10-Q 1 mime-10q_20181231.htm 10-Q mime-10q_20181231.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended December 31, 2018

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: 001-37637

 

MIMECAST LIMITED

(Exact Name of Registrant as Specified in its Charter)

 

 

Bailiwick of Jersey

Not applicable

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

CityPoint, One Ropemaker Street, Moorgate

London EC2Y 9AW

United Kingdom

EC2Y 9AW

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (781) 996-5340

 

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 every Interactive Data File required to be submitted 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 such files).    Yes      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

  

Small reporting company

 

 

 

 

 

Emerging growth Company

 

 

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

 

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

As of January 31, 2019, the registrant had 60,421,822 shares of ordinary shares, $0.012 par value per share, outstanding.

 

 

 

 


Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

1

Item 1.

Financial Statements (Unaudited)

1

 

Condensed Consolidated Balance Sheets as of December 31, 2018 and March 31, 2018

1

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2018 and 2017

2

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended December 31, 2018 and 2017

3

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2018 and 2017

4

 

Notes to Unaudited Condensed Consolidated Financial Statements

5

Item 2.

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

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

39

Item 4.

Controls and Procedures

41

PART II.

OTHER INFORMATION

42

Item 1.

Legal Proceedings

42

Item 1A.

Risk Factors

42

Item 6.

Exhibits

58

Signatures

62

 

 

i


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

MIMECAST LIMITED

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

As of December 31,

 

 

As of March 31,

 

 

 

2018

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

135,684

 

 

$

78,339

 

Short-term investments

 

 

20,951

 

 

 

58,871

 

Accounts receivable, net

 

 

64,583

 

 

 

65,392

 

Deferred contract costs, net

 

 

7,036

 

 

 

 

Prepaid expenses and other current assets

 

 

14,017

 

 

 

15,302

 

Total current assets

 

 

242,271

 

 

 

217,904

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

145,237

 

 

 

123,822

 

Intangible assets, net

 

 

27,930

 

 

 

9,819

 

Goodwill

 

 

100,611

 

 

 

5,631

 

Deferred contract costs, net of current portion

 

 

24,398

 

 

 

 

Other assets

 

 

2,430

 

 

 

1,222

 

Total assets

 

$

542,877

 

 

$

358,398

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders' equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

7,289

 

 

$

6,052

 

Accrued expenses and other current liabilities

 

 

39,593

 

 

 

33,878

 

Deferred revenue

 

 

137,018

 

 

 

123,057

 

Current portion of capital lease obligations

 

 

1,171

 

 

 

1,125

 

Current portion of long-term debt

 

 

3,438

 

 

 

 

Total current liabilities

 

 

188,509

 

 

 

164,112

 

 

 

 

 

 

 

 

 

 

Deferred revenue, net of current portion

 

 

11,593

 

 

 

18,045

 

Long-term capital lease obligations

 

 

1,638

 

 

 

2,390

 

Long-term debt

 

 

93,982

 

 

 

 

Construction financing lease obligations

 

 

88,240

 

 

 

67,205

 

Other non-current liabilities

 

 

6,058

 

 

 

4,954

 

Total liabilities

 

 

390,020

 

 

 

256,706

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 15)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

 

 

 

Ordinary shares, $0.012 par value, 300,000,000 shares authorized;

   60,349,921 and 58,949,644 shares issued and outstanding as of

   December 31, 2018 and March 31, 2018, respectively

 

 

724

 

 

 

707

 

Additional paid-in capital

 

 

244,677

 

 

 

212,839

 

Accumulated deficit

 

 

(81,702

)

 

 

(106,507

)

Accumulated other comprehensive loss

 

 

(10,842

)

 

 

(5,347

)

Total shareholders' equity

 

 

152,857

 

 

 

101,692

 

Total liabilities and shareholders' equity

 

$

542,877

 

 

$

358,398

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

1


 

MIMECAST LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

 

 

Three months ended December 31,

 

 

Nine months ended December 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue

 

$

87,611

 

 

$

67,272

 

 

$

248,184

 

 

$

188,496

 

Cost of revenue

 

 

23,258

 

 

 

17,728

 

 

 

66,172

 

 

 

49,523

 

Gross profit

 

 

64,353

 

 

 

49,544

 

 

 

182,012

 

 

 

138,973

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

14,693

 

 

 

10,005

 

 

 

41,950

 

 

 

26,188

 

Sales and marketing

 

 

34,463

 

 

 

31,190

 

 

 

103,371

 

 

 

88,904

 

General and administrative

 

 

13,625

 

 

 

9,478

 

 

 

38,287

 

 

 

26,629

 

Restructuring

 

 

 

 

 

 

 

 

(170

)

 

 

 

Total operating expenses

 

 

62,781

 

 

 

50,673

 

 

 

183,438

 

 

 

141,721

 

Income (loss) from operations

 

 

1,572

 

 

 

(1,129

)

 

 

(1,426

)

 

 

(2,748

)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

653

 

 

 

301

 

 

 

1,640

 

 

 

854

 

Interest expense

 

 

(1,961

)

 

 

(56

)

 

 

(4,056

)

 

 

(156

)

Foreign exchange income (expense) and other, net

 

 

705

 

 

 

(864

)

 

 

762

 

 

 

(2,059

)

Total other income (expense), net

 

 

(603

)

 

 

(619

)

 

 

(1,654

)

 

 

(1,361

)

Income (loss) before income taxes

 

 

969

 

 

 

(1,748

)

 

 

(3,080

)

 

 

(4,109

)

Provision for income taxes

 

 

511

 

 

 

845

 

 

 

1,991

 

 

 

1,723

 

Net income (loss)

 

$

458

 

 

$

(2,593

)

 

$

(5,071

)

 

$

(5,832

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per ordinary share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.01

 

 

$

(0.05

)

 

$

(0.08

)

 

$

(0.10

)

Diluted

 

$

0.01

 

 

$

(0.05

)

 

$

(0.08

)

 

$

(0.10

)

Weighted-average number of ordinary shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

60,141

 

 

 

57,505

 

 

 

59,707

 

 

 

56,944

 

Diluted

 

 

62,537

 

 

 

57,505

 

 

 

59,707

 

 

 

56,944

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2


 

MIMECAST LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

 

 

 

Three months ended December 31,

 

 

Nine months ended December 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income (loss)

 

$

458

 

 

$

(2,593

)

 

$

(5,071

)

 

$

(5,832

)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized (losses) gains on investments, net of tax

 

 

(10

)

 

 

101

 

 

 

86

 

 

 

44

 

Change in foreign currency translation adjustment

 

 

(3,719

)

 

 

1,959

 

 

 

(5,581

)

 

 

1,595

 

Reclassification of cumulative translation adjustment to

   net loss upon liquidation of subsidiaries, net of tax

 

 

 

 

 

 

 

 

 

 

 

188

 

Total other comprehensive (loss) income

 

 

(3,729

)

 

 

2,060

 

 

 

(5,495

)

 

 

1,827

 

Comprehensive loss

 

$

(3,271

)

 

$

(533

)

 

$

(10,566

)

 

$

(4,005

)

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3


 

MIMECAST LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Nine months ended December 31,

 

 

 

2018

 

 

2017

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(5,071

)

 

$

(5,832

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

22,043

 

 

 

12,578

 

Share-based compensation expense

 

 

18,486

 

 

 

8,698

 

Amortization of deferred contract costs

 

 

4,530

 

 

 

 

Amortization of debt issuance costs

 

 

239

 

 

 

 

Other non-cash items

 

 

(365

)

 

 

192

 

Unrealized currency loss on foreign denominated transactions

 

 

183

 

 

 

1,427

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,966

)

 

 

(7,451

)

Prepaid expenses and other current assets

 

 

630

 

 

 

(627

)

Deferred contract costs

 

 

(13,594

)

 

 

 

Other assets

 

 

(1,314

)

 

 

42

 

Accounts payable

 

 

2,460

 

 

 

760

 

Deferred revenue

 

 

20,574

 

 

 

19,717

 

Accrued expenses and other liabilities

 

 

2,072

 

 

 

2,121

 

Net cash provided by operating activities

 

 

47,907

 

 

 

31,625

 

Investing activities

 

 

 

 

 

 

 

 

Purchases of investments

 

 

(20,940

)

 

 

(47,989

)

Maturities of investments

 

 

59,000

 

 

 

54,808

 

Purchases of property, equipment and capitalized software

 

 

(23,879

)

 

 

(21,589

)

Payments for acquisitions, net of cash acquired

 

 

(108,913

)

 

 

(1,381

)

Net cash used in investing activities

 

 

(94,732

)

 

 

(16,151

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of ordinary shares

 

 

13,406

 

 

 

9,520

 

Payments on debt

 

 

(1,250

)

 

 

(1,631

)

Payments on capital lease obligations

 

 

(685

)

 

 

(416

)

Payments on construction financing lease obligations

 

 

(1,647

)

 

 

 

Proceeds from issuance of debt, net of issuance costs

 

 

97,748

 

 

 

 

Net cash provided by financing activities

 

 

107,572

 

 

 

7,473

 

Effect of foreign exchange rates on cash

 

 

(3,402

)

 

 

1,724

 

Net increase in cash and cash equivalents

 

 

57,345

 

 

 

24,671

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

78,339

 

 

 

51,319

 

Cash and cash equivalents at end of period

 

$

135,684

 

 

$

75,990

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

1,867

 

 

$

154

 

Cash paid during the period for income taxes

 

$

1,374

 

 

$

1,443

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities

 

 

 

 

 

 

 

 

Unpaid purchases of property, equipment and capitalized software

 

$

5,182

 

 

$

11,179

 

Property and equipment acquired under capital lease

 

$

 

 

$

3,834

 

Construction costs capitalized under financing lease obligations

 

$

22,847

 

 

$

36,776

 

Amounts due from seller for acquisitions

 

$

455

 

 

$

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4


 

MIMECAST LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data, unless otherwise noted)

(unaudited)

1. Organization and Basis of Presentation

Mimecast Limited (Mimecast Jersey) is a public limited company organized under the laws of the Bailiwick of Jersey on July 28, 2015. On November 4, 2015, Mimecast Jersey changed its corporate structure whereby it became the holding company of Mimecast Limited (Mimecast UK), a private limited company incorporated in 2003 under the laws of England and Wales, and its wholly-owned subsidiaries by way of a share-for-share exchange in which the shareholders of Mimecast UK exchanged their shares in Mimecast UK for an identical number of shares of the same class in Mimecast Jersey. Upon the exchange, the historical consolidated financial statements of Mimecast UK became the historical consolidated financial statements of Mimecast Jersey.

Mimecast Jersey and its subsidiaries (together the Group, the Company, Mimecast or we) is headquartered in London, England. The principal activity of the Group is the provision of email management services. Mimecast delivers a software-as-a-service (SaaS) enterprise email management service for archiving, continuity, and security, web security and awareness training. By unifying disparate and fragmented email environments into one holistic solution from the cloud, Mimecast minimizes risk and reduces cost and complexity while providing total end-to-end control of email. Mimecast’s proprietary software platform provides a single system to address key email management issues. Mimecast operates principally in Europe, North America, Africa, and Australia.

The Company is subject to a number of risks and uncertainties common to companies in similar industries and stages of development including, but not limited to, rapid technological changes, competition from substitute products and services from larger companies, customer concentration, management of international activities, protection of proprietary rights, patent litigation, and dependence on key individuals.

Basis of Presentation

The accompanying interim condensed consolidated financial statements are unaudited. These financial statements and notes should be read in conjunction with the audited consolidated financial statements for the year ended March 31, 2018 and related notes, together with management’s discussion and analysis of financial condition and results of operations, contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on May 29, 2018.

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (GAAP) have been condensed or omitted. In the opinion of management, the unaudited condensed consolidated financial statements and notes have been prepared on the same basis as the audited consolidated financial statements for the year ended March 31, 2018 contained in the Company’s Annual Report on Form 10-K and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position as of December 31, 2018, and for the three and nine months ended December 31, 2018 and 2017. These interim periods are not necessarily indicative of the results to be expected for any other interim period or the full year.

The Company reclassified $0.1 million of provision for doubtful accounts to accounts receivable within its condensed consolidated statements of cash flows for the nine months ended December 31, 2017 in this quarterly report on Form 10-Q to conform to current period presentation. This had no impact on the Company’s previously reported results of operations or its balance sheets.

The accompanying condensed consolidated financial statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes to the condensed consolidated financial statements. As of December 31, 2018, the Company’s significant accounting policies and estimates, which are detailed in the Company’s Annual Report on Form 10-K, have not changed, except as discussed below.

Revenue Recognition

Adoption of ASC 606

Effective April 1, 2018, the Company adopted the requirements of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09 or ASC 606) under the modified retrospective method of transition, which was applied to all customer contracts that were not completed on the effective date of ASC 606. The Company implemented internal controls and key system functionality to enable the preparation of financial information on adoption. The adoption of ASC 606 resulted in changes to the Company’s accounting policies for revenue recognition previously recognized under ASC 605, Revenue Recognition (Legacy GAAP), as detailed below.

 

5


 

Revenue Recognition Policy

Under ASC 606 the Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. To achieve the core principle of ASC 606, the Company performs the following steps:

 

1)

Identify the contract(s) with a customer;

 

2)

Identify the performance obligations in the contract;

 

3)

Determine the transaction price;

 

4)

Allocate the transaction price to the performance obligations in the contract; and

 

5)

Recognize revenue when (or as) we satisfy a performance obligation.

The Company derives its revenue from two sources: (1) subscription revenues, which are comprised of subscription fees from customers accessing the Company’s cloud services and from customers purchasing additional support beyond the standard support that is included in the basic subscription fees; and (2) related professional services and other revenue, which consists primarily of certain performance obligations related to set-up, ingestion, consulting and training fees.

In the three and nine months ended December 31, 2018 and 2017, subscription revenue made up the substantial majority of the Company’s revenue and professional services and other revenue made up less than 5% of the Company’s revenue.

The Company’s subscription arrangements provide customers the right to access the Company’s hosted software applications. Customers do not have the right to take possession of the Company’s software during the hosting arrangement.

The Company sells its products and services directly through the Company’s sales force and also indirectly through third-party resellers. In accordance with the provisions of ASC 606, the Company has considered certain factors in determining whether the end-user or the third-party reseller is the customer in arrangements involving resellers. The Company concluded that in the majority of transactions with resellers, the reseller is the customer. In these arrangements, the Company considered that it is the reseller, and not the Company, that has the relationship with the end-user. Specifically, the reseller has the ability to set pricing with the end-user and the credit risk with the end-user is borne by the reseller. Further, the reseller is not obligated to report its transaction price with the end-user to the Company, and in the majority of transactions, the Company is unable to determine the amount paid by the end-user customer to the reseller in these transactions. As a result of such considerations, revenue for these transactions is presented in the accompanying condensed consolidated statements of operations based upon the amount billed to the reseller. For transactions where we have determined that the end-user is the ultimate customer, revenue is presented in the accompanying condensed consolidated statements of operations based on the transaction price with the end-user.

The Company recognizes subscription and support revenue ratably over the term of the contract, typically one year in duration, beginning on the date the customer is provided access to the Company’s service. For performance obligations related to set-up and ingestion, including implementation assistance and data migration services, respectively, the Company recognizes revenue using output measures of performance that reflect the transfer of promised services to the customer consistent with progress to completion. The Company considers training, consulting, and other professional services contracts as separate performance obligations and recognizes revenue using output measures of performance as services are completed.

Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met. The Company primarily bills and collects payments from customers for its services in advance on a monthly and annual basis.

In some instances, the Company receives non-refundable upfront payments for activities that do not constitute a promise to transfer a service and therefore are considered administrative tasks, not separate performance obligations. The upfront payments are evaluated to determine whether a material right to a discount upon renewal of the subscription exists. When the Company concludes a material right does not exist, the Company recognizes revenue related to the upfront payment over the initial contract term. When the Company concludes a material right does exist, the Company recognizes revenue related to the upfront payment, under the look-through method, over the estimated customer benefit period, which has been determined to be six years.

All of the Company’s performance obligations, and associated revenue, are generally transferred to customers over time, with the exception of training, consulting and other professional services, which are generally transferred to the customer at a point in time.

Revenue is presented net of any taxes collected from customers.

6


 

Some of the Company’s contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The Company determines the standalone selling prices based on the Company’s overall pricing objectives, taking into consideration market conditions and other factors, including the value of the Company’s contracts, the products sold, customer demographics, the Company’s sales channel, and the number and size of users within the Company’s contracts.

Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from subscription and other services described above and is recognized as the revenue recognition criteria are met. Deferred revenue that is expected to be recognized during the succeeding twelve-month period is recorded as current deferred revenue and the remaining portion is recorded as non-current in the accompanying condensed consolidated balance sheets.

 

Deferred Cost Policy

As part of the Company’s adoption of ASC 606, the Company capitalizes incremental costs of obtaining revenue contracts, which primarily consist of commissions paid to its sales representatives. The Company amortizes these commissions over six years on a systematic basis, consistent with the pattern of transfer of the goods or services to which the asset relates. Six years represents the estimated benefit period of the customer relationship taking into account factors such as peer estimates of technology lives and customer lives as well as the Company's own historical data. No commissions are paid related to contract renewals. The current and noncurrent portions of deferred commissions are included in deferred contract costs, net, and deferred contract costs, net of current portion, respectively, in the accompanying condensed consolidated balance sheets. Amortization of capitalized costs to obtain revenue contracts is included in sales and marketing expense in the accompanying condensed consolidated statements of operations.

Impact of Adoption of ASC 606

The adoption of ASC 606 resulted in a decrease to deferred revenue of $6.0 million and an increase of $23.8 million in deferred contract costs as of April 1, 2018. The Company recorded the deferred tax impact associated with the cumulative-effect adjustment of adopting ASC 606 to accumulated deficit with an equal and offsetting adjustment to the Company’s valuation allowance. The decrease to deferred revenue upon adoption was primarily due to a change in the accounting treatment for certain upfront fees that were accounted for as a single unit of account under Legacy GAAP and are accounted for as separate performance obligations under ASC 606. The increase in deferred contract costs was the result of the capitalization of certain commissions that were determined to be incremental costs of obtaining a contract. Under Legacy GAAP, the Company expensed all commission costs as incurred.

As a result of the adoption of ASC 606, the Company’s accumulated deficit decreased by $29.9 million as of April 1, 2018, which was the net cumulative impact associated with the capitalization of sales commissions and the adjustment to deferred revenue.

The cumulative effect of the changes made to the Company’s April 1, 2018 balance sheet for the adoption of ASC 606 was as follows:

 

 

 

Balance as of

March 31, 2018

 

 

Adjustments Due to

Adoption of ASC 606

 

 

Balance as of

April 1, 2018

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Deferred contract costs, net

 

$

 

 

$

5,494

 

 

$

5,494

 

Deferred contract costs, net of current portion

 

 

 

 

 

18,339

 

 

 

18,339

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

 

 

123,057

 

 

 

(517

)

 

 

122,540

 

Deferred revenue, net of current portion

 

 

18,045

 

 

 

(5,526

)

 

 

12,519

 

Shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

 

(106,507

)

 

 

29,876

 

 

 

(76,631

)

7


 

In accordance with the requirements of ASC 606, the disclosure for the quantitative effect and the significant changes between the reported results under ASC 606 and those that would have been reported under Legacy GAAP on our unaudited condensed consolidated statements of operations and balance sheet are as follows:

 

 

 

Three months ended December 31, 2018

 

 

 

As Reported -

ASC 606

 

 

Amounts without

Adoption of ASC 606

 

 

Effect of Change

Increase/(Decrease)

 

Income Statement

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

87,611

 

 

$

87,115

 

 

$

496

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

(34,463

)

 

 

(38,493

)

 

 

(4,030

)

Net income (loss)

 

$

458

 

 

$

(4,068

)

 

$

4,526

 

 

 

 

Nine months ended December 31, 2018

 

 

 

As Reported -

ASC 606

 

 

Amounts without

Adoption of ASC 606

 

 

Effect of Change

Increase/(Decrease)

 

Income Statement

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

248,184

 

 

$

246,806

 

 

$

1,378

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

(103,371

)

 

 

(112,290

)

 

 

(8,919

)

Net loss

 

$

(5,071

)

 

$

(15,368

)

 

$

10,297

 

 

 

 

As of December 31, 2018

 

 

 

As Reported -

ASC 606

 

 

Balances without

Adoption of ASC 606

 

 

Effect of Change

Increase/(Decrease)

 

Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Deferred contract costs, net

 

$

7,036

 

 

$

 

 

$

7,036

 

Deferred contract costs, net of current portion

 

 

24,398

 

 

 

 

 

 

24,398

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

 

 

137,018

 

 

 

136,465

 

 

 

553

 

Deferred revenue, net of current portion

 

 

11,593

 

 

 

19,815

 

 

 

(8,222

)

Shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

 

(81,702

)

 

 

(121,875

)

 

 

40,173

 

 

Revenue recognized during the three and nine months ended December 31, 2018 from amounts included in deferred revenue at the beginning of the respective periods was approximately $55.6 million and $107.6 million, respectively. Revenue recognized during the three and nine months ended December 31, 2018 from performance obligations satisfied or partially satisfied in previous periods was not material.

The adoption of ASC 606 had no impact to net operating cash flows.

Contracted revenue as of December 31, 2018 that has not yet been recognized (contracted and not recognized) was $74.9 million, which includes deferred revenue and non-cancellable amounts that will be invoiced and recognized as revenue in future periods and excludes contracts with an original expected length of one year or less. The Company expects 51% of contracted and not recognized revenue to be recognized over the next twelve months, 45% in years two and three, with the remaining balance recognized thereafter.

2. Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

3. Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of income and expenses during the reporting period.

8


 

Significant estimates relied upon in preparing these condensed consolidated financial statements include revenue recognition, variable consideration, valuation at fair value of assets acquired or sold, including intangibles, goodwill, tangible assets, and liabilities assumed, amortization periods, expected future cash flows used to evaluate the recoverability of long-lived assets, contingent liabilities, construction financing lease obligations, restructuring liabilities, expensing and capitalization of research and development costs for internal-use software, the determination of the fair value of share-based awards issued, the average period of benefit associated with costs capitalized to obtain revenue contracts and the recoverability of the Company’s net deferred tax assets and related valuation allowance.

Although the Company regularly assesses these estimates, actual results could differ materially from these estimates. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from management’s estimates if these results differ from historical experience, or other assumptions do not turn out to be substantially accurate, even if such assumptions are reasonable when made. Changes in estimates are recorded in the period in which they become known.

4. Subsequent Events Considerations

The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence for certain estimates or to identify matters that require additional disclosure. The Company has evaluated all subsequent events. Refer to Note 19.

5. Concentration of Credit Risk and Off-Balance Sheet Risk

The Company has no off-balance sheet risk, such as foreign exchange contracts, option contracts, or other foreign hedging arrangements. Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents, investments and accounts receivable. The Company maintains its cash, cash equivalents and investments with major financial institutions of high-credit quality. Although the Company deposits its cash with multiple financial institutions, its deposits, at times, may exceed federally insured limits.

Credit risk with respect to accounts receivable is dispersed due to our large number of customers. The Company’s accounts receivable are derived from revenue earned from customers primarily located in the United States, the United Kingdom and South Africa. The Company generally does not require its customers to provide collateral or other security to support accounts receivable. Credit losses historically have not been significant and the Company generally has not experienced any material losses related to receivables from individual customers, or groups of customers. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by management to be probable in the Company’s accounts receivable. As of December 31, 2018 and March 31, 2018, no individual customer represented more than 10% of the Company’s accounts receivable. During the three and nine months ended December 31, 2018 and 2017, no individual customer represented more than 10% of the Company’s revenue.

As of December 31, 2018, the Company’s investments consisted primarily of investment-grade fixed income corporate debt securities with remaining maturities ranging from less than one month to five months and non-U.S. government securities with maturities in approximately six months. We diversify our investment portfolio by investing in multiple types of investment-grade securities and attempt to mitigate a risk of loss by using a third-party investment manager.

6. Cash, Cash Equivalents and Investments

The Company considers all highly liquid instruments purchased with an original maturity date of 90 days or less from the date of purchase to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks, amounts held in interest-bearing money market funds and investments with maturities of 90 days or less from the date of purchase. Cash equivalents are carried at cost, which approximates their fair market value. Investments not classified as cash equivalents are presented as either short-term or long-term investments based on both their stated maturities as well as the time period the Company intends to hold such securities. The Company determines the appropriate classification of investments at the time of purchase and reevaluates such designation at each balance sheet date. The Company adjusts the cost of investments for amortization of premiums and accretion of discounts to maturity. The Company includes such amortization and accretion in interest income.

 

The Company has classified all of its investments as of December 31, 2018, as available-for-sale pursuant to Accounting Standard Codification (ASC) 320, Investments – Debt and Equity Securities. The Company records available-for-sale securities at fair value, with unrealized gains and losses included in accumulated other comprehensive loss in shareholders’ equity. The Company includes interest and dividends on securities classified as available-for-sale in interest income. Realized gains and losses are recorded in the condensed consolidated statements of operations and comprehensive loss based on the specific-identification method. There were no realized gains or losses on investments for the three and nine months ended December 31, 2018 and 2017.

9


 

The Company reviews investments for other-than-temporary impairment whenever the fair value of an investment is less than its amortized cost and evidence indicates that an investment’s carrying amount is not recoverable within a reasonable period of time. Other-than-temporary impairments of investments are recognized in the condensed consolidated statements of operations if the Company has experienced a credit loss, has the intent to sell the investment, or if it is more likely than not that the Company will be required to sell the investment before recovery of the amortized cost basis. Evidence considered in this assessment includes reasons for the impairment, compliance with the Company’s investment policy, the severity and the duration of the impairment and changes in value subsequent to the end of the period. As of December 31, 2018, the aggregate fair value of investments held by the Company in an unrealized loss position for less than twelve months was $15.5 million. As of December 31, 2018, the Company determined that no other-than-temporary impairments were required to be recognized in the condensed consolidated statements of operations.

The following is a summary of cash, cash equivalents and investments as of December 31, 2018 and March 31, 2018:

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents due in 90 days or less

 

$

135,684

 

 

$

 

 

$

 

 

$

135,684

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-U.S. government securities due in one year

   or less

 

 

1,987

 

 

 

1

 

 

 

 

 

 

1,988

 

Corporate securities due in one year or less

 

 

18,967

 

 

 

7

 

 

 

(11

)

 

 

18,963

 

Total investments

 

 

20,954

 

 

 

8

 

 

 

(11

)

 

 

20,951

 

Total cash, cash equivalents and investments

 

$

156,638

 

 

$

8

 

 

$

(11

)

 

$

156,635

 

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents due in 90 days or less

 

$

78,339

 

 

$

 

 

$

 

 

$

78,339

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities due in one year or less

 

 

2,995

 

 

 

 

 

 

(5

)

 

 

2,990

 

Non-U.S. government securities due in one year

   or less

 

 

5,996

 

 

 

1

 

 

 

(1

)

 

 

5,996

 

Corporate securities due in one year or less

 

 

49,969

 

 

 

8

 

 

 

(92

)

 

 

49,885

 

Total investments

 

 

58,960

 

 

 

9

 

 

 

(98

)

 

 

58,871

 

Total cash, cash equivalents and investments

 

$

137,299

 

 

$

9

 

 

$

(98

)

 

$

137,210

 

 

7. Disclosure of Fair Value of Financial Instruments

The Company’s financial instruments include cash, cash equivalents, accounts receivable, investments, accounts payable, accrued expenses and borrowings under the Company’s long-term debt arrangements.  The carrying amount of the Company’s long-term debt arrangements approximates its fair values due to the interest rates the Company believes it could obtain for borrowings with similar terms.  The Company’s investments are classified as available-for-sale and reported at fair value in accordance with the market approach utilizing quoted prices that were directly or indirectly observable. The carrying amount of the remainder of the Company’s financial instruments approximated their fair values as of December 31, 2018 and March 31, 2018, due to the short-term nature of those instruments.

The Company has evaluated the estimated fair value of financial instruments using available market information. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts.

Fair values determined using “Level 1 inputs” utilize unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access.  Fair values determined using “Level 2 inputs” utilize quoted prices that are directly or indirectly observable. Fair values determined using “Level 3 inputs” utilize unobservable inputs for determining fair values of assets or liabilities that reflect an entity's own assumptions in pricing assets or liabilities. As of December 31, 2018 and March 31, 2018, the Company did not have any assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).

The Company measures eligible assets and liabilities at fair value, with changes in value recognized in earnings. Fair value treatment may be elected either upon initial recognition of an eligible asset or liability or, for an existing asset or liability, if an event triggers a new basis of accounting. The Company did not elect to remeasure any of its existing financial assets or liabilities, and did not elect the fair value option for any financial assets and liabilities transacted in the three and nine months ended December 31, 2018 and 2017.

10


 

The following table summarizes financial assets measured and recorded at fair value on a recurring basis in the accompanying condensed consolidated balance sheets as of December 31, 2018 and March 31, 2018, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

 

 

December 31, 2018

 

 

 

Quoted Prices in

Active Markets

for Identical Assets

(Level 1 Inputs)

 

 

Significant

Other

Observable

Inputs (Level 2

Inputs)

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

2,106

 

 

$

 

 

$

2,106

 

Non-U.S. government securities

 

 

 

 

 

1,988

 

 

 

1,988

 

Corporate securities

 

 

 

 

 

18,963

 

 

 

18,963

 

Total assets

 

$

2,106

 

 

$

20,951

 

 

$

23,057

 

 

 

 

March 31, 2018

 

 

 

Quoted Prices in

Active Markets

for Identical Assets

(Level 1 Inputs)

 

 

Significant

Other

Observable

Inputs (Level 2

Inputs)

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

10,143

 

 

$

 

 

$

10,143

 

U.S. treasury securities

 

 

 

 

 

2,990

 

 

 

2,990

 

Non-U.S. government securities

 

 

 

 

 

5,996

 

 

 

5,996

 

Corporate securities

 

 

 

 

 

49,885

 

 

 

49,885

 

Total assets

 

$

10,143

 

 

$

58,871

 

 

$

69,014

 

 

 

8. Internal-use Software Costs

Software Development Costs

Costs incurred to develop software applications used in the Company’s SaaS platform consist of certain direct costs of materials and services incurred in developing or obtaining internal-use computer software, and payroll and payroll-related costs for employees who are directly associated with, and who devote time to, the project. These costs generally consist of internal labor during configuration, coding, and testing activities. Research and development costs incurred during the preliminary project stage or costs incurred for data conversion activities, training, maintenance and general and administrative or overhead costs are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the application is substantially complete and ready for its intended use. Qualified costs incurred during the operating stage of the Company’s software applications relating to upgrades and enhancements are capitalized to the extent it is probable that they will result in added functionality, while costs incurred for maintenance of, and minor upgrades and enhancements to, internal-use software are expensed as incurred. During the three and nine months ended December 31, 2018 and 2017, the Company believes the substantial majority of its development efforts were either in the preliminary project stage of development or in the operation stage (post-implementation), and accordingly, no costs have been capitalized during these periods. These costs are included in the accompanying condensed consolidated statements of operations as research and development expense.

Cloud-computing Arrangements

The Company evaluates its accounting for fees paid in cloud computing arrangements (CCA) including determining whether the CCA includes a license to internal-use software. If the CCA includes a software license, the Company accounts for the software license as an intangible asset. Acquired software licenses are recognized and measured at cost, which includes the present value of the license obligation if the license is to be paid for over time. If the CCA does not include a software license, the Company accounts for the arrangement as a service contract (hosting arrangement) and hosting costs are generally expensed as incurred.

11


 

Upon adoption of ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-24): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (ASU 2018-15), the Company evaluates upfront costs including implementation, set-up or other costs (collectively, implementation costs) for hosting arrangements under the internal-use software framework. Costs related to preliminary project activities and post implementation activities are expensed as incurred, whereas costs incurred in the development stage are generally capitalized. Capitalized implementation costs are amortized on a straight-line basis over the expected term of the hosting arrangement, which includes consideration of the non-cancellable contractual term and reasonably certain renewals. During the three and nine months ended December 31, 2018, the Company capitalized $0.3 million and $1.2 million of implementation costs related to hosting arrangements that were incurred during the application development stage. These capitalized implementation costs will be amortized over the expected term of the arrangement and are amortized in the same line item in the condensed consolidated statements of operations as the expense for fees for the associated hosting arrangement.

9. Net Income (Loss) Per Share

 

The Company calculates basic and diluted net income (loss) per ordinary share by dividing net income (loss) by the weighted-average number of ordinary shares outstanding during the period. For periods that net losses are incurred, the Company has excluded other potentially dilutive shares, which include outstanding options to purchase ordinary shares, unvested restricted share units (RSUs) and Employee Stock Purchase Plan (ESPP) shares, from the weighted-average number of ordinary shares outstanding as their inclusion in the computation would be anti-dilutive due to net losses incurred.

 

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

 

 

 

Three months ended December 31,

 

 

Nine months ended December 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

458

 

 

$

(2,593

)

 

$

(5,071

)

 

$

(5,832

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of ordinary shares used in

   computing net income (loss) per share applicable

   to ordinary shareholders - basic

 

 

60,141

 

 

 

57,505

 

 

 

59,707

 

 

 

56,944

 

Dilutive effect of share equivalents resulting from

   share options, restricted share units and ESPP shares

 

 

2,396