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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 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: 001-38478


CARBON BLACK, INC.

(Exact Name of Registrant as Specified in its Charter)


 

 

 

Delaware

    

55-0810166

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

1100 Winter Street

 

 

Waltham, MA

 

02451

(Address of principal executive offices)

 

(Zip Code)

 

(617) 393-7400

(Registrant’s telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes       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

 

 

 

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    

There were 67,917,331 shares of the registrant’s common stock with a par value of $0.001 per share, outstanding as of October 22, 2018.

 

 

 

 

 

 


 

Table of Contents

CARBON BLACK, INC.

FORM 10-Q

For the Quarter Ended September 30, 2018

TABLE OF CONTENTS

 

 

 

 

PART I  — FINANCIAL INFORMATION 

 

 

 

 

 

 

Item 1. 

Financial Statements

 

 

 

Unaudited Condensed Consolidated Balance Sheets

 

2

 

Unaudited Condensed Consolidated Statements of Operations

 

3

 

Unaudited Condensed Consolidated Statements of Comprehensive Loss

 

4

 

Unaudited Condensed Consolidated Statement of Redeemable Convertible and Convertible Preferred Stock and Stockholders’ Equity

 

5

 

Unaudited Condensed Consolidated Statements of Cash Flows

 

6

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

 

 

 

 

Item 2.  

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

 

23

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

 

36

Item 4.  

Controls and Procedures

 

37

 

 

 

 

PART II — OTHER INFORMATION 

 

 

 

 

 

 

Item 1.  

Legal Proceedings

 

37

Item 1A.  

Risk Factors

 

37

Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

 

66

Item 6.  

Exhibits

 

67

 

Signatures

 

68

 

 

1

 


 

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CARBON BLACK, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31, 

(In thousands, except share and per share amounts)

    

2018

    

2017

Assets

 

 

  

 

 

 

Current assets:

 

 

  

 

 

  

Cash and cash equivalents

 

$

69,099

 

$

36,073

Short-term investments

 

 

94,666

 

 

 —

Accounts receivable, net of allowances of $209 and $124 as of September 30, 2018 and December 31, 2017, respectively

 

 

51,582

 

 

60,850

Prepaid expenses and other current assets

 

 

8,967

 

 

6,040

Deferred commissions

 

 

11,801

 

 

9,551

Total current assets

 

 

236,115

 

 

112,514

Deferred commissions, net of current portion

 

 

23,171

 

 

20,404

Property and equipment, net

 

 

14,792

 

 

12,459

Intangible assets, net

 

 

2,919

 

 

4,092

Goodwill

 

 

119,656

 

 

119,656

Other-long term assets

 

 

531

 

 

2,436

Total assets

 

$

397,184

 

$

271,561

Liabilities, Redeemable Convertible and Convertible Preferred Stock and Stockholders' Equity (Deficit)

 

 

  

 

 

  

Current liabilities:

 

 

  

 

 

  

Accounts payable

 

$

3,502

 

$

2,481

Accrued expenses

 

 

19,596

 

 

18,846

Deferred revenue

 

 

138,515

 

 

130,165

Deferred rent

 

 

1,176

 

 

944

Total current liabilities

 

 

162,789

 

 

152,436

Deferred revenue, net of current portion

 

 

38,316

 

 

38,535

Warrant liability

 

 

 —

 

 

2,766

Deferred rent, net of current portion

 

 

2,774

 

 

3,114

Deferred tax liability

 

 

37

 

 

33

Other long-term liabilities

 

 

42

 

 

42

Total liabilities

 

 

203,958

 

 

196,926

Commitments and contingencies (Note 11)

 

 

  

 

 

  

Redeemable convertible preferred stock (Series B, C, D, E, E-1 and F), $0.001 par value, 94,101,207 authorized, 88,741,194 shares issued and outstanding with aggregate liquidation preference of $272,506 as of December 31, 2017. No shares authorized, issued or outstanding as of September 30, 2018.

 

 

 —

 

 

333,204

Series A convertible preferred stock, $0.001 par value, 8,800,000 shares authorized, 3,851,806 shares issued and outstanding as of December 31, 2017. No shares authorized, issued or outstanding as of September 30, 2018.

 

 

 —

 

 

1,510

Stockholders' equity (deficit):

 

 

  

 

 

  

Common stock, $0.001 par value, 500,000,000 shares and 156,650,000 shares authorized as of September 30, 2018 and December 31, 2017, respectively; 67,951,050 shares and 11,193,366 shares issued and 67,895,646 and 11,139,690 shares outstanding as of September 30, 2018 and December 31, 2017, respectively

 

 

68

 

 

11

Treasury stock, at cost, 55,404 and 53,676 shares as of September 30, 2018 and December 31, 2017, respectively

 

 

(6)

 

 

(6)

Additional-paid in capital

 

 

712,156

 

 

13,429

Accumulated other comprehensive loss

 

 

(30)

 

 

 —

Accumulated deficit

 

 

(518,962)

 

 

(273,513)

Total stockholders' equity (deficit)

 

 

193,226

 

 

(260,079)

Total liabilities, redeemable convertible and convertible preferred stock and stockholders' equity (deficit)

 

$

397,184

 

$

271,561

See notes to unaudited condensed consolidated financial statements.

2


 

Table of Contents

CARBON BLACK, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30, 

(In thousands, except share and per share amounts)

2018

    

2017

    

2018

    

2017

Revenue:

 

  

 

 

  

 

 

  

 

 

  

Subscription, license and support

$

50,824

 

$

38,381

 

$

144,106

 

$

107,135

Services

 

2,591

 

 

3,128

 

 

8,735

 

 

9,010

Total revenue

 

53,415

 

 

41,509

 

 

152,841

 

 

116,145

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

Subscription, license and support

 

9,015

 

 

6,842

 

 

24,278

 

 

17,417

Services

 

2,890

 

 

2,943

 

 

8,946

 

 

8,360

Total cost of revenue

 

11,905

 

 

9,785

 

 

33,224

 

 

25,777

Gross profit

 

41,510

 

 

31,724

 

 

119,617

 

 

90,368

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

35,818

 

 

25,988

 

 

101,657

 

 

75,078

Research and development

 

16,189

 

 

13,675

 

 

47,195

 

 

37,794

General and administrative

 

7,563

 

 

5,717

 

 

25,838

 

 

16,060

Total operating expenses

 

59,570

 

 

45,380

 

 

174,690

 

 

128,932

Loss from operations

 

(18,060)

 

 

(13,656)

 

 

(55,073)

 

 

(38,564)

Interest income, net

 

737

 

 

22

 

 

1,192

 

 

 5

Change in fair value of warrant liability

 

 —

 

 

(45)

 

 

(8,838)

 

 

79

Other income (expense), net

 

(173)

 

 

102

 

 

(547)

 

 

215

Loss before income taxes

 

(17,496)

 

 

(13,577)

 

 

(63,266)

 

 

(38,265)

Provision for income taxes

 

136

 

 

22

 

 

241

 

 

108

Net loss

 

(17,632)

 

 

(13,599)

 

 

(63,507)

 

 

(38,373)

Accretion of preferred stock to redemption value

 

 —

 

 

(7,427)

 

 

(199,492)

 

 

(15,751)

Net loss attributable to common stockholders

$

(17,632)

 

$

(21,026)

 

$

(262,999)

 

$

(54,124)

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

$

(0.26)

 

$

(1.99)

 

$

(6.34)

 

$

(5.27)

Weighted-average common shares outstanding—basic and diluted

 

67,837,240

 

 

10,587,153

 

 

41,494,203

 

 

10,263,962

 

See notes to unaudited condensed consolidated financial statements.

3


 

Table of Contents

 

CARBON BLACK, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

    

Nine Months Ended September 30,

In thousands

2018

 

2017

 

2018

 

2017

Net loss

$

(17,632)

 

$

(13,599)

 

$

(63,507)

 

$

(38,373)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 Unrealized loss on available-for-sale securities

 

(30)

 

 

 -

 

 

(30)

 

 

 -

Total other comprehensive loss

 

(30)

 

 

 -

 

 

(30)

 

 

 -

Comprehensive loss

$

(17,662)

 

$

(13,599)

 

$

(63,537)

 

$

(38,373)

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

4


 

Table of Contents

CARBON BLACK, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE AND CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Convertible

 

Convertible

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

Total

 

 

Preferred Stock

 

Preferred Stock

 

 

Common Stock

 

Treasury Stock

 

Paid‑in

 

Comprehensive

 

Accumulated

 

Stockholders'

(In thousands, except share amounts)

    

Shares

    

Amount

    

Shares

    

Amount

  

  

Shares

    

Amount

    

Shares

    

Amount

    

Capital

 

Income (Loss)

    

Deficit

    

Equity

Balances at December 31, 2017

 

 

88,741,194

 

$

333,204

 

3,851,806

 

$

1,510

 

 

11,139,690

 

$

11

 

53,676

 

$

(6)

 

$

13,429

 

$

 

 

$

(273,513)

 

$

(260,079)

Exercise of Series A stock options

 

 

 —

 

 

 —

 

360,385

 

 

211

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Accretion of redeemable convertible preferred stock to redemption value

 

 

 —

 

 

199,492

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(17,550)

 

 

 —

 

 

(181,942)

 

 

(199,492)

Conversion of redeemable convertible preferred stock upon initial public offering

 

 

(88,741,194)

 

 

(532,696)

 

 —

 

 

 —

 

 

44,370,560

 

 

44

 

 —

 

 

 —

 

 

532,652

 

 

 —

 

 

 —

 

 

532,696

Conversion of convertible preferred stock upon initial public offering

 

 

 —

 

 

 —

 

(4,212,191)

 

 

(1,721)

 

 

1,709,063

 

 

 2

 

 —

 

 

 —

 

 

1,719

 

 

 —

 

 

 —

 

 

1,721

Issuance of common stock upon initial public offering, net of underwriting discounts and commissions and offering costs incurred of $4,858

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

9,200,000

 

 

 9

 

 —

 

 

 —

 

 

157,697

 

 

 —

 

 

 —

 

 

157,706

Issuance of common stock upon exercise of common stock warrants

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

712,063

 

 

 1

 

 —

 

 

 —

 

 

11,603

 

 

 —

 

 

 —

 

 

11,604

Repurchase of common stock

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(1,728)

 

 

 —

 

1,728

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Exercise of common stock options

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

765,998

 

 

 1

 

 —

 

 

 —

 

 

3,136

 

 

 —

 

 

 —

 

 

3,137

Stock-based compensation expense

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

9,470

 

 

 —

 

 

 —

 

 

9,470

Unrealized loss on available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                (30)

 

 

 —

 

 

(30)

Net loss

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(63,507)

 

 

(63,507)

Balances at September 30, 2018

 

 

 —

 

$

—  

 

 —

 

$

 

 

67,895,646

 

$

68

 

55,404

 

$

(6)

 

$

712,156

 

$

             (30)

 

$

(518,962)

 

$

193,226

 

See notes to unaudited condensed consolidated financial statements.

 

 

5


 

Table of Contents

CARBON BLACK, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

(In thousands)

2018

    

2017

Cash flows from operating activities:

 

  

 

 

  

Net loss

$

(63,507)

 

$

(38,373)

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

 

 

 

 

  

Depreciation and amortization expense

 

5,881

 

 

5,204

Stock-based compensation expense

 

9,470

 

 

6,649

Provisions for doubtful accounts

 

140

 

 

(159)

Non-cash interest expense

 

34

 

 

15

Change in fair value of warrant liability

 

8,838

 

 

(79)

Deferred income taxes

 

 4

 

 

 —

Other non-cash income

 

(115)

 

 

 —

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

9,127

 

 

(2,517)

Prepaid expenses and other assets

 

(2,657)

 

 

(1,916)

Deferred commissions

 

(5,017)

 

 

(4,122)

Accounts payable

 

1,236

 

 

1,136

Accrued expenses

 

751

 

 

(1,686)

Deferred revenue

 

8,131

 

 

23,711

Deferred rent

 

(109)

 

 

(200)

Other long-term liabilities

 

(263)

 

 

(59)

Net cash used in operating activities

 

(28,056)

 

 

(12,396)

Cash flows from investing activities:

 

  

 

 

  

Purchases of short-term investments

 

(94,581)

 

 

 —

Purchases of property and equipment

 

(5,354)

 

 

(4,228)

Capitalization of internal-use software costs

 

(1,901)

 

 

(714)

Net cash used in investing activities

 

(101,836)

 

 

(4,942)

Cash flows from financing activities:

 

  

 

 

  

Proceeds from exercise of stock options

 

3,348

 

 

2,349

Repayments of line of credit

 

 —

 

 

(5,500)

Proceeds from initial public offering, net of offering costs of $2,947

 

159,617

 

 

 —

Payments of deferred financing costs

 

(47)

 

 

(84)

Net cash provided by (used in) financing activities

 

162,918

 

 

(3,235)

Net increase (decrease) in cash and cash equivalents

 

33,026

 

 

(20,573)

Cash and cash equivalents at beginning of period

 

36,073

 

 

51,503

Cash and cash equivalents at end of period

$

69,099

 

$

30,930

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

  

Conversion of redeemable convertible preferred stock upon initial public offering

$

532,696

 

$

 —

Conversion of convertible preferred stock upon initial public offering

 

1,720

 

 

 —

Issuance of common stock upon exercise of common stock warrants

 

11,604

 

 

 —

Deferred IPO costs paid in prior periods

 

1,911

 

 

 —

Accretion of preferred stock to redemption value

 

199,492

 

 

15,751

Additions to property and equipment included in accounts payable at period end

 

75

 

 

139

Series B preferred stock issued upon exercise of Series B Warrant

 

 —

 

 

225

Series F preferred stock and common stock issued upon termination of customer warrant in connection with acquisition of Confer Technologies, Inc.

 

 —

 

 

1,347

 

See notes to unaudited condensed consolidated financial statements.

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Table of Contents

CARBON BLACK, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share amounts)

1. OVERVIEW AND BASIS OF PRESENTATION

Overview

Carbon Black, Inc. (the “Company”) is a leading provider of next-generation endpoint security solutions. The Company’s solutions enable customers to predict, prevent, detect, respond to and remediate cyber attacks before they cause a damaging incident or data breach. The Company was incorporated under the laws of the State of Delaware in December 2002 as Bit 9, Inc. and in April 2005 changed its name to Bit9, Inc. In January 2016, the Company amended its certificate of incorporation to change its name to Carbon Black, Inc.

On April 20, 2018, the Company effected a 1-for-2 reverse stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios of Company’s Series B, Series C, Series D, Series E, Series E-1 and Series F preferred stock. Accordingly, all share and per share amounts for all periods presented in the accompanying unaudited consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratios.

On May 8, 2018, the Company closed its initial public offering (“IPO”), in which it issued and sold 9,200,000 shares of common stock inclusive of the underwriters’ option to purchase additional shares that was exercised in full. The price to the public was $19 per share. The Company received aggregate proceeds of $162.6 million from the IPO, net of underwriters’ discounts and commissions, and before deducting offering costs of approximately $4.9 million. Upon closing of the IPO, all shares of the Company’s outstanding redeemable convertible and convertible preferred stock automatically converted into 46,079,623 shares of common stock. Additionally, an outstanding warrant which became exercisable upon the closing of the IPO was exercised to purchase 485,985 shares of common stock.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting standards (“GAAP”) for interim financial information and include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The Company’s condensed consolidated financial statements are unaudited, but include all adjustments of a normal recurring nature necessary for a fair presentation of the quarterly results. The Company has made estimates and judgments affecting the amounts reported in the condensed consolidated financial statements and the accompanying notes. The actual results that the Company experiences may differ materially from the Company’s estimates.

The Company’s condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s final prospectus for its IPO dated as of May 4, 2018 and filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended.

Effective January 1, 2018, the Company adopted the requirements of Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”) on a full retrospective basis as discussed in detail in Note 2. All amounts and disclosures set forth in this Quarterly Report on Form 10-Q have been updated to comply with ASC 606.

The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, permits an “emerging growth company” such as the Company to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. The Company has irrevocably elected to “opt out” of this provision and, as a result, the Company will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies.

 

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Table of Contents

2. NEW ACCOUNTING PRONOUNCEMENTS

Recently issued accounting pronouncements:

Internal-Use Software

In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) (“ASU 2018-15”). ASU 2018-15 was issued in order to address a customer's accounting for implementation costs incurred in a cloud computing arrangement (“CCA”) that is considered a service contract. Under this guidance, implementation costs for a CCA should be evaluated for capitalization using the same approach as implementation costs associated with internal-use software. The capitalized implementation costs should be expensed over the term of the hosting arrangement, which includes any reasonably certain renewal periods. The pronouncement is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of this pronouncement on its consolidated financial statements.

Stock Compensation

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718) (“ASU 2018-07”). ASU 2018-07 was issued in order to expand the guidance for stock-based compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company does not expect the adoption of the new accounting standard to have a material impact on its consolidated financial statements.

Comprehensive Income

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (“ASU 2018-02”), which provides for the reclassification of the effect of remeasuring deferred tax balances related to items within accumulated other comprehensive income to retained earnings resulting from the Tax Cuts and Jobs Act, or Tax Act. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. The Company does not expect the adoption of the new accounting standard to have a material impact on its consolidated financial statements.

Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new standard will be effective for the Company on January 1, 2019. Companies are required to use a modified retrospective approach, with the option of applying the requirements of the standard either (1) retrospectively to each prior comparative reporting period presented, or (2) retrospectively at the beginning of the period of adoption. The Company plans to adopt this standard in the first quarter of 2019 by applying the requirements to the beginning of the period of adoption through a cumulative-effect adjustment. The Company is in the process of identifying the population of potential lease arrangements and evaluating these arrangements in the context of the new guidance. While the Company continues to evaluate the effect of adoption on its consolidated financial statements, the Company expects the adoption will result in the recognition of right-of-use assets and lease liabilities that were not previously recognized, which will increase total assets and liabilities on the Company’s consolidated balance sheet.

Recently adopted accounting pronouncement:

Revenue

In May 2014, the FASB issued ASC 606, which supersedes existing revenue recognition guidance under GAAP. The Company adopted ASC 606 effective January 1, 2018 using the full retrospective method, which required the Company to restate each prior reporting period presented for the impact of adoption of the standard.

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The Company’s recognition of total revenue related to subscription (i.e., term-based) licenses, cloud-based subscriptions, access to the threat intelligence capabilities of the Cb Predictive Security Cloud, maintenance services and customer support, and stand-alone professional services remain substantially unchanged under the new standard. However, as further discussed herein, the timing of recognition related to certain aspects of subscription (i.e. term-based) licenses, perpetual licenses and associated professional services is different under the new standard.

For subscription license sales of Cb Protection and Cb Response, under the new standard, the Company considers the software license and the access to the threat intelligence capabilities of the Cb Predictive Security Cloud, which provides continuous updates of real-time threat intelligence, to be a single performance obligation. As a result, the arrangement consideration allocated to the software license is deferred on the Company’s balance sheet and recognized ratably over the term of the subscription as the performance obligation is satisfied. However, under the new standard, the Company is no longer required to delay the commencement of revenue recognition of subscription licenses until the commencement of any professional services and training sold with the subscription license  due to the lack of vendor - specific objective evidence ("VSOE") of its longest delivered service elements, maintenance and support. While under the new standard, maintenance services and customer support related to subscription licenses are a stand-alone performance obligation, the related revenue continues to be recognized ratably over the term of the maintenance and support arrangement as the performance obligation is satisfied.

For its infrequent sales of perpetual licenses of Cb Protection and Cb Response, prior to the adoption of ASC 606, the Company recognized revenue ratably over the longest service period of any deliverable in the arrangement, which was generally the maintenance and support term, due to the lack of VSOE of fair value for its maintenance and support offerings. Under the new standard, the Company is no longer required to delay revenue recognition of perpetual licenses until the commencement of any bundled professional services and training sold with the perpetual license. Further, the Company recognizes the revenue related to the sale of perpetual software licenses ratably over the customer’s estimated economic life, which the Company has estimated to be five years, rather than over the initially committed period of maintenance and support.

In addition, under the new standard, for subscription and perpetual licenses that are sold with professional services in a combined arrangement, the professional services represent a separate performance obligation and the Company recognizes revenue associated with the professional services as such services are performed. Revenue associated with professional services sold in a combined arrangement with subscription and perpetual licenses was previously recognized ratably over the longest service period of any deliverable in the arrangement, which was generally the maintenance and support term, due to the lack of VSOE of fair value for the Company’s maintenance and support offerings.

Another significant provision of the new standard requires the capitalization and amortization of costs associated with obtaining a contract, such as sales commissions. Under the new standard, all incremental costs to acquire a contract are capitalized and amortized using a systematic basis over the pattern of transfer of the goods and services to which the asset relates. Under the previous standard, the Company capitalized commission costs that were incremental and directly related to the acquisition of a customer arrangement. The commission costs were capitalized when earned and were amortized as expense over the period that the revenue was recognized for the related non-cancelable customer arrangement in proportion to the recognition of revenue, without regard to anticipated customer renewals. Under the new standard, the Company continues to capitalize all incremental commission costs to obtain a customer arrangement, but now amortizes the capitalized costs on a straight-line basis over the estimated customer relationship period, which includes anticipated customer renewals, because the Company anticipates that a majority of customers will renew their license and cloud-based subscriptions and the commissions paid by the Company for such renewals are not commensurate with the commissions paid for new sales. Accordingly, this has resulted in the Company’s capitalized commission costs being amortized to expense over a longer period under the new standard than under the prior guidance. The Company has estimated the customer relationship period to be five years.

For additional information on the Company’s accounting policies as a result of the adoption of ASC 606 see Note 13 “Revenue”.

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The Company adjusted its consolidated financial statements due to the adoption of ASC 606. Select unaudited consolidated financial statements, which reflect the adoption of ASC 606 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2017

 

 

 

 

 

Adjustments for

 

 

 

 

 

As Previously

 

ASC 606

 

 

 

    

Reported

    

Adoption

    

As Adjusted

Consolidated Balance Sheet

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Deferred commissions, current portion

 

$

15,195

 

$

(5,644)

 

$

9,551

Deferred commissions, net of current portion

 

 

3,811

 

 

16,593

 

 

20,404

Liabilities, redeemable convertible and convertible preferred stock and stockholders' equity (deficit):

 

 

 

 

 

 

 

 

 

Deferred revenue, current portion

 

 

132,278

 

 

(2,113)

 

 

130,165

Deferred revenue, net of current portion

 

 

31,902

 

 

6,633

 

 

38,535

Accumulated deficit

 

 

(279,942)

 

 

6,429

 

 

(273,513)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2017

 

Nine Months Ended September 30, 2017

 

 

As Prepared

under

ASC 605

    

Adjustments

for

ASC 606 Adoption

    

As Adjusted

    

As Prepared

under

ASC 605

    

Adjustments

for

ASC 606 Adoption

    

As Adjusted

Consolidated Statement of Operations

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Subscription, license and support

 

$

38,216

 

$

165

 

$

38,381

 

$

107,783

 

$

(648)

 

$

107,135

Services

 

 

3,163

 

 

(35)

 

 

3,128

 

 

9,417

 

 

(407)

 

 

9,010

Total revenue

 

 

41,379

 

 

130

 

 

41,509

 

 

117,200

 

 

(1,055)

 

 

116,145

Gross profit

 

 

31,594

 

 

130

 

 

31,724

 

 

91,423

 

 

(1,055)

 

 

90,368

Sales and marketing

 

 

26,905

 

 

(917)

 

 

25,988

 

 

77,929

 

 

(2,851)

 

 

75,078

Total operating expenses

 

 

46,297

 

 

(917)

 

 

45,380

 

 

131,783

 

 

(2,851)

 

 

128,932

Loss from operations

 

 

(14,703)

 

 

1,047

 

 

(13,656)

 

 

(40,360)

 

 

1,796

 

 

(38,564)

Loss before income taxes

 

 

(14,624)

 

 

1,047

 

 

(13,577)

 

 

(40,061)

 

 

1,796

 

 

(38,265)

Net loss and comprehensive loss

 

 

(14,646)

 

 

1,047

 

 

(13,599)

 

 

(40,169)

 

 

1,796

 

 

(38,373)

Net loss attributable to common stockholders

 

 

(22,073)

 

 

1,047

 

 

(21,026)

 

 

(55,920)

 

 

1,796

 

 

(54,124)

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

 

$

(2.08)

 

$

0.09

 

$

(1.99)

 

$

(5.45)

 

$

0.17

 

$

(5.27)

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

 

 

Adjustments for

 

 

 

 

 

As Prepared

 

ASC 606

 

 

 

 

    

under ASC 605

    

Adoption

    

As Adjusted

Consolidated Statement of Cash Flows

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(40,169)

 

$

1,796

 

$

(38,373)

Changes in operating assets and liabilities, excluding the impact of acquisition of businesses:

 

 

 

 

 

 

 

 

 

Deferred commissions

 

 

(1,272)

 

 

(2,850)

 

 

(4,122)

Deferred revenue

 

$

22,657

 

$

1,054

 

$

23,711

 

 

3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company’s cash equivalents consist of highly liquid investments in money market funds.

The Company considers all high quality investments purchased with original maturities at the date of purchase greater than three months to be short-term investments. Investments are available to be used for current operations and are, therefore, classified as current assets even though maturities may extend beyond one year. Short-term investments are classified as available for sale and are,

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therefore, recorded at fair value on the consolidated balance sheet, with any unrealized gains and losses reported in accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders’ equity in the Company’s consolidated balance sheets, until realized. The Company uses the specific identification method to compute gains and losses on the investments. The amortized cost of securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included as a component of interest income, net in the consolidated statement of operations. Cash equivalents and short-term investments consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September  30, 2018

 

    

Amortized Cost

    

Unrealized Gains

    

Unrealized Losses

    

Fair Value

Cash equivalents:

 

 

  

 

 

  

 

 

  

 

 

  

Money market funds

 

$

56,647

 

$

 —

 

$

 —

 

$

56,647

   Total cash equivalents

 

 

56,647

 

 

 —

 

 

 —

 

 

56,647

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

46,710

 

$

 —

 

$

 —

 

$

46,710

U.S. treasury securities

 

 

21,382

 

 

 —

 

 

(13)

 

 

21,369

Corporate bonds

 

 

13,778

 

 

 —

 

 

(6)

 

 

13,772

Asset-backed securities

 

 

12,826

 

 

 —

 

 

(11)

 

 

12,815

 Total short-term investments

 

$

94,696

 

$

 —

 

$

(30)

 

$

94,666

 

 

 

4. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company categorizes assets and liabilities recorded or disclosed at fair value on our condensed consolidated balance sheets based upon the level of judgment associated with inputs used to measure their fair value. The categories are as follows:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly.

Level 3—Inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. The inputs require significant management judgment or estimation.

The following tables present information about the Company's financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September  30, 2018

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Cash equivalents:

 

 

  

 

 

  

 

 

  

 

 

  

Money market funds

 

$

56,647

 

$

 —

 

$

 —

 

$

56,647

   Total cash equivalents

 

$

56,647

 

$

 —

 

$

 —

 

$

56,647

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

 —

 

$

46,710

 

$

 —

 

$

46,710

U.S. treasury securities

 

 

21,369

 

 

 —

 

 

 —

 

 

21,369

Corporate bonds

 

 

 —

 

 

13,772

 

 

 —

 

 

13,772

Asset-backed securities

 

 

 —

 

 

12,815

 

 

 —

 

 

12,815

 Total short-term investments

 

$

21,369

 

$

73,297

 

$

 —

 

$

94,666

 

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December 31, 2017

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

 

  

 

 

  

 

 

  

 

 

  

Money market funds

 

$

21,597

 

$

 —

 

$

 —

 

$

21,597

   Total cash equivalents

 

$

21,597

 

$

 —

 

$

 —