10-Q 1 svmk-10q_20180930.htm 10-Q svmk-10q_20180930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 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: 001-38664

 

SVMK Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

80-0765058

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

One Curiosity Way

San Mateo, California, 94403

(650) 543-8400

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

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, a 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   

 

Smaller reporting company  

 

 

Emerging growth company  

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

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

The number of shares of registrant’s common stock outstanding as of October 31, 2018 was: 125,078,892.

 

 

 

 


SVMK Inc.

Quarterly Report on Form 10-Q

For the quarterly period ended September 30, 2018

TABLE OF CONTENTS

 

 

 

 

Page

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (unaudited)

 

4

 

Condensed Consolidated Balance Sheets

 

4

 

Condensed Consolidated Statements of Operations

 

5

 

Condensed Consolidated Statements of Comprehensive Loss

 

6

 

Condensed Consolidated Statements of Cash Flows

 

7

 

Notes to Condensed Consolidated Financial Statements

 

8

Item 2.

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

 

30

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

46

Item 4.

Controls and Procedures

 

47

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

48

Item 1A.

Risk Factors

 

48

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

79

Item 6.

Exhibits

 

80

 

Signatures

 

82

 

1


 

FORWARD-LOOKING STATEMENTS

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

 

our ability to attract new users or convert registered users to paying users;

 

our ability to retain paying users;

 

our ability to convert organizations to SurveyMonkey Enterprise customers;

 

our ability to maintain and improve our products;

 

our ability to upsell and cross-sell within our existing customer and user base;

 

our future financial performance, including trends in revenue, costs of revenue, gross profit or gross margin, operating expenses, and paying users;

 

possible harm caused by significant disruption of service or loss or unauthorized access to users’ data;

 

our ability to prevent serious errors or defects in our products;

 

our ability to respond to rapid technological changes;

 

our ability to compete successfully;

 

our ability to protect our brand;

 

the demand for our survey platform or for survey software solutions in general;

 

our expectations and management of future growth;

 

our ability to accelerate growth with the introduction of a significant outbound salesforce;

 

our ability to attract large organizations as users;

 

our ability to attract and retain key personnel and highly qualified personnel;

 

our ability to manage our international expansion;

 

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

 

our ability to effectively integrate our products and solutions with others;

 

our ability to achieve or maintain profitability;

 

our ability to manage our outstanding indebtedness;

 

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

 

our ability to offer high-quality customer support;

 

the increased expenses associated with being a public company; and

 

our anticipated uses of net proceeds from our recent public offering and the concurrent private placement.

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

2


 

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

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

We announce material information to the public through filings with the Securities and Exchange Commission, or the SEC, our corporate website (www.surveymonkey.com), the investor relations page on our website (investor.surveymonkey.com), press releases, public conference calls and public webcasts. We use these channels, as well as social media, to communicate with investors and the public about our company, our offerings and other issues. It is possible that the information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media and others interested in our company to review the information we post on the U.S. social media channels listed on the investor relations page on our website. Any updates to the list of disclosure channels through which we will announce information will be posted on the investor relations page on our website.

3


 

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SVMK INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

 

(in thousands, except par value)

 

September 30, 2018

 

 

December 31, 2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

257,120

 

 

$

35,345

 

Accounts receivable, net of allowance of $141 and $50

 

 

7,251

 

 

 

5,429

 

Deferred commissions, current

 

 

1,749

 

 

 

1,225

 

Prepaid expenses and other current assets

 

 

8,049

 

 

 

5,056

 

Total current assets

 

 

274,169

 

 

 

47,055

 

Property and equipment, net

 

 

124,750

 

 

 

131,331

 

Capitalized internal-use software, net

 

 

34,889

 

 

 

41,493

 

Acquisition intangible assets, net

 

 

10,357

 

 

 

13,594

 

Goodwill, net

 

 

336,861

 

 

 

336,861

 

Deferred commissions, non-current

 

 

2,814

 

 

 

2,006

 

Other assets

 

 

6,471

 

 

 

5,749

 

Total assets

 

$

790,311

 

 

$

578,089

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

6,262

 

 

$

3,380

 

Accrued expenses and other current liabilities

 

 

14,442

 

 

 

10,173

 

Accrued compensation

 

 

15,499

 

 

 

14,910

 

Deferred revenue

 

 

101,097

 

 

 

84,818

 

Debt, current

 

 

103,282

 

 

 

2,032

 

Total current liabilities

 

 

240,582

 

 

 

115,313

 

Deferred tax liabilities

 

 

4,599

 

 

 

4,168

 

Debt, non-current

 

 

213,514

 

 

 

316,289

 

Financing obligation on leased facility

 

 

92,349

 

 

 

93,385

 

Other non-current liabilities

 

 

11,788

 

 

 

8,891

 

Total liabilities

 

 

562,832

 

 

 

538,046

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock ($0.00001 par value; 100,000 shares authorized; no shares issued and outstanding)

 

 

 

 

 

 

Common stock ($0.00001 par value; 800,000 shares authorized; 125,077 and 101,383 shares issued and outstanding)

 

 

1

 

 

 

1

 

Additional paid-in capital

 

 

534,863

 

 

 

217,594

 

Accumulated other comprehensive income (loss)

 

 

(315

)

 

 

19

 

Accumulated deficit

 

 

(307,070

)

 

 

(177,571

)

Total stockholders’ equity

 

 

227,479

 

 

 

40,043

 

Total liabilities and stockholders’ equity

 

$

790,311

 

 

$

578,089

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

4


 

SVMK INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands, except per share amounts)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue

 

$

65,205

 

 

$

55,309

 

 

$

186,392

 

 

$

161,761

 

Cost of revenue(1)(2)

 

 

23,213

 

 

 

16,241

 

 

 

58,967

 

 

 

47,083

 

Gross profit

 

 

41,992

 

 

 

39,068

 

 

 

127,425

 

 

 

114,678

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development(1)

 

 

51,765

 

 

 

14,910

 

 

 

85,997

 

 

 

39,890

 

Sales and marketing (1)(2)

 

 

34,309

 

 

 

18,878

 

 

 

71,609

 

 

 

55,791

 

General and administrative(1)

 

 

50,391

 

 

 

11,169

 

 

 

76,809

 

 

 

35,298

 

Restructuring

 

 

 

 

 

2

 

 

 

33

 

 

 

147

 

Total operating expenses

 

 

136,465

 

 

 

44,959

 

 

 

234,448

 

 

 

131,126

 

Loss from operations

 

 

(94,473

)

 

 

(5,891

)

 

 

(107,023

)

 

 

(16,448

)

Interest expense

 

 

7,496

 

 

 

6,714

 

 

 

22,181

 

 

 

20,030

 

Other non-operating income (expense), net

 

 

(219

)

 

 

774

 

 

 

132

 

 

 

7,950

 

Loss before income taxes

 

 

(102,188

)

 

 

(11,831

)

 

 

(129,072

)

 

 

(28,528

)

Provision for income taxes

 

 

174

 

 

 

1,151

 

 

 

470

 

 

 

3,551

 

Net loss

 

$

(102,362

)

 

$

(12,982

)

 

$

(129,542

)

 

$

(32,079

)

Net loss per share, basic and diluted

 

$

(0.99

)

 

$

(0.13

)

 

$

(1.27

)

 

$

(0.32

)

Weighted-average shares used in computing basic and

   diluted net loss per share

 

 

103,096

 

 

 

100,584

 

 

 

101,984

 

 

 

100,056

 

 

(1)

Includes stock-based compensation, net of amounts capitalized as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Cost of revenue

 

$

6,472

 

 

$

634

 

 

$

7,776

 

 

$

1,870

 

Research and development

 

 

37,490

 

 

 

2,799

 

 

 

43,903

 

 

 

7,065

 

Sales and marketing

 

 

14,496

 

 

 

1,322

 

 

 

16,411

 

 

 

6,622

 

General and administrative

 

 

40,354

 

 

 

3,667

 

 

 

48,014

 

 

 

10,806

 

Stock-based compensation, net of amounts capitalized

 

$

98,812

 

 

$

8,422

 

 

$

116,104

 

 

$

26,363

 

 

(2)

Includes amortization of acquisition intangible assets as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Cost of revenue

 

$

488

 

 

$

488

 

 

$

1,464

 

 

$

1,552

 

Sales and marketing

 

 

565

 

 

 

604

 

 

 

1,773

 

 

 

1,817

 

Amortization of acquisition intangible assets

 

$

1,053

 

 

$

1,092

 

 

$

3,237

 

 

$

3,369

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

5


 

SVMK INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

 

$

(102,362

)

 

$

(12,982

)

 

$

(129,542

)

 

$

(32,079

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gains (losses)(1)

 

 

(72

)

 

 

35

 

 

 

(334

)

 

 

1

 

Total other comprehensive income (loss)(1)

 

 

(72

)

 

 

35

 

 

 

(334

)

 

 

1

 

Total comprehensive loss

 

$

(102,434

)

 

$

(12,947

)

 

$

(129,876

)

 

$

(32,078

)

 

(1)

Net of tax effect which was not material.

See accompanying Notes to Condensed Consolidated Financial Statements.

 

6


 

SVMK INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2018

 

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(129,542

)

 

$

(32,079

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

34,013

 

 

 

30,048

 

Stock-based compensation expense, net of amounts capitalized

 

 

116,104

 

 

 

26,363

 

Amortization of deferred commissions

 

 

1,107

 

 

 

688

 

Recovery of long-term note receivable

 

 

 

 

 

(1,000

)

Amortization of debt discount and issuance costs

 

 

726

 

 

 

635

 

Deferred income taxes

 

 

431

 

 

 

3,023

 

Gain on sale of a private company investment and other

 

 

(765

)

 

 

(6,444

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,822

)

 

 

1,497

 

Prepaid expenses and other assets

 

 

(5,451

)

 

 

(1,098

)

Accounts payable and accrued liabilities

 

 

4,596

 

 

 

(2,189

)

Accrued interest on financing lease obligation, net of payments

 

 

(1,036

)

 

 

4,894

 

Accrued compensation

 

 

(648

)

 

 

(730

)

Deferred revenue

 

 

16,269

 

 

 

7,317

 

Net cash provided by operating activities

 

 

33,982

 

 

 

30,925

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(8,811

)

 

 

(26,158

)

Capitalized internal-use software

 

 

(8,857

)

 

 

(11,771

)

Proceeds from sale of a private company investment and other

 

 

999

 

 

 

15,453

 

Net cash used in investing activities

 

 

(16,669

)

 

 

(22,476

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from initial public offering, net of underwriters' discounts and concurrent private placement

 

 

232,509

 

 

 

 

Payments of deferred offering costs

 

 

(1,487

)

 

 

 

Proceeds from stock option exercises

 

 

440

 

 

 

128

 

Employee payroll taxes paid related to net share settlement of restricted stock units

 

 

(24,566

)

 

 

(5,431

)

Payments to repurchase common stock

 

 

(16

)

 

 

(144

)

Proceeds from term and revolving debt issuance

 

 

 

 

 

298,500

 

Repayment of debt

 

 

(2,250

)

 

 

(298,133

)

Payment of debt issuance costs and other

 

 

 

 

 

(1,666

)

Proceeds from tenant improvement allowances under lease financing obligation

 

 

 

 

 

8,281

 

Net cash provided by financing activities

 

 

204,630

 

 

 

1,535

 

Net increase in cash, cash equivalents and restricted cash

 

 

221,943

 

 

 

9,984

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

35,345

 

 

 

23,287

 

Cash, cash equivalents and restricted cash at end of period

 

$

257,288

 

 

$

33,271

 

Supplemental cash flow data:

 

 

 

 

 

 

 

 

Interest paid for term debt

 

$

16,445

 

 

$

14,951

 

Interest paid for financing obligation on leased facility

 

$

6,114

 

 

$

 

Income taxes paid

 

$

246

 

 

$

357

 

Non-cash investing and financing transactions:

 

 

 

 

 

 

 

 

Stock compensation included in capitalized software costs

 

$

1,251

 

 

$

2,510

 

Accrued unpaid capital expenditures and capitalized software development costs

 

$

600

 

 

$

5,862

 

Accrued unpaid payroll taxes related to net share settlement and offering costs

 

$

6,924

 

 

$

 

Reconciliation of cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

257,120

 

 

$

33,271

 

Restricted cash (included in other assets)

 

$

168

 

 

$

 

Total cash, cash equivalents and restricted cash at end of period

 

$

257,288

 

 

$

33,271

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

7


 

SVMK INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1. Company Overview and Basis of Presentation

Business

SVMK Inc. (the “Company”) is a global provider of survey software products. The Company was incorporated in 2011 as a Delaware corporation and is the successor to operations originally begun in 1999. The Company’s headquarters are located in the United States and its international operations are primarily based in Ireland and Canada.

Principles of Consolidation and Basis of Presentation

The accompanying interim condensed consolidated balance sheet as of September 30, 2018, the statements of operations, comprehensive loss for the three and nine months ended September 30, 2018 and 2017, and cash flows for the nine months ended September 30, 2018 and 2017 are unaudited. Such condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. These condensed consolidated financial statements include the results of operations of the Company and its wholly-owned subsidiaries and all significant intercompany transactions have been eliminated.

These condensed consolidated financial statements do not include all disclosures normally required in annual consolidated financial statements prepared in accordance with GAAP. In management’s opinion, the condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of September 30, 2018, the results of operations for the three and nine months ended September 30, 2018 and 2017, and cash flows for the nine months ended September 30, 2018 and 2017. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the full year or any other future interim or annual periods.

These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on September 26, 2018 (the “Prospectus”).

On January 1, 2018, the Company adopted the requirements of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“ASC 606”) as discussed in Note 2 below in “Accounting Pronouncements Recently Adopted.” ASC 606 establishes a principle for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. ASC 606 also includes Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer. Collectively, references to ASC 606 used herein refer to both ASC 606 and Subtopic 340-40. The Company adopted ASC 606 with retrospective application to the beginning of the earliest period presented.

Initial public offering and concurrent private placement

On September 28, 2018, the Company completed its initial public offering (“IPO”), in which the Company issued and sold 17,250,000 shares of common stock (including the additional 2,250,000 shares that were sold pursuant to the Underwriters’ option to purchase additional shares) at $12.00 per share. The Company received aggregate proceeds of $192.5 million, net of underwriters' discounts and commissions of $14.5 million. Immediately subsequent to the closing of the Company’s IPO, Salesforce Ventures LLC purchased 3,333,333 shares of common stock from the Company at the IPO price of $12.00 per share, and the Company received aggregate proceeds of $40.0 million. The Company’s net proceeds from the IPO and the concurrent private placement totaled $225.3 million after deducting offering costs of $7.2 million.

Additionally, upon effectiveness of the registration statement for the Company's IPO, 2,574,499 net shares of Performance RSUs (as defined below) were released for awards where both a service condition and Performance Vesting Condition (as defined below) were met, and the Company recognized $89.9 million of stock-based compensation expense, net of amounts capitalized on an accelerated amortization method (see Notes 2 and 7 below for further discussion) and $21.4 million in payroll tax withholding obligations.  The Company utilized a portion of its IPO proceeds to satisfy such obligations in the third quarter of 2018.

8


SVMK INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting periods covered by the condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable. The Company’s most significant estimates and judgments involve valuation of the Company’s stock-based awards, including the determination of fair value of common stock prior to the completion of its IPO, valuation of deferred income tax assets, estimating the period of benefit for deferred commissions, valuation of acquired goodwill and intangibles from acquisitions, tax contingencies and legal contingencies.

Segment Information

The Company operates as a single operating segment. The Company’s chief operating decision makers (“CODMs”) are its Chief Executive Officer and Chief Financial Officer/Chief Operating Officer, who review the Company’s operating results on a consolidated basis in order to make decisions about allocating resources and assessing performance for the entire company. The Company’s CODMs use one measure of profitability and do not segment its business for internal reporting. See Note 11 for additional information regarding the Company’s revenue by geographic area.

Related Party Transactions

Certain members of the Company’s Board of Directors (“Board”) serve as board members, are executive officers of and/or (in some cases) are investors in companies that are customers and/or vendors of the Company. The Company recognized revenue from sales of its products to a substantial stockholder of $0.4 million and $1.3 million during the three and nine months ended September 30, 2018, respectively, and $0.4 million and $1.4 million during the three and nine months ended September 30, 2017, respectively. Sales to a substantial stockholder represented less than 1.0% of the Company’s total revenue in each of the periods presented.

2. Summary of Significant Accounting Policies

Revenue Recognition and Deferred Revenue

The Company generates substantially all of its revenue from the sale of subscriptions to its survey software products including subscriptions to its purpose-built solutions. The revenue the Company generates from one purpose-built solution that is delivered and recognized at a point in time is not significant. The Company normally sells each of these products in separate contracts to its customers and each product, including purpose-built solutions, is distinct. The Company’s policy is to exclude sales and other indirect taxes when measuring the transaction price of its subscription agreements. The Company accounts for revenue contracts with customers through the following steps:

 

Identification of the contract, or contracts, with a customer;

 

Identification of the performance obligations in the contract;

 

Determination of the transaction price;

 

Allocation of the transaction price to the performance obligations in the contract; and

 

Recognition of revenue when, or as, the Company satisfies a performance obligation.

For subscription products, the Company provides customers the option of monthly, annual or multi-year contractual terms. In general, the Company’s customers elect contractual terms of one year or less. Subscription revenue is recognized on a daily basis ratably over the related subscription term beginning on the date the Company provides access to its survey product. Access to the Company’s subscription product is an obligation representing a series of distinct services (and which comprise a single performance obligation) that the Company provides to its end customer over the subscription term. The Company recognizes the majority of its revenue ratably because the customer benefits from access to the Company’s subscription products throughout the subscription term.

9


SVMK INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

The Company generally invoices its customers at the beginning of the term on a monthly or annual basis. The Company's contracts are generally non-cancellable and do not contain refund-type provisions. The Company’s contracts do not contain a significant amount of variable consideration as the price of its subscription offerings are generally fixed at contract inception. Based on the invoicing structure and related subscription term, the Company determined its contracts do not contain a financing component. The Company applied the practical expedient provided by ASC 606 and did not evaluate contracts of one year or less for the existence of a significant financing component. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether transfer of control to customers has occurred.

The Company records contract liabilities to deferred revenue when cash payments are received or due. Deferred revenue consists of the unearned portion of customer billings.

The Company recognized into revenue $43.1 million and $78.2 million during the three and nine months ended September 30, 2018, respectively, and $36.3 million and $68.8 million during the three and nine months ended September 30, 2017, respectively, that was included in the deferred revenue balances at the beginning of each respective periods.

As of September 30, 2018, future estimated revenue related to performance obligations that are unsatisfied or partially unsatisfied at the end the reporting period was $109.9 million. The substantial majority of the unsatisfied performance obligations will be satisfied over the next twelve months.

Deferred Commissions

Certain commissions earned by the Company’s salesforce are considered to be incremental and recoverable costs of obtaining a contract with a customer. Such costs are deferred and amortized on a straight-line basis over their estimated period of benefit which is generally estimated as four years. The period of benefit was estimated by considering factors such as historical customer attrition rates, the useful life of the Company’s technology, and the impact of competition in its industry. Amortization of deferred commissions, included in sales and marketing expense line within the statements of operations was $423,000 and $1.1 million during the three and nine months ended September 30, 2018, respectively, and $260,000 and $688,000 during the three and nine months ended September 30, 2017, respectively. There was no impairment loss in relation to the deferred commissions for any period presented.

Stock-Based Compensation

The Company recognizes stock-based compensation expense for all share-based payments to employees based on the grant-date fair value of the Company’s common stock estimated in accordance with the provisions of Accounting Standards Codification (“ASC”) 718, Compensation‑Stock Compensation. For time-based equity awards, stock-based compensation expense is recognized on a straight-line basis over the award’s requisite service period, which is generally four years. The Company adopted the provisions of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718) in 2016 with no material impact on the consolidated financial statements. In accordance with ASU 2016-09, the Company recognizes excess tax benefits from stock-based compensation expense in earnings, which are substantially offset by a valuation allowance, and made a policy election to account for forfeitures as they occur.

The Company determines the fair value of equity awards as follows:

Stock Options: The Company estimates the fair values of its stock options using the Black-Scholes-Merton option-pricing model for options granted at-the-money and Lattice-Binomial option valuation model for out-of-the-money option grants. The aforementioned option valuation models require the input of key assumptions which are as follows:

 

Expected Term: As the Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior, the Company determines the expected term based on the average period the stock options are expected to remain outstanding, generally calculated as the midpoint of the stock options vesting term and contractual expiration period for awards granted at-the-money. For awards granted out-of-the-money, the expected term was adjusted to also consider the estimated period for those options to become in-the-money.

10


SVMK INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

 

Expected Volatility: As the Company does not have sufficient trading history of its common stock, stock price volatility is estimated at the applicable grant date by taking the weighted-average historical volatility of a group of comparable publicly-traded companies over a period equal to the expected life of the options.

 

Expected Dividend Rate: The Company has not paid and does not anticipate paying cash dividends on its shares of common stock in the foreseeable future; therefore, the expected dividend yield is assumed to be zero.

 

Risk-Free Interest Rate: The Company determined the risk-free interest rate by using a weighted average assumption equivalent to the expected term based on the U.S. Treasury constant maturity rate as of the date of grant.

Additionally, due to the absence of an active market for the Company’s common stock prior to its IPO, the Company obtained third-party valuations (prepared contemporaneously in connection with grants of share-based payments made prior to the Company’s IPO) to estimate the fair value of its common stock for purposes of measuring stock-based compensation expense to be recognized. The third-party valuations were prepared using methodologies, approaches, and assumptions consistent with the American Institute of Certified Public Accountants (“AICPA”) Accounting & Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Additional factors considered in preparing the third-party valuations were as follows:

 

Market multiples of comparable public companies in the Company’s industry as indicated by their market capitalization and guideline merger and acquisition transactions;

 

The Company’s performance and market position relative to its competitors, who may change from time to time;

 

The Company’s historical financial results and estimated trends and prospects for its future performance;

 

The economic and competitive environment;

 

The likelihood and timeline of achieving a liquidity event, such as an IPO or sale of the Company, given prevailing market conditions;

 

Any adjustments necessary to recognize a lack of marketability for its common stock; and

 

Precedent sales of or offers to purchase its capital stock.

Restricted Stock Units and Restricted Stock Awards: The fair value of the restricted stock units (including those that are performance-based) and restricted stock awards was determined based on the fair value of the Company’s common stock on the grant date.

Beginning in the second quarter of 2015, the Company granted performance-based restricted stock units (“Performance RSUs”) that vest upon the satisfaction of both a service condition and a Performance Vesting Condition. The Performance Vesting Condition occurred upon the effectiveness of the registration statement for the Company's IPO, which was September 25, 2018. As a result, the Company recognized the cumulative amount of unrecognized stock-based compensation expense of $89.9 million for services already rendered using the accelerated attribution method. As of September 30, 2018, the remaining unamortized stock-based compensation related to these awards was $37.9 million, which the Company expects to recognize on an accelerated basis over the remaining weighted-average requisite service periods of 1.6 years (see Note 7 for additional discussion).

 

Business Combinations

When the Company acquires a business, the purchase consideration is allocated to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated respective fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require the Company to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired users, acquired technology, and trade names from a market participant perspective, useful lives and discount rates. The Company’s estimates of fair value are based upon assumptions

11


SVMK INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to non-operating income (expense) in the consolidated statement of operations.

Impairment of Long-Lived Assets

Long-lived assets with finite lives include property and equipment, capitalized internal-use software and acquisition intangible assets. Long-lived assets are depreciated or amortized over their estimated useful lives which are as follows:

 

Building

 

40 years

Computer equipment

 

2 to 5 years

Furniture, fixtures, and other assets

 

5 years

Leasehold improvements

 

Shorter of remaining lease term or 5 years

Purchased software

 

3 years

Capitalized internal-use software

 

3 years

Acquisition intangible assets: customer relationships

 

5 to 7 years

Acquisition intangible assets: trade name

 

2 to 10 years

Acquisition intangible assets: technology

 

3 to 8 years

 

The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of depreciable or amortizable long-lived assets may warrant revision or that the remaining balance may not be recoverable. When factors indicate that long-lived assets should be evaluated for possible impairment, the Company uses an estimate of the related undiscounted future cash flows over the remaining life of the long-lived assets in measuring whether they are recoverable. If the estimated undiscounted future cash flows do not exceed the carrying value of the asset, a loss is recorded as the excess of the asset’s carrying value over its fair value. The Company did not recognize any impairment of long-lived assets during each of the three and nine months ended September 30, 2018 and 2017. The Company believes that the carrying values of long-lived assets as of September 30, 2018 are recoverable.

Goodwill is not amortized but rather tested for impairment at least annually, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. Goodwill impairment is recognized when the carrying value of goodwill exceeds the implied fair value of the Company. The Company did not recognize any impairment of goodwill during each of the three and nine months ended September 30, 2018 and 2017.

Foreign Currencies

The functional currency of the Company’s foreign subsidiaries is generally the U.S. Dollar. Monetary assets and liabilities are remeasured using foreign currency exchange rates at the end of the period, and non-monetary assets are remeasured based on historical exchange rates. Gains and losses due to foreign currency are the result of either the remeasurement of subsidiary balances or transactions denominated in currencies other than the foreign subsidiaries’ functional currency and are included in other non-operating income (expense), net in the statement of operations.

For subsidiaries where the functional currency is the local currency, the assets and liabilities of those foreign subsidiaries are translated from their respective functional currencies into U.S. Dollars at the rates in effect at the balance sheet date and revenue and expense amounts are translated at a rate approximating the average exchange rate for the period. Foreign currency translation gains and losses are recorded to accumulated other comprehensive income (loss).

Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents and accounts receivable. The Company places its cash and cash equivalents in banks, primarily in checking accounts and such amounts may at times exceed the federally insured limits. Cash

12


SVMK INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

equivalents consist of short-term money market funds (for which the Company had none in any of the periods presented), which are managed by reputable financial institutions. For purposes of its customer concentration disclosure, the Company defines a customer as an organization. An organization may consist of an individual paying user, multiple paying users within an organization or the organization itself. No single customer accounted for more than 10% of revenue during each of the three and nine months ended September 30, 2018 and 2017. No customers accounted for more than 10% of accounts receivable, net as of September 30, 2018 and December 31, 2017, respectively.

Fair Value of Financial Instruments

The Company applies the provisions of ASC 820, Fair Value Measurement, to assets and liabilities that are required to be measured at fair value, which include investments in marketable debt and equity securities and derivative financial instruments.

Securities are classified as available for sale and are carried at fair value, with the change in unrealized gains and losses, net of tax, reported as a separate component on the consolidated statements of comprehensive income until realized.

See Note 4 for additional disclosures regarding fair value measurements.

Private Company Investments

As noted below under “Accounting Pronouncements Recently Adopted”, on January 1, 2018, the Company adopted ASU 2016-01 as of January 1, 2018 and accounts for private company investments, without readily determinable fair values, either under the equity or cost method. Investments through which the Company exercises significant influence but does not have control over the investee are accounted for under the equity method. Investments through which the Company is not able to exercise significant influence over the investee are measured and accounted for using an alternative measurement basis of a) the carrying value of a security at cost, b) less any impairment and c) plus or minus any qualifying observable price changes (with a same or similar security from the same issuer). These securities were previously accounted for using the cost method of accounting, measured at cost less other-than-temporary impairment. If an observable price change or impairment is recognized on the Company’s private company investments, such investments would then be classified as a Level 3 financial instrument within the fair value hierarchy based on the nature of the fair value inputs. The Company classifies private company investments as other assets on the consolidated balance sheets as those investments do not have stated contractual maturity dates. Any adjustments to the carrying value are recognized in other non-operating income (expense), net in the consolidated statement of operations. As of September 30, 2018 and December 31, 2017, respectively, the carrying value of the Company’s private company investment at cost was $3.6 million. There were no impairments or observable price changes for the Company’s private company investment during the three and nine months September 30, 2018.

Impairment of Investments

The Company periodically reviews its investments for impairment. If the Company concludes that any of these investments are impaired, the Company determines whether such impairment is other-than-temporary. Factors considered to make such determination include the duration and severity of the impairment, the reason for the decline in value and the potential recovery period and the Company’s intent to sell. For debt securities, the Company also considers whether (1) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, and (2) the amortized cost basis cannot be recovered as a result of credit losses. If the investment is considered to be other-than-temporarily impaired, the Company will record the investment at fair value by recognizing an impairment within other non-operating income (expense) in the consolidated statement of operations and establishes a new carrying value for the investment.

Derivative Financial Instruments

From time to time, the Company may use derivative financial instruments consisting of interest rate swaps to manage cash flow exposure under its credit facilities and accounts for such derivative financial instruments in accordance with ASC 815, Accounting for Derivative Instruments and Hedging Activities. The Company recognizes its derivative financial instruments as an asset or liability in the consolidated balance sheets at fair value, if material. The Company did not have any derivative financial instruments during each of the three and nine months ended September 30, 2018 and 2017.

13


SVMK INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Cash and Cash Equivalents

Cash and cash equivalents primarily consist of cash on deposit with banks and investments in money market funds (for which the Company had none in any of the periods presented) with maturities of 90 days or less from the date of purchase. The Company also classifies amounts in transit from payment processors for customer credit card and debit card transactions as cash equivalents, because such amounts generally convert to cash within five days with little or no default risk.

Accounts Receivable

Accounts receivable are customer obligations that arise due to the time taken to settle transactions through direct customer payments. The Company bills in advance for monthly contracts and generally bills annually in advance for contracts with terms of one year or longer when it has an unconditional contractual right to consideration. The Company also recognizes an immaterial amount of contract assets, or unbilled receivables, primarily relating to rights to consideration for services completed but not billed at the reporting date. Unbilled receivables are classified as receivables when the Company has the right to invoice the customer.

The Company records an allowance for doubtful accounts based upon its assessment of various factors including the Company’s historical experience, the age of a customers’ accounts receivable balance, a customers’ credit quality, current economic conditions, historical bad debt expense trends and other factors that may affect a customers’ ability to pay to determine the level of allowance required. Amounts deemed uncollectible are recorded to the allowance for doubtful accounts with an offsetting charge in the statements of operations.

Property and Equipment

Property and equipment, excluding buildings capitalized under build-to-suit lease arrangements which are discussed below, are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Expenditures that improve an asset or extend its estimated useful life are capitalized. Costs of maintenance and repairs that do not improve or extend the lives of the respective assets are expensed as incurred.

Capitalized Internal-Use Software and Website Development Costs

The Company incurs development costs relating to its online survey platform as well as other software solely for internal-use. Costs relating to the planning and post‑implementation phases of development are expensed as incurred. Costs incurred in the development phase are capitalized and included in capitalized internal-use software, net and amortized over their estimated useful life, generally three years. Maintenance and training costs are expensed as incurred.

Lease Accounting

Except for the Company’s San Mateo building lease which is accounted for as a build-to-suit lease, the Company leases facilities, datacenters, and equipment which are accounted for as operating leases (as further described in Note 8). Rent escalations and concession provisions are considered in determining the total estimated rent expense to be incurred and which is recognized over the lease term on a straight-line basis. The Company records the difference between the rent paid and the straight-line rent as a deferred rent liability in the accompanying consolidated balance sheets.

For build-to-suit lease arrangements, the Company may be deemed to be the building owner during the construction period for accounting purposes. In that circumstance, the Company records an asset and liability for estimated construction costs incurred under a build-to-suit lease arrangement to the extent the Company is involved in the construction of structural improvements or takes construction risk prior to commencement of a lease.

The Company additionally has entered into subleases for unoccupied leased office space. To the extent there are losses associated with the sublease, they are recognized in the period the sublease is executed. Gains are recognized over the sublease life. Any sublease payments received in excess of the straight-line rent payments for the sublease are recorded in other non-operating income (expense).

14


SVMK INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Legal and Other Contingencies

The Company accrues a liability for either claims arising in the ordinary course of business, assessments resulting from non-income-based audits or litigation when it is probable that a loss has been incurred and the amount is reasonably estimable, the determination of which requires significant judgment. See Note 8 for additional information pertaining to legal and other contingencies.

Liability for Sabbatical Leave

In 2016, the Company adopted a sabbatical leave program for its employees whereby the Company’s full-time employees are eligible for four weeks of paid time-off after four years of continuous service. The Company accounts for sabbatical leaves in accordance with ASC 710, Compensated Absences. As of September 30, 2018, the accrued balance was $4.2 million ($2.1 million included in accrued compensation and $2.1 million in other non-current liabilities). As of December 31, 2017, the accrued balance was $3.6 million ($1.7 million included in accrued compensation and $1.9 million in other non-current liabilities).

Advertising and Promotion Costs

Expenses related to advertising, marketing and promotion of the Company’s product offerings are expensed as incurred. These costs mainly consist of search engine marketing related costs. The Company incurred $6.6 million and $17.1 million during the three and nine months ended September 30, 2018, respectively, and $4.5 million and $13.4 million during the three and nine months ended September 30, 2017, respectively, which are included in sales and marketing expenses in the condensed consolidated statements of operations.

Cost of Revenue

Cost of revenue consists primarily of expenses associated with the delivery and distribution of the Company’s platform for users of the Company’s online survey platform. Cost of revenue generally consist of infrastructure costs, personnel costs and other related costs. Infrastructure costs generally include expenses related to the operation of the Company’s data centers, such as data center equipment depreciation and facility costs (such as co-location rentals), website hosting costs, credit card processing fees, amortization of capitalized software, charity donations and external sample costs. Personnel costs, including salaries and bonuses, stock-based compensation expense, other employee benefits and travel-related expenses for employees whose primary responsibilities relate to supporting the Company’s infrastructure and delivering user support. Other related costs include amortization of acquired developed technology intangible assets and allocated overhead.

Research and Development

Research and development costs primarily include personnel costs (including salaries, bonuses, stock-based compensation expense, other employee benefits and travel-related expenses), costs for third-party consultants, depreciation of equipment used in research and development activities and allocated overhead. Except for costs associated with the development of internal-use software, research and development costs are expensed as incurred.

Sales and Marketing

Sales and marketing expenses relate to both self-serve and outbound sales activities. Sales and marketing expenses generally are comprised of personnel costs (including salaries, sales commissions and amortization of deferred sales commissions, stock-based compensation expense, other employee benefits and travel-related expenses), costs related to brand campaign fees, lead generation fees, amortization of acquired trade name and customer relationship intangible assets and allocated overhead.

General and Administrative

General and administrative expenses consist primarily of employee-related costs (including salaries, bonuses, stock-based compensation expense, other employee benefits and travel-related expenses) for legal, finance, human resources, and other administrative functions, as well as certain executives. In addition, general and administrative expenses include outside legal, accounting and other professional fees, non-income-based taxes and allocated overhead.

15


SVMK INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Restructuring

From time to time, the Company may implement a management-approved restructuring plan to improve efficiencies across the organization, reduce its cost structure, and/or better align its resources with the Company’s product strategy. Restructuring charges can include severance costs to eliminate a specified number of employees, infrastructure charges to vacate facilities and consolidate operations, contract cancellation costs and other related costs.

In connection with such plans, the Company may incur restructuring costs comprised of employee severance and associated termination costs related to the reduction of its workforce, losses on its non-cancelable lease contracts, and other contract termination costs. Costs associated with a restructuring plan are recognized and measured at fair value in the consolidated statement of operations in the period in which the liability is incurred. These restructuring initiatives may require the Company to make estimates in several areas including: (i) expenses for employee severance and other separation costs; (ii) realizable values of assets made redundant, obsolete, or excessive; and (iii) the ability to generate sublease income and to terminate lease obligations at the estimated amounts.

Other Non-Operating Income (Expense)

Other non-operating income (expense), net consists primarily of interest income, net foreign currency exchange gains (losses), gain on sale of private company investments, net realized gains and losses related to investments, and other. The components of other non-operating income (expense) recognized in the condensed consolidated financial statements is as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Interest Income

 

$

151

 

 

$

17

 

 

$

292

 

 

$

30

 

Foreign currency gains (losses), net

 

 

(303

)

 

 

(170

)

 

 

(1,032

)

 

 

396

 

Gain on sale of a private company investment

 

 

 

 

 

 

 

 

999

 

 

 

6,750

 

Loss on debt extinguishment

 

 

 

 

 

 

 

 

 

 

 

(194

)

Other income (expense), net

 

 

(67

)

 

 

927

 

 

 

(127

)

 

 

968

 

Other non-operating income (expense), net

 

$

(219

)

 

$

774

 

 

$

132

 

 

$

7,950

 

 

As of December 31, 2016, the Company had a private company investment of approximately $5.0 million accounted for using the cost method of accounting, which it sold in January 2017 for cash consideration of $11.7 million and recognized a gain of $6.7 million during the nine months ended September 30, 2017. Additionally, the Company is entitled to receive contingent consideration to be received over three years following the close of the transaction, subject to the private company meeting certain employee retention and financial targets. Subsequent earn-out amounts collected will be recorded as a gain when cash is received. In February 2018, the Company received its share of the first installment of the earn-out payment of $1.0 million, which was recognized during in the first quarter of 2018.

Income Taxes

The Company accounts for income taxes using the asset and liability method. ASC 740, Accounting for Income Taxes, requires the recognition of deferred tax assets and liabilities based upon the temporary differences between the financial reporting and tax bases of assets and liabilities and using enacted rates in effect for the years in which the differences are expected to reverse.

Valuation allowances are established when necessary to reduce the deferred tax assets when it is more likely than not that a portion or all of the deferred tax assets will not be realized.

ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken on a tax return and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company records uncertain tax positions on the basis of a two-step process in which: (1) the Company determines

16


SVMK INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

whether it is more likely than not that the tax positions will be sustained on the basis of technical merits of the position, and (2) for those tax positions that meet the more likely than not recognition threshold, the Company recognizes the tax benefit as the largest amount that is cumulatively more than 50% likely to be realized upon ultimate settlement with the related tax authority.

From time to time, the Company engages in certain intercompany transactions and legal entity restructurings. The Company considers many factors when evaluating these transactions, including the alignment of their corporate structure with their organizational objectives and the operational and tax efficiency of their corporate structure, as well as the long-term cash flows and cash needs of its business. These transactions may impact the Company’s overall tax rate and/or result in additional cash tax payments. The impact in any period may be significant. These transactions may be complex and the impact of such transactions on future periods may be difficult to estimate.

Accounting Pronouncements Recently Adopted

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASC 606, as modified through other ASUs issued subsequent to ASU 2014-09, supersedes all existing revenue recognition requirements and requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASC 606 also includes Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer. ASC 606 was effective for public companies with fiscal years beginning after December 15, 2017.

On January 1, 2018, the Company adopted the requirements of ASC 606 using the full retrospective transition method. The primary impact of adopting ASC 606 relates to the deferral of incremental sales commissions incurred to obtain subscription contracts. Prior to the adoption of ASC 606, such costs were expensed as incurred. The Company amortizes these costs on a straight-line basis over a period of benefit, estimated to be generally four years.

The impact of adopting ASC 606 is as follows:

 

Consolidated statements of operations impact: A decrease in sales and marketing expense of $17,000 and $688,000, respectively, during the three and nine months ended September 30, 2017, respectively; and

 

Consolidated balance sheets impact: An increase in total assets of $3.2 million as of December 31, 2017.

Financial Instruments: In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 amends certain aspects of the recognition, measurement, presentation, and disclosure of financial instruments. The most significant impact of ASU 2016-01 was for the Company’s private company investments whereby such investments are recorded at cost and adjusted for impairments and observable price changes through the consolidated statements of operations. ASU 2016-01 is effective for public companies with fiscal years beginning after December 15, 2017. The Company adopted ASU 2016-01 as of January 1, 2018 with no impact upon adoption.

 

Stock Compensation: In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718) Scope of Modification Accounting, which amends and improves the current modification accounting guidance in ASC 718. As amended, the new accounting guidance would be applicable only when there is a change in value resulting from an equity award modification. ASU 2017-09 is effective for public companies with fiscal years beginning after December 15, 2017. The Company adopted ASU 2017-09 as of January 1, 2018 with no impact upon adoption.

In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting, to simplify and improve the accounting guidance applicable to equity transactions with nonemployees. The most significant impact of ASU 2018-07 is that, similar to equity awards issued to employees, equity awards issued to nonemployees are accounted for at their grant date fair values pursuant to ASC 718 (rather than at their expected settlement date fair value under current GAAP). ASU 2018-07 is effective for public companies with fiscal years beginning after December 15, 2018. The Company early adopted ASU 2018-07 as of July 1, 2018 and recognized an adjustment of $43,000 to retained earnings as of January 1, 2018 for awards not settled as of the adoption date.

17


SVMK INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Income Taxes: In October 2016, the FASB issued ASU 2016-16, Income Taxes: Intra-Entity Transfers Other than Inventory (Topic 740), which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 is effective for public companies with fiscal years beginning after December 15, 2017 and early adoption is permitted. The Company early adopted ASU 2016-16 as of January 1, 2018 with no impact upon adoption.

Accounting Pronouncements Not Yet Adopted

Leases: In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02, as ,modified through other ASUs issued subsequent to ASU 2016-02, generally requires companies to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet. ASU 2016-02 is effective for public companies with fiscal years beginning after December 15, 2018 on a modified retrospective basis and early adoption is permitted. The Company plans to adopt the requirements of ASU 2016-02 as of January 1, 2019 including use of the transition method which allows for recognition of the cumulative-effect adjustments at the beginning of the adoption period. The Company currently expects that the lease for its San Mateo building (see Note 8 for additional information) will be classified as an operating lease upon adoption of ASU 2016-02.  Additionally, the Company currently expects that its operating leases will result in recognition of right-of-use assets and corresponding liabilities. The Company will continue to evaluate the effect of adopting this guidance on its condensed consolidated financial statements and related disclosures up through the date of adoption.

Internal-Use Software: In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"). ASU 2018-15 amends current guidance to align the accounting for costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing costs associated with developing or obtaining internal-use software. Capitalized implementation costs must be expensed over the term of the hosting arrangement and presented in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement. ASU 2018-15 is effective for public companies with fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the effect of adopting this guidance on its consolidated financial statements and related disclosures.

3. Cash and Cash Equivalents

As of September 30, 2018 and December 31, 2017, cash and cash equivalents were $257.1 million and $35.3 million, respectively.

Included in cash and cash equivalents are cash in transit from payment processors for credit and debit card transactions of $3.5 million and $1.9 million as of September 30, 2018 and December 31, 2017, respectively.

Restricted cash that is included within other assets as of September 30, 2018 was $168,000. Restricted cash that is included within other assets as of December 31, 2017 was nominal.

4. Fair Value Measurements

Assets and liabilities recorded at fair value in the condensed consolidated financial statements are categorized based on the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels which are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets or liabilities are as follows:

Level 1 – Observable inputs, such as quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs, other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

18


SVMK INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

The carrying amounts of the Company’s financial instruments, which generally include cash equivalents, accounts receivable and accounts payable, approximate their fair values due to their short maturities. The carrying value of the Company’s debt approximates fair value based on borrowing rates currently available to the Company for debt with similar terms and consideration of default and credit risk.

As of September 30, 2018 and December 31, 2017, the Company did not have any financial instruments accounted for pursuant to ASC 820.

 

5. Property and Equipment

As of September 30, 2018 and December 31, 2017, property and equipment consisted of the following:

 

(in thousands)

 

September 30, 2018

 

 

December 31, 2017

 

Building

 

$

71,780

 

 

$

71,780

 

Computer equipment

 

 

21,412

 

 

 

22,225

 

Leasehold improvements

 

 

59,481

 

 

 

54,004

 

Furniture, fixtures, and other assets

 

 

10,951

 

 

 

10,573

 

Gross property and equipment

 

 

163,624

 

 

 

158,582

 

Less: Accumulated depreciation

 

 

(38,874

)

 

 

(27,251

)

Property and equipment, net

 

$

124,750

 

 

$

131,331

 

 

Depreciation expense was $4.9 million and $14.4 million, during the three and nine months ended September 30, 2018, respectively, and $4.0 million and $11.1 million, during the three and nine months ended September 30, 2017, respectively.

6. Intangible Assets

Capitalized internal-use software

As of September 30, 2018 and December 31, 2017, capitalized internal-use software consisted of the following:

 

(in thousands)

 

September 30, 2018

 

 

December 31, 2017

 

Gross capitalized internal-use software

 

$

105,352

 

 

$

95,607

 

Less: Accumulated amortization

 

 

(70,463

)

 

 

(54,114

)

Capitalized internal use software, net

 

$

34,889

 

 

$

41,493

 

 

Amortization expense related to capitalized internal-use software was $5.0 million and $16.3 million during the three and nine months ended September 30, 2018, respectively, and $5.4 million and $15.6 million during the three and nine months ended September 30, 2017, respectively, and is included in cost of revenue in the consolidated statements of operations.

19


SVMK INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Acquisition intangible assets, net

As of September 30, 2018 and December 31, 2017, intangible assets, net consisted of the following:

 

 

 

September 30, 2018

 

 

December 31, 2017

 

(in thousands)

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

Customer relationships

 

$

47,696

 

 

$

(41,981

)

 

$

5,715

 

 

$

47,696

 

 

$

(40,696

)

 

$

7,000

 

Trade name

 

 

6,072

 

 

 

(5,680

)

 

 

392

 

 

 

6,072

 

 

 

(5,192

)

 

 

880

 

Technology

 

 

22,007

 

 

 

(17,757

)

 

 

4,250

 

 

 

22,007

 

 

 

(16,293

)

 

 

5,714

 

Acquisition intangible assets, net

 

$

75,775

 

 

$

(65,418

)

 

$

10,357

 

 

$

75,775

 

 

$

(62,181

)

 

$

13,594

 

 

Amortization expense was $1.1 million and $3.2 million during the three and nine months ended September 30, 2018, respectively, and $1.1 million and $3.4 million during the three and nine months ended September 30, 2017, respectively.

Future amortization expense

As of September 30, 2018, future amortization expense by year is expected to be as follows (in thousands):

 

(in thousands)

 

Capitalized

internal-use

software, net

 

 

Acquisition

intangible

assets, net

 

Remainder of 2018

 

$

4,915

 

 

$

1,033

 

2019

 

 

11,243

 

 

 

3,839

 

2020

 

 

4,444

 

 

 

2,952

 

2021

 

 

70

 

 

 

1,705

 

2022

 

 

 

 

 

828

 

Total amortization expense

 

$

20,672

 

 

$

10,357

 

 

Future capitalized internal-use software amortization excludes $14.2 million of costs which are currently in the development phase.

 

Goodwill, net

The changes in the carrying amount of goodwill, net were as follows (in thousands):

 

Balance as of December 31, 2017

 

$

336,861

 

Balance as of September 30, 2018

 

$

336,861

 

 

7. Stockholders’ Equity and Employee Benefit Plans

Common stock and preferred stock

In connection with the Company’s IPO, the Company’s stockholders approved the Fourth Amended and Restated Certificate of Incorporation to authorize the issuance of up to 900,000,000 shares, consisting of 800,000,000 shares of common stock at par value of $0.00001 per share and 100,000,000 shares of preferred stock at par value $0.00001 per share. In connection with the Fourth Amended and Restated Certificate of Incorporation, common stock and additional paid-in capital amounts in consolidated balance sheets have been adjusted to reflect the change in par value.

20


SVMK INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

During the nine months ended September 30, 2018, the Company repurchased approximately $16,000 of common stock (1,159 shares) at a price of $13.65 per share, which was approximately the fair value of common stock at such time. During the nine months ended September 30, 2017, the Company repurchased approximately $144,000 of common stock (11,791 shares) at $12.21 per share, which was approximately the fair value of common stock.

Equity Incentive Plans

The Company has two equity incentive plans: the 2011 Equity Incentive Plan ( the “2011 Plan”) and the 2018 Equity Incentive Plan (the “2018 Plan”). The Company’s stockholders approved the 2018 Plan on September 5, 2018, and established it with an adjustable reserve of 9,394,744 shares of common stock. Additionally, upon the completion of the Company’s IPO in September 2018, the 2011 Plan was terminated and all shares that remained available for future issuance under the 2011 Plan at that time were transferred to the 2018 Plan. To the extent that grants outstanding under the 2011 Plan terminate, cancel or are forfeited, the shares reserved for issuance under such grants are transferred to the 2018 Plan and become available for subsequent grant thereunder.

Under the 2018 Plan, the Board or a committee of the Board, may grant incentive and nonqualified stock options, stock appreciation rights, restricted or unrestricted stock awards, restricted stock units (“RSUs”), phantom stock, performance awards or other stock-based awards to employees, directors and other individuals providing services to the Company. The purpose of the 2018 Plan is to promote the long-term growth and profitability of the Company by (i) providing employees with incentives to improve stockholder value and to contribute to the growth and financial success of the Company through their future services, and (ii) enabling the Company to attract, retain and reward the best‑available persons. The options granted under the 2018 Plan, may be granted at a price not less than the fair market value on the grant date.

The Board, or a committee of the Board, has granted options with an exercise price at or which approximates the fair value on the grant date to new hires, except for the out-of-the-money options granted to certain employees as discussed below. Grants of time-based awards generally vest over a four-year period for new hires and over a three-year period for subsequent grants to existing employees. The service condition for the majority of these awards are satisfied generally over the applicable vesting period. Options expire as determined by the Board, or committee of the Board, but not more than ten years after the date of the grant. In 2015, the Company began granting restricted stock units that contain both a service condition and Performance Vesting Condition. Both the service condition and Performance Vesting Condition must be met in order for these awards to vest and issue. The Performance Vesting Condition occurred upon the effectiveness of the registration statement for the Company's IPO, which was September 25, 2018.

As of September 30, 2018, 13,906,190 shares of common stock remain available for grant under the 2018 Plan.

The following is a summary of stock option activity for the current year period:

 

 

 

Stock Options

 

 

 

Number of

Shares

 

 

Weighted

Average

Exercise

Price

 

Aggregate

Intrinsic Value

(in thousands)

 

Weighted

Average

Remaining

Contractual

Term

(in years)

 

Outstanding, vested and expected to vest at December 31, 2017

 

 

13,809,069

 

 

$14.82

 

$9,292

 

 

7.8

 

Granted

 

 

5,455,835

 

 

$13.32

 

 

 

 

 

 

Exercised

 

 

(66,265

)

 

$6.62

 

 

 

 

 

 

Forfeited

 

 

(690,207

)

 

$15.23

 

 

 

 

 

 

Expired

 

 

(139,558

)

 

$13.95

 

 

 

 

 

 

Outstanding, vested and expected to vest at September 30, 2018

 

 

18,368,874

 

 

$14.39

 

$30,217

 

 

7.8

 

Exercisable at September 30, 2018

 

 

9,400,643

 

 

$14.19

 

$17,425

 

 

6.7

 

 

21


SVMK INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

 

The following is a summary of restricted stock awards for the current year period:

 

 

 

Restricted Stock Awards

 

 

 

Number of

Shares

 

 

Weighted

Average

Grant-Date Fair

Value

 

Weighted

Average

Remaining

Contractual

Term

(in years)

 

Unvested at December 31, 2017

 

 

480,866

 

 

$14.38

 

 

0.6

 

Vested

 

 

(480,866

)

 

$14.38

 

 

 

 

Unvested at September 30, 2018

 

 

 

 

$0.00

 

 

0.0

 

 

The following is a summary of restricted stock units for the current year period:

 

 

Restricted Stock Units

 

 

 

Number of

Shares

 

 

Weighted

Average

Grant-Date Fair

Value

 

Weighted

Average

Remaining

Contractual

Term

(in years)

 

Unvested at December 31, 2017

 

 

8,838,281

 

 

$12.52

 

 

2.2

 

Granted

 

 

3,483,580

 

 

$13.33

 

 

 

 

Vested, gross of shares withheld for employee payroll taxes

 

 

(5,158,846

)

 

$12.70

 

 

 

 

Forfeited/canceled, including shares withheld for employee payroll taxes