 
As of 
December 31, 
 
2013 
 
2012 
Series A-2
 
2005 and 2006
 
2015 and 2016
 
245,899
 
$
0.61

 
$
4,758

 
$
1,632

Series B
 
2006 through 2008
 
2016 through 2018
 
118,942
 
$
1.32

 
2,220

 
925

Series D
 
June 2010
 
June 2020
 
100,000
 
$
0.39

 
1,959

 
634

Series E
 
August 2011
 
August 2021
 
60,661
 
$
1.36

 
1,130

 
338

Total
 
 
 
 
 
 
 
 
 
$
10,067

 
$
3,529

 
Prior to our IPO, the fair value of the warrants was recorded as a warrant liability. The warrant was recorded at its estimated fair value with changes in the fair value of the warrant liability reflected in other expense, net. Upon the completion of our IPO, the shares underlying the warrants were converted from warrants to purchase preferred stock into warrants to purchase approximately 616,000 shares of common stock, and the related balance of the preferred stock warrant liability was reclassified to additional paid-in capital.
 
We recognized charges of $3.6 million and $0.7 million for the three months ended September 30, 2013 and 2012, respectively, and $6.5 million and $1.2 million for the nine months ended September 30, 2013 and 2012, respectively. These charges are from the remeasurement of the fair value of the warrant liability, which was recorded through other expense, net in the condensed consolidated statements of operations.
  
The value of the underlying warrants were determined using appropriate valuation techniques at September 19, 2013 and December 31, 2012 using the following assumptions:
 
 
As of September 19,
 
As of December 31,
 
 
2013 
 
2012 
Remaining contractual term (in years)
 
0.5
 
2.6 – 8.7
Risk-free interest rate
 
0.03%
 
0.3% –1.5%
Volatility
 
42.8%
 
55% – 64%
Change of control probability
 
 
25% – 50%
Control premium
 
 
40%
IPO threshold (in billions)
 
 
$0.6 – $1.8
 

9. Convertible Preferred Stock

Immediately prior to the completion of our IPO on September 19, 2013, we had the following redeemable convertible preferred stock outstanding, all of which was converted to common stock in connection with our IPO (in thousands):


13


 
 
September 19, 2013 
 
December 31, 2012 
 
 
Shares
Designated
  
 
Shares
Issued and
Outstanding
 
 
Liquidation
Preference
 
 
Shares
Designated
  
 
Shares
Issued and
Outstanding
 
Liquidation
Preference
 
Series A-1
 
1,000
 
1,000
 
$
250

 
1,000
 
1,000
 
$
250

Series A-2
 
10,410
 
10,164
 
6,200

 
10,410
 
10,164
 
6,200

Series B
 
11,104
 
10,985
 
14,500

 
11,104
 
10,985
 
14,500

Series C
 
7,049
 
7,049
 
14,604

 
7,049
 
7,049
 
14,604

Series D
 
26,331
 
26,231
 
10,187

 
26,331
 
26,231
 
10,187

Series E
 
4,632
 
4,412
 
6,000

 
4,632
 
4,412
 
6,000

Series F
 
4,800
 
4,749
 
49,999

 
4,800
 
4,274
 
45,005

Total
 
65,326
 
64,590
 
$
101,740

 
65,326
 
64,115
 
$
96,746


Significant terms of the convertible preferred stock were as follows:
 
Voting Rights
 
The holders of the convertible preferred stock were entitled to one vote for each share of common stock into which their shares of convertible preferred stock would have been converted and the holders of the convertible preferred stock and common stock would have voted together on an as converted basis. For the election of the Directors, and as long as 1,000,000 shares of convertible preferred stock were outstanding, the holders of the Series A-1, A-2, B, C, D and E convertible preferred stock could have elected two Directors. The holders of the common stock could have elected two Directors. A majority of the preferred stock (other than Series F convertible preferred stock) and common stock (each voting as a separate class) would have been required to elect any remaining directors. The holders of the Series F convertible preferred stock did not have voting rights with respect to the election of Directors.
 
Dividends
 
The holders of the convertible preferred stock were entitled, when, as, and if declared by the Board of Directors, and prior and in preference to common stock, to non-cumulative dividends at the following per annum rates; $0.015 per share for Series A-1, $0.0366 per share for Series A-2, $0.0792 per share for Series B, $0.1243 per share for Series C, $0.0233014 per share for Series D, $0.0816 per share for Series E and $0.6318 per share for Series F. There were no cumulative preferred stock dividends in arrears as of September 30, 2013 and December 31, 2012. No dividends have been paid to date.
 
Liquidation
 
In the event of any voluntary or involuntary liquidation, dissolution, or winding up of our operations, all assets available for distribution would have been distributed to the holders of convertible preferred stock based on the original issue price of the related shares as follows: $0.25 per share for Series A-1, $0.61 per share for Series A-2, $1.32 per share for Series B, $2.0717 per share for Series C, $0.3883572 per share for Series D, $1.36 per share for Series E, and $10.5294 per share for Series F; plus all declared and unpaid dividends. If the available funds were insufficient to permit full payment of each Series’ original issue price, the available funds would have been allocated based on the number of shares of convertible preferred stock outstanding on a pro-rata basis. Any remaining available funds after payment to the holders of the convertible preferred stock would have been distributed to holders of common stock on a pro-rata basis, except that if the holder of convertible preferred stock would have received more funds had they converted into common stock, then the holders of convertible preferred stock would have received the amount they would have received had they converted to common stock.
 
Conversion
 
Shares of convertible preferred stock were convertible, at any time and at the option of the holder, into shares of common stock. Shares of convertible preferred stock automatically convert into shares of common stock upon the closing of an IPO provided the aggregate proceeds from an IPO are not less than $75 million. As of September 19, 2013 and December 31, 2012, the conversion ratio for all series of convertible preferred stock was as follows; 1:1 for Series A-1, 1:1.1730769 for Series A-2, 1:1.4012739 for Series B, 1:1.4915047 for Series C, 1:1 for Series D and 1:1 for Series E. As of September 30, 2013, the conversion ratio for the Series F convertible preferred stock was 1:1. Shares of preferred stock were automatically converted to commons stock just prior to the closing of our initial public offering in September 2013 as the aggregate proceeds from the initial public offering exceeded $75 million.
 
Redemption
 
The convertible preferred stock was not redeemable.

14


 

10. Common Shares Reserved for Issuance
 
We were authorized to issue 1,000,000,000 and 130,000,000 shares, respectively, of common stock with a par value of $0.0001 per share as of September 30, 2013 and December 31, 2012. Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the Board of Directors, subject to the prior rights of holders of all classes of convertible preferred stock outstanding.
 
As of September 30, 2013 and December 31, 2012, we reserved shares of common stock for issuance as follows (in thousands):
 
 
As of September 30,
 
As of December 31,
 
 
2013
 
2012
Reserved under stock award plans
 
35,668

 
21,443

Conversion of preferred stock
 

 
73,747

Warrants to purchase convertible preferred stock
 

 
616

Warrants to purchase common stock
 
616

 

Total
 
36,284

 
95,806

 

11. Share Based Awards
 
Stock Option and Restricted Stock Plans

We have operated under three equity award plans, our 2004 Stock Option Plan (“2004 Plan”), our 2008 Stock Plan (“2008 Plan”), and our 2013 Equity Incentive Plan (“2013 Plan”) (collectively, the “Plans”), which were adopted by the Board of Directors and approved by the stockholders in August 2004, February 2008 and August 2013, respectively.
 
Our 2008 Plan and 2013 Plan provide for the issuance of restricted stock and the granting of options and restricted stock units to our employees, officers, directors, and consultants. Our 2004 Plan only allowed for the issuance of stock options. Awards granted under the Plans vest over the periods determined by the Board of Directors, generally four years, and expire no more than ten years after the date of grant. In the case of an incentive stock option granted to an employee who at the time of grant owns stock representing more than 10% of the total combined voting power of all classes of stock, the exercise price shall be no less than 110% of the fair value per share on the date of grant, and expire five years from the date of grant. For all other options granted, the per share exercise price shall be no less than 100% of the fair value per share on the date of grant. Stock that is purchased prior to vesting is subject to our right of repurchase at any time following termination of the participant.

We terminated our 2004 Plan in 2008 and terminated our 2008 Plan upon the completion of our IPO. Awards that were outstanding upon termination remained outstanding pursuant to their original terms. A total of 12,821,535 shares of our common stock are reserved for issuance pursuant to the 2013 Plan and includes shares that were reserved but unissued under the 2008 Plan.

2013 Employee Stock Purchase Plan

In August 2013, our board of directors adopted, and our stockholders approved, our 2013 Employee Stock Purchase Plan, or the "Purchase Plan". The Purchase Plan became effective upon adoption.
 
The Purchase Plan allows eligible employees to acquire shares of our common stock at 85% of the lower of the fair market value of our common stock on the first trading of each offering period or on the exercise date. Each offering period will be approximately twelve months starting on the first trading date on or after May 15 and November 15 of each year, except for the first offering period, which commenced on September 19, 2013 and will end on the first trading day on or after May 15, 2014. Participants may purchase shares of common stock through payroll deduction of up to 15% of their eligible compensation, subject to purchase limits of 3,000 shares for each normal purchase period or $25,000 worth of stock for each calendar year.
 
A total of 2,500,000 shares of our common stock is available for sales under the Purchase Plan. In addition, our Purchase Plan provides for annual increases in the number of shares available for issuance on the first day of each fiscal year beginning in 2014, equal to the lessor of: 1% of the outstanding shares of our common stock on the first day of such fiscal year; 3,700,000 shares; or such other amount as may be determined by our board of directors.



15


Stock Options Awards


A summary of the activity for our stock option changes during the reporting periods and a summary of information related to options exercisable, vested, and expected to vest are presented below (in thousands, except per share and contractual life amounts): 
 
 
 
 
Options Outstanding
 
 
Shares
Available for
Grant
 
Number of
Shares
 
Weighted-
Average
Exercise Price
 
 
Weighted-
Average
Contractual
Life (years)
 
 
Aggregate
Intrinsic Value
Balance—December 31, 2012
 
4,107

 
17,336

 
$
0.98

 
8.28
 
$
77,250

Additional shares authorized
 
20,413

 

 
 
 
 
 
 
Restricted stock awards and units granted
 
(659
)
 

 
 
 
 
 
 
Options granted
 
(12,754
)
 
12,754

 
8.57

 
 
 
 
Options exercised
 

 
(6,207
)
 
0.88

 
 
 
 
Options canceled
 
1,176

 
(1,176
)
 
2.88

 
 
 
 
Unvested stock and restricted stock units forfeited
 
172

 

 
 
 
 
 
 
Balance—September 30, 2013 (unaudited)
 
12,455

 
22,707

 
$
5.17

 
8.72
 
$
825,614

Options vested and expected to vest—September 30, 2013
 
 
 
19,600

 
$
5.11

 
8.67
 
$
713,826

Options exercisable— September 30, 2013
 
 
 
10,666

 
$
2.10

 
7.90
 
$
420,595

 

The following table summarizes the assumptions used in the Black-Scholes option-pricing model to determine fair value of our stock options:

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013  
 
2012 
 
2013 
 
2012  
Fair value of common stock
 
$12.90 - $20.00
 
$3.66
 
$6.05 - $20.00
 
$2.00 - $3.66
Risk-free interest rate
 
1.6% - 2.1%
 
0.9%
 
0.6% - 2.1%
 
0.8% - 1.4%
Expected term (in years)
 
5 - 6
 
6
 
4 - 6
 
5 - 6
Volatility
 
49% - 54%
 
51% - 52%
 
49% - 54%
 
44% - 52%
Dividend yield
 
—%
 
—%
 
—%
 
—%
 
The total grant date fair value of stock options vested during the three and nine months ended September 30, 2013 was $1.6 million and $3.6 million. The total grant date fair value of stock options vested during the three and nine months ended September 30, 2012 was $0.4 million and $0.9 million. The aggregate intrinsic value of all stock options exercised during the three and nine months ended September 30, 2013 was $7.0 million and $40.6 million. The aggregate intrinsic value of all stock options exercised during the three and nine months ended September 30, 2012 was $0.7 million and $1.8 million.


Restricted Stock Awards and Restricted Stock Units

A summary of information related to restricted stock awards and restricted stock units are presented below (in thousands, except per share):


16


 
 
Number
 of
 Shares
 
Weighted-
 Average
 Grant-Date Fair Value Per Share 
 
Weighted-
 Average
 Remaining
 Contractual
 Term (Years) 
 
Aggregate
Intrinsic Value
Unvested balance—December 31, 2012
 
1,895

 
$
2.29

 
1.15
 
$
5,971

Granted
 
659

 
8.07

 
 
 
 
Vested
 
(527
)
 
5.50

 
 
 
 
Canceled/forfeited
 
(60
)
 
6.20

 
 
 
 
Unvested balance —September 30, 2013 (unaudited)
 
1,967

 
$
3.25

 
0.77

$
75,334

RSUs vested and expected to vest—September 30, 2013
 
1,869


$
3.25

 
0.77

$
71,567


 
Employee Stock Purchase Plans Expense and Assumptions used in Valuation

During the three months ended September 30, 2013, compensation expense recognized in connection with the Purchase Plan was $0.2 million. The following table summarizes the assumptions related to the Purchase Plan:

 
 
Three Months Ended September 30,
 
 
2013
 
2012
Fair value of common stock
 
$20.00
 
NA
Risk-free interest rate
 
0.1%
 
NA
Expected term (in years)
 
0.7 - 1.2
 
NA
Volatility
 
42% - 45%
 
NA
Dividend yield
 
—%
 
NA

Stock-Based Compensation

Stock-based compensation expense is included in costs and expenses as follows (in thousands):
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013 
 
2012 
 
2013 
 
2012 
Cost of product revenue
 
$
143

 
$
27

 
$
279

 
$
60

Cost of subscription and services revenue
 
762


18


1,330


39

Research and development
 
2,350


433


4,425


671

Sales and marketing
 
3,784


341


5,878


902

General and administrative
 
1,775


1,289


4,432


2,249

Total
 
$
8,814

 
$
2,108

 
$
16,344

 
$
3,921

 
 
As of September 30, 2013 and 2012, total compensation cost related to unvested stock-based awards granted to employees under our stock option plans and Purchase Plan but not yet recognized was $69.2 million and $14.7 million, net of estimated forfeitures, respectively. This cost for all periods is expected to be amortized on a straight-line basis over the weighted-average remaining vesting period of approximately three years. Future grants will increase the amount of compensation expense to be recorded in future periods.
 

17


12. Income Taxes

We account for income taxes under the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based upon the difference between the financial statement carrying amounts and the tax basis of assets and liabilities and are measured using the enacted tax rate expected to apply to taxable income in the years in which the differences are expected to be reversed.

Our benefit for income taxes for the three and nine month periods ended September 30, 2013 reflects an effective tax rate of 1.77% and 0.27%, respectively. The benefit is primarily due to a reduction of the U.S. valuation allowance resulting from recording a deferred tax liability on the acquisition-related intangibles for which no benefit will be derived partially offset by foreign and state income tax expense.

Our provision for income taxes for the three and nine month periods ended September 30, 2012 reflects an effective rate of 0.61% and 0.49%, respectively. The tax expense is primarily due to foreign and state income tax expense.
 
13. Net Loss per Share
 
Basic loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period, less shares subject to repurchase, and excludes any dilutive effects of employee share based awards and warrants. Diluted net income per common share is computed giving effect to all potential dilutive common shares, including common stock issuable upon exercise of stock options, and unvested restricted common stock and stock units. As we had net losses for the three and nine months ended September 30, 2013 and 2012, all potential common shares were determined to be anti-dilutive.
 
The following table sets forth the computation of net loss per common share (in thousands, except per share amounts):
 
 
Three Months Ended 
September 30,
 
Nine Months Ended 
September 30, 
 
 
2013 
 
2012
 
2013
 
2012
Numerator:
 
 
 
 
 
 
 
 
Net loss
 
$
(50,926
)
 
$
(8,852
)
 
$
(118,122
)
 
$
(23,180
)
Denominator:
 
 
 
 
 
 
 
 
Weighted average number of shares outstanding—basic and diluted
 
31,590

 
11,025

 
21,838

 
9,955

Net loss per share—basic and diluted
 
$
(1.61
)
 
$
(0.80
)
 
$
(5.41
)
 
$
(2.33
)
 
The following outstanding options, unvested shares, warrants, and convertible preferred stock were excluded (as common stock equivalents) from the computation of diluted net loss per common share for the periods presented as their effect would have been antidilutive (in thousands):
 
 
 
As of September 30,
 
 
2013
 
2012
Options to purchase common stock
 
22,707

 
18,161

Unvested early exercised common shares
 
5,240

 
8,554

Unvested restricted stock awards and units
 
2,140

 

Convertible preferred stock
 

 
69,473

Warrants to purchase convertible preferred stock
 

 
616

Warrants to purchase common stock
 
616

 

 
 
14. Employee Benefit Plan
 
401(k) Plan

We have established a 401(k) tax-deferred savings plan (the “401(k) Plan”) which permits participants to make contributions by salary deduction pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended. We are responsible for administrative costs of the 401(k) Plan and have made no contributions to the 401(k) Plan since inception.


18



15. Related Party Transactions
 
Employee Notes Receivable
 
Our former Chief Executive Officer and now Chief Technology Officer and Chief Strategy Officer and our current Chief Executive Officer have exercised stock options early in exchange for full-recourse promissory notes bearing annual interest of 1.07% to 2.72% payable to us. These notes were secured by the underlying shares purchased and such unvested shares could be repurchased by us upon employee termination at the original issuance price. The promissory notes, and accrued interest were scheduled to become due and payable in full beginning January 29, 2015 and ending September 18, 2017, but could become due earlier if we become subject to the requirements of Section 13 of the Securities Exchange Act of 1934, had a change in control or the Chief Executive Officer terminated his services.
 
Employee notes receivable as of December 31, 2012 was $7.3 million, all of which was repaid in March and April 2013.
 
In March 2013, our Chief Technology Officer repaid in full his outstanding promissory notes with us in the aggregate amount of $3.7 million which covered all outstanding principal and accrued interest.
 
In April 2013, our Chief Executive Officer repaid in full his outstanding promissory note with us in the amount of $3.6 million which covered all outstanding principal and accrued interest.
 
Investor Customers
 
As of December 31, 2012, we had two customers that were also investors, owning 532,064 and 1,938,027 shares of Series C, D, E and F convertible preferred stock. Sales to these two customers accounted for $67,000 and $310,000 of revenue for the three months ended September 30, 2013 and 2012 and $191,000 and $381,000 for the nine months ended September 30, 2013 and 2012.
 
We have not reduced revenue during the nine month periods ended September 30, 2013 and 2012 related to the issuance of convertible preferred stock to related parties as we believe the issuance of the convertible preferred stock does not constitute a sales incentive. The price paid for the convertible preferred stock was representative of fair value, as evidenced by the simultaneous purchase of convertible preferred stock by other, unrelated investors.


19


16. Segment Information
 
We conduct business globally and are primarily managed on a geographic basis. Our chief operating decision maker reviews financial information presented on a consolidated basis accompanied by information about revenue by geographic region for purposes of allocating resources and evaluating financial performance. We have one business activity, and there are no segment managers who are held accountable for operations, operating results, and plans for levels, components, or types of products or services below the consolidated unit level. Accordingly, we are considered to be in a single reportable segment and operating unit structure.

Revenue by geographic region based on the billing address is as follows (in thousands):
 
 
 
Three Months Ended 
September 30,
 
Nine Months Ended 
September 30, 
 
 
2013
 
2012
 
2013       
 
2012 
Revenue:
 
 
 
 
 
 
 
 
United States
 
$
30,435

 
$
18,354

 
$
75,793

 
$
43,108

      EMEA
 
6,292

 
1,622

 
14,706

 
3,236

APAC
 
4,491

 
1,237

 
10,315

 
3,501

Other
 
1,434

 
683

 
3,476

 
1,792

Total revenue
 
$
42,652

 
$
21,896

 
$
104,290

 
$
51,637


Substantially all of our assets were attributable to operations in the United States as of September 30, 2013. Our revenue is not dependent on any particular end-customers as no end-customer represented more than 10% of our revenue in the three and nine months ended September 30, 2013 and 2012. Carahsoft Technology Corporation and Accuvant, two of our resellers, accounted for 16% and 10% of our revenue, respectively, in the three months ended September 30, 2013. Demension Data, another reseller of ours, and Accuvant accounted for approximately 11% and 11% of our revenue for the three months ended September 30, 2012, respectively. Accuvant and Fishnet Security, Inc., another of our resellers, accounted for approximately 11% and 11% of our revenue in the nine months ended September 30, 2012, respectively. None of the resellers accounted for more than 10% of our revenue for the nine months ended September 30, 2013.

 17. Subsequent Events

In October 2013, we repaid the outstanding borrowing in the amount of $20.0 million under the revolving line of credit facility under the Second Loan Agreement. We have not canceled the revolving line of credit facility.

20


Item 2.   Management's Discussion and Analysis of Financial Condition
and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”), with the SEC on September 20, 2013. The following discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, among other things, statements regarding:

beliefs and objectives for future operations;
our business plan and our ability to effectively manage our growth and associated investments;
our ability to timely and effectively scale and adapt our existing technology;
our ability to innovate new products and bring them to market in a timely manner;
our ability to expand internationally;
our ability to further penetrate our existing customer base;
our expectations concerning renewal rates for subscriptions and services by existing customers;
cost of revenue, including changes in costs associated with production, manufacturing and customer support;
operating expenses, including changes in research and development, sales and marketing, and general and administrative expenses;
our expectations concerning relationships with third parties, including channel partners and logistics providers;
economic and industry trends or trend analysis;
the effects of seasonal trends on our results of operations;
future acquisitions of or investments in complementary companies, products, subscriptions or technologies; and
the sufficiency of our existing cash and investments to meet our cash needs for at least the next 12 months

as well as other statements regarding our future operations, financial condition and prospects, and business strategies. Forward-looking statements generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “will be,” “will continue,” “will likely result,” and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q, and in particular, the risks discussed under the caption “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q and those discussed in other documents we file with the SEC. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
 
Overview
 
We have invented a purpose-built, virtual machine-based security platform that provides real-time protection to enterprises and governments worldwide against the next generation of cyber attacks. Our technology approach represents a paradigm shift from how IT security has been conducted since the earliest days of the information technology industry. The core of our purpose-built, virtual machine-based security platform is our virtual execution engine, to which we refer as our MVX engine, which identifies and protects against known and unknown threats that existing signature-based technologies are unable to detect. We believe it is an imperative for organizations to invest in this new approach to security to protect their critical assets, such as intellectual property and customer and financial data, from the global pandemic of cybercrime, cyber espionage and cyber warfare.
 
We were founded in 2004 to address the fundamental limitations of legacy signature-based technologies in detecting and blocking sophisticated cyber attacks. From 2004 to 2008, we focused our efforts on research and development to build our virtual machine technology. We released our first product, the Web Malware Protection System, or Web MPS, in 2008. Our Web MPS is designed to analyze and block advanced attacks via the Web. Since that time, we have continued to enhance our product portfolio, releasing our Email MPS in 2011 and our File MPS in 2012. Our Email MPS and File MPS address advanced threats that are introduced through email attachments and file shares. Due to the scale of our customer deployments and our customers’ desire for deeper analysis of potential malicious software, we also provide management and analysis appliances, specifically our Central Management System, or CMS, and our Malware Analysis System, or MAS. We support and enhance the functionality of our products through our Dynamic Threat Intelligence, or DTI, cloud, a subscription service that offers global threat intelligence sharing and provides a closed-loop system that leverages the network effects of a globally distributed, automated threat analysis network. Our nine years of research and development in virtual machine technology, anomaly detection and associated heuristic algorithms has enabled us to provide signature-less threat protection against next-generation cyber attacks.
 
We primarily market and sell our virtual machine-based security platform to Global 2000 companies in a broad range of industries and governments worldwide. As of September 30, 2013, we had over 1,300 end-customers, including over 100 of the Fortune 500.

21


 
We have experienced rapid growth over the last several years, increasing our revenue at a compound annual growth rate of 167% from 2009 to 2012. We have also increased our number of employees from 35 as of December 31, 2008 to over 1,100 as of September 30, 2013. We expect to continue rapidly scaling our organization to meet the needs of our customers and to pursue opportunities in new and existing markets. We intend to continue to invest in the development of our sales and marketing teams, with a particular focus on expanding our network of international channel partners, opening sales offices, hiring key sales and marketing personnel and carrying out associated marketing activities in key geographies. As of September 30, 2013, we were selling our solution to end-customers in over 40 countries, and we expect revenue from international sales to grow as a percentage of our overall revenue. We also intend to continue to invest in our product development organization to enhance the functionality of our existing platform, introduce new products and subscriptions, and build upon our technology leadership. As a result, we do not expect to be profitable for the foreseeable future.
 
 
In September 2013, we closed our initial public offering or IPO, in which we sold 17,450,000 shares of common stock (inclusive of 2,275,000 shares of common stock from the exercise of the over-allotment option granted to the underwriters). The public offering price of the shares sold in the IPO was $20.00 per share. The total gross proceeds from the offering were $349.0 million. After deducting underwriting discounts and commissions and offering expenses, the aggregate net proceeds received by us totaled approximately $321.3 million. 

We believe that the growth of our business and our short and long term success are dependent upon many factors, including our ability to extend our technology leadership, grow our base of end-customers, expand deployment of our platform within existing end-customers, and focus on end-customer satisfaction. While these areas present significant opportunities for us, they also pose challenges and risks that we must successfully address in order to sustain the growth of our business and improve our operating results.
 
We have experienced rapid growth and increased demand for our products over the last few years. To manage any future growth effectively, we must continue to improve and expand our information technology and financial infrastructure, our operating and administrative systems and controls, and our ability to manage headcount, capital, and processes in an efficient manner. Additionally, we face intense competition in our market, and to succeed, we need to innovate and offer products that are differentiated from existing infrastructure products, as well as effectively hire, retain, train, and motivate qualified personnel and senior management. If we are unable to successfully address these challenges, our business, operating results, and prospects could be adversely affected.

Our Business Model
 
We generate revenue from sales of our products, subscriptions and services. Our product revenue consists primarily of revenue from the sale of our MPS portfolio of software-based appliances, consisting of our Web MPS, Email MPS and File MPS, as well as sales of our MAS and CMS appliances. We offer our MPS portfolios as a complete solution to protect the various entry points of a customer’s network from the next generation of cyber attacks. Because the typical customer’s network has more Web entry points to protect than email and file entry points, customers that purchase our MPS portfolio generally purchase more Web MPS appliances than Email MPS or File MPS appliances. As a result, Web MPS accounts for the largest portion of our MPS product revenue. In addition, because most malicious attacks occur through the Web threat vector, smaller customers and customers who do not have the budget to purchase the full MPS portfolio often only purchase Web MPS. While we have experienced steady growth in sales of our Email MPS since its introduction in 2011, these sales have not contributed as quickly to the growth in our overall product revenue because revenue associated with our Email MPS is recognized ratably over the longer of the contractual term or the estimated period the customer is expected to benefit from the product. By contrast, revenue associated with our Web MPS, File MPS, CMS and MAS products is recognized upon shipment. Finally, we recently introduced our File MPS in the second quarter of 2012, and as a result, revenue from our File MPS represents a small percentage of our product revenue.

We require customers to purchase a subscription to our DTI cloud and support and maintenance services when they purchase any part of our MPS portfolio. In addition, we require customers that purchase our Email MPS to also purchase a subscription to our Email MPS Attachment/URL engine. Our customers generally purchase these subscriptions and services for a one or three year term, and revenue from such subscriptions is recognized ratably over the subscription period. Sales of these subscriptions and services, along with sales of Email MPS for multi-year terms, have increased our deferred revenue. As of September 30, 2013 and December 31, 2012 , our total deferred revenue was $130.8 million and $76.4 million , respectively. Amortization of this growing deferred revenue has increased our subscription and services revenue as a percentage of total revenue.

Key Business Metrics
 
We monitor the key business metrics set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts, and assess operational efficiencies. We discuss revenue and gross margin below under “—Components of Operating Results.” Deferred revenue, cash flow provided by (used in) operating activities, and free cash flow are discussed immediately below the following table.

22


 
 
 
Three Months Ended
 September 30,
 
Nine Months Ended
September 30,
 
 
2013
 
2012
 
2013
2012
 
 
(Dollars in thousands)
Product revenue
 
$
23,729

 
$
13,754

 
$
55,957

 
$
31,955

Subscription and services revenue
 
18,923

 
8,142

 
48,333

 
19,682

Total revenue
 
$
42,652

 
$
21,896

 
$
104,290

 
$
51,637

Year-over-year percentage increase
 
95
%
 
132
%
 
102
%
 
150
%
Gross margin percentage
 
69
%
 
79
%
 
71
%
 
78
%
Deferred revenue, current
 
 
 
 
 
$
71,450

 
$
30,762

Deferred revenue, non-current
 
 
 
 
 
$
59,302

 
$
28,821

Net cash provided by (used in) operating activities
 
 
 
 
 
$
(44,424
)
 
$
10,645

Free cash flow (non-GAAP)
 
 
 
 
 
$
(80,380
)
 
$
(3,841
)
 

Deferred revenue. Our deferred revenue consists of amounts that have been invoiced but have not yet been recognized as revenue as of the period end. The majority of our deferred revenue consists of the unamortized balance of revenue from sales of our Email MPS product, subscriptions to our DTI cloud and Email MPS Attachment/URL engine, and support and maintenance contracts. We monitor our deferred revenue balance because it represents a significant portion of revenue to be recognized in future periods.  

Net cash provided by (used in) operating activities. We monitor net cash provided by (used in) operating activities as a measure of our overall business performance. Our net cash provided by (used in) operating activities is driven in large part by sales of our products and from up-front payments for both subscriptions and support and maintenance services. Monitoring net cash provided by (used in) operating activities enables us to analyze our financial performance without the non-cash effects of certain items such as depreciation, amortization, and stock-based compensation costs, thereby allowing us to better understand and manage the cash needs of our business.
 
Free cash flow. We define free cash flow as net cash provided by (used in) operating activities less purchases of property and equipment and demonstration units. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by our business that, after the purchases of property and equipment and demonstration units, can be used by us for strategic opportunities, including investing in our business, making strategic acquisitions and strengthening our balance sheet. A reconciliation of free cash flow to cash flow provided by (used in) operating activities, the most directly comparable financial measure calculated and presented in accordance with U.S. generally accepted accounting principles, or GAAP, is provided below:
 
 
 
Nine Months Ended
September 30,
 
 
2013
 
2012
 
 
(In thousands)
Cash flow provided by (used in) operating activities
 
$
(44,424
)
 
$
10,645

Less: purchase of property and equipment and demonstration units
 
35,956

 
14,486

Free cash flow (non-GAAP)
 
$
(80,380
)
 
$
(3,841
)
Net cash used in investing activities
 
$
(41,464
)
 
(14,957
)
Net cash provided by financing activities
 
$
353,398

 
7,851


Components of Operating Results
 
Revenue
 
We generate revenue from the sales of our products, subscriptions and services. As discussed further in “—Critical Accounting Policies and Estimates—Revenue Recognition” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Prospectus filed with the SEC on September 20, 2013, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured.

23


 
Our total revenue consists of the following:
 
Product revenue. Our product revenue is generated from sales of our appliances. For our Web MPS, File MPS, MAS and CMS appliances, we recognize product revenue at the time of shipment, provided that all other revenue recognition criteria have been met. For our Email MPS appliances, we recognize product revenue ratably over the longer of the contractual term of the subscription service or the estimated period the customer is expected to benefit from the product.

Subscription and services revenue. Subscription and services revenue is generated primarily from our DTI cloud, our Email MPS Attachment/URL engine, and support and maintenance services. Our DTI cloud subscription is determined as a percentage of the price of the related appliance. The Email MPS Attachment/URL engine is priced on a per-user basis. We recognize revenue from subscriptions and support and maintenance services over the one or three year contract term, as applicable.

 
Cost of Revenue
 
Our total cost of revenue consists of cost of product revenue and cost of subscription and services revenue. Personnel costs associated with our operations and global customer support organizations consist of salaries, benefits, bonuses and stock-based compensation. Overhead costs consist of certain facilities, depreciation, benefits, and information technology costs.
 
Cost of product revenue. Cost of product revenue primarily consists of costs paid to our third-party contract manufacturers for our appliances and personnel and other costs in our manufacturing operations department. Our cost of product revenue also includes product testing costs, allocated costs and shipping costs. We expect our cost of product revenue to increase as our product revenue increases.

Cost of subscription and services revenue. Cost of subscription and services revenue consists of personnel costs for our global customer support organization and allocated costs. We expect our cost of subscription and services revenue to increase as our customer base grows and as we hire additional professional services personnel.
 
Gross Margin
 
Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including the average sales price of our products, subscriptions and services, manufacturing costs, the mix of products sold, and the mix of revenue among products, subscriptions and services. We expect our gross margins to fluctuate over time depending on the factors described above.
 
Operating Expenses
 
Our operating expenses consist of research and development, sales and marketing, and general and administrative expense. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation and, with regard to sales and marketing expense, sales commissions. Operating expenses also include overhead costs for facilities, IT and depreciation.
 
Research and development. Research and development expense consists primarily of personnel costs and allocated overhead. Research and development expense also includes prototype related expenses. We expect research and development expense to continue to increase in absolute dollars as we continue to invest in our research and product development efforts to enhance our product capabilities, address new threat vectors and access new customer markets, although such expense may fluctuate as a percentage of total revenue.

Sales and marketing. Sales and marketing expense consists primarily of personnel costs, incentive commission costs and allocated overhead. We expense commission costs as incurred. Sales and marketing expense also includes costs for market development programs, promotional and other marketing activities, travel, office equipment, depreciation of proof-of-concept evaluation units and outside consulting costs. We expect sales and marketing expense to continue to increase in absolute dollars as we increase the size of our sales and marketing organizations and expand our international operations, although such expense may fluctuate as a percentage of total revenue.

General and administrative. General and administrative expense consists of personnel costs, professional services and allocated overhead. General and administrative personnel include our executive, finance, human resources, facilities and legal organizations. Professional services consist primarily of legal, auditing, accounting and other consulting costs. We expect general and administrative expense to continue to increase in absolute dollars as we have recently incurred, and expect to continue to incur, additional general and administrative expenses as we grow our operations as a public company, including higher legal, corporate insurance, and accounting expenses.



24


Interest Income
 
Interest income consists of interest earned on our cash and cash equivalent balances. We have historically invested our cash in money-market funds and other short-term, investment-grade investments. We expect interest income to vary each reporting period depending on our average investment balances during the period, types and mix of investments and market interest rates.
 
Interest Expense
 
Interest expense consists of interest on our outstanding debt. See Note 6 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information about our debt.
 
Other Expense, Net
 
Other expense, net consists primarily of the change in fair value of our preferred stock warrant liability and gains or losses on disposal of fixed assets. Prior to our IPO, convertible preferred stock warrants were classified as a liability on our condensed consolidated balance sheets. During September 2013, our convertible preferred stock warrants were converted to common stock warrants. As part of this process, we performed a final remeasurement to fair value and the corresponding charge was recorded as other expense, net.

Provision for (Benefit from) Income Taxes
 
Provision for (benefit from) income taxes consists primarily of U.S. federal and state income taxes in the United States and income taxes in certain foreign jurisdictions in which we conduct business. We have a full valuation allowance for deferred tax assets, including net operating loss carry forwards, and tax credits related primarily to research and development. We expect to maintain this full valuation allowance for the foreseeable future.

 
Results of Operations
 
The following tables summarize our results of operations for the periods presented and as a percentage of our total revenue for those periods. The period-to-period comparison of results is not necessarily indicative of results for future periods.
 
 
 
Three Months Ended
September 30, 
 
 
Nine Months Ended
September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
 
(In thousands)
Revenue:
 
 
 
 
 
 
 
 
Product
 
$
23,729

 
$
13,754

 
$
55,957

 
$
31,955

Subscription and services
 
18,923

 
8,142

 
48,333

 
19,682

Total revenue
 
42,652

 
21,896

 
104,290

 
51,637

Cost of revenue:
 
 
 
 
 
 
 
 
Product
 
7,358

 
3,813

 
18,124

 
9,400

Subscription and services
 
6,079

 
904

 
12,481

 
2,183

Total cost of revenue
 
13,437

 
4,717

 
30,605

 
11,583

Total gross profit
 
29,215

 
17,179

 
73,685

 
40,054

Operating expenses:
 
 
 
 
 

 
 
Research and development
 
20,492

 
4,191

 
44,570

 
9,814

Sales and marketing
 
44,414

 
16,734

 
110,577

 
42,788

General and administrative
 
11,704

 
4,188

 
29,385

 
8,898

Total operating expenses
 
76,610

 
25,113

 
184,532

 
61,500

Operating loss
 
(47,395
)
 
(7,934
)
 
(110,847
)
 
(21,446
)
Interest income
 
1

 
2

 
53

 
5

Interest expense
 
(243
)
 
(167
)
 
(519
)
 
(377
)
Other expense, net
 
(4,206
)
 
(699
)
 
(7,129
)
 
(1,248
)
Loss before income taxes
 
(51,843
)
 
(8,798
)
 
(118,442
)
 
(23,066
)
Provision for (benefit from) income taxes
 
(917
)
 
54

 
(320
)
 
114

Net loss attributable to common stockholders
 
$
(50,926
)
 
$
(8,852
)
 
$
(118,122
)
 
$
(23,180
)

25


 
 
 
Three Months Ended
September 30, 
 
Nine Months Ended
September 30, 
 
 
2013  
 
2012  
 
2013  
 
2012  
 
 
(As a percentage of total revenue)
Revenue:
 
 
 
 
 
 
 
 
Product
 
56
 %
 
63
 %
 
54
 %
 
62
 %
Subscription and services
 
44

 
37

 
46

 
38

Total revenue
 
100

 
100

 
100

 
100

Cost of revenue:
 


 
 
 

 

Product
 
17

 
17

 
17

 
18

Subscription and services
 
14

 
4

 
12

 
4

Total cost of revenue
 
31

 
21

 
29

 
22

Total gross profit
 
69

 
79

 
71

 
78

Operating expenses:
 

 

 

 

Research and development
 
48

 
19

 
43

 
19

Sales and marketing
 
104

 
76

 
106

 
83

General and administrative
 
27

 
19

 
28

 
17

Total operating expenses
 
179

 
114

 
177

 
119

Operating loss
 
(110
)
 
(35
)
 
(106
)
 
(41
)
Interest income
 

 

 

 

Interest expense
 
(1
)
 
(1
)
 
0

 
(1
)
Other expense, net
 
(10
)
 
(3
)
 
(7
)
 
(2
)
Loss before income taxes
 
(121
)
 
(39
)
 
(113
)
 
(44
)
Provision for (benefit from) income taxes
 
(2
)