10-Q 1 zen-10q_20150331.htm 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the quarterly period ended March 31, 2015

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: 001-36456

 

ZENDESK, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

26-4411091

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1019 Market Street

San Francisco, California 94103

(Address of principal executive offices)

415.418.7506

(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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

 

Non-accelerated filer

 

x  (do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

As of April 30, 2015, there were 86,093,863 shares of the registrant’s common stock outstanding.

 

 

 

 

 


 

ZENDESK, INC.

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION

 

Item 1

Financial Statements (unaudited):

4

 

 

Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014

4

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2015 and 2014

5

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2015 and 2014

6

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014

7

 

 

Notes to Condensed Consolidated Financial Statements

8

 

Item 2

 

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

17

 

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

27

 

Item 4

 

Controls and Procedures

28

 

PART II — OTHER INFORMATION 

 

 

Item 1

Legal Proceedings

28

 

Item 1A

Risk Factors

28

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

51

 

Item 6

Exhibits

52

 

SIGNATURES

52

 

 

 

2


 

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, which 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,” “will,” “should,” “might,” “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 revenue, cost of revenue, gross profit, operating expenses, ability to generate positive cash flow, ability to improve our gross margin, and ability to achieve and maintain profitability;

the sufficiency of our cash and cash equivalents, and marketable securities to meet our liquidity needs;

our ability to attract and retain customers to use our customer service platform and live chat software, and to optimize the pricing for our customer service platform and live chat software;

the evolution of technology affecting our platform, services, and markets;

our ability to innovate and provide a superior customer experience;

our ability to successfully expand in our existing markets and into new markets;

the attraction and retention of qualified employees and key personnel;

our ability to effectively manage our growth and future expenses;

our ability to successfully offer our live chat software as a standalone service or further integrate it with our customer service platform;

our ability to maintain, protect, and enhance our intellectual property;

our ability to comply with modified or new laws and regulations applying to our business, including privacy and data security regulations;

worldwide economic conditions and their impact on information technology spending;

our ability to securely maintain customer data; and

our ability to maintain and enhance our brand.

We caution you that the foregoing list does 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, operating results, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “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. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will 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

ZENDESK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value and shares)

 

 

 

March 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

264,222

 

 

$

80,265

 

Marketable securities

 

 

44,855

 

 

 

42,204

 

Accounts receivable, net of allowance for doubtful accounts of $475 and $264 as of March 31, 2015 and December 31, 2014, respectively

 

 

12,001

 

 

 

11,523

 

Prepaid expenses and other current assets

 

 

6,047

 

 

 

5,013

 

Total current assets

 

 

327,125

 

 

 

139,005

 

Marketable securities, noncurrent

 

 

7,501

 

 

 

9,205

 

Property and equipment, net

 

 

43,351

 

 

 

41,895

 

Goodwill and intangible assets, net

 

 

13,255

 

 

 

14,152

 

Other assets

 

 

1,911

 

 

 

1,531

 

Total assets

 

$

393,143

 

 

$

205,788

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,778

 

 

$

4,763

 

Accrued liabilities

 

 

8,893

 

 

 

7,841

 

Accrued compensation and related benefits

 

 

11,370

 

 

 

11,738

 

Deferred revenue

 

 

54,891

 

 

 

50,756

 

Current portion of credit facility

 

 

3,060

 

 

 

3,041

 

Current portion of capital leases

 

 

 

 

 

10

 

Total current liabilities

 

 

81,992

 

 

 

78,149

 

Deferred revenue, noncurrent

 

 

629

 

 

 

823

 

Credit facility, noncurrent

 

 

3,139

 

 

 

3,911

 

Other liabilities

 

 

9,114

 

 

 

9,199

 

Total liabilities

 

 

94,874

 

 

 

92,082

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, par value $0.01 per share: 10.0 million shares authorized as of March 31, 2015 and December 31, 2014; no shares issued and outstanding as of March 31, 2015 and December 31, 2014

 

 

 

 

 

 

Common stock, par value $0.01 per share: 400.0 million shares authorized; 86.4 million and 76.1 million shares issued; 85.9 million and 75.6 million shares outstanding as of March 31, 2015 and December 31, 2014, respectively (including 0.5 million and 0.6 million shares subject to repurchase, legally issued and outstanding, as of March 31, 2015 and December 31, 2014, respectively)

 

 

859

 

 

 

755

 

Additional paid-in capital

 

 

450,027

 

 

 

246,000

 

Accumulated other comprehensive loss

 

 

(928

)

 

 

(528

)

Accumulated deficit

 

 

(151,037

)

 

 

(131,869

)

Treasury stock at cost (0.5 million shares as of March 31, 2015 and December 31, 2014)

 

 

(652

)

 

 

(652

)

Total stockholders’ equity

 

 

298,269

 

 

 

113,706

 

Total liabilities and stockholders’ equity

 

$

393,143

 

 

$

205,788

 

See Notes to Condensed Consolidated Financial Statements.

 

4


 

ZENDESK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

42,234

 

 

$

25,092

 

Cost of revenue (1)

 

 

14,290

 

 

 

8,995

 

Gross profit

 

 

27,944

 

 

 

16,097

 

Operating expenses (1):

 

 

 

 

 

 

 

 

Research and development

 

 

13,259

 

 

 

5,178

 

Sales and marketing

 

 

23,403

 

 

 

14,287

 

General and administrative

 

 

10,127

 

 

 

6,384

 

Total operating expenses

 

 

46,789

 

 

 

25,849

 

Operating loss

 

 

(18,845

)

 

 

(9,752

)

Other expense, net

 

 

(230

)

 

 

(458

)

Loss before provision for income taxes

 

 

(19,075

)

 

 

(10,210

)

Provision for income taxes

 

 

93

 

 

 

49

 

Net loss

 

 

(19,168

)

 

 

(10,259

)

Accretion of redeemable convertible preferred stock

 

 

 

 

 

(12

)

Net loss attributable to common stockholders

 

$

(19,168

)

 

$

(10,271

)

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common stockholders,

   basic and diluted

 

$

(0.25

)

 

$

(0.45

)

Weighted-average shares used to compute net loss per

   share attributable to common stockholders, basic and

   diluted

 

 

76,338

 

 

 

22,762

 

(1) Includes share-based compensation expense as follows:

 

 

Three Months Ended

March 31,

 

 

 

2015

 

 

2014

 

Cost of revenue

 

$

891

 

 

$

90

 

Research and development

 

 

4,064

 

 

 

310

 

Sales and marketing

 

 

2,432

 

 

 

490

 

General and administrative

 

 

2,842

 

 

 

934

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

5


 

ZENDESK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(19,168

)

 

$

(10,259

)

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

Net change in unrealized gain on available-for-sale investments

 

 

40

 

 

 

(2

)

Foreign currency translation loss

 

 

(440

)

 

 

198

 

Comprehensive loss

 

$

(19,568

)

 

$

(10,063

)

See Notes to Condensed Consolidated Financial Statements.

 

 

 

6


 

ZENDESK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 (Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

 

2014

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(19,168

)

 

$

(10,259

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4,223

 

 

 

1,808

 

Share-based compensation

 

 

10,229

 

 

 

1,824

 

Other

 

 

172

 

 

 

136

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(635

)

 

 

(1,175

)

Prepaid expenses and other current assets

 

 

(793

)

 

 

(853

)

Other assets and liabilities

 

 

(638

)

 

 

751

 

Accounts payable

 

 

(1,012

)

 

 

(777

)

Accrued liabilities

 

 

1,323

 

 

 

1,224

 

Accrued compensation and related benefits

 

 

(2,837

)

 

 

1,618

 

Deferred revenue

 

 

3,941

 

 

 

4,108

 

Net cash used in operating activities

 

 

(5,195

)

 

 

(1,595

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(3,356

)

 

 

(3,580

)

Internal-use software development costs

 

 

(1,317

)

 

 

(1,801

)

Purchases of marketable securities

 

 

(14,801

)

 

 

 

Proceeds from maturities of marketable securities

 

 

7,520

 

 

 

1,400

 

Proceeds from sale of marketable securities

 

 

6,141

 

 

 

 

Cash paid for the acquisition of Zopim, net of cash acquired

 

 

(548

)

 

 

(1,784

)

Net cash used in investing activities

 

 

(6,361

)

 

 

(5,765

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from follow-on public offering, net of issuance costs

 

 

190,794

 

 

 

 

Proceeds from exercise of employee stock options

 

 

2,938

 

 

 

2,393

 

Taxes paid related to net share settlement of equity awards

 

 

(82

)

 

 

 

Proceeds from issuance of common stock from employee stock purchase plan

 

 

2,468

 

 

 

 

Proceeds from issuance of debt

 

 

 

 

 

3,940

 

Principal payments on debt

 

 

(753

)

 

 

(1,762

)

Principal payments on capital lease obligations

 

 

(10

)

 

 

(89

)

Net cash provided by financing activities

 

 

195,355

 

 

 

4,482

 

Effect of exchange rate changes on cash and cash equivalents

 

 

158

 

 

 

8

 

Net increase (decrease) in cash and cash equivalents

 

 

183,957

 

 

 

(2,870

)

Cash and cash equivalents at the beginning of period

 

 

80,265

 

 

 

53,725

 

Cash and cash equivalents at the end of period

 

$

264,222

 

 

$

50,855

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow data:

 

 

 

 

 

 

 

 

Cash paid for interest and income taxes

 

$

122

 

 

$

467

 

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Issuance of common stock for the acquisition of Zopim

 

$

 

 

$

10,982

 

Vesting of early exercised stock options

 

$

311

 

 

$

412

 

Purchases of property and equipment in accounts payable and accrued expenses

 

$

14

 

 

$

3,495

 

Property and equipment acquired through tenant improvement allowances

 

$

174

 

 

$

584

 

Share-based compensation capitalized in internal-use software development costs

 

$

545

 

 

$

49

 

Follow-on offering related costs not yet paid for

 

$

605

 

 

$

 

See Notes to Condensed Consolidated Financial Statements.

 

 

7


 

ZENDESK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Overview and Basis of Presentation

Company and Background

Zendesk was founded in Denmark in 2007 and reincorporated in Delaware in April 2009.

Our mission is to help organizations and their customers build better relationships. We are a software development company that provides a software-as-a-service, or SaaS, customer service platform. Our platform helps organizations engage with people in new ways that foster long-term customer loyalty and satisfaction. We empower organizations to better answer customers’ questions, and to solve their problems through the channels that people use every day when seeking help, such as email, chat, voice, social media and websites. Our customer service platform also helps people find answers on their own through knowledge bases and communities, capitalizing on the increasing customer preference for self-service. Our customer engagement capabilities allow organizations to proactively serve their customers, reaching out to those who may need help and soliciting feedback about their experience. The openness of our customer service platform makes it easy for organizations to integrate with their other applications. Our customer service platform consolidates the data from customer interactions and provides organizations with powerful analytics and performance benchmarking.

References to Zendesk, the “Company”, “our”, or “we” in these notes refer to Zendesk, Inc. and its subsidiaries on a consolidated basis.

Basis of Presentation

These unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, or GAAP, and applicable rules and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2014, filed on February 17, 2015. There have been no changes to our significant accounting policies described in the Annual Report on Form 10-K that have had a material impact on our condensed consolidated financial statements and related notes.

The consolidated balance sheet as of December 31, 2014 included herein was derived from the audited financial statements as of that date. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, our comprehensive loss and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2015.

Follow-On Public Offering

 

In March 2015, we completed a follow-on public offering, in which we issued 8.8 million shares of our common stock at a public offering price of $22.75 per share. We received net proceeds of $190.1 million after deducting underwriting discounts and commissions of $8.7 million and other offering expenses of $0.9 million.

Initial Public Offering and Share-based Compensation

In May 2014, we completed our initial public offering, or IPO, in which we issued and sold 12.8 million shares of common stock at a public offering price of $9.00 per share. We received net proceeds of $103.1 million after deducting underwriting discounts and commissions of $8.1 million and other offering expenses of $3.8 million. Upon the closing of the IPO, all shares of our then-outstanding redeemable convertible preferred stock automatically converted into an aggregate of 34.3 million shares of common stock.

Share-based compensation expense to employees is measured based on the fair value of the awards on the grant date and recognized in our consolidated statements of operations over the period during which the employee is required to perform services in exchange for the award (generally the vesting period of the award). We estimate the fair value of stock options granted using the Black-Scholes option valuation model. We measure the fair value of restricted stock units, or RSUs, based on the fair value of the underlying shares on the date of grant. Compensation expense for awards with only service conditions is recognized over the vesting period of the applicable award using the straight-line method.  Compensation expense for awards with both service and performance conditions is recognized over the longer period required to achieve both conditions using the accelerated attribution method.

8


 

All RSUs and certain options granted to employees prior to the IPO vest upon the satisfaction of both a service condition and a performance condition. These RSUs and stock options with both a service condition and performance condition are collectively referred to as “Performance Awards” in the following discussion. The service condition for substantially all of these awards is satisfied over four years. The performance condition was satisfied upon the occurrence of a qualifying liquidity event which occurred upon the effectiveness of the registration statement related to our IPO. No share-based compensation expense was recognized for the Performance Awards prior to the IPO as the performance condition had not been deemed probable to have been met. Upon the satisfaction of the performance condition, we recognized a cumulative share-based compensation expense for the portion of the Performance Awards that had met the service condition. The remaining unrecognized share-based compensation expense related to the Performance Awards are being recorded over the remaining requisite service period using the accelerated attribution method, net of estimated forfeitures.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reported periods.

Significant items subject to such estimates and assumptions include the fair value of our common stock (through the date of our IPO) and share-based awards, fair value of acquired intangible assets, goodwill, unrecognized tax benefits, useful lives of intangible assets and property and equipment, and the capitalization and estimated useful life of our capitalized internal-use software.

These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ from those estimates.

Concentrations of Risk

At March 31, 2015, there were no customers that represented more than 10% of our accounts receivable balance.  At March 31, 2014, one customer represented 14% and a second customer represented 12% of our total accounts receivable balance.  There were no customers that individually exceeded 10% of our revenue during the three months ended March 31, 2015 or 2014.

Recently Issued and Adopted Accounting Pronouncements

On May 28, 2014, the FASB issued ASU 2014-09 regarding ASC Topic 606 “Revenue from Contracts with Customers.” This ASU provides principles for recognizing revenue to which an entity expects to be entitled for the transfer of promised goods or services to customers. This ASU is expected to be effective no earlier than our fiscal year beginning January 1, 2017. Early adoption is not permitted.  We are currently evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.

 

 

Note 2. Acquisition

On March 21, 2014, we completed the acquisition of Zopim Technologies Pte Ltd., or Zopim, a software development company that provides a SaaS live chat service. As of December 31, 2014, we finalized our purchase accounting after adjustments were made to the preliminary purchase price allocation. The total adjusted acquisition date fair value of consideration transferred was $15.8 million ($4.9 million of cash and $10.9 million of our common stock), which included $1.1 million of cash and $2.4 million of common stock consideration that was held back between 12 and 18 months as partial security for standard indemnification obligations.  In the three months ended March 31, 2015, we released $0.5 million of cash and $1.2 million of common stock consideration that was held back, based on the fair value of our common stock on the date of the acquisition.  The total adjusted purchase price was allocated to assets acquired and liabilities assumed as set forth below (in thousands). The excess of the purchase price over the net assets acquired was recorded as goodwill. Goodwill generated from the acquisition is attributable to expected synergies from future growth and potential future monetization opportunities, and is not deductible for tax purpose.

 

Net tangible liabilities assumed

 

$

(385

)

Intangible assets

 

 

6,560

 

Goodwill

 

 

9,594

 

Total purchase price

 

$

15,769

 

 

9


 

In connection with the acquisition, we also established a retention plan pursuant to which we issued RSUs for 0.9 million shares of our common stock, which vest in three annual installments from the date of acquisition. In addition, we agreed to pay cash in an aggregate amount of $3.0 million in two annual installments from the date of acquisition to Zopim employees in connection with their continued employment, which is recorded as compensation expense over the associated service periods of such employees.  In the three months ended March 31, 2015, RSUs for 0.3 million shares of our common stock became vested pursuant to the terms of the retention plan, and we paid the first installment of the cash retention bonus in the amount of $1.5 million.

 

Pro forma revenue and results of operations have not been presented because the historical results of Zopim were not material to our consolidated financial statements in any period presented.

 

 

Note 3. Fair Value Measurements

The following tables present information about our financial assets measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014 based on the three-tier fair value hierarchy (in thousands):

 

 

 

Fair Value Measurement at

 

 

 

March 31, 2015

 

 

 

Level 1

 

 

Level 2

 

 

Total

 

Description

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

 

$

 

 

$

38,097

 

 

$

38,097

 

Money market funds

 

 

20,491

 

 

 

 

 

 

20,491

 

Commercial paper

 

 

 

 

 

7,991

 

 

 

7,991

 

Asset-backed securities

 

 

 

 

 

5,069

 

 

 

5,069

 

U.S. treasury securities

 

 

 

 

 

1,199

 

 

 

1,199

 

Total

 

$

20,491

 

 

$

52,356

 

 

$

72,847

 

Included in cash and cash equivalents

 

 

 

 

 

 

 

 

 

$

20,491

 

Included in marketable securities

 

 

 

 

 

 

 

 

 

$

52,356

 

 

 

 

 

Fair Value Measurement at

 

 

 

December 31, 2014

 

 

 

Level 1

 

 

Level 2

 

 

Total

 

Description

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

 

$

 

 

$

40,345

 

 

$

40,345

 

Money market funds

 

 

21,382

 

 

 

 

 

 

21,382

 

Asset-backed securities

 

 

 

 

 

5,080

 

 

 

5,080

 

Commercial paper

 

 

 

 

 

3,993

 

 

 

3,993

 

U.S. treasury securities

 

 

 

 

 

1,991

 

 

 

1,991

 

Total

 

$

21,382

 

 

$

51,409

 

 

$

72,791

 

Included in cash and cash equivalents

 

 

 

 

 

 

 

 

 

$

21,382

 

Included in marketable securities

 

 

 

 

 

 

 

 

 

$

51,409

 

 

Gross unrealized gains or losses for cash equivalents and available-for-sale marketable securities as of March 31, 2015 and December 31, 2014 were not material. As of March 31, 2015 and December 31, 2014, there were no securities that were in an unrealized loss position for more than 12 months.

The following table classifies our available-for-sale marketable securities by contractual maturities as of March 31, 2015 and December 31, 2014 (in thousands):

 

 

 

March 31,

2015

 

 

December 31,

2014

 

Due in one year

 

$

44,855

 

 

$

42,204

 

Due in one to five years

 

 

7,501

 

 

 

9,205

 

Total

 

$

52,356

 

 

$

51,409

 

 

10


 

For certain other financial instruments, including accounts receivable, accounts payable and other current liabilities, the carrying amounts approximate their fair value due to the relatively short maturity of these balances. Based on borrowing rates available to us for loans with similar terms and maturities, the carrying value of borrowings approximates fair value or Level 2 within the fair value hierarchy.

There were no transfers between fair value measurement levels during the three months ended March 31, 2015.

Note 4. Property and Equipment

Property and equipment, net consists of the following (in thousands):  

 

 

 

March 31,

2015

 

 

December 31,

2014

 

Capitalized internal-use software

 

$

23,305

 

 

$

18,541

 

Furniture and fixtures

 

 

4,619

 

 

 

4,524

 

Hosting equipment

 

 

16,642

 

 

 

14,085

 

Computer equipment and software

 

 

4,335

 

 

 

4,310

 

Leasehold improvements

 

 

15,439

 

 

 

15,144

 

Construction in progress

 

 

757

 

 

 

3,546

 

Total

 

 

65,097

 

 

 

60,150

 

Less: accumulated depreciation and amortization

 

 

(21,746

)

 

 

(18,255

)

Property and equipment, net

 

$

43,351

 

 

$

41,895

 

 

Depreciation expense was $2.3 million and $1.0 million for the three months ended March 31, 2015 and 2014, respectively.

 

We capitalized $1.9 million and $1.8 million in internal-use software during the three months ended March 31, 2015 and 2014, respectively. Included in the capitalized development costs are $0.5 million and $49,000 in share-based compensation costs for the three months ended March 31, 2015 and 2014, respectively. Amortization expense of capitalized internal-use software totaled $1.5 million and $0.7 million for the three months ended March 31, 2015 and 2014, respectively. The carrying value of capitalized internal-use software at March 31, 2015 and December 31, 2014 was $14.0 million and $13.6 million, respectively, including $0.6 million and $3.5 million in construction in progress, respectively.

 

Note 5. Goodwill and Purchased Intangible Assets

The changes in the carrying amount of goodwill for the three months ended March 31, 2015 are as follows (in thousands):

 

Balance as of December 31, 2014

 

$

9,240

 

Foreign currency translation adjustments

 

 

(306

)

Balance as of March 31, 2015

 

$

8,934

 

 

Purchased intangible assets subject to amortization as of March 31, 2015 and December 31, 2014 consist of the following (in thousands).

 

 

 

March 31, 2015

 

 

 

Cost

 

 

Accumulated

Amortization

 

 

Foreign Currency Translation Adjustment

 

 

Net

 

 

Remaining Useful Life

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In years)

 

Developed technology

 

$

5,200

 

 

$

(1,526

)

 

$

(253

)

 

$

3,421

 

 

 

2.5

 

Customer relationships

 

 

1,300

 

 

 

(334

)

 

 

(66

)

 

 

900

 

 

 

3.0

 

Trade name

 

 

60

 

 

 

(60

)

 

 

 

 

 

 

 

 

 

 

 

$

6,560

 

 

$

(1,920

)

 

$

(319

)

 

$

4,321

 

 

 

 

 

 

 

11


 

 

 

December 31, 2014

 

 

 

Cost

 

 

Accumulated

Amortization

 

 

Foreign Currency Translation Adjustment

 

 

Net

 

 

Remaining Useful Life

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In years)

 

Developed technology

 

$

5,200

 

 

$

(1,118

)

 

$

(191

)

 

$

3,891

 

 

 

2.7

 

Customer relationships

 

 

1,300

 

 

 

(244

)

 

 

(48

)

 

 

1,008

 

 

 

3.2

 

Trade name

 

 

60

 

 

 

(45

)

 

 

(2

)

 

 

13

 

 

 

0.2

 

 

 

$

6,560

 

 

$

(1,407

)

 

$

(241

)

 

$

4,912

 

 

 

 

 

 

Amortization expense of purchased intangible assets for the three months ended March 31, 2015 and 2014 was $0.4 million and $52,000, respectively.

Estimated future amortization expense as of March 31, 2015 is as follows (in thousands):

 

Remainder of 2015

 

$

1,271

 

2016

 

 

1,686

 

2017

 

 

1,298

 

2018

 

 

66

 

 

 

$

4,321

 

 

Note 6. Credit Facility

We have a credit facility with Silicon Valley Bank consisting of a $20.0 million revolving line of credit and a $10.0 million equipment line of credit.  In June 2014 we repaid all outstanding principal and accrued interest under the revolving line of credit and as of March 31, 2015 there was no balance outstanding.  As of March 31, 2015 and December 31, 2014, the outstanding balance under the equipment line of credit was $6.2 million and $7.0 million, respectively.

Prior to our IPO, borrowings on the revolving line of credit bore interest at the prime rate plus 2.0% per annum. Upon the consummation of our IPO, the interest rate was reduced to the prime rate. Borrowings on the revolving line of credit are subject to a borrowing base limit determined monthly based on our recurring revenue metrics from previous months and the ratio of certain current assets to current liabilities as of the previous month end. To the extent we borrow funds pursuant to the revolving line of credit, we are entitled to make interest-only payments until January 1, 2016, when the outstanding balance is due in full.

Borrowings on the equipment line of credit bear interest of 2.5% per annum. For each equipment advance, we made interest-only payments prior to September 2014, when the outstanding balance became payable in 30 equal monthly installments, with the last payment due on March 14, 2017. We are also required to make a final payment fee of $0.3 million on March 14, 2017.

The credit facility is collateralized by substantially all of our assets, excluding our intellectual property. Our domestic subsidiary is a guarantor of the credit facility and we have pledged up to 65% of the equity in our international subsidiaries as collateral. The credit facility also imposes various covenants on us, including the delivery of financial and other information, the maintenance of our primary operating and securities accounts with the lender, the maintenance of minimum revenue targets and an agreed ratio of certain current assets to current liabilities, as well as limitations on dispositions, changes in business or management, certain mergers or consolidations, dividends and other corporate activities. As of March 31, 2015 and December 31, 2014, we were in compliance with all of the covenants contained in the credit facility.

Contractual future principal repayments in relation to the credit facility are as follows for the year ending December 31 (in thousands):

 

Remainder of 2015

 

$

2,288

 

2016

 

 

3,118

 

2017

 

 

793

 

 

 

$

6,199

 

12


 

In June 2012, in connection with the credit facility, we issued a non-refundable, fully earned warrant to Silicon Valley Bank to purchase 125,000 shares of common stock at $1.92 per share with an expiration date of June 2019. The fair value of the warrant on issuance is being accreted to interest expense using the effective interest rate method over the life of the credit facility. This warrant was exercised in the three months ended June 30, 2014.

 

 

Note 7. Commitments and Contingencies

Leases

We lease office space under noncancelable operating leases with various expiration dates. Certain of the office space lease agreements contain rent holidays or rent escalation provisions. Rent holiday and rent escalation provisions are considered in determining the straight-line expense to be recorded over the lease term. The lease term begins on the date of initial possession of the leased property for purposes of recognizing lease expense on a straight-line basis over the term of the lease. Rent expense was $1.6 million and $1.8 million for the three months ended March 31, 2015 and 2014, respectively.  

We leased computer equipment from various parties under capital lease agreements that expired in March 2015.  

Litigation and Loss Contingencies

We accrue estimates for resolution of legal and other contingencies when losses are probable and estimable. From time to time, we may become a party to litigation and subject to claims incident to the ordinary course of business, including intellectual property claims, labor and employment claims, and threatened claims, breach of contract claims, tax, and other matters. We currently have no material pending litigation.

We are not currently aware of any litigation matters or loss contingencies that would be expected to have a material adverse effect on our business, consolidated financial position, results of operations, comprehensive loss, or cash flows.

Indemnifications

In the ordinary course of business, we enter into contractual arrangements under which we agree to provide indemnification of varying scope and terms to business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, intellectual property infringement claims made by third parties, and other liabilities relating to or arising from our customer service platform, live chat software, or our acts or omissions. In these circumstances, payment may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract. Further, our obligations under these agreements may be limited in terms of time and/or amount, and in some instances, we may have recourse against third parties for certain payments. In addition, we have indemnification agreements with our directors and executive officers that require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The terms of such obligations may vary. To date, we have not incurred any material costs, and we have not accrued any liabilities in the accompanying condensed consolidated financial statements, as a result of these obligations.

We have entered into service-level agreements with certain customers warranting defined levels of uptime reliability and performance and permitting those customers to receive credits for future services in the event that we fail to meet those levels. To date, we have not accrued for any significant liabilities in the accompanying consolidated financial statements as a result of these service-level agreements.  

 

 

Note 8. Common Stock and Stockholders’ Equity

 

Common Stock Authorized

Upon the completion of our IPO, we increased the amount of common stock authorized for issuance from 125 million to 400 million common shares with a par value of $0.01 per share.

13


 

Employee Equity Plans

Employee Stock Purchase Plan

Our board of directors adopted the Employee Stock Purchase Plan, or ESPP, in February 2014, which became effective in May 2014 upon the effectiveness of the registration statement related to our IPO. Under the ESPP, eligible employees are granted options to purchase shares of our common stock through payroll deductions. The ESPP provides for eighteen-month offering periods, which include three six-month purchase periods. At the end of each purchase period, employees are able to purchase shares at 85% of the lower of the fair market value of our common stock at the beginning of an offering period or the fair market value of our common stock at the end of the purchase period. We commenced our first purchase period under the ESPP on May 15, 2014. For the three months ended March 31, 2015, no shares of common stock were purchased under the ESPP. Pursuant to the terms of the ESPP, the number of shares reserved under the ESPP increased by 0.8 million shares on January 1, 2015.  As of March 31, 2015, 4.0 million shares of common stock were available for issuance under the ESPP.

Stock Option and Grant Plans

Our board of directors adopted the 2009 Stock Option and Grant Plan, or the 2009 Plan, in July 2009. The 2009 Plan was terminated in connection with our IPO, and accordingly, no shares are available for issuance under this plan. The 2009 Plan continues to govern outstanding awards granted thereunder.

Our 2014 Stock Option and Incentive Plan, or the 2014 Plan, serves as the successor to our 2009 Plan.  Pursuant to the terms of the 2014 Plan, the number of shares reserved for issuance under the 2014 Plan increased by 3.8 million shares on January 1, 2015.  As of March 31, 2015, we had 8.1 million shares of common stock available for future grants under the 2014 Plan.

The following table summarizes our stock option and RSU award activities for the three months ended March 31, 2015 (in thousands, except per share information):

 

 

 

 

 

 

 

Options Outstanding

 

 

RSUs Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

Shares

 

 

 

 

 

 

Weighted

 

 

Remaining

 

 

Aggregate

 

 

 

 

 

 

Average

 

 

 

Available

 

 

Number of

 

 

Average

 

 

Contractual

 

 

Intrinsic

 

 

Outstanding

 

 

Grant Date

 

 

 

for Grant

 

 

Shares

 

 

Exercise Price

 

 

Term

 

 

Value

 

 

RSUs

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In years)

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding — January 1, 2015

 

 

7,560

 

 

 

12,043

 

 

$

7.39

 

 

 

8.29

 

 

$

204,467

 

 

 

3,064

 

 

$

13.69

 

Increase in authorized shares

 

 

3,779

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options granted

 

 

(1,494

)

 

 

1,494

 

 

 

24.55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RSUs granted

 

 

(1,854

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,854

 

 

 

24.77

 

Stock options exercised

 

 

 

 

 

 

(982

)

 

 

2.99

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RSUs vested

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(519

)

 

 

12.63

 

Unvested shares repurchased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options forfeited or canceled

 

 

39

 

 

 

(39

)

 

 

4.52

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RSUs forfeited or cancelled

 

 

80

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(80

)

 

 

15.18

 

Outstanding —March 31, 2015

 

 

8,110

 

 

 

12,516

 

 

$

9.80

 

 

 

8.35

 

 

$

161,387

 

 

 

4,319

 

 

$

18.55

 

 

Aggregate intrinsic value represents the difference between the Company's closing stock price of its common stock and the exercise price of outstanding, in-the-money options. The Company’s closing stock price as reported on the New York Stock Exchange as of March 31, 2015 was $22.69.

 

As of March 31, 2015, we had a total of $129.8 million in future share-based compensation expense related to all equity awards, net of estimated forfeitures, to be recognized over a weighted average period of 3.4 years.

14


 

Early Exercise of Stock Options and Purchase of Unvested Stock Awards

Certain of our stock options permit early exercise. Common stock purchased pursuant to an early exercise of stock options or unvested stock awards is not deemed to be outstanding for financial reporting purposes until those shares vest. Therefore, cash received in exchange for unvested shares is recorded as a liability and is transferred into common stock and additional paid-in capital as the shares vest. Upon termination of service, we may, at our discretion, repurchase unvested shares acquired through early exercise of stock options or purchase of unvested stock awards at a price equal to the price per share paid upon the exercise of such options or the purchase of such unvested stock awards. As of March 31, 2015 and December 31, 2014, there were 0.5 million and 0.6 million shares, respectively, outstanding as a result of the early exercise of stock options and purchase of unvested stock awards by our employees and directors that were classified as accrued liabilities for an aggregated amount of $1.8 million and $2.1 million, respectively.

 

 

Note 9. Net Loss Per Share

We compute net loss per share of common stock in conformity with the two-class method required for participating securities. We considered all series of the redeemable convertible preferred stock to be participating securities as the holders of the preferred stock were entitled to receive a non-cumulative dividend on a pari passu basis in the event that a dividend is paid on common stock. We also consider shares of common stock issued upon the early exercise of stock options subject to repurchase to be participating securities, because holders of such shares have non-forfeitable dividend rights in the event a dividend is paid on common stock. The holders of all series of the redeemable convertible preferred stock and the holders of shares of common stock acquired upon early exercise of stock options do not have a contractual obligation to share in our losses. As such, our net losses for the three months ended March 31, 2015 and 2014 were not allocated to these participating securities. Upon the closing of the IPO in May 2014, all shares of our then-outstanding redeemable convertible preferred stock automatically converted into our common stock.  

Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, less the weighted-average unvested common stock subject to repurchase. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including common stock issuable upon conversion of the redeemable convertible preferred stock, outstanding share-based awards, and outstanding warrants, to the extent dilutive. Basic and diluted net loss per share was the same for each period presented as the inclusion of all potential common stock outstanding would have been anti-dilutive.

The following table presents the calculation of basic and diluted net loss per share for the periods presented (in thousands, except per share data):

 

 

 

Three Months Ended

March 31,

 

 

 

2015

 

 

2014

 

Net loss

 

$

(19,168

)

 

$

(10,259

)

Less: Accretion of redeemable convertible preferred stock

 

 

 

 

 

(12

)

Net loss attributable to common stockholders

 

$

(19,168

)

 

$

(10,271

)

Basic shares:

 

 

 

 

 

 

 

 

Weighted-average shares used to compute basic net loss per share

 

 

76,338

 

 

 

22,762

 

Diluted shares:

 

 

 

 

 

 

 

 

Weighted-average shares used to compute diluted net loss per share

 

 

76,338

 

 

 

22,762

 

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.25

)

 

$

(0.45

)

 

The anti-dilutive securities excluded from the shares used to calculate the diluted net loss per share are as follows (in thousands):

 

 

 

March 31,

 

 

 

2015

 

 

2014

 

Redeemable convertible preferred stock

 

 

 

 

 

34,323

 

Shares subject to outstanding common stock options

 

 

12,516

 

 

 

14,665

 

Shares subject to common stock warrants

 

 

 

 

 

125

 

Restricted stock units

 

 

4,319

 

 

 

2,657