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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

 

 

 

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

 

For the quarterly period ended March 31, 2019

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    

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

CBLK

The Nasdaq Global Select Market

 

There were 71,569,406 shares of the registrant’s common stock with a par value of $0.001 per share, outstanding as of April 30, 2019.

 

 

 

 


 

Table of Contents

CARBON BLACK, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED

MARCH 31, 2019

 

TABLE OF CONTENTS

PART I  — FINANCIAL INFORMATION 

 

 

 

 

 

 

Item 1. 

Financial Statements

 

 

 

Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 (Unaudited)

 

3

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018 (Unaudited)

 

4

 

Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2019 and 2018 (Unaudited)

 

5

 

Consolidated Statements of Redeemable Convertible and Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Three Months Ended March 31, 2019 and 2018 (Unaudited)

 

6

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 (Unaudited)

 

7

 

Condensed Notes to the Consolidated Financial Statements (Unaudited)

 

8

 

 

 

 

Item 2.  

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

 

24

Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

 

38

Item 4.  

Controls and Procedures

 

38

 

 

 

 

PART II — OTHER INFORMATION 

 

 

 

 

 

 

Item 1.  

Legal Proceedings

 

39

Item 1A. 

Risk Factors

 

39

Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

 

63

Item 3. 

Defaults upon Senior Securities

 

63

Item 4. 

Mine Safety Disclosures

 

63

Item 5. 

Other Information

 

63

Item 6.  

Exhibits

 

64

Signatures 

 

 

65

 

 

 

2


 

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CARBON BLACK, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

 

 

 

 

 

 

March 31, 

 

December 31, 

(In thousands, except share and per share amounts)

2019

    

2018

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

72,880

 

$

67,868

Short-term investments

 

80,399

 

 

92,770

Accounts receivable, net of allowances of $210 and $300, as of March 31, 2019 and December 31, 2018, respectively

 

43,870

 

 

62,555

Prepaid expenses and other current assets

 

9,397

 

 

8,751

Deferred commissions

 

13,680

 

 

13,078

Total current assets

 

220,226

 

 

245,022

Deferred commissions, net of current portion

 

25,397

 

 

25,076

Property and equipment, net

 

13,253

 

 

14,370

Operating lease right-of-use assets

 

14,931

 

 

 —

Intangible assets, net

 

2,204

 

 

2,529

Goodwill

 

119,656

 

 

119,656

Deferred tax asset

 

483

 

 

483

Other-long term assets

 

560

 

 

601

Total assets

$

396,710

 

$

407,737

Liabilities:

 

 

 

 

 

Current liabilities:

 

  

 

 

  

Accounts payable

$

4,846

 

$

4,663

Accrued expenses

 

13,901

 

 

20,669

Deferred revenue

 

146,912

 

 

152,522

Deferred rent

 

 —

 

 

1,216

Operating lease short-term liability

 

5,339

 

 

 —

Total current liabilities

 

170,998

 

 

179,070

Deferred revenue, net of current portion

 

36,296

 

 

40,371

Deferred rent, net of current portion

 

 —

 

 

2,651

Operating lease long-term liability

 

13,344

 

 

 —

Deferred tax liability

 

49

 

 

49

Other long-term liabilities

 

28

 

 

42

Total liabilities

 

220,715

 

 

222,183

Commitments and contingencies (Note 10)

 

  

 

 

  

Stockholders' equity:

 

 

 

 

 

Common stock, $0.001 par, 500,000,000 shares authorized:

 

 

 

 

 

71,396,964 and 69,738,599 shares issued, and 71,341,560 and 69,683,195 shares outstanding,as of March 31, 2019 and December 31, 2018, respectively

 

71

 

 

70

Treasury stock, at cost, 55,404 shares as of March 31, 2019 and December 31, 2018, respectively

 

(6)

 

 

(6)

Additional paid-in capital

 

733,129

 

 

723,051

Accumulated other comprehensive loss

 

 —

 

 

(49)

Accumulated deficit

 

(557,199)

 

 

(537,512)

Total stockholders' equity

 

175,995

 

 

185,554

Total liabilities and stockholders' equity

$

396,710

 

$

407,737

 

 

 

 

See accompanying condensed notes to the consolidated financial statements.

3


 

Table of Contents

CARBON BLACK, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

(In thousands, except share and per share amounts)

    

2019

    

2018

Revenue:

 

 

  

 

 

  

Subscription, license and support

 

$

56,294

 

$

45,391

Services

 

 

2,262

 

 

3,043

Total revenue

 

 

58,556

 

 

48,434

Cost of revenue:

 

 

 

 

 

 

Subscription, license and support

 

 

10,502

 

 

7,212

Services

 

 

2,523

 

 

3,003

Total cost of revenue

 

 

13,025

 

 

10,215

Gross profit

 

 

45,531

 

 

38,219

Operating expenses:

 

 

 

 

 

 

Sales and marketing

 

 

39,410

 

 

30,678

Research and development

 

 

18,377

 

 

14,922

General and administrative

 

 

8,088

 

 

10,426

Total operating expenses

 

 

65,875

 

 

56,026

Loss from operations

 

 

(20,344)

 

 

(17,807)

Other income (expense), net:

 

 

 

 

 

 

Interest income

 

 

859

 

 

68

Interest expense

 

 

(31)

 

 

(23)

Change in fair value of warrant liability

 

 

 —

 

 

(2,881)

Other income (expense), net

 

 

(105)

 

 

120

Total other income (expense), net

 

 

723

 

 

(2,716)

Loss before income taxes

 

 

(19,621)

 

 

(20,523)

Provision for income taxes

 

 

66

 

 

71

Net loss

 

 

(19,687)

 

 

(20,594)

Accretion of preferred stock to redemption value

 

 

 —

 

 

(40,039)

Net loss attributable to common stockholders

 

$

(19,687)

 

$

(60,633)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(0.28)

 

$

(5.38)

Weighted-average common shares outstanding—basic and diluted

 

 

70,474,542

 

 

11,264,252

 

 

 

 

 

 

 

 

See accompanying condensed notes to the consolidated financial statements.

4


 

Table of Contents

CARBON BLACK, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

 

 

 

 

 

 

 

Three Months Ended March 31, 

(In thousands)

2019

 

2018

Net loss

$

(19,687)

 

$

(20,594)

Other comprehensive income (loss), net of related taxes:

 

 

 

 

 

Net unrealized gains (losses) on available-for-sale securities, net of related taxes of zero

 

49

 

 

 -

Other comprehensive income (loss)

 

49

 

 

 -

Total comprehensive loss

$

(19,638)

 

$

(20,594)

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying condensed notes to the consolidated financial statements.

 

 

5


 

Table of Contents

CARBON BLACK, INC.

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE AND CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Loss

    

Deficit

    

Equity (Deficit)

Balance 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)

Net loss

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(20,594)

 

 

(20,594)

Exercise of Series A stock options

 

 

 

 

185,063

 

 

89

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Exercise of common stock options

 

 

 

 

 —

 

 

 —

 

 

274,840

 

 

 —

 

 —

 

 

 —

 

 

976

 

 

 —

 

 

 —

 

 

976

Stock-based compensation expense

 

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

2,389

 

 

 —

 

 

 —

 

 

2,389

Accretion of redeemable convertible preferred stock to redemption value

 

 

 

40,039

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(16,794)

 

 

 —

 

 

(23,245)

 

 

(40,039)

Repurchase of common stock

 

 

 

 

 —

 

 

 —

 

 

(1,728)

 

 

 —

 

1,728

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Balance at March 31, 2018

 

88,741,194

 

$

373,243

 

4,036,869

 

$

1,599

 

 

11,412,802

 

$

11

 

55,404

 

$

(6)

 

$

 —

 

$

 —

 

$

(317,352)

 

$

(317,347)

Balance at December 31, 2018

 

 —

 

$

 —

 

 —

 

$

 —

 

 

69,683,195

 

$

70

 

55,404

 

$

(6)

 

$

723,051

 

$

(49)

 

$

(537,512)

 

$

185,554

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(19,687)

 

 

(19,687)

Exercise of common stock options

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,535,993

 

 

 1

 

 —

 

 

 —

 

 

6,225

 

 

 —

 

 

 —

 

 

6,226

Vesting of restricted stock units, net of shares withheld for employee taxes

 

 —

 

 

 —

 

 —

 

 

 —

 

 

122,372

 

 

 —

 

 —

 

 

 —

 

 

(351)

 

 

 —

 

 

 —

 

 

(351)

Stock-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

4,204

 

 

 —

 

 

 —

 

 

4,204

Unrealized gain (loss) on available-for-sale securities

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

49

 

 

 —

 

 

49

Balance at March 31, 2019

 

 —

 

$

 —

 

 —

 

$

 —

 

 

71,341,560

 

$

71

 

55,404

 

$

(6)

 

$

733,129

 

$

 —

 

$

(557,199)

 

$

175,995

 

 

 

 

 

 

 

 

 

 

See accompanying condensed notes to the consolidated financial statements.

 

 

6


 

Table of Contents

CARBON BLACK, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

 

 

 

 

 

Three Months Ended March 31,

(In thousands)

2019

 

2018

Cash flows from operating activities:

 

 

 

 

 

Net loss

$

(19,687)

 

$

(20,594)

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

 

 

 

 

 

Depreciation and amortization expense

 

2,124

 

 

1,905

Stock-based compensation expense

 

4,204

 

 

2,389

Provisions for doubtful accounts

 

(41)

 

 

19

Non-cash interest expense

 

16

 

 

 9

Change in fair value of warrant liability

 

 —

 

 

2,881

Deferred income taxes

 

 —

 

 

 4

Other non-cash income

 

(383)

 

 

 —

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

18,726

 

 

24,031

Prepaid expenses and other assets

 

(893)

 

 

(1,861)

Deferred commissions

 

(923)

 

 

(494)

Accounts payable

 

236

 

 

25

Accrued expenses

 

(7,482)

 

 

(2,305)

Deferred revenue

 

(9,686)

 

 

(6,703)

Deferred rent

 

 —

 

 

(82)

Operating leases right-of-use assets

 

1,088

 

 

 —

Operating leases liability

 

(1,202)

 

 

 —

Other long-term liabilities

 

(13)

 

 

(1)

Net cash used in operating activities

 

(13,916)

 

 

(777)

Cash flows from investing activities:

 

 

 

 

 

Purchases of short-term investments

 

(15,897)

 

 

 —

Sale and maturities of short-term investments

 

28,700

 

 

 —

Purchases of property and equipment

 

(577)

 

 

(1,495)

Capitalization of internal-use software costs

 

(160)

 

 

(293)

Net cash provided by (used in) investing activities

 

12,066

 

 

(1,788)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from exercise of stock options

 

6,546

 

 

1,065

Payments of deferred financing costs

 

(47)

 

 

(47)

Taxes paid related to net share settlement of equity awards

 

(351)

 

 

 —

Proceeds from employee stock purchase plan

 

714

 

 

 —

Payments of initial public offering costs

 

 —

 

 

(840)

Net cash provided by financing activities

 

6,862

 

 

178

Net increase (decrease) in cash and cash equivalents

 

5,012

 

 

(2,387)

Cash and cash equivalents at beginning of period

 

67,868

 

 

36,073

Cash and cash equivalents at end of period

$

72,880

 

$

33,686

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

Accretion of preferred stock to redemption value

$

 —

 

$

40,039

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

$

189

 

$

353

Deferred offering costs included in accounts payable at period end

$

 —

 

$

546

 

 

See accompanying condensed notes to the consolidated financial statements.

 

 

7


 

Table of Contents

CARBON BLACK

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

Note 1 

Overview and Basis of Presentation

 

9

Note 2 

New Accounting Pronouncements

 

10

Note 3 

Cash Equivalents and Short-Term Investments

 

13

Note 4 

Fair Value of Financial Instruments

 

14

Note 5 

Property and Equipment, Net

 

16

Note 6 

Goodwill and Intangible Assets

 

16

Note 7 

Leases

 

17

Note 8 

Stockholders’ Equity

 

18

Note 9 

Equity Award Plans

 

18

Note 10 

Commitments and Contingencies

 

20

Note 11 

Income Taxes

 

21

Note 12 

Revenue

 

21

Note 13 

Net Loss per Share

 

22

 

 

8


 

Table of Contents

CARBON BLACK

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1. OVERVIEW AND BASIS OF PRESENTATION

Overview

Carbon Black, Inc. (the “Company,” ”we,” “us,” “our”) is a leader in cloud endpoint protection. 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.

The company is headquartered in Waltham, Massachusetts. The Company has wholly owned subsidiaries in the United States, the United Kingdom, Singapore, Australia, Canada, Malaysia and Japan.

Reverse Stock Split

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 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.

Initial Public Offering

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 $19.00 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 the 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 consolidated financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States (“GAAP”), as well as pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), regarding interim financial reporting. Accordingly, certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the financial information included in our Annual Report on Form 10-K for 2018 filed with the SEC on March 8, 2019 (“2018 Form 10-K”).

The consolidated financial statements include our results of operations and those of our wholly-owned subsidiaries and reflect all adjustments which are, in the opinion of management, necessary for a fair statement of results for the interim periods presented. All intercompany transactions and balances have been eliminated in consolidation.

Certain previously reported amounts presented in this Quarterly Report on Form 10-Q (“Form 10-Q”) may be reclassified to conform to current-period presentation. Events occurring subsequent to the date of our consolidated balance sheet were evaluated for potential recognition or disclosure in our consolidated financial statements through the date we filed this Form 10-Q with the SEC.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that may materially affect the reported amounts of assets, liabilities, equity, revenue and expenses. As a result of unanticipated events or circumstances, actual results could differ from those estimates, and such differences may be material to the consolidated financial statements. For additional information about our use of estimates refer to “Critical Accounting Policies” included under management’s discussion and analysis in our 2018 Form 10-K.

Significant Accounting Policies

9


 

Table of Contents

CARBON BLACK

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Effective January 1, 2019, the Company adopted the requirements of Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASC 842”) on a modified retrospective transition approach as discussed in detail in Note 2. All amounts and disclosures set forth in this Form 10-Q have been updated to comply with ASC 842.

The Jumpstart Our Business Startups Act of 2012 (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. For a complete discussion of our significant accounting policies refer to Note 2 to the consolidated financial statements in our 2018 Form 10-K.

 

NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS

Recently issued accounting pronouncements:

Standard

Description

Date of Adoption

Effects on the financial statements or other significant matters

ASU 2018-15, Intangibles-Goodwill and Other (Topic 350): Internal-Use Software

The standard 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. Generally costs incurred to configure/customize the hosted software are capitalizable, however, data conversion and training costs are expensed as incurred consistent with internal-use software guidance. The amortization period is over the non-cancelable term and any reasonable certain renewals are expensed to the same line item in which fees paid to the vendor are recognized (i.e., not included in amortization expense).

January 1, 2020, early adoption permitted

We are currently assessing the impact of the standard on our consolidated financial statements.

ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

The standard requires immediate recognition of expected credit losses for financial assets carried at amortized cost, including trade and other receivables, loans and commitments, held-to-maturity debt securities and other financial assets, held at the reporting date to be measured based on historical experience, current conditions and reasonable supportable forecasts.  Credit losses on available-for-sale securities will be recorded as an allowance versus a write-down of the amortized cost basis of the security and will allow for a reversal of impairment loss when the credit of the issuer improves.

January 1, 2020, early adoption permitted

We are currently assessing the impact of the standard on our consolidated financial statements.

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(UNAUDITED)

 

ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment

The standard simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The ASU requires an entity to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying value exceeds the fair value of the reporting unit.  Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss.

January 1, 2020, early adoption permitted

We are currently evaluating the impacts of early adoption and will apply this standard prospectively, as applicable.

ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement

The standard eliminates, amends and adds disclosure requirements for fair value measurements. Eliminated disclosures include: amount of and reasons for transfers between levels 1 and 2, policy on timing of transfers, valuation processes for level 3. Removal of the requirement to disclose future changes in FV inputs. Relevant amended disclosures include no longer requiring full level 3 rollforward but rather disclosure of transfers in/out and purchases/ issuances. New disclosures include changes in OCI on level 3 assets/ liabilities and disclosure of range and weighted average of significant unobservable inputs for level 3. 

January 1, 2020, early adoption permitted

We are in the process of evaluating the changes required by the new provisions. We expect this to be minimal as we do not have any level 3 inputs.

 

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CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Recently adopted accounting pronouncements:

Leases

In February 2016, the FASB issued ASC No. 2016-02, Leases (Topic 842) (“ASC 842”), 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. We adopted ASC 842 effective January 1, 2019 and elected the modified retrospective approach, whereby periods prior to 2019 were not adjusted for the new standard.

We elected the hindsight practical expedient to determine the lease term for existing leases, and we did not elect to apply the recognition requirements in the leases standard to leases that at commencement date have a lease term of 12 months or less.

We have elected the available package of practical expedients permitted under the transition guidance within the new standard which does not require us to reassess the prior conclusions about lease identification, lease classification and initial direct costs. The adoption of ASC 842 resulted in the recognition of operating right-of-use assets of approximately $16.0 million and operating lease liabilities of approximately $19.9 million. Included within our operating lease assets are the previously recorded net deferred rent balances which were reclassified into our operating lease assets upon the adoption of ASC 842. The standard did not have a material effect on our consolidated statement of operations, consolidated statement of comprehensive loss or consolidated statement of cash flows. Expanded disclosures about the nature and terms of our lease agreements are included in Note 7 in this Form 10-Q.

Stock Compensation

We adopted ASU No. 2018-07, Compensation – Stock Compensation (Topic 718) (“ASC 718”), effective January 1, 2019. The standard provides expanded guidance for stock-based compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. The overall effect from the adoption of ASC 718  had an immaterial impact to our consolidated financial statements.

 

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NOTE 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, 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 in the consolidated statement of operations.

The following tables present the amortized cost, fair value and associated unrealized gains and losses of cash equivalents and short-term investments as of the periods presented:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

(In thousands)

 

Amortized Cost

 

Unrealized Gains

   

Unrealized Losses

 

Fair Value

Cash equivalents:

 

 

  

 

 

  

 

 

  

 

 

  

Money market funds

 

$

55,798

 

$

 —

 

$

 —

 

$

55,798

Total cash equivalents

 

$

55,798

 

$

 —

 

$

 —

 

$

55,798

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

37,606

 

$

 —

 

$

 —

 

$

37,606

U.S. treasury securities

 

 

14,375

 

 

 —

 

 

 —

 

 

14,375

Corporate bonds

 

 

17,852

 

 

 —

 

 

 —

 

 

17,852

Asset-backed securities

 

 

10,566

 

 

 —

 

 

 —

 

 

10,566

Total short-term investments

 

$

80,399

 

$

 —

 

$

 —

 

$

80,399

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CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

(In thousands)

    

Amortized Cost

    

Unrealized Gains

    

Unrealized Losses

    

Fair Value

Cash equivalents:

 

 

  

 

 

  

 

 

  

 

 

  

Money market funds

 

$

52,047

 

$

 —

 

$

 —

 

$

52,047

Total cash equivalents

 

$

52,047

 

$

 —

 

$

 —

 

$

52,047

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

42,706

 

$

 —

 

$

 —

 

$

42,706

U.S. treasury securities

 

 

21,486

 

 

 —

 

 

(9)

 

 

21,477

Corporate bonds

 

 

13,790

 

 

 —

 

 

(23)

 

 

13,767

Asset-backed securities

 

 

14,837

 

 

 —

 

 

(17)

 

 

14,820

Total short-term investments

 

$

92,819

 

$

 —

 

$

(49)

 

$

92,770

The following table summarizes the contractual maturities of our short-term investments as of the period presented:

 

 

 

 

 

 

 

March 31, 2019

(In thousands)

Amortized Cost

    

Fair Value

Due within one year

$

80,399

 

$

80,399

Due after one year

 

 —

 

 

 —

Total short-term investments

$

80,399

 

$

80,399

 

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

(In thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

Cash equivalents:

 

 

  

 

 

  

 

 

  

 

 

  

Money market funds

 

$

55,798

 

$

 —

 

$

 —

 

$

55,798

Total cash equivalents

 

$

55,798

 

$

 —

 

$

 —

 

$

55,798

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

 —

 

$

37,606

 

$

 —

 

$

37,606

U.S. treasury securities

 

 

14,375

 

 

 —

 

 

 —

 

 

14,375

Corporate bonds

 

 

 —

 

 

17,852

 

 

 —

 

 

17,852

Asset-backed securities

 

 

 —

 

 

10,566

 

 

 —

 

 

10,566

Total short-term investments

 

$

14,375

 

$

66,024

 

$

 —

 

$

80,399

 

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CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

(In thousands)

    

Level 1

    

Level 2