sail-10q_20180331.htm

Large accelerated filer

Accelerated filer

Non-accelerated filer

☒ (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ☒ No ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, the registrant’s equity was not listed on a domestic exchange or over-the-counter market. The registrant’s common stock began trading on the New York Stock Exchange on November 17, 2017.

The registrant had 87,219,160 shares of common stock outstanding as of May 4, 2018.

	As of
	March 31, 2018			December 31, 2017
	(In thousands, except share and per share data)
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	130,859		$	116,049
Restricted cash		126			78
Accounts receivable		55,997			72,907
Prepayments and other current assets		9,094			10,013
Total current assets		196,076			199,047
Property and equipment, net		3,126			3,018
Deferred tax asset - non-current		264			264
Other non-current assets		3,106			3,542
Goodwill		219,377			219,377
Intangible assets, net		78,979			81,185
Total assets	$	500,928		$	506,433
Liabilities and stockholders’ equity
Current liabilities
Accounts payable	$	1,872		$	2,231
Accrued expenses and other liabilities		12,012			22,636
Income taxes payable		1,918			1,688
Deferred revenue		75,883			73,671
Total current liabilities		91,685			100,226
Long-term debt		68,321			68,329
Other long-term liabilities		65			27
Deferred revenue non-current		13,175			9,454
Total liabilities		173,246			178,036
Commitments and contingencies (Note 4)
Stockholders’ equity
Common stock, $0.0001 par value, authorized 300,000,000 shares issued and outstanding 85,953,041 shares at March 31, 2018 and 84,948,126 shares at December 31, 2017		9			8
Preferred stock, $0.0001 par value, authorized 10,000,000 shares, no shares issued and outstanding at March 31, 2018 and December 31, 2017		—			—
Additional paid in capital		358,858			353,609
Accumulated deficit		(31,185	)		(25,220	)
Total stockholders' equity		327,682			328,397
Total liabilities and stockholders’ equity	$	500,928		$	506,433

See accompanying notes to unaudited condensed consolidated financial statements.

	Three Months Ended
	March 31, 2018			March 31, 2017
	(In thousands, except share and per share data)
	(Unaudited)
Revenue
Licenses	$	16,987		$	12,236
Subscription		23,005			14,952
Services and other		9,722			8,278
Total revenue		49,714			35,466
Cost of revenue
Licenses		1,138			1,087
Subscription		4,658			3,575
Services and other		6,974			5,473
Total cost of revenue		12,770			10,135
Gross profit		36,944			25,331
Operating expenses
Research and development		9,762			6,927
General and administrative		7,657			3,032
Sales and marketing		23,815			15,173
Total operating expenses		41,234			25,132
(Loss) income from operations		(4,290	)		199
Other expense, net:
Interest expense, net		(1,178	)		(2,657	)
Other, net		(147	)		(64	)
Total other expense, net		(1,325	)		(2,721	)
Loss before income taxes		(5,615	)		(2,522	)
Income tax (expense) benefit		(352	)		239
Net loss	$	(5,967	)	$	(2,283	)
Net loss available to common shareholders	$	(5,967	)	$	(8,453	)
Net loss per share
Basic	$	(0.07	)	$	(0.18	)
Diluted	$	(0.07	)	$	(0.18	)
Weighted average shares outstanding
Basic		85,719,240			47,208,477
Diluted		85,719,240			47,208,477

See accompanying notes to unaudited condensed consolidated financial statements.

	Three Months Ended
	March 31, 2018			March 31, 2017
	(In thousands)
	(Unaudited)
Operating activities
Net loss	$	(5,967	)	$	(2,283	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization expense		2,628			2,476
Amortization of loan origination fees		108			152
Gain on disposal of fixed assets		(4	)		(8	)
Stock-based compensation expense		5,139			158
Deferred taxes		—			(68	)
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable		16,910			6,500
Prepayments and other current assets		919			1,058
Other non-current assets		436			(1,355	)
Accounts payable		(358	)		711
Accrued expenses and other liabilities		(10,651	)		(2,283	)
Income taxes payable (receivable)		230			(313	)
Deferred revenue		5,932			2,113
Net cash provided by operating activities		15,322			6,858
Investing activities
Purchase of property and equipment		(530	)		(382	)
Proceeds from sale of property and equipment		4			109
Net cash used in investing activities		(526	)		(273	)
Financing activities
Repurchase of equity shares		—			(267	)
Exercise of stock options		62			29
Net cash provided by (used in) financing activities		62			(238	)
Increase in cash		14,858			6,347
Cash, cash equivalents and restricted cash, beginning of period		116,127			18,272
Cash, cash equivalents and restricted cash, end of period	$	130,985		$	24,619

Supplemental disclosure of cash flow information:
Cash paid for interest	$	884		$	2,513
Cash paid for income taxes	$	94		$	73
Conversion of prepaid incentive units to common stock (Note 7)	$	65		$	10

See accompanying notes to unaudited condensed consolidated financial statements.

SailPoint Technologies Holdings, Inc. (“we,” “our,” “the Company” or “SailPoint”) was incorporated in the state of Delaware on August 8, 2014, in preparation for the purchase of SailPoint Technologies, Inc. The purchase (the “Acquisition”) occurred on September 8, 2014. SailPoint Technologies, Inc. was formed July 14, 2004 as a Delaware corporation. The Company designs, develops, and markets identity governance software that helps organizations govern user access to critical systems and data. The Company currently markets its products and services throughout North America, Europe and the Asia Pacific regions.

The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with Article 10 of Regulation S-X, “Interim Financial Statements” and the rules and regulations for Form 10-Q of the Securities and Exchange Commission (the “SEC”). Pursuant to those rules and regulations, the Company has condensed or omitted certain information and footnote disclosure it normally includes in its annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the balance sheet, statements of operations and the statements of 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, 2018 or any future period. Our unaudited consolidated financial statements have been prepared in a manner consistent with the accounting principles described in our Company’s Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the SEC on March 19, 2018 (the “Annual Report”). These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Annual Report. All intercompany accounts and transactions have been eliminated in consolidation.

We consider all highly liquid investments with an original maturity of three months or less from date of purchase to be cash equivalents. The Company is required to maintain a small amount of restricted cash to guarantee rent payments in a foreign subsidiary.

The Company operates as one operating segment. The Company’s chief operating decision maker is its chief executive officer, who reviews financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance and allocating resources.

ASC 280, “Segment Reporting,” establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company manages its business on the basis of one reportable segment, and derives revenues from licensing of software, sale of professional services, maintenance and technical support. The following tables sets forth the Company’s consolidated total revenue by geography:

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. The Company maintains its cash in bank deposit accounts that, at times, may exceed federally insured limits. There is no concentration of credit risk for customers as no individual entity represented more than 10% of the balance in accounts receivable as of March 31, 2018 and December 31, 2017 or 10% of revenue for three months ended March 31, 2018 and 2017. The Company does not experience concentration of credit risk in foreign countries as no foreign country represents more than 10% of the Company’s condensed consolidated revenues or net assets.

There have been no significant changes to the Company’s significant accounting policies, which are discussed in Note 2 of “Notes to Consolidated Financial Statements” in the Annual Report.

Under the Jumpstart Our Business Startups Act (the “JOBS Act”), emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to take advantage of the longer phase-in periods for the adoption of new or revised financial accounting standards under the JOBS Act until we are no longer an emerging growth company.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates guidance for when revenue should be recognized from the exchange of goods or services. ASU No. 2016-08 was issued in March 2016 to clarify the principal versus agent guidance in this new revenue recognition standard. ASU 2016-10 was issued in April 2016 to clarify the guidance on accounting for licenses of intellectual property and identifying performance obligations in the new revenue recognition standard. ASU 2016-12 was issued in May 2016 to clarify the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes in the new revenue recognition standard. ASU 2016-20 was issued in December 2016 to make technical corrections and improvements on narrow aspects of this guidance. ASU No. 2015-14 was issued in August 2015 to defer the effective date of ASU 2014-09 for one year. The new standard permits adoption either by using (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. For public companies, the new standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. For all other entities, this standard is effective for annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company does not plan to early adopt, and therefore plans to adopt for the annual reporting period beginning after December 15, 2018.

The Company currently plans to adopt using the full retrospective approach; however, a final decision regarding the adoption method has not been made at this time. The Company’s final determination will depend on a number of factors such as the significance of the impact of the new standard on the Company’s financial results, system readiness, including that of software procured from third-party providers, and the Company’s ability to accumulate and analyze the information necessary to assess the impact on prior period financial statements, as necessary.

The Company is in the initial stages of its evaluation of the impact of the new standard on its accounting policies, and processes. The Company has assigned internal resources in addition to the engagement of third party service providers to assist in the evaluation. While the Company continues to assess all potential impacts under the new standard will have on our condensed consolidated financial statements and related disclosures there may be the potential for significant impacts to the timing of recognition of professional services revenue, and contract acquisition costs, with respect to the amounts that will be capitalized as well as the period of amortization.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This standard requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The standard also expands the required quantitative and qualitative disclosures surrounding leases. This standard is effective for annual periods beginning after December 15, 2019 including interim periods within that reporting period. Early adoption is permitted. The Company does not plan to early adopt, and therefore plans to adopt for the annual period beginning after December 15, 2019. This standard will be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Management is currently evaluating the effect of these provisions on the Company’s consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This standard requires companies to account for the income tax effects of intercompany transfers of assets other than inventory when the transfer occurs. This guidance is effective for annual periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. The Company does not plan to early adopt and therefore plans to adopt for the annual period beginning after December 15, 2018. Management is currently evaluating the effect of these provisions on the Company’s consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718). This standard clarifies which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. An entity is required to account for the effects of a modification unless all of the following conditions are met: (i) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or value using an alternative measurement method) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; (ii) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (iii) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted in the first period of the year this guidance is adopted. The Company does not plan to early adopt, and therefore plans to adopt for the annual period beginning after December 15, 2017. Management is currently evaluating the effect of these provisions on the Company’s consolidated financial statements.

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260). This standard addresses the complexity of accounting for certain financial instruments with down round features. This guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company does not plan to early adopt, and therefore plans to adopt for the annual period beginning after December 15, 2020. Management is currently evaluating the effect of these provisions on the Company’s consolidated financial statements.

Goodwill represents the excess of the purchase price over the identifiable tangible and intangible assets acquired plus liabilities assumed arising from business combinations. The carrying amount of goodwill was $219.4 million for the periods ended March 31, 2018 and 2017 as there has been no acquisition activity in these periods. Goodwill and other intangible balances are tested for impairment on an annual basis during the fourth quarter, or sooner if an indicator of impairment occurs. No triggering events have occurred during the three-month period ended March 31, 2018 and 2017 that would indicate a potential impairment of goodwill and other intangible assets.

		As of
	Weighted Average Useful Life	March 31, 2018			December 31, 2017
Intangible assets, net	(In years)	(In thousands)
Customer lists	15	$	42,500		$	42,500
Developed technology	9.6		42,000			42,000
Trade names and trademarks	17		24,500			24,500
Order backlog	1.5		1,100			1,100
Non-competition agreements and related items	4.4		810			810
Total intangible assets			110,910			110,910
Less: Accumulated amortization			(31,931	)		(29,725	)
Total intangible assets, net		$	78,979		$	81,185

Amortization expense of intangible assets was $2.2 million for the three months ended March 31, 2018 and March 31, 2017. Amortization expense is included in the condensed consolidated statements of operations for the three months ended March 31, 2018 and 2017, respectively, as follows:

Periodically, the Company evaluates intangible assets for possible impairment. There were no impairments for intangible assets during the three months ended March 31, 2018 and 2017.

The Company leases its facilities under non-cancelable operating lease agreements. The majority of these agreements include a renewal option, and/or require the Company to pay taxes, insurance, and maintenance costs, which are not included in the table below. Certain of these facility leases contain predetermined fixed escalations of the minimum rentals, and the Company recognizes expense for these leases on a straight-line basis. The difference between the recognized rental expense and amounts payable under the lease is recorded as deferred rent, which is included in accrued expenses and other liabilities on the accompanying condensed consolidated balance sheets.

Rent expense under all operating leases was approximately $0.9 million and $0.5 million for the three months ended March 31, 2018 and 2017, respectively.

In the ordinary course of business, the Company enters into contractual arrangements under which it agrees to provide indemnification of varying scope and terms to customers, business partners and other parties with respect to certain matters, including, losses arising out of the breach of such agreements, intellectual property infringement claims made by third parties, and other liabilities with respect to our products and services and business. In these circumstances, payment may be conditional on the other party making a claim pursuant to the procedures specified in a particular contract.

The Company includes service level commitments to our cloud customers warranting certain levels of uptime reliability and performance and permitting those customers to receive credits in the event that we fail to meet those levels. To date, the Company has not incurred any material costs as a result of these commitments and we expect the time between any potential claims and issuance of

the credits to be short. As a result, we have not accrued any liabilities related to these commitments in our consolidated financial statements.

The Company is subject to claims and suits that may arise from time to time in the ordinary course of business. In addition, some legal actions, claims and governmental inquiries may be instituted or asserted in the future against us and our subsidiaries. Although the outcome of our legal proceedings cannot be predicted with certainty and no assurances can be provided, based upon current information, we do not believe the liabilities, if any, which may ultimately result from the outcome of such matters, individually or in the aggregate, will have a material adverse impact on our financial statements.

The outstanding balance of the term loan at March 31, 2018 and December 31, 2017 was $70 million. There was no outstanding balance of the revolving line of credit at March 31, 2018 and December 31, 2017. The Company was in compliance with all applicable covenants as of March 31, 2018 and December 31, 2017.

In 2017, the Company amended its existing credit facility in connection with the consummation of its initial public offering. Such amendment required that the Company use a portion of its net proceeds to repay $90.0 million of borrowings outstanding under its term loan facility to reduce the aggregate outstanding principal amount thereof to $70.0 million. This repayment was subject to a prepayment premium of 1.50% approximately $1.4 million, which is recorded as interest expense. As a result of this paydown, the Company incurred a $1.7 million loss on the modification and partial extinguishment of debt which was also recorded as interest expense in the consolidated statements of operations for the years ended December 31, 2017. In October 2017, in connection with its new corporate headquarters lease, the Company executed a standby letter of credit in the amount of $6.0 million. The term loan and the credit facility both bear interest based on the adjusted LIBOR rate, as defined in the credit agreement, with a 1% floor plus an applicable margin of 4.5%.

The Company has incurred total debt issuance costs of $4.5 million in connection with these loan and security agreements of which $1.4 million relates to the modified agreement as of December 31, 2017. These costs are being amortized to interest expense over the life of the debt on a straight-line basis, which approximates the interest method. Amortization of debt issuance costs for existing loan and security agreement as of March 31, 2018 and March 31, 2017, was approximately $0.1 million and $0.2 million, respectively, and was recorded in interest expense in the accompanying condensed consolidated statements of operations. As of March 31, 2018, future principal payment for long-term debt, is $68.3 million, net of $1.7 million of unamortized debt issuance costs included in long-term debt. The maturity date on the term loan is August 16, 2021, with principal payment due in full on maturity date, and interest payments due quarterly. The rate prevalent at March 31, 2018 was 5.5% consisting of the 1% floor, plus an applicable margin of 4.5% for the term loan and the credit facility.

During the three months ended March 31, 2018 and 2017, the Company engaged in ordinary sales transactions of $147,000, and $0 and purchase transactions of $101,000 and $382,000, respectively, with entities affiliated with its controlling entity. At March 31, 2018 and December 31, 2017, the accompanying condensed consolidated balance sheets included accounts payable balances of $400 and $3,400, as well as accounts receivable balances $91,000 and $516,000, respectively, associated with these transactions.

In September 2014, the Company entered into an advisory services agreement (the “Consulting Agreement”) with its controlling entity. The Consulting Agreement requires quarterly payments from September 8, 2014 through December 31, 2018 for business consulting services provided by the controlling entity to the Company. Consulting fees from the Consulting Agreement totaled $313,000 in the three months ended March 31, 2017 and were included in general and administrative expenses in the accompanying condensed consolidated statements of operations. Upon completion of the initial public offering, the Consulting Agreement ceased, and the Company was no longer required to make future payments.

In 2015, the Company adopted (i) the Amended and Restated 2015 Stock Option and Grant Plan and (ii) the 2015 Stock Incentive Plan (together the “2015 Stock Option Plans”) under which it may grant incentive stock options (“ISOs”), nonqualified stock options (“NSOs”), and restricted stock to purchase shares of common stock. The 2015 Stock Option Plans reserve 5,000,000

shares of common stock for issuance as ISOs, 500,000 shares of restricted stock and 250,000 shares for issuance under the 2015 Stock Incentive Plan. Under the 2015 Stock Option Plans ISOs may not be granted at less than fair market value on the date of the grant and generally vest over a four-year period based on continued service. Certain options are subject to vesting based on certain future performance targets. Options generally expire ten years after the grant date.

At March 31, 2018, 468,956 shares were available for issuance under the Amended and Restated 2015 Stock Option and Grant Plan. At March 31, 2018, 333,999 shares were available for issuance under the 2015 Stock Incentive Plan. The Company currently uses authorized and unissued shares to satisfy share award exercises.

In November 2017, the Company’s board of directors adopted the 2017 Long Term Incentive Plan (the “2017 Plan”). As of December 31, 2017, the Company had reserved 8,856,876 shares of common stock available for issuance under the 2017 Plan to employees, directors, officers and consultants of the Company and its subsidiaries. The number of shares of common stock available for issuance under the 2017 Plan will be increased on each January 1 hereafter by 4,428,438 shares of common stock. Options granted under the 2017 Plan generally vest over four years. Common stock subject to an award that expires or is canceled, forfeited, exchanged, settled in cash or otherwise terminated without delivery of shares, and shares withheld or surrendered to pay the exercise price of, or to satisfy the withholding obligations with respect to an award, will become available for future grants under the 2017 Plan. At March 31, 2018, 6,482,775 shares were available for issuance under the 2017 Plan. The Company currently uses authorized and unissued shares to satisfy share award exercises.

In November 2017, the Company’s board of directors adopted the Employee Stock Purchase Plan (the "ESPP"). The ESPP became effective on in November of 2017, after the date our registration statement was declared effective by the SEC. As of March 31, 2018, the participation in the ESPP is not effective and no shares were purchased.

The fair value for the Company’s stock options granted during the year ended March 31, 2018 and 2017 was estimated at the date of grant using a Black Scholes option-pricing model using the following weighted average assumptions:

The following table summarizes option activity under the Plans and related information:

	Number of Options			Weighted Average Exercise Price (per share)		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Balances at December 31, 2017		3,500,075		$	5.43		8.8		31,784,488
Granted		34,875		$	19.02
Exercised		(26,334	)	$	2.36
Forfeited		(53,579	)	$	2.77
Balances at March 31, 2018		3,455,037		$	5.64		8.6		52,025,934
Options vested and expected to vest at March 31, 2018		3,455,037		$	5.64		8.6		52,025,934
Options vested and exercisable at March 31, 2018		1,043,709		$	2.32		7.6		19,172,966

The Company expects all outstanding stock options at March 31, 2018 to fully vest. The weighted average grant date fair value per share for the period ended March 31, 2018 and 2017 was $8.42 and $1.56, respectively. Compensation expense relating to stock options was approximately $1.7 million and $158,000 for the three months ended March 31, 2018 and 2017, respectively. The total fair value of shares vested during the three months ended March 31, 2018 and 2017 was approximately $0.4 million and $98,000, respectively.

The total unrecognized compensation expense related to non-vested stock options granted is $9.2 million and is expected to be recognized over a weighted average period of 2.71 years as of March 31, 2018.

In 2014 and 2015, the Company granted shares of the Company’s common stock (the “incentive units”) to certain members of management pursuant to restricted stock agreements (the “RSAs”).

The incentive units were granted with an exercise price equal to the fair market value on the date of grant, are subject to vesting, and if exercised in advance of vesting were subject to the Company’s right to repurchase. Upon vesting, the incentive units automatically convert to common stock. 50% of incentive units granted to executives vest based on performance meeting or exceeding EBITDA targets, as defined in the RSAs. Incentive units granted to non-executives and the remaining 50% of incentive units granted to executives vest 25% on the first anniversary date of the grant, and ratably over the remaining three years. The graded-vesting attribution method is used by the Company to determine the monthly stock-based compensation expense over the applicable vesting periods. In 2017, the Board of Directors waived the EBITDA criteria associated with the annual tranche of performance vesting stock options resulting in a modification.

The Company did not grant any incentive units during the first quarter of 2018. As of March 31, 2018, the aggregate intrinsic value for 1,257,000 non-vested incentive units was $26.0 million, and the total unrecognized compensation related to non-vested incentive units granted was approximately $6.9 million and is expected to be recognized over a weighted-average remaining period of 0.8 years. During the first quarter of 2018, approximately 979,000 units vested. Compensation expense relating to incentive units was approximately $2.1 million and $10,000 for the three months ended March 31, 2018 and 2017, respectively.

The Company granted 382,427 restricted stock units during the three months ended March 31, 2018. As of March 31, 2018, 1,270,966 units of restricted stock is expected to vest over a weighted average remaining contractual period of 2.1 years with an aggregate intrinsic value of approximately $26.3 million. The total unrecognized compensation related to restricted stock units was $15.4 million as of March 31, 2018 and is expected to be recognized over a weighted average period of 3.57 years. Compensation expense relating to restricted stock units was approximately $1.2 million and $0 for the three months ended March 31, 2018 and 2017, respectively.

Stock-based compensation expense, which includes stock options, restricted stock units and incentive units, was recognized as follows:

	Three Months Ended
	March 31, 2018		March 31, 2017
	(In thousands)
Cost of revenue – subscription	$	121	$	9
Cost of revenue – services and other		375		18
Research and development		641		30
General and administrative		2,340		30
Sales and marketing		1,662		71
Total stock-based compensation	$	5,139	$	158

The U.S. 2017 Tax Cuts and Jobs Act (the “Act”), which was signed into law on December 22, 2017 and effective January 1, 2018, reduces the U.S. federal corporate tax rate from 35% to 21%. There was no net impact to the Company’s provision for income taxes or net deferred taxes due to the Company’s valuation allowance. The decrease in future tax assets via the reduced rate was offset by the decrease in our valuation allowance.

The Act subjects a U.S. shareholder to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for GILTI, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. Given the complexity of the GILTI

provisions, we are still evaluating the effects of the GILTI provisions and have not yet determined our accounting policy. As of March 31, 2018, the Company is not subject to the GILTI provisions due to Section 956 inclusions.

The provision for income taxes for 2018 and 2017 is generated from activity in certain foreign jurisdictions by our consolidated subsidiaries.

The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. During the three months ended March 31, 2018 and 2017 the Company did not record any material interest or penalties.

The Company files tax returns in the U.S. federal jurisdiction, in several state jurisdictions, and in several foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years before 2013 and is no longer subject to state, local and foreign income tax examinations by tax authorities for years before 2012. The Company is not currently under income tax audit in any jurisdiction.

Basic and diluted net loss per share is computed by dividing net loss attributable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is calculated using our weighted-average outstanding common shares including the dilutive effect of stock awards. In periods when the Company recognizes a net loss, the Company excludes the impact of outstanding stock awards from the diluted loss per share calculation as their inclusion would have an antidilutive effect.

The following table sets forth the calculation of basic and diluted net loss per share during the periods presented:

	Three months ended
	March 31, 2018			March 31, 2017
	(In thousands, except share data)
Numerator:
Net loss	$	(5,967	)	$	(2,283	)
Deemed dividends to preferred stockholders		—			(6,170	)
Net loss attributable to common shareholders	$	(5,967	)	$	(8,453	)

Denominator
Weighted average shares outstanding
Basic and diluted		85,719,240			47,208,477
Net loss attributable to common shareholders
Basic and diluted	$	(0.07	)	$	(0.18	)

The following weighted average outstanding shares of common stock equivalents were excluded from the computation of the diluted net loss per share attributable to common shareholders for the periods presented because their effect would have been anti-dilutive. For the period prior to our initial public offering, convertible preferred stock is not included in this computation as it was contingently convertible based upon a future event.

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

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our Unaudited Condensed Consolidated Financial Statements and notes thereto in Part I, Item 1 of this Quarterly Report on Form 10-Q (this “Quarterly Report”) and the Annual Report, including the Consolidated Financial Statements and related notes included therein.

This Quarterly Report 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. All statements of historical fact included in this Quarterly Report regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. These forward-looking statements are based on management’s current beliefs, based on currently available information, as to the outcome and timing of future events. The forward-looking statements are contained principally in this Quarterly Report in “Management’s Discussion and Analysis of Financial Condition and Result of Operations” and “Risk Factors”.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained this Quarterly Report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors. Important factors, some of which are beyond our control, that could cause actual results to differ materially from our historical results or those expressed or implied by these forward-looking statements include the following: our ability to attract and retain customers and our ability to deepen our relationships with existing customers; our expectations regarding our customer growth rate; our ability to maintain successful relationships with our channel partners and further develop strategic relationships; our ability to develop or acquire new solutions, improve our platform and solutions and increase the value of and benefits associated with our platform and solutions; our ability to compete successfully against current and future competitors; our plans to further invest in and grow our business, and our ability to effectively manage our growth and associated investments; our ability to adapt and respond to rapidly changing technology, evolving industry standards, changing regulations and changing customer needs; our ability to maintain and enhance our brand or reputation as an industry leader and innovator; our ability to hire, retain, train and motivate our senior management team and key employees; our ability to successfully enter new markets and manage our international expansion; adverse economic conditions in the United States, Europe or the global economy; significant changes in the contracting or fiscal policies of the public sector; actual or perceived failures by us to comply with privacy policy or legal or regulatory requirements; our ability to maintain third-party licensed software in or with our solutions; and our ability to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies. These and other important risk factors are described more fully in our reports and other documents filed with the SEC, including under “Risk Factors” in Part I, Item 1A in the Annual Report and “Risk Factors” in Part II, Item 1A 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. 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 relate only to events as of the date hereof. We undertake no obligation to update any forward-looking statements made in this Quarterly Report to reflect events or circumstances after the date of this Quarterly Report 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.

SailPoint is the leading provider of enterprise identity governance solutions. Our open identity platform provides organizations with critical visibility into who currently has access to which resources, who should have access to those resources, and how that access is being used.

We offer both on-premises software and cloud-based solutions, which empower our customers to efficiently and securely govern the digital identities of employees, contractors, business partners and other users, and manage their constantly changing access rights to enterprise applications and data across hybrid IT environments, whether comprised of on-premises, cloud or mobile applications. We help customers enable their businesses with more agile and innovative IT, enhance their security posture and better meet compliance and regulatory requirements. We believe that our open identity platform is a critical, foundational layer of a modern cyber security strategy that complements and builds upon traditional perimeter- and endpoint-centric security solutions, which on their own are increasingly insufficient to secure organizations, and their applications and data. Our customers include many of the world’s largest and most complex organizations, including commercial enterprises, educational institutions and governments.

We were founded by identity industry veterans to develop a new category of identity management solutions and address emerging identity governance challenges. Since our inception, we have focused on driving innovation in the identity market, with our key milestones including:

Our success is principally dependent on our ability to deliver compelling solutions to attract new customers and retain existing customers. Delivering these solutions is challenging because our customers have large, complex IT environments, often rely on both legacy and innovative technologies, and deploy different business models, including on premise and cloud solutions. Rising security threats and evolving regulations and compliance standards for cyber security, data protection, privacy and internal IT controls create new opportunities for our industry and require us to adapt our solutions to be successful. Our ability to continue to maintain our historical growth rates is also challenging because our growth strategy depends in part on our ability to expand our global presence and invest in new vertical markets, while competing against much larger companies with more recognizable brands and financial resources. Although we seek to grow rapidly, we also focus on delivering positive net cash from operations while continuing to invest in our platform and to deliver innovative solutions to our customers. Additionally, our gross margins vary depending on the type of solution we sell, and a shift in the mix of our solutions could affect our performance relative to historical results.

We deliver an integrated set of solutions that supports all aspects of identity governance, including provisioning, access request, compliance controls, password management and identity governance for data stored in files. Our solutions are built on an open identity platform, which offers connectivity to a variety of security and operational IT applications, extending the reach of our identity governance processes and enabling effective identity governance controls across customer environments.

Our set of solutions currently consists of (i) IdentityIQ, our on-premises identity governance solution, (ii) IdentityNow, our cloud-based, multi-tenant governance suite, which is delivered as a subscription service, and (iii) SecurityIQ, our on-premises identity governance for files solution that secures access to data stored in file servers, collaboration portals, mailboxes and cloud storage systems, and (iv) IdentityAI, our cloud-based advanced identity analytics solution. See the section titled “Business—Products” in Part I, Item 1 of the Annual Report for more information regarding our solutions.

For our IdentityIQ and SecurityIQ solutions, our customers typically purchase a perpetual software license, which includes one year of maintenance. Our maintenance provides software maintenance as well as access to our technical support services during the maintenance term. After the initial maintenance period, customers with perpetual licenses may renew their maintenance agreement for an additional fee. For our cloud-based solutions, IdentityNow and IdentityAI, for a subscription fee, we offer customers access to this

solution and infrastructure support for the duration of their subscription agreement. Our standard subscription agreement for our IdentityNow solution has a duration of three years.

Pricing for each of our solutions is dependent on the number of digital identities of employees, contractors, business partners and other users that the customer is entitled to govern with the solution. We also package and price our IdentityIQ and IdentityNow solutions into modules. Each module has unique functionalities, and our IdentityIQ and IdentityNow customers are able to purchase one or more modules, depending on their needs. We package and price SecurityIQ, our identity governance for files solution, by target storage systems. Thus, our revenue from any customer is generally determined by the number of identities that the customer is entitled to govern as well as the number of modules (for our IdentityIQ and IdentityNow solutions) or target storage systems (for our SecurityIQ solution) purchased by the customer.

Our go-to-market strategy consists of both direct sales and indirect sales through our partnership network of systems integrators, value-added resellers and adjacent technology vendors. We work closely with systems integrators, many of whom have dedicated SailPoint practices (including Accenture, Deloitte, KPMG and PwC), with some dating back more than seven years, and resellers (including value-added resellers such as Optiv) to identify potential sales opportunities and help us increase our reach, and we frequently cooperate with systems integrators to make joint sales proposals to address our mutual customers’ requirements. We also collaborate with leading access management vendors by adding our identity governance capabilities to their access management services (e.g., Microsoft, Okta and VMware). We do not have any material payment obligations to systems integrators, resellers or our technology partners; nor do they have any material payment obligations to us, except that resellers typically purchase solutions directly from us and resell to customers. See the section titled “Business—Partnerships and Strategic Relationships” in Part I, Item 1 of the Annual Report for more information regarding our partnership network.

In addition to our solutions, we offer professional services to our customers and partners to configure and optimize the use of our solutions as well as training services related to the configuration and operation of our platform. Most of our professional services activity is in support of our partners, who perform a significant majority of all initial and follow-on implementation work for our customers. Most of our consulting services are priced on a time and materials basis; our training services are provided through multiple pricing models, including on a per-person basis (for courses provided at our headquarters and on-site at our customers’ offices) and a flat-rate basis (for our e-learning course).

We devote significant resources to acquire new customers, in both existing and new markets, in order to grow our customer base. In addition, we focus on three distinct opportunities to increase sales to existing customers: (i) expand the number of digital identities; (ii) up-sell additional modules or target storage systems, as applicable, within a single solution; and (iii) cross-sell additional solutions.

Our historical financial performance has been, and we expect our financial performance in the future to be, driven by our ability to:

In addition to our GAAP financial information, we monitor the following key metrics to help us measure and evaluate the effectiveness of our operations:

In addition to our financial information presented in accordance with GAAP, we use adjusted EBITDA, a non-GAAP financial measure, to clarify and enhance our understanding of past performance and future prospects. Generally, a non-GAAP financial measure is a numerical measure of a company’s operating performance, financial position or cash flow that includes or excludes amounts that are included or excluded from the most directly comparable measure calculated and presented in accordance with GAAP.

Our non-GAAP financial measure of adjusted EBITDA may not provide information that is directly comparable to that provided by other companies in our industry because they may calculate adjusted EBITDA differently. In addition, there are limitations in using non-GAAP financial measures, such as adjusted EBITDA, because they are not prepared in accordance with GAAP and exclude expenses that may have a material impact on our reported financial results. In particular, interest expense, which is excluded from adjusted EBITDA, has been and will continue to be a significant recurring expense in our business for the foreseeable future. The presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with GAAP. We urge you to review the reconciliations of our adjusted EBITDA to net loss, the comparable GAAP financial measure, included below, and not to rely on any single financial measure to evaluate our business.

We calculate adjusted EBITDA as net income (loss) adjusted to exclude income taxes, interest expense, net, depreciation and amortization, purchase accounting adjustments, acquisition and sponsor related costs and stock-based compensation expense.

We believe that adjusted EBITDA is a measure widely used by securities analysts and investors to evaluate the financial performance of our company and other companies. We believe that adjusted EBITDA is an important measure for evaluating our performance because it facilitates comparisons of our core operating results from period to period by removing the impact of our capital structure (net interest income or expense from our outstanding debt), asset base (depreciation and amortization), tax consequences, purchase accounting adjustments, acquisition and sponsor related costs and stock-based compensation. In addition, we base certain of our forward-looking estimates and budgets on adjusted EBITDA.

The following table reflects the reconciliation of adjusted EBITDA to net loss calculated in accordance with GAAP:

	March 31, 2018			March 31, 2017
	(In thousands)
Net loss	$	(5,967	)	$	(2,283	)
Stock-based compensation		5,139			158
Amortization		2,206			2,221
Depreciation		421			255
Purchase price accounting adjustment ⁽¹⁾		13			55
Acquisition and sponsor related costs		—			328
Interest expense		1,178			2,657
Income tax expense (benefit)		352			(239	)
Adjusted EBITDA	$	3,342		$	3,152

See the section titled “Components of Results of Operations” in Part II, Item 7 of the Annual Report, for information regarding the components of our results of operations.

The following table sets forth our statement of operations for the periods presented:

	Three Months Ended
	March 31, 2018			March 31, 2017
	(In thousands)
Revenue:
Licenses	$	16,987		$	12,236
Subscription		23,005			14,952
Services and other		9,722			8,278
Total revenue		49,714			35,466
Cost of revenue:
Licenses		1,138			1,087
Subscription ⁽¹⁾		4,658			3,575
Services and other ⁽¹⁾		6,974			5,473
Total cost of revenue		12,770			10,135
Gross profit		36,944			25,331
Operating expenses:
Research and development ⁽¹⁾		9,762			6,927
General and administrative ⁽¹⁾		7,657			3,032
Sales and marketing ⁽¹⁾		23,815			15,173
Total operating expenses		41,234			25,132
(Loss) income from operations		(4,290	)		199
Other expense, net:
Interest expense, net		(1,178	)		(2,657	)
Other, net		(147	)		(64	)
Total other expense, net		(1,325	)		(2,721	)
Loss before income taxes		(5,615	)		(2,522	)
Income tax (expense) benefit		(352	)		239
Net loss	$	(5,967	)	$	(2,283	)

	Three Months Ended
	March 31, 2018		March 31, 2017
	(In thousands)
Cost of revenue – subscription	$	121	$	9
Cost of revenue – services and other		375		18
Research and development		641		30
General and administrative		2,340		30
Sales and marketing		1,662		71
Total stock-based compensation	$	5,139	$	158

The following table sets forth the consolidated statements of operations data for each of the periods presented as a percentage of total revenue:

	Three Months Ended
	March 31, 2018			March 31, 2017
Revenue:
Licenses		34	%		35	%
Subscription		46			42
Services and other		20			23
Total revenue		100			100
Cost of revenue:
Licenses		2			3
Subscription		10			10
Services and other		14			15
Total cost of revenue		26			28
Gross profit		74			72
Operating expenses:
Research and development		20			19
General and administrative		15			9
Sales and marketing		48			43
Total operating expenses		83			71
(Loss) income from operations		(9	)		1
Other expense, net:
Interest expense, net		(2	)		(8	)
Other, net		(0	)		(0	)
Total other expense, net		(2	)		(8	)
Loss before income taxes		(11	)		(7	)
Income tax (expense) benefit		(1	)		1
Net loss		(12	)%		(6	)%

	Three Months Ended
	March 31, 2018		March 31, 2017		variance $		variance %
	(In thousands, except percentages)
Revenue:
Licenses	$	16,987	$	12,236	$	4,751		39	%
Subscription		23,005		14,952		8,053		54	%
Services and other		9,722		8,278		1,444		17	%
Total revenue	$	49,714	$	35,466	$	14,248		40	%

License Revenue. License revenue increased by $4.8 million, or 39%, for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. License revenue from new customers and existing customers were nearly equal for the three months ended March 31, 2018; however, the increase in total license revenue compared to March 31, 2017 was primarily attributable to sales to the new customers, with 72% year over year growth. During the three months ended March 31, 2018 and 2017 revenue from new customers was $8.4 million and $5.0 million, respectively; and license revenue from existing customers was $8.6 million and $7.2 million, respectively. Our revenue from any single customer is determined by the number of identities the customer is entitled to govern as well as the number of modules and solutions purchased.

Subscription Revenue. Subscription revenue increased by $8.1 million, or 54%, for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. The increase was primarily a result of an increase in ongoing maintenance renewals and an increase in maintenance revenue derived from new licenses. Our customer base increased by 259, or 36%, from 725 customers at March 31, 2017 to 984 customers at March 31, 2018. During the three months ended March 31, 2018 and 2017, revenue from existing customers contributed to more than 95% of subscription revenue.

Services and Other Revenue. Services and other revenue increased by $1.4 million, or 17%, for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. The increase is primarily a result of an increase in the number of customers using our consulting and training services.

Geographic Regions. Our operations in the United States were responsible for the largest portion of our revenue in each three months ended March 31, 2018 and 2017 because of our larger and more established sales force and partner network in the United States as compared to our other regions. Revenue from both Europe, the Middle East and Africa (“EMEA”) and the rest of the world also increased for three months ended March 31, 2018 and 2017, primarily due to our investment in increasing the size of our international sales force and strengthening partnerships with global system integrators and resellers worldwide.

The following table sets forth summary of our consolidated total revenue by geography and the respective percentage of total revenue:

	Three Months Ended
	March 31, 2018			March 31, 2017
	$		% of revenue	$		% of revenue
	(In thousands, except percentages)
United States	$	32,698	66%	$	25,915		73	%
EMEA⁽¹⁾		11,671	23%		5,814		16	%
Rest of the World ⁽¹⁾		5,345	11%		3,737		11	%
Total revenue	$	49,714	100%	$	35,466		100	%

	Three Months Ended
	March 31, 2018		March 31, 2017		variance $		variance %
Cost of revenue:	(In thousands, except percentages)
Licenses	$	1,138	$	1,087	$	51		5	%
Subscription		4,658		3,575		1,083		30	%
Services and other		6,974		5,473		1,501		27	%
Total cost of revenue	$	12,770	$	10,135	$	2,635		26	%

Cost of License Revenue. The cost of license revenue increased slightly by 5% for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. During each of the three months ended March 31, 2018 and 2017, cost of license revenue included $1.0 million in amortization of intangibles acquired in business combinations.

Cost of Subscription Revenue. Cost of subscription revenue increased by $1.1 million, or 30%, for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. Approximately $0.8 million was attributable to an increase in headcount and related allocated expenses to support growth of our subscription cloud-based offering and ongoing maintenance for our expanding licensed customer base. Approximately $0.3 million was attributable to our increased cloud-based hosting costs.

Cost of Services and Other Revenue. Cost of services and other revenue increased by $1.5 million, or 27%, for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. Substantially all of the increase was the result of our increased services and training headcount, related allocated overhead and related stock based compensation expense.

	Three Months Ended
	March 31, 2018			March 31, 2017			variance $			variance %
	(In thousands, except percentages)
Gross profit:
Licenses	$	15,849		$	11,149		$	4,700			42	%
Subscription		18,347			11,377			6,970			61	%
Services and other		2,748			2,805			(57	)		(2	)%
Total gross profit	$	36,944		$	25,331		$	11,613			46	%
Gross Margin:
Licenses		93	%		91	%
Subscription		80	%		76	%
Services and other		28	%		34	%
Total gross margin		74	%		71	%

Licenses. License gross profit increased by $4.7 million, or 42%, for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. The increase was the result of increased license revenues with only minor increases in third party royalties.

Subscription. Subscription gross profit increased by $7.0 million, or 61%, for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. The increase was the result of growth in subscription revenue, as described above, coupled with growth in costs of subscription revenue at a rate lower than our revenue growth as we continue to build economies of scale within our customer support organization and our utilization of cloud-based hosting services.

Services and Other. Services and other gross profit decreased by $0.1 million, or 2%, for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. This decrease was primarily attributable to the higher costs associated with expanding our infrastructure for our professional services and training organization to support an increasing number of customers.

	Three Months Ended
	March 31, 2018		March 31, 2017		variance $		variance %
Operating expenses:	(In thousands, except percentages)
Research and development	$	9,762	$	6,927	$	2,835		41	%
General and administrative		7,657		3,032		4,625		153	%
Sales and marketing		23,815		15,173		8,642		57	%
Total operating expenses	$	41,234	$	25,132	$	16,102		64	%

Research and Development Expenses. Research and development expenses increased by $2.8 million, or 41%, for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. Approximately 83% of this increase was the result of an increase in headcount, and related allocated overhead, to optimize and expand our product offerings as well as pursue innovation in identity governance. Substantially all of the remaining increase in research and development expenses was the result of an increase in stock based compensation expense and an increase in software and maintenance expenses, primarily cloud-based hosting costs related to the development of our cloud-based offering.

General and Administrative Expenses. General and administrative expenses increased by $4.6 million, or 153%, for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. Approximately 82% of the increase was the result of an increase in corporate headcount, and related allocated overhead, to support our transition to a public company and the growth and scale of the business. During the first quarter of 2018, approximately $2.3 million of the increase was related to stock based compensation expense. Additionally, general and administrative expenses increased as a result of increase in facility expense and professional services expenses comprised of legal, accounting and consulting fees.

Sales and Marketing Expenses. Sales and marketing expenses increased by $8.6 million, or 57%, for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. Approximately $7.6 million, or 88%, of the increase was the result of our increased sales and marketing headcount, stock based compensation expense and related allocated overhead, to support increased penetration into our existing customer base as well as expansion into new industry verticals and geographic markets. As our

headcount increased, we also experienced related increases in travel and advertising costs of $0.5 million and $0.4 million, respectively, for the three months ended March 31, 2018 compared to the three months ended March 31, 2017.

Interest expense, net of interest income, decreased by $1.5 million, or 56%, for the three months ended March 31, 2018, compared to March 31, 2017. This decrease was primarily due to refinancing our debt to lower the stated interest rate from 9.0% to 5.5%, as well as decrease in the term loan principal balance and related lower amortization of debt issuance cost.

Provision for income taxes consists of U.S. and state income taxes and income taxes in certain foreign jurisdictions in which we conduct business. We have a full valuation allowance for net deferred tax assets, including net operating loss carryforwards, and tax credits related primarily to research and development for our operations in the United States. We expect to maintain this full valuation allowance for the foreseeable future.

Our income tax rate varies from the federal statutory rate due to the valuation allowances on our deferred tax assets and foreign withholding taxes; changing tax laws, regulations and interpretations in multiple jurisdictions in which we operate; changes to the financial accounting rules for income taxes; unanticipated changes in tax rates; differences in accounting and tax treatment of our stock-based compensation and the tax effects of purchase accounting for acquisitions. We expect this fluctuation in income tax rates, as well as its potential impact on our results of operations, to continue.

We operate in several tax jurisdictions and are subject to taxes in each country or jurisdiction in which we conduct business including the United States and Israel. Earnings from our non-U.S. activities are subject to local country income tax and may be subject to U.S. income tax if such earnings are distributed to the U.S. We have incurred net losses in each fiscal year since our inception except during the fourth quarter of each year. We have recorded insignificant U.S. federal income tax expense. Our tax expense to date relates primarily to foreign income taxes, mainly from our Israeli activities, and to a lesser extent, state income taxes. The effective tax rate for the three months ended March 31, 2018 is 6.3% compared to 9.4% for the prior period. The difference in effective tax rate is primarily due to the increase in foreign taxes and in worldwide pre-tax book loss.

For further discussion regarding tax matters, see Note 8 of the “Notes to Consolidated Financial Statements” included in Part I, Item 1 of the Annual Report.

As of March 31,2018, we had $131 million of cash and cash equivalents and $1.5 million of availability under our revolving credit facility. As of March 31, 2018, we had approximately $3.3 million of cash and cash equivalents held in our foreign subsidiaries. We do not consider the earnings of our foreign subsidiaries, with the exception of India, to be permanently reinvested in foreign jurisdictions and have consistently applied Section 956 of the Internal Revenue Code of 1986, as amended, to such earnings. As a result of applying Section 956 consistently to our intercompany cash flows, the majority of the earnings in our foreign subsidiaries represent income that was previously taxed in the United States. As a result, there would be no material income tax consequences to repatriating the cash currently held in our foreign subsidiaries. In India, we continue to invest and grow our research and development activities and have no plans to repatriate undistributed earning held in India back to the U.S. parent company, and therefore consider earnings in India to be permanently reinvested.

We believe that existing cash and cash equivalents, any positive cash flows from operations and available borrowings under our revolving credit facility will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the continued expansion of sales and marketing activities and the introduction of new solutions and product enhancements. To the extent existing cash and cash equivalents and borrowings under our revolving credit facility are not sufficient to fund future activities, we may seek to raise additional funds through equity, equity-linked or debt financings. If we raise additional funds through the incurrence of indebtedness, such indebtedness may have rights that are senior to holders of our equity securities and could contain covenants that restrict operations. Any additional equity financing may be dilutive to our existing stockholders. Although we are not currently a party to any agreement or letter of intent with respect to potential investments in, or acquisitions of, complementary businesses, services or technologies, we may enter into these types of arrangements in the future, which could also require us to seek additional equity financing, incur indebtedness, or use cash resources. We have no present understandings, commitments or agreements to enter into any such acquisitions. Also, as of March 31, 2018, we had no material commitments for capital expenditures.

Since inception, we have financed operations primarily through license fees, maintenance fees, subscription fees, consulting and training fees, borrowings under our credit facility and the sale of equity securities including initial public offering. Our principal uses of cash are funding operations and capital expenditures. Over the past several years, revenue has increased significantly from year to year and, as a result, cash flows from customer collections have increased. However, operating expenses have also increased as we have invested in growing our business. Our operating cash requirements may increase in the future as we continue to invest in the strategic growth of our company.

Pursuant to a credit and guaranty agreement by and among SailPoint Technologies, Inc., as the borrower, and SailPoint Technologies Intermediate Holdings, LLC and SailPoint International, Inc., as guarantors, the lenders party thereto from time to time and Goldman Sachs Bank USA, as administrative agent and collateral agent, as amended, we have a senior secured credit facility (our “credit facility”) that consists of a term loan facility with a balance outstanding of $70.0 million as of March 31,2018, a $7.5 million revolving credit facility, and a letter of credit sub-facility with an aggregate limit equal to the lesser of $7.5 million and the aggregate unused amount of the revolving commitments then in effect. Each of the term loan facility and revolving credit facility has a maturity of five years and will mature on August 16, 2021.

As of March 31, 2018, we had $1.5 million available under the revolving credit facility and $6.0 million in standby letters of credit outstanding, issued primarily in connection with our new corporate headquarters lease.

All of our obligations under our credit facility are guaranteed by our existing and future domestic subsidiaries and, subject to certain exceptions, secured by a security interest in substantially all of our tangible and intangible assets.

Borrowings under our credit facility bear interest at our option at (i) LIBOR, subject to a 1.00% floor, plus a margin, or (ii) the base rate, subject to a 3.50% floor, plus a margin. For LIBOR borrowings, the applicable rate margin is 4.50%. For base rate borrowings, the applicable margin is 4.00%. We are also required to pay a 0.50% per annum fee on undrawn amounts under our revolving credit facility, payable quarterly in arrears.

During the three months ended March 31, 2018, cash provided by operating activities was $15.3 million, which consisted of a net loss of $6.0 million, adjusted by non-cash charges of $7.9 million and a net change of $13.4 million in our net operating assets and liabilities. The non-cash charges are primarily comprised of depreciation and amortization of $2.6 million, amortization of debt issuance costs of $0.1 million, and stock-based compensation of $5.1 million. The change in our net operating assets and liabilities was primarily as a result of an increase in deferred revenue of $5.9 million due to the timing of billings and cash received in advance of revenue recognition primarily for subscription and support services, an decrease in accounts receivable of $16.9 million due to the timing of receipts of payments from customers, a decrease in prepayments and other assets of $1.4 million, and an increase in income taxes payable of $0.2 million, partially offset by an decrease in accounts payable of $0.4 million due to timing of cash disbursements, and an decrease in accrued expenses and other liabilities of $10.7 million due primarily to accrual of additional commissions and bonuses.

During the three months ended March 31, 2017, cash provided by operating activities was $6.9 million, which consisted of a net loss of $2.3 million, adjusted by non-cash charges of $2.7 million and a net change of $6.4 million in our net operating assets and liabilities. The non-cash charges are primarily comprised of depreciation and amortization of $2.5 million, amortization of debt issuance costs of $0.2 million, deferred taxes of $0.1 million and stock-based compensation of $0.2 million. The change in our net operating assets and liabilities was primarily as a result of an increase in deferred revenue of $2.1 million due to the timing of billings

and cash received in advance of revenue recognition primarily for subscription and support services, a decrease in accounts receivable of $6.5 million due to the timing of receipts of payments from customers, an increase in accounts payable of $0.7 million due to timing of cash disbursements, partially offset by a decrease in prepayments and other assets of $0.3 million, a decrease in income taxes payable of $0.3 million and a decrease in accrued expenses of $2.3 million due primarily to the payout of prior period commissions and bonuses.

During the three months ended March 31, 2018, cash used in investing activities was $0.5 million, consisting of $0.5 million in purchases of property and equipment, compared to three months ended March 31, 2017, cash used in investing activities was $0.3 million, consisting of $0.4 million in purchases of property and equipment, partially offset by $0.1 million in proceeds from sales of property and equipment.

During the three months ended March 31, 2018, cash provided by financing activities was $0.1 million proceeds from exercise of stock options.

During the three months ended March 31, 2017, cash used in financing activities was $0.2 million, consisting of $0.3 million for the repurchase of common and preferred stock, partially offset by proceeds from the exercise of stock options.

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs, and expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these judgments and estimates under different assumptions or conditions and any such differences may be material. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

We believe that the accounting policies associated with revenue recognition, share-based compensation and income taxes are most significant areas involving management's judgments and estimates. Therefore, these are considered to be our critical accounting policies and estimates. There have been no material changes to these estimates or the policies related to them during the three months ended March 31, 2018. For a full discussion of these estimates and policies, see the section titled “Critical Accounting Policies and Estimates” in Part II, Item 7 of the Annual Report.

See Note 2 to our condensed consolidated financial statements included in Part I, Item 1 for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on our results of operations, financial condition, and cash flows.

We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to take advantage of all of the reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards, until we are no longer an emerging growth company. Our election to use the phase-in periods permitted by this election may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the longer phase-in periods under the JOBS Act and who will comply with new or revised financial accounting standards. If we were to subsequently elect to instead comply with these public company effective dates, such election would be irrevocable pursuant to the JOBS Act.

For a description of market risks, see Part II, Item 7A in the Annual Report. Our exposure to market risks has not changed materially from the exposure described in the Annual Report.

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, the Company’s disclosure controls and procedures were effective at a reasonable assurance level such that material information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

There were no changes to our internal control over financial reporting (as defined in Rules 13a‑15(f) and 15d‑15(f) under the Exchange Act) during the quarter ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.

We are not currently a party to, nor is our property currently subject to, any material legal proceedings. We are not aware of any governmental inquiries or investigations into our business.

Except for the additional risk factor set forth below, there have been no material changes to the risk factors disclosed in Part I, Item 1A in the Annual Report.

If we lose emerging growth company status on December 31, 2018, we will incur substantial costs and significant demands will be placed upon management in connection with complying with non-emerging growth company requirements earlier than we had planned.

The aggregate worldwide market value of our common stock held by non-affiliates as of June 29, 2018 may equal or exceed $700 million, which would cause us to become a large accelerated filer on December 31, 2018. Based on the transition provisions outlined in Exchange Act Rule 12b-2, if we become a large accelerated filer on December 31, 2018, we will lose emerging growth company status on the same date, which will require us to significantly accelerate our compliance efforts to, for example, allow our independent registered public accounting firm to attest to the effectiveness of our internal controls as required by Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) in our Annual Report on Form 10-K for the year ending December 31, 2018.

Additionally, if we cease to be an emerging growth company on December 31, 2018, we will be required to implement ASU No. 2014-09, Revenue from Contracts with Customers (“Topic 606”) for the year ending December 31, 2018 instead of December 31, 2019, which is the date that emerging growth companies are first required to implement Topic 606. Because our revenue recognition process is complex, this accelerated timeframe would result in significant additional costs beyond that comprehended in our 2018 financial plan and require substantially burdensome efforts, which would include maintaining additional accounting records to allow us to track transactions on two revenue recognition standards, significantly accelerating our planned timeline for implementing appropriate policies and procedures for recording transactions on the new basis, and hiring additional personnel and consultants. Moreover, because it will take us a significant amount of time to fully implement Topic 606, we anticipate that such implementation will not be complete, and all historical transactions will not be analyzed under Topic 606, until after our Quarterly Report on Form 10-Q for the quarter ending September 30, 2018. Therefore, we do not expect to be able to provide investors with quantitative guidance regarding our expected financial results based on the new reporting standard in advance of releasing such results in connection with our Annual Report on Form 10-K for the year ending December 31, 2018. Consequently, our actual financial results for the year ending December 31, 2018, as reported in accordance with Topic 606, may differ substantially from what you may anticipate based on our historical results of operations and guidance.

In addition to the substantial additional expenses beyond what we had planned, our management would need to devote significant time and efforts to implement and comply with the additional standards, rules and regulations that would apply to us as a result of becoming a large accelerated filer and losing our emerging growth company status, diverting such time from the day-to-day conduct of our business operations.

Furthermore, due to the complexity and logistical difficulty of implementing the standards, rules and regulations that apply to non-emerging growth companies, such as Section 404 of the Sarbanes-Oxley Act and Topic 606, on an accelerated timeframe, there is an increased risk that we may be found to be in non-compliance with such standards, rules and regulations or to have significant deficiencies or material weaknesses in our internal controls over financial reporting.

On November 16, 2017, the Registration Statement on Form S-1 (File No. 333-221036) (the “Registration Statement”) relating to our initial public offering was declared effective by the SEC. Pursuant to the Registration Statement, we registered an aggregate of 23,000,000 shares of our common stock, of which 15,800,000 shares were sold by us and 7,200,000 shares were sold by certain selling stockholders named therein at a price to the public of $12.00 per share. We received net proceeds of approximately $172.0 million, after deducting underwriting discounts and commissions and offering-related expenses. There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus dated November 16, 2017 and filed with the SEC on November 17, 2017 pursuant to Rule 424(b) of the Securities Act of 1933, as amended. As of March 30, 2018, we have used $90.0 million of the proceeds from our initial public offering to repay borrowings under our term loan facility and approximately $1.4 million of such proceeds to pay a related prepayment premium, both of which were made concurrently with the closing of our

initial public offering in the fourth quarter of 2017. As of March 30, 2018, all of the remaining net proceeds are held in cash and have not been deployed.

The Company’s board of directors (the “Board”) has determined that it intends to hold the Company’s first Annual Meeting of Stockholders (the “2018 Annual Meeting”) on November 6, 2018, at a time and location to be specified in the Company’s proxy statement for the 2018 Annual Meeting (the “Proxy Statement”). The record date for determining stockholders eligible for notice of, and to vote at, the 2018 Annual Meeting has not yet been set by the Board and will also be included in the Proxy Statement.

Because the 2018 Annual Meeting will be the Company’s first annual meeting as a public company, pursuant to Rule 14a-8 (“Rule 14a-8”) under the Exchange Act, stockholders of the Company who wish to have a proposal considered for inclusion in the Company’s proxy materials for the 2018 Annual Meeting pursuant to Rule 14a-8 must ensure that their proposal is received by the Secretary of the Company at 11305 Four Points Drive, Building 2, Suite 100, Austin, Texas 78726 by June 6, 2018, which the Company has determined to be a reasonable time before it expects to begin to print and send its proxy materials. Rule 14a-8 proposals must also comply with the requirements of Rule 14a-8 and other applicable laws in order to be eligible for inclusion in the Company’s proxy materials for the 2018 Annual Meeting. The June 6, 2018 deadline will also apply in determining whether notice of a stockholder proposal is timely for purposes of exercising discretionary voting authority with respect to proxies under Rule 14a-4(c) under the Exchange Act.

In addition, in accordance with the requirements contained in the Company’s Second Amended and Restated Bylaws (the “Bylaws”), stockholders who wish to bring business before the 2018 Annual Meeting outside of Rule 14a-8 or to nominate a person for election as a director must ensure that written notice of such proposal (including all of the information specified in the Bylaws) is received by the Secretary of the Company at the address specified above no earlier than the close of business on July 9, 2018 and no later than the close of business on August 8, 2018. Any such proposal must meet the requirements set forth in the Bylaws in order to be brought before the 2018 Annual Meeting.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Delaware	47-1628077
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

11305 Four Points Drive, Building 2, Suite 100, Austin, TX 78726	78726
(Address of principal executive offices)	(Zip Code)

	PART I. FINANCIAL INFORMATION	Page

Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets as of March 31, 2018 (Unaudited) and December 31, 2017	1
	Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017	2
	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017	3
	Notes to Unaudited Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 5.	Other Information	26
Item 6.	Exhibits, Financial Statement Schedules	26
	Signatures	28

	March 31, 2018	March 31, 2017
Expected dividend rate	0%	0%
Expected volatility	41.0%	49.0%
Risk-free interest rate	2.63% - 2.73%	2.02% - 2.11%
Expected term (in years)	6.25 - 6.25	5.5 - 6.25

	Three months ended
	March 31, 2018		March 31, 2017
Convertible preferred stock on an as-if converted basis
Stock options to purchase common stock		3,468,458		2,057,211
RSUs issued and outstanding		1,097,668		—
Non-vested incentive units		1,480,304		3,689,429
Total		6,046,430		5,746,640

Exhibit Number		Description

3.1		Third Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (File No. 001-38297)).

3.2		Second Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (File No. 001-38297)).

31.1*		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS***		XBRL Instance Document.

101.SCH***		XBRL Taxonomy Extension Schema Document.

101.CAL***		XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF***		XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB***		XBRL Taxonomy Extension Label Linkbase Document.

101.PRE***		XBRL Taxonomy Extension Presentation Linkbase Document.

	SailPoint Technologies Holdings, Inc.,

Date: May 9, 2018	By:	/s/ Mark McClain
		Mark McClain
		Chief Executive Officer and Director

Date: May 9, 2018	By:	/s/ Cam McMartin
		Cam McMartin
		Chief Financial Officer