10-Q 1 zen-10q_20150930.htm 10-Q zen-10q_20150930.htm

 

 

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 September 30, 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 October 31, 2015, there were 88,697,514 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 September 30, 2015 and December 31, 2014

4

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014

5

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2015 and 2014

6

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 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

18

 

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

29

 

Item 4

 

Controls and Procedures

29

 

PART II — OTHER INFORMATION 

 

 

Item 1

Legal Proceedings

30

 

Item 1A

Risk Factors

30

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

54

 

Item 6

Exhibits

54

 

SIGNATURES

55

 

 

 

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 integrate We Are Cloud SAS with our existing corporate operations, to sell our analytics software as a standalone service and to integrate our analytics software 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)

 

 

 

September 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

255,386

 

 

$

80,265

 

Marketable securities

 

 

25,247

 

 

 

42,204

 

Accounts receivable, net of allowance for doubtful accounts of $1,070 and $264 as of September 30, 2015 and December 31, 2014, respectively

 

 

24,121

 

 

 

11,523

 

Prepaid expenses and other current assets

 

 

9,904

 

 

 

5,013

 

Total current assets

 

 

314,658

 

 

 

139,005

 

Marketable securities, noncurrent

 

 

22,513

 

 

 

9,205

 

Property and equipment, net

 

 

52,747

 

 

 

41,895

 

Goodwill and intangible assets, net

 

 

11,888

 

 

 

14,152

 

Other assets

 

 

2,450

 

 

 

1,531

 

Total assets

 

$

404,256

 

 

$

205,788

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,390

 

 

$

4,763

 

Accrued liabilities

 

 

10,445

 

 

 

7,841

 

Accrued compensation and related benefits

 

 

11,872

 

 

 

11,738

 

Deferred revenue

 

 

74,295

 

 

 

50,756

 

Current portion of credit facility

 

 

 

 

 

3,041

 

Current portion of capital leases

 

 

 

 

 

10

 

Total current liabilities

 

 

101,002

 

 

 

78,149

 

Deferred revenue, noncurrent

 

 

1,657

 

 

 

823

 

Credit facility, noncurrent

 

 

 

 

 

3,911

 

Other liabilities

 

 

8,966

 

 

 

9,199

 

Total liabilities

 

 

111,625

 

 

 

92,082

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock

 

 

 

 

 

 

Common stock

 

 

887

 

 

 

755

 

Additional paid-in capital

 

 

485,417

 

 

 

246,000

 

Accumulated other comprehensive loss

 

 

(1,578

)

 

 

(528

)

Accumulated deficit

 

 

(191,443

)

 

 

(131,869

)

Treasury stock at cost (0.5 million shares as of September 30, 2015 and December 31, 2014)

 

 

(652

)

 

 

(652

)

Total stockholders’ equity

 

 

292,631

 

 

 

113,706

 

Total liabilities and stockholders’ equity

 

$

404,256

 

 

$

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

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

55,661

 

 

$

33,910

 

 

$

146,122

 

 

$

88,508

 

Cost of revenue (1)

 

 

17,039

 

 

 

11,684

 

 

 

47,491

 

 

 

32,410

 

Gross profit

 

 

38,622

 

 

 

22,226

 

 

 

98,631

 

 

 

56,098

 

Operating expenses (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

16,031

 

 

 

9,550

 

 

 

43,517

 

 

 

25,227

 

Sales and marketing

 

 

29,079

 

 

 

21,548

 

 

 

79,725

 

 

 

56,174

 

General and administrative

 

 

12,319

 

 

 

8,940

 

 

 

33,982

 

 

 

23,639

 

Total operating expenses

 

 

57,429

 

 

 

40,038

 

 

 

157,224

 

 

 

105,040

 

Operating loss

 

 

(18,807

)

 

 

(17,812

)

 

 

(58,593

)

 

 

(48,942

)

Other income (expense), net

 

 

145

 

 

 

(343

)

 

 

(428

)

 

 

(1,252

)

Loss before provision for (benefit from) income taxes

 

 

(18,662

)

 

 

(18,155

)

 

 

(59,021

)

 

 

(50,194

)

Provision for (benefit from) income taxes

 

 

262

 

 

 

(236

)

 

 

554

 

 

 

(272

)

Net loss

 

 

(18,924

)

 

 

(17,919

)

 

 

(59,575

)

 

 

(49,922

)

Accretion of redeemable convertible preferred stock

 

 

 

 

 

 

 

 

 

 

 

(18

)

Net loss attributable to common stockholders

 

$

(18,924

)

 

$

(17,919

)

 

$

(59,575

)

 

$

(49,940

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common stockholders, basic and diluted

 

$

(0.22

)

 

$

(0.25

)

 

$

(0.71

)

 

$

(1.07

)

Weighted-average shares used to compute net loss per

   share attributable to common stockholders, basic and diluted

 

 

87,777

 

 

 

71,732

 

 

 

83,536

 

 

 

46,751

 

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

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Cost of revenue

 

$

1,131

 

 

$

591

 

 

$

3,136

 

 

$

1,691

 

Research and development

 

 

4,974

 

 

 

3,052

 

 

 

13,484

 

 

 

7,530

 

Sales and marketing

 

 

3,786

 

 

 

4,877

 

 

 

10,154

 

 

 

8,635

 

General and administrative

 

 

3,551

 

 

 

2,298

 

 

 

10,283

 

 

 

5,769

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

5


 

ZENDESK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(18,924

)

 

$

(17,919

)

 

$

(59,575

)

 

$

(49,922

)

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized gain (loss) on available-for-sale investments

 

 

39

 

 

 

(58

)

 

 

70

 

 

 

(66

)

Foreign currency translation gain (loss)

 

 

(781

)

 

 

(303

)

 

 

(1,019

)

 

 

17

 

Net change in unrealized loss on derivative instruments

 

 

(101

)

 

 

 

 

 

(101

)

 

 

 

Comprehensive loss

 

$

(19,767

)

 

$

(18,280

)

 

$

(60,625

)

 

$

(49,971

)

See Notes to Condensed Consolidated Financial Statements.

 

 

 

6


 

ZENDESK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 (Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(59,575

)

 

$

(49,922

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

13,672

 

 

 

7,673

 

Share-based compensation

 

 

37,057

 

 

 

23,625

 

Other

 

 

525

 

 

 

331

 

Excess tax benefit from share-based award activity

 

 

(124

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(13,082

)

 

 

(5,104

)

Prepaid expenses and other current assets

 

 

(4,161

)

 

 

(1,960

)

Other assets and liabilities

 

 

(1,622

)

 

 

1,321

 

Accounts payable

 

 

(1,919

)

 

 

591

 

Accrued liabilities

 

 

2,261

 

 

 

922

 

Accrued compensation and related benefits

 

 

(2,355

)

 

 

5,215

 

Deferred revenue

 

 

24,372

 

 

 

17,290

 

Net cash used in operating activities

 

 

(4,951

)

 

 

(18

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(14,231

)

 

 

(19,121

)

Internal-use software development costs

 

 

(3,548

)

 

 

(6,268

)

Purchases of marketable securities

 

 

(56,991

)

 

 

(43,006

)

Proceeds from maturities of marketable securities

 

 

30,425

 

 

 

6,950

 

Proceeds from sale of marketable securities

 

 

29,650

 

 

 

 

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

 

 

(1,099

)

 

 

(1,896

)

Net cash used in investing activities

 

 

(15,794

)

 

 

(63,341

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from initial public offering, net of issuance costs

 

 

 

 

 

103,110

 

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

 

 

190,110

 

 

 

 

Proceeds from exercise of employee stock options

 

 

5,773

 

 

 

2,745

 

Taxes paid related to net share settlement of equity awards

 

 

(481

)

 

 

(1,750

)

Proceeds from issuance of common stock from employee stock purchase plan

 

 

7,243

 

 

 

2,346

 

Proceeds from issuance of debt

 

 

 

 

 

3,940

 

Excess tax benefit from share-based award activity

 

 

124

 

 

 

 

Principal payments on debt

 

 

(6,952

)

 

 

(20,000

)

Principal payments on capital lease obligations

 

 

(10

)

 

 

(271

)

Net cash provided by financing activities

 

 

195,807

 

 

 

90,120

 

Effect of exchange rate changes on cash and cash equivalents

 

 

59

 

 

 

(50

)

Net increase in cash and cash equivalents

 

 

175,121

 

 

 

26,711

 

Cash and cash equivalents at the beginning of period

 

 

80,265

 

 

 

53,725

 

Cash and cash equivalents at the end of period

 

$

255,386

 

 

$

80,436

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow data:

 

 

 

 

 

 

 

 

Cash paid for interest and income taxes

 

$

710

 

 

$

930

 

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment in accounts payable and accrued expenses

 

$

3,766

 

 

$

998

 

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

 

$

1,674

 

 

$

1,856

 

Vesting of early exercised stock options

 

$

815

 

 

$

1,196

 

Property and equipment acquired through tenant improvement allowances

 

$

174

 

 

$

3,932

 

Issuance of common stock for the acquisition of Zopim

 

$

 

 

$

10,893

 

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

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.

8


 

Immaterial Error Correction

We corrected an immaterial prior period error on the statement of operations for the nine months ended September 30, 2014 related to the calculation of weighted average shares used to compute net loss per share attributable to common stockholders.  As a result of this error, basic and diluted net loss per share attributable to common stockholders decreased by $0.01 for the nine months ended September 30, 2014.  The adjustment did not affect any other financial statements presented.

 

Reclassification

Certain prior year amounts have been reclassified for consistency with the current year presentation.  These reclassifications had no effect on the reported results of operations.

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

As of September 30, 2015, one customer represented 10% of our total accounts receivable balance.  As of December 31, 2014, no customers represented more than 10% of our accounts receivable balance.  There were no customers that individually exceeded 10% of our revenue during the three and nine months ended September 30, 2015 or 2014.

Recently Issued and Adopted Accounting Pronouncements

In September 2015, the FASB issued ASU 2015-16 “Simplifying the Accounting for Measurement-Period Adjustments”, which requires that an acquirer in a business combination recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The new standard is required to be applied prospectively.  We plan to adopt this guidance in the first quarter of 2016.  The adoption of this new standard is not expected to have a material impact on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09 regarding ASC Topic 606 “Revenue from Contracts with Customers.” This standard provides principles for recognizing revenue to which an entity expects to be entitled for the transfer of promised goods or services to customers.  In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 by one year.  Early adoption is permitted.  The amendment may be applied retrospectively to each prior period presented, or with the cumulative effect recognized as of the date of initial adoption.  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.  These hold back amounts were released in equal installments in March and September 2015.  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 income tax purposes.

9


 

 

Net tangible liabilities assumed

 

$

(385

)

Intangible assets

 

 

6,560

 

Goodwill

 

 

9,594

 

Total purchase price

 

$

15,769

 

 

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. Financial Instruments

Investments

The following tables present information about our financial assets measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014 based on the three-tier fair value hierarchy (in thousands):

 

 

 

Fair Value Measurement at

 

 

 

September 30, 2015

 

 

 

Level 1

 

 

Level 2

 

 

Total

 

Description

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

 

$

 

 

$

35,736

 

 

$

35,736

 

Money market funds

 

 

25,368

 

 

 

 

 

 

25,368

 

Asset-backed securities

 

 

 

 

 

6,030

 

 

 

6,030

 

Commercial paper

 

 

 

 

 

3,991

 

 

 

3,991

 

Agency securities

 

 

 

 

 

2,003

 

 

 

2,003

 

Total

 

$

25,368

 

 

$

47,760

 

 

$

73,128

 

Included in cash and cash equivalents

 

 

 

 

 

 

 

 

 

$

25,368

 

Included in marketable securities

 

 

 

 

 

 

 

 

 

$

47,760

 

 

 

 

 

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

 

U.S. treasury securities

 

 

 

 

 

1,991

 

 

 

1,991

 

Commercial paper

 

 

 

 

 

3,993

 

 

 

3,993

 

Total

 

$

21,382

 

 

$

51,409

 

 

$

72,791

 

Included in cash and cash equivalents

 

 

 

 

 

 

 

 

 

$

21,382

 

Included in marketable securities

 

 

 

 

 

 

 

 

 

$

51,409

 

 

As of September 30, 2015 and December 31, 2014, there were no securities within Level 3 of the fair value hierarchy.  Gross unrealized gains or losses for cash equivalents and available-for-sale marketable securities as of September 30, 2015 and December 31, 2014 were not material. As of September 30, 2015 and December 31, 2014, there were no securities that were in an unrealized loss position for more than 12 months.

10


 

The following table classifies our available-for-sale marketable securities by contractual maturities as of September 30, 2015 and December 31, 2014 (in thousands):

 

 

 

September 30,

2015

 

 

December 31,

2014

 

Due in one year or less

 

$

25,247

 

 

$

42,204

 

Due after one year

 

 

22,513

 

 

 

9,205

 

Total

 

$

47,760

 

 

$

51,409

 

 

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 within Level 2 of the fair value hierarchy.

There were no transfers between fair value measurement levels during the three and nine months ended September 30, 2015.

Derivative Instruments and Hedging

Our foreign currency exposures typically arise from foreign operations and, to a lesser extent, sales in foreign currencies for subscriptions to our customer service platform.  In September 2015, we implemented a hedging program to mitigate the impact of foreign currency fluctuations on our future cash flows and earnings.  We entered into foreign currency forward contracts with certain financial institutions and designated those hedges as cash flow hedges.  Our foreign currency forward contracts generally have maturities of fifteen months or less.

These derivative instruments expose us to credit risk to the extent that our counterparties are unable to meet the terms of the arrangement. We seek to mitigate this risk by transacting with major financial institutions with high credit ratings. In addition, we have a master netting agreement with each of our counterparties, which permits net settlement of multiple, separate derivative contracts with a single payment.  We may also be required to exchange cash collateral with certain of our counterparties on a regular basis. ASC 815 permits companies to present the fair value of derivative instruments on a net basis according to master netting arrangements.  We have elected to present our derivative instruments on a gross basis in our consolidated financial statements.

Cash Flow Hedges

Our foreign currency forward contracts are designated as cash flow hedges of foreign currency forecasted revenues and expenses.  We recognize all derivative instruments on our balance sheet at fair value as either assets or liabilities.  The effective portion of the gain or loss on each forward contract is reported as a component of accumulated other comprehensive income (loss) and reclassified into earnings to either revenue or operating expense in the same period, or periods, during which the hedged transaction affects earnings. The ineffective portion of the gains or losses, if any, is recorded immediately in other income (expense), net. The change in time value related to our cash flow hedges is excluded from the assessment of hedge effectiveness and is recorded immediately in other income (expense), net.  We evaluate the effectiveness of our cash flow hedges on a quarterly basis.

As of September 30, 2015, $0.1 million of unrealized losses related to the effective portion of changes in the fair value of foreign currency forward contracts designated as cash flow hedges were included in the balance of other accumulated comprehensive loss. We expect to reclassify $0.1 million from accumulated other comprehensive loss into earnings over the next twelve months associated with our cash flow hedges.

The following table presents information about our derivative instruments on the consolidated balance sheet as of September 30, 2015 (in thousands):

 

 

September 30, 2015

 

 

Asset Derivatives

 

 

Liability Derivatives

 

Derivative Instrument

Balance Sheet Location

 

Fair Value

(Level 2)

 

 

Balance Sheet Location

 

Fair Value

(Level 2)

 

Foreign currency forward contracts

Other current assets

 

 

69

 

 

Accrued liabilities

 

 

163

 

Foreign currency forward contracts

Other assets

 

 

10

 

 

Other

liabilities

 

 

25

 

Total

 

 

$

79

 

 

 

 

$

188

 

11


 

Our foreign currency contracts are classified within Level 2 because the valuation inputs are based on quoted prices and market observable data of similar instruments in active markets, such as currency spot and forward rates.  Our foreign currency forward contracts had a total notional value of $47.6 million as of September 30, 2015. There were no derivative assets or liabilities on our consolidated balance sheet as of December 31, 2014.

The following table presents information about our derivative instruments on the statement of operations for the three and nine months ended September 30, 2015 (in thousands):

 

 

 

 

Three Months Ended September 30, 2015

 

 

Nine Months Ended September 30, 2015

 

Hedging Instrument

Location of Gain (Loss) Reclassified into Earnings

 

Gain (Loss) Recognized in AOCI

 

 

Gain (Loss) Reclassified from AOCI into Earnings

 

 

Gain (Loss) Recognized in AOCI

 

 

Gain (Loss) Reclassified from AOCI into Earnings

 

Foreign currency forward contracts

Revenue, cost of revenue, operating expenses

 

 

(101

)

 

 

 

 

 

(101

)

 

 

 

Total

 

 

$

(101

)

 

$

 

 

$

(101

)

 

$

 

There were no gains or losses on derivative instruments for the three and nine months ended September 30, 2014.

All derivatives have been designated as hedging instruments.  Amounts recognized in earnings related to excluded time value and hedge ineffectiveness were not material for the three and nine months ended September 30, 2015.

Note 4. Property and Equipment

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

 

 

 

September 30,

2015

 

 

December 31,

2014

 

Capitalized internal-use software

 

$

25,613

 

 

$

18,541

 

Hosting equipment

 

 

24,740

 

 

 

14,085

 

Leasehold improvements

 

 

16,651

 

 

 

15,144

 

Computer equipment and software

 

 

5,949

 

 

 

4,310

 

Furniture and fixtures

 

 

5,092

 

 

 

4,524

 

Construction in progress

 

 

4,575

 

 

 

3,546

 

Total

 

 

82,620

 

 

 

60,150

 

Less: accumulated depreciation and amortization

 

 

(29,873

)

 

 

(18,255

)

Property and equipment, net

 

$

52,747

 

 

$

41,895

 

 

Depreciation expense was $2.8 million and $1.7 million for the three months ended September 30, 2015 and 2014, respectively, and $7.7 million and $4.0 million for the nine months ended September 30, 2015 and 2014, respectively.

 

Amortization expense of capitalized internal-use software totaled $1.6 million and $0.9 million for the three months ended September 30, 2015 and 2014, respectively, and $4.6 million and $2.6 million for the nine months ended September 30, 2015 and 2014, respectively. The carrying value of capitalized internal-use software at September 30, 2015 and December 31, 2014 was $14.2 million and $13.6 million, respectively, including $1.7 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 nine months ended September 30, 2015 are as follows (in thousands):

 

Balance as of December 31, 2014

 

$

9,240

 

Foreign currency translation adjustments

 

 

(670

)

Balance as of September 30, 2015

 

$

8,570

 

 

12


 

Purchased intangible assets subject to amortization as of September 30, 2015 and December 31, 2014 consist of the following (in thousands).

 

 

 

September 30, 2015

 

 

 

Cost

 

 

Accumulated

Amortization

 

 

Foreign Currency Translation Adjustment

 

 

Net

 

 

Remaining Useful Life

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In years)

 

Developed technology

 

$

5,200

 

 

$

(2,271

)

 

$

(326

)

 

$

2,603

 

 

 

2.0

 

Customer relationships

 

 

1,300

 

 

 

(497

)

 

 

(88

)

 

 

715

 

 

 

2.5

 

Trade name

 

 

60

 

 

 

(60

)

 

 

 

 

 

 

 

 

 

 

 

$

6,560

 

 

$

(2,828

)

 

$

(414

)

 

$

3,318

 

 

 

 

 

 

 

 

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 September 30, 2015 and 2014 was $0.4 million and $0.5 million, respectively, and $1.4 million and $1.0 million for the nine months ended September 30, 2015 and 2014, respectively.

Estimated future amortization expense as of September 30, 2015 is as follows (in thousands):

 

Remainder of 2015

 

$

406

 

2016

 

 

1,610

 

2017

 

 

1,239

 

2018

 

 

63

 

 

 

$

3,318

 

 

Note 6. Credit Facility

Until its termination in June 2015, we had 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. The revolving line of credit bore interest at the prime rate plus 2.0% per annum prior to our IPO and was reduced to the prime rate upon the consummation of our IPO.  Borrowings on the equipment line of credit bore interest of 2.5% per annum.  In June 2014, we repaid all outstanding principal and accrued interest under the revolving line of credit. In June 2015, we repaid all outstanding principal and interest under the equipment line of credit and terminated the Silicon Valley Bank credit facility.

 

 

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 $2.0 million and $1.7 million for the three months ended September 30, 2015 and 2014, respectively, and $5.4 million and $5.2 million for the nine months ended September 30, 2015 and 2014, respectively.  

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

13


 

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 customers, 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, analytics 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.

Certain of our product offerings contain service-level agreements 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

Upon the completion of our IPO, we increased the number of shares authorized for issuance from 125 million to 400 million with a par value of $0.01 per share.  As of September 30, 2015 and December 31, 2014, there were 89.1 million and 76.1 million shares of common stock issued and 88.5 million and 75.5 million shares outstanding, respectively.  Included within the number of shares issued and outstanding were 0.3 million and 0.6 million shares of common stock subject to repurchase, as of September 30, 2015 and December 31, 2014, respectively.

 

Preferred Stock

As of September 30, 2015 and December 31, 2014, 10 million shares of preferred stock were authorized for issuance with a par value of $0.01 per share and no shares of preferred stock were issued or outstanding.

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.  No shares of common stock were purchased under the ESPP during the three months ended September 30, 2015.  For the nine months ended September 30, 2015, 0.6 million 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 September 30, 2015, 3.4 million shares of common stock were available for issuance under the ESPP.

14


 

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 September 30, 2015, we had 6.0 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 nine months ended September 30, 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