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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 

FORM 10-Q
x
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2017
OR
 ¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-35580

sncrlogostandarda01.jpg
SERVICENOW, INC.
(Exact name of registrant as specified in its charter) 
Delaware
 
20-2056195
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)


ServiceNow, Inc.
2225 Lawson Lane
Santa Clara, California 95054
(408) 501-8550
(Registrant's telephone number, including area code) 


Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
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 Act). Yes ¨ No x
As of September 30, 2017, there were approximately 172.7 million shares of the Registrant’s Common Stock outstanding.



TABLE OF CONTENTS

 
 
 
Page
 
 
Item 1.
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 
 
   
 
 

i

Table of Contents

PART I

ITEM 1.     FINANCIAL STATEMENTS

SERVICENOW, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

 
September 30,
 
December 31,
 
2017
 
2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,104,871

 
$
401,238

Short-term investments
567,026

 
498,124

Accounts receivable, net
291,903

 
322,757

Current portion of deferred commissions
96,811

 
76,780

Prepaid expenses and other current assets
66,881

 
43,636

Total current assets
2,127,492

 
1,342,535

Deferred commissions, less current portion
69,041

 
61,990

Long-term investments
424,858

 
262,658

Property and equipment, net
231,304

 
181,620

Intangible assets, net
68,970

 
65,854

Goodwill
108,097

 
82,534

Other assets
39,753

 
36,576

Total assets
$
3,069,515

 
$
2,033,767

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
20,752

 
$
38,080

Accrued expenses and other current liabilities
177,553

 
171,636

Current portion of deferred revenue
1,082,346

 
861,782

Total current liabilities
1,280,651

 
1,071,498

Deferred revenue, less current portion
42,298

 
33,319

Convertible senior notes, net
1,156,629

 
507,812

Other long-term liabilities
38,546

 
34,177

Total liabilities
2,518,124

 
1,646,806

Stockholders’ equity:
 
 
 
Common stock
173

 
167

Additional paid-in capital
1,670,339

 
1,405,317

Accumulated other comprehensive loss
(408
)
 
(21,133
)
Accumulated deficit
(1,118,713
)
 
(997,390
)
Total stockholders’ equity
551,391

 
386,961

Total liabilities and stockholders’ equity
$
3,069,515

 
$
2,033,767

 
See accompanying notes to condensed consolidated financial statements

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Table of Contents

SERVICENOW, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands, except share and per share data)
(unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Subscription
$
455,421

 
$
318,934

 
$
1,242,563

 
$
877,035

Professional services and other
42,749

 
38,722

 
144,093

 
127,812

Total revenues
498,170

 
357,656

 
1,386,656

 
1,004,847

Cost of revenues(1):
 
 
 
 
 
 
 
Subscription
81,878

 
61,566

 
228,046

 
170,707

Professional services and other
45,402

 
41,271

 
137,366

 
123,039

Total cost of revenues
127,280

 
102,837

 
365,412

 
293,746

Gross profit
370,890

 
254,819

 
1,021,244

 
711,101

Operating expenses(1):
 
 
 
 
 
 
 
Sales and marketing
227,015

 
166,491

 
686,325

 
511,607

Research and development
98,465

 
75,018

 
272,959

 
211,306

General and administrative
52,465

 
40,085

 
150,242

 
117,393

Legal settlements

 

 

 
270,000

Total operating expenses
377,945

 
281,594

 
1,109,526

 
1,110,306

Loss from operations
(7,055
)
 
(26,775
)
 
(88,282
)
 
(399,205
)
Interest expense
(16,566
)
 
(8,389
)
 
(36,581
)
 
(24,746
)
Interest income and other income (expense), net
853

 
1,783

 
739

 
4,745

Loss before income taxes
(22,768
)
 
(33,381
)
 
(124,124
)
 
(419,206
)
Provision for (benefit from) income taxes
1,420

 
2,877

 
(2,801
)
 
9

Net loss
$
(24,188
)
 
$
(36,258
)
 
$
(121,323
)
 
$
(419,215
)
Net loss per share - basic and diluted
$
(0.14
)
 
$
(0.22
)
 
$
(0.71
)
 
$
(2.56
)
Weighted-average shares used to compute net loss per share - basic and diluted
171,883,190

 
165,378,836

 
170,359,717

 
163,767,329

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
3,389

 
$
203

 
$
15,482

 
$
(1,106
)
Unrealized gain (loss) on investments, net of tax
(2,864
)
 
(615
)
 
5,243

 
1,523

Other comprehensive income (loss), net of tax
525

 
(412
)
 
20,725

 
417

Comprehensive loss
$
(23,663
)
 
$
(36,670
)
 
$
(100,598
)
 
$
(418,798
)
 
(1)
Includes stock-based compensation as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Cost of revenues:
 
 
 
 
 
 
 
Subscription
$
8,980

 
$
7,140

 
$
25,860

 
$
20,698

Professional services and other
7,056

 
7,150

 
21,622

 
20,045

Sales and marketing
43,962

 
31,898

 
124,650

 
95,757

Research and development
23,092

 
21,376

 
67,624

 
62,956

General and administrative
17,352

 
13,523

 
48,695

 
35,004


 
See accompanying notes to condensed consolidated financial statements

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SERVICENOW, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Nine Months Ended September 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net loss
$
(121,323
)
 
$
(419,215
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
81,808

 
59,716

Amortization of premiums on investments
2,508

 
3,745

Amortization of deferred commissions
80,251

 
57,742

Amortization of debt discount and issuance costs
36,581

 
24,746

Stock-based compensation
288,451

 
234,460

Deferred income tax
(6,055
)
 
(5,095
)
Other
(4,062
)
 
(857
)
Changes in operating assets and liabilities, net of effect of business combinations:
 
 
 
Accounts receivable
42,341

 
(15,761
)
Deferred commissions
(102,348
)
 
(79,190
)
Prepaid expenses and other assets
(26,866
)
 
(11,733
)
Accounts payable
(11,088
)
 
(8,625
)
Deferred revenue
193,594

 
151,019

Accrued expenses and other liabilities
4,247

 
36,282

Net cash provided by operating activities
458,039

 
27,234

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(115,856
)
 
(84,112
)
Business combinations, net of cash acquired
(26,537
)
 
(34,297
)
Purchases of other intangibles
(6,170
)
 
(10,750
)
Purchases of investments
(641,666
)
 
(434,397
)
Purchases of strategic investments
(4,000
)
 

Sales of investments
77,968

 
266,288

Maturities of investments
350,597

 
218,452

Restricted cash
(739
)
 
(322
)
Net cash used in investing activities
(366,403
)
 
(79,138
)
Cash flows from financing activities:
 
 
 
Net proceeds from borrowings on convertible senior notes
772,127

 

Proceeds from issuance of warrants
54,071

 

Purchases of convertible note hedges
(128,017
)
 

Repurchases and retirement of common stock
(55,000
)
 

Proceeds from employee stock plans
76,748

 
55,063

Taxes paid related to net share settlement of equity awards
(131,130
)
 
(88,567
)
Payments on financing obligations
(2,681
)
 
(1,361
)
Net cash provided by (used in) financing activities
586,118

 
(34,865
)
Foreign currency effect on cash and cash equivalents
25,879

 
(469
)
Net increase (decrease) in cash and cash equivalents
703,633

 
(87,238
)
Cash and cash equivalents at beginning of period
401,238

 
412,305

Cash and cash equivalents at end of period
$
1,104,871

 
$
325,067

Non-cash investing and financing activities:
 
 
 
Property and equipment included in accounts payable and accrued expenses
$
9,321

 
$
9,691


See accompanying notes to condensed consolidated financial statements

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SERVICENOW, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 
Unless the context requires otherwise, references in this report to “ServiceNow,” the "Company", “we,” “us,” and “our” refer to ServiceNow, Inc. and its consolidated subsidiaries.

(1)    Description of the Business

ServiceNow is a leading provider of enterprise cloud computing solutions that define, structure, manage and automate services for global enterprises. Our mission is to help our customers improve service levels and reduce costs while scaling and automating their businesses. We typically deliver our software via the Internet as a service, through an easy-to-use, consumer product-like interface, which means it can be easily configured and rapidly deployed. In a minority of cases, we deploy our software on-premises at a customer data center to support a customer's unique regulatory or security requirements.

(2)    Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements and condensed footnotes have been prepared in accordance with the applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for fair statement of results for the interim periods presented have been included. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017 or for other interim periods or future years. The condensed consolidated balance sheet as of December 31, 2016 is derived from audited financial statements as of that date; however, it does not include all of the information and footnotes required by GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the SEC on February 28, 2017.

Principles of Consolidation

The condensed consolidated financial statements have been prepared in conformity with GAAP, and include our accounts and the accounts of our wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation.

Prior Period Reclassification

Certain reclassifications of prior period amounts have been made in our condensed consolidated statements of cash flow and Note 16 to conform to the current period presentation.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as reported amounts of revenues and expenses during the reporting period. Such management estimates and assumptions include, but are not limited to, the best estimate of selling price of the deliverables included in multiple elements revenue arrangements, the fair value of assets acquired and liabilities assumed for business combinations, stock-based compensation expenses, the assessment of the useful life and recoverability of our property and equipment, goodwill and identifiable intangible assets, future taxable income and legal contingencies. Actual results could differ from those estimates.


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New Accounting Pronouncements Pending Adoption

In May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-09, "Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting," which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This new standard is effective for our interim and annual periods beginning January 1, 2018, and early adoption is permitted. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, "Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20)—Premium Amortization on Purchased Callable Debt Securities," which shortens the amortization period for certain callable debt securities held at a premium to require such premiums to be amortized to the earliest call date unless applicable guidance related to certain pools of securities is applied to consider estimated prepayments. This new standard is effective for our interim and annual periods beginning January 1, 2019, and early adoption is permitted. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which eliminates Step 2 from the goodwill impairment test. This standard requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. In addition, this new standard eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. This new standard is effective for our interim and annual periods beginning January 1, 2020, and early adoption is permitted. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” which 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. This new standard is required to be applied on a prospective basis, effective for our interim and annual periods beginning January 1, 2018, and early adoption is permitted. The actual impact upon adoption of this new standard will depend upon the nature of our future acquisitions, if any.

In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)," which requires that amounts generally described as restricted cash or restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This new standard is effective for our interim and annual periods beginning January 1, 2018, and early adoption is permitted. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory," which includes a revision of the accounting for the income tax consequences of intra-entity transfers of assets other than inventory to reduce the complexity in accounting standards. This new standard is effective for our interim and annual periods beginning January 1, 2018, and early adoption is permitted. The new standard is required to be applied on a modified retrospective basis through a cumulative effect adjustment directly to retained earnings as of the beginning of the period of adoption. While we believe the current impact upon the adoption of this standard on our consolidated financial statements will be immaterial, the actual impact will largely depend on future intra-entity asset transfers, if any.

In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," which provides guidance on eight specific cash flow issues. Among these issues, this standard requires, at the settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowings, the portion of the cash payment attributable to the accreted interest related to the debt discount to be classified as cash flows for operating activities, and the portion of the cash payments attributable to the principal to be classified as cash outflows for financing activities. This new standard is effective for our interim and annual periods beginning January 1, 2018, and early adoption is permitted. We currently expect to settle $575.0 million relating to the principal amount of our 0% convertible senior notes due November 1, 2018 in cash upon maturity. At that time, we expect to classify approximately $155.3 million of debt discount attributable to the difference between the 0% coupon interest rate and the 6.5% effective interest rate as an operating cash outflow in our consolidated statements of cash flows. The remaining $419.7 million will be presented as a financing cash outflow in our consolidated statements of cash flows.


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Table of Contents

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which requires a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. This new standard is effective for our interim and annual periods beginning January 1, 2020. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which requires lessees to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets, and to recognize on the income statement the expenses in a manner similar to current practice. This new standard, including related amendments recently issued by the FASB, is effective for our interim and annual periods beginning January 1, 2019, and early adoption is permitted. While we are currently evaluating the impact of the adoption of this standard on our consolidated financial statements, we currently anticipate that the adoption of this standard will have a material impact on our consolidated balance sheets given that we had operating lease commitments of approximately $352 million as of September 30, 2017. However, we do not anticipate that the adoption of this standard will have a material impact on our consolidated statements of comprehensive loss since the expense recognition under this new standard will be similar to current practice.

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments, and requires equity securities to be measured at fair value with changes in fair value recognized through net income. This new standard allows a measurement alternative for equity investments that do not have readily determinable fair values to be measured at cost, less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. This new standard is effective for our interim and annual periods beginning January 1, 2018, and will be adopted by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, with prospective adoption of the amendments related to equity securities without readily determinable fair values existing as of the date of adoption. While we are currently evaluating the impact of the adoption of this standard on our consolidated financial statements, we preliminarily expect the adoption of this standard to impact our strategic investments and our marketable equity securities, and plan to elect the measurement alternative for equity investments that do not have readily determinable fair values.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." Under this new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, this standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has recently issued several amendments to the standard, including clarification on accounting for licenses of intellectual property and identifying performance obligations. This new standard is effective for our interim and annual periods beginning January 1, 2018.

The Topic 606 guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method) or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). We currently anticipate adopting the standard using the full retrospective method to restate each prior reporting period presented.

Given the scope of work required to implement the recognition and disclosure requirements under the Topic 606 standard, we began our assessment process in 2014 and have since made significant progress, including the identification and on-going implementation of necessary changes to our policies, processes, systems and controls.

We do not expect the Topic 606 standard to have a material impact on the timing of revenue recognition related to our cloud-based subscription offerings. However, we expect this new standard to have a material impact on the timing of revenue and expense recognition for our contracts related to on-premises offerings, in which we grant customers the right to deploy our software on the customer’s own servers, without significant penalty. Under this new standard, the requirement to have vendor specific objective evidence (VSOE) for undelivered elements is eliminated. As such, we may be required to recognize as revenue a portion of the sales price upon delivery of the software, compared to the current practice of recognizing the entire sales price ratably over an estimated subscription period due to the lack of VSOE. To the extent the amounts recognized as revenue have not been billed, the accrued revenue will be recorded as unbilled receivables on our consolidated balance sheets. We currently believe our total revenues reported for the year ended December 31, 2016 would have increased by approximately $10 to $15 million on a pro forma basis if the new standard had been applied for the entire 2016 fiscal year starting on January 1, 2016.


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Table of Contents

In addition, we expect the Topic 606 standard to change the way we account for commissions paid on both our on-premises offerings and our cloud-based subscription offerings. Our current practice is to defer only direct and incremental commission costs to obtain a contract and amortize those costs over the contract term for both our on-premises offerings and our cloud-based subscription offerings. Under this new standard, we will defer all incremental commission costs to obtain customer contracts, including indirect costs that are not tied to a specific contract, for both our on-premises offerings and our cloud-based subscription offerings. Commissions allocated to the software element of our on-premises offerings, which are delivered up front, will be expensed immediately under this new standard, while commissions allocated to the support element of our on-premises offerings as well as commissions paid on our cloud-based subscription offerings, which are delivered over time, will be amortized over an expected period of benefit, which we have determined to be approximately five years. As a result, we currently expect the deferred commissions asset to increase and the related amortization expense in each reporting period to decrease under this new standard. The aggregate impact resulting from changes in the way we account for commission expense for both our cloud-based subscription offerings and our on-premises offerings would have reduced our sales and marketing expenses by approximately $20 to $25 million on a pro forma basis for the year ended December 31, 2016 if the new standard had been applied for the entire 2016 fiscal year starting on January 1, 2016.

We are continuing to evaluate the impact of the adoption of this standard on our consolidated financial statements, including the tax effects related to the revenue and commission adjustments discussed above and the increased disclosure requirements on our footnotes. Our preliminary assessments are subject to change.

(3)    Investments
 
Marketable Securities

The following is a summary of our available-for-sale investment securities, excluding those securities classified within cash and cash equivalents on the condensed consolidated balance sheets (in thousands):
 
September 30, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Available-for-sale securities:
 
 
 
 
 
 
 
Commercial paper
$
52,596

 
$

 
$

 
$
52,596

Corporate notes and bonds
775,622

 
126

 
(1,064
)
 
774,684

Certificates of deposit
38,288

 

 

 
38,288

U.S. government agency securities
108,587

 

 
(209
)
 
108,378

Marketable equity securities
10,000

 
7,938

 

 
17,938

Total available-for-sale securities
$
985,093

 
$
8,064

 
$
(1,273
)
 
$
991,884


 
December 31, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Available-for-sale securities:
 
 
 
 
 
 
 
Commercial paper
$
56,839

 
$

 
$

 
$
56,839

Corporate notes and bonds
628,054

 
91

 
(1,590
)
 
626,555

Certificates of deposit
35,355

 

 

 
35,355

U.S. government agency securities
42,088

 
7

 
(62
)
 
42,033

Total available-for-sale securities
$
762,336

 
$
98

 
$
(1,652
)
 
$
760,782




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As of September 30, 2017, the contractual maturities of our available-for-sale investment securities, excluding marketable equity securities and those securities classified within cash and cash equivalents on the condensed consolidated balance sheets, did not exceed 24 months. The fair values of these securities, by remaining contractual maturity, are as follows (in thousands):
 
September 30, 2017
Due in 1 year or less
$
549,088

Due in 1 to 2 years
424,858

Total
$
973,946


The following table shows the fair values and the gross unrealized losses of our available-for-sale investment securities, classified by the length of time that the securities have been in a continuous unrealized loss position, and aggregated by investment types, excluding those securities classified within cash and cash equivalents on the condensed consolidated balance sheets (in thousands): 
 
September 30, 2017
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Corporate notes and bonds
$
499,576

 
$
(822
)
 
$
114,109

 
$
(242
)
 
$
613,685

 
$
(1,064
)
U.S. government agency securities
91,901

 
(185
)
 
8,977

 
(24
)
 
100,878

 
(209
)
Total
$
591,477

 
$
(1,007
)
 
$
123,086

 
$
(266
)
 
$
714,563

 
$
(1,273
)


 
December 31, 2016
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
Corporate notes and bonds
$
492,503

 
$
(1,530
)
 
$
47,940

 
$
(60
)
 
$
540,443

 
$
(1,590
)
U.S. government agency securities
30,033

 
(62
)
 

 

 
30,033

 
(62
)
Total
$
522,536

 
$
(1,592
)
 
$
47,940

 
$
(60
)
 
$
570,476

 
$
(1,652
)


There were no impairments considered "other-than-temporary" as it is more likely than not we will hold the securities until maturity or a recovery of the cost basis.

Strategic Investments

Our strategic investments consist of debt and non-marketable equity investments in privately-held companies. Debt investments in privately-held companies are classified as available-for-sale and are recorded at their estimated fair value with changes in fair value recorded through accumulated other comprehensive income, while non-marketable equity securities are recorded at cost. We have not recorded any impairment charges for any of our investments in privately-held companies. The total amount of debt and equity investments in privately-held companies included in other assets on the condensed consolidated balance sheets was $5.0 million and $11.0 million as of September 30, 2017 and December 31, 2016, respectively. During the nine months ended September 30, 2017, we reclassified $10.0 million of non-marketable equity securities (at cost) to short-term investments on our condensed consolidated balance sheets due to an initial public offering by the investee, and recorded an unrealized gain of $7.9 million within other comprehensive income in our consolidated statements of comprehensive loss. During the nine months ended September 30, 2017, we also acquired an additional $4.0 million in strategic investments. The fair value of our debt investments in privately-held companies included within our strategic investments is $1.5 million and $0.5 million as of September 30, 2017 and December 31, 2016, respectively. These investments are recorded at fair value using significant unobservable inputs or data in an inactive market and the valuation requires our judgment due to the absence of quoted prices in active markets and inherent lack of liquidity and are categorized accordingly as Level 3 in the fair value hierarchy.


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Table of Contents

(4)    Fair Value Measurements
 
The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis at September 30, 2017 (in thousands): 
 
Level 1
 
Level 2
 
Total
Cash equivalents:
 
 
 
 
 
Money market funds
$
196,998

 
$

 
$
196,998

Commercial paper

 
12,478

 
12,478

Certificates of deposit

 
2,948

 
2,948

U.S. government agency securities

 
551,772

 
551,772

Short-term investments:
 
 
 
 
 
Commercial paper

 
52,596

 
52,596

Corporate notes and bonds

 
449,379

 
449,379

Certificates of deposit

 
18,755

 
18,755

U.S. government agency securities

 
28,358

 
28,358

Marketable equity securities
17,938

 

 
17,938

Long-term investments:
 
 
 
 
 
Corporate notes and bonds

 
325,305

 
325,305

Certificates of deposit

 
19,533

 
19,533

U.S. government agency securities

 
80,020

 
80,020

Total
$
214,936

 
$
1,541,144

 
$
1,756,080

 
The following table presents our fair value hierarchy for our assets measured at fair value on a recurring basis at December 31, 2016 (in thousands): 
 
Level 1
 
Level 2
 
Total
Cash equivalents:
 
 
 
 
 
Money market funds
$
165,627

 
$

 
$
165,627

Short-term investments:
 
 
 
 
 
Commercial paper

 
56,839

 
56,839

Corporate notes and bonds

 
388,429

 
388,429

Certificates of deposit

 
35,355

 
35,355

U.S. government agency securities

 
17,501

 
17,501

Long-term investments:
 
 
 
 
 
Corporate notes and bonds

 
238,125

 
238,125

U.S. government agency securities

 
24,533

 
24,533

Total
$
165,627

 
$
760,782

 
$
926,409



We determine the fair value of our security holdings based on pricing from our service providers and market prices from industry-standard independent data providers. Such market prices may be quoted prices in active markets for identical assets (Level 1 inputs) or pricing determined using inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs), such as yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures.

See Note 3 for the fair value measurement of our debt investments in privately-held companies and Note 9 for the fair value measurement of our convertible senior notes.


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Table of Contents

(5)    Business Combinations
 
2017 Business Combinations

DxContinuum

On January 20, 2017, we completed the acquisition of a privately-held company, DxContinuum, Inc. (DxContinuum), by acquiring all issued and outstanding common shares of DxContinuum for approximately $15.0 million in an all-cash transaction to enhance the predictive capabilities of our solutions.

The following table summarizes the allocation of the purchase price to the fair value of the tangible and intangible assets acquired and liabilities assumed as of the acquisition date:
 
Purchase Price Allocation
(in thousands)
 
Useful Life
(in years)
Net tangible assets acquired
$
37

 
 
Intangible assets:
 
 
 
Developed technology
6,400

 
5
Goodwill
11,159

 
 
Net deferred tax liabilities(1)
(2,561
)
 
 
Total purchase price
$
15,035

 
 

(1)
Deferred tax liabilities, net primarily relates to purchased identifiable intangible assets and is shown net of deferred tax assets.

The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. We believe the goodwill represents the synergies expected from expanded market opportunities when integrating DxContinuum technologies with our offerings. The goodwill balance is not deductible for income tax purposes.

Other 2017 Business Combinations

In addition to the DxContinuum acquisition during the nine months ended September 30, 2017, we also completed the acquisition of privately-held companies Qlue, Inc. and Digital Telepathy, Inc. (Telepathy) for approximately $11.6 million in cash, and have included the results of operations of these companies in our condensed consolidated financial statements from their respective dates of purchase. In allocating the aggregate purchase price based on the estimated fair value, we recorded $9.1 million of goodwill, $3.5 million of developed technology intangible assets (to be amortized over estimated useful life of five years) and $1.1 million of deferred tax liabilities. Amounts allocated to the remaining acquired tangible assets and assumed liabilities were not material. $4.1 million of the goodwill balance associated with these business combinations is deductible for income tax purposes. We are obligated to make cash payments of up to $5.0 million in connection with the acquisition of Telepathy,, contingent upon the continued employment by us of certain former employees of Telepathy on specified future dates. We determined that this additional consideration was not part of the purchase price and will be recognized as post-acquisition expense over the related requisite service period.

Aggregate acquisition-related costs associated with all 2017 business combinations of $1.5 million for the nine months ended September 30, 2017 are included in general and administrative expenses in our condensed consolidated statements of comprehensive loss.


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Table of Contents


2016 Business Combinations

BrightPoint Security

On June 3, 2016, we completed the acquisition of a privately-held company, BrightPoint Security, Inc. (BrightPoint), by acquiring all issued and outstanding common shares of BrightPoint for approximately $19.6 million in an all-cash transaction in order to expand our Security Operations solutions. The following table summarizes the allocation of the purchase price to the fair value of the tangible and intangible assets acquired and liabilities assumed as of the acquisition date:
 
Purchase Price Allocation
(in thousands)
 
Useful Life
(in years)
Intangible assets:
 
 
 
Developed technology
$
8,100

 
6
Customer contracts and related relationships
500

 
1.5
Goodwill
15,258

 
 
Net tangible liabilities acquired
(1,339
)
 
 
Net deferred tax liabilities(1)
(2,890
)
 
 
Total purchase price
$
19,629

 
 

(1)
Deferred tax liabilities, net primarily relates to purchased identifiable intangible assets and is shown net of deferred tax assets.

ITapp

On April 8, 2016, we completed the acquisition of a privately-held company, ITapp Inc. (ITapp), by acquiring all issued and outstanding common shares of ITapp for approximately $14.5 million in an all-cash transaction in order to expand our IT Operations Management solutions. The following table summarizes the allocation of the purchase price to the fair value of the tangible and intangible assets acquired and liabilities assumed as of the acquisition date:
 
Purchase Price Allocation
(in thousands)
 
Useful Life
(in years)
Net tangible assets acquired
$
140

 
 
Intangible assets:
 
 
 
Developed technology
4,700

 
5
Customer contracts and related relationships
200

 
1.5
Goodwill
11,437

 
 
Net deferred tax liabilities(1)
(2,015
)
 
 
Total purchase price
$
14,462

 
 

(1)
Deferred tax liabilities, net primarily relates to purchased identifiable intangible assets and is shown net of deferred tax assets.

For both of the 2016 business combinations, the excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. We believe the goodwill represents the synergies expected from expanded market opportunities when integrating the acquired technologies with our offerings. The goodwill balance for both business combinations is not deductible for income tax purposes. Aggregate acquisition-related costs of $1.0 million are included in general and administrative expenses in our condensed consolidated statements of comprehensive loss.

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Table of Contents


Unaudited Pro Forma Financial Information

The results of operations of our 2017 and 2016 business combinations have been included in our condensed consolidated financial statements from their respective dates of purchase. The following pro forma consolidated financial information combines the results of operations from us and all the companies that we acquired since January 1, 2016 for the three and nine months ended September 30, 2017 and 2016, as if these acquisitions had occurred on January 1, 2016 (in thousands, except share and per share data):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues
$
499,529

 
$
359,362

 
$
1,390,582

 
$
1,010,374

Net loss
$
(24,152
)
 
$
(37,134
)
 
$
(120,882
)
 
$
(426,883
)
Weighted-average shares used to compute net loss per share - basic and diluted
171,883,190

 
165,378,836

 
170,359,717

 
163,767,329

Net loss per share - basic and diluted
$
(0.14
)
 
$
(0.22
)
 
$
(0.71
)
 
$
(2.61
)


The pro forma results as presented above are based on estimates and assumptions, which we believe are reasonable. They are not necessarily indicative of our condensed consolidated results of operations in future periods or the results that actually would have been realized had we been a combined company during the periods presented. The pro forma results include adjustments primarily related to amortization of acquired intangible assets and acquisition-related costs.

(6) Goodwill and Intangible Assets
Goodwill balances are presented below (in thousands):
 
Carrying Amount
Balance as of December 31, 2016
$
82,534

Goodwill acquired
20,281

Foreign currency translation adjustments
5,282

Balance as of September 30, 2017
$
108,097



Intangible assets consist of the following (in thousands):
 
September 30, 2017
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Developed technology
$
91,527

 
$
(44,069
)
 
$
47,458

Patents
23,780

 
(2,532
)
 
21,248

Other
1,775

 
(1,511
)
 
264

Total intangible assets
$
117,082

 
$
(48,112
)
 
$
68,970


During the nine months ended September 30, 2017, we acquired patents with a weighted average useful life of 10 years for an aggregate purchase price of $6.2 million.

 
December 31, 2016
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Developed technology
$
79,206

 
$
(30,858
)
 
$
48,348

Patents
17,610

 
(867
)
 
16,743

Other
1,775

 
(1,012
)
 
763

Total intangible assets
$
98,591

 
$
(32,737
)
 
$
65,854



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Table of Contents

Amortization expense for intangible assets for the three months ended September 30, 2017 and 2016 was approximately $4.8 million and $4.3 million, respectively, and for the nine months ended September 30, 2017 and 2016 was approximately $14.3 million and $10.9 million, respectively.

The following table presents the estimated future amortization expense related to intangible assets held at September 30, 2017 (in thousands):
Years Ending December 31,
2017
 
$
4,769

2018
 
18,772

2019
 
18,692

2020
 
8,796

2021
 
6,871

Thereafter
 
11,070

Total future amortization expense
 
$
68,970



(7)    Property and Equipment
 
Property and equipment, net consists of the following (in thousands):
 
September 30,
 
December 31,
 
2017
 
2016
Computer equipment
$
303,336

 
$
222,648

Computer software
41,200

 
32,132

Leasehold improvements
48,000

 
37,095

Furniture and fixtures
36,283

 
31,574

Building
6,978

 
6,379

Construction in progress
7,044

 
2,535

 
442,841

 
332,363

Less: Accumulated depreciation
(211,537
)
 
(150,743
)
Total property and equipment, net
$
231,304

 
$
181,620



Construction in progress consists primarily of leasehold improvements and in-process software development costs. Depreciation expense for the three months ended September 30, 2017 and 2016 was $24.3 million and $17.9 million, respectively, and for the nine months ended September 30, 2017 and 2016 was approximately $66.9 million and $48.7 million, respectively.

(8)    Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):
 
September 30,
 
December 31,
 
2017
 
2016
Taxes payable
$
18,694

 
$
19,472

Bonuses and commissions
57,691

 
67,259

Accrued compensation
41,229

 
30,816

Other employee related liabilities
27,386

 
28,812

Other
32,553

 
25,277

Total accrued expenses and other current liabilities
$
177,553

 
$
171,636




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Table of Contents

(9)    Convertible Senior Notes

During the three months ended June 30, 2017, we issued $782.5 million of 0% convertible senior notes (the 2022 Notes), due June 1, 2022 unless earlier converted or repurchased in accordance with their terms. In November 2013, we issued $575.0 million of 0% convertible senior notes (the 2018 Notes, and together with the 2022 Notes, the Notes), due November 1, 2018 unless earlier converted or repurchased in accordance with their terms. The Notes do not bear interest, and we cannot redeem the Notes prior to maturity.

The Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries.

Upon conversion of the Notes, we may choose to pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock. We currently intend to settle the principal amount of the Notes with cash.

 
Convertible Date
 
Initial Conversion Price per Share
 
Initial Conversion Rate per $1,000 Par Value
 
Initial Number of Shares
2022 Notes
February 1, 2022
 
$
134.75

 
7.42 shares
 
5,806,936

2018 Notes
July 1, 2018
 
$
73.88

 
13.54 shares
 
7,783,023



Holders of the Notes may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding February 1, 2022 and July 1, 2018, for the 2022 Notes and 2018 Notes, respectively (each, a Convertible Date), only under the following circumstances:

during any calendar quarter (and only during such calendar quarter) if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day; or

during the five-business day period after any five-consecutive trading day period, or the measurement period, in which the trading price per $1,000 principal amount of the Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the applicable conversion rate on each such trading day; or

upon the occurrence of specified corporate events.

On or after the applicable Convertible Date, a holder may convert all or any portion of its Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date regardless of the foregoing conditions. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. As noted above, we currently intend to settle the principal amount of the Notes with cash.

The conversion price will be subject to adjustment in some events. Holders of the Notes who convert their Notes in connection with certain corporate events that constitute a “make-whole fundamental change” are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a corporate event that constitutes a “fundamental change,” holders of the Notes may require us to purchase with cash all or a portion of the Notes upon the occurrence of a fundamental change, at a purchase price equal to 100% of the principal amount of the respective Notes plus any accrued and unpaid special interest, if any.

In accounting for the issuance of the Notes, we separated the Notes into liability and equity components. The carrying cost of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Notes. The difference between the principal amount of the Notes and the proceeds allocated to the liability component, or the debt discount, is amortized to interest expense using the effective interest method over the term of the respective Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.


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Table of Contents

In accounting for the transaction costs related to the issuance of the Notes, we allocated the total amount incurred to the liability and equity components based on their relative fair values. Transaction costs attributable to the liability component are being amortized to interest expense over the respective terms of the Notes, and transaction costs attributable to the equity component were netted with the equity component of the Notes in stockholders’ equity. The Notes consisted of the following (in thousands):
 
September 30, 2017
 
December 31, 2016
Liability component:
 
 
 
Principal:
 
 
 
2022 Notes
$
782,500

 
$

2018 Notes
575,000

 
575,000

Less: debt issuance cost and debt discount, net of amortization
 
 
 
2022 Notes
(160,164
)
 

2018 Notes
(40,707
)
 
(67,188
)
Net carrying amount
$
1,156,629

 
$
507,812

 
2022 Notes
 
2018 Notes
Equity component recorded at issuance:
 
 
 
Note
$
162,039

 
$
155,319

Issuance cost
(2,148
)
 
(3,257
)
Net amount recorded in equity
$
159,891

 
$
152,062



The price of our common stock was greater than or equal to 130% of the conversion price of the 2018 Notes for at least 20 trading days during the 30 consecutive trading days ending on the last trading day of the quarter ended June 30, 2017. Therefore, as of June 30, 2017, the 2018 Notes became convertible at the holders’ option beginning on July 1, 2017 and ending September 30, 2017. As of September 30, 2017, the 2018 Notes continue to be convertible at the holders' option for the period beginning October 1, 2017 and ending December 31, 2017. During the quarter ended September 30, 2017, we received requests to convert an aggregate of $4,000 principal amount of 2018 Notes, which we elected to settle in cash.

As we have the option to settle the principal amount in shares and we are more than 12 months away from the maturity date, we continue to classify the net carrying amount of our 2018 Notes as a long-term liability and the equity component of our 2018 Notes continues to remain in permanent equity. Our 2018 Notes were not convertible as of December 31, 2016. Our 2022 Notes were not convertible as of September 30, 2017.

We consider the fair value of the Notes at September 30, 2017 to be a Level 2 measurement. The estimated fair values of the Notes at September 30, 2017 and December 31, 2016 based on the closing trading price per $100 of the Notes were as follows (in thousands):

 
September 30, 2017
 
December 31, 2016
2022 Notes
$
842,322

 
N/A

2018 Notes
$
922,501

 
$
681,375




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Table of Contents

As of September 30, 2017, the remaining life of the 2022 Notes and 2018 Notes are 56 months and 13 months, respectively. The following table sets forth total interest expense recognized related to the Notes (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Amortization of debt issuance cost
 
 
 
 
 
 
 
2022 Notes
$
367

 
$

 
$
489

 
$

2018 Notes
481

 
450

 
1,421

 
1,327

Amortization of debt discount
 
 
 
 
 
 
 
2022 Notes
7,222

 

 
9,610

 

2018 Notes
8,496

 
7,939

 
25,061

 
23,419

Total
$
16,566

 
$
8,389

 
$
36,581

 
$
24,746

Effective interest rate of the liability component
 
2022 Notes
4.75%
2018 Notes
6.50%

Note Hedges

To minimize the impact of potential economic dilution upon conversion of the Notes, we entered into convertible note hedge transactions (the 2022 Note Hedge and 2018 Note Hedge, respectively, and collectively, the Note Hedges) with certain investment banks, with respect to our common stock concurrently with the issuance of the 2022 Notes and 2018 Notes.
 
Purchase
 
Shares
 
(in thousands)
 
 
2022 Note Hedge
$
128,017

 
5,806,936

2018 Note Hedge
$
135,815

 
7,783,023



The Note Hedges cover shares of our common stock at a strike price per share that corresponds to the initial conversion price of the respective Notes, subject to adjustment, and are exercisable upon conversion of the Notes. If exercised, we may elect to receive cash, shares of our common stock, or a combination of cash and shares. We have accounted for the aggregate amount of purchase price for the Note Hedges as a reduction to additional paid-in capital. The Note Hedges will expire upon the maturity of the Notes. The Note Hedges are intended to reduce the potential economic dilution upon conversion of the Notes in the event that the fair value per share of our common stock at the time of exercise is greater than the conversion price of the Notes. The Note Hedges are separate transactions and are not part of the terms of the Notes. Holders of the Notes will not have any rights with respect to the Note Hedges. The Note Hedges do not impact earnings per share, as they were entered into to offset any dilution from the Notes.

Warrants
 
Proceeds
 
Shares
 
Strike Price
 
(in thousands)
 
 
 
 
2022 Warrants
$
54,071

 
5,806,936

 
$
203.40

2018 Warrants
$
84,525

 
7,783,023

 
$
107.46



Separately, we entered into warrant transactions (the 2022 Warrants and 2018 Warrants, respectively, and collectively, the Warrants) with certain investment banks, whereby we sold warrants to acquire, subject to adjustment, the number of shares of our common stock shown in the table above. If the average market value per share of our common stock for the reporting period, as measured under the Warrants, exceeds the strike price of the respective Warrants, such Warrants would have a dilutive effect on our earnings per share to the extent we report net income. The Warrants are separate transactions and are not remeasured through earnings each reporting period. The Warrants are not part of the Notes or N