UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the quarterly period ended September 30, 2014

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: 001-36456

 

ZENDESK, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

26-4411091

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1019 Market Street

San Francisco, California 94103

(Address of principal executive offices)

415.418.7506

(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 x    No  ¨

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

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

 

Non-accelerated filer

 

x  (do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

As of October 31, 2014, there were 72,834,725 shares of the registrant’s common stock outstanding.

 

 

 

 

 


 

ZENDESK, INC.

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION

 

Item 1

Financial Statements (unaudited):

4

 

 

Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013

4

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013

5

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2014 and 2013

6

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013

7

 

 

Notes to Condensed Consolidated Financial Statements

8

 

Item 2

 

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

17

 

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

27

 

Item 4

 

Controls and Procedures

28

 

PART II — OTHER INFORMATION

 

 

 

Item 1

Legal Proceedings

28

 

Item 1A

Risk Factors

28

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

51

 

Item 6

Exhibits

51

 

SIGNATURES

52

 

 

 

2


 

SPECIAL NOTE REGARDING 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,” “should,” “might,” “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 future financial performance, including our revenue, cost of revenue, gross profit, operating expenses, ability to generate positive cash flow, ability to improve our gross margin, and ability to achieve and maintain profitability;

the sufficiency of our cash and cash equivalents, and marketable securities to meet our liquidity needs;

our ability to attract and retain customers to use our customer service platform and live chat software, and to optimize the pricing for our customer service platform and live chat software;

the evolution of technology affecting our platform, services, and markets;

our ability to innovate and provide a superior customer experience;

our ability to successfully expand in our existing markets and into new markets, including expanding our enterprise customer base;

the attraction and retention of qualified employees and key personnel;

worldwide economic conditions and their impact on information technology spending;

our ability to effectively manage our growth and future expenses, including our ability to expand, and realize economies of scale within our self-managed colocation data centers and reduce incremental personnel costs resulting from growth of customers;

our ability to successfully offer Zopim live chat software as a standalone service and further integrate it with our customer service platform;

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

our ability to comply with modified or new laws and regulations applying to our business, including privacy and data security regulations;

the increased expenses and administrative workload associated with being a public company; and

the estimates and methodologies used in calculating our key business metrics.

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

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, operating results, 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.

 

 

 

3


 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

ZENDESK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value and shares)

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

80,436

 

 

$

53,725

 

Marketable securities

 

29,858

 

 

 

9,889

 

Accounts receivable, net of allowance for doubtful accounts of $355 and $282 as of September 30, 2014 and

  December 31, 2013, respectively

 

12,858

 

 

 

7,237

 

Prepaid expenses and other current assets

 

5,255

 

 

 

3,008

 

Total current assets

 

128,407

 

 

 

73,859

 

Marketable securities, noncurrent

 

18,007

 

 

 

2,225

 

Property and equipment, net

 

40,864

 

 

 

15,431

 

Goodwill and intangible assets, net

 

15,158

 

 

 

 

Other assets

 

1,545

 

 

 

1,221

 

Total assets

$

203,981

 

 

$

92,736

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

5,501

 

 

$

3,988

 

Accrued liabilities

 

10,224

 

 

 

4,737

 

Accrued compensation and related benefits

 

9,661

 

 

 

4,226

 

Deferred revenue

 

45,412

 

 

 

28,473

 

Current portion of credit facility

 

3,022

 

 

 

365

 

Current portion of capital leases

 

103

 

 

 

364

 

Total current liabilities

 

73,923

 

 

 

42,153

 

Deferred revenue, noncurrent

 

1,219

 

 

 

575

 

Credit facility, noncurrent

 

4,678

 

 

 

23,395

 

Other liabilities

 

9,539

 

 

 

1,520

 

Total liabilities

 

89,359

 

 

 

67,643

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

Redeemable convertible preferred stock, par value $0.01 per share, issuable in series: no shares and 24.0 million

   shares authorized; no shares and 23.6 million shares issued and outstanding as of September 30, 2014 and

   December 31, 2013, respectively

 

 

 

 

71,369

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

Preferred stock, par value $0.01 per share: 5.0 million and no shares authorized as of September 30, 2014 and

   December 31, 2013, respectively; no shares issued and outstanding as of September 30, 2014 and December

   31, 2013

 

 

 

 

 

Common stock, par value $0.01 per share: 400.0 million and 125.0 million shares authorized; 73.3 million

    and 23.7 million shares issued; 72.8 million and 23.2 million shares outstanding as of September 30, 2014

    and December 31, 2013, respectively (including 0.7 million and 0.8 million shares subject to repurchase,

    legally issued and outstanding, as of September 30, 2014 and December 31, 2013, respectively)

 

721

 

 

 

229

 

Additional paid-in capital

 

228,968

 

 

 

18,591

 

Accumulated other comprehensive income

 

(39

)

 

 

10

 

Accumulated deficit

 

(114,376

)

 

 

(64,454

)

Treasury stock at cost (0.5 million shares as of September 30, 2014 and December 31, 2013)

 

(652

)

 

 

(652

)

Total stockholders’ equity (deficit)

 

114,622

 

 

 

(46,276

)

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

$

203,981

 

 

$

92,736

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

4


 

ZENDESK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

33,910

 

 

$

19,237

 

 

$

88,508

 

 

$

49,544

 

Cost of revenue (1)

 

11,684

 

 

 

6,327

 

 

 

32,410

 

 

 

16,878

 

Gross profit

 

22,226

 

 

 

12,910

 

 

 

56,098

 

 

 

32,666

 

Operating expenses (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

9,550

 

 

 

3,860

 

 

 

25,227

 

 

 

10,737

 

Sales and marketing

 

21,548

 

 

 

10,015

 

 

 

56,174

 

 

 

26,218

 

General and administrative

 

8,940

 

 

 

3,646

 

 

 

23,639

 

 

 

11,744

 

Total operating expenses

 

40,038

 

 

 

17,521

 

 

 

105,040

 

 

 

48,699

 

Operating loss

 

(17,812

)

 

 

(4,611

)

 

 

(48,942

)

 

 

(16,033

)

Other expense, net

 

(343

)

 

 

(102

)

 

 

(1,252

)

 

 

(312

)

Loss before provision for income taxes

 

(18,155

)

 

 

(4,713

)

 

 

(50,194

)

 

 

(16,345

)

Provision for (benefit from) income taxes

 

(236

)

 

 

42

 

 

 

(272

)

 

 

120

 

Net loss

 

(17,919

)

 

 

(4,755

)

 

 

(49,922

)

 

 

(16,465

)

Accretion of redeemable convertible preferred stock

 

 

 

 

(12

)

 

 

(18

)

 

 

(36

)

Net loss attributable to common stockholders

$

(17,919

)

 

$

(4,767

)

 

$

(49,940

)

 

$

(16,501

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common stockholders,

   basic and diluted

$

(0.25

)

 

$

(0.22

)

 

$

(1.08

)

 

$

(0.77

)

Weighted-average shares used to compute net loss per

   share attributable to common stockholders, basic and

   diluted

 

71,732

 

 

 

22,024

 

 

 

46,110

 

 

 

21,486

 

(1) Includes share-based compensation expense as follows:

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Cost of revenue

$

591

 

 

$

77

 

 

$

1,691

 

 

$

177

 

Research and development

 

3,052

 

 

 

196

 

 

 

7,530

 

 

 

422

 

Sales and marketing

 

4,877

 

 

 

338

 

 

 

8,635

 

 

 

726

 

General and administrative

 

2,298

 

 

 

264

 

 

 

5,769

 

 

 

2,419

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

5


 

ZENDESK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(17,919

)

 

$

(4,755

)

 

$

(49,922

)

 

$

(16,465

)

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized gain (loss) on available-for-sale investments

 

(58

)

 

 

21

 

 

 

(66

)

 

 

 

Foreign currency translation gain (loss)

 

(303

)

 

 

 

 

 

17

 

 

 

 

Comprehensive loss

$

(18,280

)

 

$

(4,734

)

 

$

(49,971

)

 

$

(16,465

)

See Notes to Condensed Consolidated Financial Statements.

 

 

 

6


 

ZENDESK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

Nine Months Ended September 30,

 

 

2014

 

 

2013

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

$

(49,922

)

 

$

(16,465

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

7,673

 

 

 

3,591

 

Share-based compensation

 

23,625

 

 

 

3,744

 

Other

 

331

 

 

 

144

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(5,104

)

 

 

(3,122

)

Prepaid expenses and other current assets

 

(1,960

)

 

 

(1,504

)

Other assets and liabilities

 

1,321

 

 

 

268

 

Accounts payable

 

591

 

 

 

955

 

Accrued liabilities

 

922

 

 

 

963

 

Accrued compensation and related benefits

 

5,215

 

 

 

1,812

 

Deferred revenue

 

17,290

 

 

 

10,537

 

Net cash provided (used) in operating activities

 

(18

)

 

 

923

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

(19,121

)

 

 

(5,650

)

Internal-use software development costs

 

(6,268

)

 

 

(3,556

)

Purchases of marketable securities

 

(43,006

)

 

 

(12,409

)

Proceeds from maturities of marketable securities

 

6,950

 

 

 

 

Cash paid for the acquisition of Zopim, net of cash acquired

 

(1,896

)

 

 

 

Net cash used in investing activities

 

(63,341

)

 

 

(21,615

)

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from initial public offering, net of issuance costs

 

103,110

 

 

 

 

Proceeds from exercise of employee stock options

 

5,091

 

 

 

628

 

Proceeds from issuance of debt

 

3,940

 

 

 

1,000

 

Principal payments on debt

 

(20,000

)

 

 

 

Taxes paid related to net share settlement of equity awards

 

(1,750

)

 

 

 

Principal payments on capital lease obligations

 

(271

)

 

 

(251

)

Net cash provided by financing activities

 

90,120

 

 

 

1,377

 

Effect of exchange rate changes on cash and cash equivalents

 

(50

)

 

 

(7

)

Net increase (decrease) in cash and cash equivalents

 

26,711

 

 

 

(19,322

)

Cash and cash equivalents at the beginning of period

 

53,725

 

 

 

48,688

 

Cash and cash equivalents at the end of period

$

80,436

 

 

$

29,366

 

 

 

 

 

 

 

 

 

Supplemental cash flow data:

 

 

 

 

 

 

 

Cash paid for interest and income taxes

$

930

 

 

$

142

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Issuance of common stock for the acquisition of Zopim

$

10,893

 

 

$

 

Purchases of property and equipment in accounts payable and accrued expenses

$

998

 

 

$

13

 

Property and equipment acquired through tenant improvement allowances

$

3,932

 

 

$

 

Share-based compensation capitalized in internal-use software development costs

$

1,856

 

 

$

118

 

Vesting of early exercised stock options

$

1,196

 

 

$

680

 

See Notes to Condensed Consolidated Financial Statements.

 

 

7


 

ZENDESK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Overview and Basis of Presentation

Company and Background

Zendesk was founded in Denmark in 2007 and reincorporated in Delaware in April 2009.

Our mission is to help organizations build successful long-term relationships with their customers. We are a software development company that provides a software-as-a-service, or SaaS, customer service platform that enables our customers to provide tailored support through multiple channels, establish effective self-service support resources, proactively serve customers through customer engagement capabilities, integrate with other applications and consolidate and analyze data from customer interactions in powerful ways.  We also provide SaaS live chat software that can be utilized independently to facilitate proactive communications between organizations and their customers or integrated seamlessly into our customer service platform.

References to Zendesk, “Company”, “our”, or “we” in these notes refer to Zendesk, Inc. and its subsidiaries on a consolidated basis.

Basis of Presentation

These unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, or GAAP, and applicable rules and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting. 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. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our final prospectus filed with the SEC on May 16, 2014 pursuant to Rule 424(b) of the Securities Act of 1933, as amended. There have been no changes to our significant accounting policies described in the prospectus that have had a material impact on our condensed consolidated financial statements and related notes.

The consolidated balance sheet as of December 31, 2013 included herein was derived from the audited financial statements as of that date. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, our comprehensive loss and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2014.

Initial Public Offering and Share-based Compensation

In May 2014, we completed our initial public offering, or IPO, in which we issued and sold 12.8 million shares of common stock at a public offering price of $9.00 per share. We received net proceeds of $103.1 million after deducting underwriting discounts and commissions of $8.1 million and other offering expenses of $3.8 million. Upon the closing of the IPO, all shares of our then-outstanding redeemable convertible preferred stock automatically converted into an aggregate of 34.3 million shares of common stock.

All restricted stock units, or RSUs, and certain options granted to employees prior to the IPO vest upon the satisfaction of both a service condition and a performance condition. These RSUs and stock options with both a service condition and performance condition are collectively referred to as “Performance Awards” in the following discussion. The service condition for substantially all of the Performance Awards is satisfied over three or four years. The performance condition was satisfied upon the effectiveness of the registration statement related to our IPO. No share-based compensation expense had been recognized for the Performance Awards prior to the IPO. Upon the satisfaction of the performance condition, we recognized a cumulative share-based compensation expense for the portion of the Performance Awards that had met the service condition. For the three and nine months ended September 30, 2014, share-based compensation expense related to the Performance Awards recognized was $2.9 million and $9.0 million, respectively, using the accelerated attribution method. The remaining unrecognized share-based compensation expense related to the Performance Awards will be recorded over the remaining requisite service period using the accelerated attribution method, net of estimated forfeitures.

As of September 30, 2014, we had a total of $74.5 million future period share-based compensation expense related to all equity awards, net of estimated forfeitures, to be recognized over a weighted average period of 3.6 years.

8


 

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reported periods. Significant items subject to such estimates and assumptions include the fair value of share-based awards, fair value of acquired intangible assets, goodwill, unrecognized tax benefits, useful lives of intangible assets and property and equipment, and the capitalization and estimated useful life of our capitalized internal-use software.

These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ from those estimates.

Concentrations of Risk

At September 30, 2014, there was one customer represented 17% of our total accounts receivable balance.  At December 31, 2013, there were no customers that represented more than 10% of our accounts receivable balance.  There were no customers that individually exceeded 10% of our revenue during the three and nine months ended September 30, 2014.

Recently Issued and Adopted Accounting Pronouncements

On May 28, 2014, the FASB issued ASU 2014-09 regarding ASC Topic 606 “Revenue from Contracts with Customers.” This ASU provides principles for recognizing revenue to which an entity expects to be entitled for the transfer of promised goods or services to customers. This ASU will be effective for our fiscal year beginning January 1, 2017. Early adoption is not permitted.  We are currently evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.

 

 

Note 2. Acquisition

On March 21, 2014, we completed the acquisition of Zopim Technologies Pte Ltd., or Zopim, a software development company that provides a SaaS live chat service. The fair value of assets acquired and liabilities assumed was based on a preliminary valuation and our estimates and assumptions are subject to change within the measurement period. The primary areas of those preliminary estimates that are not yet finalized relate to accrued liabilities and income and non-income based tax liabilities. During the nine months ended September 30, 2014, we made adjustments of $0.2 million to the preliminary purchase price allocation related to final working capital acquired.  No adjustments were made to the preliminary purchase price during the three months ended September 30, 2014.  The total adjusted acquisition date fair value of consideration transferred was $15.8 million ($4.9 million of cash and $10.9 million of our common stock), which included $1.1 million of cash and $2.4 million of common stock consideration held back between 12 and 18 months as partial security for standard indemnification obligations.  Of the total purchase price, $9.6 million was allocated to goodwill, $6.6 million to identifiable intangible assets, and $0.4 million to net liabilities assumed. Goodwill generated from the acquisition is attributable to expected synergies from future growth and potential future monetization opportunities, and is not deductible for tax purpose.  Pro forma revenue and results of operations have not been presented because the historical results of Zopim were not material to our consolidated financial statements in any period presented.  

In connection with the acquisition, we also established a retention plan pursuant to which we issued RSUs for 0.9 million shares of our common stock, which vest in three annual installments from the date of acquisition, and agreed to pay cash in an aggregate amount of $3.0 million in two annual installments from the date of acquisition to Zopim employees in connection with their continued employment, which is recorded as compensation expense over the associated service periods of such employees.

 

 

9


 

Note 3. Fair Value Measurements

The following tables present information about our financial assets measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013 based on the three-tier fair value hierarchy (in thousands):

 

 

Fair Value Measurement at

 

 

September 30, 2014

 

 

Level 1

 

 

Level 2

 

 

Total

 

Description

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

 

 

 

41,140

 

 

$

41,140

 

Money market funds

 

24,820

 

 

 

 

 

 

24,820

 

U.S. treasury securities

 

 

 

 

2,998

 

 

 

2,998

 

Asset-backed securities

 

 

 

 

2,026

 

 

 

2,026

 

U.S. agency obligations

 

 

 

 

1,002

 

 

 

1,002

 

Commercial paper

 

 

 

 

699

 

 

 

699

 

Total

$

24,820

 

 

$

47,865

 

 

$

72,685

 

Included in cash and cash equivalents

 

 

 

 

 

 

 

 

$

24,820

 

Included in marketable securities

 

 

 

 

 

 

 

 

$

47,865

 

 

 

 

 

Fair Value Measurement at

 

 

December 31, 2013

 

 

Level 1

 

 

Level 2

 

 

Total

 

Description

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

 

 

$

12,114

 

 

$

12,114

 

Money market funds

 

10,836

 

 

 

 

 

 

10,836

 

Total

$

10,836

 

 

$

12,114

 

 

$

22,950

 

Included in cash and cash equivalents

 

 

 

 

 

 

 

 

$

10,836

 

Included in marketable securities

 

 

 

 

 

 

 

 

$

12,114

 

 

Gross unrealized gains or losses for cash equivalents and available-for-sale marketable securities as of September 30, 2014 and December 31, 2013 were not material. As of September 30, 2014 and December 31, 2013, there were no securities that were in an unrealized loss position for more than 12 months.

The following table classifies our available-for-sale marketable securities by contractual maturities as of September 30, 2014 and December 31, 2013 (in thousands):

 

 

September 30,

2014

 

 

December 31,

2013

 

Due in one year

$

29,858

 

 

$

9,889

 

Due in one to five years

 

18,007

 

 

 

2,225

 

Total

$

47,865

 

 

$

12,114

 

 

For certain other financial instruments, including accounts receivable, accounts payable and other current liabilities, the carrying amounts approximate their fair value due to the relatively short maturity of these balances. Based on borrowing rates available to us for loans with similar terms and maturities, the carrying value of borrowings approximates fair value or Level 2 within the fair value hierarchy.

There were no transfers between fair value measurement levels during the three and nine months ended September 30, 2014.

 

10


 

Note 4. Property and Equipment

Property and equipment, net consists of the following (in thousands):

 

 

September 30,

2014

 

 

December 31,

2013

 

Capitalized internal-use software

$

14,453

 

 

$

11,104

 

Furniture and fixtures

 

4,440

 

 

 

1,383

 

Hosting equipment

 

12,423

 

 

 

7,931

 

Computer equipment and software

 

3,898

 

 

 

1,680

 

Leasehold improvements

 

14,871

 

 

 

1,717

 

Construction in progress

 

6,198

 

 

 

341

 

Total

 

56,283

 

 

 

24,156

 

Less accumulated depreciation and amortization

 

(15,419

)

 

 

(8,725

)

Property and equipment, net

$

40,864

 

 

$

15,431

 

 

Depreciation expense was $1.7 million and $0.8 million for the three months ended September 30, 2014 and 2013, respectively, and $4.0 million and $1.9 million for the nine months ended September 30, 2014 and 2013, respectively.

We capitalized $3.1 million and $1.3 million in internal-use software during the three months ended September 30, 2014 and 2013, respectively, and $8.1 million and $3.7 million during the nine months ended September 30, 2014 and 2013, respectively. Included in the capitalized development costs are $0.8 million and $33,000 in share-based compensation costs for the three months ended September 30, 2014 and 2013, respectively, and $1.9 and $0.1 million for the nine months ended September 30, 2014 and 2013, respectively. Amortization expense of capitalized internal-use software totaled $0.9 million and $0.6 million for the three months ended September 30, 2014 and 2013, respectively, and $2.6 million and $1.6 million for the nine months ended September 30, 2014 and 2013, respectively. The net carrying value of capitalized internal-use software at September 30, 2014 and December 31, 2013 was $12.3 million and $6.8 million, respectively, including $5.1 million and $0.3 million in construction in progress, respectively.

 

Note 5. Goodwill and Purchased Intangible Assets

The changes in the carrying amount of goodwill for the nine months ended September 30, 2014 are as follows (in thousands):

 

Balance as of December 31, 2013

$

 

Goodwill acquired

 

9,373

 

Goodwill adjustments

 

216

 

Balance as of September 30, 2014

$

9,589

 

 

Purchased intangible assets subject to amortization as of September 30, 2014 consist of the following (in thousands). No purchased intangible assets were recorded as of December 31, 2013.

 

 

Cost

 

 

Accumulated

Amortization

 

 

Net

 

 

Remaining Useful Life

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In years)

 

Developed technology

$

5,200

 

 

$

(787

)

 

$

4,413

 

 

 

3.0

 

Customer relationships

 

1,300

 

 

 

(172

)

 

 

1,128

 

 

 

3.5

 

Trade name

 

60

 

 

 

(32

)

 

 

28

 

 

 

0.5

 

 

$

6,560

 

 

$

(991

)

 

$

5,569

 

 

 

 

 

 

Amortization expense of purchased intangible assets for the three and nine months ended September 30, 2014 was $0.5 million and $1.0 million, respectively. No amortization expense was recorded for the three and nine months ended September 30, 2013.

11


 

Estimated future amortization expense as of September 30, 2014 is as follows (in thousands):

 

Remainder of 2014

$

471

 

2015

 

1,823

 

2016

 

1,810

 

2017

 

1,393

 

2018

 

72

 

2019 and thereafter

 

 

 

$

5,569

 

 

 

Note 6. Credit Facility

We have a credit facility with Silicon Valley Bank consisting of a $20.0 million revolving line of credit and a $10.0 million equipment line of credit. As of December 31, 2013, outstanding balance under the revolving line of credit was $20.0 million. In June 2014 we repaid all outstanding principal and accrued interest under the revolving line of credit and as of September 30, 2014 there was no balance outstanding.  As of September 30, 2014 and December 31, 2013, outstanding balance under the equipment line of credit was $7.7 million and $3.8 million, respectively.

Prior to our IPO, borrowings on the revolving line of credit bore interest at the Prime Rate plus 2.0% per annum. Upon the consummation of the IPO, the interest rate was reduced to the Prime Rate of 3.25% as of September 30, 2014. Borrowings on the revolving line of credit are subject to a borrowing base limit determined monthly based on our recurring revenue metrics from previous months and the ratio of certain current assets to current liabilities as of the previous month end. To the extent we borrow funds pursuant to the revolving line of credit, we are entitled to make interest-only payments until January 1, 2016, when the outstanding balance is due in full.

Borrowings on the equipment line of credit bear interest of 2.5% per annum. For each equipment advance, we were entitled to make interest-only payments until September 14, 2014, when the last draw against the equipment line of credit could be made. The outstanding balance as of September 14, 2014 is payable in  30  equal monthly installments, with the last payment due on March 14, 2017. We are also required to make a final payment fee of $0.3 million on March 14, 2017.

The credit facility is collateralized by substantially all of our assets, excluding our intellectual property. Our domestic subsidiary is a guarantor of the credit facility and we have pledged up to 65% of the equity in our international subsidiaries as collateral. The credit facility also imposes various covenants on us, including the delivery of financial and other information, the maintenance of our primary operating and securities accounts with the lender, the maintenance of minimum revenue targets and an agreed ratio of certain current assets to current liabilities, as well as limitations on dispositions, changes in business or management, certain mergers or consolidations, dividends and other corporate activities. As of September 30, 2014 and December 31, 2013, we were in compliance with all of the covenants contained in the credit facility.

Contractual future principal repayments in relation to the credit facility are as follows for the year ending December 31 (in thousands):

 

2014 (remaining 3 months)

$

749

 

2015

 

3,041

 

2016

 

3,118

 

2017

 

792

 

2018 and thereafter

 

 

 

$

7,700

 

 

 

12


 

Note 7. Commitments and Contingencies

Leases

We lease office space under noncancelable operating leases with various expiration dates. Certain of the office space lease agreements contain rent holidays or rent escalation provisions. Rent holiday and rent escalation provisions are considered in determining the straight-line expense to be recorded over the lease term. The lease term begins on the date of initial possession of the leased property for purposes of recognizing lease expense on a straight-line basis over the term of the lease. Rent expense was $1.7 million and $0.6 million for the three months ended September 30, 2014 and 2013, respectively, and $5.2 million and $1.5 million for the nine months ended September 30, 2014 and 2013, respectively. Deferred rent of $7.4 million and $1.0 million as of September 30, 2014 and December 31, 2013, respectively, is included in other liabilities.  

We lease computer equipment from various parties under capital lease agreements that expire through March 2015. The total outstanding balance financed under capital leases was $0.1 million and $0.4 million as of September 30, 2014 and December 31, 2013, respectively. Accumulated depreciation on the leased assets was $0.9 million and $0.7 million as of September 30, 2014 and December 31, 2013, respectively. Depreciation of assets recorded under the capital leases is included in depreciation expense.

Litigation and Loss Contingencies

We accrue estimates for resolution of legal and other contingencies when losses are probable and estimable. From time to time, we may become a party to litigation and subject to claims incident to the ordinary course of business, including intellectual property claims, labor and employment claims, and threatened claims, breach of contract claims, tax, and other matters. We currently have no material pending litigation.

We are not currently aware of any litigation matters or loss contingencies that would be expected to have a material adverse effect on our business, consolidated financial position, results of operations, comprehensive loss, or cash flows.

 

 

Note 8. Common Stock and Stockholders’ Equity (Deficit)

Convertible Preferred Stock

Upon the completion of the IPO, all outstanding convertible preferred stock was converted into 34.3 million shares of common stock.

Reverse Stock Split

In April 2014, our board of directors and stockholders approved an amendment of our sixth amended and restated certificate of incorporation, as amended to effect a one-for-two reverse stock split of our common stock and a corresponding adjustment to the conversion prices of our redeemable convertible preferred stock. All share and per share information and the conversion prices of each outstanding series of our redeemable convertible preferred stock referenced throughout the condensed consolidated financial statements and notes to the condensed consolidated financial statements have been retroactively adjusted to reflect this stock split.

Common Stock Authorized

Upon the completion of the IPO, we increased the amount of common stock authorized for issuance from 125 million to 400 million common shares with a par value of $0.01 per share.

Employee Equity Plans

Employee Stock Purchase Plan

Our board of directors adopted the Employee Stock Purchase Plan, or ESPP, in February 2014, which became effective in May 2014 upon the effectiveness of the registration statement related to our IPO. The ESPP initially reserved and authorized the issuance of up to 3.6 million shares of common stock. The ESPP provides that the number of shares reserved and available for issuance under the plan will automatically increase each January, beginning on January 1, 2015, by the lesser of 1.5 million shares, 1% of the number of shares issued and outstanding on the immediately preceding December 31, or such lesser number of shares as determined by our compensation committee.

13


 

2009 Stock Option and Grant Plan

Our board of directors adopted the 2009 Stock Option and Grant Plan, or the 2009 Plan, in July 2009. The 2009 Plan was terminated in connection with our IPO, and accordingly, no shares are available for issuance under this plan. The 2009 Plan continues to govern outstanding awards granted thereunder.

2014 Stock Option and Grant Plan

Our board of directors adopted the 2014 Stock Option and Incentive Plan, or the 2014 Plan, in February 2014, which became effective in May 2014 upon the effectiveness of the registration statement related to our IPO. The 2014 Plan serves as the successor to our 2009 Plan. The 2014 Plan initially reserved and authorized the issuance of 7.5 million shares of our common stock. Additionally, shares not issued or subject to outstanding grants under the 2009 Plan rolled into the 2014 Plan, resulting in a total of 8.3 million available shares under the 2014 Plan as of the effective date. The 2014 Plan provides that the number of shares reserved and available for issuance under the plan will automatically increase each January 1, beginning on January 1, 2015, by 5% of the outstanding number of shares of our common stock on the immediately preceding December 31, or such lesser number of shares as determined by our compensation committee.

The following table summarizes our stock option and RSU award activities for the nine months ended September 30, 2014 (in thousands, except per share information):

 

 

 

 

 

 

Options Outstanding

 

 

RSUs Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Shares

 

 

 

 

 

 

Weighted

 

 

Remaining

 

 

Aggregate

 

 

 

 

 

 

Average

 

 

Available

 

 

Number of

 

 

Average

 

 

Contractual

 

 

Intrinsic

 

 

Outstanding

 

 

Grant Date

 

 

for Grant

 

 

Shares

 

 

Exercise Price

 

 

Term

 

 

Value

 

 

RSUs

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In years)

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding — January 1, 2014

 

1,854

 

 

 

10,134

 

 

$

2.82

 

 

 

 

 

 

 

 

 

 

 

811

 

 

$

6.76

 

Increase in authorized shares

 

13,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options granted

 

(6,008

)

 

 

6,008

 

 

 

10.85

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RSUs granted

 

(2,643

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,643

 

 

 

13.24

 

Stock options exercised

 

 

 

 

(1,264

)

 

 

2.17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RSUs vested

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(234

)

 

 

8.64

 

Stock options forfeited or canceled

 

664

 

 

 

(664

)

 

 

3.60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RSUs forfeited or cancelled

 

276

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(276

)

 

 

8.37

 

Outstanding —September 30, 2014

 

7,893

 

 

 

14,214

 

 

$

6.24

 

 

 

8.30

 

 

$

218,185

 

 

 

2,944

 

 

$

12.29

 

 

Aggregate intrinsic value represents the difference between the Company's closing stock price of its common stock and the exercise price of outstanding, in-the-money options. The Company’s closing stock price as reported on the New York Stock Exchange as of September 30, 2014 was $21.59.

During the three and nine months ended September 30, 2014 we recorded $2.8 million and $4.3 million share-based compensation expense, respectively, related to the accelerated vesting of certain stock options and RSUs.

Early Exercise of Stock Options and Purchase of Unvested Stock Awards

Certain of our stock options permit early exercise. Common stock purchased pursuant to an early exercise of stock options or unvested stock awards is not deemed to be outstanding for financial reporting purposes until those shares vest. Therefore, cash received in exchange for unvested shares is recorded as a liability and is transferred into common stock and additional paid-in capital as the shares vest. Upon termination of service, we may, at our discretion, repurchase unvested shares acquired through early exercise of stock options or purchase of unvested stock awards at a price equal to the price per share paid upon the exercise of such options or the purchase of such unvested stock awards. As of September 30, 2014 and December 31, 2013, there were 0.7 million and 0.8 million shares, respectively, outstanding as a result of the early exercise of stock options and purchase of unvested stock awards that were classified as accrued liabilities for an aggregated amount of $2.4 million and $1.4 million, respectively.   There were no repurchases during the three and nine months ended September 30, 2014.

 

 

14


 

Note 9. Net Loss Per Share

We compute net loss per share of common stock in conformity with the two-class method required for participating securities. We considered all series of the redeemable convertible preferred stock to be participating securities as the holders of the preferred stock were entitled to receive a non-cumulative dividend on a pari passu basis in the event that a dividend is paid on common stock. We also consider shares of common stock issued upon the early exercise of stock options subject to repurchase to be participating securities, because holders of such shares have non-forfeitable dividend rights in the event a dividend is paid on common stock. The holders of all series of the redeemable convertible preferred stock and the holders of shares of common stock acquired upon early exercise of stock options do not have a contractual obligation to share in our losses. As such, our net losses for the three and nine months ended September 30, 2014 and 2013 were not allocated to these participating securities. Upon the closing of the IPO in May 2014, all shares of our then-outstanding redeemable convertible preferred stock automatically converted into our common stock.  

Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, less the weighted-average unvested common stock subject to repurchase. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including common stock issuable upon conversion of the redeemable convertible preferred stock, outstanding share-based awards, and outstanding warrants, to the extent dilutive. Basic and diluted net loss per share was the same for each period presented as the inclusion of all potential common stock outstanding would have been anti-dilutive.

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

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net loss

$

(17,919

)

 

$

(4,755

)

 

$

(49,922

)

 

$

(16,465

)

Less: Accretion of redeemable convertible preferred stock

 

 

 

 

(12

)

 

 

(18

)

 

 

(36

)

Net loss attributable to common stockholders

$

(17,919

)

 

$

(4,767

)

 

$

(49,940

)

 

$

(16,501

)

Basic shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares used to compute basic net loss per share

 

71,732

 

 

 

22,024

 

 

 

46,110

 

 

 

21,486

 

Diluted shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares used to compute diluted net loss per share

 

71,732

 

 

 

22,024

 

 

 

46,110

 

 

 

21,486

 

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

$

(0.25

)

 

$

(0.22

)

 

$

(1.08

)

 

$

(0.77

)

 

The anti-dilutive securities excluded from the shares used to calculate the diluted net loss per share are as follows (in thousands):

 

 

As of September 30,

 

 

2014

 

 

2013

 

Redeemable convertible preferred stock

 

 

 

 

34,323

 

Shares subject to outstanding common stock options

 

14,214

 

 

 

10,351

 

Shares subject to common stock warrants

 

 

 

 

125

 

Restricted stock units

 

2,944

 

 

 

554

 

 

 

17,158

 

 

 

45,353

 

 

Note 10. Income Taxes

The effective tax rates for the three and nine months ended September 30, 2014 and 2013 were one percent. The effective tax rate differs from the statutory rate primarily as a result of not recognizing a deferred tax asset for U.S. losses due to having a full valuation allowance against U.S. deferred tax assets.  The tax benefit recorded for the three and nine months ended September 30, 2014 is primarily due to recognizing deferred tax assets in foreign jurisdictions for losses and research credits. There were no material changes to the unrecognized tax benefits in the three and nine months ended September 30, 2014 and 2013.

 

15


 

Note 11. Geographic Information

Our chief operating decision maker reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating our financial performance. Accordingly, we have determined that we operate in a single reporting segment.

Revenue

The following table presents our revenue by geographic areas, as determined based on the billing address of our customers (in thousands):

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

United States

$

19,031

 

 

$

11,432

 

 

$

50,774

 

 

$

29,000

 

EMEA

 

9,704

 

 

 

4,993

 

 

 

24,565

 

 

 

13,236

 

Other

 

5,175

 

 

 

2,812

 

 

 

13,169

 

 

 

7,308

 

Total

$

33,910

 

 

$

19,237

 

 

$

88,508