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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended April 30, 2017

OR

Commission File Number: 001-37451

 

Xactly Corporation

(Exact name of registrant as specified in its charter) 

 

 

300 Park Avenue, Suite 1700

San Jose, California 95110

(Address of principal executive offices)

Telephone Number (408) 977-3132

(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 (the “Exchange Act”) 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 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, 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.

 

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 May 31, 2017, there were 32,140,812 shares of the registrant’s common stock outstanding.

 

 

 

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Xactly Corporation

 

 

 

 

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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “plan,” “intend,” “expect,” “could,” “target,” “project,” “should,” “predict,” “potential,” “would,” “seek” and similar expressions and the negative of those expressions are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements concerning the following:

These forward-looking statements are subject to a number of risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results may differ materially and adversely from those expressed in any forward-looking statements. Readers are directed to risks and uncertainties identified below under “Risk Factors” and elsewhere in this report for additional detail regarding factors that may cause actual results to be different than those expressed in our forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.

 

 

 

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PART I. FINANCIAL INFORMATION

 

 

ITEM 1. FINANCIAL STATEMENTS

Xactly Corporation

Condensed Consolidated Balance Sheets

(in thousands, except par value and share amounts)

(Unaudited)

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

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Xactly Corporation

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(Unaudited)

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

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Xactly Corporation

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(Unaudited)

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

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Xactly Corporation

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

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Xactly Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 1. Overview and Basis of Presentation

Company and Background

Xactly Corporation (the Company) was incorporated in Delaware in 2005. The Company is a provider of enterprise-class, cloud-based incentive compensation solutions for employee and sales performance management. The Company’s customers leverage these solutions to optimize incentive compensation and drive behavior by automating manual processes, streamlining workflows, providing visibility to users and delivering actionable analyses and insights. The Company’s solutions are delivered through a scalable, secure cloud-based platform that allows for fast innovation benefiting all customers. The Company is headquartered in San Jose, California. The Company’s fiscal year end is January 31 and its fiscal quarters end on April 30, July 31, October 31 and January 31.

Initial Public Offering

On July 1, 2015, the Company completed its initial public offering (IPO) in which it sold 7,909,125 shares of common stock, to the public at $8.00 per share. The total gross proceeds from the offering were approximately $63,273,000. After deducting underwriting discounts and commissions and offering expenses, the aggregate net proceeds received totaled approximately $54,546,000. Upon the closing of the IPO, all shares of the Company’s then-outstanding convertible preferred stock automatically converted into an aggregate of 17,871,971 shares of common stock. In addition, upon the IPO, the Company’s outstanding convertible preferred stock warrants became warrants to purchase common stock and the Company’s outstanding preferred stock warrant liabilities became indexed to the Company's common stock and accordingly have been reclassified to additional paid-in capital. 

Basis of Presentation

These unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Accordingly, they do not include all of the financial information and footnotes required by U.S. GAAP for complete financial statements. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2017, which was filed with the SEC on April 12, 2017.

The consolidated balance sheet as of January 31, 2017, included herein was derived from the audited financial statements as of that date. These unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, the Company’s 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 January 31, 2018.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant items subject to such estimates and assumptions include, but are not limited to, revenue and sales allowances, allowance for doubtful accounts, determination of the fair value of short-term marketable securities, determination of the fair value of common and preferred stock and preferred stock warrant liabilities (prior to IPO), stock-based compensation, determination of the fair value of acquired intangible assets, contingent liabilities and accounting for income taxes. These estimates and assumptions are based on management’s best judgment. Management evaluates its estimates and assumptions using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.

Pending Merger

On May 29, 2017, the Company entered into an Agreement and Plan of Merger (Merger Agreement) with Excalibur Parent LLC, a Delaware limited liability company (Parent), and Excalibur Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (Merger Sub), providing for the merger of Merger Sub with and into the Company (the Merger), with the Company surviving the Merger as a wholly owned subsidiary of Parent. Pursuant to the Merger Agreement, Parent and Merger Sub were formed by

 

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affiliates of Vista Equity Partners Fund VI, L.P., a Cayman Islands exempted limited partnership. Pursuant to the Merger Agreement, Parent will acquire all outstanding shares of the Company’s common stock for a total value of approximately $564 million.

 

Consummation of the Merger is subject to certain conditions, including, but not limited to, the: (i) requisite approval by the Company’s stockholders; (ii) expiration or termination of any waiting periods applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act); and (iii) absence of any law or order restraining, enjoining or otherwise prohibiting the Merger.

The transaction is expected to close in the third quarter of the 2017 calendar year.

 

 

Note 2. Balance Sheet Components

Accounts receivable, net consisted of the following (in thousands):

 

 

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

 

 

Depreciation and amortization expense for the three months ended April 30, 2017 and 2016 was $1,062,000 and $866,000, respectively.  

 

Accrued expenses consisted of the following (in thousands):

 

 

Other long-term liabilities consisted of the following (in thousands):

 

 

 

 

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Note 3. Marketable Securities

At April 30, 2017, marketable securities consisted of the following (in thousands):

 

 

At January 31, 2017, marketable securities consisted of the following (in thousands):

 

 

The Company considers the declines in market value of its marketable securities investment portfolio to be temporary in nature. When evaluating an investment for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates and the Company’s intent to sell, or whether it is more likely than not it will be required to sell the investment before recovery of the investment’s cost basis. As of April 30, 2017, the Company does not consider any of its investments to be other-than-temporarily impaired. The Company classifies its marketable securities as available-for-sale at the time of purchase and reevaluates such classification as of each balance sheet date. The Company may sell these securities at any time for use in current operations or for other purposes, such as consideration for acquisitions, even if they have not yet reached maturity. As a result, the Company classifies its investments, including securities with maturities beyond twelve months as “current assets” in the accompanying condensed consolidated balance sheets. Marketable securities on the condensed consolidated balance sheets consist of securities with original maturities at the time of purchase greater than three months and the remaining securities are reflected in cash and cash equivalents. During the three months ended April 30, 2017, the Company did not sell any of its marketable securities.

 

 

Note 4. Fair Value Measurements of Assets and Liabilities

The Company measures certain financial assets and liabilities at fair value on a recurring basis. The Company determines fair value based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy. These levels are:

Observable inputs are based on market data obtained from independent sources.

 

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The following summarizes assets and liabilities that are measured at fair value on a recurring basis, by level, within the fair value hierarchy (in thousands):

 

 

 

 

 

Note 5. Debt

The Company has an Amended and Restated Loan and Security Agreement (Amended SVB Agreement) with Silicon Valley Bank (SVB), effective October 30, 2015. The Amended SVB Agreement amended the Company’s existing revolving line of credit (LOC) with SVB and provided the Company with a term loan (SVB Term Loan) to repay the Company’s existing Mezzanine Loan and Security Agreement, dated as of October 24, 2014, by and among the Company and SVB (Mezzanine Loan).

The LOC provides the Company with a revolving line of credit for $15,000,000 and carries a variable interest rate equal to Prime plus 1.25% or LIBOR plus 2.5%. The LOC has a maturity date of October 2018. As of April 30, 2017 and January 31, 2017, $6,500,000 had been borrowed under the LOC, leaving $8,500,000 available for borrowing. As of April 30, 2017 and January 31, 2017, the interest rate on the LOC was 3.50% and 3.28%, respectively. The SVB Term Loan provides for a $10,000,000 term loan with a maturity date of September 2019. The SVB Term Loan carries a variable interest rate of Prime plus 1.25% or LIBOR plus 2.5% and requires equal quarterly principal payments and monthly interest payments through the maturity date in September 2019. As of April 30, 2017 and January 31, 2017, $6,250,000 and $6,875,000, respectively, was outstanding under the SVB Term Loan. As of April 30, 2017 and January 31, 2017, the interest rate on the SVB Term Loan was 3.49% and 3.28%, respectively.    

All of the Company’s agreements with SVB include various financial and non-financial covenants with which the Company was in compliance as of April 30, 2017 and January 31, 2017.

 

 

Note 6. Commitments and Contingencies

Minimum Service Commitments and Leases

The Company has certain contractual service contracts that contain non-cancellable minimum service commitments that expire on various dates through fiscal 2018 and leases office space and equipment under non-cancellable operating and capital leases that expire on various dates through fiscal 2022. These commitments as of January 31, 2017 are disclosed in the Company’s Annual Report on Form 10-K, and did not change materially during the three months ended April 30, 2017. Leases for certain office facilities include scheduled periods of abatement and escalation of rental payments. The Company recognizes minimum rental expenses and lease incentives for operating leases on a straight-line basis over the term of the leases.  

 

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Indemnifications

In the normal course of business, the Company provides indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of the Company’s services and the Company may be subject to claims by customers under these indemnification provisions. Historically, costs related to these indemnification provisions have not been significant and the Company is unable to estimate the maximum potential impact of these indemnification provisions on future results of operations.

To the extent permitted under Delaware law, the Company has agreements to indemnify directors and officers for certain events or occurrences while the director or officer is or was serving at the Company’s request in such capacity. The indemnification period covers all pertinent events and occurrences during the director’s or officer’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has director and officer insurance coverage that limits the Company’s exposure and enables the Company to recover a portion of any future amounts paid. The Company believes that the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.

Other Taxes

The Company conducts operations in many tax jurisdictions throughout the United States. In many of these jurisdictions, non-income based taxes, such as property taxes, sales and use taxes, and value-added taxes are assessed on the Company’s operations in that particular location. While the Company strives to ensure compliance with these various non-income based tax filing requirements, there have been instances where potential noncompliance exposures have been identified. In accordance with U.S. GAAP, the Company makes a provision for these exposures when it is both probable that a liability has been incurred and the amount of the exposure can be reasonably estimated.

 

 

Note 7. Stock-based Awards and Stock-based Compensation

2005 Stock Option Plan

In 2005, the Company adopted a stock plan (2005 Plan), which was amended in September 2011 and again in March 2015. The 2005 Plan was terminated in connection with the Company’s initial public offering (IPO), and accordingly, no shares are available for future issuance under this plan. All shares that were available for the Company to grant under the 2005 Plan immediately prior to its termination were canceled. Awards under the 2005 Plan that expire or terminate without having been exercised subsequent to the IPO or are forfeited to or repurchased by the Company subsequent to the IPO will become available for issuance under the 2015 Equity Incentive Plan (2015 Plan), subject to the limits set forth in the 2015 Plan.

2015 Equity Incentive Plan

In June 2015, the Board adopted and the Company’s stockholders approved the 2015 Plan, which became effective upon the effectiveness of the IPO Prospectus. The 2015 Plan provides for the grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code, to the Company’s employees and any subsidiary corporations’ employees, and for the grant of nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares to the Company’s employees, directors and consultants and the Company’s subsidiary corporations’ employees and consultants. During the three months ended April 30, 2017, the Company, automatically by the terms of the 2015 Plan, increased the shares reserved and available for issuance under the 2015 Plan by 1,575,956.

As of April 30, 2017, an aggregate of 2,916,452 common shares were reserved and available for issuance under the 2015 Plan.

2015 Employee Stock Purchase Plan

In June 2015, the Company’s Board of Directors adopted and the Company’s stockholders approved the 2015 Employee Stock Purchase Plan (ESPP) with the first offering period under the ESPP beginning on the effectiveness of the IPO Prospectus. As of January 31, 2017, an aggregate of 857,350 shares of common stock were reserved and are available for issuance under the ESPP. During the three months ended April 30, 2017, the Company, automatically by the terms of the ESPP, increased the shares reserved and available for issuance under the ESPP by 630,382.  The Company issued 190,143 shares under the ESPP during the three months ended April 30, 2017. As of April 30, 2017, there were 1,297,589 shares reserved and available for issuance under the ESPP. The ESPP allows eligible employees to purchase shares of common stock at a discount through payroll deductions of up to 15% of their eligible compensation, at 85% of the fair market value, as defined in the ESPP, on the first day of the offering period or the last day of the purchase period, whichever is lower, and subject to any plan limitations. The ESPP provides for consecutive six-month purchase periods, starting on the first trading day on or after March 20 and September 20 of each year.

 

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As of April 30, 2017, the Company had $563,000 in unrecognized stock-based compensation expense, net of estimated forfeitures, related to purchase rights that will be recognized over the weighted average period of approximately 1.0 year.

 

Stock option activity

Stock option activity is as follows:

 

 

The intrinsic value for options exercised represents the difference between the fair market value based on the valuation of the common stock as determined by the Company’s Board of Directors prior to the IPO, or the closing market price of the Company’s common stock, following the IPO, on the date of exercise and the exercise price of the in-the-money stock options.

 

As of April 30, 2017, there was $6,661,000 of unamortized stock-based compensation expense related to unvested stock options which will be recognized over a weighted average period of approximately 2.8 years.

 

Restricted stock units

A summary of RSU activity during the three months ended April 30, 2017 was as follows:

 

 

As of April 30, 2017, there was a total of $16,131,000 in unrecognized stock-based compensation expense related to RSUs, which is expected to be recognized over a weighted-average period of approximately 3.2 years.

Valuation and expense of stock-based compensation

The fair value of stock options and ESPP awards is estimated at the grant date for options and issuance date for ESPP using the Black-Scholes option valuation model. The determination of fair value of stock options on the date of grant and ESPP awards on the date of issuance using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards based on average historical volatility of comparable entities with publicly traded shares and actual employee stock option exercise behavior. We recognize the stock-based compensation expense of RSUs, net of estimated forfeitures, over the vesting term. The stock-based compensation cost for RSUs is based on the fair value of our common stock on the date of grant.

 

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Stock-based compensation from stock options, RSUs and the ESPP included in the Company’s condensed consolidated statements of operations is as follows (in thousands):

 

 

 

Note 8. Income Taxes

For the three months ended April 30, 2017 and 2016, the provision for income taxes differed from the statutory amount primarily due to state and foreign taxes currently payable, and the Company realized no benefit for current year losses due to maintaining a full valuation allowance against its domestic and foreign net deferred tax assets.

In March 2016, the Financial Accounting Standards Board issued ASU 2016-09 “Compensation - Stock Compensation: Topic 718” (“ASU 2016-09”) which simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification in the statement of cash flows. The Company implemented ASU 2016-09 on a prospective basis beginning in the first quarter of 2018.  Upon adoption, the “without” basis NOL deferred tax asset was booked up for historical excess benefits to match the “with” basis NOL deferred tax asset, offset by the full valuation allowance. Subsequent to the adoption, all stock option activities will be accounted for discretely in the quarter that occur. However, due to the full valuation allowance on our federal deferred tax assets, no excess benefits have been reported discretely.

 

Note 9. Basic and Diluted Net Loss Per Share

The following table sets forth the computation of the Company’s basic and diluted net loss per share of common stock under the two-class method attributable to common stockholders (in thousands, except per share data):

 

 

 

The following is a table summarizing the potentially dilutive common shares that were excluded from diluted weighted-average common shares outstanding because they were anti-dilutive (in thousands):

 

 

 

Note 10. Segment Information and Information About Geographic Concentrations

The Company has determined that the chief executive officer is the chief operating decision maker. The Company’s chief executive officer reviews financial information presented on a consolidated basis for purposes of assessing performance and making decisions on how to allocate resources. Accordingly, the Company has determined that it operates in a single reporting segment.

 

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Revenue by location is determined by the billing address of the customer. Approximately 90% of the Company’s revenue was from the United States for both the three months ended April 30, 2017 and 2016. Revenue from no other individual country exceeded 10% of total revenue for the three months ended April 30, 2017 or 2016.

Property and equipment by geographic location is based on the location of the legal entity that owns the asset. As of April 30, 2017 and January 31, 2017, more than 95% of the Company’s property and equipment was located in the United States.

 

Note 11. Subsequent Events

 

On May 30, 2017, the Company announced that it has entered into a definitive agreement to be acquired by Vista Equity Partners (Vista), a leading private equity firm focused on investments in software, data and technology-enabled businesses. Under the terms of the agreement, affiliates of Vista will acquire all outstanding shares of Xactly common stock for a total value of approximately $564 million. Xactly stockholders will receive $15.65 in cash per share.

 

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. The last day of our fiscal year is January 31. Our fiscal quarters end on April 30, July 31, October 31 and January 31. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. See “Special Note Regarding Forward-Looking Statements” above.

Overview

We are a leading provider of enterprise-class, cloud-based incentive compensation solutions for employee and sales performance management. We address a critical business need: to incentivize employees and align their behaviors with company goals. Our solutions allow organizations to make better strategic decisions, optimize behaviors, increase sales and employee performance, improve margins, increase operational efficiencies, mitigate risk, design better incentive compensation plans and reduce error rates in incentive compensation calculations. We were the first 100% cloud-based, multi-tenant provider focusing solely on the incentive compensation and employee and sales performance management market and we achieved our leadership position through domain expertise and innovative technology. We deliver our solutions through a Software-as-a-Service (SaaS) business model.

We were founded in March 2005 and initially we focused on providing incentive compensation solutions for sales personnel. As we have grown, we have expanded our solutions to serve many types of employees across a variety of industries and companies, ranging from FORTUNE 50 enterprises to small, emerging companies. Our initial commercially available solution was Xactly Incent Enterprise, our flagship solution, which helps large enterprise and mid-market companies manage the critical elements of incentive compensation. In 2010, we introduced Xactly Incent Express, our incentive compensation solution that provides streamlined functionality targeted to companies with fewer than 350 employees. In 2013, we introduced Xactly Objectives, a solution for both sales and non-sales personnel, allowing managers and employees to collaboratively track and achieve individual and shared goals. In August 2014, we introduced Xactly Insights, a solution which helps our customers make fact-based decisions to motivate employees and drive business performance using our empirical set of aggregated and anonymized data. In addition, over the years, we have also introduced modules that augment Xactly Incent Enterprise, such as analytics, modeling, automated workflows, quotas and approvals and credit assignment. In May 2016, we introduced Xactly Inspire, a solution for on-boarding and coaching for sales personnel and managers. Also in May 2016, we introduced Xactly Connect, an application program interface (API) solution for customers to leverage their own internal IT resources for managing data sources for incentive compensation.

Our customer base has been predominantly located in the U.S., and we plan to grow our customer base internationally. However, a number of our customers are U.S. companies with employees abroad. We estimate that approximately 32% of our subscribers are located outside of the U.S., based on a representative sample of our user logins during the last two months of the fiscal quarter ended April 30, 2017. For the three months ended April 30, 2017, approximately 90% of our revenue was from U.S. customers. We market our solutions and services through our direct sales force and sales support staff, and we also rely on partners to refer opportunities to our sales force.

Because we offer our solutions on a subscription basis, we have visibility into a substantial portion of our near-term subscription services revenue. Subscriptions are typically sold through non-cancellable contracts with one to three year terms. Subscription fees are primarily based on the number of subscribers per customer per month. We generally invoice customers annually in advance. The prices we charge a customer per subscriber are driven, in part, by subscriber attributes and the number of subscribers for which that customer has contracted, with generally lower prices per subscriber for larger contracts consistent with industry practice. Customer attributes that impact pricing include, in no particular order, frequency of payment by the customer to its employees, complexity of the compensation plans, value of the employee’s compensation, value of the product or service that the employee is selling and the number of payees. Changes in competitive or market conditions may also cause us to reduce the prices we charge for our solutions or revise the pricing model upon which they are based. The average pricing per subscriber of our subscription services for the three months ended April 30, 2017 remained relatively consistent when compared to the three months ended April 30, 2016; however, we have noticed an increase in competitive discounting in the past fiscal quarter and fiscal year. We recognize subscription services revenue ratably over the term of the contract, and amounts billed in excess of revenue recognized for the period are reported as deferred revenue on our consolidated balance sheet. Our deferred revenue does not include the unbilled portion of subscription agreements.

 

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We also derive revenue from professional services. Professional services include revenue from assisting customers in implementing our solutions and optimizing their uses, such as application configuration, system integration, data transformation and automation services, education and training services and strategic services. This revenue is largely driven by the number and mix of implementations performed by us in a quarter. Professional services are billed predominantly on a time-and-materials basis, with some fixed-fee arrangements. Professional services yield lower margins than subscriptions due to the labor-intensive nature of such services. We also have partners who implement our solutions for which we do not receive professional services revenue.

As of April 30, 2017, we had approximately 303,000 subscribers, compared to approximately 268,000 subscribers at April 30, 2016, an increase of approximately 13%. No single customer accounted for more than 5% of our revenue for the three months ended April 30, 2017 or 2016. Within our customer base, deployments range from implementations within a single division or geography to enterprise-wide or global deployments. Our growth to date has been a function of growth in new customers, new subscribers at current customers and sales of additional modules to current customers. While approximately 56% of our customers were enterprise and mid-market companies as of April 30, 2017, we derived approximately 93% of our revenue from enterprise and mid-market customers for the three months ended April 30, 2017. We define our enterprise customers as those customers with a minimum of 4,000 employees and our mid-market customers as those customers with at least 350 and less than 4,000 employees. We have sold our solutions to customers in a number of industry verticals, including business & financial services, communications, high-tech manufacturing, life sciences, retail, travel & hospitality, media & internet and SaaS & traditional software.

We had total revenue of $24.6 million and $23.3 million for the three months ended April 30, 2017 and 2016, respectively, an increase of 6%. Our subscription services revenue for the three months ended April 30, 2017 and 2016 was $19.5 million and $17.3 million, respectively, an increase of 13%. We have made and expect to continue to make significant investments to support our growth, and accordingly have incurred net losses of $4.3 million for both the three months ended April 30, 2017 and 2016. We expect to incur losses for at least the next fiscal year.

Our growth strategy includes acquiring new customers, selling more subscriptions and modules to existing customers, enhancing our existing solutions, introducing new solutions and modules, expanding internationally, developing our partner ecosystem and pursuing selective acquisitions.

Proposed Merger

On May 29, 2017, we entered into an Agreement and Plan of Merger (the Merger Agreement) with Excalibur Parent LLC, a Delaware limited liability company (Parent), and Excalibur Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Parent (Merger Sub), providing for the merger of Merger Sub with and into the Company (the Merger), with the Company surviving the Merger as a wholly owned subsidiary of Parent.  Parent and Merger Sub were formed by affiliates of Vista Equity Partners Fund VI, L.P., a Cayman Islands exempted limited partnership.  Capitalized terms used herein but not otherwise defined have the meaning set forth in the Merger Agreement.

 

At the Effective Time, each:

 

 

 

 

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The parties have made customary representations, warranties and covenants in the Merger Agreement, including covenants regarding the conduct of their respective businesses and the use of reasonable best efforts to cause the conditions of the Merger to be satisfied.  We have agreed, subject to the restrictions and exceptions in the Merger Agreement, to conduct our business and operations in the ordinary course of business. We have also agreed to not initiate, propose or induce or knowingly encourage, facilitate or assist any inquiries regarding any proposal or offer that constitutes or would reasonably be expected to lead to an alternative acquisition proposal, subject to certain exceptions set forth in the Merger Agreement. The Merger Agreement also includes termination provisions for both the Company and Parent and provides that, in connection with the termination of the Merger Agreement under specified circumstances, the Company may be required to pay to Parent a termination fee of $18.5 million.

 

Consummation of the Merger is subject to certain conditions, including, but not limited to, the: (i) requisite approval by our stockholders; (ii) expiration or termination of any waiting periods applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act); and (iii) absence of any law or order restraining, enjoining or otherwise prohibiting the Merger.

 

In connection with the execution of the Merger Agreement, Parent entered into voting agreements (the Voting Agreements) with entities affiliated with Alloy Ventures, entities affiliated with Bay Partners and entities affiliated with Rembrandt Venture Partners, which hold, in the aggregate, approximately 23% of the outstanding shares of Company Common Stock. Under the Voting Agreement, these parties have agreed, during the term of the Voting Agreement, to vote their shares of Company Common Stock (i) in favor of the adoption of the Merger Agreement and the approval of the Merger and the other transactions contemplated by the Merger Agreement and/or (ii) against any acquisition proposal or any action or agreement which would reasonably be expected to result in any of the conditions to the Company’s obligations to consummate the Merger as specified in the Merger Agreement not being fulfilled or any alternative acquisition proposals. The obligations under the Voting Agreements generally terminate when the Merger Agreement terminates.

 

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Under the Company’s Second Amended and Restated Loan and Security Agreement (the Loan Agreement) with Silicon Valley Bank (SVB), dated October 30, 2015 and as amended from time to time, the Company intends to pay off its obligations in connection with the closing of the Merger and the closing of the Merger would be a technical covenant event of default under the Loan Agreement. As of the date of this report, the Company had $6.5 million outstanding under the revolving line of credit and $6.9 million outstanding under the term loan.

 

The foregoing description of the Merger Agreement and the transactions contemplated thereby does not purport to be complete, and is subject to, and qualified in its entirety by reference to, the full text of the Merger Agreement, which was filed as Exhibit 2.1 to our Current Report on Form 8-K, filed with the SEC on May 30, 2017. We plan to file with the SEC a proxy statement in connection with the proposed Merger, which will contain additional information about the Merger and related matters.

 

Key business metrics

We use the following key business metrics in addition to our U.S. GAAP financial results to evaluate growth trends, measure our performance and make strategic decisions.

Subscribers

The number of subscribers at each of our customers ranges from tens to thousands. As of April 30, 2017, we had approximately 303,000 subscribers. This represents an increase of approximately 13% over the approximately 268,000 subscribers we had as of April 30, 2016. We expect subscriber additions to vary quarter to quarter based on factors such as seasonality, deal mix across customer segments and customer retention. A subscriber is a unique user account purchased by a customer for use by an employee or other customer-authorized user.

 

 

Revenue Retention Rate

On an annual fiscal year basis, we also use the revenue retention rate as described in our Annual Report on Form 10-K for the fiscal year ended January 31, 2017, filed with the SEC on April 12, 2017.

Components of Results of Operations

Revenue

Subscription services

Subscription services include revenue from our incentive compensation solutions. We generate revenue from subscription services and related support of our solutions, generally pursuant to non-cancellable contracts that range in duration from one to three years. We typically invoice customers in advance in annual installments for our subscription services. We recognize subscription services revenue ratably over the term of the subscription. Amounts billed in excess of revenue recognized for the period are reported as deferred revenue on our consolidated balance sheet.

Professional services

Professional services include revenue from assisting customers in implementing and optimizing use of our incentive compensation solutions. These services include application configuration, system integration, data transformation and automation services, education and training services and strategic services.

Our professional services are billed predominantly on a time-and-materials basis, with some services billed on a fixed-fee basis. We generally invoice customers monthly as the work is performed for time-and-materials arrangements or on a milestone basis for fixed-fee arrangements. We recognize professional services revenue as the services are performed using the proportional-performance method, with performance based on hours of work performed or upon project completion for certain fixed-fee contracts.

 

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Cost of revenue

Subscription services

Our cost of subscription services consists primarily of data center capacity costs, personnel costs for our data center and customer support departments, software and maintenance costs, third-party royalties and other outside services associated with delivery of our subscription services. In addition, our cost of subscription services includes allocated depreciation and amortization, facilities, insurance and rent expenses.

Professional services

Cost of professional services consists primarily of personnel costs for our professional services delivery team as well as other outside services primarily labor associated with supplementing our internal staff. In addition, our cost of professional services includes allocated depreciation, facilities, insurance and rent expenses.

Operating expenses

We classify our operating expenses as research and development, sales and marketing, and general and administrative expenses.

Research and development expenses consist primarily of personnel costs and outside services. In addition, research and development expenses include allocated depreciation, facilities, insurance and rent expenses. We believe that continued investment in our solutions is important for our growth. We expect our research and development expenses to continue to increase in dollar amount but not necessarily as a percentage of revenue for the foreseeable future.

Sales and marketing expenses consist primarily of personnel costs, commissions, lead generation, promotions, customer-focused events and travel-related expenses. In addition, sales and marketing expenses include allocated depreciation, facilities, insurance and rent expenses. We expect our sales and marketing expenses to continue to increase in dollar amount for the foreseeable future as we expand our sales and marketing efforts domestically and internationally.

General and administrative expenses consist primarily of personnel costs for finance, accounting, legal, human resources and management information systems personnel. In addition, general and administrative expenses include outside legal costs, professional fees and all other supporting corporate expenses not allocated to other departments. We expect to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, and increased expenses for insurance, investor relations, and professional services. We expect our general and administrative expenses to continue to increase in dollar amount for the foreseeable future.

 

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Results of operations

The following tables show our results of operations in dollars and as a percentage of our total revenue. The historical results presented below are not necessarily indicative of the results that may be expected for any future period:

 

 

Percentage of total revenue 

 

 

 

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Comparison of the three months ended April 30, 2017 and 2016

Revenue

 

 

Total revenue increased by $1.4 million, or 6%, for the three months ended April 30, 2017 compared to the three months ended April 30, 2016.

Subscription services revenue increased by $2.2 million, or 13%, for the three months ended April 30, 2017 compared to the three months ended April 30, 2016, respectively. The increase was primarily due to the addition of new customers and to a lesser extent, an increase in subscribers at existing customers, as well as the sale of additional modules to existing customers.

Professional services revenue decreased by $0.8 million, or 13%, for the three months ended April 30, 2017 compared to the three months ended April 30, 2016, respectively. The decrease was primarily due to a decrease in our professional services average hourly billing rate, partially offset by an increase in the number of professional service hours in the three months ended April 30, 2017 compared to the three months ended April 30, 2016.

Cost of revenue and gross margin

 

 

 

Cost of revenue increased by $1.3 million, or 10%, for the three months ended April 30, 2017 compared to the three months ended April 30, 2016.

Cost of subscription services revenue increased by $0.5 million, or 11%, for the three months ended April 30, 2017 compared to the three months ended April 30, 2016. The increase was primarily due to a $0.3 million increase in personnel costs related to higher headcount, $0.2 million increase in software and equipment costs and a $0.2 million increase in depreciation expense, partially offset by a $0.2 million decrease in hosting services costs.

Cost of professional services decreased $0.4 million, or 8%, for the three months ended April 30, 2017 compared to the three months ended April 30, 2016. The decrease was primarily due to a decrease of $0.8 million in outside service costs and other costs, partially offset by a $0.3 million increase in personnel costs related to increased headcount and a $0.1 million increase in stock-based compensation expense.

 

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Overall gross margin increased to 60% for the three months ended April 30, 2017 compared to 58% for the three months ended April 30, 2016. The increase was primarily due to the increase in subscription services revenue of 13% while the cost of subscription services revenue increased 11%, partially offset by the decrease in professional services revenue of 13% while the cost of professional services revenue decreased 8%.

Operating expenses

 

 

Research and development expenses increased by $0.5 million, or 12%, for the three months ended April 30, 2017 compared to the three months ended April 30, 2016. The increase for the three months ended April 30, 2017 was primarily due to an increase of $0.3 million in personnel costs related to increased headcount and an increase in stock-based compensation expense of $0.2 million.

Sales and marketing expenses increased by $0.8 million, or 8%, for the three months ended April 30, 2017 compared to the three months ended April 30, 2016. The increase for the three months ended April 30, 2017 was primarily due to an increase in personnel costs of $0.4 million related primarily to increased headcount, a $0.3 million increase in stock-based compensation expense and a $0.2 million increase in marketing and promotions, partially offset by a decrease of $0.1 million in travel and entertainment related expenses.

General and administrative expenses increased by $0.1 million, or 1%, for the three months ended April 30, 2017 compared to the three months ended April 30, 2016. The increase for the three months ended April 30, 2017 was primarily due to increases of $0.2 million in stock-based compensation expense and $0.1 million in personnel costs related to increased headcount, partially offset by decreases of $0.1 million in outside services and $0.1 million in facilities costs.

 

 

Total other income (expense) 

 

 

 

Interest expense decreased by $11,000, or 8%, for the three months ended April 30, 2017 compared to the three months ended April 30, 2016, primarily due to the decrease in debt outstanding during the three months ended April 30, 2017.

 

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Other income (expense), net increased by $20,000 for the three months ended April 30, 2017, as compared to the three months ended April 30, 2016, primarily due to higher interest income from our short-term investments, partially offset by an increase in foreign exchange losses.

 

Liquidity and capital resources

Liquidity

The following table summarizes our cash flows for the periods indicated:

 

 

Prior to our IPO, we financed our operations primarily through the sales of our solutions, private placements of our convertible preferred stock and proceeds from our credit facilities in the form of term debt, capital leases and a revolving line of credit. In July 2015, we raised gross proceeds of $63.3 million in our IPO. After deducting underwriting discounts and commissions, the aggregate net proceeds received totaled approximately $58.8 million, before offering costs of approximately $4.3 million. As of April 30, 2017, and January 31, 2017, we had $44.2 million and $41.5 million, respectively, of cash, cash equivalents and marketable securities. Our marketable securities investment portfolio primarily consists of highly rated securities, and our investment policy generally limits the amount of credit exposure to securities from any one issuer. The policy requires investments generally to be rated “investment grade” so as to minimize the potential risk of principal loss.

In October 2015, we entered into an Amended and Restated Loan and Security Agreement with Silicon Valley Bank (SVB) (Amended SVB Agreement) which provided for an increase of the revolving line of credit (LOC) to $15.0 million and extended the maturity date to October 2018. As of both April 30, 2017 and January 31, 2017, we had $6.5 million outstanding under the LOC.  

In October 2015, as part of the Amended SVB Agreement, we entered into a $10.0 million term loan (SVB Term Loan) which was used to repay the $10.0 million outstanding under our then existing Mezzanine Loan and Security Agreement (Mezzanine Loan), dated as of October 24, 2014, by and among the Company and SVB, in full in accordance with its terms. The SVB Term Loan matures on September 30, 2019. As of April 30, 2017, we had $6.3 million outstanding under the SVB Term Loan.

A significant majority of our customers pay in advance for annual subscriptions. Therefore, a substantial source of our cash provided by operating activities is our deferred revenue, which is included on our consolidated balance sheet as a liability. Deferred revenue consists of the unearned portion of billed subscription fees, which is then recognized as revenue in accordance with our revenue recognition policy. As of April 30, 2017 and January 31, 2017, we had deferred revenue of $57.8 million and $56.9 million, respectively. Of these amounts, $53.6 million and $53.4 million, respectively, were recorded as current liabilities and are expected to be recorded as revenue in the following fiscal year, provided all other revenue recognition criteria have been met.

Net cash provided by or used in operating activities

Cash provided by or used in operating activities is significantly influenced by the amount of cash we invest in personnel, customer acquisition and infrastructure to support the anticipated growth of our business, the increase in the number of customers using our solutions, and the amount and timing of customer payments. We have continued to experience increases in operating expenses combined with increases in investments in personnel and infrastructure, all of which have significantly exceeded the revenue generated from the growth in our subscriber base, resulting in net losses for the periods presented. As we continue to invest in personnel and infrastructure to support the anticipated growth of our business, we expect working capital deficits and uses of cash in operations to continue.

We generated $2.9 million in cash from operating activities for the three months ended April 30, 2017, which reflects our net loss of $4.3 million, adjusted by non-cash charges consisting primarily of stock-based compensation expense of $2.7 million and depreciation and amortization expense of $1.1 million and a favorable net change in operating assets and liabilities of $3.4 million. The significant items in the net change in operating assets and liabilities include a $3.5 million decrease in accounts receivable, a $0.1 million increase in accounts payable and accrued expenses and a $0.9 million increase in deferred revenue, which was partially offset by a $0.8 million increase in prepaid expenses and other current assets and a $0.3 million decrease in other long-term liabilities.

 

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We used $1.4 million in cash for operating activities for the three months ended April 30, 2016, which reflects our net loss of $4.3 million, adjusted by non-cash charges of $2.5 million (consisting primarily of $1.6 million for stock-based compensation expense and $0.9 million for depreciation and amortization). Additional sources of cash inflows were from changes in our working capital, including a $2.5 million increase in deferred revenue and a $0.4 million decrease in accounts receivable, which was partially offset by a $0.9 million increase in prepaid expenses and other assets, a $1.3 million decrease in accounts payable and accrued expenses and a $0.2 million decrease in other long-term liabilities.

Average days sales outstanding were 90 days and 78 days for the three months ended April 30, 2017 and 2016, respectively.

Net cash provided by or used in investing activities

Our primary investing activities have consisted of capital expenditures to purchase equipment necessary to support our data center facilities, our network and other operations. As our business grows, we expect our capital expenditures to continue to increase.

We generated $0.8 million in cash from investing activities for the three months ended April 30, 2017, reflecting proceeds of $7.4 million from maturities of marketable securities and sales of property and equipment, partially offset by $5.9 million for the purchases of marketable securities and $0.7 million for the purchases of property and equipment.

We used $0.9 million in cash for investing activities for the three months ended April 30, 2016, reflecting $0.9 million for the purchases of property and equipment.

Net cash provided by financing activities

We generated $0.5 million in cash from financing activities for the three months ended April 30, 2017, which was primarily due to proceeds of $1.6 million from the exercise of stock options and issuance of common stock for our Employee Stock Purchase Plan (ESPP). These increases were partially offset by payments of principal on term debt of $0.6 million and tax payments related to the vesting of restricted stock units of $0.6 million.

We generated $0.4 million in cash from financing activities for the three months ended April 30, 2016, which was primarily due to proceeds of $1.0 million from the exercise of stock options and issuance of common stock for our ESPP. These increases were partially offset by payments of principal on term debt of $0.6 million.

 

Capital resources

As of April 30, 2017, we had cash, cash equivalents and marketable securities of $44.2 million, which were predominantly denominated in U.S. dollars and consisted of bank deposits, money market funds, corporate bonds and notes, US Treasuries, certificates of deposit and commercial paper. As of April 30, 2017, $0.7 million of cash was held by our foreign subsidiaries. We incurred net losses of $4.3 million for both the three months ended April 30, 2017 and 2016. In addition, our accumulated deficit was $161.7 million as of April 30, 2017.

We may require access to capital to fund our operations, including general working capital for operating expenses, purchases of property and equipment for our operations, and other needs. We believe that our existing liquidity sources will satisfy our cash requirements and operations (including continued growth in revenue and employees) for at least the next 12 months. We expect that our operating losses and negative cash flows from operations will continue through at least the foreseeable future. To the extent that existing cash and cash from operations are not sufficient to fund our future operations, we may need to raise additional funds through public or private equity or additional debt financing. Although we currently are not a party to any agreement and do not have any understanding with any third parties with respect to potential investments in, or acquisitions of, businesses or technologies, we may enter into these types of arrangements in the future, which could also require us to seek additional equity or debt financing. We cannot assure you that such additional financing will be available at terms acceptable to us, or at all. In addition, we may opportunistically seek to raise additional capital to fund our continued growth. To the extent that we are unsuccessful in obtaining additional debt or equity financing, our plans for continued growth may need to be moderated or curtailed.

Contractual obligations

There were no material changes in our commitments under contractual obligations except for scheduled payments from the ongoing business, as disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2017. 

 

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Silicon Valley Bank credit facility

In October 2015, we entered into the Amended SVB Agreement. The Amended SVB Agreement, among other things, provided for a revolving line of credit up to $15.0 million with a maturity date of October 30, 2018, and a variable annual rate of interest of Prime plus 1.25% or LIBOR plus 2.5%. As of October 31, 2016 and January 31, 2016, we had $8.5 million available under the SVB credit facility. Also, as part of the Amended SVB Agreement, we entered into a $10.0 million SVB Term Loan, with a maturity date of September 30, 2019. The SVB Term Loan carries a variable annual rate of interest of Prime plus 1.25% or LIBOR plus 2.5% and requires principal payments due in 16 equal quarterly installments and interest payments on a monthly basis. In accordance with the Amended SVB Agreement, the $10.0 million outstanding under the Mezzanine Loan was paid in full in accordance with the terms of the Mezzanine Loan. The Amended SVB Agreement contains several standard financial covenants with which we were in compliance as of April 30, 2017.  

Indemnification Obligations

In the normal course of business, we provide indemnification of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our services, and from time to time we may be subject to claims by our customers under these indemnification provisions. Historically, costs related to these indemnification provisions have not been significant, but we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations.

To the extent permitted under Delaware law, we have agreements whereby we indemnify our directors and officers for certain events or occurrences while the director or officer is or was serving at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the director’s or officer’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that limits our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.

Contingencies

Other taxes

We conduct operations in many tax jurisdictions throughout the U.S. In many of these jurisdictions, non-income based taxes, such as property taxes, sales and use taxes, and value-added taxes are assessed on our operations in that particular location. While we strive to ensure compliance with these various non-income based tax filing requirements, there have been instances where potential noncompliance exposures have been identified. In accordance with U.S. GAAP, we make a provision for these exposures when it is both probable that a liability has been incurred and the amount of the exposure can be reasonably estimated. We believe that, as of April 30, 2017 and January 31, 2017, we have adequately provided for such contingencies. However, it is possible that our results of operations, cash flows, and financial position could be harmed if one or more noncompliance tax exposures are asserted by any of the jurisdictions where we conduct our operations.

Employee agreements

We have various employment agreements with executives and key employees pursuant to which if we terminate such employee’s employment without cause, or if such employee does so for good reason, within one year following a change of control of our company, such employee is entitled to receive certain benefits including cash payments and accelerated vesting of stock options. To date, no triggering events which would cause these provisions to become effective have occurred.

Off-balance sheet arrangements

During the three months ended April 30, 2017 and 2016, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.

Critical accounting policies and estimates

Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.

 

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We believe our critical accounting policies involve the greatest degree of judgment and complexity and have the greatest potential impact on our consolidated financial statements. There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the fiscal year ended January 31, 2017.

Recent Accounting Pronouncements

Goodwill Impairment: In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-04, “Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment” (ASU 2017-04), that eliminates “Step 2” from the goodwill impairment test. The new standard is effective for us in the first quarter of fiscal 2020, and early adoption is permitted. The new guidance must be applied on a prospective basis. We do not anticipate that the adoption of ASU 2017-04 will have a significant impact on our consolidated financial statements or the related disclosures.

Business Combinations: In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805) Clarifying the Definition of a Business", which amends the guidance of FASB Accounting Standards Codification (ASC) Topic 805, "Business Combinations", adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted under certain circumstances. We will evaluate the impact of this guidance on our consolidated financial statements and related disclosures next time there is a potential business combination.

Restricted Cash: In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (ASU 2016-18), which enhances and clarifies the guidance on the classification and presentation of restricted cash in the statement of cash flows. We will adopt ASU 2016-18 in its first quarter of 2019 utilizing the retrospective adoption method. We do not anticipate that the adoption of this standard will have a significant impact on our consolidated financial statements or the related disclosures.

Statement of Cash Flows: In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (ASU 2016-15). ASU 2016-15 is intended to reduce the existing diversity in practice in how certain transactions are classified in the statement of cash flows. The ASU is effective for annual periods (and interim periods within those annual periods) beginning after December 15, 2017. Early adoption is permitted if all amendments are adopted in the same period. We have not yet begun to evaluate the impact this standard will have on our consolidated financial statements or related disclosures.

Simplifying the Accounting for Stock-Based Compensation: In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting” (ASU 2016-09). ASU 2016-09 is intended to improve the accounting for share-based payment transactions as part of the FASB’s simplification initiative. The ASU changes several aspects of the accounting for share-based payment award transactions, including: accounting for income taxes; classification of excess tax benefits on the statement of cash flows; forfeitures; minimum statutory tax withholding requirements; and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. We adopted ASU 2016-09 in the first quarter of 2018 and elected to apply this adoption prospectively. Prior periods have not been adjusted. The adoption, along with the remaining provisions of ASU 2016-09, did not have a material impact on our consolidated financial statements.

Leases: In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (ASU 2016-02). ASU 2016-02 requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The amendments also require certain quantitative and qualitative disclosures. Accounting guidance for lessors is largely unchanged. This guidance should be applied on a modified retrospective basis beginning in the first quarter of fiscal 2020. We have not yet begun to evaluate the impact this standard will have on our consolidated financial statements and related disclosures.

Revenue Recognition: In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (Topic 606), which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)” (Topic 605). Topic 606 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Topic 606 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued “Updated 2015-14 – Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” to defer the effective date of the standard by one year. The new standard is effective for us in our first quarter of fiscal 2019. Topic 606 permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method) or modified retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (cumulative catch-up transition method). We currently anticipate adopting the standard using the cumulative catch-up transition method.

 

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While we continue to assess all potential impacts of Topic 606, we currently expect to continue to recognize revenue over time for our subscription arrangements. We currently believe the adoption of Topic 606 will impact our accounting for multiple element arrangements that include both subscription and professional services. Topic 606 requires us to separate the different elements in an arrangement through the use of stand-alone selling price and to recognize the revenue allocated to the different elements as if those elements had been sold on a standalone basis, either upon delivery at a point in time or over time. More judgment and estimates will be required under Topic 606 than are required under Topic 605.

Furthermore, Topic 606 also includes Subtopic 340-40, “Other Assets and Deferred Costs - Contracts with Customers”, which discusses the deferral of incremental costs of obtaining a contract with a customer, including the period of amortization of such costs. This will require that we capitalize costs directly related to obtaining customer contracts including commissions, and we will amortize those costs over the expected life of a customer. Due to the broad scope and complexity associated with Topic 606, we are currently implementing systems and processes to assist in the adoption of this accounting standard.

JOBS Act Accounting Election

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (JOBS Act). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards, and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates. We do not hold or issue financial instruments for trading purposes.

Foreign currency risk

The functional currency of our foreign subsidiaries is generally the local currency. Most of our sales are denominated in U.S. dollars, and therefore our revenue is not currently subject to significant foreign currency risk. Our operating expenses are denominated in the currencies of the countries in which our operations are located, which are primarily in the U.S., the United Kingdom and India. Our consolidated results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative financial instruments. During the three months ended April 30, 2017 and 2016, the effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have had a material impact on our consolidated financial statements.

Interest rate sensitivity

We had cash, cash equivalents, and marketable securities of $44.2 million and $41.5 million as of April 30, 2017 and as of January 31, 2017, respectively. Our cash and cash equivalents are held in cash (i.e. bank deposits) and short-term money market funds. Our marketable securities consist primarily of corporate bonds and notes, US Treasuries, certificates of deposit and commercial paper, all of which have original maturities of less than one year. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future interest income. During the fiscal year ended January 31, 2017 and the three months ended April 31, 2017 and 2016, the effect of a hypothetical 10% increase or decrease in overall interest rates would not have had a material impact on our interest income. In addition, as of April 30, 2017 and as of January 31, 2017, we had approximately $12.7 million and $13.4 million, respectively, in short- and long-term debt with variable interest rate components. A hypothetical 10% increase or decrease in overall interest rates is not expected to have a material impact on our interest expense.

 

 

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Under the supervision of and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of April 30, 2017 (Evaluation Date).

 

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In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on management’s evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.

(b) Changes in Internal Control Over Financial Reporting

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recently completed fiscal quarter. Based on that evaluation, our principal executive officer and principal financial officer concluded that there has not been any material change in our internal control over financial reporting during the quarter covered by this report that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

(c) Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

 

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time we are party to various litigation matters and subject to claims arising in the ordinary course of our business including, for example, patent infringement lawsuits by non-practicing entities. In addition, third parties may from time to time assert claims against us in the form of letters and other communications. We currently believe that these ordinary course matters will not have a material adverse effect on future results of operations; however the results of litigation and claims are inherently unpredictable. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

 

 

ITEM 1A. RISK FACTORS

The risks and uncertainties described below are not the only ones facing us. Other events that we do not currently anticipate or that we currently deem immaterial may also affect our results of operations, cash flows and financial condition.

Risks related to our business

The pendency of the Merger or our failure to complete the Merger could have a material adverse effect on our business, results of operations, financial condition and stock price.

Completion of the Merger is subject to the satisfaction of various conditions, including the absence of certain legal impediments. There is no assurance that all of the various conditions will be satisfied, or that the Merger will be completed on the proposed terms, within the expected timeframe, or at all.

The Merger gives rise to inherent risks that include:

We have a history of losses, and we may not be able to generate sufficient revenue to achieve or maintain profitability.

We generated net losses of $4.3 million for the three months ended April 30, 2017. As of April 30, 2017, we had an accumulated deficit of $161.7 million. We will need to generate and sustain increased revenue levels in future periods in order to become and remain profitable. We intend to continue to expend significant funds to expand our marketing and sales operations, develop and enhance our incentive compensation and employee and sales performance management solutions, meet the increased compliance requirements associated with our operation as a public company, scale our professional services capabilities and expand

 

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into new markets. Our efforts to grow our business may be more costly than we expect, and we may not be able to increase our revenue enough to offset our higher operating expenses. We may incur significant losses in the future for a number of reasons, including the other risks described in this filing, and unforeseen expenses, difficulties, complications and delays and other unknown events. We may not be able to maintain or increase our revenue levels, and we expect to incur losses for the foreseeable future and may not be able to achieve or sustain profitability.

Our business substantially depends on the continued growth in demand for incentive compensation and employee and sales performance management solutions.

The market for incentive compensation and employee and sales performance management services and products, is relatively new and evolving. We believe one of our key challenges is to be able to demonstrate the benefit of our solutions and services to prospective customers such that they place purchases of our solutions and services at a higher priority relative to other projects to which they allocate a portion of their budget, including the maintenance or renewal of their existing solutions. Organizations with existing homegrown, manual, spreadsheet or on-premise solutions may be reluctant or unwilling to migrate to a cloud-based solution like ours for a variety of reasons, including the perceived implementation costs and ongoing subscription costs. Our financial performance depends in large part on continued growth in the number of organizations adopting incentive compensation management, employee and sales performance management and other related solutions, and particularly cloud-based solutions, to manage the performance of their sales and non-sales organizations. The market for incentive compensation and employee and sales performance management solutions may not develop as we expect, or at all.

Growth forecasts are subject to significant uncertainty and are based on assumptions and estimates which may not prove to be accurate. Forecasts relating to, among other things, the expected growth in the SaaS and cloud software market or the market for incentive compensation and employee and sales performance management solutions may prove to be inaccurate. Demand for incentive compensation and employee and sales performance management solutions depends substantially on the adoption of variable compensation practices by organizations, and such practices may not be adopted in accordance with our expectations or at all. Even if these markets experience the forecasted growth, we may not grow our business at similar rates, or at all. Our growth may be affected by consolidations or reorganizations of our customers. For example, our growth during the fiscal year ended January 31, 2017 was negatively impacted due to the loss of two large customers to reorganization events that resulted in both customers’ sale. In any of these cases, our business and operating results will be adversely affected.

Cloud-based incentive compensation solutions such as ours represent a relatively recent approach to addressing incentive compensation challenges, and we may be forced to change the prices we charge for our solutions or the pricing model upon which they are based as the market for these types of solutions evolves, which may harm our business.

The market for cloud-based solutions to address incentive compensation challenges is still developing. Competitive dynamics may cause pricing levels and pricing models to change, as the market matures and as existing and new market participants introduce new types of solutions and different approaches to enable organizations to address their incentive compensation management needs. As a result, we may be forced to reduce the prices we charge for our solutions or the pricing model on which they are based, and may be unable to renew existing customer agreements or enter into new customer agreements at the same prices and upon the same terms that we have historically, which could have a material adverse effect on our revenue, gross margin and operating results.

We compete in a highly competitive market, and competitive pressures from existing and new companies may adversely impact our business, revenue, growth rates and market share.

The market for incentive compensation solutions for employee and sales performance management is highly competitive and significantly fragmented. With the introduction of new technologies and the potential entry of new competitors into the market, we expect competition to increase and intensify in the future, which could harm our ability to increase sales, maintain or increase renewals and maintain our prices. We compete primarily with companies offering incentive compensation and employee and sales performance management applications via hybrid cloud-based and on-premise solutions. We also compete with spreadsheets, homegrown systems, and toolsets and products developed by software providers that allow customers to build new applications that run on the customers’ current infrastructure or as hosted services. Our competitors include Callidus, Cognos and Oracle, as well as several other privately held companies.

Competition could significantly impede our ability to sell our incentive compensation and employee and sales performance management solutions on terms favorable to us. Our current and potential competitors may develop and market new technologies that render our existing or future solutions less competitive, unmarketable or obsolete. In addition, if these competitors develop products with similar or superior functionality to our solutions, including big data analysis and benchmarking capabilities, streamlined user experiences or real-time mobile accessibility, or engage in greater price competition, we may need to decrease the prices for our solutions in order to remain competitive. If we are unable to maintain our current pricing due to competitive pressures, our margins will be reduced and our operating results will be negatively affected.

 

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Some of our current competitors have, and future competitors may have, greater financial, technical, marketing and other resources, greater resources to devote to the development, promotion, sale and support of their products and services, more extensive customer bases and broader customer relationships and longer operating histories and greater name recognition. As a result, these competitors may be better able to respond quickly to new technologies and to undertake more extensive marketing campaigns. Some competitors may also be able to offer competing solutions at little or no additional cost by bundling them with a broader suite of solutions. In addition, if one or more of our competitors were to merge or partner with another of our competitors, the change in the competitive landscape could adversely affect our ability to compete effectively. If we are unable to compete with such companies, the demand for our incentive compensation and employee and sales performance management solutions could decline substantially.

We operate in a rapidly evolving market and if we are unable to introduce new solutions or make enhancements to our existing solutions that successfully respond to emerging technological and customer demand trends and achieve market acceptance, our growth rates would likely decline and our business, operating results and competitive position could suffer.

Incentive compensation solutions and cloud-based software markets are generally characterized by:

To keep pace with technological developments, satisfy increasingly sophisticated customer requirements, achieve market acceptance and effectively respond to competition, we must quickly identify emerging trends and requirements, accurately define and design enhancements and improvements for existing solutions and services, and introduce new solutions and services. Accelerated introductions and short product life cycles for solutions and services require high levels of expenditures for research and development that could adversely affect our operating results. In addition, as we expand our business and target new industry verticals, we may be required to develop additional features for our solutions, expand our expertise in certain areas and add sales and support personnel possessing familiarity with relevant industry verticals.

Our growth strategy depends, in part, on our ability to develop and launch new solutions on a timely basis. For example, we introduced two new products, Xactly Inspire and Xactly Connect, in May 2016, in January 2017 introduced a Commission Expense Forecasting solution as part of Xactly Incent Enterprise, and most recently in May 2017 announced Xactly SimplyComp and Xactly Insights for sales. If existing and potential customers do not perceive the benefits of these new offerings, a market may not develop or may develop more slowly than we expect, either of which would adversely affect our revenue growth prospects. We also face the risk that customers may not understand or be willing to bear the cost of incorporating these newer solutions into their organizations. In addition, we have limited experience in pricing any new solutions, such as Xactly Inspire, Xactly Connect and Xactly SimplyComp, which could result in underpricing that adversely affects our expected financial performance, or overpricing that inhibits our customers’ acceptance of such new solutions. Even if the initial development and commercial introduction of any new solutions are successful, we cannot assure you that they will achieve widespread market acceptance or that any market acceptance will be sustainable over the longer term.

Moreover, new solutions that we develop may not be introduced in a timely manner. If we are unable to successfully develop or enhance existing solutions, or if we fail to position and price our solutions to meet market demand, our business and operating results will be adversely affected.

If we are unable to attract new customers, our revenue growth will be adversely affected.

To increase our revenue, we must add new customers, increase the number of subscribers at existing customers and sell additional modules to current customers. As our industry matures or as competitors introduce lower cost and/or differentiated products or services that are perceived to compete with ours, our ability to sell based on pricing, technology and functionality could be impaired. As a result, we may be unable to attract new customers at rates or on terms that would be favorable or comparable to prior periods, which could have an adverse effect on our revenue and growth.

Our business depends substantially on customers renewing their agreements and purchasing additional modules from us or adding additional subscribers. Any decline in our customer renewals or purchases of additional modules or subscriptions would harm our future operating results. If we cannot accurately predict customer or subscriber renewals or the impact of any non-renewals on our future revenue, we may not meet our revenue targets, which may adversely affect the market price of our common stock.

In order for us to improve our operating results, it is important that our customers renew their agreements with us when their contract terms expire and also purchase additional solutions and modules and add additional subscribers. Our customers have no obligation to renew their subscriptions after the initial subscription period, and we cannot assure you that customers will renew subscriptions with the same or higher number of modules, if at all. In the past, some of our customers have elected not to renew their

 

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agreements with us or have renewed their agreements with a lower number of subscribers or with fewer modules. We may be unable to predict customer or subscriber renewal rates and the impact these rates may have on our future revenue and operating results. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their satisfaction or dissatisfaction with our solutions, pricing, the prices of competing products or services, mergers and acquisitions affecting our customer base, reduced hiring by our customers, reductions in our customers’ spending levels or the loss of an executive sponsor at a customer. If our customers do not renew their subscriptions, renew on less favorable terms, fail to purchase additional solutions or modules, or fail to add additional subscriptions, our revenue may decline, and our operating results may be harmed. For example, our growth during the second half of fiscal year 2017 was negatively impacted due to the loss of two large customers in the quarter ended October 31, 2016.

Our sales cycles to our enterprise customers can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, our sales are difficult to predict and may vary substantially from period to period, which may cause our operating results to fluctuate significantly.

Our sales efforts involve educating prospective customers and our existing customers about the use, technical capabilities and benefits of our solutions. In general, the enterprise customers we target may undertake a significant evaluation process before purchasing our solutions. As we continue to pursue enterprise customers, we may face greater costs, longer sales cycles and less predictability in completing such sales. We may spend substantial time, effort and money on our sales efforts without any assurance that our efforts will produce any sales. Events affecting our customers’ businesses may occur during the sales cycle that could affect the size or timing of a purchase, contributing to more unpredictability in our business and operating results.

Shifts over time in the mix of sizes or types of organizations that purchase our solutions or changes in the components of our solutions purchased by our customers could negatively affect our operating results.

Our strategy is to sell our incentive compensation and employee and sales performance management solutions to organizations of broadly different sizes, from FORTUNE 50 enterprises to small, emerging companies. Our gross margin can vary depending on numerous factors related to the implementation and use of our incentive compensation and sales performance management solutions, including the sophistication and intensity of our customers’ use of our solutions and the level of professional services and support required by a customer. Sales to enterprise customers may entail longer sales cycles and more significant selling efforts, and the prices we charge each customer per subscriber are driven, in part, by subscriber attributes and the number of subscribers for which that customer has contracted, with generally lower prices per subscriber for larger contracts consistent with industry practice.

Selling to small, emerging companies may involve smaller contract sizes, higher relative selling costs, greater risk of non-renewal and greater credit risk and uncertainty. If the mix of organizations that purchase our solutions changes, or the mix of solution components purchased by our customers changes, our gross margins could decrease and our operating results could be adversely affected. Customer attributes that impact pricing include, in no particular order, frequency of payment by the customer to its employees, complexity of the compensation plans, value of the employee’s compensation, value of the product or service that the employee is selling and the number of payees.

Seasonality may cause fluctuations in our calculated billings, revenue and expenses.

We believe there are seasonal factors that may cause calculated billings and professional services revenue to be higher in some quarters compared with others. Generally, the timing of calculated billings have been split approximately 40% in the first half of the fiscal year and 60% in the second half of the fiscal year. Also, professional services revenue reflects this seasonality and is generally higher in our fourth fiscal quarter. We believe this variability is largely due to our customers’ compensation plan design and budgetary and spending patterns. In addition, investments in sales and marketing programs are seasonally higher in our second fiscal quarter, primarily due to our end user CompCloud conference that we host during the second quarter. In fiscal 2018, our participation in the salesforce.com DreamForce conference during the fourth quarter also is expected to increase our fourth fiscal quarter sales and marketing expenses.

 

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Because our long-term growth strategy involves further expansion of our sales to customers outside the U.S., our business will be increasingly susceptible to risks associated with international operations.

A component of our growth strategy involves the further expansion of our operations and customer base internationally. For the three months ended April 31, 2017 and the year ended January 31, 2017, revenue generated outside of the U.S. was approximately 10% and 9%, respectively, of our total revenue. In addition, a number of our customers are U.S. companies with employees abroad, and we estimate that approximately 32% of our subscribers are located outside of the U.S., based on a representative sample of our user logins during the last two months of the fiscal year ended January 31, 2017. We currently have international offices outside of the U.S. in the United Kingdom for sales and marketing and support and India for research and development, support, professional services and sales. In the future, we may expand to other international locations. Our current international operations and future initiatives will involve a variety of risks, including:

Our limited experience in operating our business internationally increases the risk that any potential future expansion efforts that we may undertake will not be successful. If we invest substantial time and resources to expand our international operations and are unable to do so successfully and in a timely manner, our business and operating results will suffer.

Because we recognize revenue from subscriptions over the term of the relevant contract, downturns or upturns in sales are not immediately reflected in full in our operating results.

As a subscription-based business, we recognize revenue over the terms of each of our contracts, which are typically from one to three years. As a result, much of the revenue we report each quarter results from contracts entered into during previous quarters. Consequently, a shortfall in demand for our solutions and professional services or a decline in new or renewed contracts in any one quarter may not significantly reduce our revenue for that quarter but could negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in new sales or renewals of our solutions will not be reflected in full in our operating results until future periods. Our revenue recognition model also makes it difficult for us to rapidly increase our revenue through additional sales in any quarter, as revenue from new customers must be recognized over the applicable term of the contracts.

 

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Our quarterly operating results may fluctuate significantly and be unpredictable, which makes our future operating results difficult to predict and could cause the trading price of our common stock to decline.

Our quarterly operating results have fluctuated in the past and are expected to fluctuate in the future due to a variety of factors, many of which are outside of our control. As a result, our past results may not be indicative of our future performance, and comparing our operating results on a period-to-period basis may not be meaningful. Additionally, some of the important factors that may affect our quarterly operating results include the following:

If we are unable to maintain, develop and grow our relationships with platform partners, or if we do not or cannot maintain the compatibility of our solutions with third-party applications that our customers use, our business will suffer.

We integrate our solutions with third-party applications and platforms. Our platform partners include Oracle, Salesforce, SAP, and Workday. Our APIs allow our customers to integrate our solutions into their existing business processes and systems. Our customers use our APIs to import data into our solutions from CRM, ERP, HCM and CPQ solutions, such as those provided by Microsoft, Workday and our platform partners, as well as to extract data from our solutions for use in CRM, finance and payroll solutions. The functionality and popularity of our incentive compensation and employee and sales performance management solutions depends, in part, on our ability to integrate our solutions with these third-party applications and platforms. Any deterioration in our relationship with any third-party applications provider or platform partner would harm our business and adversely affect our operating results.

Our business may be harmed if any platform partner:

In addition, we have benefited from these platform partners’ brand recognition, reputations, referrals and customer bases. Any losses or shifts in the referrals from or the market position of these platform partners in general, in relation to one another or to new competitors or new technologies could lead to losses in our relationships or customers, or our need to identify or transition to alternative channels for marketing our solutions.

 

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Third-party providers of applications may change their APIs or the features of their applications and platforms, restrict our access to their applications and platforms or alter the terms governing use of their applications and APIs and access to those applications and platforms in an adverse manner. Such changes could functionally limit or terminate our ability to use these third-party applications and platforms in conjunction with our solutions, which could negatively impact our offerings and harm our business. If we fail to integrate our solutions with new third-party applications and platforms that our customers use, we may not be able to offer the functionality that our customers need, which would negatively impact our ability to reach our prospective customers and generate revenue and adversely impact our business.

Our development of solutions is costly, and our current development efforts may not produce successful solutions and may achieve delayed, or lower than expected, benefits, which could harm our operating results.

In order to remain competitive, we must continue to develop new solutions and modules and enhancements to our existing solutions. Maintaining adequate research and development personnel and resources to meet the demands of the market is essential. If we are unable to develop high-quality solutions for any reason, such as high employee turnover, lack of management ability or a lack of other research and development resources, we may miss market opportunities. Further, our competitors may expend a considerably greater amount of funds on their research and development programs, and those that do not may be acquired by larger companies that could allocate greater resources to our competitors’ research and development programs. Our failure to maintain adequate research and development resources or to compete effectively with the research and development programs of our competitors could materially adversely affect our business.

In addition, because our service is designed to operate on a variety of network hardware and software platforms using a standard browser or our mobile applications, we will need to continuously modify and enhance our service to keep pace with changes in internet-related hardware, software, communication, browser, database and mobile technologies. We may not be successful in either developing these modifications and enhancements or in timely bringing them to market. Furthermore, uncertainties about the timing and nature of new network platforms or technologies, or modifications to existing platforms or technologies, could increase our research and development expenses. Any failure of our service to operate effectively with future network platforms and technologies could reduce the demand for our service, result in customer dissatisfaction and harm our business.

Interruptions to or degraded performance of our solutions or cloud-based data centers managed by us or third parties could result in customer dissatisfaction, damage to our reputation, loss of customers, limited growth and reduction in revenue.

We currently serve our customers from data centers located in Virginia and California, with most of these data center operations managed by third parties, and some managed by us beginning in April 2015. We have announced our plan to open a data center in Germany in December 2017. The continuous availability of our service depends on the operations of those facilities, on a variety of network service providers, on third-party vendors and on our own data center operations staff. In addition, we depend on our operations staff and our third-party facility providers’ ability to protect these facilities against damage or interruption from natural disasters, power or telecommunications failures, criminal acts, cyber-attacks and similar events. If there are any lapses of service or damage to a facility, we could experience lengthy interruptions in our service as well as delays and additional expenses in arranging new facilities and services. Even with current and planned disaster recovery arrangements, which, to date, have not been tested in an actual crisis and may not cover all forms of disaster and crisis, our business could be harmed.

We designed our system infrastructure and own, lease or contract through managed service providers the hardware used for our services. Design and mechanical errors, spikes in usage volume and failure to follow operations protocols and procedures could cause interruptions in our service or our systems to fail. Any interruptions or delays in our service, whether as a result of third-party error, our own error, natural disasters, criminal acts, security breaches or other causes, whether accidental or willful, could harm our relationships with customers, harm our reputation and cause our revenue to decrease and/or our expenses to increase. Also, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. These factors in turn could further reduce our revenue, subject us to liability and cause us to issue credits or cause customers not to renew their subscriptions, any of which could materially adversely affect our business.

We have historically had limited experience managing data center operations ourselves, and we may lack the required expertise to manage these operations effectively. We may have difficulty recruiting or retaining qualified personnel who can provide such data center management services. Also, the third-party managers of our other data center operations are under no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, we may be required to move to new data centers, and we may incur significant costs and possible service interruptions in connection with such a move.

 

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If our software fails due to defects or similar problems, and if we fail to correct any defect or other software problems, we could lose customers, become subject to service performance or warranty claims, incur significant costs or our reputation could be damaged.

Our solutions and the systems infrastructure underlying our platform are inherently complex and may contain material defects or errors. We have from time to time found defects in our solutions and may discover additional defects in the future. We may not be able to detect and correct defects or errors before customers begin to use our solutions. Consequently, we or our customers may discover defects or errors after our solutions have been implemented. These defects or errors could also cause inaccuracies in the data we collect, process or produce for our customers, or even the loss, damage or inadvertent release of such confidential or personal data. Any problem in connection with our regularly-scheduled system maintenance may lead to unplanned system downtime. Even if we are able to implement the bug fixes and upgrades in a timely manner, any defects or inaccuracies in the data we collect, process or produce for our customers, or the loss, damage, unauthorized access to or inadvertent release of such confidential or personal data could expose us to substantial liability and cause our reputation to be harmed, could lead to customers electing not to purchase or renew their agreements with us and subject us to service performance credits, warranty claims or increased insurance costs. The costs associated with any material defects, errors or other performance problems in or affecting in our solutions or the systems underlying our platform may be substantial and could materially adversely affect our operating results.

Our efforts to market and sell solutions to small, emerging companies may not be successful which may lead to greater expenses and lower revenue.

Our success depends, in part, on our ability to attract and retain customers that are small, emerging companies, such as those we target with our Xactly Incent Express product and with our new product, Xactly SimplyComp. These customers are challenging to reach, acquire and retain in a cost-effective manner. Selling to and retaining these smaller companies can be more difficult than selling to and retaining large enterprise customers because smaller companies generally have high business failure rates, are price-sensitive, are difficult to reach with targeted sales campaigns, have lower renewal rates and generate less revenue. In addition, smaller companies frequently have limited budgets and may choose to spend funds on items other than our solutions. If these organizations experience economic hardship, they may be unwilling or unable to expend resources on technology software and services. If we are unable to market and sell our solutions to these smaller companies with competitive pricing and in a cost-effective manner, our ability to grow our revenue will be harmed.

Our implementation cycles can be long and encounter unforeseen complications with customer integrations of our solutions. Any delay with our implementations could lead to increased costs and dissatisfied customers.

We may face unexpected challenges with some customers or more complicated implementations of our solutions with such customers. It may be difficult or expensive to implement our solutions if a customer has unexpected data, hardware or software technology challenges, or complex or unanticipated business requirements. Any difficulties or delays in the initial implementation could cause customers to delay or forego future purchases of our solutions, in which case our business, operating results and financial condition would be adversely affected.

Our use of distributed product development, support and professional services may prove difficult to manage and may hinder our ability us to produce new solutions and services and provide professional services in order to drive growth.

Certain of our engineering services for product development, customer technical support and professional consulting services are performed in remote offices including our subsidiary located in India. Our use of distributed personnel to perform new product and services development, and provide support and professional consulting efforts has required, and will continue to require, detailed technical and logistical coordination. We must ensure that our distributed personnel are aware of and understand development specifications and customer support, implementation and configuration requirements and that they can meet applicable timelines or, if they are not met, that any delays are not significant. We may not be able to maintain acceptable standards of quality in support, product development and professional services. If we are unable to retain or attract personnel in our distributed locations our attempts to drive growth through new solutions and margin improvements in technical support and professional services may be negatively impacted, which would adversely affect our results of operations.

Weakened U.S. and global economic conditions may harm our industry, business and operating results, including as a result of decreasing demand for our solutions by our customers.

Our overall performance depends in part on U.S. and worldwide economic conditions, especially as the macroeconomic environment impacts our customers. Key economies have experienced downturns in the past in which economic activity was impacted by falling demand for a variety of goods and services, restricted credit, poor liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets, bankruptcies and overall uncertainty with respect to the economy. In addition, political developments may exacerbate economic conditions, such as the change in the U.S. administration, with any related policy uncertainty,

 

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and the Brexit vote, which creates an uncertain political, regulatory and economic environment in the United Kingdom and potentially across other EU member states, and may last for a number of months or years. These conditions may affect the rate of information technology spending generally and could adversely affect our customers’ ability or willingness to purchase our solutions and professional services, delay prospective customers’ purchasing decisions, reduce the value or duration of their subscription contracts, or affect renewal rates, all of which could adversely affect our operating results. In particular, if any such economic slowdown disproportionately impacts any particular industry verticals of our customers, we may face diminished demand for our solutions or a contraction of subscribers and modules, which would significantly harm our revenue and results of operations.

We may not be able to scale our business quickly enough to meet our customers’ growing needs and if we are not able to grow efficiently, our operating results could be harmed.

As usage of our incentive compensation and employee and sales performance management solutions grows, we will need to devote additional resources to improving our platform architecture, integrating with third-party systems and maintaining infrastructure performance. In addition, we will need to appropriately scale our internal business systems and our customer support and professional services organization to serve our enterprise customers and our growing customer base. We will also need to scale our network of partners, including hiring and contracting with additional third-party service providers, as well as scale our data center capabilities. Any failure of or delay in these efforts could cause impaired system performance and reduced customer satisfaction. These issues could reduce the attractiveness of our solutions to customers, resulting in decreased sales to new customers, lower renewal rates by existing customers, the issuance of service credits or requested refunds, which could impede our revenue growth and harm our reputation. Even if we are able to upgrade our systems and expand our staff, any such expansion will be expensive and could be complex, requiring management time and attention. We could also face inefficiencies or operational failures as a result of our efforts to scale our infrastructure. Moreover, there are inherent risks associated with upgrading, improving and expanding our information technology systems. We cannot be sure that the expansion and improvements to our infrastructure and systems will be fully or effectively implemented on a timely basis, if at all. These efforts may reduce revenue and our margins and adversely affect our operating results.

Failure to effectively develop and expand our marketing and sales capabilities, including third-party partners, could harm our ability to increase our customer base and achieve broader market acceptance of our solutions.

Our ability to increase our customer base and achieve broader market acceptance of our incentive compensation and employee and sales performance management solutions will depend to a significant extent on our ability to expand our marketing and sales operations. We plan to continue expanding our sales force and third-party partners, both domestically and internationally. These efforts will require us to invest significant financial and other resources. In addition, the cost to acquire customers is high due to these marketing and sales efforts. Our business will be seriously harmed if our efforts do not generate a correspondingly significant increase in revenue. We may not achieve anticipated revenue growth from expanding our sales force if we are unable to hire, develop and retain talented sales personnel, if our new sales personnel are unable to achieve desired productivity levels in a reasonable period of time or if our sales and marketing programs are not otherwise effective.

We engage partners to promote, sell, integrate and support our solutions, and we intend to seek expansion of our international partner network. Any failure to effectively develop and manage this distribution channel could adversely affect our ability to generate revenue from the sale of our solutions.

We rely on third-party service providers to provide certain services to us and/or our customers, as well as indirect sales partners to pursue additional channel and agency distribution partnerships. Our future growth in revenue and ability to achieve and sustain profitability depends, in part, on our ability to identify, establish and retain successful third-party service provider relationships, including internationally, which will take significant time and resources and involve significant risk. If any of these third-party service providers stop supporting our solution or if our network of providers does not expand, we will likely have to expand our internal team to meet the needs of our customers, which could increase our operating costs and result in lower margins. To the extent that we are unable to recruit alternative partners, or to expand our internal team, our revenue and operating results would be harmed.

If our security measures or those of our customers are compromised or unauthorized access to customer data is otherwise obtained, our solutions may be perceived as not being secure, customers may curtail or cease their use of our solutions, our reputation may be harmed and we may incur significant liabilities.

Our operations involve the storage and transmission of customer data, including, in some cases, personally identifiable information, and any unauthorized access to, loss of or unauthorized disclosure of this information, as a result of a security incident, employee, customer or partner error, malfeasance, stolen or fraudulently obtained log-in credentials or otherwise could result in litigation, substantial liability, regulatory investigations or fines, indemnity obligations and other possible liabilities, as well as negative publicity, any of which could damage our reputation, impair our sales and harm our business. Cyber-attacks and other malicious internet-based activity continue to increase generally, and cloud-based platform providers have been targeted. In addition, if

 

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the security measures of any of our customers or platform partners are compromised, even without any actual compromise of our own systems, we may face substantial liability or negative publicity or reputational harm if our customers, platform partners or anyone else incorrectly attributes the blame for such security breaches to us or our systems. We may be unable to anticipate or prevent techniques used to obtain unauthorized access to or to sabotage our systems because they change frequently and generally are not detected until after an incident has occurred. As we increase our customer base and our brand becomes more widely known and recognized, we may become more of a target for third parties seeking to compromise our security systems or gain unauthorized access to our customers’ data.

Many governments have enacted laws requiring companies to notify individuals of data security incidents involving certain types of personal data. In addition, some of our customers contractually require notification of any data security compromise. Security compromises experienced by our competitors, by our platform partners, by our customers or by us may lead to public disclosures, which may lead to widespread negative publicity. Any security compromise in our industry, whether actual or perceived, could harm our reputation, erode customer confidence in the effectiveness of our security measures, negatively impact our ability to attract new customers, cause existing customers to elect not to renew their subscriptions or subject us to third-party lawsuits, regulatory fines or other action or liability, which could materially and adversely affect our business and operating results.

If we fail to maintain our thought leadership position in incentives and employee performance, our business may suffer.

We believe that maintaining our thought leadership position in incentives and employee performance is an important element in attracting new customers. We devote significant resources to developing and maintaining our thought leadership position, with a focus on identifying and interpreting emerging trends in incentive compensation, shaping and guiding industry dialogue, and creating and sharing proposed best practices. Our activities related to developing and maintaining our thought leadership may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incur in such effort. We rely upon the continued services of our management and employees with domain expertise in incentives and employee performance, and the loss of any key management or employees in this area could harm our competitive position and reputation. If we fail to successfully grow and maintain our thought leadership position, or incur substantial expenses in our attempts to do so, we may not attract enough new customers or retain our existing customers, and our business could suffer.

We rely on our management team and other key employees, and the loss of one or more key employees could harm our business.

Our success and future growth depend upon the continued services of our management team, including Christopher Cabrera, our founder and Chief Executive Officer, and other key employees in the areas of research and development, marketing, sales, services and general and administrative functions. From time to time, there may be changes in our management team resulting from the hiring or departure of executives, which could disrupt our business. We also are dependent on the continued service of our existing software engineers and our key sales personnel. We may terminate any employee’s employment at any time, with or without cause, and any employee may resign at any time, with or without cause. In addition, our executive officers and certain other management-level employees benefit from change of control severance agreements in which an involuntary termination by us without cause or a voluntary termination by the employee for good reason within one year after a change of control transaction, will result in acceleration of equity vesting and cash severance payments for the individual, which would increase the cost to us of any such departure. We do not maintain key man life insurance on any of our employees. The loss of one or more of our key employees could harm our business.

The failure to attract and retain additional qualified personnel could prevent us from executing our business strategy.

To execute our business strategy, we must attract and retain highly qualified personnel. In particular, we compete with many other companies for software developers with high levels of experience in designing, developing and managing cloud-based software, as well as for skilled sales and operations professionals, and we may not be successful in attracting and retaining the professionals we need. Also, sales compensation management experts and enterprise sales professionals are very important to our success and are difficult to replace. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly-skilled employees with appropriate qualifications. In particular, we have experienced a very competitive hiring environment in the San Francisco Bay Area, where we are headquartered. In addition, changes to U.S. immigration policies that restrain the flow of technical and professional talent may inhibit our ability to adequately staff our research and development efforts. Many of the companies with which we compete for experienced personnel have greater resources than we do. In addition, in making employment decisions, particularly in the software industry, job candidates often consider the value of the stock options or other equity incentives they are to receive in connection with their employment. It may be more difficult to attract new employees, some of whom may prefer to work for a private company with the possibility of a future initial public offering. If the price of our stock does not increase, or experiences significant volatility, our ability to attract or retain key employees may be adversely affected. If we fail to attract new personnel or fail to retain and motivate our current personnel, our growth prospects could be severely harmed.

 

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If we fail to enhance our brand, our ability to expand our customer base will be impaired and our financial condition may suffer.

We believe that our development of the Xactly brand is important to achieving awareness of our existing and future incentive compensation and employee and sales performance management solutions, and, as a result, is important to attracting new customers, maintaining existing customers and continuing our relationship with key platform partners. We also believe that the importance of brand recognition will increase as competition in our market increases. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful incentive compensation and employee and sales performance management solutions at competitive prices. In the past, our efforts to build our brand have involved significant expenses. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incur in building our brand.

We may experience difficulties in implementing new business and financial systems.

We currently are in the process of transitioning certain of our business and financial systems, particularly the adoption and integration of a new third-party software to manage our revenue processes. The process of migrating our legacy systems could disrupt our ability to timely and accurately process and report key aspects of our revenue cycle, including billing, accounts receivable, deferred revenue and recognition of revenue in accordance with our revenue recognition policy. In addition, certain financial controls and processes will change with the transition and need to be monitored and assessed for effective implementation and to minimize internal controls risks, and there is no assurance that we will be able to identify future deficiencies in our internal controls, including material weaknesses, in future periods. Any difficulties in implementing the new software or related failures of our internal control over financial reporting could adversely affect our results of operations or financial condition and cause harm to our reputation.

If we fail to forecast our revenue accurately, or if we fail to match our expenditures with corresponding revenue, our operating results could be adversely affected.

Because our recent growth has resulted in the expansion of our business, we do not have a long history upon which to base forecasts of future operating revenue. In addition, for our enterprise customers, the lengthy sales cycle for the evaluation and implementation of our solutions, which typically extends for several months, may also cause us to experience a delay between increasing operating expenses for such sales efforts, and, upon successful sales, the generation of corresponding revenue. In addition, we are currently in the process of adopting and integrating a new third-party software to manage our revenue recognition. Accordingly, we may be unable to prepare accurate internal financial forecasts or replace anticipated revenue that we do not receive as a result of delays arising from these factors. As a result, our operating results in future reporting periods may be significantly below the expectations of equity research analysts or investors, which could harm the price of our common stock.

If we fail to offer high-quality professional services and customer support, our business and reputation would suffer.

High-quality professional services and customer support are important for the successful marketing and sale of our solutions, the renewal of existing customers, the addition of subscribers at existing customers and the sale of additional solutions to existing customers. Providing these professional services requires that our customer support personnel and implementation partners have specific incentive compensation and employee and sales performance management knowledge and expertise, making it more difficult for us to hire qualified personnel and to scale up our support operations due to the extensive training required. The importance of high-quality performance services and customer support will increase as we expand our business and pursue new customers. Also, as we rely more on our implementation partners to deliver our solutions to our customers and provide necessary support, our ability to manage and ensure the successful implementation of our solutions will be further limited. If we or our implementation partners fail to help our customers effectively implement our solutions, resolve post-deployment issues and provide ongoing support, our ability to sell additional functionality and professional services to existing customers may suffer and our reputation with existing or potential customers may be harmed.

If we are unable to protect our intellectual property rights, our competitive position, ability to protect our proprietary technology and our brand could be harmed or we could be required to incur significant expense to enforce our rights.

Our success is dependent, in part, upon our proprietary technology and content, including software, databases, confidential information and know-how, the protection of which is crucial to the success of our business. We rely on a combination of patents, copyrights, trademarks, service marks, domain names, trade secret laws and contractual restrictions to establish and protect our proprietary rights in our solutions and services. However, the steps we take to protect our intellectual property may be inadequate. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Any of our patents, trademarks or other intellectual property rights may be challenged, infringed, misappropriated, or circumvented by others or invalidated through administrative process or litigation. The steps we take to protect our intellectual property may not prevent the misappropriation or misuse of our intellectual property, or deter independent development of similar intellectual property by others. Confidentiality and non-disclosure agreements may not effectively prevent

 

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unauthorized use or disclosure of our confidential information, intellectual property or technology and may not provide an adequate remedy in the event of unauthorized use or disclosure of our confidential information, intellectual property or technology. Some aspects of our business and services also rely on technologies, software and content developed by or licensed from third parties, and we may not be able to maintain our relationships with such third parties or enter into similar relationships in the future on reasonable terms or at all.

While we have two issued U.S. patents and eight U.S. patent applications pending, those applications and any patent applications that we may file in the future may not result in issued patents, and we may be unable to obtain protection for the covered technology. In addition, any patents issued or other intellectual property may not provide us with competitive advantages, or may be successfully challenged or invalidated by third parties through administrative process or litigation. Effective trademark, trade secret, patent, copyright and domain name protection is expensive to develop and maintain, both in terms of initial and ongoing registration requirements and the costs of defending our rights. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Additional uncertainty may result from changes to intellectual property legislation enacted in the U.S. and elsewhere, and from interpretations of intellectual property laws by applicable courts and agencies. Despite our precautions, it may be possible for unauthorized third parties to copy our solutions or to use information that we regard as proprietary to create products and services that compete with ours. Some license provisions protecting against unauthorized use, copying, transfer and disclosure of our solutions may be unenforceable under the laws of certain jurisdictions. In addition, the laws of some countries do not protect proprietary and intellectual property rights to the same extent as the laws of the U.S., and mechanisms for enforcement of intellectual property rights may be inadequate. To the extent we expand our international activities, our exposure to unauthorized copying and use of our solutions and proprietary information may increase. We may be required to spend significant resources to monitor and protect our intellectual property rights. We may in the future initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights, including as counterclaims to any intellectual property litigation. Litigation is inherently uncertain, and any litigation, whether as a plaintiff or defendant and whether or not it is resolved in our favor, could result in significant expense to us and the invalidation or narrowing of the scope of our intellectual property and could divert the efforts of our technical and management personnel.

We have been and may in the future be sued by third parties for various claims including alleged infringement of proprietary rights.

We have been and may in the future be involved in various legal matters arising from our business activities. Such future actions may include claims, suits, government investigations and other proceedings alleging that we, our customers, our licensees, or parties indemnified by us have infringed, misappropriated, or otherwise violated the intellectual property rights or other rights of third parties, or have violated commercial, corporate and securities, labor and employment, wage and hour, and other laws and regulations. For example, we may be subject to claims that we are infringing the patent, trademark or copyright rights of third parties, or that our employees have misappropriated or divulged their former employers’ trade secrets or confidential information.

The cloud-based and business-to-business software and internet industries are characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. We have received, and in the future may receive, communications from third parties, including practicing entities and non-practicing entities, claiming that we have infringed, misappropriated or otherwise violated their proprietary rights or intellectual property.

We expect that software and other solutions in our industry increasingly may be subject to third-party infringement claims as the number of competitors grows and the functionality of solutions in different industry segments overlaps. Moreover, many of our competitors and other industry participants have been issued patents and/or have filed patent applications, and have asserted claims and related litigation regarding patent and other intellectual property rights. From time to time, third parties, including certain of these companies, have asserted patent, copyright, trademark, trade secret and other intellectual property rights within the industry. Any of these third parties might in the future make a claim of infringement against us.

We and our customers or partners may in the future be sued by third parties for alleged infringement of their claimed proprietary rights. Our technologies may be subject to injunction if they are found to infringe the rights of a third party or we may be required to pay damages, or both. Many of our agreements with customers and partners require us to indemnify them for third-party intellectual property infringement claims, which would increase the cost to us of an adverse ruling on such a claim.

The outcome of any claims or litigation, regardless of the merits, is inherently uncertain. Any claims and lawsuits, and the disposition of such claims and lawsuits, whether through settlement or licensing discussions, or litigation, could be time-consuming and expensive to resolve, divert management attention from executing our business plan, result in efforts to enjoin our activities, lead to attempts on the part of other parties to pursue similar claims, adversely affect our relationships with our current or future customers and partners, cause delays or stoppages in providing our services, necessitate incurring significant legal fees and, in the case of intellectual property claims, require us to change our technology, change our business practices and/or pay monetary damages or enter

 

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into short- or long-term royalty or licensing agreements. Some claimants may have substantially greater resources, including larger patent portfolios, than we do and may be able to sustain the costs of complex intellectual property litigation to a greater degree and for longer periods of time than we could. In addition, patent holding companies that focus on extracting royalties and settlements by enforcing patent rights may target us. Liability for monetary damages against us may be tripled and may include attorneys’ fees, or, in some circumstances, damages against our customers and partners, and we may be prohibited from developing, commercializing or continuing to provide some or all of our services unless we obtain licenses from, and pay royalties to, the holders of the patents or other intellectual property rights, which may not be available on commercially favorable terms, or at all.

Any adverse determination related to intellectual property claims or other litigation could prevent us from offering our services to others, could be material to our financial condition or cash flows, or both, or could otherwise adversely affect our operating results. In addition, depending on the nature and timing of any such dispute, an unfavorable resolution of a legal matter could materially affect our future results of operation or cash flows or both.

In addition, our exposure to risks associated with various claims, including the use of intellectual property, may be increased as a result of acquisitions of other companies, or as we expand the complexity, scope and public profile of our business. For example, we may have a lower level of visibility into the development process with respect to intellectual property or the care taken to safeguard against infringement risks with respect to the acquired company or technology. In addition, third parties may make infringement and similar or related claims after we have acquired technology that had not been asserted prior to our acquisition.

We use open source software in our solutions, which could subject us to litigation or other actions.

We use open source software in our platform and we intend to continue to use open source software in the future. From time to time, there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products or alleging that these companies have violated the terms of an open source license. As a result, we could be subject to lawsuits by parties claiming ownership of what we believe to be open source software or alleging that we have violated the terms of an open source license. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition or require us to devote additional research and development resources to change our solutions. In addition, if we were to combine our proprietary software solutions with open source software in certain manners, we could, under certain open source licenses, be required to publicly release the source code of our proprietary software solutions. If we inappropriately use open source software, we may be required to re-engineer our solutions, discontinue the sale of our solutions, release the source code of our proprietary software to the public at no cost or take other remedial actions. Although we have taken steps to control our use of open source software, many open source licenses have not been interpreted by courts, and we cannot be certain that our processes for controlling our use of open source software in our products have been or will be effective. There is a risk that open source licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our solutions, which could adversely affect our business, operating results and financial condition.

Data usage limitations, privacy and data protection concerns, evolving regulation of the internet, cross-border data transfers and other domestic or foreign regulations may limit the use and adoption of our solutions and adversely affect our business.

Our customers can use our solutions to store contact and other personal or identifying information regarding some of their employees. As internet commerce continues to evolve, increasing regulation by federal, state or foreign governments and agencies becomes more likely. For example, increased regulation is occurring in the areas of data privacy and data protection, both in the U.S. and internationally, and privacy- and data security-related regulatory obligations are evolving. New and modified laws and regulations applying to the solicitation, collection, processing, use and security of personal information could affect our or our customers’ ability to use data, potentially reducing demand for our solutions, imposing greater compliance burdens on us or our customers and restricting our ability to store, process and share data with our customers.

We use our customers’ data in an aggregated and anonymized format for our solutions. Privacy and data protection-related concerns may cause our customers’ employees or contacts to resist providing the personal data necessary to allow our customers to use our solutions effectively. Even the perception of privacy concerns, whether or not valid, may inhibit market adoption of our solutions in certain industries and in certain countries.

We may be subject to future foreign regulation requiring data collected or used within such foreign jurisdiction to reside there. Foreign data privacy laws and regulations, such as the EU’s Data Protection Directive, and the country-specific laws and regulations that implement the directive, also govern the processing of personally identifiable data, and may be stricter than U.S. laws. The EU formally adopted the GDPR, to supersede the Data Protection Directive in 2018, which would cause EU data privacy laws to be more stringent and to provide for greater penalties for noncompliance. Additionally, with regard to transfers of personal data from Europe to the U.S., we historically relied on the U.S.‑EU and U.S.‑Swiss Safe Harbor Frameworks as agreed to by the U.S. Department of Commerce, and the EU and Switzerland, which established means for complying with certain restrictions on the transfer of personal data by U.S. companies from the EEA and Switzerland to the U.S. In October 2015, the Court of Justice of the EU issued a ruling

 

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invalidating the U.S.-EU Safe Harbor Framework as a method of complying with restrictions in the EU Data Protection Directive (and member states’ implementations thereof) regarding the transfer of personal data outside of the EEA.  We are in the process of implementing appropriate changes to our practices with respect to personal data as a result of this ruling, and this ruling and other developments in the legal landscape surrounding cross-border data transfer may serve as a basis for our personal data handling practices, or those of our customers, to be challenged, may require us to change our business practices, and may otherwise adversely impact our business. More recently, the U.S. and the EU reached agreement upon a new data transfer framework referred to as the U.S.-EU Privacy Shield, designed to replace the invalidated U.S.-EU Safe Harbor. The U.S.-EU Privacy Shield has recently become effective, but it is not clear that we will find it appropriate to utilize as a mechanism to legitimize data transfers from the EEA to the U.S. We are engaging in other measures to legitimize our transfers of personal data from the EEA to the U.S. in the interim. As a result of the Court of Justice of the EU’s ruling regarding the U.S.-EU Safe Harbor Framework, or if other restrictions are adopted by the EU or other jurisdictions upon the transfer of personal data to the U.S., we may have to create duplicative, and potentially expensive, information technology infrastructure and business operations in other jurisdictions, which may hinder our expansion plans in those jurisdictions or render such plans commercially infeasible. The costs of compliance with, and other burdens imposed by, such laws and regulations that are applicable to us or to the businesses of our customers may be substantial and may limit the use and adoption of our solutions and reduce overall demand, may require us to change our business practices in a manner that could compromise our ability to effectively pursue our growth strategy, or may lead to significant fines, penalties or liabilities for any noncompliance with such privacy laws or regulations.

In addition to government activity, privacy advocacy groups and the technology and other industries are considering various new or additional self-regulatory standards that may place additional burdens on our customers or on us. If the gathering of personal information were to be curtailed in this manner, our solutions would be less effective and we would be required to work with our customers to modify such information on our solutions, which may reduce demand for our solutions and harm our business.

The limitations of liability provisions in our contracts and our insurance coverage may not be enforceable or adequate.

There can be no assurance that any limitations of liability provisions in our contracts would be enforceable or adequate or would otherwise protect us from any liabilities or damages with respect to any particular claim, including any intellectual property claims, claims relating to a data security breach, or other claims for which we must indemnify our customers or partners. We also cannot be sure that our existing general liability insurance coverage and coverage for errors or omissions will continue to be available on acceptable terms or will be available in sufficient amounts to cover one or more large claims, or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and operating results.

We may expand through acquisitions of, or investments in, other companies, which may divert our management’s attention and result in additional dilution to our stockholders, and we may be unable to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions.

We may in the future seek to acquire or invest in businesses, products or technologies that we believe could complement or expand our solutions, enhance our technical capabilities or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not the acquisitions are completed. In addition, we have limited experience in acquiring other businesses, having acquired one company in 2009. If we acquire additional businesses, we may not be able to successfully integrate the acquired personnel, operations and technologies, maintain relationships with customers or partners or effectively manage the combined business following the acquisition. We may not be able to find and identify desirable acquisition targets or be successful in entering into an agreement with any particular target. We also may fail to identify all of the problems, liabilities, or other shortcomings or challenges of an acquired business, product, or technology, including issues related to intellectual property, solution quality or architecture, regulatory compliance practices, revenue recognition or other accounting practices or employee or client issues. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could impact our cash flows and subject us to restrictive covenants that could inhibit our business, any of which could adversely affect our operating results. In addition, if an acquired business fails to meet our expectations or if we are unable to successfully integrate it, our business and operating results may suffer.

We may not be able to utilize a significant portion of our net operating loss or research tax credit carryforwards, which could adversely affect our future liquidity position.

As of January 31, 2017, we had approximately $240.0 million and $84.2 million of federal and state net operating loss carryforwards, respectively, and federal and state research and development tax credit carryforwards in the amount of $3.8 million and $2.5 million, respectively, which if not utilized will begin to expire in 2019 for federal purposes and 2017 for state purposes. These net operating loss carryforwards could expire unused and be unavailable to offset future income tax liabilities, which could require

 

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additional cash expenditures for income taxes in the future. In addition, under Section 382 of the Internal Revenue Code of 1986 (the Code), our ability to utilize net operating loss carryforwards or other tax attributes in any taxable year may be limited if we experience an “ownership change.” Under Section 382 of the Code, an “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50% over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. It is possible that prior ownership changes or any future ownership change could have a material effect on the use of our net operating loss carryforwards or other tax attributes.

We are leveraged financially, which could adversely affect our ability to adjust our business to respond to competitive pressures and to obtain sufficient funds to satisfy our future research and development needs, to protect and enforce our intellectual property, and to meet other needs.

As of April 30, 2017, we had total outstanding indebtedness of approximately $12.7 million drawn under various credit facilities.

The degree to which we are leveraged could have negative consequences, including the following:

A failure to comply with the covenants and other provisions of our credit agreements could result in events of default under such agreements, which could permit acceleration of all of our outstanding indebtedness. For example, the closing of the Merger requires the repayment of the amounts outstanding under our existing indebtedness pursuant to the terms of the agreements. Any required repayment of the principal amount of our existing indebtedness as a result of a fundamental change or acceleration of our existing indebtedness would reduce our cash on hand such that we would not have those funds available for use in our business.

Financing agreements to which we are party or may become party may contain operating and financial covenants that restrict our business and financing activities.

Our existing credit facilities with certain lenders contain certain operating and financial restrictions and covenants, including a prohibition on the incurrence of certain indebtedness and liens, a prohibition on certain investments, a prohibition on paying dividends on our common stock, restrictions against certain merger and consolidation transactions, including the closing of the Merger, certain restrictions against the disposition of assets and the requirement to maintain a minimum level of liquidity. These restrictions and covenants, as well as those contained in any future financing agreements that we may enter into, restrict our ability to finance our operations, engage in, expand or otherwise pursue our business activities and strategies. Our ability to comply with these covenants may be affected by events beyond our control, and breaches of these covenants could result in a default under our credit agreements and any future financing agreements that we may enter into. If not waived, defaults could cause our outstanding indebtedness under our credit agreement and any future financing agreements that we may enter into to become immediately due and payable.

Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value-added or similar taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our results of operations.

We do not collect sales and use, value-added and similar taxes in all jurisdictions in which we have sales of our solutions or related services where we do not believe that such taxes are applicable. Sales and use, value-added and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future. Such tax assessments, penalties and interest or future requirements may adversely affect the results of our operations.

We may be affected by fluctuations in currency exchange rates.

We are potentially exposed to adverse movements in currency exchange rates. Although most of our revenue and expenses occur in U.S. dollars, some occur in local currencies, such as the United Kingdom and India, and the amounts in local currency may increase as we expand our international operations. An increase in the value of the U.S. dollar could increase the real cost to our customers of our products in those markets outside the U.S., and a weakened U.S. dollar could increase the cost of our expenses, as

 

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well as overseas capital expenditures. We have not engaged in hedging transactions to reduce exposure to foreign currency fluctuations.

Violations of the U.S. Foreign Corrupt Practices Act and similar foreign anti-bribery laws could adversely impact our business, financial condition and results of operations.

The U.S. Foreign Corrupt Practices Act (FCPA) and similar anti-bribery laws in other jurisdictions prohibit companies and their intermediaries and agents from making improper payments to foreign officials, including employees of government owned businesses, as well as private organizations, for the purpose of obtaining or retaining business. During the last few years, the United States Department of Justice and the SEC have brought an increasing number of FCPA enforcement cases, many resulting in very large fines and deferred criminal prosecutions.

We have anti-corruption policies in effect to mandate compliance with the FCPA and other similar anti-bribery laws and are implementing a plan that seeks to ensure compliance with those policies. However, there can be no assurance that our employees and third-party intermediaries will comply with the FCPA and similar anti-bribery laws and the policies that we implement to seek to ensure compliance with them. Violations of the FCPA or other foreign anti-bribery laws, or allegations of such violations, could disrupt our business and cause us to suffer civil and criminal financial penalties and other sanctions, which may have a material adverse impact on our business, financial condition and results of operations.

Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, and to interruption by manmade problems such as network security breaches, computer viruses or terrorism.

We rely heavily on our data centers, network infrastructure and information technology systems for our business operations. A disruption or failure of these systems in the event of a terrorist attack, online or hacker attack, earthquake, fire, flood, power loss, telecommunications failure, or other similar catastrophic event could cause system interruptions, delays in accessing our service, reputational harm and loss of critical data or could prevent us from providing our solutions to our customers. Our service is delivered from data centers located in Virginia and California, and in the future, in Germany, with most of the data center operations managed both by third parties and, beginning in April 2015, by us. In addition, we are headquartered and most of our employees reside in the San Francisco Bay Area, an area susceptible to earthquakes, and a major earthquake or other catastrophic event could affect our employees, who may not be able to access our systems or otherwise continue to provide our solutions to our customers. A catastrophic event that results in the destruction or disruption of our data centers, or our network infrastructure or information technology systems, or access to our systems, could affect our ability to conduct normal business operations and adversely affect our operating results.

Risks Related to Owning Our Common Stock

Our stock price may be volatile and may decline regardless of our operating performance and could subject us to litigation.

The trading prices of the securities of technology companies, including providers of cloud-based software, have been highly volatile. The market price of our common stock has been and is likely to continue to be subject to wide fluctuations. Factors affecting the market price of our stock, many of which are beyond our control, include:

 

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In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies.

In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business.

Substantial future sales of shares of our common stock by existing stockholders could depress the market price of our common stock.

The market price for our common stock could decline as a result of the sale of substantial amounts of our common stock, particularly sales by our directors, executive officers and significant stockholders, a large number of shares of our common stock becoming available for sale or the perception in the market that holders of a large number of shares intend to sell their shares. As of April 30, 2017, we have outstanding 32,007,136 shares of common stock.

Holders of a significant number of shares of our common stock have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or our stockholders.

In addition, the shares of common stock subject to outstanding options under our equity incentive plans and the shares reserved for future issuance under our equity incentive plans will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations.

If securities or industry analysts do not publish research or publish incorrect or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business, our market and our competitors. If no or few securities or industry analysts cover our company, the trading price for our stock would be negatively impacted. If one or more of the analysts who covers us downgrades our stock or publishes incorrect or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price or trading volume to decline.

The concentration of our capital stock ownership with insiders will likely limit your ability to influence corporate matters, including the ability to influence the outcome of director elections and other matters requiring stockholder approval.

Our executive officers, directors, current 5% or greater stockholders and affiliated entities together beneficially own approximately 39% of our common stock outstanding based on shares outstanding as of April 30, 2017. As a result, these stockholders, acting together, have significant influence over all matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate action might be taken even if other stockholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial.

Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from growing.

Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds to invest in future growth opportunities. Additional financing may not be available on favorable terms, if at all. If adequate funds are not available on acceptable terms, we may be unable to invest in future growth opportunities, which could seriously harm our business and operating results. If we incur debt, the debt holders would have rights senior to common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. Furthermore, if we issue additional equity securities, stockholders will experience dilution, and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. As a result, our stockholders bear the risk of our future securities offerings reducing the market price of our common stock and diluting their interest.

 

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The requirements of being a public company have subjected us to increased costs and will likely result in further increases in costs and may strain our resources and divert management’s attention.

As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes‑Oxley Act of 2002 (Sarbanes‑Oxley Act), the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the rules and regulations of the New York Stock Exchange (the “NYSE”). The requirements of these rules and regulations will increase our legal, accounting and financial compliance costs, will make some activities more difficult, time-consuming and costly and may also place undue strain on our personnel, systems and resources.

The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes‑Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing the costly process of implementing and testing our systems to report our results as a public company, to continue to manage our growth and to implement internal controls. We will be required to implement and maintain various other control and business systems related to our equity, finance, treasury, information technology, other recordkeeping systems and other operations. As a result of this implementation and maintenance, management’s attention may be diverted from other business concerns, which could adversely affect our business. Furthermore, we rely on third-party software and system providers for ensuring our reporting obligations and effective internal controls, and to the extent these third parties fail to provide adequate service including as a result of any inability to scale to handle our growth and the imposition of these increased reporting and internal controls and procedures, or to the extent we are unable to transition successfully to a new third-party software to manage our revenue recognition or similar system upgrades, we could incur material costs and our business could be materially affected.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.

In addition, we expect these laws, rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain appropriate levels of coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers.

As a result of disclosure of information in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the time and resources of our management and adversely affect our business and operating results.

As a result of the Merger, upon closing our common stock will no longer be publicly traded, and will be delisted from the NYSE. In addition, we will no longer file periodic reports with the SEC.

As a result of becoming a public company, we are obligated to further develop and maintain proper and effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.

We are required, pursuant to Section 404 of the Sarbanes‑Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for each fiscal year. This assessment will include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. Prior to our initial public offering (IPO), we have never been required to test our internal controls within a specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner. In addition, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes‑Oxley Act until the year following the date we are no longer an “emerging growth company” as defined in the Jumpstart Our Business Act (JOBS Act). If we are unable to comply with the requirements of Section 404 of the Sarbanes‑Oxley Act in a timely

 

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manner, the market price of our stock could decline and we could be subject to sanctions or investigations by the stock exchange on which our common stock is listed, the SEC or other regulatory authorities, which would require additional financial and management resources.

Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations. Any failure to implement and maintain effective internal controls also could adversely affect the results of periodic management evaluations regarding the effectiveness of our internal control over financial reporting. Ineffective disclosure controls and procedures or internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock.

Implementing any appropriate changes to our internal controls, including as may be necessary in connection with our transition to a new third-party software to manage our revenue recognition, may require specific compliance training of our directors, officers and employees, entail substantial costs in order to modify our existing accounting systems, and take a significant period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. In the event that we are not able to demonstrate compliance with Section 404 of the Sarbanes‑Oxley Act in a timely manner, that our internal controls are perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and our stock price could decline.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced financial disclosure obligations, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. We may take advantage of these provisions for up to five years or such earlier time that we are no longer an “emerging growth company.” We would cease to be an “emerging growth company” upon the earliest to occur of: the last day of the fiscal year in which we have more than $1.0 billion in annual revenue; the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; and the last day of the fiscal year ending after the fifth anniversary of our IPO. We may choose to take advantage of some but not all of these reduced reporting burdens. If we take advantage of any of these reduced reporting burdens in future filings, the information that we provide our security holders may be different than what you might get from other public companies in which you hold equity interests. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have chosen to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

We do not intend to pay dividends for the foreseeable future.

We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable future. In addition, the Amended SVB Agreement and the SVB Term Loan prohibit us from paying cash dividends, and future financing or credit agreements may contain similar restrictions. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in its value. Consequently, investors may need to sell all or part of their holdings of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares. Investors seeking cash dividends should not purchase our common stock.

 

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Provisions in our amended and restated certificate of incorporation and amended and restated bylaws and under Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that may have the effect of delaying or preventing a change in control of us or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us in certain circumstances.

Any provision of our amended and restated certificate of incorporation or amended and restated bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

a) Sales of Unregistered Securities

None.

b) Use of Proceeds from Public Offerings of Common Stock

On July 1, 2015, we completed our IPO of 7,909,125 shares of our common stock, which included 1,055,625 shares to cover over-allotments, to the public at the price of $8.00 per share. The offer and sale of all of the shares were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-204288), which was declared effective by the SEC on June 25, 2015. J.P. Morgan Securities LLC, Deutsche Bank Securities Inc., UBS Securities LLC, Needham & Company, LLC, and Oppenheimer & Co. Inc. acted as the underwriters. After deducting underwriting discounts and commissions, the aggregate net proceeds received totaled approximately $58.8 million, before offering costs of approximately $4.3 million.

On August 31, 2015, we repaid in full all amounts outstanding under the May 2013 Loan and Security Agreement, as amended (Wellington Agreement), in accordance with its terms using a portion of the proceeds from the IPO. The principal balance outstanding under the Wellington Agreement was $15.4 million and had a fixed term interest rate of 9.5% per annum. The terms of the Wellington Agreement are described in further detail elsewhere in this report. Other than this debt repayment, there has been no material change in the planned use of proceeds from our IPO as described in our IPO Prospectus.  We invested the remaining funds received in the IPO in money market funds.

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

 

 

 

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ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

 

ITEM 5. OTHER INFORMATION

Not applicable.

 

 

ITEM 6. EXHIBITS

Exhibits

The Exhibits listed in the Index to Exhibits of this quarterly report on Form 10-Q are incorporated by reference or are filed with this quarterly report on Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).

 

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: June 8, 2017

 

 

 

 

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Exhibit Index

 

 

 

 

 

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