10-Q 1 hubs-10q_20170930.htm 10-Q hubs-10q_20170930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED September 30, 2017

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 001-36680

 

HubSpot, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-2632791

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

25 First Street, 2nd Floor

Cambridge, Massachusetts, 02141

(Address of principal executive offices)

(888) 482-7768

(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      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      NO  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

 

Large accelerated filer

 

  

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.    YES      NO  

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

There were 37,371,546 shares of the registrant’s Common Stock issued and outstanding as of October 26, 2017.

 

 

 

 

 


 

HUBSPOT, INC.

Table of Contents

 

Part I — Financial Information

 

 

 

 

Item 1.

 

Unaudited Consolidated Financial Statements:

 

 

 

Unaudited Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016

4

 

 

Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016

5

 

 

Unaudited Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2017 and 2016

6

 

 

Unaudited Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2017

7

 

 

Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016

8

 

 

Notes to Unaudited Consolidated Financial Statements

9

Item 2.

 

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

20

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

30

Item 4.

 

Controls and Procedures

31

 

Part II — Other Information

 

 

 

 

Item 1.

 

Legal Proceedings

32

Item 1A.

 

Risk Factors

32

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

51

Item 3.

 

Default Upon Senior Securities

51

Item 4.

 

Mine Safety Disclosures

51

Item 5.

 

Other Information

51

Item 6.

 

Exhibits

52

Signatures

 

 

 

EX-31.1

 

CERTIFICATION OF THE CEO PURSUANT TO SECTION 302

 

EX-31.2

 

CERTIFICATION OF THE CFO PURSUANT TO SECTION 302

 

EX-32.1

 

CERTIFICATION OF THE CEO AND CFO PURSUANT TO SECTION 906

 

 

 

 

 


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, and these statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

 

our future financial performance, including our expectations regarding our revenue, cost of revenue, gross margin and operating expenses;

 

maintaining and expanding our customer base and increasing our average subscription revenue per customer;

 

the impact of competition in our industry and innovation by our competitors;

 

our anticipated growth and expectations regarding our ability to manage our future growth;

 

our predictions about industry and market trends;

 

our ability to anticipate and address the evolution of technology and the technological needs of our customers, to roll-out upgrades to our existing software platform and to develop new and enhanced applications to meet the needs of our customers;

 

our ability to maintain our brand and inbound marketing thought leadership position;

 

the impact of our corporate culture and our ability to attract, hire and retain necessary qualified employees to expand our operations;

 

the anticipated effect on our business of litigation to which we are or may become a party;

 

our ability to successfully acquire and integrate companies and assets; and

 

our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business both in the United States and internationally.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

 

 

3


 

PART I — Financial Information

 

 

Item 1.

Financial Statements

HubSpot, Inc.

Unaudited Consolidated Balance Sheets

(in thousands)

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

176,743

 

 

$

59,702

 

Short-term investments

 

 

315,130

 

 

 

54,648

 

Accounts receivable — net of allowance for doubtful accounts of $622 and $617

   at September 30, 2017 and December 31, 2016, respectively

 

 

48,790

 

 

 

38,984

 

Deferred commission expense

 

 

11,228

 

 

 

9,025

 

Restricted cash

 

 

-

 

 

 

162

 

Prepaid hosting costs

 

 

1,411

 

 

 

5,299

 

Prepaid expenses and other current assets

 

 

17,726

 

 

 

8,433

 

Total current assets

 

 

571,028

 

 

 

176,253

 

Long-term investments

 

 

35,669

 

 

 

35,718

 

Property and equipment, net

 

 

40,601

 

 

 

30,201

 

Capitalized software development costs, net

 

 

8,566

 

 

 

6,523

 

Restricted cash

 

 

5,106

 

 

 

321

 

Other assets

 

 

4,044

 

 

 

950

 

Intangible assets

 

 

6,362

 

 

 

16

 

Goodwill

 

 

14,950

 

 

 

9,773

 

Total assets

 

$

686,326

 

 

$

259,755

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,749

 

 

$

4,350

 

Accrued compensation costs

 

 

11,611

 

 

 

11,415

 

Other accrued expenses

 

 

25,753

 

 

 

16,033

 

Deferred rent

 

 

157

 

 

 

159

 

Deferred revenue

 

 

118,366

 

 

 

95,426

 

Total current liabilities

 

 

160,636

 

 

 

127,383

 

Deferred rent, net of current portion

 

 

18,173

 

 

 

10,079

 

Deferred revenue, net of current portion

 

 

1,792

 

 

 

1,171

 

Other long-term liabilities

 

 

3,626

 

 

 

2,422

 

Convertible senior notes

 

 

293,563

 

 

 

-

 

Total liabilities

 

 

477,790

 

 

 

141,055

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock

 

 

36

 

 

 

36

 

Additional paid-in capital

 

 

482,964

 

 

 

365,444

 

Accumulated other comprehensive income (loss)

 

 

83

 

 

 

(864

)

Accumulated deficit

 

 

(274,547

)

 

 

(245,916

)

Total stockholders’ equity

 

 

208,536

 

 

 

118,700

 

Total liabilities and stockholders’ equity

 

$

686,326

 

 

$

259,755

 

 

The accompanying notes are an integral part of the consolidated financial statements.

4


 

HubSpot, Inc.

Unaudited Consolidated Statements of Operations

(in thousands, except per share data)

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription

 

$

93,164

 

 

$

66,505

 

 

$

255,030

 

 

$

182,357

 

Professional services and other

 

 

4,562

 

 

 

4,084

 

 

 

14,041

 

 

 

12,166

 

Total revenue

 

 

97,726

 

 

 

70,589

 

 

 

269,071

 

 

 

194,523

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription

 

 

12,933

 

 

 

10,655

 

 

 

36,834

 

 

 

29,550

 

Professional services and other

 

 

6,077

 

 

 

5,157

 

 

 

17,839

 

 

 

15,428

 

Total cost of revenues

 

 

19,010

 

 

 

15,812

 

 

 

54,673

 

 

 

44,978

 

Gross profit

 

 

78,716

 

 

 

54,777

 

 

 

214,398

 

 

 

149,545

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

18,828

 

 

 

12,100

 

 

 

48,087

 

 

 

33,182

 

Sales and marketing

 

 

57,904

 

 

 

41,193

 

 

 

155,284

 

 

 

115,531

 

General and administrative

 

 

14,110

 

 

 

11,435

 

 

 

41,730

 

 

 

31,674

 

Total operating expenses

 

 

90,842

 

 

 

64,728

 

 

 

245,101

 

 

 

180,387

 

Loss from operations

 

 

(12,126

)

 

 

(9,951

)

 

 

(30,703

)

 

 

(30,842

)

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

1,274

 

 

 

224

 

 

 

2,311

 

 

 

604

 

Interest expense

 

 

(5,063

)

 

 

(97

)

 

 

(7,947

)

 

 

(277

)

Other expense

 

 

(26

)

 

 

(365

)

 

 

(251

)

 

 

(900

)

Total other expense

 

 

(3,815

)

 

 

(238

)

 

 

(5,887

)

 

 

(573

)

Loss before income tax benefit (expense)

 

 

(15,941

)

 

 

(10,189

)

 

 

(36,590

)

 

 

(31,415

)

Income tax benefit (expense)

 

 

5,358

 

 

 

(326

)

 

 

8,411

 

 

 

(318

)

Net loss

 

$

(10,583

)

 

$

(10,515

)

 

$

(28,179

)

 

$

(31,733

)

Net loss per share, basic and diluted

 

$

(0.29

)

 

$

(0.30

)

 

$

(0.77

)

 

$

(0.91

)

Weighted average common shares used in computing basic

   and diluted net loss per share:

 

 

37,047

 

 

 

35,393

 

 

 

36,639

 

 

 

35,038

 

 

The accompanying notes are an integral part of the consolidated financial statements.

5


 

HubSpot, Inc.

Unaudited Consolidated Statements of Comprehensive Loss

(in thousands)

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net loss

 

$

(10,583

)

 

$

(10,515

)

 

$

(28,179

)

 

$

(31,733

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

319

 

 

 

(21

)

 

 

883

 

 

 

109

 

Changes in unrealized gain (loss) on investments, net of income taxes of $34 and $56 for the three and nine months ended September 30, 2017 and ($36) and $136 for the three and nine months ended September 30, 2016

 

 

32

 

 

 

(108

)

 

 

64

 

 

 

163

 

Comprehensive loss

 

$

(10,232

)

 

$

(10,644

)

 

$

(27,232

)

 

$

(31,461

)

 

The accompanying notes are an integral part of the consolidated financial statements.

6


 

HubSpot, Inc.

Unaudited Consolidated Statements of Stockholders’ Equity

(in thousands)

 

 

Common

Stock, $0.001

Par Value

 

 

Additional

Paid-In

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

Equity

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

(Deficit)

 

 

Total

 

Balances at December 31, 2016

 

 

35,784

 

 

$

36

 

 

$

365,444

 

 

$

(864

)

 

$

(245,916

)

 

$

118,700

 

Issuance of common stock under stock

   plans, net of shares withheld for

   employee taxes

 

 

1,398

 

 

 

 

 

 

7,699

 

 

 

 

 

 

 

 

 

7,699

 

Stock-based compensation

 

 

 

 

 

 

 

 

35,656

 

 

 

 

 

 

 

 

 

35,656

 

Cumulative adjustment from adoption of stock compensation standard

 

 

 

 

 

 

 

 

452

 

 

 

 

 

 

 

(452

)

 

 

 

Cumulative translation adjustment

 

 

 

 

 

 

 

 

 

 

 

883

 

 

 

 

 

 

883

 

Unrealized gain on investments, net of income taxes of $56

 

 

 

 

 

 

 

 

 

 

 

64

 

 

 

 

 

 

64

 

Equity component of 2022 Notes (Note 7)

 

 

 

 

 

 

 

 

73,713

 

 

 

 

 

 

 

 

 

73,713

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(28,179

)

 

 

(28,179

)

Balances at September 30, 2017

 

 

37,182

 

 

$

36

 

 

$

482,964

 

 

$

83

 

 

$

(274,547

)

 

$

208,536

 

 

The accompanying notes are an integral part of the consolidated financial statements.

7


 

HubSpot, Inc.

Unaudited Consolidated Statements of Cash Flow

(in thousands)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Operating Activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(28,179

)

 

$

(31,733

)

Adjustments to reconcile net loss to net cash and cash equivalents provided

   by operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

11,123

 

 

 

7,992

 

Stock-based compensation

 

 

34,419

 

 

 

23,401

 

Benefit for deferred income taxes

 

 

(9,125

)

 

 

(165

)

Amortization of debt discount and issuance costs

 

 

7,482

 

 

 

 

(Accretion) amortization of bond discount premium

 

 

(747

)

 

 

547

 

Noncash rent expense

 

 

4,343

 

 

 

2,693

 

Unrealized currency translation

 

 

(348

)

 

 

(146

)

Changes in assets and liabilities, net of acquisition

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(8,510

)

 

 

(5,140

)

Prepaid expenses and other assets

 

 

(5,363

)

 

 

(3,386

)

Deferred commission expense

 

 

(2,011

)

 

 

(80

)

Accounts payable

 

 

1,556

 

 

 

733

 

Accrued expenses

 

 

6,838

 

 

 

3,737

 

Deferred rent

 

 

3,581

 

 

 

(75

)

Deferred revenue

 

 

20,561

 

 

 

18,715

 

Net cash and cash equivalents provided by operating activities

 

 

35,620

 

 

 

17,093

 

Investing Activities:

 

 

 

 

 

 

 

 

Purchases of investments

 

 

(572,636

)

 

 

(44,323

)

Maturities of investments

 

 

313,060

 

 

 

43,388

 

Purchases of property and equipment

 

 

(15,089

)

 

 

(13,350

)

Capitalization of software development costs

 

 

(5,306

)

 

 

(4,173

)

Acquisition of a business and purchase of technology

 

 

(9,415

)

 

 

 

Purchases of strategic investments

 

 

(2,800

)

 

 

 

Restricted cash

 

 

(4,587

)

 

 

 

Net cash and cash equivalents used in investing activities

 

 

(296,773

)

 

 

(18,458

)

Financing Activities:

 

 

 

 

 

 

 

 

Employee taxes paid related to the net share settlement of stock-based awards

 

 

(3,154

)

 

 

(1,820

)

Proceeds related to the issuance of common stock under stock plans

 

 

10,409

 

 

 

9,145

 

Repayments of capital lease obligations

 

 

(787

)

 

 

(528

)

Proceeds of the issuance of convertible notes, net of issuance costs paid of $10,767

 

 

389,233

 

 

 

 

Purchase of note hedge related to convertible notes

 

 

(78,920

)

 

 

 

Proceeds from the issuance of warrants related to convertible notes, net of issuance costs paid of $200

 

 

58,880

 

 

 

 

Net cash and cash equivalents provided by financing activities

 

 

375,661

 

 

 

6,797

 

Effect of exchange rate changes on cash and cash equivalents

 

 

2,533

 

 

 

427

 

Net increase in cash and cash equivalents

 

 

117,041

 

 

 

5,859

 

Cash and cash equivalents, beginning of period

 

 

59,702

 

 

 

55,580

 

Cash and cash equivalents, end of period

 

$

176,743

 

 

$

61,439

 

Supplemental cash flow disclosure:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

201

 

 

$

166

 

Cash paid for income taxes

 

$

436

 

 

$

623

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment acquired under capital lease

 

$

1,053

 

 

$

720

 

Capital expenditures incurred but not yet paid

 

$

836

 

 

$

1,259

 

Asset retirement obligations

 

$

403

 

 

$

626

 

The accompanying notes are an integral part of the consolidated financial statements.

8


 

HubSpot, Inc.

Notes to Unaudited Consolidated Financial Statements

 

 

1. Organization and Operations

HubSpot, Inc. (the “Company”) was formed as a limited liability company in Delaware on April 4, 2005. The Company converted to a Delaware corporation on June 7, 2007. The Company provides a cloud-based inbound marketing and sales platform which features integrated applications to help businesses attract visitors to their websites, convert visitors into leads, close leads into customers and delight customers so they become promoters of those businesses. These integrated applications include social media, search engine optimization, blogging, website content management, marketing automation, email, CRM, analytics, and reporting.

The Company is headquartered in Cambridge, Massachusetts, and has wholly-owned subsidiaries in Dublin, Ireland, which commenced operations in January 2013, in Sydney, Australia, which commenced operations in August 2014, in Singapore, which commenced operations in October 2015, in Tokyo, Japan, which commenced operations in July 2016, and in Berlin, Germany, which commenced operations in July 2017.  

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) applicable to interim periods, under the rules and regulations of the United States Securities and Exchange Commission (“SEC”). In the opinion of management, the Company has prepared the accompanying unaudited consolidated financial statements on a basis substantially consistent with the audited consolidated financial statements of the Company as of and for the year ended December 31, 2016, and these consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results of the interim periods presented. All intercompany balances and transactions have been eliminated in consolidation.   

The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2017. The year-end balance sheet data was derived from audited financial statements, but this Form 10-Q does not include all disclosures required under GAAP. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted under the rules and regulations of the SEC.

These interim financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 16, 2017. There have been no changes in the Company’s significant accounting policies from those that were disclosed in the Company’s Annual Report on Form 10-K that have had a material impact on our consolidated financial statements and related notes, except the adoption of updated guidance related to certain aspects of share-based payments to employee described within the Recent Accounting Pronouncements below.

Recent Accounting Pronouncements

Recent accounting standards not included below are not expected to have a material impact on our consolidated financial position and results of operations.

The Company adopted updated guidance related to certain aspects of share-based payments to employees. The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid-in capital pools. As a result of the adoption, we recorded an increase to deferred tax assets with a corresponding increase to the valuation allowance of $30.4 million to recognize net operating loss carryforwards attributable to excess tax benefits on stock compensation that had not been previously recognized as additional paid-in capital. In addition, the Company changed its policy election to account for forfeitures as they occur rather than on an estimated basis. The change in the policy election related to forfeitures resulted in the Company reclassifying $452 thousand from additional paid-in capital to accumulative deficit for the net cumulative-effect adjustment in stock compensation expense related to prior periods.

 

In January 2017, the FASB issued guidance, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are not a business and clarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output to be considered a business. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period, and early adoption is permitted.  The Company adopted this standard in the third quarter of 2017 and the adoption of this standard did not have a material impact on the consolidated financial statements.

9


 

 

In January 2017, the Financial Accounting Standards Board (“FASB”) issued guidance simplifying the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. Under current guidance, Step 2 of the goodwill impairment test requires entities to calculate the implied fair value of goodwill in the same manner as the amount of goodwill recognized in a business combination by assigning the fair value of a reporting unit to all of the assets and liabilities of the reporting unit. The carrying value in excess of the implied fair value is recognized as goodwill impairment. Under the new standard, goodwill impairment is recognized based on Step 1 of the current guidance, which calculates the carrying value in excess of the reporting unit’s fair value. The new standard is effective beginning in January 2020, with early adoption permitted. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

In November 2016, the FASB issued guidance related to the presentation of restricted cash within the statement of cash flows. The guidance requires entities to show the changes in cash, cash equivalents, and restricted cash in the statement of cash flows. Entities will no longer present transfers between cash and cash equivalents and restricted cash in the statement of cash flows. As of September 30, 2017, we had $5.1 million in restricted cash. The new standard is effective beginning in the first quarter of 2018, with early adoption permitted. The Company is currently evaluating the impact of this guidance on the consolidated financial statements.

In February 2016, the FASB issued guidance that requires lessees to recognize most leases on their balance sheets but record expenses on their income statements in a manner similar to current accounting. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The guidance is effective in 2019 with early adoption permitted. The Company is currently evaluating the impact of this guidance on the consolidated financial statements.

 

In May 2014, the FASB issued updated guidance and disclosure requirements for recognizing revenue. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also provides guidance on the recognition of costs related to obtaining customer contracts.  In July 2015, the FASB approved the deferral of the new standard's effective date by one year. The new standard now is effective for annual reporting periods beginning January 1, 2018. The FASB will permit companies to adopt the new standard early, but not before the original effective date of January 1, 2017. The Company will adopt the standard on January 1, 2018, and currently anticipates adopting the standard using the modified retrospective method, which would result in a cumulative effect adjustment as of the date of adoption. The Company has established a team that is continuing to assess potential impacts of the standard on the timing of revenue recognition and accounting for deferred commission balances and whether the adoption will have a material impact on the consolidated financial statements and footnote disclosures. The Company has determined that there will be a change to the period over which sales commissions will be amortized to incorporate an estimated customer life, in addition to the initial contract period, and a change to the scope of capitalized sales commissions based on the definition of incremental costs of obtaining a contract. This will result in a higher capitalized commissions balance upon adoption. The amortization period is also expected to be longer than it currently is, which will reduce the expense in any one period as compared to today. In addition, there will be a change in relation to the timing of revenue recognition for certain sales contracts, where free or discounted services are bundled with our subscription offering due primarily to the removal of the current limitation on contingent revenue. This will accelerate revenue recognition on these contracts when these services are provided up front as compared to today. These changes are being evaluated to determine the potential impact to our financial statements and disclosures.

 

 

2. Net Loss per Share

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, options to purchase common stock, restricted stock units (“RSUs”), Employee Stock Purchase Plan (“ESPP”), and the Conversion Option of the 2022 Notes (Note 7) are considered to be potential common stock equivalents.

10


 

A reconciliation of the denominator used in the calculation of basic and diluted net loss per share is as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

 

2017

 

 

 

2016

 

 

 

2017

 

 

 

2016

 

Net loss

 

$

(10,583

)

 

$

(10,515

)

 

$

(28,179

)

 

$

(31,733

)

Weighted-average common shares outstanding — basic

 

 

37,047

 

 

 

35,393

 

 

 

36,639

 

 

 

35,038

 

Dilutive effect of share equivalents resulting from stock options, RSUs, ESPP and the Conversion Option of the 2022 Notes

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares,

   outstanding — diluted

 

 

37,047

 

 

 

35,393

 

 

 

36,639

 

 

 

35,038

 

Net loss per share, basic and diluted

 

$

(0.29

)

 

$

(0.30

)

 

$

(0.77

)

 

$

(0.91

)

 

Additionally, since the Company incurred net losses for each of the periods presented, diluted net loss per share is the same as basic net loss per share. The Company’s outstanding stock options, RSUs, ESPP, and Conversion Option of the 2022 Notes were not included in the calculation of diluted net loss per share as the effect would be anti-dilutive. The following table contains all potentially dilutive common stock equivalents.

 

 

As of September 30,

 

 

 

 

2017

 

 

 

2016

 

 

 

(in thousands)

 

Options to purchase common shares

 

 

2,398

 

 

 

2,818

 

RSUs

 

 

2,173

 

 

 

2,364

 

ESPP

 

 

3

 

 

 

5

 

 

The Company expects to settle the principal amount of the 2022 Notes in cash, and therefore, the Company uses the treasury stock method for calculating any potential dilutive effect of the Conversion Option on diluted net income per share, if applicable. The Conversion Option will have a dilutive impact on net income per share of common stock when the average market price of the Company’s common stock for a given period exceeds the conversion price of the 2022 Notes of $94.77 per share.  During the three and nine months ended September 30, 2017, the Company's weighted average common stock price was below the conversion price of the 2022 Notes.

 

3. Fair Value of Financial Instruments

The Company measures certain financial assets at fair value. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows:

 

Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 — Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

11


 

The following table details the fair value measurements within the fair value hierarchy of the Company’s financial assets and liabilities at September 30, 2017 and December 31, 2016.

 

 

 

September 30, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(in thousands)

 

Cash equivalents and investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

26,230

 

 

$

 

 

$

 

 

$

26,230

 

Commercial paper

 

 

 

 

 

4,767

 

 

 

 

 

 

4,767

 

Corporate bonds

 

 

 

 

 

77,359

 

 

 

 

 

 

77,359

 

U.S. government agency obligations

 

 

 

 

 

8,990

 

 

 

 

 

 

8,990

 

U.S. Treasury securities

 

 

 

 

 

368,422

 

 

 

 

 

 

368,422

 

Restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

 

 

 

5,106

 

 

 

 

 

 

5,106

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Strategic investments

 

 

 

 

 

 

 

 

2,800

 

 

 

2,800

 

Total

 

$

26,230

 

 

$

464,644

 

 

$

2,800

 

 

$

493,674

 

 

 

 

 

 

 

December 31, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(in thousands)

 

Cash equivalents and investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

32,260

 

 

$

 

 

$

 

 

$

32,260

 

Commercial paper

 

 

 

 

 

12,439

 

 

 

 

 

 

12,439

 

Corporate bonds

 

 

 

 

 

66,947

 

 

 

 

 

 

66,947

 

U.S. government agency obligations

 

 

 

 

 

10,980

 

 

 

 

 

 

10,980

 

Total

 

$

32,260

 

 

$

90,366

 

 

$

 

 

$

122,626

 

 

The Company considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents. The fair value of the Company’s investments in certain money market funds is their face value and such instruments are classified as Level 1 and are included in cash and cash equivalents on the consolidated balance sheets. At September 30, 2017 and December 31, 2016, our Level 2 securities were priced by pricing vendors. These pricing vendors utilize the most recent observable market information in pricing these securities or, if specific prices are not available for these securities, use other observable inputs like market transactions involving identical or comparable securities.

 

As of September 30, 2017, the fair value of the 2022 Notes (Note 7) was $443.6 million.  The fair value was determined on the basis of market prices observable for similar instruments and is considered Level 2 in the fair value hierarchy.

 

For certain other financial instruments, including accounts receivable, accounts payable, capital leases and other current liabilities, the carrying amounts approximate their fair value due to the relatively short maturity of these balances.

 

Restricted cash is comprised of certificates of deposit related to landlord guarantees for our leased facilities. These restricted cash balances have been excluded from our cash and cash equivalents balance on our consolidated balance sheets.

 

Strategic investments consist of non-controlling equity investments in privately held companies. These investments without readily determinable fair values for which the Company does not have the ability to exercise significant influence are accounted for using the cost method of accounting. Under the cost method of accounting, the non-marketable securities are carried at cost and are adjusted only for other-than-temporary impairments, certain distributions and additional investments. These investments are valued using significant unobservable inputs or data in an inactive market and the valuation requires the Company's judgment due to the absence of market prices and inherent lack of liquidity. The estimated fair value is based on quantitative and qualitative factors including, but not limited to, subsequent financing activities by the investee and projected discounted cash flows. Fair value is not estimated for non-marketable equity securities if there are no identified events or changes in circumstances that may have an effect on the fair value of the investment.

12


 

The following tables summarize the composition of our short- and long-term investments at September 30, 2017 and December 31, 2016.

 

 

 

September 30, 2017

 

 

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Aggregate

Fair Value

 

 

 

(in thousands)

 

Commercial paper

 

$

4,770

 

 

$

 

 

$

(3

)

 

$

4,767

 

Corporate bonds

 

 

77,460

 

 

 

2

 

 

 

(103

)

 

 

77,359

 

U.S. government agency obligations

 

 

8,999

 

 

 

 

 

 

(9

)

 

 

8,990

 

U.S. Treasury securities

 

 

259,663

 

 

 

26

 

 

 

(6

)

 

 

259,683

 

Total

 

$

350,892

 

 

$

28

 

 

$

(121

)

 

$

350,799

 

 

 

 

 

December 31, 2016

 

 

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Aggregate

Fair Value

 

 

 

(in thousands)

 

Commercial paper

 

$

12,446

 

 

$

 

 

$

(7

)

 

$

12,439

 

Corporate bonds

 

 

67,126

 

 

 

 

 

 

(179

)

 

 

66,947

 

U.S. government agency obligations

 

 

10,998

 

 

 

 

 

 

(18

)

 

 

10,980

 

Total

 

$

90,570

 

 

$

 

 

$

(204

)

 

$

90,366

 

 

For all of our securities for which the amortized cost basis was greater than the fair value at September 30, 2017, the Company has concluded that there is no plan to sell the security nor is it more likely than not that the Company would be required to sell the security before its anticipated recovery. In making the determination as to whether the unrealized loss is other-than-temporary, the Company considered the length of time and extent the investment has been in an unrealized loss position, the financial condition and near-term prospects of the issuers, the issuers’ credit rating and the time to maturity.

Contractual Maturities

The contractual maturities of short-term and long-term investments held at September 30, 2017 and December 31, 2016 are as follows:

 

 

 

September 30, 2017

 

 

December 31, 2016