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EX-32.1 - PEO 906 CERTIFICATION - IMPERVA INCimpv-ex321_6.htm
EX-32.2 - PFO 906 CERTIFICATION - IMPERVA INCimpv-ex322_7.htm
EX-31.2 - PFO 302 CERTIFICATION - IMPERVA INCimpv-ex312_12.htm
EX-31.1 - PEO 302 CERTIFICATION - IMPERVA INCimpv-ex311_11.htm
EX-23.1 - EY CONSENT - IMPERVA INCimpv-ex231_77.htm
EX-21.1 - SUBSIDIARIES - IMPERVA INCimpv-ex211_78.htm
EX-10.15 - EX-10.15 - IMPERVA INCimpv-ex1015_391.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

(Mark One)

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

For the Fiscal Year Ended December 31, 2017

OR

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

Commission file number: 001-35338

 

Imperva, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

03-0460133

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

3400 Bridge Parkway

Redwood Shores, California 94065

(Address of Principal Executive Offices, including Zip Code)

(650) 345-9000

(Registrant’s Telephone Number, including Area Code)

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

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, par value $0.0001 per share

 

The NASDAQ Stock Market LLC

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

None

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes      No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.      

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or 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. (Check one):

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

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

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

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2017 (the last business day of the registrant’s most recently completed second fiscal quarter), based upon the closing price of the common stock reported by the Nasdaq Stock Market LLC on such date, was approximately $1,608 million. Shares of common stock held by each executive officer and director of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of outstanding shares of the registrant’s common stock as of February 14, 2018 was 34,565,641.

 

 

 

 


2017 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

 

 

 

Page

PART I

 

Item 1.

Business

1

Item 1A.

Risk Factors

10

Item 1B.

Unresolved Staff Comments

29

Item 2.

Properties

29

Item 3.

Legal Proceedings

29

Item 4.

Mine Safety Disclosures

30

 

 

PART II

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

31

Item 6.

Selected Financial Data

34

Item 7.

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

36

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

56

Item 8.

Financial Statements and Supplementary Data

56

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

94

Item 9A.

Controls and Procedures

95

Item 9B.

Other Information

95

 

 

PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance

96

Item 11.

Executive Compensation

96

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

96

Item 13.

Certain Relationships and Related Transactions, and Director Independence

96

Item 14.

Principal Accountant Fees and Services

96

 

 

PART IV

 

Item 15.

Exhibits and Financial Statement Schedules

97

Signatures

100

 

 

Documents Incorporated by Reference

 

Portions of the definitive proxy statement for our 2017 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.  We intend to file the definitive proxy statement with the Securities and Exchange Commission, or SEC, within 120 days of the year ended December 31, 2017.

 

Forward Looking Statements

The information in this Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. Words such as “may,” “will,” “should,” “could,” “estimate,” “predict,” “potential,” “continue,” “strategy,” “believe,” “anticipate,” “plan,” “expect,” “intend” and similar expressions or variations are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed elsewhere in this Annual Report on Form 10-K in the section titled “Risk Factors” and the risks discussed in our other filings with the SEC. We undertake no obligation to publicly release any revisions to the forward-looking statements after the date of this Annual Report on Form 10-K.

 

 

 

 


 

PART I

Item 1. Business

Overview

We are a cyber security leader that delivers best-in-class solutions to protect data and applications on-premises, in the cloud, and across hybrid environments. As organizations worldwide undergo digital transformation, particularly as they transition their data and applications from on premises to the cloud, their day-to-day operations are increasingly complex. They have a need for solutions that can support both environments and we believe we are uniquely positioned to help them manage their hybrid environments. Extortion and theft by cybercriminals, using an evolving array of sophisticated attacks, continuously threaten applications and data wherever they reside. Organizations are facing numerous challenges in providing the visibility and control required to protect these business-critical applications and data from attack. Adoption of new technologies and architectures, such as mobile applications, web applications, application to application interfaces and big data, increases the complexity of, opens access to, and increases the vulnerability of business-critical data and applications. The increasing use of virtualization technologies and cloud delivery models, including unsanctioned, employee-adopted applications, known as “shadow IT,” is forcing organizations to operate outside of the traditional security model. Additionally, organizations must comply with complex regulatory standards enacted to ensure they protect their systems and data. We believe that these challenges are driving a greater need for cyber security solutions that protect applications and data, wherever they reside - on-premises, in the cloud, and across hybrid environments.

Our cyber security solutions directly protect the business critical data and applications that are being attacked, and are designed to fill the gaps left by existing endpoint and network or perimeter security solutions. Our cloud offerings protect against the unique threats created as enterprises increasingly deploy their applications and store their data in the cloud and allow our customers to take advantage of the flexibility and cost-efficiency offered by cloud-based solutions.

Our Imperva SecureSphere platform provides database, file and web application security across various physical and virtual systems in data centers, including those in traditional on-premises data centers as well as in private, public and hybrid cloud computing environments. Our Imperva Incapsula product line provides cloud-based website security, denial of service protection and performance solutions that do not require software or hardware changes. Our Imperva CounterBreach product line uses machine learning to analyze how users access data and to spotlight data breach activity. Our Imperva Camouflage product line pseudonymizes and anonymizes sensitive data by masking it so it can be safely used in development, testing, warehouses and analytical stores.

Business Highlights for the Year Ended December 31, 2017

In February 2017, we sold the assets of our Skyfence Networks Ltd. business to Forcepoint LLC for approximately $40 million in cash.

In March 2017, we introduced our FlexProtect licensing program to give customers access to our on-premises and hybrid solutions for data and applications under a single license.  Designed to give customers the flexibility to use Imperva products, regardless of where data and applications are initially deployed or migrated, Imperva FlexProtect directly supports dynamic hybrid cloud deployments and provides needed investment protection to manage this transition.

We also experienced several changes on the executive management team during 2017 and in early 2018 that led to the rollout of new strategic initiatives. In August 2017, Christopher Hylen joined as our new President and Chief Executive Officer and undertook a review of our strategy and operations, with oversight from the Board of Directors. In January 2018, Mike Burns joined as our new Chief Financial Officer. On January 22, 2018, we announced organizational changes designed to allow us to focus on customers and product innovation and to drive operational efficiencies.

As part of the reorganization, we unified disjointed teams under sales, marketing, product management and product development to drive more cohesive go-to-market product strategies, and to increase efficiencies. We also created a new customer success function and appointed Sunil Nagdev as Chief Customer Officer to improve our customer renewal process and delivery of our subscription services. We plan to reallocate in excess of $10.0 million to fund incremental investments in the new initiatives and growth priorities.  

On February 8, 2018, we announced our strategy to transform into the world’s leading hybrid security company, accelerate our go-to-market and simplify how we do business. We declared our key growth priorities to invest in world-class cloud experiences, create actionable insights through data and analytics and deliver innovative new services that extend our offerings.

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As of December 31, 2017, Imperva had over 5,900 end user customers in more than 100 countries. For purposes of this end user customer count, we refer to end user customers who purchased directly through our sales force or indirectly through channel partners. In addition, our solutions are used to protect thousands of organizations through cloud-based deployments with our Software-as-a-Service, or SaaS, customers and managed security service providers, or MSSPs, and hosting partners. We primarily sell our products and services through our network of channel partners worldwide, including both distributors and resellers, which provide sales and support leverage to our sales organization. As of December 31, 2017, we had more than 280 direct and 580 indirect channel partners worldwide. We generated revenue of $321.7 million in 2017, an increase of 22% over the $264.5 million in revenue we generated in 2016. Net income (loss) attributable to our stockholders was $22.9 million in 2017 as compared to ($70.3) million in 2016.  

Our Strategy

Our goal is to extend our leadership position in the cyber security market and to be the world’s leading hybrid security company. Key elements of our growth strategy include:

 

Focus on hybrid opportunities as businesses continue to adopt cloud computing. Our customers are increasingly migrating from on premises to the cloud, which we see as a tremendous opportunity as these companies have a need for solutions to support both environments. We believe we are uniquely positioned to help them with our hybrid capabilities and pricing models such as FlexProtect. We intend to invest in and deliver the tools required to help customers quickly and easily navigate the transition from on premises to the cloud. As a leading provider of cyber security solutions, we believe we are well positioned to benefit as our customers expand the scope of their cyber security and compliance initiatives on premises, in the cloud and across hybrid environments.

 

Accelerate our go-to-market efforts by driving increased sales to customers. We have implemented a new strategy to improve how we serve our customers and leverage strategic partners in targeted vertical and global markets. We have historically aligned our go-to-market efforts around our products. We intend to transition to focus more on our customers. For example, as part of the reorganization we created a Customer Success function led by our Chief Customer Officer to improve the customer experience. In addition, we made substantive changes to our partner program, including an increased focus on our most strategic partners and changes in incentives to align with our mutual outcomes and will also have an increased focus on cloud platforms.  

 

Simplify how we do business.  Our products solve complex and important security problems for our customers. We have talked to employees, customers and partners and, based on their feedback, we believe we can make buying, implementing and consuming our products and services easier for all of our constituents. We will be focused going forward on simplification and ease in our touch points with customers and partners.

 

Enhance and extend our leadership position through technology and product innovation. We intend to continue to invest in product upgrades, product line extensions and the development of new products and services that address emerging cyber security and regulatory compliance requirements and to maintain our technological advantages. We also intend to continue to invest in advanced threat research and increase our threat intelligence leadership, as well as our research and development efforts in cyber security for cloud computing environments.

 

Pursue strategic acquisition and partnership opportunities. We intend to pursue targeted acquisition and partnership opportunities to continue to broaden our technology and offerings and better enable organizations to protect applications and data on premises, in the cloud and across hybrid environment.

On-Premise, Cloud and Hybrid Products

Our products include our Imperva SecureSphere platform, Imperva CounterBreach and Imperva Camouflage for enterprise data centers, and our Imperva Incapsula offering for cloud-based security services.

Our SecureSphere, CounterBreach and Camouflage product lines secure business-critical applications and data in physical and virtual data centers from hackers and malicious insiders.  These products also provide an accelerated and cost-effective route to address regulatory compliance and establish a repeatable process for data risk management. Our SecureSphere products are built on a common modular platform, which includes a single operating system and common code base. All of our SecureSphere products can be managed either individually as stand-alone appliances or collectively from our SecureSphere MX Management Server. Our SecureSphere MX Management Server provides a single, centralized point for aggregating and managing SecureSphere security policies, real-time monitoring, logging, auditing and compliance reporting, customizable reporting and in-depth analytics. With the SecureSphere MX Management Server, administrators can simultaneously manage our database, file and web security products from a single console. CounterBreach uses machine learning to analyze how users access structured data, unstructured data, and data in the cloud in order to spotlight dangerous data access and use.  Camouflage data masking discovers where sensitive data resides, prioritizes what data should be masked and masks it.

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Our Incapsula service is purpose-built to deliver cloud-based website security, DDoS, or distributed denial of service protection and load balancing and failover, all of which are fully integrated with, and built on top of, a global content delivery network. Our Incapsula service can be deployed easily without requiring any additional hardware or software to be installed and is accessible to businesses of all sizes that want to maximize the security, speed and availability of their websites. It is also Payment Card Industry and SOC 2 Type II certified.  Without needing to purchase or install any hardware or software to use our Incapsula service, we estimate that most customers can set up our Incapsula service in less than ten minutes. Our customers typically begin using our Incapsula service by changing their website’s Domain Name System setting to route traffic to the Incapsula network. The global network of Incapsula servers apply security and optimization solutions to traffic on our customers’ websites according to the Incapsula service options they purchase. The screened, filtered and optimized traffic is then routed by the Incapsula network to the customer’s websites.

We sell our SecureSphere products primarily using perpetual software licenses installed on hardware appliances or virtual appliances. We sell our cloud-based products and services using subscription-based pricing plans. We also sell our ThreatRadar services as separate, add-on subscription services to our SecureSphere appliances.

We organize our product lines into customer-focused capability areas based on their ability to protect applications or data against attacks.

Application Protection

 

SecureSphere Products

 

 

 

 

 

SecureSphere Web Application Firewall: Protects business-critical web applications and data

 

We believe that our SecureSphere Web Application Firewall, or WAF, is one of the industry’s leading solutions for protecting web assets from application attacks. Our SecureSphere WAF protects our customers’ business-critical applications and data from large scale cyber-attacks, adapts to evolving threats to protect against data breaches and enables compliance with regulatory requirements. Our web application security products can be deployed as a physical or virtual appliance based on the feature and traffic capacity requirements of our customers. Key capabilities of our SecureSphere WAF include dynamic identification of legitimate web application usage, fortification of web defenses with research-driven intelligence on current threats from the Imperva Defense Center, IDC, alerts and requests blocking as well as virtual patching of application vulnerabilities.

 

 

 

ThreatRadar Products

 

 

 

 

 

ThreatRadar: Provides reputation and crowdsourced security intelligence services

 

ThreatRadar Reputation Services recognizes attack sources and dynamically adjusts web security policies within our SecureSphere WAF to provide protection against attacks.

 

 

 

 

 

ThreatRadar Community Defense, a part of ThreatRadar Reputation Services, delivers crowd-based threat intelligence to SecureSphere WAF. ThreatRadar Community Defense gathers attack data from SecureSphere deployments around the world and uses algorithms to translate this data into attack patterns, policies and reputation data.

 

 

 

 

 

ThreatRadar Bot Protection Services uses a client classification engine to analyze and classify incoming website traffic, and to distinguish between human and bot traffic. It also identifies good and bad bots and classifies traffic by browser type. The intelligence it collects during this process is then used by SecureSphere to drive WAF policy enforcement.

 

 

 

 

 

ThreatRadar Account Takeover Protection protects web application accounts from being compromised by cybercriminals. The product combines awareness of credentials known to be compromised, knowledge of login device reputation and risk, detection of credential stuffing and dictionary attacks against passwords, and analysis of behavior across multiple devices and accounts to identify account takeover attempts and compromised accounts, protecting against hackers before they gain access to protected web applications and services.

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Incapsula Products

 

 

 

 

 

Incapsula Website Security: Blocks attacks against web applications to promote website safety and availability

 

Incapsula Website Security is a PCI-certified service with advanced bot detection and mitigation. It protects websites and applications against application layer hacking attempts and blocks scrapers, vulnerability scanners and content spammers that overload servers and steal content. Our cloud-based approach, coupled with crowdsourcing techniques, enables us to anonymously harness real data from our customer base to better understand the global attack landscape and continually improve security.

 

 

 

Incapsula Content Delivery Network: Optimizes website performance

 

Incapsula Content Delivery Network, or CDN, is a globally distributed network of data centers that delivers full site acceleration through intelligent caching and content optimization tools. The CDN is application-aware and dynamically profiles website resources and identifies cacheable, dynamic and static content, including content that other CDNs consider uncacheable.

 

 

 

Incapsula DDoS Protection: Safeguards networks, applications and DNS servers from volumetric and protocol-based DDoS attacks

 

Incapsula reroutes traffic through the Incapsula network, and subjects it to progressively more stringent layers of protection. Using sophisticated security rules and challenges, Incapsula is able to identify and filter out DDoS attack traffic, while allowing legitimate traffic to flow unhindered to protected applications such as websites, email, and FTP.

 

 

 

Incapsula Load Balancing: Balances web traffic load across multiple web servers

 

Incapsula Load Balancing provides layer 7 load balancing and failover as a service, so organizations can replace costly appliances with an enterprise-grade, cloud-based solution. The service supports in-datacenter and cross-datacenter high availability scenarios. It also provides real-time health monitoring to ensure that traffic is routed to a viable web server.

 

 

 

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Data Protection

 

SecureSphere Products

 

 

 

 

 

SecureSphere Database Firewall and Database Activity Monitoring: Secures business-critical data in structured repositories

 

SecureSphere Database Firewall and Database Activity Monitoring secure business-critical data in structured repositories in the data center. They provide comprehensive visibility and control over structured business data repositories, including database data usage, vulnerabilities, and access rights, and enable security, audit, risk and IT professionals to improve data security and address compliance requirements. SecureSphere can be deployed as a physical or virtual appliance, based on the feature and traffic capacity requirements of our customers. SecureSphere Database Firewall and Database activity monitoring protect relational and big data databases running on distributed platforms and IBM z/OS.

 

 

 

SecureSphere Database Assessment Server: Finds sensitive data and runs assessments

 

SecureSphere Database Assessment Server automates the process of discovering databases and sensitive business data on the network and performs a security assessment to identify risks to business-critical data. It identifies database vulnerabilities and measures compliance with industry standards and best practices using tests and assessment policies. By identifying where databases and sensitive data are located on the network, and which databases are vulnerable or misconfigured, Database Assessment Server helps organizations prioritize their database risk mitigation efforts.

 

 

 

SecureSphere User Rights Management for Databases: Establishes automated access rights review process and demonstrates compliance

 

SecureSphere User Rights Management for Databases automatically aggregates user rights across heterogeneous databases. This enables organizations to establish an automated access rights review process, identify excessive user rights, and demonstrate compliance with regulations such as Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 and requirements 7 and 8.5 of the PCI Data Security Standards.

 

 

 

SecureSphere File Firewall: Protects file access activity to ensure business-critical data and applications are secured

 

SecureSphere File Firewall secures unstructured data, including spreadsheets, presentation slides, word processing documents, videos and PDFs that contain business critical data and applications that our customers store in unstructured repositories, such as file servers, content management repositories, network-attached storage and storage area network devices. It provides full visibility and control over unstructured business data repositories, including file ownership, usage and access rights, and enables security, audit, risk and IT professionals to improve file data security and address compliance requirements. SecureSphere File Firewall can be deployed as a physical or virtual appliance based on feature and traffic capacity requirements of our customers.

 

 

 

CounterBreach Product

 

 

 

 

 

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CounterBreach:  Designed to protect enterprise data from theft and loss due to compromised, malicious and careless users

 

CounterBreach uses machine learning to analyze how users access data in order to spotlight dangerous data access and use. CounterBreach complements machine learning with non-invasive deception technology to identify compromised end-point devices. By dynamically learning normal data access patterns and then finding anomalies, CounterBreach proactively alerts IT teams to dangerous behavior.

 

CounterBreach provides a multi-layered solution that provides direct visibility into which users access what data, giving IT organizations

insight into the ‘who,’ ‘what’ and ‘when’ of access to sensitive information; combines Imperva expertise in monitoring and protecting data with advanced machine learning to spotlight dangerous user data access activity and applies non-invasive deception techniques to identify compromised end-points.

 

 

 

Camouflage Product

 

 

 

 

 

Imperva Camouflage Data Masking: Creates realistic, functional data for development, testing, and training by disguising sensitive information while maintaining the characteristics of the original data.

 

Imperva Camouflage Data Masking is designed to reduce data breach risk by replacing sensitive data in non-production systems, including test and development systems or data warehouses and analytical data stores, with realistic fictional data. The fictional data maintains referential integrity and is statistically accurate enabling testing, analysis and business processes to operate normally. Imperva Camouflage data masking protects data from theft and helps ensure compliance with regulations governing data transfers and data protection.  

 

Technology

Our solutions include several proprietary technologies described below.

SecureSphere

 

Dynamic Profiling: Allows customers to create and monitor security policies based on actual application and database behavior, automatically recognizes valid application and database changes over time and automatically updates the profile according to these application and database changes, enabling faster identification and deployment of application protection.

 

Universal User Tracking: Helps customers achieve the primary requirements of any audit and security process by tracking the individual end user that accessed or modified business data, including web application user tracking, web to database user tracking, SQL connection user tracking and direct user tracking that collectively enable our solution to audit end users regardless of how they connect to the database.

 

Transparent Inspection: Provides application layer security without needing to intermediate web connections, allowing our solution to inspect traffic without any significant impact on performance, latency or availability.

 

Correlated Attack Validation: Provides our customers with protection against malicious activity by analyzing multiple data points, tracking events over time and correlating disparate events to identify and block sophisticated attacks.

Incapsula

 

Client Classification Engine: Analyzes and classifies all incoming traffic to a website, distinguishes between human and bot traffic, identifies “good” and “bad” bots, and classifies traffic by browser type. While this technology was originally developed on the Incapsula service, we recently incorporated the technology into our ThreatRadar Bot Protection Services, which is a SecureSphere add-on service.

Camouflage

 

Data Masking System: Static masking software that creates realistic, fully functional data for development, testing and training by disguising sensitive information while maintaining the characteristics of the original data.

 

Data Masking across Multiple Systems: Allows masked data to be used across different technology platforms while maintaining the consistency of the data’s characteristics across those platforms.

Maintenance and Support

We offer our customers ongoing product support services for both hardware and software. These maintenance programs are typically sold to customers for one- to three-year terms at the time of the initial product sale and typically renew for successive one- to three-year periods. We offer premium levels of service which include advance replacement and greater call center availability. While

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some of our channel partners provide tier one support, including MSSPs and data center hosting providers, in most instances we provide tier one level support and above.

Our IDC updates are included with maintenance and support contracts. The service consists of a content delivery mechanism by which we can distribute product content enhancements to our customers. Our IDC update servers deliver various types of security content to our appliances deployed in the field without the need for our customers to install a software patch or upgrade. Examples of IDC updates include new security signatures and policies for our WAF, new database assessment tests for our discovery and assessment server and new audit policy functionality for our database products.

Professional Services and Training

Our professional services consultants assist our customers in the deployment and configuration of our products. These fee-based services, provided by our professional services consultants, include providing advice on deployment planning, network design, product configuration and implementation, automating and customizing reports and tuning policies and configuration of our products for the particular characteristics of the customer’s environment. Additionally, we provide our customers with fee-based, hands-on training classes for our solution that are offered regularly and in different parts of the world.

Customers

We provide products and services to a variety of customers worldwide, including some of the world’s largest banks, retailers, insurers, technology and telecommunication companies and hospitals, as well as U.S. and other national, state and local government agencies. As of December 31, 2017, Imperva had over 5,900 customers in more than 100 countries. In addition, our solutions are used to protect thousands of organizations through cloud-based deployments with our SaaS customers and our MSSPs and hosting partners.

In 2017, 2016 and 2015, we had one reseller that represented 12%, 13% and 18% of our total revenue respectively. In 2017, 2016 and 2015, we generated approximately 60%, 63% and 67% of our revenue from customers in the Americas and approximately 40%, 37% and 33% from customers outside of the Americas, respectively. See Note 13 of “Notes to Consolidated Financial Statements” for information about segment disclosures and revenue by customer geographic regions.

Sales and Marketing

We believe that our hybrid sales model, which combines the leverage of a channel sales model with the account control of a direct sales model, has played an important role in our success to date. Our hybrid model employs a direct touch sales organization and an overlay channel sales team that actively assist our extensive network of channel partners throughout the sales process. We primarily sell our products and services to our customers through our channel partners, including distributors and resellers. In 2017, our channel partners originated over 57% of our sales and fulfilled almost 84% of our sales. Although our products are designed for turnkey deployment, they are highly customizable, which allows our channel partners to provide a variety of value added services to our customers. As of December 31, 2017, our network of channel partners included more than 280 direct and 580 indirect partners worldwide, including leading security distributors, value added resellers and some of the world’s largest hosting companies.

Sales

We support the sales of our products and services with a team of experienced channel account managers, sales professionals and sales engineers who provide business planning, joint marketing strategy, and pre-sales and operational sales support. Our overlay channel team is responsible for managing relationships with our resellers, MSSPs and distributors. Our sales professionals are responsible for assisting channel partners in gaining and supporting key customer accounts and acting as liaisons between the end customers and our marketing and product development organizations. Our sales professionals and sales engineers also directly engage with customers to address their unique security and deployment requirements. We also have an inside sales team that is principally focused on lead generation for our reseller partners and regional sales professionals. To support our broadly dispersed global channel and customer base, we had sales personnel in 27 countries as of December 31, 2017. We plan to continue to invest in our sales organization to support our growth, including through increased sales through our channel partners.

Marketing

We believe the market for cyber security continues to grow rapidly and our marketing strategy is focused on building market awareness of the benefits of our solutions, investing in our brand to drive customer demand for our security solutions, extending our leadership in the cyber security market and enabling both our direct and channel sales models. We execute this strategy by leveraging a combination of internal marketing professionals and a network of regional and global channel partners. Our internal marketing organization is responsible for building brand awareness, driving demand generation, supporting channel enablement and product

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marketing, and working with our business operations team to support channel marketing and sales support programs. We focus our resources on targeted, integrated activities that can be leveraged by partners worldwide to extend our reach. Our marketing efforts include public and analyst relations, online and offline awareness building and demand generation, seminars, tradeshows, webinars, digital and website marketing, building sales tools and collateral information regarding product awards and technical certifications and social media outreach on channels such as LinkedIn, Facebook and Twitter, and including our data security blog. Our marketing programs help connect us with potential buyers along paid, earned, shared and owned channels.

Research and Development

Our research and development efforts focus primarily on improving and enhancing our existing security products and services, as well as developing new products, features and functionality and conducting advanced security research. We conduct our research and development activities primarily in Israel, with small engineering teams in Redwood Shores, California; Austin, Texas; St. John’s, Newfoundland and Labrador, Canada and Kiev, Ukraine. We believe this provides us with access to some of the best engineering talent in the security industry. As of December 31, 2017, we had 325 employees dedicated to research and development, including our advanced security research group, the IDC.

When considering product improvements and enhancements, we communicate with our customers and partners who provide significant feedback for product development and innovation. We regularly release new versions of our products incorporating these improvements and enhancements. Our research and development team works with our customer support group to resolve escalated support issues by providing consultation, bug fixes and patches. Our research and development team also provides technical assistance to our other departments, including to our sales team by overseeing product pilots for potential customers.

In addition to enhancing our products and services, our research and development organization includes our IDC team. We believe our IDC team is an important differentiator for us in the security marketplace. Our IDC team performs security analysis, tracks hackers and trends in the hacker community and undertakes vulnerability discovery, in addition to providing us with regulatory compliance expertise. IDC research combines extensive lab work with hands-on testing in real world environments to ensure that our products, through advanced data security technology, deliver up-to-date threat protection and leading compliance automation. Our IDC has discovered numerous commercial application vulnerabilities and has issued numerous security advisories, providing insight into both published and unpublished security threats to help commercial application and database vendors and security professionals. Our IDC’s “Hacker Intelligence Initiative” focuses on improving risk management by tracking hackers, developments in attack techniques and potential targets in known hacker forums and chat rooms.  In prior years, the IDC also issued a Web Application Attack Report that provided an in-depth view of the threat landscape for the year, including hacking trends, the latest cyber-crime business models and breach analysis by geography, industry and attack type.  The IDC’s research is also the foundation for many of our products, product features and services, including attack signature updates, database vulnerability assessments, pre-defined compliance reports and the engine and analysis behind our crowdsourced security intelligence service, ThreatRadar Community Defense. We deliver automated feeds from our IDC to our products in the field to ensure that our customers are always armed with the latest defenses against new threats, and the most recent regulatory compliance best practices.

Our research and development expense was $63.5 million, $62.4 million and $53.4 million in 2017, 2016 and 2015, respectively.

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Intellectual Property

To protect our intellectual property, both domestically and abroad, we rely primarily on patent, trademark, copyright and trade secret laws. As of December 31, 2017, we had 38 issued patents and 16 pending patent applications in the United States. The claims for which we have sought patent protection relate primarily to methods, computer programs, devices and systems we have developed for our products. We also license software from third parties for integration into our products, including open source software and other software available on commercially reasonable terms.  Our industry is characterized by the existence of a large number of relevant patents and frequent claims and related litigation regarding patent and other intellectual property rights. For more information about risks related to our and third party intellectual property rights see the section entitled “Risk Factors—Risks Related to our Business— Assertions by third parties of infringement or other violations by us of their intellectual property rights could result in significant costs and substantially harm our business and operating results”; “—We rely on the availability of licenses to third-party software and other intellectual property, the loss of which could increase our costs and delay software shipments”; “—Our products contain “open source” software, and any failure to comply with the terms of one or more of these open source licenses could negatively affect our business”; and “—Failure to protect our proprietary technology and intellectual property rights could substantially harm our business and operating results.”

Manufacturing and Suppliers

Our security hardware appliance products are manufactured to our specifications by Caswell, Inc. and to a lesser extent Lanner Electronics Incorporated. Both are Taiwanese original design manufacturers of network appliance hardware products. We have entered into non-exclusive contracts to purchase these hardware appliances from American Portwell Technology, Inc. (a wholly owned subsidiary of Portwell, Inc.) and Lanner Electronics USA, Inc., which are value-added distributors of these products.

The value-added distributors receive the hardware appliances from the manufacturer, configure and install our proprietary software on the appliances and then undertake quality testing at their fulfillment centers. They then ship our appliances directly to our distributors, resellers or customers or our logistics partner, Base Logistics BV. We hold inventory in their fulfillment centers and in our logistics partner’s warehouses, in anticipation of orders for new appliances and to support our advance replacement program with new and repaired appliances. In addition, our contracts with our value-added distributors govern their use of our intellectual property and allocate the responsibilities for warranty repair, out of warranty repair and replacement costs with respect to damaged and defective products. These contracts remain in effect until terminated by either party. The contracts are terminable by us for any reason upon six months’ notice, by the value-added distributors upon nine months’ notice or by either party for an uncured material breach.

We currently work with and provide the value-added distributors with rolling product demand forecasts, but our contracts contain no obligation for us to purchase any minimum amount of products. We submit purchase orders that describe the types and quantities of our products to be manufactured, the delivery dates and other delivery terms. Upon submitting the purchase orders, we are committed to purchase inventory within six months from the date the inventory arrived at the vendor’s warehouse.

We believe that having third parties manufacture, configure and test our products and provide a substantial portion of our logistics enables us to efficiently allocate capital, better adjust manufacturing volumes to meet changes in demand and more quickly deliver products, allowing us to focus resources on our core competencies.

The hardware components included in our products are sourced from various suppliers by our manufacturers and are principally industry standard parts and components that are available from multiple vendors. We have limited sources of supply for certain key components of our products, such as semiconductors, printed circuit boards and hard disk drives, which exposes us to the risk of component shortages or unavailability. For more information on risks related to product manufacturing and availability of components, see the section entitled “Risk Factors–Risks Related to Our Business–Delays or interruptions in the manufacturing and delivery of SecureSphere appliances by our manufacturers may harm our business.”

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Competition

The market for cyber security solutions is intensely competitive and we expect competition to increase in the future. Our primary competitors by product area include:

 

Database security. International Business Machines Corporation and Oracle Corporation

 

File security. Dell EMC Corporation, Symantec Corporation and Varonis Systems, Inc.

 

Web application security and DDoS. Akamai Technologies, Inc. and F5 Networks, Inc.

We believe that the principal competitive factors affecting the market for cyber security solutions include breadth of product offerings, security effectiveness, manageability, reporting, technical features, performance, ease of use, price, professional services capabilities, distribution relationships and customer service and support. We believe that our solutions generally compete favorably with respect to such factors.

Employees

As of December 31, 2017, our total headcount was 1,020 employees, with 325 in research and development, 373 in sales and marketing, 117 in services and support, 80 in operations and 125 in a general and administrative capacity. As of December 31, 2017, our headcount was 458 people in the United States, 449 in Israel and 113 in other countries. None of our employees is represented by a labor union with respect to his or her employment with us. We have not experienced any work stoppages, and we consider our relations with our employees to be good.

Available Information

Our Internet address is www.imperva.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports are available on the Investor Relations section of our website free of charge, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information found on our website is not part of this or any other report we file with or furnish to the SEC. The SEC also maintains an Internet website that contains reports, proxy and information statements and other information regarding registrants, such as Imperva, that file electronically with the SEC. The address of the website is www.sec.gov. In addition, you may read and copy any filing that we make with the SEC at the public reference room maintained by the SEC, located at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room.

 

Item 1A.

Risk Factors

Risks Related to Our Business

We have a history of losses, we may not remain profitable and our revenue growth may not continue.

We have incurred net losses in each fiscal year since our inception, including net losses of $48.9 million in 2015 and $70.3 million in 2016.  While we generated net income of $22.9 million in 2017, we had an accumulated deficit of $256.5 million as of December 31, 2017. We may not remain profitable in the future if we fail to increase revenue and manage our expenses, or if we incur unanticipated liabilities. Revenue may decline or its growth may slow for a number of possible reasons. Demand for our products or services may slow. Competition may increase. Our overall market may experience a decline or its growth may slow. We may experience difficulty executing on our go-to-market sales plan. We may fail to capitalize on growth opportunities such as subscription renewals and introducing new products and services. In addition, we have incurred, and anticipate that we will continue to incur, significant legal, accounting and other expenses relating to being a public company. If our revenue does not increase at a rate that proportionally offsets these expected increases in operating expense, our operating margins will suffer. Further, in future periods, our revenue could decline and, accordingly, we may not be able to sustain profitability and our net losses may increase. We may not be able to sustain or increase profitability on a consistent basis. Any failure by us to maintain or increase profitability and continue our revenue growth could cause the price of our common stock to materially decline.

Our quarterly operating results have and are likely to continue to vary significantly and to be unpredictable, which could cause the trading price of our stock to decline.

Our revenue and operating results have and could continue to vary significantly from period to period as a result of a variety of factors, many of which are outside of our control. As a result, comparing our revenue and operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. We may not be able to accurately predict our future revenue or results of operations. We base our current and future expense levels on our operating plans and sales forecasts, and our operating costs are relatively fixed in the short-term. As a result, we may not be able to reduce our costs

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sufficiently to compensate for an unexpected shortfall in revenue, and even a small shortfall in revenue could disproportionately and adversely affect financial results for that quarter. If our revenue or operating results fall below the expectations of investors or any securities analysts that cover our stock, the price of our common stock could decline substantially.

In addition to other risk factors listed in this section, factors that may individually or cumulatively affect our operating results from period to period include:

 

the level of demand for our products and services, and the timing of orders from our channel partners and customers;

 

the timing of sales and shipments of products during a quarter, which may depend on many factors such as inventory and logistics and our ability to ship new products on schedule and accurately forecast inventory requirements;

 

the mix of products sold, the mix of revenue between products and services, including subscription services, and the degree to which products and services are bundled and sold together for a package price;

 

the budgeting, procurement and work cycles of our customers, which may result in seasonal variation as our business and the market for solutions such as ours mature;

 

changes in customer renewal rates for our services;

 

general economic conditions, both domestically and in our foreign markets, and economic conditions specifically affecting industries in which our customers participate;

 

the timing of satisfying revenue recognition criteria for our sales, including shipping and delivery terms, particularly where we accrue the associated commission expense in a different period, which may be affected by the extent to which we bring on new resellers and distributors, and our ability to establish vendor-specific objective evidence of fair value, or VSOE, for new products and maintain VSOE for maintenance and services;

 

future accounting pronouncements or changes in our accounting policies; and

 

increases or decreases in our expenses caused by fluctuations in foreign currency exchange rates, since a significant portion of our expenses are incurred and paid in the Israeli shekel and other currencies besides the U.S. dollar.

Reliance on a concentration of shipments at the end of the quarter could cause our revenue to fall below expected levels, resulting in a decline in our stock price.

Historically, we have received a significant majority of a quarter’s sales orders and generated a significant majority of a quarter’s revenue during the last two weeks of the quarter. The fact that so many orders arrive at the end of a quarter means that our revenue may shift from one quarter to the next if we cannot fulfill all of the orders and satisfy all of the revenue recognition criteria under our accounting policies before the quarter ends.

This pattern is a result of customer buying habits and the efforts of our sales force and channel partners to meet or exceed quarterly quotas. If expected revenue at the end of any quarter is delayed because anticipated purchase orders fail to materialize, our logistics partners fail to ship or deliver products on time, we fail to manage our inventory properly, we fail to release new products on schedule, or for any other reason, then our revenue for that quarter could fall below our expectations or those of securities analysts and investors, resulting in a decline in our stock price.

We rely on third party channel partners to generate a significant portion of, and to fulfill a substantial majority of, our sales. If we fail to expand and manage our distribution channels, our revenue could decline and our growth prospects could suffer.

In 2017, our channel partners originated over 57%, and fulfilled almost 84%, of our sales, and we expect that channel sales will represent a substantial portion of our revenue for the foreseeable future. Our ability to expand our distribution channels depends in part on our ability to educate our channel partners about our products and services, which are often complex. Our agreements with our channel partners are generally non-exclusive and many of our channel partners have more established relationships with our competitors. If our channel partners choose to place greater emphasis on products and services of their own or those offered by our competitors, our ability to grow our business and sell our products may be adversely affected. If our channel partners do not effectively market and sell our products and services, or if they fail to meet the needs of our customers, then our ability to grow our business and sell our products may be adversely affected. The loss of one or more of our larger channel partners, who may cease marketing our products with limited or no notice, and our possible inability to replace them could adversely affect our sales. Our failure to recruit additional channel partners, or any reduction or delay in their sales of our products and services or conflicts between channel sales and our direct sales and marketing activities could materially and adversely affect our revenue.

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We face intense competition, especially from larger, better-known companies and we may lack sufficient financial or other resources to maintain or improve our competitive position.

The market for cyber security products is intensely competitive and we expect competition to intensify in the future. Our competitors include companies such as Akamai Technologies, Inc., F5 Networks, Inc., International Business Machines Corporation (“IBM”), Oracle Corporation (“Oracle”) and other point solution security vendors.

Many of our existing and potential competitors may have substantial competitive advantages such as:

 

greater name recognition and longer operating histories;

 

larger sales and marketing budgets and resources and the capacity to leverage their sales efforts and marketing expenditures across a broader portfolio of products;

 

broader, deeper or otherwise more well-established relationships with customers, potential customers and channel partners;

 

broader distribution networks and more established relationships with distributors;

 

wider geographic presence;

 

access to larger customer bases;

 

greater customer support resources;

 

greater resources to make acquisitions;

 

greater resources to develop and introduce products that compete with our products;

 

lower labor and development costs; and

 

substantially greater financial, technical and other resources.

As a result, they may be able to adapt more quickly and effectively to new or emerging technologies and changing opportunities, standards or customer requirements. In addition, these companies could reduce the price of their competing products, resulting in intensified pricing pressures within the markets in which we compete. Further, some of our larger competitors have substantially broader product offerings and leverage their relationships based on other products or incorporate functionality into existing products in a manner that discourages customers from purchasing our products.

Our competitors may offer a bundled product offering, and our customers may elect to accept this offering from our competitors, even if it has more limited functionality than our product offering, instead of adding the additional appliances required to implement our offering. The consolidation in the cyber security industry increases the likelihood of competition based on integration or bundling, particularly where our competitors’ products and offerings are effectively integrated, and we believe that consolidation in our industry may increase the competitive pressures we face on all our products and services. If we are unable to sufficiently differentiate our products and services from the integrated or bundled products of our competitors, such as by offering enhanced functionality, performance or value, we may see a decrease in demand for those products or services, which would adversely affect our business, operating results and financial condition. Further, it is possible that continued industry consolidation may impact customers’ perceptions of the viability of smaller or even medium-sized software firms and consequently customers’ willingness to purchase from firms of our size. Similarly, if customers seek to concentrate their software purchases in the product portfolios of a few large providers or have already deployed products that are similar to ours, we may be at a competitive disadvantage notwithstanding the superior performance that we believe our products and services can deliver. Larger competitors are also often in a better position to withstand any significant reduction in capital spending by customers, and will therefore not be as susceptible to economic downturns.

Many of our smaller competitors that specialize in providing protection from a single type of cyber security threat may deliver these specialized cyber security products to the market more quickly than we can or may introduce innovative new products or enhancements before we do. Conditions in our markets could change rapidly and significantly as a result of technological advancements.

We may not compete successfully against our current or potential competitors. Companies competing with us may introduce products that have greater performance or functionality, are easier to implement or use, or incorporate technological advances that we have not yet developed or implemented. Our current and potential competitors may also establish cooperative relationships among themselves or with third parties that may further enhance their resources. In addition, companies competing with us may price their products more competitively than ours, or have an entirely different pricing or distribution model. Increased competition could result in fewer customer orders, price reductions, reduced operating margins and loss of market share. Further, we may be required to make

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substantial additional investments in research and development and marketing and sales in order to respond to such competitive threats, and we cannot assure you that we will be able to compete successfully in the future.

We operate in an evolving market that has not yet reached widespread adoption.  New or existing technologies that may be perceived to address cyber security risks in better ways could gain wide adoption and supplant some or all of our products and services, making analysis of trends or predictions about our business difficult and potentially weakening our sales and our financial results.

We operate in new, rapidly evolving categories in the security industry that focus on securing our customers’ business-critical data and applications. We offer database, file and web application security in an integrated, modular cyber security solution, data breach detection, data masking technology and cloud-based security services. Because we depend in part on the market’s acceptance of our products and services and customers may choose to acquire technologies that are not directly comparable to ours, it is difficult to evaluate trends that may affect our business, including how large the cyber security market will be and what products customers will adopt. For example, organizations that use other security products, such as network firewalls, security information and event management products or data loss prevention solutions, may believe that these security solutions sufficiently protect access to sensitive data. Therefore, they may continue to devote their IT security budgets to these products and may not adopt our cyber security solutions in addition to such products. If customers do not recognize the benefits that our cyber security solutions offer in addition to other security products, then our revenue may not grow as anticipated or may decline, and our stock price could decline.

The introduction of products and services embodying new technologies could render some or all of our existing products and services obsolete or less attractive to customers. Other cyber security technologies exist or could be developed in the future, and our business could be materially adversely affected if such technologies are widely adopted. We may not be able to successfully anticipate or adapt to changing technology or customer requirements on a timely basis, or at all. Even if customers purchase our products, they may not make repeat purchases or purchase products across our various product families, which trend may be exacerbated by the rapid evolution of our market. As of December 31, 2017, approximately 25% of our customers had purchased products from more than one of our product families. If we are unable to sell additional products from multiple product families to our customers, then our revenue may not grow as anticipated or may decline, and our stock price could decline. If we fail to keep up with technological changes or to convince our customers and potential customers of the value of our solutions even in light of new technologies, our business, financial condition and results of operations could be materially and adversely affected.

In addition, because of our rapidly evolving market, any predictions about our revenue in future periods may not be as accurate as they would be if we operated in a more established market.

If we do not successfully anticipate market needs and opportunities or changes in the legal, regulatory and industry standard landscape and make timely enhancements to our products and develop new products that meet those needs, we may not be able to compete effectively and our ability to generate revenue will suffer.

The cyber security market is characterized by rapid technological advances, changes in customer requirements, including changes driven by legal, regulatory and self-regulatory compliance mandates, frequent new product introductions and enhancements and evolving industry standards in computer hardware and software technology. Customers and industry analysts expect speedy introduction of software and new functionality to respond to new threats, requirements and risks and we may be unable to meet these expectations. As a result, we must continually improve our products and introduce new solutions in response to changes in operating systems, application software, computer and communications hardware, networking software, data center architectures, programming tools and computer language technology. Moreover, the technology in our products is especially complex because it needs to effectively identify and respond to methods of attack and theft, while minimizing the impact on network, database, file system and web application performance. In addition, our products must successfully interoperate with products from other vendors.

We cannot guarantee that we will be able to anticipate future market needs and opportunities or be able to develop product enhancements or new products to meet such needs or opportunities in a timely manner or at all. Since developing new products or new versions of, or add-ons to, existing products is complex, the timetable for their commercial release is difficult to predict and may vary from our historical experience, which could result in delays in their introduction from anticipated or announced release dates. We may not offer updates as rapidly as new threats affect our customers or our newly developed products or enhancements may have defects, errors or failures. If we do not quickly respond to the rapidly changing and rigorous needs of our customers by developing and introducing on a timely basis new and effective products, upgrades and services that can respond adequately to new security threats, our competitive position, business and growth prospects will be harmed.

Even if we are able to anticipate, develop and commercially introduce enhancements and new products, there can be no assurance that we will be successful in developing sufficient market awareness of them or that such enhancements or new products will achieve widespread market acceptance. Diversifying our product offerings will require significant investment and planning, will

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bring us more directly into competition with software providers that may be better established or have greater resources than we do, will require additional investments of time and resources in the development and training of our channel and strategic partners and will entail a significant risk of failure.

Further, one factor that drives demand for our products and services is the legal, regulatory and industry standard framework in which our customers operate, which we expect will continue to be a factor for the foreseeable future. For example, many of our customers purchase our web application security products to help them comply with the security standards developed and maintained by the Payment Card Industry Security Standards Council, which apply to companies that process or store credit card information. Laws, regulations and industry standards are subject to drastic changes that, particularly in the case of industry standards, may arrive with little or no notice, and these could either help or hurt the demand for our products. If we are unable to adapt our products and services to changing regulatory standards in a timely manner, or if our products fail to assist our customers with their compliance initiatives, our customers may lose confidence in our products and could switch to competing solutions. In addition, if regulations and standards related to cyber security are changed in a manner that makes them less onerous, our customers may view government and industry regulatory compliance as less critical to their businesses, and our customers may purchase fewer of our products and services, or none at all. In either case, our sales and financial results would suffer.

Real or perceived errors, failures or bugs in our products, particularly those that result in our customers experiencing security breaches, could adversely affect our reputation and business could be harmed.

Our products and services are very complex and have contained and may contain undetected defects or errors, especially when first introduced or when new versions are released. Defects in our products may impede or block network traffic or cause our products or services to fail to help secure business-critical data and applications. Defects in our products may lead to product returns and require us to implement design changes or software updates. Any defects or errors in our products, or the perception of such defects or errors, could result in:

 

expenditure of significant financial and product development resources in efforts to analyze, correct, eliminate or work around errors or defects;

 

loss of existing or potential customers or channel partners;

 

delayed or lost revenue;

 

delay or failure to attain market acceptance;

 

delay in the development or release of new products or services;

 

negative publicity, which will harm our reputation;

 

warranty claims against us, which could result in an increase in our provision for doubtful accounts;

 

an increase in collection cycles for accounts receivable or the expense and risk of litigation; and

 

harm to our results of operations.

Data thieves are sophisticated, often affiliated with organized crime and operate large scale and complex automated attacks. In addition, their techniques change frequently and generally are not recognized until launched against a target. If we fail to identify and respond to new and complex methods of attack and to update our products to detect or prevent such threats in time to protect our customers’ business-critical data and applications, our business and reputation will suffer.

In addition, many of our customers use our products in applications that are critical to their businesses and may have a greater sensitivity to defects in our products than to defects in other, less critical, software products. An actual or perceived security breach or theft of the business-critical data of one of our customers, regardless of whether the breach is attributable to the failure of our products or services, could adversely affect the market’s perception of our security products. Despite our best efforts, there is no guarantee that our products will be free of flaws or vulnerabilities, and, even if we discover these weaknesses, we may be unable to correct them promptly, if at all. Our customers may also misuse our products, which could result in a breach or theft of business-critical data.

Although we have limitation of liability provisions in our standard terms and conditions of sale, they may not fully or effectively protect us from claims as a result of federal, state or local laws or ordinances or unfavorable judicial decisions in the United States or other countries. The sale and support of our products also entail the risk of product liability claims. We maintain insurance to protect against certain claims associated with the use of our products, but our insurance coverage may not adequately cover all claims asserted against us, or cover only a portion of such claims. In addition, even claims that ultimately are unsuccessful could result in our expenditure of funds in litigation and divert management’s time and other resources.

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False detection of security breaches or false identification of malicious sources could adversely affect our business.

Our cyber security products may falsely detect threats that do not actually exist. For example, our ThreatRadar Reputation Services product relies on information on attack sources aggregated from third-party data providers who monitor global malicious activity originating from anonymous proxies, specific IP addresses, botnets and phishing sites. If the information from these data providers is inaccurate, the potential for false positives increases. These false positives, while typical in the industry, may affect the perceived reliability of our products and may therefore adversely impact market acceptance of our products. If our products and services restrict access to important databases, files or applications based on falsely identifying users or traffic as an attack or otherwise unauthorized, then our customers’ businesses could be adversely effected. Any such false identification of users or traffic could result in negative publicity, loss of customers and sales, increased costs to remedy any problem and costly litigation.

Our success in acquiring and integrating other businesses, products or technologies could impact our financial position.

In order to remain competitive, we may seek to acquire additional businesses, products or technologies, any of which could be material to our business, operating results and financial condition. For example, we acquired assets from Camouflage Software Inc. in December 2016, completed our acquisition of the remaining shares of Incapsula, Inc. in March 2014, acquired the outstanding shares of Skyfence Networks Ltd. in February 2014 and acquired assets from Tomium Software, LLC in January 2014. The environment for acquisitions in the markets in which we operate is very competitive and acquisition candidate purchase prices will likely exceed what we would prefer to pay, but may be required to pay in order to make an acquisition. Furthermore, we may not find suitable acquisition candidates, and acquisitions we complete may be difficult to successfully integrate into our overall business. Achieving the anticipated benefits of future acquisitions will depend in part upon whether we can integrate acquired operations, products and technology in a timely and cost-effective manner.

Acquisitions involve many risks, including the following:

 

an acquisition may negatively impact our results of operations because it:

 

may require us to incur charges and substantial debt or liabilities,

 

may cause adverse tax consequences, substantial depreciation or deferred compensation charges,

 

may result in acquired in-process research and development expenses or in the future may require the amortization, write-down or impairment of amounts related to deferred compensation, goodwill and other intangible assets, or

 

may not generate sufficient financial return to offset acquisition costs;

 

we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, personnel or operations of any company that we acquire, particularly if key personnel of the acquired company decide not to work for us;

 

an acquisition and integration process is complex, expensive and time consuming, and may disrupt our ongoing business, divert resources, increase our expenses and distract our management;

 

an acquisition may result in a delay or reduction of customer purchases for both us and the company acquired due to customer uncertainty about continuity and effectiveness of service from either company;

 

we may encounter difficulties in, or may be unable to, successfully sell any acquired products;

 

we may obtain unanticipated or unknown liabilities or become exposed to unanticipated risks in connection with any acquisition; and

 

an acquisition may involve the entry into geographic or business markets in which we have little or no prior experience.

If we are unable to effectively execute acquisitions, our business, financial condition and results of operations could be adversely affected.

From time to time, we may seek to divest or wind down portions of our business that are no longer core to our strategy, which could materially affect our results of operations and result in disruption to other parts of the business.

On February 23, 2017, we completed the sale of the assets of our Skyfence business to Forcepoint LLC. The disposition of the Skyfence assets or any other future dispositions we make may involve risks and uncertainties, including our ability to sell these businesses on terms acceptable to us, or at all. Any such dispositions could result in disruption to other parts of our business, potential loss of employees, customers or revenue, exposure to unanticipated liabilities or result in ongoing obligations and liabilities to us following any such divestiture. For example, in connection with a disposition, we may enter into transition services agreements or

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other strategic relationships, including long-term research and development or sales arrangements, or agree to provide certain indemnities to the purchaser in any such transaction, which may result in additional expense and may adversely affect our financial condition and results of operations. In addition, dispositions may include the transfer or division of technology and/or the licensing of certain IP rights to third party purchasers, which could limit our IP rights or our ability to assert our IP rights against such purchasers or other third parties.

Our business and operations are experiencing growth.  If we do not appropriately manage any future growth, or are unable to improve our systems and processes, our operating results will be negatively affected.

We have experienced growth over the last several years. We grew from 923 employees as of December 31, 2015 to 993 employees as of December 31, 2016 to 1,020 employees as of December 31, 2017. Changes in headcount have placed, and will continue to place, a strain on our employees, management systems and other resources. Managing our headcount has required, and will continue to require, significant expenditures and allocation of valuable management resources. We rely heavily on information technology systems to help manage critical functions, such as order processing, revenue recognition, financial forecasts and inventory and supply chain management. To manage any future growth effectively, we must continue to improve our information technology and financial infrastructure, operating and administrative systems and controls, and continue to manage headcount, capital and processes in an efficient manner. We may not be able to successfully implement improvements to these systems and processes in a timely manner.

In addition, we rely heavily on hosted SaaS technologies from third parties in order to operate critical functions of our business, including enterprise resource planning services from NetSuite Inc. and customer relationship management services from salesforce.com, inc. If these services become unavailable due to extended outages or interruptions or because they are no longer available on commercially reasonable terms or prices, our expenses could increase, our ability to manage our finances could be interrupted and our processes for managing sales of our products and services and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and integrated, all of which could harm our business. Also, our systems and processes may not prevent or detect all errors, omissions or fraud. Our failure to improve our systems and processes, or their failure to operate in the intended manner, may result in our inability to manage the growth of our business and to accurately forecast our revenue, expenses and earnings, or to prevent certain losses. Our productivity and the quality of our products and services may also be adversely affected if we do not integrate and train our new employees quickly and effectively. Any future growth would add complexity to our organization and require effective coordination across our organization. If we fail to achieve the necessary level of efficiency in our organization as it grows or otherwise fail to manage any future growth effectively, we could incur increased costs, and experience a loss of customer and investor confidence in our internal systems and processes, any of which could result in harm to our business, results of operations and financial condition.

If we are unable to hire, retain and motivate qualified personnel, our business would suffer.

We depend on the continued contributions of our senior management and other key employees to execute on our business plan, and to identify and pursue new opportunities and product innovations. The loss of services of senior management or other key employees, particularly Christopher Hylen, our President and Chief Executive Officer, could significantly delay or prevent the achievement of our development and strategic objectives.

Our future success depends, in part, on our ability to continue to attract and retain highly skilled technical, managerial and other personnel, particularly in our sales and marketing, research and development, professional services and finance departments. Any of our employees may terminate their employment at any time. Competition for highly skilled personnel is frequently intense, globally for sales personnel, as well as in the San Francisco Bay Area and in Tel Aviv and Rehovot, Israel, the locations in which we have a substantial presence and need for highly-skilled personnel. We may be unable to attract and retain suitably qualified individuals who are capable of meeting our growing technical, operational and managerial requirements, on a timely basis or at all, and we may be required to pay increased compensation in order to do so. If we are unable to attract and retain the qualified personnel we need to succeed, our business will suffer.

Volatility or lack of performance in our stock price may also affect our ability to attract and retain our key employees. Employees may be more likely to leave us if the shares or RSUs they hold have declined in value or if the exercise prices of the options that they hold exceed the market price of our common stock. If we are unable to retain our employees, our business, operating results and financial condition will be harmed.

Restructuring activities may not be as effective as anticipated.

In January 2018, we announced a restructuring plan to improve customer experiences, fuel product innovation and increase operational effectiveness. As a result of these changes, we anticipate incurring pre-tax restructuring charges of $2.3 million to $2.9

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million in the first quarter 2018, substantially all of which are for cash severance costs. While we anticipate approximately $10.0 million in savings in future periods, which we intend to use to fund incremental investments in new initiatives and growth priorities, we cannot be sure our investments will be at the desire levels, achieve the desired benefits, or improve our results as we expect, or in the time frame that we expect. There may also be unanticipated costs that we will be required to prioritize instead. If we are unable to realize the expected outcomes from the restructuring plan, if our operating costs are higher than we expect or if we do not maintain adequate control of our costs and expenses, our business and operating results may be harmed.

Delays or interruptions in the manufacturing and delivery of SecureSphere appliances by our manufacturers may harm our business.

Our hardware appliances are built by two manufacturers in Taiwan and we rely principally on one of these two manufacturers to build the majority of our hardware appliances. We only recently began using the second manufacturer and the few entry level products they manufacture for us were released for sale in July 2017. Our primary reliance on a single manufacturer for a majority of our hardware revenue, particularly a foreign manufacturer, involves several risks, including a potential inability to obtain an adequate supply of appliances and limited control over pricing, quality and timely delivery of products. In addition, replacing this manufacturer may be difficult and could result in an inability or delay in obtaining products. As a result, we may be unable to fulfill customer orders and our operating results may fluctuate from period to period, particularly if a disruption occurs near the end of a fiscal period.

Our manufacturers’ ability to timely manufacture and ship our appliances in large quantities depends on a variety of factors. They rely on a limited number of sources for the supply of functional components, such as semiconductors, printed circuit boards and, to a lesser extent, hard disk drives. Functional component supply shortages or delays could prevent or delay the manufacture and shipment of appliances and, in the event of shortages or delays, we may not be able to procure alternative functional components on similar pricing terms, if at all. In addition, contractual restrictions or claims for infringement of intellectual property rights may restrict our manufacturers’ use of certain components. These restrictions or claims may require our manufacturers to utilize alternative components or obtain additional licenses or technologies, and may impede their ability to manufacture and deliver appliances on a timely or cost-effective basis. If at some point, either manufacturer is no longer financially viable, we may lose our source of supply with little or no notice or recourse. Further, even if quality products are timely manufactured, delays in shipping may occur, resulting in delayed satisfaction of a primary revenue recognition criterion.

In the event of an interruption from either manufacturer or any quality control issues with a manufacturer, we may be unable to develop alternate sources in a timely manner. If we are unable to procure our appliances in quantities sufficient to meet our requirements, we will not be able to deliver products to our channel partners and customers, which would materially and adversely affect present and future sales.

A failure to manage excess inventories or inventory shortages could result in decreased revenue and gross margins and harm our business.

We purchase products from our manufacturing partners outside of, and in advance of, reseller or customer orders and hold our products in inventory. If we fail to accurately predict demand and as a result our manufacturers maintain insufficient hardware or component inventory or excess inventory, we may be unable to timely deliver products to our distributors or customers or may have substantial inventory expense. Because our channel partners do not purchase our products in advance of customer orders, our difficulty in accurately forecasting demand for our hardware products may be exacerbated. There is a risk we may incorrectly forecast demand and may be unable to sell excess products ordered from our manufacturing partners. Inventory levels in excess of customer demand may result in inventory write-downs, and the sale of excess inventory at discounted prices could significantly impair our brand image and have an adverse effect on our financial condition and results of operations.

Conversely, if we underestimate demand for our products or if our manufacturing partners fail to supply products we require in a timely manner, we may experience inventory shortages. Inventory shortages might delay shipments to resellers, distributors and customers or cause us to lose sales. Further, as the size of individual orders increases, the risk that we may be unable to deliver unforecasted orders also increases, particularly near the end of quarterly periods. These shortages may diminish the loyalty of our channel partners or customers.

The difficulty in forecasting demand also makes it difficult to estimate our future financial condition and results of operations from period to period. A failure to accurately predict the level of demand for our products could adversely affect our net revenue and net income, and we are unlikely to forecast such effects with any certainty in advance.

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We have operations outside of the United States and a significant portion of our customers and suppliers are located outside of the United States, which subjects us to a number of risks associated with conducting international operations.

We market and sell our products throughout the world and have personnel in many parts of the world. In addition, we have sales offices and research and development facilities outside the United States and we conduct, and expect to continue to conduct, a significant amount of our business with companies that are located outside the United States, particularly in Israel, Asia, Europe and Latin America. We also source our components for our products and deliver our services from various geographical regions. Therefore, we are subject to risks associated with having international sales and worldwide operations, including:

 

challenges caused by distance, language, cultural and ethical differences and the competitive environment;

 

multiple and conflicting laws and regulations, including complications due to unexpected changes in these laws and regulations;

 

trade and foreign exchange restrictions;

 

foreign currency exchange fluctuations and foreign exchange controls;

 

economic, social or political instability in foreign markets;

 

greater difficulty in enforcing contracts, accounts receivable collection and longer collection periods;

 

changes in regulatory requirements;

 

difficulties and costs of staffing and managing foreign operations or relationships with channel partners;

 

the uncertainty and limitation of protection for intellectual property rights in some countries;

 

costs of complying with U.S. and foreign laws and regulations, including import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell our products in certain foreign markets, and the risks and costs of non-compliance or complaints of non-compliance;

 

heightened risks of unethical, unfair or corrupt business practices, actual or claimed, in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of, and irregularities in, financial statements;

 

the potential that our operations in the U.S. may limit the acceptability of our products to some foreign customers, and that our international sourcing and operations may limit the acceptability of our products to some U.S. customers;

 

the potential for acts of terrorism, hostilities or war;

 

management communication and integration problems resulting from cultural differences and geographic dispersion; and

 

multiple and possibly overlapping tax structures.

Our product and service sales may be subject to foreign governmental regulations, which vary substantially from country to country and change from time to time. Failure to comply with these regulations could adversely affect our business. Violations of laws or key control policies by our employees, contractors, channel partners or agents could result in delays in revenue recognition, financial reporting misstatements, fines, penalties or the prohibition of the importation or exportation of our products and services and could have a material adverse effect on our business and results of operations.

A portion of our revenue is generated by sales to government entities and such sales are subject to a number of challenges and risks.

Sales to U.S. and foreign federal, state and local governmental agency customers have accounted for approximately 13% of our bookings for the year ended December 31, 2015, 11% for the year ended December 31, 2016 and 11% of our bookings for the year ended December 31, 2017, and sales to government entities may increase. Sales to government entities are subject to a number of risks. Selling to government entities can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that we will complete a sale. Governments and governmental agencies may delay or refrain from purchasing our products and services in the future for the following reasons, which would have an adverse effect on our business, financial condition and results of operations:

 

changes in fiscal or contracting policies or decreases and uncertainties in available government funding;

 

changes in government programs or applicable requirements;

 

the adoption of new laws or regulations or changes to existing laws or regulations;

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changes in political or social attitudes with respect to security issues; and

 

potential delays or changes in the government appropriations process, including actions such as spending freezes implemented to address political or fiscal policy concerns.

Most of our sales to government entities have been made indirectly through our channel partners. Government entities may have contractual or other legal rights to terminate contracts with our distributors and resellers for convenience or due to a default, and any such termination may adversely impact our results of operations.

In addition, for purchases by the U.S. federal government, we must comply with laws and regulations relating to U.S. federal government contracting, which affect how we and our channel partners do business in connection with U.S. federal agencies. These laws and regulations may impose added costs on our business, and failure to comply with these or other applicable regulations and requirements, including non-compliance in the past, could lead to claims for damages from our channel partners, penalties, termination of contracts and suspension or debarment from government contracting for a period of time. Any such damages, penalties, disruption or limitation in our ability to do business with the U.S. federal government may adversely impact our results of operations.

Our business in countries with a history of corruption and transactions with foreign governments increase the risks associated with our international activities.

As we operate and sell internationally, we are subject to the U.S. Foreign Corrupt Practices Act, or the FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties for the purpose of obtaining or retaining business. We have operations, deal with and make sales to governmental customers in countries known to experience corruption, particularly certain emerging countries in Africa, East Asia, Eastern Europe, South America and the Middle East. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees, consultants, sales agents or channel partners that could be in violation of various anti-corruption laws, even though these parties may not be under our control. While we have implemented safeguards to prevent these practices by our employees, consultants, sales agents and channel partners, our existing safeguards and any future improvements to our processes may prove to be less than effective, and our employees, consultants, sales agents or channel partners may engage in conduct for which we might be held responsible. Violations of the FCPA may result in severe criminal or civil sanctions, including suspension or debarment from U.S. government contracting, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition.

We rely significantly on revenue from maintenance and support which may decline and, because we recognize revenue from such services over the term of the relevant service period, downturns or upturns in sales are not immediately reflected in full in our operating results.

Our maintenance and support revenue accounted for 28% of our total revenue for 2015, 30% of our total revenue for 2016 and 28% of our total revenue for 2017. Sales of new maintenance and support contracts or renewal of such services contracts may decline or fluctuate as a result of a number of factors, including customers’ level of satisfaction with our products and services, the prices of our products and services, the prices of products and services offered by our competitors or reductions in our customers’ spending levels. If our sales of new or renewal services contracts decline, our revenue or revenue growth may decline and our business will suffer. In addition, we recognize services revenue ratably over the term of the relevant service period, which is usually one to three years. As a result, much of the revenue we report each quarter is the recognition of deferred revenue from services contracts entered into during previous quarters. Consequently, a decline in new or renewal services contracts in any one quarter will not be fully reflected in revenue in that quarter, but will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in new or renewal sales of our services would not be reflected in full in our results of operations until future periods.

If we are unable to increase sales to large customers, our results of operations may suffer.

We continuously seek to increase sales of our products to large enterprises, managed security service providers (“MSSPs”), cloud hosting providers and government entities. Sales to large enterprises, MSSPs, cloud hosting providers and government entities involve risks that may not be present, or are present to a lesser extent, in sales to small to mid-sized entities. These risks include:

 

preexisting relationships with larger, entrenched providers of security solutions who have access to key decision makers within the organization and who also have the ability to bundle competing products with a broader product offering;

 

increased purchasing power and leverage held by large customers in negotiating contractual arrangements with us;

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more stringent requirements in our support service contracts, including stricter support response times, and increased penalties for any failure to meet support requirements; and

 

longer sales cycles, including lengthening of sales cycles due to competitive pressures or the evaluation by customers of both our cloud security solutions from Incapsula and our on-premise products as potential alternatives, and the associated risk that substantial time and resources may be spent on a potential customer who elects not to purchase our products and services.

In addition, product purchases by large enterprises, MSSPs, cloud hosting providers and government entities are frequently subject to budget constraints, multiple approvals, and unplanned administrative, processing and other delays. Further, large enterprises, MSSPs, cloud hosting providers and government entities typically have longer implementation cycles; require greater product functionality and scalability and a broader range of services; demand that vendors take on a larger share of risks; sometimes require acceptance provisions that can lead to a delay in revenue recognition; and expect greater payment flexibility from vendors. Additionally, the ongoing increase in the number of security vendors competing for these entities’ business, who in some cases use overlapping or confusing messaging, may combine with these factors to extend the sales cycles for our products and services. All these factors can add risk to doing business with these customers. If our sales expectations for large customers do not materialize in a particular quarter or at all, then our business, financial condition and results of operations could be materially and adversely affected.

If our existing and potential customers migrate to hosted, cloud-based data centers that do not deploy our products, our revenue could suffer.

The majority of our current sales are made through a model in which our channel partners sell our cyber security solutions to large enterprise customers that operate their own data centers and have the ability to choose the cyber security solutions and configurations to fit their environment. If our large enterprise customers and potential customers choose to outsource the hosting of their data centers to large, multi-tenancy hosting providers like Rackspace Hosting, Inc., Amazon Web Services (“AWS”) and Savvis, Inc. (dba CenturyLink Technology Solutions), they may not be able to choose what cyber security solutions are deployed in these hosted environments, and our current sales model may not be effective. Although we work with large hosting services providers like Rackspace Hosting, Inc., AWS and Savvis, Inc., to integrate our cyber security solutions into their hosting environments so that our solutions may be offered to their hosting customers, we cannot guarantee that all such hosting service providers will adopt our solutions, offer them as a choice to their customers or promote our solutions over those of our competitors. Even if these large hosting services providers integrate our cyber security solutions into their hosting environments and promote our solutions, they may be able to negotiate larger discounts than individual enterprise customers and, consequently, the average selling price of our products may decrease and our revenue would suffer. Alternatively, they may offer services based on our competitors’ products at lower cost or bundled with other services that we do not offer, and their customers may choose those services even if they would otherwise choose our products if making a decision on a stand-alone basis.

We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial condition and results of operations.

Our functional and reporting currency is the U.S. dollar and we generate a majority of our revenue in U.S. dollars. However, in 2015, 2016 and 2017, we incurred approximately 27%, 38% and 32%, respectively, of our expenses outside of the United States in foreign currencies, primarily the Israeli shekel, principally with respect to salaries and related personnel expenses associated with our Israeli operations. The exchange rate between the U.S. dollar and foreign currencies has fluctuated substantially in recent years and may continue to fluctuate substantially in the future. We expect that a majority of our revenue will continue to be generated in U.S. dollars for the foreseeable future and that a significant portion of our expenses, including personnel costs, as well as capital and operating expenditures, will continue to be denominated in Israeli shekels. Our results of operations may be adversely affected by foreign exchange fluctuations.

We use forward foreign exchange contracts to hedge or mitigate the effect of changes in foreign exchange rates on our operating expenses denominated in certain foreign currencies. However, this strategy cannot eliminate our exposure to foreign exchange rate fluctuations and involves costs and risks of its own, such as cash expenditures, ongoing management time and expertise, external costs to implement the strategy and potential accounting implications. Additionally, our hedging activities may contribute to increased losses as a result of volatility in foreign currency markets.

Assertions by third parties of infringement or other violations by us of their intellectual property rights could result in significant costs and substantially harm our business and operating results.

Patent and other intellectual property disputes are common in the IT security industry. Some companies in the IT security industry, including some of our competitors, own large numbers of patents, copyrights, trademarks and trade secrets, which they may use to assert

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claims against us. This disparity between our patent portfolio and the patent portfolios of our most significant competitors may increase the risk that they may sue us for patent infringement and may limit our ability to counterclaim for patent infringement or settle through patent cross-licenses. In addition, there are patent holding companies or other patent owners who are solely or primarily in the business of building portfolios of patents and asserting them against operating companies, often with little merit, and who have no relevant product revenue so that potential assertions of our patents (and potential patents) against such companies may provide little or no deterrence. Third parties have asserted and may in the future assert claims of infringement, misappropriation or other violations of intellectual property rights against us. For example, in May 2010, F5 Networks, Inc., an IT infrastructure company that competes with us in the web application firewall market, filed a lawsuit against us alleging patent infringement. In September 2010, we filed a counterclaim alleging patent infringement by F5 Networks, Inc. In February 2011, we entered into a settlement and license agreement with F5 Networks, Inc., which dismissed the litigation. Third parties may also assert such claims against our customers or channel partners whom we typically indemnify against claims that our products infringe, misappropriate or otherwise violate the intellectual property rights of third parties. As the numbers of products and competitors in our market increase and overlaps occur, claims of infringement, misappropriation and other violations of intellectual property rights may increase. Also, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or have divulged proprietary or other confidential information.

We cannot assure you that we are not infringing or otherwise violating any third-party intellectual property rights. Further, any claim of infringement, misappropriation or other violation of intellectual property rights by a third party, even those without merit, could be asserted against us, cause us to incur substantial costs defending against the claim and could distract our management from our business. An adverse outcome of an IP dispute may require us to pay substantial damages, including treble damages, if we are found to have willfully infringed a third party’s patents or copyrights; cease making, licensing or using solutions that are alleged to infringe or misappropriate the intellectual property of others; expend additional development resources to attempt to redesign our products or services or otherwise to develop non-infringing technology, which may not be successful; enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies or intellectual property rights; and indemnify our customers and partners. Royalty or licensing agreements, if required or desirable, may be unavailable on terms acceptable to us, or at all, or may require significant royalty payments and other expenditures. In addition, some licenses may be non-exclusive, and therefore our competitors may have access to the same technology licensed to us. Any of these events could seriously harm our business, financial condition and results of operations.

We rely on the availability of licenses to third-party software and other intellectual property, the loss of which could increase our costs and delay software shipments.

Many of our products and services include software or other intellectual property licensed from third parties, and we also use software and other intellectual property licensed from third parties in our business. This exposes us to risks over which we may have little or no control. For example, a licensor may have errors or defects in its products that harm our business, may have difficulties keeping up with technological changes or may stop supporting the software or other intellectual property that it licenses to us. Also, it will be necessary in the future to renew licenses, expand the scope of existing licenses or seek new licenses, relating to various aspects of these products and services, or otherwise relating to our business, which may result in increased license fees. In addition, a direct or indirect licensor may assert that we or our customers are in breach of the terms of a license, which could, among other things, give such licensor the right to terminate a license or seek damages from us, or both. Moreover, the inclusion in our products and services of software or other intellectual property licensed from third parties on a nonexclusive basis could limit our ability to differentiate our products from those of our competitors.

Licensed software may not continue to be available on commercially reasonable terms, or at all. While we believe that there are currently adequate replacements for third-party software, any loss of the right to use any of this software could result in delays in producing or delivering our software until equivalent technology is identified and integrated, which delays could harm our business. Our business would be disrupted if any of the software we license from others or functional equivalents of this software were either no longer available to us or no longer offered to us on commercially reasonable terms. In either case, we would be required to either redesign our products to function with software available from other parties or to develop these components ourselves, which would result in increased costs and could result in delays in our product shipments and the release of new product offerings. Furthermore, we might be forced to limit the features available in our current or future products. If we fail to maintain or renegotiate any of these software licenses, we could face significant delays and diversion of resources in attempting to license and integrate a functional equivalent of the software. Any of these events could have a material adverse effect on our business, financial condition and results of operations.

Our products contain “open source” software, and any failure to comply with the terms of one or more of these open source licenses could negatively affect our business.

Certain of our products are distributed with software licensed under “open source” licenses. Some of these licenses contain requirements that we make available source code for modifications or derivative works we create based upon the open source software, and that we license these modifications or derivative works under the terms of a particular open source license or subject to

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certain license requirements. If we combine our proprietary software with open source software in a certain manner, we could, under certain provisions of the open source licenses, be required to release the source code of our proprietary software. In addition to risks related to license requirements, usage of open source software can subject us to greater risks than use of third-party commercial software, as licensors of open source software generally do not provide warranties or any indemnification for infringement of third party intellectual property rights. We have established processes to help alleviate these risks, including a review process for screening requests from our development organization for the use of open source software, but we cannot be sure that all open source software is submitted for approval prior to use in our products. In addition, open source license terms may be ambiguous and many of the risks associated with use of open source software cannot be eliminated, and could, if not properly addressed, negatively affect our business. If we were found to have inappropriately used open source software, we might be required to re-engineer our products, to release proprietary source code, to discontinue the sale of our products in the event re-engineering could not be accomplished on a timely basis or to take other remedial action that may divert resources away from our development efforts, any of which could adversely affect our business, operating results and financial condition. Disclosing the source code of our proprietary software could make it easier for malicious third parties to discover vulnerabilities in our cyber security products and allow our competitors to create similar products with decreased development effort and time. Any of these events could have a material adverse effect on our reputation, business, financial condition and results of operations.

Failure to protect our proprietary technology and intellectual property rights could substantially harm our business and operating results.

Our success depends, in part, on our ability to protect proprietary methods and technologies that we develop under the intellectual property laws of the United States and other countries, so that we can prevent others from using our inventions and proprietary information. We attempt to protect our intellectual property under patent, trademark, copyright and trade secret laws, and through a combination of confidentiality procedures, contractual provisions and other methods, all of which offer only limited protection. If we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology, and our business might be harmed. In addition, defending our intellectual property rights might entail significant expenses. Any of our patents, copyrights, trademarks or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. Imperva and its subsidiaries had 38 issued patents and 16 patent applications pending as of December 31, 2017 in the United States. Our issued patents, which are limited in number compared to some of our competitors, may not provide us with any competitive advantages or may be challenged by third parties, and our patent applications may never be granted at all. Additionally, the process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Further, for strategic and other reasons we may choose not to seek patent protection for certain innovations and may choose not to pursue patent protection in certain jurisdictions. Even if issued, there can be no assurance that our patents will adequately protect our intellectual property, as the legal standards relating to the validity, enforceability and scope of protection of patent and other intellectual property rights are uncertain.

Any patents that are issued may subsequently be invalidated or otherwise limited, enabling other companies to better develop products that compete with ours, which could adversely affect our competitive business position, business prospects and financial condition. In addition, issuance of a patent does not guarantee that we have a right to practice the patented invention. Patent applications in the United States are typically not published until 18 months after filing, or in some cases not at all, and publications of discoveries in industry-related literature lag behind actual discoveries. We cannot be certain that we were the first to make the inventions claimed in our issued patents or pending patent applications or otherwise used in our products, that we were the first to file for protection in our patent applications, or that third parties do not have blocking patents that could be used to prevent us from marketing or practicing our patented products or technology. Effective patent, trademark, copyright and trade secret protection may not be available to us in every country in which our products and services are available. The laws of some foreign countries may not be as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may be inadequate. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property.

We might be required to spend significant resources to monitor and protect our intellectual property rights. We may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel, which may adversely affect our business, operating results and financial condition.

We may become subject to claims for remuneration or royalties for assigned service invention rights by our Israeli employees, which could result in litigation and adversely affect our business.

We have entered into assignment of invention agreements with our Israeli employees pursuant to which such individuals agree to assign to us all rights to any inventions created in the scope of their employment or engagement with us. A significant portion of our intellectual property has been developed by our Israeli employees in the course of their employment for us. Under the Israeli

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Patents Law, 5727-1967 (the “Patents Law”), inventions conceived by an employee during the scope of his or her employment with a company are regarded as “service inventions,” which belong to the employer, absent a specific agreement between the employee and employer giving the employee service invention rights. The Patents Law also provides that if there is no such agreement between an employer and an employee, the Israeli Compensation and Royalties Committee (the “Committee”), a body constituted under the Patents Law, shall determine whether the employee is entitled to remuneration for his or her inventions. The Committee has previously held that employees may be entitled to remuneration for intellectual property that they develop during their service for a company despite their explicit waiver of such right. In a recent decision, however, the Committee overturned its position and upheld that an employee’s waiver of his right to remuneration is valid and binding. The plaintiff in this last case filed a petition with the Israeli Supreme Court requesting to remand the case to the Committee for a second review, but the Israeli Supreme Court decided on July 8, 2015 that the Committee acted within its administrative authority and that it would not intervene in the Committee’s decision. Even though the decision still stands, the Committee’s inconsistency raises doubt as to the outcome in different sets of circumstances. Thus, although our Israeli employees have agreed to assign to us service invention rights, we may face claims demanding remuneration in consideration for assigned inventions. As a consequence of such claims, we could be required to pay additional remuneration or royalties to our current and/or former Israeli employees, or be forced to litigate such claims, which could negatively affect our business.

Confidentiality agreements with partners, employees, consultants and others may not adequately prevent disclosure of trade secrets and other proprietary information.

In order to protect our proprietary technology, processes and methods, we rely in part on confidentiality agreements and other restrictions with our customers, partners, employees, consultants and others. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Despite our efforts to protect our proprietary technology, processes and methods, unauthorized parties may attempt to misappropriate, reverse engineer or otherwise obtain and use them. We may be unable to determine the extent of any unauthorized use or infringement of our products, technologies or intellectual property rights. In addition, others may independently develop identical or substantially similar technology and in these cases we would not be able to assert any trade secret rights against those parties. Moreover, policing unauthorized use of our technologies, products and intellectual property is difficult, expensive and time-consuming, particularly in foreign countries where the laws may not be as protective of intellectual property rights as those in the United States and where mechanisms for enforcement of intellectual property rights may be weak. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.

Our business activities are subject to various restrictions under U.S. export controls and trade and economic sanctions laws, including the U.S. Commerce Department’s Export Administration Regulations and economic and trade sanctions regulations maintained by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”). If we fail to comply with these laws and regulations, we could be subject to civil or criminal penalties and reputational harm. U.S. export control laws and economic sanctions laws also prohibit certain transactions with U.S. embargoed or sanctioned countries, governments, persons and entities.

Many of our products incorporate encryption technology and may be exported outside the U.S. only if we obtain an export license or qualify for an export license exception. Compliance with applicable regulatory requirements regarding the export of our products may prevent our customers with international operations from deploying our products throughout their global systems or, in some cases, prevent the export of our products to some countries altogether. Further, various countries regulate the import of encryption technology and appliance-based products and have enacted laws that could limit our ability to distribute products, could create delays in the introduction of our products in those countries or could limit our customers’ ability to implement our products in those countries.

U.S. export control laws and economic sanctions prohibit the shipment of certain products to U.S. embargoed or sanctioned countries, governments and persons. While we and our channel partners take precautions to prevent our products from being shipped to, downloaded or accessed by U.S. sanctions targets, our products could be shipped to, downloaded or accessed by persons located in countries that are the subject of U.S. embargoes despite our efforts. Any such shipment or access could have negative consequences, including government investigations, penalties and reputational harm. For example, in 2015, we discovered that some of our free downloadable software evaluation products may have been downloaded by a limited number of persons located in countries that are the subject of U.S. embargoes. We terminated the unauthorized accounts, filed an initial disclosure with the U.S. Commerce Department’s Bureau of Industry and Security (“BIS”) and with OFAC and filed final reports with BIS and OFAC on September 2, 2015 and September 22, 2015, respectively. We have implemented new screening measures designed to prevent users in embargoed countries and prohibited persons from purchasing, downloading or accessing our free downloadable evaluation software or other

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products or services. OFAC issued a cautionary letter on October 14, 2015 as a final enforcement response to the apparent violations and did not impose any monetary penalties. BIS issued a warning letter on October 5, 2016 in response to our voluntary self-disclosure and closed the matter, having determined not to take any further action.  Even though we take precautions to prevent transactions with U.S. sanctions targets, any such precautions, or any new precautions we may implement in the future, may be ineffective. As a result, there is risk that in the future we could provide our products to or permit our products to be downloaded or accessed by such targets despite these precautions. This could result in negative consequences to us, including government investigations, penalties and reputational harm.

In the future, there may be changes in our products or changes in export and import regulations or economic sanctions. Similarly, there may be shifts in the enforcement or scope of existing regulations or restrictions or changes in the countries, governments, persons or technologies targeted by such regulations and restrictions. Such changes and shifts may create delays in the introduction and sale of our products in international markets, could result in decreased use of our products or, in some cases, prevent the sale of our products to certain countries, governments or persons altogether, including by current customers or potential customers. Any such limitation, delay, restriction or reduction could adversely affect our business, financial condition, results of operations and prospects.

Conditions in Israel may limit our ability to develop and sell our products. This could result in a decline in revenue.

Our principal research and development facilities are located in Israel. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries, as well as incidents of civil unrest, and a number of state and non-state actors have publicly committed to its destruction. Political, economic and military conditions in Israel could directly affect our operations. We could be adversely affected by any major hostilities involving Israel, including acts of terrorism or any other hostilities involving or threatening Israel, the interruption or curtailment of trade between Israel and its trading partners, a significant increase in inflation or a significant downturn in the economic or financial condition of Israel. Any on-going or future violence between Israel and the Palestinians, including a resumption of the conflict in Gaza, armed conflicts, terrorist activities, tension along the Israeli borders or with other countries in the region, including Iran, or political instability in the region could disrupt international trading activities in Israel and may materially and negatively affect our business and could harm our results of operations.

Certain countries, as well as certain companies and organizations, continue to participate in a boycott of Israeli firms, firms with large Israeli operations and others doing business with Israel and Israeli companies. In addition, such boycott, restrictive laws, policies or practices may change over time in unpredictable ways, and could, individually or in the aggregate, have a material adverse effect on our business in the future.

Some of our employees in Israel are obligated to perform annual military reserve duty in the Israel Defense Forces, depending on their age and position in the armed forces. Furthermore, they may be called to active reserve duty at any time under emergency circumstances for extended periods of time. For example, in 2017, approximately 70 of our employees in Israel were called for active reserve duty, each serving for an average of nine days. Our operations could be disrupted by the absence, for a significant period, of one or more of our executive officers or key employees due to military service, and any significant disruption in our operations could harm our business.

Our internal network system and website may be subject to intentional disruption that could adversely impact our reputation and future sales.

Because we are a leading provider of cyber security products, hackers and others may try to access our data or compromise our systems. Similarly, experienced computer programmers may attempt to penetrate our network security or the security of our website and cause interruptions of our services. Because the techniques used by hackers to access or sabotage networks change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques. The theft and/or unauthorized use or publication of our trade secrets and other confidential business information as a result of such an event could adversely affect our competitive position, reputation, brand and future sales of our products, and could impair our ability to operate our business, including our ability to provide subscription or maintenance and support services to our customers. We could suffer monetary and other losses and reputational harm in the event of such incidents.

Outages, interruptions or delays in hosting services could impair the delivery of our cloud-based security services and harm our business.

We operate infrastructure that supports our ThreatRadar and Security Operations Center services and use third party hosting facilities for certain ThreatRadar services. Despite precautions taken within our own internal network and at these third party facilities, the occurrence of a natural disaster or an act of terrorism or other unanticipated problems could result in lengthy interruptions in our services.

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The cloud-based security services that we provide through our subsidiary, Incapsula, are operated from a network of third party facilities that host the software and systems that operate these security services. Any damage to, or failure of, our internal systems or systems at third party hosting facilities could result in outages or interruptions in our cloud-based services. Outages or interruptions in our cloud-based security services may cause our customers and potential customers to believe our cloud-based security services are unreliable or suffer from perceived vulnerabilities, cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and adversely affect our renewal rates and our ability to attract new customers, ultimately harming our business and revenue.  Our Incapsula service has experienced outages in the past and we may continue to experience such outages in the future.

Changes in our provision for income taxes or adverse outcomes resulting from examination of our income tax returns could adversely affect our results.

We are subject to income taxation in the United States and numerous foreign jurisdictions. Determining our provision for income taxes requires significant management judgment. In addition, our provision for income taxes is subject to volatility and could be adversely affected by many factors, including, among other things, changes to our operating or holding structure, changes in the amounts of earnings in jurisdictions with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities and changes in tax laws.

On December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was enacted.  The Tax Act represents a significant change to the U.S. federal tax code. It lowers the U.S. statutory tax rate from 35% to 21% for years after 2017, and also includes a number of provisions that could adversely impact our U.S. federal income tax position in a reporting period, including the limitation of the utilization of net operating losses generated after 2018 to 80 percent of taxable income and a minimum tax on certain foreign earnings in excess of 10 percent of the foreign subsidiaries’ tangible assets. We have remeasured our U.S. deferred tax assets as of December 31, 2017 to reflect the reduced rate that will apply in future periods when the deferred tax assets reverse, offset by a change in valuation allowance, resulting in a net impact of an approximately $0.2 million tax benefit. Our final determination during 2018 of the Tax Act’s impact on deferred tax assets and the related valuation allowance requirements may differ from our estimates due to, among other factors, changes in interpretations of the Tax Act, our analysis of the Tax Act, or any updates or changes to estimates that we have utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates and assertions. In addition, any further changes to tax laws applicable to corporate multinationals in the countries in which we do business could adversely affect our effective tax rates, cause us to change the way in which we structure our business or result in other costs to us.

We are subject to ongoing tax examinations in various jurisdictions. For example, we are currently under audit by the Israeli Tax Authority. Tax authorities may disagree with our intercompany charges, cross-jurisdictional transfer pricing, determinations regarding the inclusion of stock-based compensation expense as part of a cost-plus arrangement and taxes owed on the purchase and sale of Skyfence intellectual property and related assets or other matters and assess additional taxes. While we regularly assess the likely outcomes of these examinations to determine the adequacy of our provision for income taxes, there can be no assurance that the outcomes of such examinations will not have a material impact on our operating results and cash flows.

Significant judgment is required to determine the recognition and measurement attributes prescribed in Accounting Standards Codification (“ASC”) 740-25 (formerly referred to as Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109”). In addition, ASC 740-25 applies to all income tax positions, including the potential recovery of previously paid taxes, which if settled unfavorably could adversely impact our provision for income taxes or additional paid-in capital. In addition, we are subject to the continuous examination of our income tax returns by the U.S. Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our results of operations.

Our ability to utilize net operating loss carryforwards may be subject to limitations and may result in increased future tax liability to us.

Our ability to utilize net operating loss carryforwards to offset our future tax liability would be limited if we were to undergo an “ownership change” within the meaning of Section 382 of the Internal Revenue Code. Generally, a change of more than 50% in the ownership of a corporation’s stock, by value, over a three-year period constitutes an ownership change for U.S. federal and applicable state income tax purposes. In the event we undergo an ownership change under Section 382, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards to offset U.S. federal taxable income may become subject to limitations, which could potentially result in increased future tax liability to us.

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Our business is subject to the risks of earthquakes, fire, power outages, floods and other catastrophic events, and to interruption by manmade events such as terrorist attacks.

A significant natural disaster, such as an earthquake, fire or a flood, or a significant power outage could have a material adverse impact on our business, financial condition and results of operations. Our corporate headquarters are located in the San Francisco Bay Area, a region known for seismic activity, on land reclaimed from the bay that is susceptible to high liquefaction risk in the event of an earthquake. In addition, natural disasters could affect our manufacturing vendors or logistics providers’ ability to perform services such as manufacturing products on a timely basis and assisting with shipments on a timely basis. In the event our service providers’ information technology systems or manufacturing or logistics abilities are hindered by any of the events discussed above, shipments could be delayed, resulting in missing financial targets, such as revenue and shipment targets, for a particular quarter. Further, if a natural disaster occurs in a region from which we derive a significant portion of our revenue, customers in that region may delay or forego purchases of our products, which may materially and adversely impact our results of operations for a particular period. In addition, acts of terrorism could cause disruptions in our business or the business of our manufacturer, logistics providers, partners, customers or the economy as a whole. Given our typical concentration of sales at each quarter end, any disruption in the business of our manufacturer, logistics providers, partners or customers that impacts sales at the end of our quarter could have a significant adverse impact on our quarterly results. All of the aforementioned risks may be augmented if the business continuity plans for us and our suppliers prove to be inadequate. To the extent that any of the above results in delays or cancellations of customer orders, or the delay in the manufacture, deployment or shipment of our products, our business, financial condition and results of operations would be adversely affected.

Risks Related to Ownership of our Common Stock

If we fail to maintain an effective system of disclosure controls and procedures and internal controls over financial reporting, our ability to produce accurate financial statements or comply with applicable regulations could be impaired.

As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), and the rules and regulations of the NASDAQ Stock Market LLC. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly and place strains on our personnel, systems and resources.

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 to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our current controls and any new controls that we develop may become inadequate because of changes in conditions, and the degree of compliance with the policies or procedures may deteriorate. In addition, weaknesses in our internal controls over financial reporting may be discovered in the future. Our filings with the SEC are subject to periodic review by the SEC, and our auditors are subject to periodic inspection by the Public Company Accounting Oversight Board. Any failure to maintain effective controls over financial reporting, any difficulties encountered in the implementation of additional controls or the improvement of existing controls, or any issues that emerge as a result of regulatory review, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a revision or restatement of our prior period financial statements. Any failure to maintain effective internal controls also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we are required to include in our annual reports filed with the SEC under Section 404 of the Sarbanes-Oxley Act. Ineffective disclosure controls and procedures and 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.

For example, in connection with the review of our unaudited interim condensed consolidated financial statements in our Form 10-Q filed with the SEC on November 7, 2014, management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our disclosure controls and procedures as of September 30, 2014. Based on that assessment, management concluded that our disclosure controls and procedures were not effective as of September 30, 2014, because of a material weakness in internal control over financial reporting related to insufficient oversight and review controls to ensure the proper determination of stock-based compensation expense for certain complex equity awards that were not issued in the ordinary course. While these control deficiencies were remediated, we continue to identify risks and make improvements to our internal controls and we cannot assure you that additional material weaknesses in our internal control over financial reporting will not be identified in the future.

In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended significant resources, and anticipate that we will continue to add personnel and provide significant management oversight, which involve substantial accounting-related costs. Any failure to maintain the adequacy of our internal controls, 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 continue to demonstrate compliance

26


 

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. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NASDAQ Global Select Market.

We also have implemented elements of a disaster recovery/business continuity plan for our accounting and related information technology systems but we have not yet implemented a complete disaster recovery/business continuity plan that covers all of our operations. If the elements that we have developed and plan to develop in the future prove inadequate in the circumstances of a particular disaster or other business continuity event, our ability to maintain timely accounting and reporting may be materially impaired.

Market volatility may affect our stock price and the value of your investment

The trading prices of the securities of technology companies generally, and of our stock in particular, have been highly volatile. The market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot predict or control, including:

 

announcements of new products, services or technologies, commercial relationships, acquisitions, dispositions, strategic partnerships, joint ventures, capital commitments or other events by us or our competitors;

 

fluctuations in operating performance and in stock market prices and trading volumes of securities of other technology companies generally, or those in our industry in particular;

 

general market conditions and overall price and volume fluctuations in U.S. equity markets;

 

actual or anticipated variations in our operating results, or the operating results of our competitors;

 

the financial and other projections we may provide to the public, any changes in these projections or our failure to meet these projections or changes in our financial guidance or securities analysts’ estimates of our financial performance;

 

failure of securities analysts to maintain coverage of us, changes in financial or other estimates by any securities analysts who follow us, or our failure to meet these estimates or the expectations of our investors;

 

ratings or other changes by any securities analysts who follow our company or our industry;

 

announcements of restructurings, reductions in force, departure of senior management or key employees and/or consolidation of operations;

 

sales or purchases of large blocks of our common stock, including by our executive officers, directors, significant stockholders and activist stockholders;

 

rumors and market speculation involving Imperva or other companies in our industry, particularly with respect to strategic transactions; and

 

lawsuits threatened or filed against us and changing legal or regulatory developments in the United States and other countries.

In addition, the stock market in general, and the NASDAQ Stock Market in particular, have experienced substantial price and volume volatility that is often seemingly unrelated to the operating performance of particular companies. These broad market fluctuations or factors affecting us more specifically may cause the trading price of our common stock to decline. In the past, securities class action litigation has often been brought against a company after a period of volatility in the market price of its common stock.

We face risks related to securities litigation that could result in significant legal expenses and settlement or damage awards.

We are currently and may in the future become subject to claims and litigation alleging violations of the securities laws or similar claims, which could harm our business and require us to incur significant costs. For example, on April 11, 2014, a purported stockholder class action lawsuit was filed in the United States District Court for the Northern District of California against us and certain of our officers alleging that defendants made false and misleading statements and purporting to assert claims for violations of the federal securities laws, and seeking unspecified compensatory damages and other relief. As described further in Part II, Item 1 (Legal Proceedings), in January 2018 the court gave its final approval for the settlement of this matter, but future litigation of this type may require significant attention from management and could result in significant legal expenses, settlement costs or damage awards that could have a material impact on our financial position, results of operations and cash flows.

27


 

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

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our industry. If we do not establish and maintain adequate research coverage or if one or more of the analysts who covers us downgrades our stock or publishes inaccurate 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 and trading volume to decline.

We do not intend to pay dividends on our common stock so any returns will be limited to the value of our stock.

We have never declared or paid any cash dividend on our common stock. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to stockholders will therefore be limited to the value of their stock.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our restated certificate of incorporation and amended and restated bylaws may delay or prevent an acquisition of us or a change in our management. These provisions include:

 

authorizing “blank check” preferred stock, which could be issued by the board without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock, which would increase the number of outstanding shares and could thwart a takeover attempt;

 

a classified board of directors whose members can be dismissed only for cause;

 

the prohibition on actions by written consent of our stockholders;

 

the limitation on who may call a special meeting of stockholders;

 

the establishment of stock ownership and advance notice requirements for stockholders who intend to submit proposals to be acted upon at stockholder meetings, including nominations of persons for election to our board of directors; and

 

the requirement that at least 75% of our outstanding capital stock must approve any amendment of the foregoing second through fifth provisions.

In addition, because we are incorporated in Delaware, we are governed by the provisions of the anti-takeover provisions of the Delaware General Corporation Law, which may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. Although we believe these provisions collectively provide for an opportunity to obtain greater value for stockholders by requiring potential acquirers to negotiate with our board of directors, they would apply even if an offer rejected by our board were considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.

We previously announced a review of strategic alternatives and our subsequent decision to remain a standalone company, which may result in lingering uncertainty about our prospects.

On August 4, 2016, we announced that we retained advisors to assist us in a comprehensive review of strategic alternatives and on November 3, 2016, we announced that we had concluded the review process.  The process did not result in a transaction or any other specific strategic action, but did result in a restructuring plan that was also announced.  These announcements may result in a perception from time to time that there is uncertainty about our prospects as a standalone entity, and may lead to rumors of instability, irrespective of the actual circumstances, which may be exploited by our competitors, cause concern to our current or potential customers and partners, and make it more difficult to attract and retain qualified personnel. Such issues or perceptions may negatively impact our business, disrupt our operations and divert the attention of management and our employees, all of which could materially and adversely affect our operations and operating results. In addition, our stock price may experience periods of increased volatility as a result of prolonged rumors and speculation about our business. Further, while we have concluded the review of strategic alternatives, it is possible that a strategic transaction or other type of strategic action may arise in the future.

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Our business could be negatively affected by stockholder activism, which could impact the trading price and volatility of our common stock.   

An activist investor, Elliott Associates, L.P., and its affiliates, or Elliott, took an ownership position in our common stock in June 2016.  In September 2017, Elliott disclosed in its Schedule 13D/A that it economically owns approximately 6.7% of our common stock (with additional economic exposure through derivatives of approximately 2.8% of our common stock).  Elliott has communicated its opinions to us regarding strategic and operational opportunities that it believes would meaningfully increase value to our stockholders. In the future, Elliott may take actions that could be costly and time-consuming to us, disrupt our operations and divert the attention of management and our employees, such as public proposals and requests for special meetings, potential nominations of candidates for election to our board of directors, requests to pursue a strategic combination or other transaction, or other special requests. Additionally, perceived uncertainties as to our future direction or changes to the composition of our board may be exploited by our competitors, cause concern to our current or potential customers and partners, and make it more difficult to attract and retain qualified personnel. Such uncertainties may adversely impact our business and future financial results. In addition, our stock price may experience periods of increased volatility as a result of stockholder activism, including in reaction to any future acquisition or disposition of our common stock by Elliott or other activists.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

Our corporate headquarters are located in Redwood Shores, California in an office consisting of approximately 82,000 square feet.  The lease for our corporate headquarters expires in December 2020. Our offices in Texas, where we employ sales, support, research and development and professional services employees, consist of approximately 21,966 square feet and the leases for these offices expire in January 2018, in April 2021 and in April 2023. Our office in Tel Aviv, Israel, where we employ our SecureSphere research and development team, consists of approximately 8,451 square meters (approximately 90,966 square feet). The lease for the Tel Aviv office expires in January 2027.  The majority of our Incapsula team is in offices in Rehovot, Israel that consist of 3,240 square meters (approximately 34,875 square feet).  The lease for a portion of the office space expires in May 2020 and the lease for the remainder of the space expires in March 2022.  We also have a number of sales offices around the world.  We believe that our facilities are suitable to meet our needs for the foreseeable future; however, we will continue to seek additional space as needed to accommodate our growth.

Item 3. Legal Proceedings

On April 11, 2014, a purported shareholder class action lawsuit was filed in the United States District Court for the Northern District of California against us and certain of our current and former officers. On August 7, 2014, the Court entered an order appointing lead plaintiff and counsel for the purported class. The lead plaintiff filed an amended complaint on October 10, 2014. The lawsuit named us and certain of our current and former officers and purported to bring suit on behalf of those investors who purchased our publicly traded securities between May 2, 2013 and April 9, 2014. The plaintiff alleged that defendants made false and misleading statements about our operations and business and financial results and purported to assert claims for violations of the federal securities laws. The amended complaint sought unspecified compensatory damages, interest thereon, costs incurred in the action and equitable/injunctive or other relief. On January 6, 2015, defendants filed a motion to dismiss the amended complaint. On September 17, 2015, the Court granted defendants’ motion to dismiss with leave to amend. The lead plaintiff filed an amended complaint on January 13, 2016, again naming the same current and former officers, alleging false and misleading statements about our operations and business and financial results, and seeking the same relief.  On February 10, 2016, defendants filed a motion to dismiss the amended complaint. On May 16, 2016, the Court granted the motion in part and denied the motion in part.  On September 7, 2016, defendants filed their operative answer to the amended complaint. In July 2017, with the help of a mediator, the parties reached an agreement in principle to settle the action.  On October 11, 2017, the Court issued an order granting lead plaintiff’s motion for preliminary approval of the settlement. The Court issued an order granting final approval of the settlement, which was funded entirely by the Company’s insurance carriers, on January 31, 2018.

On September 1, 2017, a purported class action lawsuit was filed against us and others, alleging that current, former and prospective employees are entitled to monetary damages for violations of the notice provisions of the Fair Credit Reporting Act and similar California laws governing background checks. The lawsuit was filed in the Superior Court for San Mateo County and on September 29, 2017, we removed the action to the U.S. District Court for the Northern District of California. On November 6, 2017, we filed a motion to dismiss the action. 

On September 1, 2017, the same plaintiff filed a second purported class action lawsuit against us and others in the Superior Court for San Mateo County, alleging, among other claims, violation of California wage and hour, overtime, meal break and rest break

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rules and regulations, failure to provide for proper expense reimbursements, failure to maintain accurate and complete payroll records, failure to pay commissions and unfair business practices, and seeking unspecified monetary damages, injunctive relief and attorneys’ fees.  We filed an answer to the complaint on September 29, 2017. On November 3, 2017, the plaintiff amended his complaint to assert an additional representative Private Attorney General Act (PAGA) claim against us. On December 6, 2017, we filed an answer to the amended complaint. The plaintiff’s motion for class certification is due on or before September 7, 2018.  Our opposition is due on or before November 6, 2018. Any reply is due on or before November 20, 2018. A hearing on the motion for class certification has been set for Friday, December 7, 2018. 

In addition to the above, from time to time, we may be subject to legal proceedings and claims in the ordinary course of business, including commercial claims, claims from third parties asserting infringement of their intellectual property rights, and claims by employees that are brought on an individual or class action basis alleging wage and hour violations, employment discrimination, unlawful employment practices or other employment law violations. Future litigation may be necessary to defend ourselves.  In the case of intellectual property claims, we may also be involved in litigation to defend our channel partners and our customers by determining the scope, enforceability and validity of third-party proprietary rights or to establish our proprietary rights.

The ultimate outcome of any litigation is uncertain and, regardless of outcome, litigation can have an adverse impact on us because of defense costs, potential negative publicity, diversion of management resources and other factors. Accordingly, there can be no assurance that existing or future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on our business, consolidated financial position, results of operations or cash flows.

Item 4. Mine Safety Disclosures

Not applicable.

 

 

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PART II

 

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information for Common Stock

Our common stock has been listed on the NASDAQ Stock Market since December 2016. Prior to that, it was listed on the New York Stock Exchange. The following table sets forth, for the periods indicated, the high and low intra-day prices for our common stock as reported on the New York Stock Exchange or the NASDAQ Stock Market, as applicable.

 

Fiscal 2016

 

High

 

 

Low

 

First Quarter

 

$

62.80

 

 

$

32.83

 

Second Quarter

 

$

51.69

 

 

$

31.11

 

Third Quarter

 

$

54.53

 

 

$

42.10

 

Fourth Quarter

 

$

57.24

 

 

$

34.40

 

 

 

 

 

 

 

 

 

 

Fiscal 2017

 

High

 

 

Low

 

First Quarter

 

$

47.30

 

 

$

37.20

 

Second Quarter

 

$

51.75

 

 

$

40.15

 

Third Quarter

 

$

52.40

 

 

$

41.60

 

Fourth Quarter

 

$

46.10

 

 

$

37.17

 

 

 

 

 

 

 

 

 

 

Fiscal 2018

 

High

 

 

Low

 

First Quarter (through February 14, 2018)

 

$

47.75

 

 

$

39.66

 

 

Stockholders

As of February 14, 2018, we had 20 record holders of our common stock.

Dividend Policy

We have never declared or paid cash dividends on our common stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will be dependent on a number of factors, including our earnings, capital requirements and overall financial conditions.

Stock Price Performance Graph

The following graph shows a comparison from December 31, 2012 through December 31, 2017 of the cumulative total return for an investment of $100 (and the reinvestment of dividends) in our common stock, the NYSE Composite Index, the NASDAQ Composite Index and the S&P Information Technology Index. Such returns are based on historical results and are not intended to

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suggest future performance.  Our common stock was listed on the New York Stock Exchange from November 2011 to December 12, 2016 and since December 13, 2016, has been listed on the NASDAQ Stock Market.  

 

 

 

 

 

12/12

 

 

12/13

 

12/14

 

12/15

 

 

12/16

 

12/17

Imperva Inc.

 

 

100.00

 

 

152.65

 

156.77

 

200.79

 

 

121.79

 

125.91

NYSE Composite

 

 

100.00

 

 

126.28

 

134.81

 

129.29

 

 

144.73

 

171.83

NASDAQ Composite

 

 

100.00

 

 

141.63

 

162.09

 

173.33

 

 

187.19

 

242.29

S&P Information Technology

 

 

100.00

 

 

128.43

 

154.26

 

 

163.40

 

 

186.03

 

258.28

 

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

 

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The above information under the heading “Stock Price Performance Graph” shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section or Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended, and shall not be incorporated by reference into any registration statement or other document filed by us with the Securities and Exchange Commission, whether made before or after the date of this Annual Report on Form 10-K, regardless of any general incorporation language in such filing, except as shall be expressly set forth by specific reference in such filing.

Use of Proceeds from Public Offering of Common Stock

The Form S-1 Registration Statement (Registration No. 333-175008) relating to our IPO was declared effective by the SEC on November 8, 2011. The net proceeds to us of our IPO after deducting $6.9 million of underwriters’ discounts and $5.8 million of offering expenses were $86.2 million. Since the IPO, we have invested approximately $29.4 million of the net proceeds as follows: in January 2012, we invested $3.5 million in Incapsula, our majority owned subsidiary, and received in exchange an additional 4,375,000 shares of Incapsula’s Series A-1 Preferred Stock; in October 2013, we loaned $1.1 million to Incapsula at a rate of 2% per annum with a maturity date of December 31, 2014; in January 2014, we paid approximately $4.7 million in cash as part of the consideration in connection with our purchase of certain assets and liabilities of Tomium; in February 2014, we paid $8.6 million in cash, and in February 2016 released an additional $7.6 million, as part of the consideration in connection with the acquisition of Skyfence; and in December 2016, we paid approximately $3.9 million in cash as consideration for our purchase of certain assets and liabilities of Camouflage Software.  We expect to use the remaining net IPO proceeds for working capital and general corporate purposes, including acquisitions. Although we may also use a portion of the net proceeds for acquisition of complementary businesses, technologies or other assets, we have no present understandings, commitments or agreements to enter into any acquisitions.

Our management will retain broad discretion in the allocation and use of the net proceeds of our IPO, and investors will be relying on the judgment of our management regarding the application of the net proceeds. Pending specific utilization of the net proceeds as described above, we have invested the net proceeds of the offering in short-term, interest-bearing obligations. The goal with respect to the investment of the net proceeds will be capital preservation and liquidity so that such funds are readily available to fund our operations.

 

 

33


 

Item 6. Selected Financial Data

The following selected consolidated financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The selected financial data in this section is not intended to replace the financial statements and is qualified in its entirety by the consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. Our historical results of operations are not necessarily indicative of results to be expected for any future period.

 

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

 

(dollars in thousands, except per share amounts)

 

Consolidated Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products and license

 

$

97,122

 

 

$

86,798

 

 

$

107,563

 

 

$

74,299

 

 

$

72,153

 

Services

 

 

224,594

 

 

 

177,657

 

 

 

126,735

 

 

 

89,711

 

 

 

65,606

 

Total net revenue

 

 

321,716

 

 

 

264,455

 

 

 

234,298

 

 

 

164,010

 

 

 

137,759

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products and license

 

 

7,738

 

 

 

9,525

 

 

 

10,947

 

 

 

9,248

 

 

 

8,756

 

Services

 

 

56,215

 

 

 

44,307

 

 

 

36,633

 

 

 

27,335

 

 

 

20,940

 

Total cost of revenue1

 

 

63,953

 

 

 

53,832

 

 

 

47,580

 

 

 

36,583

 

 

 

29,696

 

Gross profit

 

 

257,763

 

 

 

210,623

 

 

 

186,718

 

 

 

127,427

 

 

 

108,063

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development1

 

 

63,452

 

 

 

62,402

 

 

 

53,376

 

 

 

43,052

 

 

 

27,556

 

Sales and marketing1

 

 

152,178

 

 

 

156,465

 

 

 

136,292

 

 

 

106,382

 

 

 

81,500

 

General and administrative1

 

 

54,435

 

 

 

51,260

 

 

 

43,440

 

 

 

34,499

 

 

 

24,436

 

Restructuring charges

 

 

667

 

 

 

8,118

 

 

 

-

 

 

 

-

 

 

 

-

 

Amortization of purchased intangibles

 

 

714

 

 

 

1,408

 

 

 

1,408

 

 

 

1,269

 

 

 

-

 

Total operating expenses

 

 

271,446

 

 

 

279,653

 

 

 

234,516

 

 

 

185,202

 

 

 

133,492

 

Loss from operations

 

 

(13,683

)

 

 

(69,030

)

 

 

(47,798

)

 

 

(57,775

)

 

 

(25,429

)

Gain on sale of business

 

 

35,871

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Other income (expense), net

 

 

1,142

 

 

 

(77

)

 

 

(402

)

 

 

(220

)

 

 

(125

)

Income (loss) before provision for income taxes

 

 

23,330

 

 

 

(69,107

)

 

 

(48,200

)

 

 

(57,995

)

 

 

(25,554

)

Provision for income taxes

 

 

461

 

 

 

1,172

 

 

 

682

 

 

 

1,181

 

 

 

777

 

Net income (loss)

 

 

22,869

 

 

 

(70,279

)

 

 

(48,882

)

 

 

(59,176

)

 

 

(26,331

)

Loss attributable to non - controlling interest

 

 

-

 

 

 

-

 

 

 

-

 

 

 

213

 

 

 

1,153

 

Net income (loss) attributable to Imperva, Inc. stockholders

 

$

22,869

 

 

$

(70,279

)

 

$

(48,882

)

 

$

(58,963

)

 

$

(25,178

)

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.68

 

 

$

(2.18

)

 

$

(1.64

)

 

$

(2.28

)

 

$

(1.04

)

Diluted

 

$

0.67

 

 

$

(2.18

)

 

$

(1.64

)

 

$

(2.28

)

 

$

(1.04

)

Shares used in computing earnings per share2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

33,724

 

 

 

32,284

 

 

 

29,849

 

 

 

25,806

 

 

 

24,300

 

Diluted

 

 

34,238

 

 

 

32,284

 

 

 

29,849

 

 

 

25,806

 

 

 

24,300

 

 

1

Includes stock-based compensation as follows (in thousands):

 

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Cost of revenue

 

$

5,290

 

 

$

4,664

 

 

$

3,862

 

 

$

2,058

 

 

$

1,440

 

Research and development

 

 

12,187

 

 

 

14,711

 

 

 

13,831

 

 

 

8,799

 

 

 

3,660

 

Sales and marketing

 

 

14,696

 

 

 

20,510

 

 

 

16,717

 

 

 

13,558

 

 

 

8,537

 

General and administrative

 

 

13,822

 

 

 

17,131

 

 

 

16,554

 

 

 

12,858

 

 

 

8,857

 

Restructuring charges

 

 

675

 

 

 

5,859

 

 

 

-

 

 

 

-

 

 

 

-

 

 

34


 

2

Please see Note 14 to our audited consolidated financial statements for an explanation of the calculations of our basic and diluted net loss per share of common stock.

 

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

 

(in thousands)

 

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents and short-term investments

 

$

359,531

 

 

$

261,092

 

 

$

264,807

 

 

$

109,720

 

 

$

115,085

 

Working capital

 

$

284,256

 

 

$

194,149

 

 

$

214,173

 

 

$

78,244

 

 

$

103,214

 

Total assets

 

$

528,062

 

 

$

408,819

 

 

$

397,669

 

 

$

220,645

 

 

$

176,491

 

Deferred revenue, current and long-term

 

$

159,255

 

 

$

130,471

 

 

$

106,657

 

 

$

81,175

 

 

$

63,052

 

Non - controlling interest

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

(2,614

)

Total stockholders' equity

 

$

315,117

 

 

$

231,963

 

 

$

240,201

 

 

$

97,243

 

 

$

86,222

 

 

 

35


 

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our “Selected Consolidated Financial Data” and consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of 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”). These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors,” set forth in Item 1A of this Annual Report on Form 10-K and in our other SEC filings. You should review these risk factors for a more complete understanding of the risks associated with an investment in our securities. We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

We were incorporated as a Delaware corporation in 2002 with the vision of protecting high-value applications and data assets within the enterprise. Since that time we have been investing in our cyber security solutions to meet the rapidly evolving demands of customers. We shipped our initial web application security and data security products in 2002. In 2006, we expanded our database security product to include compliance features. In 2010, we launched our file security offering. In addition, in 2010, we launched our cloud-based initiatives with ThreatRadar. In 2011, we introduced our cloud-based offering for mid-market enterprises and small and medium-sized businesses (“SMB”) that we provide through Incapsula, Inc., which was majority owned by Imperva until March 2014 when we acquired the remaining portion of Incapsula that we did not already own in order to more fully integrate their operations with ours. In January 2014, we acquired certain assets and liabilities of Tomium Software, LLC to accelerate our mainframe data security solutions. In February 2014, we acquired Skyfence Networks Ltd. to further our ability to secure cloud and Software as a Service (“SaaS”) applications. In December 2016, we acquired certain assets and liabilities of Camouflage Software, Inc., to further our data masking, security and compliance solutions in the cloud and on-premises.

In February 2017, we sold the assets of the Skyfence business to Forcepoint LLC.  In March 2017, we introduced our FlexProtect licensing program to give customers access to our on-premises and hybrid solutions for data and applications under a single license.  Designed to give customers the flexibility to use Imperva products, regardless of where data and applications are initially deployed or migrated, Imperva FlexProtect directly supports dynamic hybrid cloud deployments and provides protection to manage this transition.

In January 2018, we announced organizational changes designed to allow us to focus on customers and product innovation and to drive operational efficiencies. The reorganization enables us to reallocate resources and focus employees on transformation and growth initiatives.

Our research and development efforts are focused primarily on improving and enhancing our existing cyber security solutions and services, as well as developing new products and services and conducting advanced security research. We conduct most of our research and development activities in Israel, and we believe this provides us with access to some of the best engineering talent in the security industry. As of December 31, 2017, we had 325 employees dedicated to research and development, including our advanced security research group, the Imperva Defense Center (“IDC”). Our research and development expense was $63.5 million, $62.4 million, and $53.4 million for the years ended December 31, 2017, 2016 and 2015, respectively.

We derive our revenue from sales and licenses of our products and sales of our services. Products and license revenue is generated primarily from sales of perpetual software licenses installed on hardware appliances or virtual appliances for our SecureSphere product line. Services revenue consists of maintenance and support, professional services and training and subscriptions. A majority of our revenue is derived from customers in the Americas region. In 2017, 45% of our total revenue was generated from United States, 20% from Europe, Middle East and Africa (“EMEA”), 20% from Asia Pacific (“APAC”) and 15% from other regions.

We market and sell our products through a hybrid sales model, which combines a direct touch sales organization and an overlay channel sales team that actively assist our extensive network of channel partners throughout the sales process. We also provide our channel partners with marketing assistance, technical training and support. We primarily sell our products and services through our channel partners, including distributors and resellers, which sell to end-user customers, who we refer to in this Annual Report on Form 10-K as our customers. We have a network of approximately 280 direct and 580 indirect partners worldwide, including both

36


 

resellers and distributors. In 2017, our channel partners originated over 57%, and fulfilled almost 84%, of our sales. We work with many of the world’s leading security value-added resellers, and our partners include some of the largest hosting companies for cloud-based deployments.

As of December 31, 2017, Imperva had over 5,900 customers in more than 100 countries. In addition, our solutions are used to protect thousands of organizations through cloud-based deployments with our Software-as-a-Service (“SaaS”) customers and our managed security service provider (“MSSP”) and hosting partners.

Our net revenue has increased in each of the last three years, growing from $234.3 million in 2015 to $264.5 million in 2016 to $321.7 million in 2017. We generated net income of $22.9 million in 2017, however, incurred net losses of $48.9 million and $70.3 million 2015 and 2016, respectively. As of December 31, 2017, we had an accumulated deficit of $256.5 million.

Opportunities, Challenges and Risks

We believe that the growth of our business and our future success are dependent upon many factors, including our ability to maintain our technology leadership, improve our go to market strategy, address the needs of smaller enterprises and compete effectively in the marketplace for cyber security solutions. While each of these areas presents significant opportunities for us, they also pose important challenges and risks that we must successfully address in order to sustain the growth of our business and improve our results of operations.

Maintain Technology Leadership. As a result of the rise in sophisticated attacks by hackers and malicious insiders, the difficulty in complying with regulations governing business data and the growing complexity of, and open access to, data centers, we believe that enterprises are struggling to provide visibility and control over high-value business applications and data assets that they need to protect. In addition, organizations are increasingly taking advantage of cloud-based services and virtualization technologies, and these new technologies and architectures are increasing the complexity of, and accessibility to, the data center. We believe these challenges are driving the need for a new protection layer positioned closely around the applications and data assets in the data center. We expect that as enterprises recognize the growing risk to high-value business data and the need to comply with increasing regulatory compliance mandates, their spending will increase on solutions designed to control and protect such data. We believe that traditional security and compliance products do not address the evolving needs of enterprises or do not do so adequately, and that this presents us with a large market opportunity. To capitalize on this opportunity, we have introduced and expect that in the future we will need to continue to introduce innovations to our broad business security solutions, including solutions to address cyber security opportunities that arise as enterprises pursue cloud computing initiatives. We cannot assure you that our products will achieve widespread market acceptance or that we will properly anticipate future customer needs. Moreover, if our products do not satisfy evolving customer requirements, we will not capture the increase in spending that we expect will result from enterprises seeking to secure data across various systems in the data center.

Invest in Our Go To Market Strategy. We are investing in our go to market strategy to improve how we serve our customers and leverage strategic partners in targeted vertical and global markets. We have historically aligned our go-to-market efforts around our products and intend to transition to focus more on our customers. For example, as part of the reorganization we created a Customer Success function led by our Chief Customer Officer to improve the customer experience. In addition, we made substantive changes to our partner program, including an increased focus on our most strategic partners and changes in incentives to align with our mutual outcomes and will also have an increased focus on cloud platforms.

Address Needs of Smaller Enterprises. As market awareness of the benefits of a comprehensive cyber security solution increases, we believe there is a significant opportunity to provide cyber security solutions to smaller enterprises as they confront increasing security threats and compliance mandates. To capitalize on this opportunity, we intend to increase our business with mid-market enterprises and SMBs by expanding our cloud-based service offerings. We have made, and may in the future continue to make, significant investments in our cloud-based security products to address the business security needs of mid-market enterprises and SMBs. If our cloud-based security products, which are relatively new, fail to gain broad acceptance with mid-market enterprises and SMBs, our revenue growth, results of operations and competitive position in our industry could suffer.

Compete Effectively. We operate in an intensely competitive market that has witnessed significant consolidation in recent years with large companies acquiring many of our competitors. We track our success rate in competitive sales opportunities against certain competitors, some of which generate higher revenues and have greater market capitalizations than we do, and many of which are more established or have greater name recognition within our industry. Based upon our internal tracking of the results of such competitive sales opportunities, we believe that we have historically competed favorably against our larger competitors, and that we have a proven track record of successfully competing against such larger competitors. Nonetheless, some of our larger competitors have numerous advantages, including, but not limited to, greater financial resources, broader product offerings and more established relationships with channel partners and customers. If we are unable to compete effectively for a share of the business security market, our business, results of operations and financial condition could be materially and adversely affected.

37


 

We generated net income in 2017, however, we have incurred, and continue to incur, losses from operations. We believe that our existing cash, cash equivalents and short-term investments will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Further, we expect that, if we successfully execute our business plan and strategy, our losses from operations will decline, and that we will reach profitability. Should we need additional cash in the future, we may enter into one or more lines of credit or raise funds through the sale of equity securities.

Key Metrics of Our Business

We monitor the key financial metrics discussed below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies.

Net Revenue. We measure our net revenue to assess the acceptance of our products from our customers, our growth in the markets we serve and to help us establish our strategic and operating plans for future periods. We discuss the components of our net revenue in “—Financial Overview— Net Revenue” below.

Gross Margin. We monitor our gross margin to assess the impact on our current and forecasted financial results from any changes to the pricing and mix of products we are selling to our customers.

Gain (Loss) from Operations. We track our gains and losses from operations to assess how effectively we are planning and monitoring our operations as well as controlling our operational costs, which are primarily driven by headcount.

Deferred Revenue. We monitor our deferred revenue balance because it represents a significant portion of revenue to be recognized in future periods. We also assess the increase in our deferred revenue balance plus revenue we recognized in a particular period as a measure of our sales activity for that period.

Cash, Cash Equivalents and Short-term Investments. We evaluate the level of our cash, cash equivalents and short-term investments to ensure we have sufficient liquidity to fund our operations, including the development of future products and product enhancements and the expansion into new sales channels and territories.

Net Cash Provided by Operations. We monitor cash flow from operations as a measure of our overall business performance. Our cash flow from operations is driven primarily by sales of our products and licenses and, to a lesser extent, from up-front payments from customers under maintenance and support contracts. Our primary uses of cash in operating activities are for personnel-related expenditures, costs of acquiring the hardware used for our appliances, sales, marketing and promotional expenses and costs related to our facilities. Monitoring cash flow from operations enables us to analyze our financial performance without the non-cash effects of certain items such as depreciation and amortization and stock-based compensation expenses, thereby allowing us to better understand and manage the cash needs of our business.

Number of Customers. We believe our customer count is a key indicator of our market penetration, the productivity of our sales organization and the value that our products bring to our customer base. We also believe our existing customers represent significant future revenue opportunities for us.

We discuss for the periods presented revenue, gross margin, the components of loss from operations, number of customers deferred revenue and cash flow from operations further below under “—Segments” and “—Results of Operations”, as applicable, and we discuss our cash and cash equivalents under “—Liquidity and Capital Resources.”

 

 

 

Years ended (or as of December 31)

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

(in thousands, except number of

customers and percentages)

 

Net revenue

 

$

321,716

 

 

$

264,455

 

 

$

234,298

 

Gross margin

 

 

80.1

%

 

 

79.6

%

 

 

79.7

%

Loss from operations

 

$

(13,683

)

 

$

(69,030

)

 

$

(47,798

)

Total deferred revenue

 

$

159,255

 

 

$

130,471

 

 

$

106,657

 

Cash, cash equivalents and short-term investments

 

$

359,531

 

 

$

261,092

 

 

$

264,807

 

Net cash provided by operations

 

$

67,156

 

 

$

22,494

 

 

$

23,867

 

Number of customers

 

 

5,968

 

 

 

5,291

 

 

 

4,541

 

 

38


 

Segments

Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by our chief operating decision maker in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is the Chief Executive Officer.

We operate our business in one operating segment, which is the development, marketing, sales, service and support of cyber security solutions that protect business critical data and applications, whether in the cloud or on premises.

Financial Overview

Net Revenue

We derive our revenue from sales and licenses of our products and sales of our services. As discussed further in “—Critical Accounting Policies and Estimates—Revenue Recognition” below, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collection is probable.

Our net revenue is comprised of the following:

 

Products and License Revenue—Product and license revenue is generated primarily from sales of perpetual software licenses installed on hardware appliances or virtual appliances for our SecureSphere product line. Our SecureSphere product line consists of database security, file security and web application security. Our other product lines include CounterBreach, ThreatRadar and Camouflage. We offer multiple hardware appliance versions that accompany our SecureSphere software, each with different throughput capacities. Perpetual software license revenue is generated from sales of our appliances, licenses for additional users and add-on software modules. We also generate a small amount of hardware revenue from sales of spares or replacement appliances, demonstration units and accessories.

 

Services Revenue—Services revenue consists of subscription, maintenance and support and professional services and training. Subscription revenue is generated from sales of our cloud-based services such as Incapsula and ThreatRadar services. Incapsula services provide distributed denial of service protection (“DDoS”) and load balancing and failover. ThreatRadar services provide reputation and crowdsourced security intelligence services. Maintenance and support revenue is generated from support services that are bundled with appliances and add-on software modules. There are three levels of maintenance and support—Standard, Enhanced and Premium—and these are usually offered through agreements for one to three-year terms. Maintenance and support includes major and minor when-and-if available software updates; customer care, which includes our designated support engineer and Imperva resident engineer programs; content updates from our advanced security research group, the IDC, and hardware replacement. Professional services revenue consists of fees we earn related to implementation and consulting services we provide our customers. Training revenue consists of fees we earn related to training customers and partners on the use of our products. We expect subscription revenue will increase as sales of our cloud-based services continue to increase We also expect that the services revenue from maintenance and support contracts will continue to grow along with the increase in the size of our installed base.

A majority of our products and services are sold to customers in the United States, however, a significant portion of our revenue is generated from international sales. See Note 13 of “Notes to Consolidated Financial Statements” for a discussion of our financial information by geographic region.

 

Cost of Revenue

Our total cost of revenue is comprised of the following:

 

Cost of Products and License Revenue—Cost of products and license revenue is comprised primarily of third-party hardware costs and royalty fees. Our cost of products and license revenue also includes personnel costs related to our operations team, shipping costs and write-offs for excess and obsolete inventory.

 

Cost of Services Revenue—Cost of services revenue is primarily comprised of personnel costs of our technical support team, our professional consulting services and training teams and our Security Operations Center (“SOC”) team. Cost of services revenue also includes facilities costs, subscription fees and depreciation. We expect that our cost of services revenue will increase in absolute dollars as we increase our headcount.

39


 

Operating Expenses

Our operating expenses consist of research and development, sales and marketing, general and administrative expenses, restructuring charges and amortization of acquired intangible assets. Personnel costs are the most significant component of our operating expenses and consist of wages, benefits and bonuses and, with regard to the sales and marketing expense, sales commissions. Personnel costs also include stock-based compensation. We expect personnel costs to continue to increase in absolute dollars as we hire new employees to continue to grow our business.

Research and Development

Our research and development is focused on maintaining and improving our existing products and on new product development. A majority of our research and development expenses are comprised of personnel costs including stock-based compensation, and, to a lesser extent, facility costs, hardware prototype costs, laboratory expenses and depreciation. We expense research and development costs as incurred. We expect our research and development expenses to increase in absolute dollars as we continue to enhance our existing products and develop new products and services that address the emerging market for business security and regulatory compliance.

Sales and Marketing

Sales and marketing expense is the largest component of our operating expenses and consists primarily of personnel costs, including commissions, stock-based compensation and travel expenses. Sales and marketing expenses also include costs related to marketing and promotional activities, third-party referral fees and, to a lesser extent, facilities costs and depreciation. We expect our sales and marketing expenses to increase in absolute dollars as we expand our sales and marketing efforts worldwide.

General and Administrative

General and administrative expense consists primarily of personnel costs, including stock-based compensation, as well as professional fees, facilities costs and depreciation. General and administrative personnel costs include our executive, finance, purchasing, order entry, human resources, information technology and legal functions. Our professional fees consist primarily of accounting, external legal, information technology and other consulting costs. We expect our general and administrative expenses to increase in absolute dollars as we hire new employees to continue to grow our business.

Restructuring charges

In November 2016, we implemented a business restructuring plan to reduce sales, marketing and general and administrative expenses through reductions in headcount and spending generally. The restructuring activity was completed by the end of the first quarter of 2017. The expenses incurred primarily consisted of employee severance charges and other termination-related costs.

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets consists of amortization of intangible assets from the acquisitions of Skyfence and Tomium that occurred in the first quarter of 2014 and Camouflage in the fourth quarter of 2016. On February 23, 2017, we completed the sale of Skyfence.

Other Income (Expense), net

Other income (expense), net is comprised of the following items:

 

Interest Income—Interest income consists of interest earned on our cash, cash equivalents and short-term investments. We expect interest income will vary each reporting period depending on our average investment balances during the period and market interest rates.

 

Interest Expense—Interest expense consists of interest accrued or paid on debt obligations.

 

Foreign Currency Forward Contract Gains (Losses)—Foreign currency forward contract gains and losses pertain to the ineffective portion of derivative instruments designated as hedges that we have entered into primarily to manage our exposure to the variability in expected future expenses resulting from changes in foreign currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes.

 

Foreign Currency Exchange Gains (Losses)—Foreign currency exchange gains and losses relate to transactions denominated in currencies other than the U.S. Dollar.

40


 

Provision for Income Taxes

We operate in several tax jurisdictions and are subject to taxes in each country or jurisdiction in which we conduct business including the United States and Israel. Earnings from our non-U.S. activities are subject to local country income tax and may be subject to U.S. income tax if such earnings are distributed to the U.S. We have incurred net losses in each fiscal year since our inception. For the year ended December 31, 2017, we generated net income. We have recorded insignificant U.S. federal income tax expense. Our tax expense to date relates primarily to foreign income taxes, mainly from our Israeli and United Kingdom activities, and to a lesser extent, state income taxes and impact of the Tax Cuts and Jobs Act.

Results of Operations

The following table is a summary of our consolidated statements of operations in dollars and as a percentage of our total net revenue. We have derived the data for the years ended December 31, 2017, 2016 and 2015 from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

 

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

Amount

 

 

% of Net

Revenue

 

 

Amount

 

 

% of Net

Revenue

 

 

Amount

 

 

% of Net

Revenue

 

 

 

(dollars in thousands)

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products and license

 

$

97,122

 

 

 

30.2

 

 

$

86,798

 

 

 

32.8

 

 

$

107,563

 

 

 

46.0

 

Services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maintenance and support

 

 

91,300

 

 

 

28.4

 

 

 

80,007

 

 

 

30.3

 

 

 

66,380

 

 

 

28.3

 

Professional services and training

 

 

13,918

 

 

 

4.3

 

 

 

13,693

 

 

 

5.2

 

 

 

14,084

 

 

 

6.0

 

Subscriptions

 

 

119,376

 

 

 

37.1

 

 

 

83,957

 

 

 

31.7

 

 

 

46,271

 

 

 

19.7

 

Total services

 

 

224,594

 

 

 

69.8

 

 

 

177,657

 

 

 

67.2

 

 

 

126,735

 

 

 

54.0

 

Total net revenue

 

 

321,716

 

 

 

100.0

 

 

 

264,455

 

 

 

100.0

 

 

 

234,298

 

 

 

100.0

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products and license

 

 

7,738

 

 

 

2.4

 

 

 

9,525

 

 

 

3.6

 

 

 

10,947

 

 

 

4.7

 

Services

 

 

56,215

 

 

 

17.5

 

 

 

44,307

 

 

 

16.8

 

 

 

36,633

 

 

 

15.6

 

Total cost of revenue

 

 

63,953

 

 

 

19.9

 

 

 

53,832

 

 

 

20.4

 

 

 

47,580

 

 

 

20.3

 

Gross profit

 

 

257,763

 

 

 

80.1

 

 

 

210,623

 

 

 

79.6

 

 

 

186,718

 

 

 

79.7

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

63,452

 

 

 

19.7

 

 

 

62,402

 

 

 

23.6

 

 

 

53,376

 

 

 

22.8

 

Sales and marketing

 

 

152,178

 

 

 

47.3

 

 

 

156,465

 

 

 

59.2

 

 

 

136,292

 

 

 

58.2

 

General and administrative

 

 

54,435

 

 

 

16.9

 

 

 

51,260

 

 

 

19.4

 

 

 

43,440

 

 

 

18.5

 

Restructuring charges

 

 

667

 

 

 

0.2

 

 

 

8,118

 

 

 

3.1

 

 

 

-

 

 

 

-

 

Amortization of purchased intangibles

 

 

714

 

 

 

0.2

 

 

 

1,408

 

 

 

0.5

 

 

 

1,408

 

 

 

0.6

 

Total operating expenses

 

 

271,446

 

 

 

84.3

 

 

 

279,653

 

 

 

105.8

 

 

 

234,516

 

 

 

100.1

 

Loss from operations

 

 

(13,683

)

 

 

(4.2

)

 

 

(69,030

)

 

 

(26.2

)

 

 

(47,798

)

 

 

(20.4

)

Gain on sale of business

 

 

35,871

 

 

 

11.1

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Other income (expense), net

 

 

1,142

 

 

 

0.4

 

 

 

(77

)

 

 

-

 

 

 

(402

)

 

 

(0.2

)

Income (loss) before provision for income taxes

 

 

23,330

 

 

 

7.3

 

 

 

(69,107

)

 

 

(26.2

)

 

 

(48,200

)

 

 

(20.6

)

Provision for income taxes

 

 

461

 

 

 

0.1

 

 

 

1,172

 

 

 

0.4

 

 

 

682

 

 

 

0.3

 

Net income (loss)

 

$

22,869

 

 

 

7.2

 

 

$

(70,279

)

 

 

(26.6

)

 

$

(48,882

)

 

 

(20.9

)

 

41


 

Comparison of the Years Ended December 31, 2017 and 2016

Net Revenue

 

 

 

Years ended December 31,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

Change

 

 

 

Amount

 

 

% of Net

Revenue

 

 

Amount

 

 

% of Net

Revenue

 

 

Amount

 

 

%

 

 

 

(dollars in thousands)

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products and license

 

$

97,122

 

 

 

30.2

 

 

$

86,798

 

 

 

32.8

 

 

$

10,324

 

 

 

11.9

%

Services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maintenance and Support

 

 

91,300

 

 

 

28.4

 

 

 

80,007

 

 

 

30.3

 

 

 

11,293

 

 

 

14.1

%

Professional Services and training

 

 

13,918

 

 

 

4.3

 

 

 

13,693

 

 

 

5.2

 

 

 

225

 

 

 

1.6

%

Subscriptions

 

 

119,376

 

 

 

37.1

 

 

 

83,957

 

 

 

31.7

 

 

 

35,419

 

 

 

42.2

%

Total Services

 

 

224,594

 

 

 

69.8

 

 

 

177,657

 

 

 

67.2

 

 

 

46,937

 

 

 

26.4

%

Total net revenue

 

$

321,716

 

 

 

100.0

 

 

$

264,455

 

 

 

100.0

 

 

$

57,261

 

 

 

21.7

%

United States

 

$

146,215

 

 

 

45.4

 

 

$

143,607

 

 

 

54.3

 

 

$

2,608

 

 

 

1.8

%

EMEA

 

 

63,884

 

 

 

19.9

 

 

 

50,838

 

 

 

19.2

 

 

 

13,046

 

 

 

25.7

%

APAC

 

 

63,959

 

 

 

19.9

 

 

 

48,391

 

 

 

18.3

 

 

 

15,568

 

 

 

32.2

%

Other

 

 

47,658

 

 

 

14.8

 

 

 

21,619

 

 

 

8.2

 

 

 

26,039

 

 

 

120.4

%

Total net revenue

 

$

321,716

 

 

 

100.0

 

 

$

264,455

 

 

 

100.0

 

 

$

57,261

 

 

 

21.7

%

 

Our net revenue increased by $57.2 million, or 21.7%, to $321.7 million during the year ended December 31, 2017 from $264.5 million during the year ended December 31, 2016 primarily due to growth in the subscription revenue and to a lesser extent due to growth in maintenance and support revenue and products and license revenue. This revenue growth reflects the increasing demand for our subscription service offerings, a broader installed base of product and licenses which generate higher maintenance and support revenues, increased sales volume of our products and improved sales execution reflected in the addition of 677 customers in 2017. We had 686 orders exceeding $100,000 during the year ended December 31, 2017, compared to 573 orders for year ended December 31, 2016.

All regions contributed to this growth with a $15.6 million, $13.0 million, $2.6 million and $26.0 million increase in APAC, EMEA, United States and Other respectively, over the same period in 2016. The increase in all regions was primarily due to increasing demand for our subscription service offerings, increased sales volume of our products and improved sales execution.

Products and license revenue increased by $10.3 million, or 11.9%, to $97.1 million during the year ended December 31, 2017 from $86.8 million during the year ended December 31, 2016. The increase in product and license revenue was primarily due to increased sales volume of our products and improved sales execution.

Services revenue increased by $46.9 million, or 26.4%, to $224.6 million during the year ended December 31, 2017 from $177.6 million during the year ended December 31, 2016. During the year ended December 31, 2017, our services revenue was comprised of $119.4 million of subscriptions, $91.3 million of maintenance and support, and $13.9 million of professional services and training. The change in services revenue in the year ended December 31, 2017 from the year ended December 31, 2016 was primarily due to an increase of $35.4 million in subscriptions revenue resulting from our cloud-based security services, in addition to an increase of $11.3 million in maintenance and support revenue from our larger installed base in all regions.

Gross Profit

 

 

 

Years Ended December 31,

 

 

 

 

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

Amount

 

 

Gross

Margin

 

 

Amount

 

 

Gross

Margin

 

 

% Change

 

 

 

(dollars in thousands)

 

 

 

 

 

Products and license gross profit

 

$

89,384

 

 

 

92.0

%

 

$

77,273

 

 

 

89.0

%

 

 

3.0

 

Services gross profit

 

 

168,379

 

 

 

75.0

%

 

 

133,350

 

 

 

75.1

%

 

 

(0.1

)

Total gross profit

 

$

257,763

 

 

 

80.1

%

 

$

210,623

 

 

 

79.6

%

 

 

0.5

 

 

42


 

Total gross margin increased by 0.5% to 80.1% during the year ended December 31, 2017 from 79.6% during the year ended December 31, 2016. Products and license gross margin increased 3.0% to 92.0% for the year ended December 31, 2017 compared to 89.0% for the same period in 2016. The products and license gross margin increase was primarily attributable to increased sales of software licenses, which generally have higher gross margins than hardware products.

Services gross profit is consistent during the year ended December 31, 2017 compared to the same period in 2016.

Operating Expenses

 

 

 

Years Ended December 31,

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

Change

 

 

 

Amount

 

 

% of Net

Revenue

 

 

Amount

 

 

% of Net

Revenue

 

 

Amount

 

 

%

 

 

 

(dollars in thousands)

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

63,452

 

 

 

19.7

 

 

$

62,402

 

 

 

23.6

 

 

$

1,050

 

 

 

1.7

%

Sales and marketing

 

 

152,178

 

 

 

47.3

 

 

 

156,465

 

 

 

59.2

 

 

 

(4,287

)

 

 

(2.7

)%

General and administrative

 

 

54,435

 

 

 

16.9

 

 

 

51,260

 

 

 

19.4

 

 

 

3,175

 

 

 

6.2

%

Restructuring charges

 

 

667

 

 

 

0.2

 

 

 

8,118

 

 

 

3.1

 

 

 

(7,451

)

 

 

(91.8

)%

Amortization of acquired intangible assets

 

 

714

 

 

 

0.2

 

 

 

1,408

 

 

 

0.5

 

 

 

(694

)

 

 

(49.3

)%

Total operating expenses

 

$

271,446

 

 

 

84.3

 

 

$

279,653

 

 

 

105.8

 

 

$

(8,207

)

 

 

(2.9

)%

 

Results above include stock-based compensation expense of:

 

 

 

Years ended December 31,

 

 

 

2017

 

 

2016

 

 

Change

 

 

 

(dollars in thousands)

 

Research and development

 

$

12,187

 

 

$

14,711

 

 

$

(2,524

)

Sales and marketing

 

 

14,696

 

 

 

20,510

 

 

 

(5,814

)

General and administrative

 

 

13,822

 

 

 

17,131

 

 

 

(3,309

)

Restructuring charges

 

 

675

 

 

 

5,859

 

 

 

(5,184

)

 

Research and development expenses increased by $1.1 million, or 1.7%, to $63.5 million during the year ended December 31, 2017 from $62.4 million during the year ended December 31, 2016. The change was primarily due to the charge recorded in the first quarter 2017 for modification of stock awards of $2.3 million, increase in facilities cost by $0.9 million partially offset by a decrease of $2.0 million in personnel costs following the sale of the assets of the Skyfence business in the first quarter of 2017.

Sales and marketing expenses decreased by $4.3 million, or 2.7%, to $152.2 million during the year ended December 31, 2017 from $156.5 million during the year ended December 31, 2016. The change was primarily related to $3.6 million cost reduction initiatives of marketing costs such as lead generation programs and marketing research. There also were decreases in direct sales expenses and travel costs totaling $1.3 million upon implementing our 2016 restructuring plan and cost reduction initiatives. This was partially offset by an increase of $1.2 million in personnel costs, mainly due to sales commissions resulting from increased revenue and consulting fees.

General and administrative expenses increased by $3.2 million, or 6.2%, to $54.4 million during the year ended December 31, 2017 from $51.2 million during the year ended December 31, 2016. The change was primarily due to increased consulting and professional services fees of $2.0 million and an increase in recruiting cost by $0.9 million.

We incurred restructuring charges of $0.7 million and $8.1 million during the year ended December 31, 2017 and 2016 respectively in connection with the restructuring plan implemented in November 2016. The restructuring charges during the year ended December 31, 2017 are termination-related costs, which consist of stock-based compensation expense. The restructuring charges during the year ended December 31, 2016 are termination-related costs, of which $5.8 million consist of stock-based compensation expense and $2.3 million are cash severance costs. The restructuring plan was initiated to reduce sales, marketing and general and administrative expenses through reductions in headcount and spending generally and to align personnel resources in our growth areas.

43


 

Amortization of purchased intangibles decreased by $0.7 million, or 49.3% during the year ended December 31, 2017 compared to the same period in 2016. The decrease is due to a lower acquired intangible assets balance as result of the sale of the Skyfence business in the first quarter of 2017.

Loss from Operations

 

Years ended December 31,

 

 

Change

 

2017

 

 

2016

 

 

Amount

 

 

%

 

(dollars in thousands)

 

$

(13,683

)

 

$

(69,030

)

 

$

55,347

 

 

 

80.18

%

 

 

Our loss from operations decreased by $55.3 million, or 80.2%, to $13.7 million during the year ended December 31, 2017 from $69.0 million during the year ended December 31, 2016 primarily due to higher gross profit and a decrease in total operating expenses. Our gross profit increased by $47.1 million during the year ended December 31, 2017 due to higher total revenues. Our total operating expenses decreased by $8.2 million for the year ended December 31, 2017 when compared to the prior year period primarily due to the sale of the assets of the Skyfence business in the first quarter of 2017, reductions in headcount as a result of the November 2016 restructuring plan, and cost reduction initiatives. This was partially offset by increased costs from higher sales commissions resulting from higher revenue and higher consulting and professional services fees.

Gain on Sale of Business

 

On February 23, 2017, we completed the sale of the assets of Skyfence to Forcepoint LLC for consideration of approximately $40 million in cash. As a result of the sale, we recognized a gain of $35.9 million during the first quarter of 2017.

 

Years Ended December 31,

 

 

Change

 

2017

 

 

2016

 

 

Amount

 

 

%

 

(dollars in thousands)

 

$

35,871

 

 

$

-

 

 

$

35,871

 

 

 

100.0

%

 

Other Income (Expense), Net

 

Years ended December 31,

 

 

Change

 

2017

 

 

2016

 

 

Amount

 

 

%

 

(dollars in thousands)

 

$

1,142

 

 

$

(77

)

 

$

1,219

 

 

 

1583.1

%

 

Other income (expense), net, changed by $1.2 million, or over 100% during the year ended December 31, 2017 as compared to 2016. The change was primarily due to an increase in interest income from higher short-term investments.

Provision for Income Taxes

 

 

 

Years ended December 31,

 

 

Change

 

 

 

2017

 

 

2016

 

 

Amount

 

 

%

 

 

 

(dollars in thousands)

 

Provision for income taxes

 

$

461

 

 

$

1,172

 

 

$

(711

)

 

 

-60.7

%

Effective tax rate

 

 

2.0

%

 

 

(1.7

)%

 

 

 

 

 

 

 

 

 

The Company is subject to income tax in the United States as well as other tax jurisdictions in which it conducts business. Earnings from non-U.S. activities are subject to local country income tax. The Company does not provide for federal income taxes on the undistributed earnings of its foreign subsidiaries as such earnings are to be reinvested indefinitely. The provision for income taxes for the years ended December 31, 2017 was comprised primarily of foreign and state income taxes including tax effects of the gain related to the sale of the Skyfence business, offset in part by tax benefits related to employee gains from their sale of Company stock and an intraperiod tax benefit allocation related to unrealized gains reported in other comprehensive income. The provision for income taxes for the years ended December 31, 2016 was comprised primarily of foreign and state income taxes. The increase in the provision for income taxes in the year ended December 31, 2017 compared with the year ended December 31, 2016 was primarily attributable to an increase in foreign income tax. The provisional accounting for the Tax Cuts and Jobs Act did not have a material impact on the 2017 financial statements.

44


 

Deferred Revenue

 

 

 

Years ended December 31,

 

 

Change

 

 

 

2017

 

 

2016

 

 

Amount

 

 

%

 

 

 

(dollars in thousands)

 

Total deferred revenue

 

$

159,255

 

 

$

130,471

 

 

$

28,784

 

 

 

22.1

%

 

Deferred revenue increased by $28.8 million, or 22.1%, to $159.3 million as of December 31, 2017 from $130.5 million as of December 31, 2016. The growth in our deferred revenue was primarily attributable to an increase in our installed base of products and licenses worldwide, subscription customers and resulting renewals of maintenance and support and subscription agreements, as well as new sales of maintenance and support, and subscription revenue.

Number of Customers

 

 

 

As of December 31,

 

 

Change

 

 

 

2017

 

 

2016

 

 

Amount

 

 

%

 

Number of customers

 

 

5,968

 

 

 

5,291

 

 

 

677

 

 

 

12.8

%

 

Our number of customers increased by 677, or 12.8%, to 5,968 as of December 31, 2017 from 5,291 as of December 31, 2016. Our growth in customer count was driven by increasing market acceptance of our subscription services as well as an increase in our global sales and services and support organizations to 442 as of December 31, 2017 from 408 people as of December 31, 2016. The growth in our sales and services and support organizations was consistent with our plans to continue expanding our global sales and support coverage, in particular for our channel partner sales and support teams. The increase in our services and support organization allowed us to target new customers while continuing to support our existing customers across all of our geographies.

Comparison of the Years Ended December 31, 2016 and 2015

Net Revenue

 

 

 

Years ended December 31,

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

2015

 

 

Change

 

 

 

Amount

 

 

% of Net

Revenue

 

 

Amount

 

 

% of Net

Revenue

 

 

Amount

 

 

%

 

 

 

(dollars in thousands)

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products and license

 

$

86,798

 

 

 

32.8

 

 

$

107,563

 

 

 

46.0

 

 

$

(20,765

)

 

 

(19.3

)%

Services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maintenance and Support

 

 

80,007

 

 

 

30.3

 

 

 

66,380

 

 

 

28.3

 

 

 

13,627

 

 

 

20.5

%

Professional Services and training

 

 

13,693

 

 

 

5.2

 

 

 

14,084

 

 

 

6.0

 

 

 

(391

)

 

 

(2.8

)%

Subscriptions

 

 

83,957

 

 

 

31.7

 

 

 

46,271

 

 

 

19.7

 

 

 

37,686

 

 

 

81.4

%

Total Services

 

 

177,657

 

 

 

67.2

 

 

 

126,735

 

 

 

54.0

 

 

 

50,922

 

 

 

40.2

%

Total net revenue

 

$

264,455

 

 

 

100.0

 

 

$

234,298

 

 

 

100.0

 

 

$

30,157

 

 

 

12.9

%

United States

 

$

143,607

 

 

 

54.3

 

 

$

141,225

 

 

 

60.3

 

 

$

2,382

 

 

 

1.7

%

EMEA

 

 

50,838

 

 

 

19.2

 

 

 

47,429

 

 

 

20.2

 

 

 

3,409

 

 

 

7.2

%

APAC

 

 

48,391

 

 

 

18.3

 

 

 

30,180

 

 

 

12.9

 

 

 

18,211

 

 

 

60.3

%

Other

 

 

21,619

 

 

 

8.2

 

 

 

15,464

 

 

 

6.6

 

 

 

6,155

 

 

 

39.8

%

Total net revenue

 

$

264,455

 

 

 

100.0

 

 

$

234,298

 

 

 

100.0

 

 

$

30,157

 

 

 

12.9

%

 

Our net revenue increased by $30.2 million, or 12.9%, to $264.5 million during the year ended December 31, 2016 from $234.3 million during the year ended December 31, 2015 primarily due to growth in the subscription revenue and to a lesser extent due to growth in maintenance and support revenue partly offset by a decrease in products and license revenue. This revenue growth reflects the increasing demand for our subscription service offerings reflected in the addition of 750 customers in 2016 as well as a broader installed base of product and licenses which generate higher maintenance and support revenues. We had 573 orders exceeding $100,000 during the year ended December 31, 2016, compared to 501 orders for year ended December 31, 2015.

45


 

The APAC region contributed the largest portion of this growth with an $18.2 million increase over the same period in 2015. The revenue growth in EMEA, United States and Other regions was $3.4 million, $2.4 million and $6.2 million, respectively, over the same period in 2015. The increase in all regions was principally due to increasing demand for our subscription service offerings, an increase in our international sales personnel and improved sales execution in the APAC region.

Products and license revenue decreased by $20.8 million, or 19.3%, to $86.8 million during the year ended December 31, 2016 from $107.6 million during the year ended December 31, 2015. The decrease in product and license revenue was primarily due to extended sales cycles predominantly relating to larger deals in the Americas region and to sales execution challenges in the United States and EMEA region.

Services revenue increased by $50.9 million, or 40.2%, to $177.6 million during the year ended December 31, 2016 from $126.7 million during the year ended December 31, 2015. During the year ended December 31, 2016, our services revenue was comprised of $80.0 million of maintenance and support, $13.7 million of professional services and training and $83.9 million of subscriptions. The change in services revenue in the year ended December 31, 2016 from the year ended December 31, 2015 was primarily due to an increase of $37.7 million in subscriptions revenue attributable to improved execution and strong traction of Incapsula, our cloud-based security services, which generated $13.6 million in maintenance and support revenue from our larger installed base as reflected in our product and license revenue. This was offset by a decrease in our professional services and training revenue by $0.4 million primarily due to timing of projects and a decrease in our product and licensing revenue.

Gross Profit

 

 

 

Years Ended December 31,

 

 

 

 

 

 

 

2016

 

 

2015

 

 

 

 

 

 

 

Amount

 

 

Gross

Margin

 

 

Amount

 

 

Gross

Margin

 

 

% Change

 

 

 

(dollars in thousands)

 

 

 

 

 

Products and license gross profit

 

$

77,273

 

 

 

89.0

%

 

$

96,616

 

 

 

89.8

%

 

 

(0.8

)

Services gross profit

 

 

133,350

 

 

 

75.1

%

 

 

90,102

 

 

 

71.1

%

 

 

4.0

 

Total gross profit

 

$

210,623

 

 

 

79.6

%

 

$

186,718

 

 

 

79.7

%

 

 

(0.1

)

 

Total gross margin decreased by 0.1% to 79.6% during the year ended December 31, 2016 from 79.7% during the year ended December 31, 2015. Products and license gross margin decreased 0.8% to 89.0% for the year ended December 31, 2016 compared to 89.8% for the same period in 2015. The products and license gross margin decrease was primarily attributable to decreased sales of higher throughput appliances, which generally have higher gross margins. Services gross profit increased 4.0% to 75.1% for the year ended December 31, 2016 as compared to 71.1% for the same period in 2015. The services gross margin increase was primarily attributable to higher subscription, maintenance and support revenues and cost efficiencies driven by the higher volume of services.

Operating Expenses

 

 

 

Years Ended December 31,

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

2015

 

 

Change

 

 

 

Amount

 

 

% of Net

Revenue

 

 

Amount

 

 

% of Net

Revenue

 

 

Amount

 

 

%

 

 

 

(dollars in thousands)

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

62,402

 

 

 

23.6

 

 

$

53,376

 

 

 

22.8

 

 

$

9,026

 

 

 

16.9

%

Sales and marketing

 

 

156,465

 

 

 

59.2

 

 

 

136,292

 

 

 

58.2

 

 

 

20,173

 

 

 

14.8

%

General and administrative

 

 

51,260

 

 

 

19.4

 

 

 

43,440

 

 

 

18.5

 

 

 

7,820

 

 

 

18.0

%

Restructuring charges

 

 

8,118

 

 

 

3.1

 

 

 

-

 

 

 

-

 

 

 

8,118

 

 

 

100.0

%

Amortization of acquired intangible assets

 

 

1,408

 

 

 

0.5

 

 

 

1,408

 

 

 

0.6

 

 

 

-

 

 

 

0.0

%

Total operating expenses

 

$

279,653

 

 

 

105.8

 

 

$

234,516

 

 

 

100.1

 

 

$

45,137

 

 

 

19.2

%

 

46


 

Results above include stock-based compensation expense of:

 

 

 

Years ended December 31,

 

 

 

2016

 

 

2015

 

 

Change

 

 

 

(dollars in thousands)

 

Research and development

 

$

14,711

 

 

$

13,831

 

 

$

880

 

Sales and marketing

 

 

20,510

 

 

 

16,717

 

 

 

3,793

 

General and administrative

 

 

17,131

 

 

 

16,554

 

 

 

577

 

Restructuring charges

 

 

5,859

 

 

 

-

 

 

 

5,859

 

 

Research and development expenses increased by $9.0 million, or 16.9%, to $62.4 million during the year ended December 31, 2016 from $53.4 million during the year ended December 31, 2015. The change was primarily attributable to an increase of $7.5 million in personnel costs, including stock-based compensation, due to additional research and development personnel being hired to support our ongoing product development efforts. We also incurred increased rent expenses and travel costs totaling $1.5 million related to the increased headcount.

Sales and marketing expenses increased by $20.2 million, or 14.8%, to $156.5 million during the year ended December 31, 2016 from $136.3 million during the year ended December 31, 2015. The change was principally related to an increase of $13.3 million in personnel costs, including stock-based compensation and contractor costs, due to increased headcount in all regions in an effort to help drive our overall revenue growth and costs to settle a compensation-related claim with a key employee. We also incurred increases of $6.9 million in direct sales expenses, travel costs and rent expenses due to marketing event expenses, including increased expenses year over year for our annual sales kick-off event.

General and administrative expenses increased by $7.8 million, or 18.0%, to $51.2 million during the year ended December 31, 2016 from $43.4 million during the year ended December 31, 2015. The change was primarily due to an increase of $6.0 million in personnel costs, including stock-based compensation, to build out our corporate level functions to support global growth. We also incurred increased travel costs and rent expenses totaling $1.4 million related to the increased headcount.

We incurred restructuring charges of $8.1 million during the year ended December 31, 2016. We incurred no restructuring charges during the year ended December 31, 2015. The restructuring charges are termination-related costs, of which $5.8 million consist of stock-based compensation expense and $2.3 million are cash severance costs. The restructuring plan was initiated to reduce sales, marketing and general and administrative expenses through reductions in headcount and spending generally and to align personnel resources in our growth areas.

Amortization of purchased intangibles were consistent during the year ended December 31, 2016 compared to the same period in 2015.

Loss from Operations

 

Years ended December 31,

 

 

Change

 

2016

 

 

2015

 

 

Amount

 

 

%

 

(dollars in thousands)

 

$

(69,030

)

 

$

(47,798

)

 

$

(21,232

)

 

 

(44.4

)%

 

Our loss from operations increased by $21.2 million, or 44.4%, to $69.0 million during the year ended December 31, 2016 from $47.8 million during the year ended December 31, 2015. Our gross profit increased by $23.9 million during the year ended December 31, 2016 due to higher subscription, maintenance and support revenues. This improvement was offset by an increase in total operating expenses of $45.1 million for the year ended December 31, 2016 when compared to the prior year principally due to increases in personnel costs, including stock-based compensation expense, to support the increase in scope and global reach of our business and increased marketing costs. The increase in operating expenses was comprised of increased sales and marketing costs of $20.2 million to expand our global sales efforts, an increase of $9.0 million of research and development costs to support our ongoing product development efforts and an increase in general and administrative costs of $7.8 million related to increased headcount to support the growth and operations of our business and $8.1 million of restructuring costs.

 

 

47


 

Other Income (Expense), Net

 

Years ended December 31,

 

 

Change

 

2016

 

 

2015

 

 

Amount

 

 

%

 

(dollars in thousands)

 

$

(77

)

 

$

(402

)

 

$

325

 

 

 

80.8

%

 

Other income (expense), net, changed by $0.3 million, or 80.8% during the year ended December 31, 2016 as compared to 2015. The change was primarily due to an increase in interest income with increased short-term investments.

 

Provision for Income Taxes

 

 

 

Years ended December 31,

 

 

Change

 

 

 

2016

 

 

2015

 

 

Amount

 

 

%

 

 

 

(dollars in thousands)

 

Provision for income taxes

 

$

1,172

 

 

$

682

 

 

$

490

 

 

 

71.8

%

Effective tax rate

 

 

(1.7

)%

 

 

(1.4

)%

 

 

 

 

 

 

 

 

 

The provision for income taxes for the years ended December 31, 2016 and 2015 was comprised primarily of foreign and state income taxes. The increase in the provision for income taxes in the year ended December 31, 2016 compared with the year ended December 31, 2015 was primarily attributable to an increase in foreign income tax.

Deferred Revenue

 

 

 

Years ended December 31,

 

 

Change

 

 

 

2016

 

 

2015

 

 

Amount

 

 

%

 

 

 

(dollars in thousands)

 

Total deferred revenue

 

$

130,471

 

 

$

106,657

 

 

$

23,814

 

 

 

22.3

%

 

Deferred revenue increased by $23.8 million, or 22.3%, to $130.5 million as of December 31, 2016 from $106.7 million as of December 31, 2015. The growth in our deferred revenue was primarily attributable to an increase in our installed base of products and licenses worldwide and resulting renewals of maintenance and support agreements, as well as new sales of maintenance and support, and subscription revenue.

Number of Customers

 

 

 

As of December 31,

 

 

Change

 

 

 

2016

 

 

2015

 

 

Amount

 

 

%

 

Number of customers

 

 

5,291

 

 

 

4,541

 

 

 

750

 

 

 

16.5

%

 

Our number of customers increased by 750, or 16.5%, to 5,291 as of December 31, 2016 from 4,541 as of December 31, 2015. Our growth in customer count was driven by increasing market acceptance of our subscription services as well as an increase in our global sales and services and support organizations to 408 as of December 31, 2016 from 397 people as of December 31, 2015. The growth in our sales and services and support organizations was consistent with our plans to continue expanding our global sales and support coverage, in particular for our channel partner sales and support teams. The increase in our services and support organization allowed us to target new customers while continuing to support our existing customers across all of our geographies.

Liquidity and Capital Resources

To date, we have satisfied our capital and liquidity needs through sales of our products and services, our initial and follow-on public offering of common stock, and private placements of convertible preferred stock. We have incurred significant losses in the past as we continue to expand our business. Our cash flow from operating activities will continue to be affected principally by the extent to which our revenue exceeds or does not exceed any increase in spending on personnel to support the growth of our business. Our largest source of operating cash flow is cash collections from our customers.

48


 

Capital Resources

As of December 31, 2017, we had $359.5 million of cash, cash equivalents and short-term investments, $15.4 million of which is held outside of the United States and not presently available to fund domestic operations and obligations. Our cash, cash equivalents and short-term investments have increased from $17.7 million as of December 31, 2010 to $359.5 million as of December 31, 2017. This increase is primarily the result of our initial public offering of common stock in November 2011 in which we raised $86.2 million, after deducting underwriters’ discounts and offering expenses, our follow-on public offering of common stock in March 2015 in which we raised $127.9 million after deducting underwriters’ discounts and offering expenses and cash provided by operating activities. This amount was partially offset by our losses from operations as we continued to fund our investments in growth, including the development of future products and product enhancements, and expanded into new sales channels and geographies. In addition, we increased our use of cash through the acquisitions of Skyfence Networks, Ltd. and certain assets of Tomium and Camouflage which included cash consideration totaling approximately $24.8 million. We believe our existing cash, cash equivalents and short-term investments will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including, among other things, market acceptance of our products, the cost of our research and development activities, the acquisition of other businesses and overall economic conditions.

Cash Flows

The following summary of our cash flows for the periods indicated has been derived from our consolidated financial statements which are included elsewhere in this Annual Report on Form 10-K:

 

 

 

Years ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

(dollars in thousands)

 

Net cash provided by operating activities

 

$

67,156

 

 

$

22,494

 

 

$

23,867

 

Net cash provided by (used in) investing activities

 

$

7,287

 

 

$

(78,447

)

 

$

(63,775

)

Net cash provided by (used in) financing activities

 

$

9,453

 

 

$

(4,831

)

 

$

140,078

 

 

Cash Flows from Operating Activities

Our largest uses of cash from operating activities are for employee related expenditures. Our primary source of cash flow from operating activities is cash receipts from customers. Our cash flow from operations will continue to be affected principally by the extent to which we grow our revenues and increase our headcount, primarily in our sales and marketing and research and development functions, in order to grow our business.

Net cash provided by operating activities of $67.2 million for the year ended December 31, 2017 reflected a net income of $22.9 million, adjusted for non-cash charges of $21.1 million and a net change of $23.2 million in our net operating assets and liabilities.  The non-cash charges of $21.1 million are primarily due to stock-based compensation expense of $46.7 million and a depreciation and amortization charge of $10.9 million, partially offset by gain on sale of business of $35.9 million. The net change of $23.2 million in our operating assets and liabilities was primarily the result of an increase in our deferred revenue of $30.2 million, an increase in both accrued compensation and benefits of $5.2 million and accrued and other liabilities of $3.4 million partially offset by an increase in accounts receivable of $13.0 million and increase in prepaid expenses and other assets of $2.0 million.

Net cash provided by operating activities of $22.5 million for the year ended December 31, 2016 reflected a net loss of $70.3 million, adjusted for non-cash charges of $72.4 million primarily due to stock-based compensation expense, as well as a net change of $20.4 million in our net operating assets and liabilities. The net change in our operating assets and liabilities was primarily the result of a $23.7 million increase in our deferred revenue, which represents unearned amounts billed to our customers, resulting from our larger installed base combined with strong maintenance and support renewal rates from our existing customers, in addition to an increase of $2.2 million in accrued and other liabilities. This change was partially offset by a decrease in accrued compensation and benefits of $2.5 million, an increase in accounts receivable of $1.5 million and a decrease in accounts payable of $1.4 million.

Cash Flows from Investing Activities

Our investing activities consist primarily of purchases, maturities and sales of short-term investments, expenditures to purchase property and equipment and cost of acquisitions.

49


 

During the year ended December 31, 2017, cash provided by investing activities was $7.3 million, primarily due to proceeds from the maturities of short-term investments of $117.6 million and proceeds from the disposition of the Skyfence business of $35.0 million, partially offset by purchases of short-term investments of $131.0 million and capital expenditures of $14.0 million.

During the year ended December 31, 2016, cash used in investing activities was $78.4 million, primarily as a result of $130.0 million in purchases of short-term investments, $16.8 million in net purchases of property and equipment and $3.9 million in acquisition of Camouflage offset by $72.5 million in proceeds from maturities of short-term investments.

Cash Flows from Financing Activities

Net cash provided by financing activities was $9.5 million for the year ended December 31, 2017 primarily as a result of net proceeds from issuance of common stock.

Net cash used in financing activities was $4.8 million for the year ended December 31, 2016 primarily as a result of settlement of holdback liability as part of the consideration in connection with the acquisition of SkyFence Networks Ltd of $7.1 million offset by net proceeds from issuance of common stock of $2.4 million.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and include our accounts and the accounts of our wholly-owned subsidiaries. The preparation of our consolidated financial statements requires our management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the applicable periods. Management bases its estimates, assumptions and judgments on historical experience and on various other factors that they believe to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our consolidated financial statements, which, in turn, could change the results from those reported. Our management evaluates its estimates, assumptions and judgments on an ongoing basis.

The critical accounting policies requiring estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements are described below.

Revenue Recognition

Our management must make significant judgments and estimates to determine revenue to be recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if our management makes different judgments or utilizes different estimates.

We derive revenue from two sources: (i) products and license revenue, which includes hardware and perpetual software license revenue and (ii) services revenue, which includes maintenance, professional services, training and subscription arrangements. Substantially all of product and license sales have been sold in combination with maintenance services. Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery or performance has occurred; the sales price is fixed or determinable; and collection is reasonably assured.

We define each of the four criteria above as follows:

 

Persuasive evidence of an arrangement exists: Evidence of an arrangement consists of a purchase order or acknowledgment issued pursuant to the terms and conditions of a direct customer end user or distributor or value-added reseller (VAR) agreement and, in limited cases with both distributor/VAR and an end user agreement and/or purchase order.

 

Delivery or performance has occurred: We use shipping and related documents, or written evidence of customer acceptance, when applicable, to verify delivery or performance. We recognize product revenue upon transfer of title and risk of loss, which primarily is upon shipment to value-added resellers, distributors or end users. We recognize software license revenue upon transfer of electronic keys to a customer. In most instances, we do not have significant obligations for future performance, such as customer acceptance provisions, rights of return or pricing credits, associated with our sales. In instances where final acceptance of the product or service is specified by the customer, revenue is deferred until all acceptance criteria have been met.

50


 

 

The sales price is fixed or determinable: We assess whether the sales price is fixed or determinable based on payment terms and whether the sales price is subject to refund or adjustment. Standard payment terms to customers range from 30 to 90 days. In the event payment terms are provided that differ from our standard business practices, the fees are deemed to not be fixed or determinable and revenue is recognized when the payments become due, provided the remaining criteria for revenue recognition have been met.

 

Collection is reasonably assured: We assess probability of collection on a customer-by-customer basis. Our customers are subjected to a credit review process that evaluates their financial condition and ability to pay for products and services. If we conclude that collection is not reasonably assured based upon an initial review, we do not recognize revenue until payment is received.

Maintenance and subscription revenue includes arrangements for software maintenance and technical support for our products and subscription services revenue primarily related to our cloud-based services. The terms of our subscription service arrangements do not provide customers the right to take possession of the related software. Maintenance is offered under renewable, fee-based contracts, which include technical support, hardware repair and replacement parts, bug fixes, patches and unspecified upgrades on a when-and-if-available basis. Maintenance and subscription revenue is initially deferred and recognized ratably over the life of the contract, with the related expenses recognized as incurred. Maintenance and subscription contracts usually have a term of one to three years. Unearned maintenance and subscription revenue is included in deferred revenue.

Professional service revenue primarily consists of the fees we earn related to installation and consulting services. We recognize revenue from professional services upon delivery or completion of performance. Professional service arrangements are typically short term in nature and are largely completed within 90 days from the start of service.

Training services are recognized upon delivery of the training.

Multiple Element Arrangements

Most of our products are hardware appliances containing software components that function together to provide the essential functionality of the product. Therefore, our hardware appliances are considered non-software deliverables and are not subject to industry-specific software revenue recognition guidance.

Our product revenue also includes revenue from the sale of stand-alone software products. Stand-alone software may operate on our hardware appliance, but is not considered essential to the functionality of the hardware and is, therefore, subject to the industry-specific software revenue recognition guidance. Additionally, we provide unspecified software upgrades for our products, on a when-and-if available basis, and hardware replacements through maintenance and support contracts. These support arrangements when sold on a stand-alone basis are subject to the industry-specific software revenue recognition guidance.

Under the software revenue recognition guidance, we use the residual method to recognize revenue when a product agreement includes one or more elements to be delivered at a future date and Vendor Specific Objective Evidence (“VSOE”) of the fair value of all undelivered elements exists. In the majority of our contracts, the only element that remains undelivered at the time of delivery of the product is maintenance and support services and subscriptions. Under the residual method, the VSOE of fair value of the undelivered elements is deferred and the remaining portion of the contract fee is recognized as product revenue. If evidence of the VSOE of fair value of one or more undelivered elements does not exist, all revenue is generally deferred and recognized when delivery of those elements occurs or when fair value can be established.

For certain arrangements with multiple deliverables, we allocate the arrangement fee to the non-software element based upon the relative selling price of such element and, if software and software-related elements (e.g., maintenance and support for the software element) are also included in the arrangement, we allocate the arrangement fee to each of those software and software-related elements as a group. After such allocations are made, the amount of the arrangement fee allocated to the software and software-related elements is accounted for using the residual method. When applying the relative selling price method, we determine the selling price for each element using VSOE of selling price, if it exists, or if not, Third-Party Evidence (“TPE”) of selling price, if it exists. If neither VSOE nor TPE of selling price exist for an element, we use its Best Estimate of Selling Price (“BESP”) for that element. The revenue allocated to each element is then recognized when the basic revenue recognition criteria are met for that element. We limit the amount of revenue recognized for delivered elements to the amount that is not contingent on the future delivery of products or services, or subject to our future performance obligation.

VSOE of fair value for elements of an arrangement is based upon the normal pricing and discounting practices for those services when sold separately. In determining VSOE, we require that a substantial majority of the selling prices for a service fall within a reasonably narrow pricing range, evidenced by a substantial majority of such historical stand-alone transactions falling within a reasonably narrow range. In addition, we consider major service groups and geographies in determining VSOE.

51


 

We are not able to determine TPE for our products or services. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from that of our peers and our offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis.

When we are unable to establish the selling price of our non-software deliverables using VSOE or TPE, we use BESP in our allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis. We determine BESP for the purposes of allocating the arrangement by reviewing external and internal market factors including, but not limited to, pricing practices including discounting, the geographies in which we offer our products and services, the type of customer (i.e., distributor, value added reseller or direct end user) and competition. Additionally, we consider historical transactions, including transactions whereby the deliverable was sold on a stand-alone basis. The determination of BESP is made through consultation with and approval by our management. Selling prices are analyzed on a quarterly basis to identify if we have experienced significant changes in our selling prices that would impact our determination of BESP.

For our non-software deliverables we allocate the arrangement consideration based on the relative selling price of the deliverables. For our hardware appliances we use BESP as our selling price. For our maintenance and support services, subscriptions and professional services and training, we primarily use VSOE as the selling price and when we are unable to establish a selling price using VSOE, we use BESP.

Stock-Based Compensation

We recognize compensation costs related to stock option, employee stock purchase plan, restricted stock unit, or RSU, and shares of restricted stock grants to employees based on the estimated fair value of the awards on the date of grant, net of estimated forfeitures. For stock option and employee stock purchase plan grants, we estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The fair value of RSUs is determined using the closing price of our stock on the date of grant. The grant date fair value of the stock-based awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards.

For performance based RSUs granted to employees which have multiple performance and a market condition we used a Monte Carlo simulation model to determine fair value of such awards. The key inputs used to determine the fair value of the awards were our stock price on the date of grant, the expected volatility, the risk free interest rate and revenues achieved. We update the estimated expense, net of forfeitures, at the end of each reporting period. The expense is recognized on an accelerated basis over the requisite service period, generally the vesting period of the respective awards.

For performance based RSUs granted to employees which only have performance conditions, we recognized expense based on our best estimate of number of awards which are expected to vest upon achievement of performance conditions. We revisit this estimate periodically

The fair value of the options and employee stock purchase plan awards during 2017, 2016 and 2015 were calculated using the Black-Scholes option pricing model with the following weighted-average assumptions:

 

 

 

Years ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Option grants:

 

 

 

 

 

 

 

 

 

 

 

 

Expected dividend rate

 

-

 

 

 

0

%

 

 

0

%

Risk-free interest rate

 

-

 

 

 

1.4

%

 

 

1.8

%

Expected term (in years)

 

-

 

 

 

6.0

 

 

 

6.1

 

Expected volatility

 

-

 

 

 

58

%

 

 

49

%

ESPP grants:

 

 

 

 

 

 

 

 

 

 

 

 

Dividend rate

 

 

0

%

 

 

0

%

 

 

0

%

Risk-free interest rate

 

 

1.3

%

 

 

0.5

%

 

 

0.4

%

Expected term (in years)

 

 

0.5

 

 

 

0.5

 

 

 

0.5

 

Expected volatility

 

 

49

%

 

 

58

%

 

 

65

%

 

52


 

The Black-Scholes options pricing model requires the use of highly subjective and complex assumptions which determine the fair value of share-based awards, including the grant’s expected term and the price volatility of the underlying stock. These assumptions include:

Expected Term. The expected term represents the period over which the stock-based awards are expected to be outstanding. The expected term is based on historical option exercise behavior and post-vesting cancellations of options by employees. For ESPP grants, the expected term is based on the length of the offering period, which is six months.

Risk-Free Interest Rate. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to each award’s expected term.

Expected Volatility. The expected volatility was based on our historical volatilities. The volatility is over a period equal to the expected terms of the stock option grants and the offering period for employee stock purchase plan.

Expected Dividend. The expected dividend was assumed to be zero as we have never paid dividends and have no current plans to do so.

The Company adopted the guidance in Accounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting, on January 1, 2017. Under this ASU, entities are permitted to make an accounting policy election to either estimate forfeitures on share-based payment awards, as previously required, or to recognize forfeitures as they occur. The Company elected to recognize forfeitures as they occur. During the year ended December 31, 2016 and 2015, we estimated a forfeiture rate to calculate the stock-based compensation for expense which was based on an analysis of our actual forfeitures.

We will continue to use judgment in evaluating the expected term and expected volatility related to our own stock-based compensation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may have refinements to the estimates of our expected volatility and expected terms, which could materially impact our future stock-based compensation expense.

Business Combinations

We account for our business acquisitions in accordance with Accounting Standards Codification (ASC) No. 805, Business Combinations. We use our best estimates and assumptions as part of the purchase price allocation process to value assets acquired and liabilities assumed at the business combination date. However, our estimates and assumptions are subject to refinement. We record adjustments to assets acquired or liabilities assumed subsequent to the purchase price allocation period in our operating results in the period in which the adjustments were determined.

The total purchase consideration allocated to the tangible assets acquired is assigned based on the fair values as of the date of the acquisition. The identifiable intangible assets are subject to amortization on a straight-line basis as this best approximates the benefit period related to these assets.

Property and Equipment

Property and equipment, including leasehold improvements, are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, generally two to seven years.

Leasehold improvements are amortized using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the assets. Upon the retirement or disposition of property and equipment, the related costs and accumulated depreciation is removed and any related gain or loss is recorded in the consolidated statements of operations. Repairs and maintenance that do not extend the life or improve an asset are expensed in the periods incurred.

Goodwill and Acquired Intangibles

Goodwill is not amortized and is reviewed at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company operates its business in one operating segment and one reporting unit, which is the development, marketing, sales, service and support of cyber security solutions that protect business-critical data and applications whether in the cloud or on premises. In reviewing goodwill, we bypass the qualitative assessment and proceeds directly to performing the quantitative two step impairment test to test the reporting unit’s goodwill for impairment. The first step of the impairment test involves comparing the fair value of the reporting unit to its net book value, including goodwill and is used as a screening process for identifying a potential goodwill impairment loss. If the net book value exceeds its fair value, then we would perform the second step

53


 

of the goodwill impairment test to determine the amount of the impairment loss. The impairment loss would be calculated by comparing the implied fair value of our goodwill to our net book value. In calculating the implied fair value of our goodwill, the fair value would be allocated to all of the other assets and liabilities based on their fair values. The excess of the fair value of the Company over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value.

We complete our annual impairment test during the fourth quarter of each fiscal year. There was no impairment of goodwill recorded for the fiscal year ended December 31, 2017.

Intangible assets consist of purchased technology, customer relationships, trade names and domain names which are amortized over the period of estimated benefit using the straight-line method, as the consumption pattern of the asset is not apparent, and estimated useful lives ranging from seven to ten years. No significant residual value is estimated for intangible assets.

Impairment of Long-Lived Assets

We evaluate our long-lived assets, which consist of property and equipment and acquired intangible assets, for indicators of possible impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Impairment exists if the carrying amounts of such assets exceed the estimates of future net undiscounted cash flows expected to be generated by such assets. Should impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset’s estimated fair value. As of December 31, 2017 and 2016, we have not incurred impairment losses on our long-lived assets.

Income Taxes

We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, tax benefits and deductions and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. Significant changes to these estimates may result in an increase or decrease to our tax provision in the subsequent period when such a change in estimate occurs.

We use the liability method for accounting of deferred income taxes, which requires recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements, but have not been reflected in our taxable income. Estimates and judgments occur in the calculation of certain tax liabilities and in the determination of the recoverability of certain deferred income tax assets, which arise from temporary differences and carry-forwards. Deferred income tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. We regularly assess the likelihood that our deferred income tax assets will be realized. To the extent that we believe any amounts are not more likely than not to be realized, we record a valuation allowance to reduce our deferred income tax assets. In the event we determine that all or part of the net deferred tax assets are not realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. Similarly, if we subsequently realize deferred income tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in an adjustment to earnings in the period such determination is made. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize and measure potential liabilities based upon a more likely than not criteria. Based upon these criteria, we estimate whether, and the extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities may result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our estimate of tax liabilities is less than the amount ultimately assessed, a further charge to expense would result.

Significant judgment is required in determining any valuation allowance recorded against deferred income tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred income tax assets that could be realized, we will adjust our valuation allowance with a corresponding effect to the provision for income taxes in the period in which such determination is made.

54


 

Significant judgment is also required in evaluating our uncertain tax positions and determining our provision for income taxes. Although we believe our reserves for uncertain tax positions are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the effect of reserves for uncertain tax positions and any changes to the reserves that are considered appropriate, as well as the related net interest and penalties, if applicable.

The U.S. Tax Cuts and Jobs Act of 2017 (“Tax Act”) was enacted on December 22, 2017. ASC Topic 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment even though the effective date for most provisions is for tax years beginning after December 31, 2017, or in the case of certain other provisions of the law, January 1, 2018.

Given the significance of the legislation, the U.S. Securities and Exchange Commission (the "SEC") staff issued Staff Accounting Bulletin ("SAB") No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared, and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared, or analyzed.

The Company is still evaluating the provisions of the Tax Reform and amounts reflected in the financial statements for the year ended December 31, 2017 are provisional. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act. The accounting is expected to be completed in 2018.

Contractual Obligations

The following summarizes our contractual obligations as of December 31, 2017:

 

 

 

Payments Due by Period

 

Contractual Obligations:

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

Thereafter

 

 

Total

 

 

 

(in thousands)

 

Operating lease obligations(1)

 

$

8,295

 

 

$

4,991

 

 

$

4,714

 

 

$

557

 

 

$

309

 

 

$

87

 

 

$

18,953

 

Severance Pay Fund(2)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7,238

 

Purchase commitments(3)

 

 

2,600

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,600

 

Total

 

$

10,895

 

 

$

4,991

 

 

$

4,714

 

 

$

557

 

 

$

309

 

 

$

87

 

 

$

28,791

 

  

1

Operating lease agreements represent our obligations to make payments under our non-cancelable lease agreements for our facilities. During the year ended December 31, 2017, we made regular lease payments of $6.9 million under the operating lease agreements.

2

Our consolidated balance sheet as of December 31, 2017 includes $7.2 million of non-current liabilities for our Israeli severance pay fund. The specific timing of any cash payments relating to this obligation cannot be projected with reasonable certainty and, therefore, no amounts for this obligation are included in the annual columns of the table set forth above.

3

Purchase commitments are contractual obligations to purchase hardware appliances and related component parts from our vendors in advance of anticipated sales.

Off-Balance Sheet Arrangements

Through December 31, 2017, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

55


 

Recent Accounting Pronouncements

See "Note 1 - The Company and Summary of Significant Accounting Policies" to the consolidated financial statements included in this report, regarding the impact of certain recent accounting pronouncements on our consolidated financial statements.

 

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks 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 interest rates and foreign currency exchange rates. We do not hold or issue financial instruments for trading purposes.

Interest Rate Sensitivity

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. Our cash, cash equivalents and short-term investment accounts as of December 31, 2017 and 2016 totaled $359.5 million and $261.1 million, respectively, and consist primarily of cash, cash equivalents and short-term investments with maturities of less than two years from the date of purchase. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of the interest rates in the United States. However, because of the short-term nature of the instruments in our portfolio, a sudden change in market interest rates would not be expected to have a material impact on our financial condition or our results of operation.

As of December 31, 2017, we have no indebtedness for borrowed money. To the extent in the future we enter into long-term debt arrangements, we would be subject to fluctuations in interest rates which could have a material impact on our future financial condition and results of operation.

Foreign Currency Exchange Risk

Our consolidated results of operations and cash flow are subject to fluctuations due to changes in foreign currency exchange rates. Substantially all of our revenue is generated in U.S. dollars. Our expenses are generally denominated in the currencies in which our operations are located, which is primarily in the U.S. and Israel and to a lesser extent in EMEA and APAC. Our consolidated results of operations and cash flow 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. The effect of a hypothetical 10% change in foreign currency exchanges rates applicable to our business would not have a material impact on our historical consolidated financial statements.

To date, we have used derivative financial instruments, specifically foreign currency forward contracts, to manage exposure to foreign currency risks, by hedging a portion of our forecasted expenses denominated in Israeli shekels, the British Pound and Euros expected to occur within a year. The effect of exchange rate changes on foreign currency forward contracts is expected to offset the effect of exchange rate changes on the underlying hedged item. We do not use derivative financial instruments for speculative or trading purposes.

 

 

Item 8. Financial Statements and Supplementary Data

Quarterly Results of Operations

The following table sets forth unaudited quarterly consolidated statements of operations data for each of the years in the two-year period ended December 31, 2017 (in thousands, except per share data). We derived this information from our unaudited consolidated financial statements, which we prepared on the same basis as our audited consolidated financial statements contained in this Annual Report on Form 10-K. In our opinion, these unaudited statements include all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair statement of that information when read in conjunction with the

56


 

consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The operating results for any quarter should not be considered indicative of results for any future period.

 

 

 

Three Months Ended

 

 

 

Dec. 31,

2017

 

 

Sept.30,

2017

 

 

June 30,

2017

 

 

March 31,

2017

 

 

Dec. 31,

2016

 

 

Sept.30,

2016

 

 

June 30,

2016

 

 

March 31,

2016

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products and license

 

$

30,905

 

 

$

26,627

 

 

$

20,012

 

 

$

19,578

 

 

$

28,641

 

 

$

22,486

 

 

$

14,830

 

 

$

20,841

 

Services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maintenance and support

 

 

23,591

 

 

 

23,133

 

 

 

22,596

 

 

 

21,980

 

 

 

21,018

 

 

 

20,326

 

 

 

19,802

 

 

 

18,861

 

Professional services and training

 

 

3,514

 

 

 

3,176

 

 

 

3,730

 

 

 

3,498

 

 

 

3,374

 

 

 

3,228

 

 

 

3,656

 

 

 

3,435

 

Subscriptions

 

 

33,071

 

 

 

30,956

 

 

 

28,097

 

 

 

27,252

 

 

 

25,369

 

 

 

22,367

 

 

 

19,585

 

 

 

16,636

 

Total services

 

 

60,176

 

 

 

57,265

 

 

 

54,423

 

 

 

52,730

 

 

 

49,761

 

 

 

45,921

 

 

 

43,043

 

 

 

38,932

 

Total net revenue

 

 

91,081

 

 

 

83,892

 

 

 

74,435

 

 

 

72,308

 

 

 

78,402

 

 

 

68,407

 

 

 

57,873

 

 

 

59,773

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products and license

 

 

2,100

 

 

 

1,883

 

 

 

1,823

 

 

 

1,932

 

 

 

3,133

 

 

 

2,394

 

 

 

1,814

 

 

 

2,184

 

Services

 

 

14,760

 

 

 

14,684

 

 

 

13,751

 

 

 

13,020

 

 

 

11,466

 

 

 

11,354

 

 

 

10,703

 

 

 

10,784

 

Total cost of revenue

 

 

16,860

 

 

 

16,567

 

 

 

15,574

 

 

 

14,952

 

 

 

14,599

 

 

 

13,748

 

 

 

12,517

 

 

 

12,968

 

Gross profit

 

 

74,221

 

 

 

67,325

 

 

 

58,861

 

 

 

57,356

 

 

 

63,803

 

 

 

54,659

 

 

 

45,356

 

 

 

46,805

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

15,959

 

 

 

15,515

 

 

 

14,528

 

 

 

17,450

 

 

 

15,518

 

 

 

15,289

 

 

 

15,576

 

 

 

16,019

 

Sales and marketing

 

 

40,421

 

 

 

38,245

 

 

 

36,388

 

 

 

37,124

 

 

 

36,620

 

 

 

38,128

 

 

 

40,977

 

 

 

40,740

 

General and administrative

 

 

14,879

 

 

 

13,645

 

 

 

12,375

 

 

 

13,536

 

 

 

12,460

 

 

 

12,669

 

 

 

12,245

 

 

 

13,886

 

Restructuring charges

 

 

-

 

 

 

-

 

 

 

-

 

 

 

667

 

 

 

8,118

 

 

 

-

 

 

 

-

 

 

 

-

 

Amortization of acquired intangible assets

 

 

132

 

 

 

133

 

 

 

132

 

 

 

317

 

 

 

352

 

 

 

352

 

 

 

352

 

 

 

352

 

Total operating expenses

 

 

71,391

 

 

 

67,538

 

 

 

63,423

 

 

 

69,094

 

 

 

73,068

 

 

 

66,438

 

 

 

69,150

 

 

 

70,997

 

Income (loss) from operations

 

 

2,830

 

 

 

(213

)

 

 

(4,562

)

 

 

(11,738

)

 

 

(9,265

)

 

 

(11,779

)

 

 

(23,794

)

 

 

(24,192

)

Gain on sale of business

 

 

-

 

 

 

-

 

 

 

-

 

 

 

35,871

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Other income (expense), net

 

 

509

 

 

 

567

 

 

 

158

 

 

 

(92

)

 

 

(26

)

 

 

107

 

 

 

(241

)

 

 

83

 

Income (loss) before provision for income taxes

 

 

3,339

 

 

 

354

 

 

 

(4,404

)

 

 

24,041

 

 

 

(9,291

)

 

 

(11,672

)

 

 

(24,035

)

 

 

(24,109

)

Provision (benefit) for income taxes

 

 

(307

)

 

 

724

 

 

 

(914

)

 

 

958

 

 

 

527

 

 

 

66

 

 

 

681

 

 

 

(102

)

Net income (loss)

 

$

3,646

 

 

$

(370

)

 

$

(3,490

)

 

$

23,083

 

 

$

(9,818

)

 

$

(11,738

)

 

$

(24,716

)

 

$

(24,007

)

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.11

 

 

$

(0.01

)

 

$

(0.10

)

 

$

0.70

 

 

$

(0.30

)

 

$

(0.36

)

 

$

(0.77

)

 

$

(0.75

)

Diluted

 

$

0.11

 

 

$

(0.01

)

 

$

(0.10

)

 

$

0.68

 

 

$

(0.30

)

 

$

(0.36

)

 

$

(0.77

)

 

$

(0.75

)

Shares used in computing earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

34,122

 

 

 

33,907

 

 

 

33,640

 

 

 

33,207

 

 

 

32,744

 

 

 

32,445

 

 

 

32,163

 

 

 

31,843

 

Diluted

 

 

34,576

 

 

 

33,907

 

 

 

33,640

 

 

 

33,771

 

 

 

32,744

 

 

 

32,445

 

 

 

32,163

 

 

 

31,843

 

 

 

57


 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

IMPERVA, INC. AND SUBSIDIARIES

 

 

58


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and the Board of Directors of Imperva, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Imperva, Inc. and subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 23, 2018 expressed an unqualified opinion thereon.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Ernst & Young LLP

 

We have served as the Company’s auditor since 2011.

San Jose, California

February 23, 2018

 

 

59


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and the Board of Directors of Imperva, Inc.

 

Opinion on Internal Control over Financial Reporting

 

We have audited Imperva, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). In our opinion, Imperva, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2017 consolidated financial statements of the Company and our report dated February 23, 2018 expressed an unqualified opinion thereon.

 

Basis for Opinion

 

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  

 

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control Over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ Ernst & Young LLP

San Jose, California

February 23, 2018

 

 

60


 

IMPERVA, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share and per share data)

 

 

 

December 31,

 

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

192,538

 

 

$

107,343

 

Short-term investments

 

 

166,993

 

 

 

153,749

 

Restricted cash

 

 

52

 

 

 

68

 

Accounts receivable, net of allowance of $936 and $ 1,784 as of

   December 31, 2017 and 2016, respectively

 

 

75,535

 

 

 

62,571

 

Inventory

 

 

617

 

 

 

590

 

Prepaid expenses and other current assets

 

 

14,894

 

 

 

7,922

 

Total current assets

 

 

450,629

 

 

 

332,243

 

Property and equipment, net

 

 

25,407

 

 

 

21,496

 

Goodwill

 

 

36,389

 

 

 

37,448

 

Acquired intangible assets, net

 

 

3,184

 

 

 

8,393

 

Severance pay fund

 

 

6,554

 

 

 

5,070

 

Restricted cash

 

 

2,284

 

 

 

1,884

 

Deferred tax assets

 

 

2,022

 

 

 

1,220

 

Other assets

 

 

1,593

 

 

 

1,065

 

TOTAL ASSETS

 

$

528,062

 

 

$

408,819

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,869

 

 

$

5,529

 

Accrued compensation and benefits

 

 

22,913

 

 

 

20,840

 

Accrued and other current liabilities

 

 

11,417

 

 

 

7,683

 

Deferred revenue

 

 

126,174

 

 

 

104,042

 

Total current liabilities

 

 

166,373

 

 

 

138,094

 

Other liabilities

 

 

6,253

 

 

 

6,637

 

Deferred revenue

 

 

33,081

 

 

 

26,429

 

Accrued severance pay

 

 

7,238

 

 

 

5,696

 

TOTAL LIABILITIES

 

 

212,945

 

 

 

176,856

 

Commitments and Contingencies (Note 9)

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value - 5,000,000 shares authorized, no shares

     issued and outstanding as of December 31, 2017 and 2016, respectively

 

 

-

 

 

 

-

 

Common stock, $0.0001 par value - 145,000,000 shares authorized, 34,233,888

    and 33,088,990 shares issued and outstanding as of December 31, 2017 and

    2016, respectively

 

 

3

 

 

 

3

 

Additional paid-in capital

 

 

572,106

 

 

 

510,257

 

Accumulated deficit

 

 

(256,537

)

 

 

(276,819

)

Accumulated other comprehensive loss

 

 

(455

)

 

 

(1,478

)

TOTAL STOCKHOLDERS' EQUITY

 

 

315,117

 

 

 

231,963

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

528,062

 

 

$

408,819

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

 

61


 

IMPERVA, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except per share data)

 

 

 

Years ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Products and license

 

$

97,122

 

 

$

86,798

 

 

$

107,563

 

Services

 

 

224,594

 

 

 

177,657

 

 

 

126,735

 

Total net revenue

 

 

321,716

 

 

 

264,455

 

 

 

234,298

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Products and license

 

 

7,738

 

 

 

9,525

 

 

 

10,947

 

Services

 

 

56,215

 

 

 

44,307

 

 

 

36,633

 

Total cost of revenue

 

 

63,953

 

 

 

53,832

 

 

 

47,580

 

Gross profit

 

 

257,763

 

 

 

210,623

 

 

 

186,718

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

63,452

 

 

 

62,402

 

 

 

53,376

 

Sales and marketing

 

 

152,178

 

 

 

156,465

 

 

 

136,292

 

General and administrative

 

 

54,435

 

 

 

51,260

 

 

 

43,440

 

Restructuring charges

 

 

667

 

 

 

8,118

 

 

 

-

 

Amortization of acquired intangible assets

 

 

714

 

 

 

1,408

 

 

 

1,408

 

Total operating expenses

 

 

271,446

 

 

 

279,653

 

 

 

234,516

 

Loss from operations

 

 

(13,683

)

 

 

(69,030

)

 

 

(47,798

)

Gain on sale of business

 

 

35,871

 

 

 

-

 

 

 

-

 

Other income (expense), net

 

 

1,142

 

 

 

(77

)

 

 

(402

)

Income (loss) before provision for income taxes

 

 

23,330

 

 

 

(69,107

)

 

 

(48,200

)

Provision for income taxes

 

 

461

 

 

 

1,172

 

 

 

682

 

Net income (loss)

 

$

22,869

 

 

$

(70,279

)

 

$

(48,882

)

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.68

 

 

$

(2.18

)

 

$

(1.64

)

Diluted

 

$

0.67

 

 

$

(2.18

)

 

$

(1.64

)

Shares used in computing earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

33,724

 

 

 

32,284

 

 

 

29,849

 

Diluted

 

 

34,238

 

 

 

32,284

 

 

 

29,849

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

62


 

IMPERVA, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

 

 

 

Years ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Net income (loss)

 

$

22,869

 

 

$

(70,279

)

 

$

(48,882

)

Other comprehensive income (loss) (net of tax):

 

 

 

 

 

 

 

 

 

 

 

 

Net change in net unrealized loss on investments

 

 

(202

)

 

 

(103

)

 

 

(249

)

Net change in unrealized gain (loss) on hedging instruments

 

 

1,225

 

 

 

(44

)

 

 

407

 

 

 

 

1,023

 

 

 

(147

)

 

 

158

 

Comprehensive income (loss)

 

$

23,892

 

 

$

(70,426

)

 

$

(48,724

)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

63


 

IMPERVA, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(In thousands except share data)

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Shareholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income (Loss)

 

 

Equity

 

Balance as at December 31, 2014

 

 

26,895,480

 

 

$

2

 

 

$

256,388

 

 

$

(157,658

)

 

$

(1,489

)

 

$

97,243

 

Proceeds from follow-on public offering, net of offering costs

 

 

3,450,000

 

 

 

1

 

 

 

127,740

 

 

 

-

 

 

 

-

 

 

 

127,741

 

Issuance of common stock, net of repurchases

 

 

670,844

 

 

 

-

 

 

 

18,724

 

 

 

-

 

 

 

-

 

 

 

18,724

 

Vesting of restricted stock

 

 

706,121

 

 

 

-

 

 

 

767

 

 

 

-

 

 

 

-

 

 

 

767

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

50,964

 

 

 

-

 

 

 

-

 

 

 

50,964

 

Issuance of common stock in connection with employee stock

   purchase plan

 

 

114,699

 

 

 

-

 

 

 

4,785

 

 

 

-

 

 

 

-

 

 

 

4,785

 

Income tax benefit from employee stock option exercises

 

 

-

 

 

 

-

 

 

 

165

 

 

 

-

 

 

 

-

 

 

 

165

 

Shares withheld for tax withholding on

   vesting of restricted stock units

 

 

-

 

 

 

-

 

 

 

(11,464

)

 

 

-

 

 

 

-

 

 

 

(11,464

)

Components of other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized loss on investments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(249

)

 

 

(249

)

Change in unrealized loss on derivatives

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

407

 

 

 

407

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(48,882

)

 

 

-

 

 

 

(48,882

)

Comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(48,724

)

Balance as at December 31, 2015

 

 

31,837,144

 

 

$

3

 

 

$

448,069

 

 

$

(206,540

)

 

$

(1,331

)

 

$

240,201

 

Issuance of holdback shares in connection

   with acquisitions

 

 

206,499

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Issuance of common stock, net of repurchases

 

 

843,724

 

 

 

 

 

 

 

5,402

 

 

 

-

 

 

 

-

 

 

 

5,402

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

59,750

 

 

 

-

 

 

 

-

 

 

 

59,750

 

Issuance of common stock in connection with employee stock

   purchase plan

 

 

201,623

 

 

 

-

 

 

 

5,831

 

 

 

-

 

 

 

-

 

 

 

5,831

 

Income tax benefit from employee stock option exercises

 

 

-

 

 

 

-

 

 

 

36

 

 

 

-

 

 

 

-

 

 

 

36

 

Shares withheld for tax withholding on

   vesting of restricted stock units

 

 

-

 

 

 

-

 

 

 

(8,831

)

 

 

-

 

 

 

-

 

 

 

(8,831

)

Components of other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized loss on investments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(103

)

 

 

(103

)

Change in unrealized loss on derivatives

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(44

)

 

 

(44

)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(70,279

)

 

 

-

 

 

 

(70,279

)

Comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(70,426

)

Balance as at December 31, 2016

 

 

33,088,990

 

 

$

3

 

 

$

510,257

 

 

$

(276,819

)

 

$

(1,478

)

 

$

231,963

 

Cumulative effect of a change in accounting principle

 

 

-

 

 

 

-

 

 

 

2,601

 

 

 

(2,587

)

 

 

-

 

 

 

14

 

Issuance of common stock, net of repurchases

 

 

951,055

 

 

 

-

 

 

 

15,587

 

 

 

-

 

 

 

-

 

 

 

15,587

 

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

46,670

 

 

 

-

 

 

 

-

 

 

 

46,670

 

Issuance of common stock in connection with employee stock

   purchase plan

 

 

193,843

 

 

 

-

 

 

 

6,633

 

 

 

-

 

 

 

-

 

 

 

6,633

 

Shares withheld for tax withholding on

   vesting of restricted stock units

 

 

-

 

 

 

-

 

 

 

(9,642

)

 

 

-

 

 

 

-

 

 

 

(9,642

)

Components of other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized loss on investments

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(202

)

 

 

(202

)

Change in unrealized loss on derivatives

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,225

 

 

 

1,225

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

22,869

 

 

 

-

 

 

 

22,869

 

Comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

23,892

 

Balance as at December 31, 2017

 

 

34,233,888

 

 

$

3

 

 

$

572,106

 

 

$

(256,537

)

 

$

(455

)

 

$

315,117

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

64


 

IMPERVA, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

 

 

 

Years ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

22,869

 

 

$

(70,279

)

 

$

(48,882

)

Adjustments to reconcile net income (loss) to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

10,857

 

 

 

7,488

 

 

 

4,551

 

Stock-based compensation

 

 

46,670

 

 

 

62,875

 

 

 

50,964

 

Amortization of acquired intangibles

 

 

714

 

 

 

1,408

 

 

 

1,408

 

Amortization of premiums/accretion of discounts on short-term investments

 

 

(25

)

 

 

238

 

 

 

496

 

Loss on disposal of equipment

 

 

74

 

 

 

267

 

 

 

-

 

Excess tax benefits from share-based compensation

 

 

-

 

 

 

(36

)

 

 

(165

)

Gain on sale of business

 

 

(35,871

)

 

 

-

 

 

 

-

 

Other

 

 

(1,299

)

 

 

125

 

 

 

-

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(12,964

)

 

 

(1,520

)

 

 

(13,605

)

Inventory

 

 

(93

)

 

 

(16

)

 

 

(1,056

)

Prepaid expenses and other assets

 

 

(1,959

)

 

 

383

 

 

 

(4,220

)

Accounts payable

 

 

115

 

 

 

(1,398

)

 

 

977

 

Accrued compensation and benefits

 

 

5,197

 

 

 

(2,543

)

 

 

4,510

 

Accrued and other liabilities

 

 

3,378

 

 

 

2,178

 

 

 

3,242

 

Severance pay, net

 

 

58

 

 

 

272

 

 

 

16

 

Deferred revenue

 

 

30,237

 

 

 

23,684

 

 

 

25,482

 

Deferred tax assets

 

 

(802

)

 

 

(632

)

 

 

149

 

Net cash provided by operating activities

 

 

67,156

 

 

 

22,494

 

 

 

23,867

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of short-term investments

 

 

(130,972

)

 

 

(129,989

)

 

 

(89,626

)

Proceeds from sales/maturities of short-term investments

 

 

117,552

 

 

 

72,453

 

 

 

33,948

 

Proceeds from sale of business

 

 

35,015

 

 

 

-

 

 

 

-

 

Acquisitions, net of cash acquired

 

 

-

 

 

 

(3,914

)

 

 

-

 

Net purchases of property and equipment

 

 

(13,924

)

 

 

(16,789

)

 

 

(8,080

)

Change in restricted cash

 

 

(384

)

 

 

(208

)

 

 

(17

)

Net cash provided by (used in) investing activities

 

 

7,287

 

 

 

(78,447

)

 

 

(63,775

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of repurchases

 

 

19,095

 

 

 

11,233

 

 

 

23,524

 

Shares withheld for tax withholding on vesting of restricted stock units

 

 

(9,642

)

 

 

(8,831

)

 

 

(11,464

)

Offering costs relating to follow-on public offering

 

 

-

 

 

 

(112

)

 

 

-

 

Proceeds from follow-on public offering, net of offering costs

 

 

-

 

 

 

-

 

 

 

127,853

 

Settlement of holdback liability

 

 

-

 

 

 

(7,157

)

 

 

-

 

Excess tax benefits from share-based compensation

 

 

-

 

 

 

36

 

 

 

165

 

Net cash provided by (used in) financing activities

 

 

9,453

 

 

 

(4,831

)

 

 

140,078

 

Effect of exchange rate changes on cash and cash equivalents

 

 

1,299

 

 

 

(125

)

 

 

(14

)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

85,195

 

 

 

(60,909

)

 

 

100,156

 

CASH AND CASH EQUIVALENTS - Beginning of period

 

 

107,343

 

 

 

168,252

 

 

 

68,096

 

CASH AND CASH EQUIVALENTS - End of period

 

$

192,538

 

 

$

107,343

 

 

$

168,252

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

1,409

 

 

$

1,480

 

 

$

652

 

NONCASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment incurred but not yet paid

 

$

1,645

 

 

$

574

 

 

$

517

 

Vesting of restricted and early exercised stock options

 

$

-

 

 

$

-

 

 

$

767

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

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IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

1. The Company and Summary of Significant Accounting Policies

Business

Imperva, Inc. (together with its subsidiaries, the “Company”) was incorporated in April 2002 in Delaware. The Company is headquartered in Redwood Shores, California and has subsidiaries located throughout the world including Israel, Asia, Europe and North America. The Company is engaged in the development, marketing, sales, service and support of cyber-security solutions that protect data and applications on-premises, in the cloud, and across hybrid environments. 

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include all adjustments necessary for the fair presentation of the Company’s consolidated financial position, results of operations and cash flows for the periods presented. The consolidated financial statements include the accounts of Imperva Inc., and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Segment Information

Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the Chief Executive Officer.

The Company has one operating segment, which is the development, marketing, sales, service and support of cyber-security solutions that protect business-critical data and applications, whether in the cloud or on premises.

Use of Estimates

The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Such management estimates include the fair value of accounts receivable, inventory, intangible assets and goodwill, useful lives of intangible assets and property and equipment, and assumptions used in the calculation of revenue, income taxes and stock-based compensation, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.

Concentration of Supply Risk

The Company relies on a single third party to manufacture its hardware appliances, and purchases its hardware appliances through such third party’s value-added resellers. Quality or performance failures of the Company’s products or changes in the Company’s suppliers’ financial or business condition could disrupt the Company’s ability to supply quality products to its customers and thereby have a material adverse effect on its business and consolidated financial statements.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash, cash equivalents, short-term investments, restricted cash and derivative financial instruments. The Company’s cash, cash equivalents, short-term investments and restricted cash are invested in high-quality instruments with banks and financial institutions located in the United States and Israel. Such deposits may be in excess of insured limits provided on such deposits.

The Company uses derivative financial instruments to manage exposures to foreign currency risks. The Company’s derivatives expose it to credit risk to the extent that the counterparty may be unable to meet the terms of the agreement. The Company seeks to mitigate such risk by limiting its counterparties to those with high or investment-grade credit ratings. The Company does not require collateral under these agreements and has not historically experienced any losses due to credit risk or lack of performance by counterparties.

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Derivative Financial Instruments

The Company uses forward foreign currency exchange contracts to reduce its exposure to foreign currency rate changes for operating expenses that are forecasted to be incurred in currencies other than U.S. dollars. The Company records all of its derivative instruments at their gross fair value on the consolidated balance sheets. The Company classifies its cash flows from derivative financial instruments as operating activities.

The accounting for changes in the fair value of a derivative instrument depends on whether the instrument has been designated and qualifies as a cash flow hedge for accounting purposes. For forward foreign currency exchange contracts that are designated and qualify as cash flow hedges, the effective portion of the gain or loss resulting from changes in the fair value of the derivative instruments is accounted for in accumulated other comprehensive income (loss) (“AOCI”) in the consolidated statements of stockholders’ equity and reclassified into operating expenses in the consolidated statements of operations in the period or periods during which the hedged transaction affects earnings. As of December 31, 2017, the Company estimated that $0.6 million of net derivative loss included in accumulated other comprehensive income (loss) will be reclassified into earnings within the next 12 months. The ineffective portion of the gain or loss resulting from the change in fair value is recognized in other income (expense), net in the consolidated statements of operations.

Cash, Cash Equivalents and Short-Term Investments

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of cash on hand, highly liquid investments in money market funds and various deposit accounts.

The Company considers all high quality investments purchased with original maturities at the date of purchase greater than three months to be short-term investments. Investments are available to be used in current operations and are, therefore, classified as current assets even though maturities may extend beyond one year. Cash equivalents and short-term investments are classified as available-for-sale and are, therefore, recorded at fair value on the consolidated balance sheets, with any unrealized gains and losses reported in the consolidated statements of stockholders’ equity as a component of accumulated other comprehensive income (loss) until realized. The Company uses the specific-identification method to compute gains and losses on the investments. The amortized cost of securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included as a component of other income (expense), net in the consolidated statements of operations.

Restricted Cash

The Company has restricted cash pledged as collateral representing a security deposit required for facility leases. As of December 31, 2017 and 2016, the Company has classified $2.3 million and $1.9 million, respectively, of security deposit as non-current assets relating to its facility lease arrangements.

Insurance Recoveries Receivable

Insurance recoveries receivable consists of amounts receivable by the Company from insurance recoveries in connection with settlement costs and professional fees. Claims for loss recoveries are generally recognized when a loss event has occurred and recovery is considered probable.

Inventory

Inventory consists of finished goods hardware appliances and related component parts and is stated at the lower of cost or market value where the cost is determined as the lower of an average cost basis or last invoice. Inventory that is obsolete or in excess of forecasted demand is written down to its estimated realizable value. Inventory write-downs, once established, are not reversed as they establish a new cost basis for the inventory. For the years ended December 31, 2017, 2016 and 2015, the amount of inventory write-downs incurred by the Company were insignificant.

Business Combination

The Company accounts for its business acquisitions in accordance with Accounting Standards Codification (ASC) No. 805, Business Combinations. The Company uses its best estimates and assumptions as part of the purchase price allocation process to value assets acquired and liabilities assumed at the business combination date. However, the Company’s estimates and assumptions are subject to refinement. The Company records adjustments to assets acquired or liabilities assumed subsequent to the purchase price allocation period in our operating results in the period in which the adjustments were determined.

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The total purchase price allocated to the tangible assets acquired is assigned based on the fair values as of the date of the acquisition. The identifiable intangible assets are subject to amortization on a straight-line basis as this best approximates the benefit period related to these assets

Property and Equipment

Property and equipment, including leasehold improvements, are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, generally two to seven years.

Leasehold improvements are amortized using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the assets. Upon the retirement or disposition of property and equipment, the related costs and accumulated depreciation is removed and any related gain or loss is recorded in the consolidated statements of operations. Repairs and maintenance that do not extend the life or improve an asset are expensed in the periods incurred.

Goodwill and Acquired Intangibles

Goodwill is not amortized and is reviewed at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company operates its business in one operating segment and one reporting unit, which is the development, marketing, sales, service and support of cyber-security solutions that protect business-critical data and applications whether in the cloud or on premises. In reviewing goodwill, the Company bypasses the qualitative assessment and proceeds directly to performing the quantitative two step impairment test to test the reporting unit’s goodwill for impairment. The first step of the impairment test involves comparing the fair value of the reporting unit to its net book value, including goodwill and is used as a screening process for identifying a potential goodwill impairment loss. If the net book value exceeds its fair value, then the Company would perform the second step of the goodwill impairment test to determine the amount of the impairment loss. The impairment loss would be calculated by comparing the implied fair value of goodwill of the Company to its net book value. In calculating the implied fair value of the Company’s goodwill, the fair value of the Company would be allocated to all of the other assets and liabilities based on their fair values. The excess of the fair value of the Company over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value.

The Company completes its annual impairment test during the fourth quarter of each fiscal year. There was no impairment of goodwill recorded for the fiscal year ended December 31, 2017.

Intangible assets consist of purchased technology, customer relationships, trade names and domain names which are amortized over the period of estimated benefit using the straight-line method, as the consumption pattern of the asset is not apparent, and estimated useful lives ranging from seven to ten years as of December 31, 2017. No significant residual value is estimated for intangible assets.

Impairment of Long-Lived Assets

The Company evaluates its long-lived assets, which consist of property and equipment and acquired intangible assets, for indicators of possible impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Impairment exists if the carrying amounts of such assets exceed the estimates of future net undiscounted cash flows expected to be generated by such assets. Should impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset’s estimated fair value. As of December 31, 2017 and 2016, the Company has not written down any of its long-lived assets as a result of impairment.

Revenue Recognition

The Company derives revenue from two sources: (i) products and license revenue, which includes hardware and perpetual software license revenue and (ii) services revenue, which includes maintenance and support, professional services, training and subscription arrangements. Substantially all of product and license sales have been sold in combination with maintenance and support services. Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery or performance has occurred; the sales price is fixed or determinable; and collection is reasonably assured.

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The Company defines each of the four criteria above as follows:

 

Persuasive evidence of an arrangement exists: Evidence of an arrangement consists of a purchase order or acknowledgment issued pursuant to the terms and conditions of a direct customer end user or distributor or value-added reseller (VAR) agreement and, in limited cases with both distributor/VAR and an end user agreement and/or purchase order

 

Delivery or performance has occurred: The Company uses shipping and related documents, or written evidence of customer acceptance, when applicable, to verify delivery or performance. The Company recognizes product revenue upon transfer of title and risk of loss, which primarily is upon shipment to value-added resellers, distributors or end users. We recognize software license revenue upon transfer of electronic keys to a customer. In most instances, the Company does not have significant obligations for future performance, such as customer acceptance provisions, rights of return or pricing credits, associated with the Company’s sales. In instances where final acceptance of the product or service is specified by the customer, revenue is deferred until all acceptance criteria have been met.

 

The sales price is fixed or determinable: The Company assesses whether the sales price is fixed or determinable based on payment terms and whether the sales price is subject to refund or adjustment. Standard payment terms to customers range from 30 to 90 days. In the event payment terms are provided that differ from the Company’s standard business practices, the fees are deemed to not be fixed or determinable and revenue is recognized when the payments become due, provided the remaining criteria for revenue recognition have been met.

 

Collection is reasonably assured: The Company assesses probability of collection on a customer-by-customer basis. The Company’s customers are subjected to a credit review process that evaluates their financial condition and ability to pay for products and services. If the Company concludes that collection is not reasonably assured based upon an initial review, the Company does not recognize revenue until payment is received.

Maintenance and support and subscription revenue includes arrangements for software maintenance and technical support for the Company’s products and subscription services revenue primarily related to the Company’s cloud-based services. The terms of the Company’s subscription service arrangements do not provide customers the right to take possession of the related software. Maintenance and support is offered under renewable, fee-based contracts, which include technical support, hardware repair and replacement parts, bug fixes, patches and unspecified upgrades on a when-and-if-available basis. Maintenance and support and subscription revenue is initially deferred and recognized ratably over the life of the contract, with the related expenses recognized as incurred. Maintenance and support and subscription contracts usually have a term of one to three years. Unearned maintenance and support and subscription revenue is included in deferred revenue.

Professional service revenue primarily consists of the fees the Company earns related to installation and consulting services. The Company recognizes revenue from professional services upon delivery or completion of performance. Professional service arrangements are typically short term in nature and are largely completed within 90 days from the start of service.

Training services are recognized upon delivery of the training.

Multiple Element Arrangements

Most of the Company’s products are hardware appliances containing software components that function together to provide the essential functionality of the product. Therefore, the Company’s hardware appliances are considered non-software deliverables and are not subject to industry-specific software revenue recognition guidance.

The Company’s product revenue also includes revenue from the sale of stand-alone software products. Stand-alone software may operate on the Company’s hardware appliance, but is not considered essential to the functionality of the hardware and is, therefore, subject to the industry-specific software revenue recognition guidance. Additionally, the Company provides unspecified software upgrades for our products, on a when-and-if available basis, and hardware replacements through maintenance and support contracts. These support arrangements when sold on a stand-alone basis are subject to the industry-specific software revenue recognition guidance.

Under the software revenue recognition guidance, the Company uses the residual method to recognize revenue when a product agreement includes one or more elements to be delivered at a future date and Vendor Specific Objective Evidence (“VSOE”) of the fair value of all undelivered elements exists. In the majority of the Company’s contracts, the only element that remains undelivered at the time of delivery of the product is maintenance and support services and subscriptions. Under the residual method, the VSOE of fair value of the undelivered elements is deferred and the remaining portion of the contract fee is recognized as product revenue. If evidence of the VSOE of fair value of one or more undelivered elements does not exist, all revenue is generally deferred and recognized when delivery of those elements occurs or when fair value can be established.

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For certain arrangements with multiple deliverables, the Company allocates the arrangement fee to the non-software element based upon the relative selling price of such element and, if software and software-related elements (e.g., maintenance and support for the software element) are also included in the arrangement, the Company allocates the arrangement fee to each of those software and software-related elements as a group. After such allocations are made, the amount of the arrangement fee allocated to the software and software-related elements is accounted for using the residual method. When applying the relative selling price method, the Company determines the selling price for each element using VSOE of selling price, if it exists, or if not, Third-Party Evidence (“TPE”) of selling price, if it exists. If neither VSOE nor TPE of selling price exist for an element, the Company uses its Best Estimate of Selling Price (“BESP”) for that element. The revenue allocated to each element is then recognized when the basic revenue recognition criteria are met for that element. The Company limits the amount of revenue recognized for delivered elements to the amount that is not contingent on the future delivery of products or services, or subject to the Company’s future performance obligation.

VSOE of fair value for elements of an arrangement is based upon the normal pricing and discounting practices for those services when sold separately. In determining VSOE, the Company requires that a substantial majority of the selling prices for a service fall within a reasonably narrow pricing range, evidenced by a substantial majority of such historical stand-alone transactions falling within a reasonably narrow range. In addition, the Company considers major service groups and geographies in determining VSOE.

The Company is not able to determine TPE for its products or services. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, the Company’s go-to-market strategy differs from that of its peers and its offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine what similar competitor products’ selling prices are on a stand-alone basis.

When the Company is unable to establish the selling price of its non-software deliverables using VSOE or TPE, the Company uses BESP in its allocation of arrangement consideration. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company determines BESP for the purposes of allocating the arrangement by reviewing external and internal market factors including, but not limited to, pricing practices including discounting, the geographies in which the Company offers its products and services, the type of customer (i.e., distributor, value added reseller or direct end user) and competition. Additionally, the Company considers historical transactions, including transactions whereby the deliverable was sold on a stand-alone basis. The determination of BESP is made through consultation with and approval by the Company’s management. Selling prices are analyzed on a quarterly basis to identify if the Company has experienced significant changes in its selling prices that would impact our determination of BESP.

For its non-software deliverables the Company allocates the arrangement consideration based on the relative selling price of the deliverables. For its hardware appliances the Company uses BESP as its selling price. For its maintenance and support services, subscriptions and professional services and training, the Company primarily uses VSOE as the selling price and when the Company is unable to establish a selling price using VSOE, it uses BESP.

Deferred Revenue

Deferred revenue represents amounts invoiced to customers for which the related revenue has not been recognized because one or more of the revenue recognition criteria have not been met. The current portion of the deferred revenues represents the amount that is expected to be recognized as revenue within one year of the consolidated balance sheet date.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at invoiced amounts, net of allowances for doubtful accounts if applicable, and do not bear interest.

The Company generally does not require collateral from its customers; however, in certain circumstances, may require letters of credit, other collateral, additional guarantees or advance payments. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of its customer accounts. The Company regularly reviews its accounts receivable that remain outstanding past their applicable payment terms and establishes allowance and potential write-offs by considering certain factors such as historical experience, industry data, credit quality, age of balances and current economic conditions that may affect a customers’ ability to pay.

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Concentration of Revenue and Accounts Receivable

Significant customers are those which represent 10% or more of the Company’s total revenue or gross accounts receivable balance at each respective balance sheet date. For the year ended December 31, 2017, 2016 and 2015, we had one customer that represented 12%, 13% and 18% of our total revenue, respectively. The same customer represented 18% and 18% of gross accounts receivable as of December 31, 2017 and 2016 respectively.

Shipping and Handling Costs

Costs related to shipping and handling are included in cost of revenue.

Research and Development Costs

Research and development costs, including direct and allocated expenses, are expensed as incurred.

Software Development Costs

The costs to develop software for sale have not been capitalized as the Company believes that the technological feasibility of the related software is not established until substantially all product development is complete.

Warranty Costs

The Company generally provides a 60-day warranty on hardware appliance products and software from the date of shipment to customers. To date, cost to repair or replace items sold to customers has been insignificant.

Advertising Costs

The Company expenses advertising costs as incurred. Advertising expense is included within sales and marketing expense in the consolidated statements of operations. For the years ended December 31, 2016, 2015 and 2014, advertising expenses were not material.

Retirement Savings Plan

The Company maintains a defined contribution 401(k) retirement savings plan for its U.S. employees. Each participant in the 401(k) retirement savings plan may elect to contribute a percentage of his or her annual compensation up to a specified maximum amount allowed under U.S. Internal Revenue Service regulations. There were no employer contributions to the 401(k) retirement savings plan for the years ended December 31, 2017, 2016 and 2015.

Severance Pay Asset and Liability

The Company has recorded a severance pay asset and liability on its consolidated balance sheets related to its employees located in Israel. The Company’s liability for severance pay is calculated pursuant to Israeli severance pay law based on the most recent salary for the employees multiplied by the number of years of employment, as of the respective balance sheet date. Employees are entitled to one month salary for each year of employment or a portion thereof. The Company’s liability at each respective balance sheet date for all of its Israeli employees is fully accrued in the accompanying consolidated financial statements and is mainly funded through monthly deposits to the employee’s pension and management insurance policies. The carrying value of these policies is recorded as a severance fund asset in the Company’s consolidated balance sheets.

The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israeli severance pay law. The carrying value of the deposited funds is based on the cash surrender value of these policies and includes profits accumulated through the respective balance sheet date. The Company recognized severance expense related to the Israeli severance pay law during the years ended December 31, 2017, 2016 and 2015 of $1.8 million, $1.6 million, and $1.3 million, respectively.

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Income Taxes

The Company accounts for income taxes in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification No. 740 (“ASC 740”), Accounting for Income Taxes. The Company makes certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, tax benefits and deductions and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. Significant changes to these estimates may result in an increase or decrease to the Company’s tax provision in the subsequent period when such a change in estimate occurs.

The Company uses the liability method for accounting for deferred income taxes, which requires recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in its financial statements, but have not been reflected in its taxable income. Estimates and judgments occur in the calculation of certain tax liabilities and in the determination of the recoverability of certain deferred income tax assets, which arise from temporary differences and carryforwards. Deferred income tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets and liabilities are expected to be realized or settled. The Company regularly assesses the likelihood that its deferred income tax assets will be realized from recoverable income taxes or recovered from future taxable income based on the realization criteria set forth in ASC 740. To the extent that the Company believes any amounts are more likely not to be realized, the Company records a valuation allowance to reduce the deferred income tax assets. In the event the Company determines that all or part of the net deferred tax assets are not realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. Similarly, if the Company subsequently realizes deferred income tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in an adjustment to earnings in the period such determination is made.

In addition, the calculation of the Company’s tax liabilities involves addressing uncertainties in the application of complex tax regulations. The Company recognizes and measures potential liabilities based upon criteria set forth in ASC 740. Based upon these criteria, the Company estimates whether, and the extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities may result in tax benefits being recognized in the period when the Company determines the liabilities are no longer necessary. If the Company’s estimate of tax liabilities is less than the amount ultimately assessed, a further charge to expense would result.

Significant judgment is required in determining any valuation allowance recorded against deferred income tax assets. In assessing the need for a valuation allowance, the Company considers all available evidence, including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. In the event that the Company changes its determination as to the amount of deferred income tax assets that could be realized, it will adjust its valuation allowance with a corresponding effect to the provision for income taxes in the period in which such determination is made.

Significant judgment is also required in evaluating the Company’s uncertain tax positions under ASC 740 and determining its provision for income taxes. Although the Company believes its reserves for uncertain tax positions are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in the Company’s historical income tax provisions and accruals. The Company adjusts these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the effect of reserves for uncertain tax positions and any changes to the reserves that are considered appropriate, as well as the related net interest and penalties, if applicable.

The U.S. Tax Cuts and Jobs Act of 2017 (“Tax Act”) was enacted on December 22, 2017. ASC Topic 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment even though the effective date for most provisions is for tax years beginning after December 31, 2017, or in the case of certain other provisions of the law, January 1, 2018.Given the significance of the legislation, the U.S. Securities and Exchange Commission (the "SEC") staff issued Staff Accounting Bulletin ("SAB") No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared, and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared, or analyzed. The Company is still evaluating the provisions of the Tax Reform and amounts reflected in the financial statements for the year ended December 31, 2017 are provisional. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act. The accounting is expected to be completed in 2018.

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Stock-Based Compensation

Compensation costs related to employee restricted stock units (“RSUs”) and stock option grants are based on the fair value of the RSU and options on the date of grant. The Company determines the fair value of RSUs using the closing price of the Company’s stock on the date of grant. The Company determines the grant date fair value of the options using the Black-Scholes option-pricing model and the related stock-based compensation expense is generally recognized on a straight-line basis over the period in which an employee is required to provide service in exchange for the options, or the vesting period of the respective options.

The Company adopted the guidance in Accounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting, on January 1, 2017. Under this ASU, entities are permitted to make an accounting policy election to either estimate forfeitures on share-based payment awards, as previously required, or to recognize forfeitures as they occur. The Company has elected to recognize forfeitures as they occur and the impact of that change in accounting policy has been recorded as a $2.6 million cumulative effect adjustment to increase our accumulated deficit as of January 1, 2017. Additionally, the Company has elected to use a prospective transition method for presentation of excess tax benefits on the statement of cash flows. The remaining provisions of ASU 2016-09 did not have a material impact on the accompanying condensed consolidated financial statements.

Foreign Currency

The functional currency of the Company’s foreign subsidiaries is the U.S. dollar. Transactions denominated in currencies other than the functional currency are remeasured to the functional currency at the average exchange rate in effect during the period. At the end of each reporting period, monetary assets and liabilities are re-measured to the functional currency using exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are re-measured at historical exchange rates. Gains and losses related to remeasurement are recorded in other income (expense) in the consolidated statements of operations.

Fair Value of Financial Instruments

The Company measures and reports its cash equivalents, short-term investments, derivative instruments, and the Israeli severance pay fund assets at fair value. Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:

Level I—Unadjusted quoted prices in active markets for identical assets or liabilities;

Level II—Inputs other than quoted prices included within Level I that are observable, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level III—Unobservable inputs that are supported by little or no market activity for the related assets or liabilities.

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The Company’s financial instruments consist of Level I and Level II assets. Level I securities include highly liquid money market funds and mutual funds. Level II instruments include deposits maintained with financial institutions and derivative instruments.

Net Income (Loss) per Share of Common Stock

The Company’s basic net income (loss) per share of common stock is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. The weighted-average number of shares of common stock used to calculate the Company’s basic net income (loss) per share of common stock excludes those shares subject to repurchase as these shares are not deemed to be issued for accounting purposes until they vest. The diluted net income (loss) per share of common stock is computed by giving effect to all potential common stock equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, stock options to purchase common stock, common stock subject to repurchase, and warrants to purchase common stock are considered to be common stock equivalents. Basic and diluted net loss per share of common stock was the same during the years ended December 31, 2016 and 2015 as the inclusion of all potential common shares outstanding was anti-dilutive.

 

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Recent Accounting Pronouncements

In May 2017, the FASB issued ASU 2017-09 Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Under the new guidance, modification accounting is required if the fair value, vesting conditions or classification (equity or liability) of the new award are different from the original award immediately before the original award is modified. The standard is effective for the Company on January 1, 2018. The new guidance must be applied prospectively to awards modified on or after the adoption date. The future impact of ASU 2017-09 will be dependent on the nature of future stock award modifications.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The new standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard will be effective for the Company beginning January 1, 2018. The standard will require adoption on a retrospective basis. The new accounting pronouncements will not have a significant impact on the Company’s consolidated financial statements.

In August 2016, FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new standard will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The standard will be effective for the Company beginning January 1, 2018. The standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case we would be required to apply the amendments prospectively as of the earliest date practicable. The new accounting pronouncements will not have a significant impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 regarding ASC Topic 842 "Leases." The amendments in this guidance require balance sheet recognition of lease assets and lease liabilities by lessees for leases classified as operating leases, with an optional policy election to not recognize lease assets and lease liabilities for leases with a term of 12 months or less. The amendments also require new disclosures, including qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The standard will be effective for the Company beginning January 1, 2019. The amendments require a modified retrospective approach with optional practical expedients. While the Company continues to evaluate the effect of the standard on its ongoing financial reporting, the Company currently believes that the adoption of the ASU may materially affect its Balance Sheet. We are in the process of implementing processes in conjunction with our review of existing lease agreements. We will adopt ASC 842 effective January 1, 2019 and expect to elect certain available transitional practical expedients.

In May 2014, the FASB issued ASU 2014-09—Revenue (Topic 606): Revenue from Contracts with Customers. The standard will replace most existing U.S. GAAP guidance on this topic. The standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. The standard defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation, among others. The standard also provides guidance on the recognition of costs related to obtaining customer contracts.

We will adopt this new standard effective January 1, 2018, and we will use the modified retrospective method of adoption as permitted by the standard. Under that method, the cumulative effect of initially applying the standard is recognized as an adjustment to the opening balance of retained earnings, and revenues reported in the periods prior to the date of adoption are not changed. We are currently developing our revenue disclosures and enhancing our accounting systems to enable the preparation of such disclosures as well as the implementation of our internal controls.

Based on our initial assessment the new standard will impact the timing of revenue recognition. In the year of adoption, total revenue will be impacted primarily by (a) acceleration of revenue in certain software arrangements where revenue would be recognized ratably under the current standard, but in 2018 would be recognized at a point in time under the new standard, and (b) reduction in revenue from certain arrangements where revenue was deferred in prior periods and would have been recognized ratably in 2018 but will now be recorded as reduction of deferred revenue and a reduction to accumulated deficit. We expect the net impact to revenue to be immaterial in aggregate, however, the exact impact to revenue of the new standard could vary from quarter to quarter depending upon facts and circumstances of revenue arrangements.

74


 

We are required to apply the new rules to existing contracts which are not complete as of January 1, 2018, and therefore, upon adoption, we expect to record a cumulative effect adjustment to accumulated deficit as of the adoption date. We are currently in final stages of testing changes to our financial systems to adopt the new standard and quantify this adjustment. We do not expect the cumulative effect adjustment to the deferred revenue balance to be material.

In addition to the above revenue recognition timing impacts, the new standard will require incremental contract acquisition costs (such as sales commissions) for customer contracts to be capitalized and amortized over the contract period. Currently, these costs are expensed as incurred. We expect to record an adjustment to establish an asset and a decrease in accumulated deficit related to the requirement to capitalize incremental contract acquisition costs for customer contracts. Based on an initial assessment of the contract cost guidance included in the new standard, we expect to record an asset upon adoption of approximately $16.0 million related to the incremental cost to obtain contracts for contracts which are not complete as of January 1, 2018. This amount is expected to be amortized over its estimated period of benefit, which we currently estimate to be approximately five years.

 

 

2. Acquisition

On December 15, 2016, the Company acquired certain assets and liabilities of Camouflage Software Inc. (“Camouflage”), a private company based in Newfoundland, Canada. Camouflage is a provider of data management, security and data masking solutions. The Company acquired Camouflage for cash consideration of $4.5 million. Approximately $0.6 million of the consideration is a holdback payment commitment due 24 months from the date the acquisition closes. Imperva acquired certain tangible assets and also assumed liabilities of Camouflage. Substantially all of the consideration was allocated to goodwill and intangible assets, such as developed technology, customer relationships and trade name.

The acquisition was accounted for in accordance with Accounting Standards Codification (ASC) No. 805, Business Combinations, and the results of operations of the acquisition have been included in the Company’s consolidated results of operations from the date of the acquisition. The acquisition was not material to the Company’s results of operations in the period of acquisition.

The purchase consideration allocated to the tangible assets acquired is assigned based on the fair values as of the date of the acquisition. The Company believes that these identified intangible assets will have no residual value after their estimated economic useful lives. The identifiable intangible assets are subject to amortization on a straight-line basis over a seven-year estimated useful life as this best approximates the benefit period related to these assets.

The excess of the purchase consideration over the identified tangible and intangible assets, less liabilities assumed, is recorded as goodwill and primarily reflects the value of the synergies expected to be generated from combining the Company’s and the acquired entities’ technology and operations. 

The following table summarizes the allocation of the consideration to the fair value of the tangible and intangible assets acquired and liabilities assumed as of the acquisition date (in thousands):

 

Acquired Technology

 

$

1,050

 

Customer relationships

 

 

480

 

Trade name and other

 

 

280

 

Goodwill

 

 

2,476

 

Total intangible assets acquired

 

 

4,286

 

Other acquired tangible assets

 

 

363

 

Liability assumed

 

 

(130

)

Fair value of assets acquired

 

$

4,519

 

 

The total purchase consideration was allocated using the information available at the business combination date. Goodwill recorded in connection with the acquisition is deductible for U.S. income tax purposes.

The Company expensed the related acquisition costs, consisting primarily of legal costs in the amount of $0.1 million in general and administrative expenses. The Company’s management believes that the goodwill represents the synergies expected from combining the acquired technology and operations with those of Imperva.

The results of operations related to the Camouflage assets and liabilities have been included in the Company’s consolidated statements of operations from the acquisition date. Pro forma results of operations have not been presented because the acquisition was not material to the Company’s results of operations.

 

75


 

 

3. Cash, Cash Equivalents and Short-Term Investments

Cash, cash equivalents and short-term investments consist of the following (in thousands):

 

 

 

As of December 31, 2017

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

92,030

 

 

$

-

 

 

$

-

 

 

$

92,030

 

Money market funds

 

 

84,144

 

 

 

-

 

 

 

-

 

 

 

84,144

 

US government agencies

 

 

16,367

 

 

 

-

 

 

 

3

 

 

 

16,364

 

Total

 

$

192,541

 

 

$

-

 

 

$

3

 

 

$

192,538

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

699

 

 

$

-

 

 

$

-

 

 

$

699

 

Corporate debt obligations

 

 

123,320

 

 

 

-

 

 

 

488

 

 

 

122,832

 

US government agencies

 

 

43,097

 

 

 

-

 

 

 

114

 

 

 

42,983

 

Bank deposits

 

 

480

 

 

 

-

 

 

 

1

 

 

 

479

 

Total

 

$

167,596

 

 

$

-

 

 

$

603

 

 

$

166,993

 

 

 

 

As of December 31, 2016

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

63,642

 

 

$

-

 

 

$

-

 

 

$

63,642

 

Commercial paper

 

 

6,995

 

 

 

-

 

 

 

2

 

 

 

6,993

 

Money market funds

 

 

36,708

 

 

 

-

 

 

 

-

 

 

 

36,708

 

Total

 

$

107,345

 

 

$

-

 

 

$

2

 

 

$

107,343

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

14,245

 

 

$

-

 

 

$

8

 

 

$

14,237

 

Corporate debt obligations

 

 

110,062

 

 

 

-

 

 

 

347

 

 

 

109,715

 

US government agencies

 

 

18,998

 

 

 

2

 

 

 

50

 

 

 

18,950

 

Bank deposits

 

 

10,846

 

 

 

1

 

 

 

-

 

 

 

10,847

 

Total

 

$

154,151

 

 

$

3

 

 

$

405

 

 

$

153,749

 

 

The following table sets forth the cost and estimated fair value of short-term investments based on stated effective maturities as of December 31, 2017 (in thousands):

 

 

 

As of December 31, 2017

 

 

 

 

 

 

 

Estimated

 

 

 

Amortized

 

 

Fair

 

 

 

Cost

 

 

Value

 

Short-term investments:

 

 

 

 

 

 

 

 

Due in 2018

 

$

94,231

 

 

$

93,980

 

Due in 2019

 

 

73,365

 

 

 

73,013

 

Total

 

$

167,596

 

 

$

166,993

 

 

The Company reviews its short-term investments on a regular basis to evaluate whether or not any security has experienced an other-than-temporary decline in fair value. The Company considers factors such as the length of time and extent to which the market value has been less than the cost, the financial condition and near-term prospects of the issuer and its intent to sell, or whether it is more likely than not the Company will be required to sell, the investment before recovery of the investment’s amortized cost basis. If the Company believes that an other-than-temporary decline exists in one of these securities, the Company writes down these investments to fair value. For debt securities, the portion of the write-down related to credit loss would be recorded to other income (expense), net, in the Company’s condensed consolidated statements of operations. Any portion not related to credit loss would be recorded to accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders’ equity in the

76


 

Company’s condensed consolidated balance sheets. During the years ended December 31, 2017 and 2016, the Company did not consider any of its investments to be other-than-temporarily impaired.

The following tables show the short-term investments in an unrealized loss position and the related gross unrealized losses and fair value and length of time that the short-term investments have been in a continuous unrealized loss position (in thousands):

 

 

 

As of December 31, 2017

 

 

 

Less than 12 Months

 

 

12 Months or Greater

 

 

Total

 

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

Commercial paper

 

$

699

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

699

 

 

$

-

 

Corporate debt obligations

 

 

77,715

 

 

 

377

 

 

 

45,117

 

 

 

111

 

 

 

122,832

 

 

 

488

 

US government agencies

 

 

29,093

 

 

 

76

 

 

 

11,461

 

 

 

38

 

 

 

40,554

 

 

 

114

 

Bank deposits

 

 

-

 

 

 

-

 

 

 

479

 

 

 

1

 

 

 

479

 

 

 

1

 

 

 

$

107,507

 

 

$

453

 

 

$

57,057

 

 

$

150

 

 

$

164,564

 

 

$

603

 

 

 

 

As of December 31, 2016

 

 

 

Less than 12 Months

 

 

12 Months or Greater

 

 

Total

 

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

Commercial paper

 

$

14,237

 

 

$

8

 

 

$

-

 

 

$

-

 

 

$

14,237

 

 

$

8

 

Corporate debt obligations

 

 

78,821

 

 

 

323

 

 

 

29,689

 

 

 

24

 

 

 

108,510

 

 

 

347

 

US government agencies

 

 

11,451

 

 

 

46

 

 

 

3,496

 

 

 

4

 

 

 

14,947

 

 

 

50

 

 

 

$

104,509

 

 

$

377

 

 

$

33,185

 

 

$

28

 

 

$

137,694

 

 

$

405

 

 

 

4. Fair Value of Financial Instruments

The Company evaluates assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them for each reporting period. The following table sets forth the Company’s assets and liabilities that were measured at fair value as of December 31, 2017 and 2016, by level within the fair value hierarchy (in thousands):

 

 

 

As of December 31, 2017

 

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Fair Value

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

84,144

 

 

$

-

 

 

$

-

 

 

$

84,144

 

US government agencies

 

 

-

 

 

 

16,364

 

 

 

-

 

 

 

16,364

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

-

 

 

 

699

 

 

 

-

 

 

 

699

 

Corporate debt obligations

 

 

-

 

 

 

122,832

 

 

 

-

 

 

 

122,832

 

US government agencies

 

 

-

 

 

 

42,983

 

 

 

-

 

 

 

42,983

 

Bank deposits

 

 

-

 

 

 

479

 

 

 

-

 

 

 

479

 

Prepaid expenses and other current assets - Forward foreign

   exchange contracts

 

 

-

 

 

 

551

 

 

 

-

 

 

 

551

 

Total financial assets

 

$

84,144

 

 

$

183,908

 

 

$

-

 

 

$

268,052

 

77


 

 

 

 

As of December 31, 2016

 

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Fair Value

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

-

 

 

$

6,993

 

 

$

-

 

 

$

6,993

 

Money market funds

 

 

36,708

 

 

 

-

 

 

 

-

 

 

 

36,708

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

-

 

 

 

14,237

 

 

 

-

 

 

 

14,237

 

Corporate debt obligations

 

 

-

 

 

 

109,715

 

 

 

-

 

 

 

109,715

 

US government agencies

 

 

-

 

 

 

18,950

 

 

 

-

 

 

 

18,950

 

Bank deposits

 

 

-

 

 

 

10,847

 

 

 

-

 

 

 

10,847

 

Total financial assets

 

$

36,708

 

 

$

160,742

 

 

$

-

 

 

$

197,450

 

Financial Liability:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued and other current liabilities - Forward foreign

   exchange contracts

 

$

-

 

 

$

639

 

 

$

-

 

 

$

639

 

 

In addition to the amounts disclosed in the above table, the fair value of the Company’s Israeli severance pay assets, which were comprised of Level II assets, was $6.6 million and $5.1 million as of December 31, 2017 and 2016, respectively.

The Company’s cash equivalents and short-term investments are classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include mutual funds and money market securities. Such instruments are generally classified within Level 1 of the fair value hierarchy. The types of instruments valued based on quoted prices in less active markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability, include U.S. agency securities, investment-grade corporate bonds, term deposits and commercial paper. Such instruments are generally classified within Level 2 of the fair value hierarchy. There were no transfers between Level 1, Level 2 and Level 3 during the years ended December 31, 2017 and 2016.

 

 

5. Derivative Instruments

The Company’s primary objective for holding derivative instruments is to reduce its exposure to foreign currency rate changes. The Company reduces its exposure by entering into forward foreign exchange contracts with respect to operating expenses that are forecast to be incurred in currencies other than U.S. dollars. Substantially all of the Company’s revenue and capital purchasing activities and a majority of its operating expenditures are transacted in U.S. dollars. However, certain operating expenditures are incurred in or exposed to other currencies, primarily the Israeli shekel, the British Pound and the Euro.

The Company has established forecasted transaction currency risk management programs to protect against fluctuations in fair value and the volatility of future cash flows caused by changes in exchange rates. The Company’s currency risk management program includes forward foreign exchange contracts designated as cash flow hedges. These forward foreign exchange contracts generally mature within 12 months. The Company does not enter into derivative financial instruments for trading purposes.

Derivative instruments measured at fair value and their classification on the consolidated balance sheets are presented in the following tables (in thousands):

 

 

 

Liability as of December 31,

 

 

 

2017

 

 

2016

 

 

 

Notional

Amount

 

 

Fair Value

 

 

Notional

Amount

 

 

Fair Value

 

Foreign exchange forward contract derivatives in cash flow hedging

   relationships -  included in prepaid expenses and other current assets (accrued and other current liabilities)

 

$

66,560

 

 

$

551

 

 

$

60,756

 

 

$

(639

)

 

78


 

Gains (losses) on derivative instruments accounted for as hedges and their classification on the consolidated statement of operations, are presented in the following tables (in thousands):

 

 

 

Years ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Foreign Exchange Forward Contract Derivatives in cash flow

    hedging relationships:

 

 

 

 

 

 

 

 

 

 

 

 

Gains recognized in OCI (a)

 

$

5,037

 

 

$

1,775

 

 

$

834

 

Losses recognized in OCI (a)

 

$

(551

)

 

$

(1,909

)

 

$

(1,399

)

Gains recognized from accumulated OCI into net loss (b)

 

$

3,271

 

 

$

257

 

 

$

-

 

Losses recognized from accumulated OCI into net loss (b)

 

$

(10

)

 

$

(347

)

 

$

(972

)

 

(a)

Net change in the fair value of the effective portion classified in other comprehensive income (loss) (“OCI”).

(b)

Effective portion of cash flow hedges reclassified from accumulated other income (loss), into net loss, of which $499, $(8) and $(107) were recognized within cost of sales for the years ended December 31, 2017, 2016 and 2015, respectively, and $2,762, $(82), and $(865) were recognized within operating expenses for the year ended December 31, 2017, 2016 and 2015, respectively. All amounts are reflected with the respective consolidated statement of operations.

 

 

 

6. Consolidated Balance Sheet Components

Allowance for Doubtful Accounts

The allowance for doubtful accounts is comprised of the following activity (in thousands):

 

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Allowance for doubtful accounts and sales returns reserve,

   beginning balance

 

$

1,784

 

 

$

1,438

 

 

$

215

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts, beginning balance

 

$

953

 

 

$

1,115

 

 

$

215

 

Charged to costs and expenses, net of recoveries

 

 

(334

)

 

 

315

 

 

 

1,044

 

Deductions (write-offs)

 

 

(467

)

 

 

(477

)

 

 

(144

)

Allowance for doubtful accounts, ending balance

 

 

152

 

 

 

953

 

 

 

1,115

 

Sales returns reserve, beginning balance

 

 

831

 

 

 

323

 

 

 

 

 

Charged to revenue

 

 

1,702

 

 

 

1,560

 

 

 

677

 

Deductions (write-offs)

 

 

(1,749

)

 

 

(1,052

)

 

 

(354

)

Sales returns reserve, ending balance

 

 

784

 

 

 

831

 

 

 

323

 

Total allowance for doubtful accounts and sales returns

   reserve, ending balance

 

$

936

 

 

$

1,784

 

 

$

1,438

 

 

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following (in thousands):

 

 

 

As of December 31,

 

 

 

2017

 

 

2016

 

Prepaid expenses

 

$

6,001

 

 

 

4,980

 

Skyfence Escrow Fund Receivable

 

 

5,000

 

 

 

-

 

Prepaid income taxes

 

 

1,674

 

 

 

1,559

 

Interest receivable

 

 

808

 

 

 

758

 

Derivative asset

 

 

551

 

 

 

-

 

Other

 

 

860

 

 

 

625

 

Total prepaid expenses and other current assets

 

$

14,894

 

 

$

7,922

 

 

79


 

Property and Equipment, net

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

 

 

 

As of December 31,

 

 

 

2017

 

 

2016

 

Computers and related equipment

 

$

35,885

 

 

$

25,285

 

Office furniture and equipment

 

 

3,371

 

 

 

3,228

 

Leasehold improvements

 

 

13,492

 

 

 

11,947

 

Total property and equipment

 

 

52,748

 

 

 

40,460

 

Less: accumulated depreciation and amortization

 

 

(27,341

)

 

 

(18,964

)

Total property and equipment, net

 

$

25,407

 

 

$

21,496

 

 

Depreciation and amortization expense totaled $10.9 million, $7.5 million and $4.5 million, for the years ended December 31, 2017, 2016 and 2015, respectively.

Accrued Compensation and Benefits

Accrued compensation and benefits consist of the following (in thousands):

 

 

 

As of December 31,

 

 

 

2017

 

 

2016

 

Salary and related benefits

 

$

8,824

 

 

$

9,588

 

Accrued vacation

 

 

4,453

 

 

 

4,178

 

Accrued incentive payments

 

 

9,636

 

 

 

5,942

 

Accrued restructuring

 

 

-

 

 

 

1,132

 

Total accrued compensation and benefits

 

$

22,913

 

 

$

20,840

 

 

Accrued and Other Current Liabilities

Accrued and other current liabilities consist of the following (in thousands):

 

 

 

As of December 31,

 

 

 

2017

 

 

2016

 

Accrued expenses

 

$

7,516

 

 

$

4,616

 

Derivative liability

 

 

-

 

 

 

639

 

Income tax payable

 

 

319

 

 

 

435

 

Short-term deferred rent

 

 

844

 

 

 

461

 

Sales Taxes Payable

 

 

2,098

 

 

 

849

 

Other

 

 

640

 

 

 

683

 

Total accrued and other current liabilities

 

$

11,417

 

 

$

7,683

 

 

Other Liabilities

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

 

 

 

As of December 31,

 

 

 

2017

 

 

2016

 

Long-term deferred rent

 

$

2,070

 

 

$

2,111

 

Deferred tax liability

 

 

333

 

 

 

1,265

 

Uncertain Tax Positions

 

 

3,615

 

 

 

2,446

 

Other

 

 

235

 

 

 

815

 

Total other liabilities

 

$

6,253

 

 

$

6,637

 

 

 

80


 

7. Goodwill and Acquired Intangible Assets

In February 2017, the Company completed the sale of its assets related to the Skyfence cloud access security broker business (“Skyfence”) to Forcepoint LLC and its Israeli subsidiary. The Company allocated goodwill of $1.1 million to the business being disposed of. Additionally, the acquired intangible assets with the carrying value of $4.5 million were derecognized in connection with this transaction. In December 2016, the Company completed the acquisition of Camouflage Software Inc., which $2.5 million was allocated to goodwill and $1.8 million to acquired intangible assets. The Company did not have any goodwill impairments during 2017, 2016 or 2015.

The changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2016 were as follows (in thousands):

 

 

2017

 

 

2016

 

Balance as of January 1

 

$

37,448

 

 

$

34,972

 

Goodwill with acquisition of Camouflage Software Inc.

 

 

-

 

 

 

2,476

 

Goodwill disposed with sale of Skyfence

 

 

(1,059

)

 

 

-

 

Balance as of December 31

 

$

36,389

 

 

$

37,448

 

 

Acquired intangible assets subject to amortization as of December 31, 2017 and 2016 were as follows (in thousands):

 

 

 

As of December 31, 2017

 

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Book

Value

 

Acquired Technology

 

$

3,753

 

 

$

(1,216

)

 

$

2,537

 

Customer relationships

 

 

480

 

 

 

(71

)

 

 

409

 

Trade name and other

 

 

280

 

 

 

(42

)

 

 

238

 

Total

 

$

4,513

 

 

$

(1,329

)

 

$

3,184

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2016

 

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Book

Value

 

Acquired Technology

 

$

11,718

 

 

$

(4,085

)

 

$

7,633

 

Customer relationships

 

 

480

 

 

 

-

 

 

 

480

 

Trade name and other

 

 

280

 

 

 

-

 

 

 

280

 

Total

 

$

12,478

 

 

$

(4,085

)

 

$

8,393

 

 

 

Amortization expense related to acquired intangible assets was $0.7 million for the year ended December 31, 2017. Acquired intangible assets are amortized over their estimated useful lives of 7 to 10 years. Acquired technology, customer relationships, and trade names and other have weighted-average remaining useful lives from the date of purchase of 6 years for all three categories. As of December 31, 2017, the Company expects amortization expense in future periods to be as follows (in thousands):

 

 

 

Acquired

 

Fiscal Year

 

Intangibles

 

2018

 

$

528

 

2019

 

 

528

 

2020

 

 

528

 

2021

 

 

528

 

2022

 

 

528

 

Thereafter

 

 

544

 

Total expected amortization expense

 

$

3,184

 

 

 

81


 

8. Other Income (Expense), net

Other income (expense), net is comprised of the following (in thousands):

 

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Other Income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

2,792

 

 

$

1,369

 

 

$

701

 

Foreign currency forward contract gains, net

 

 

27

 

 

 

9

 

 

 

-

 

Foreign currency exchange gains, net

 

 

1,227

 

 

 

209

 

 

 

5

 

Total other income

 

 

4,046

 

 

 

1,587

 

 

 

706

 

Other Expense:

 

 

 

 

 

 

 

 

 

 

 

 

Skyfence holdback liability accretion

 

 

-

 

 

 

(6

)

 

 

(212

)

Foreign currency exchange losses, net

 

 

(2,138

)

 

 

(708

)

 

 

(322

)

Bank charges and Other expenses

 

 

(766

)

 

 

(950

)

 

 

(574

)

Total other expense

 

 

(2,904

)

 

 

(1,664

)

 

 

(1,108

)

Total other income (expense), net

 

$

1,142

 

 

$

(77

)

 

$

(402

)

 

 

9. Commitments and Contingencies

(a) Operating Leases

The Company rents its facilities under operating leases with lease periods expiring from 2018 through 2023. Future minimum payments under these facility operating leases are as follows as of December 31, 2017 (in thousands):

 

 

 

Operating

Leases

 

 

Estimated

Sublease

Income

 

Year Ending December 31:

 

 

 

 

 

 

 

 

2018

 

$

8,295

 

 

$

687

 

2019

 

 

4,991

 

 

 

-

 

2020

 

 

4,714

 

 

 

-

 

2021

 

 

557

 

 

 

-

 

2022

 

 

309

 

 

 

-

 

Thereafter

 

 

87

 

 

 

-

 

Total

 

$

18,953

 

 

$

687

 

 

Rent expense for the Company’s operating leases is recognized on a straight-line basis over the lease term. Rent expense for the years ended December 31, 2017, 2016 and 2015 was $6.6 million, $6.1 million, and $4.6 million, respectively.

In connection with leases for office space, the Company received tenant improvement allowances of $0.7 million, $0.3 million and $0.6 million during the years ended December 31, 2016, 2012 and 2010, respectively. The Company has recorded the tenant improvement allowances as a leasehold improvement within property and equipment, net and as deferred rent within other liabilities on the consolidated balance sheets. The deferred rent liability is amortized to rent expense over the term of the lease on a straight-line basis. The leasehold improvements are being amortized to expense over the period from when the improvements were placed into service until the end of their useful life, which is the end of the respective lease term.

In addition, certain of the Company’s operating lease agreements for office space also include rent holidays and scheduled rent escalations during the initial lease term. The Company has recorded the rent holidays as a deferred rent within other liabilities on the consolidated balance sheets. The Company recognizes the deferred rent liability and scheduled rent increase on a straight-line basis into rent expense over the lease term commencing on the date the Company takes possession of the lease space.

As of December 31, 2017 and 2016 the Company has $2.3 million and $1.9 million, respectively, in restricted cash to secure bank guarantees provided to the lessor.

82


 

(b) Cancelable Lease Agreement

The Company leases motor vehicles under a cancelable operating lease agreement. The Company has an option to cancel the lease agreement, which may result in penalties in a maximum amount of $0.1 million as of December 31, 2017. Motor vehicle lease expenses for the years ended December 31, 2017, 2016 and 2015 were $4.6 million, $2.7 million and $2.4 million, respectively.

(c) Purchase Commitments

As of both December 31, 2017 and 2016, the Company had purchase commitments of $2.6 million and $3.8 million, respectively, to purchase inventory, trial units, and research and development equipment from its vendors. The purchase commitments result from the Company’s contractual obligation to order or build inventory in advance of anticipated sales. According to the Company’s agreements with its vendors, the Company committed to purchase inventory within six months from the date the inventory arrived at the vendor’s warehouse.

(d) Litigation

From time to time, the Company may be subject to other legal proceedings and claims in the ordinary course of business.

On April 11, 2014, a purported shareholder class action lawsuit was filed in the United States District Court for the Northern District of California against us and certain of our current and former officers. On August 7, 2014, the Court entered an order appointing lead plaintiff and counsel for the purported class. The lead plaintiff filed an amended complaint on October 10, 2014. The lawsuit named us and certain of our current and former officers and purported to bring suit on behalf of those investors who purchased our publicly traded securities between May 2, 2013 and April 9, 2014. The plaintiff alleged that defendants made false and misleading statements about our operations and business and financial results and purported to assert claims for violations of the federal securities laws. The amended complaint sought unspecified compensatory damages, interest thereon, costs incurred in the action and equitable/injunctive or other relief. On January 6, 2015, defendants filed a motion to dismiss the amended complaint. On September 17, 2015, the Court granted defendants’ motion to dismiss with leave to amend. The lead plaintiff filed an amended complaint on January 13, 2016, again naming the same current and former officers, alleging false and misleading statements about our operations and business and financial results, and seeking the same relief.  On February 10, 2016, defendants filed a motion to dismiss the amended complaint. On May 16, 2016, the Court granted the motion in part and denied the motion in part.  On September 7, 2016, defendants filed their operative answer to the amended complaint. In July 2017, with the help of a mediator, the parties reached an agreement in principle to settle the action.  On October 11, 2017, the Court issued an order granting lead plaintiff’s motion for preliminary approval of the settlement. The Court issued an order granting final approval of the settlement, which was funded entirely by the Company’s insurance carriers, on January 31, 2018.

On September 1, 2017, a purported class action lawsuit was filed against us and others, alleging that current, former and prospective employees are entitled to monetary damages for violations of the notice provisions of the Fair Credit Reporting Act and similar California laws governing background checks. The lawsuit was filed in the Superior Court for San Mateo County and on September 29, 2017, we removed the action to the U.S. District Court for the Northern District of California. On November 6, 2017, we filed a motion to dismiss the action.

On September 1, 2017, the same plaintiff filed a second purported class action lawsuit against us and others in the Superior Court for San Mateo County, alleging, among other claims, violation of California wage and hour, overtime, meal break and rest break rules and regulations, failure to provide for proper expense reimbursements, failure to maintain accurate and complete payroll records, failure to pay commissions and unfair business practices, and seeking unspecified monetary damages, injunctive relief and attorneys’ fees.  We filed an answer to the complaint on September 29, 2017. On November 3, 2017, the plaintiff amended his complaint to assert an additional representative Private Attorney General Act (PAGA) claim against us. On December 6, 2017, we filed an answer to the amended complaint. The plaintiff’s motion for class certification is due on or before September 7, 2018.  Our opposition is due on or before November 6, 2018. Any reply is due on or before November 20, 2018. A hearing on the motion for class certification has been set for Friday, December 7, 2018.

In addition, the Company has received, and may in the future continue to receive, claims from third parties asserting, among other things, infringement of their intellectual property rights. Future litigation may be necessary to defend the Company, its channel partners and its customers by determining the scope, enforceability and validity of third-party proprietary rights or to establish its proprietary rights.

83


 

In the opinion of management, liabilities associated with these claims, while possible, are not probable at this time, and therefore the Company has not recorded any accrual for them as of December 31, 2017 and 2016. Further, any possible range of loss cannot be reasonably estimated at this time. The ultimate outcome of any litigation is uncertain and, regardless of outcome, litigation can have an adverse impact on the Company because of defense costs, potential negative publicity, diversion of management resources and other factors. Accordingly, there can be no assurance that existing or future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on the Company’s business, consolidated financial position, results of operations or cash flows.

(e) Indemnification

Under the indemnification provisions of its standard sales contracts, the Company agrees to defend its channel partners and end customers against third-party claims asserting infringement of certain intellectual property rights, which may include patents, copyrights, trademarks, or trade secrets, and to pay judgments and settlements entered on such claims. The Company’s exposure under these indemnifications provisions is generally limited to the total amount paid under the agreement. However, certain agreements included indemnification provisions that could potentially expose the Company to losses in excess of the amount received under the agreement. To date, there have been no claims under such indemnification provisions. Accordingly, the Company has not recorded a liability on its consolidated balance sheets for these indemnification provisions.

In addition to the foregoing, the Company maintains director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify its directors and officers.

 

 

10. Capital Stock

Common Stock Reserved for Issuance

The Company had reserved shares of common stock, on an as if converted basis, for issuance as follows:

 

 

 

As of December 31,

 

 

 

2017

 

 

2016

 

Issuance in connection with outstanding stock options

 

 

997,674

 

 

 

1,570,765

 

Issuance in connection with restricted stock units outstanding

 

 

2,353,315

 

 

 

1,994,790

 

Reserved for future stock option and restricted stock unit

   grants

 

 

2,572,922

 

 

 

2,464,181

 

Reserved for future issuance under the employee stock

   purchase plan

 

 

1,298,442

 

 

 

1,161,396

 

 

 

 

7,222,353

 

 

 

7,191,132

 

 

Preferred Stock

Our board of directors is authorized, subject to any limitations prescribed by law, without stockholder approval, to issue from time to time up to an aggregate of 5,000,000 shares of preferred stock, in one or more series, each series to have such rights and preferences, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences as the Company’s board of directors determines. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that may be issued in the future. The Company currently has no shares of preferred stock outstanding and the Company has no present plans to issue any shares of preferred stock.

Stock Plans

(a) 2003 Stock Plan

During 2003, the Board of Directors adopted the 2003 Stock Plan (the “2003 Plan”), which allowed for the grant of both incentive stock options and non-qualified stock options and the direct award or sale of shares of the Company’s common stock (including restricted common stock) to officers, employees, directors, consultants and other key persons. In connection with the Company’s initial public offering, which was completed in November 2011, the Board of Directors determined not to grant any further awards under the 2003 Plan upon completion of the public offering.  The 2011 Stock Option and Incentive Plan (the “2011 Plan”) replaced the 2003 Plan in November 2011.  Under the 2003 Plan, incentive stock options could have been granted to employees with exercise prices of no less than the fair value of the common stock on the grant date, and non-qualified options could have been granted to employees, directors, or consultants at exercise prices of no less than 85% of the fair value of the common stock on the grant date, as determined by the Board of Directors. If, at the time the Company granted an option, the optionee directly or by

84


 

attribution owned stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, the option price had to have been at least 110% of the fair value. Options granted under the 2003 Plan generally expire no later than ten years from the date of grant and, in general, vest four years from the date of grant.

(b) 2011 Stock Option and Incentive Plan

In September 2011, the Board of Directors adopted the 2011 Plan which was subsequently approved by the Company’s stockholders. The 2011 Plan replaced the 2003 Plan and the Company no longer grants awards under the 2003 Plan. The Company initially reserved a total of  1,000,000 shares of common stock for issuance under the 2011 Plan. In addition, 955,568 reserved but unissued shares under the 2003 Stock Plan were added to the number of shares reserved for issuance under the 2011 Plan. The 2011 Plan also provided that the number of shares reserved and available for issuance under the plan would automatically increase each January 1, beginning in 2012 and ending in 2015, by 4% of the outstanding number of shares of common stock on the immediately preceding December 31. The last automatic increase occurred on January 1, 2015.  In April 2017 and May 2016, the Company’s stockholders approved an increase to the share reserve under the 2011 Plan by 850,000 shares and 1,300,000 shares respectively.

The 2011 Plan permits the granting of incentive stock options, non-qualified stock options, restricted stock units (“RSUs”), stock appreciation rights, restricted shares of common stock and performance share awards. The exercise price of stock options may not be less than 100% of the fair market value of the common stock on the date of grant. Options granted pursuant to the 2011 Plan generally expire no later than ten years from the date of grant. The Company also grants RSUs. RSUs granted to new hires and merit grants to existing employees generally vest over a four-year period with 25% vesting at the end of one year and the remainder vesting quarterly thereafter. Additionally, from time to time, the Company grants performance-based RSUs (“PRSUs”). The PRSUs provide for a target number of shares that generally vest over three years including a one year performance period and two years of service-based vesting.  

During the quarters ended March 31, 2017 and June 30, 2017, the Company granted PRSUs to its executives to align with the Company’s pay-for-performance philosophy. An aggregate of 46,619 PRSUs were issued to executives during the quarter ended March 31, 2017, based on the Company’s achievement against its annual contract value of subscription bookings target for fiscal 2016 and achieving total operating expenses for 2016 that were 110% or less of the internal operating plan. The PRSUs are subject to vest over a two-year period and vest quarterly through February 15, 2019.

For fiscal 2017, the PRSUs vest contingent upon the Company’s achievement of an annual contract value of subscription bookings target for fiscal 2017 and total operating expenses for 2017 that are at 110% or less of the internal operating plan.  The amount of PRSUs earned was an aggregate of 74,621 PRSUs to be issued to executives during the quarter ending March 31, 2018.

 

(c) 2011 Employee Stock Purchase Plan

In September 2011, the Board of Directors adopted the 2011 Employee Stock Purchase Plan (the “ESPP”) which was subsequently approved by the Company’s stockholders. The ESPP took effect on November 8, 2011, the effective date of the registration statement for the Company’s initial public offering. The ESPP permits eligible employees to acquire shares of the Company’s common stock by accumulating funds through periodic payroll deductions of up to 15% of base salary. Each offering period may run for no more than 24 months and consist of no more than five purchase periods. The purchase price for shares of the Company’s common stock purchased under the ESPP will be 85% of the lesser of the fair market value of the Company’s common stock on the first day of the offering period or the last trading day of the applicable purchase period within that offering period.

The Company initially reserved a total of 500,000 shares of common stock for future issuance under the ESPP. The number of shares reserved for issuance under the ESPP increases automatically on January 1 of each of the first eight years commencing in 2012 by the number of shares equal to 1% of the Company’s total outstanding shares as of the immediately preceding December 31. The Board of Directors or compensation committee may reduce the amount of the increase in any particular year. No more than 20,000,000 shares of common stock may be issued under the ESPP and no other shares may be added to the ESPP without the approval of the Company’s stockholders. On January 1, 2017, the share reserve under the 2011 Employee Stock Purchase Plan was automatically increased by 330,889 shares.

85


 

(d) Inducement Stock Option Plans and Agreement and Inducement Restricted Stock Unit Plans and Agreement

In August 2014 and August 2015, the Compensation Committee of the Board of Directors adopted Inducement Stock Option Plans and Agreements (the “Inducement Option Plans”) and Inducement Restricted Stock Unit Plans and Agreements (the “Inducement RSU Plans”), in each case created as employment inducement awards. In accordance with the terms of the Inducement Option Plans, the Company issued options to purchase 290,000 shares of the Company’s common stock at an exercise price equal to the fair market value of a share of the Company’s common stock on the dates of grant of the options. The options, which have a ten-year term, vest at the rate of 25% of the shares on each of the first anniversary of the vesting commencement date with an additional 6.25% of the shares subject to the option vesting each quarter thereafter so long as the participant has not been terminated. In accordance with the terms of the Inducement RSU Plans, the Company issued RSUs representing an aggregate of 290,000 shares of the Company’s common stock. The RSUs, which expire following settlement, vest at the rate of 25% of the shares on each of the first anniversary of the vesting commencement date with an additional 6.25% of the shares subject to the RSU vesting each quarter thereafter so long as the participant has not been terminated.

(e) 2015 Equity Inducement Plan

In October 2015, the Board of Directors adopted the 2015 Equity Inducement Plan, a non-stockholder approved plan that provides for the granting of stock options and RSUs as employment inducement awards and in connection with acquisitions, subject to compliance with applicable securities laws and stock exchange requirements for such plans.  The Company has reserved 100,000 shares of common stock for issuance under the 2015 Equity Inducement Plan.  No awards have been made under the 2015 Equity Inducement Plan and the entire reserve remains available for grant.  Under the terms of the 2015 Equity Inducement Plan, the exercise price of stock options may not be less than 100% of the fair market value of common stock on the date of grant and generally expire no later than ten years from the date of grant. In August 2017 and December 2017, the Board of Directors amended the Equity Inducement Plan to increase the number of shares available for grant by 100,000 shares and 250,000 shares, respectively.

 

 

(f) Option Activity

The following table summarizes option activity under the Plans and related information:

 

 

 

Options Outstanding

 

 

Weighted-

Average

Remaining

 

 

 

 

 

 

 

Number of

Shares

 

 

Weighted

Average

Exercise Price

 

 

Contractual

Term

(in years)

 

 

Aggregate

Intrinsic Value

(in thousands) (1)

 

Outstanding - December 31, 2014

 

 

2,244,363

 

 

$

33.83

 

 

 

8.27

 

 

$

38,457

 

Granted

 

 

696,971

 

 

$

49.20

 

 

 

 

 

 

 

 

 

Exercised or released

 

 

(636,424

)

 

$

29.44

 

 

 

 

 

 

 

 

 

Cancelled or forfeited

 

 

(355,821

)

 

$

42.00

 

 

 

 

 

 

 

 

 

Outstanding - December 31, 2015

 

 

1,949,089

 

 

$

39.27

 

 

 

8.09

 

 

$

47,480

 

Granted

 

 

48,260

 

 

$

53.59

 

 

 

 

 

 

 

 

 

Exercised or released

 

 

(184,737

)

 

$

29.24

 

 

 

 

 

 

 

 

 

Cancelled or forfeited

 

 

(241,847

)

 

$

47.35

 

 

 

 

 

 

 

 

 

Balances - December 31, 2016

 

 

1,570,765

 

 

$

39.64

 

 

 

6.90

 

 

$

9,226

 

Granted

 

 

-

 

 

$

-

 

 

 

 

 

 

 

 

 

Exercised or released

 

 

(415,022

)

 

$

30.02

 

 

 

 

 

 

 

 

 

Cancelled or forfeited

 

 

(158,069

)

 

$

50.79

 

 

 

 

 

 

 

 

 

Balances - December 31, 2017

 

 

997,674

 

 

$

41.87

 

 

 

5.72

 

 

$

5,689

 

Vested and expected to vest - December 31, 2017

 

 

997,674

 

 

$

41.87

 

 

 

5.72

 

 

$

5,689

 

Exercisable - December 31, 2017

 

 

779,746

 

 

$

41.11

 

 

 

5.34

 

 

$

4,958

 

 

(1)

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing stock price of $39.70 of the Company’s common stock on December 31, 2017

86


 

Additional information regarding the Company’s stock options outstanding and exercisable as of December 31, 2017 is summarized below:

 

 

 

Options Outstanding

 

 

Options Exercisable

 

Exercise Prices

 

Number of

Stock Options

Outstanding

 

 

Weighted

Average

Remaining

Contractual

Life (Years)

 

 

Weighted

Average

Exercise Price

per Share

 

 

Shares Subject

to Stock Options

 

 

Weighted

Average

Exercise Price

per Share

 

$0.02 to $10.70

 

 

101,276

 

 

 

3.24

 

 

$

8.26

 

 

 

101,276

 

 

$

8.26

 

$10.71 to $29.10

 

 

77,236

 

 

 

5.18

 

 

$

25.30

 

 

 

60,439

 

 

$

24.51

 

$29.11 to $32.50

 

 

93,747

 

 

 

6.53

 

 

$

29.37

 

 

 

42,932

 

 

$

29.50

 

$32.51 to $35.50

 

 

65,474

 

 

 

4.37

 

 

$

34.07

 

 

 

64,499

 

 

$

34.09

 

$35.51 to $54.50

 

 

320,119

 

 

 

6.73

 

 

$

43.20

 

 

 

232,819

 

 

$

43.21

 

$54.51 to $61.50

 

 

209,260

 

 

 

4.92

 

 

$

55.14

 

 

 

190,385

 

 

$

55.02

 

$61.51 to $69.50

 

 

111,802

 

 

 

6.74

 

 

$

65.19

 

 

 

76,855

 

 

$

64.79

 

$69.51 to $77.50

 

 

18,760

 

 

 

7.52

 

 

$

71.72

 

 

 

10,541

 

 

$

71.69

 

 

 

 

997,674

 

 

 

5.72

 

 

$

41.87

 

 

 

779,746

 

 

$

41.11

 

 

(g) RSU Activity

A summary of RSU activity for the year ended December 31, 2017, is as follows:

 

 

 

Number of

Restricted

Stock Units

Outstanding

 

 

Weighted-

Average Grant

Date Fair Value

 

Unvested - December 31, 2015

 

 

1,898,025

 

 

$

49.53

 

Granted

 

 

1,160,062

 

 

$

47.42

 

Granted, performance RSUs

 

 

273,900

 

 

$

51.55

 

Released

 

 

(884,349

)

 

$

43.04

 

Cancelled or forfeited

 

 

(452,848

)

 

$

49.86

 

Unvested - December 31, 2016

 

 

1,994,790

 

 

$

51.42

 

Granted

 

 

1,489,189

 

 

$

43.36

 

Granted, performance RSUs

 

 

301,900

 

 

$

41.96

 

Released

 

 

(749,845

)

 

$

47.18

 

Cancelled or forfeited

 

 

(682,719

)

 

$

48.09

 

Unvested - December 31, 2017

 

 

2,353,315

 

 

$

47.42

 

 

(h) Stock-Based Compensation Expense

The Company recognized stock-based compensation expense under the 2011 Stock Option and Incentive Plan, 2003 Stock Plan, Inducement Plans, 2011 Employee Stock Purchase Plan, and the Incapsula 2010 Share Incentive Plan in the consolidated statements of operations as follows (in thousands):

 

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Cost of revenue

 

$

5,290

 

 

$

4,664

 

 

$

3,862

 

Research and development

 

 

12,187

 

 

 

14,711

 

 

 

13,831

 

Sales and marketing

 

 

14,696

 

 

 

20,510

 

 

 

16,717

 

General and administrative

 

 

13,822

 

 

 

17,131

 

 

 

16,554

 

Restructuring charges

 

 

675

 

 

 

5,859

 

 

 

-

 

Total stock-based compensation expense

 

$

46,670

 

 

$

62,875

 

 

$

50,964

 

 

 

(i) Determining the Fair Value of RSUs, Performance RSUs, Stock Options, and ESPP

The fair value of RSUs is determined using the closing price of the Company’s stock on the date of grant. Compensation is recognized on a straight-line basis over the requisite service period of each grant.

87


 

The fair value of RSUs granted to employees which have multiple performance conditions is determined by the Company using a Monte Carlo simulation model. The key inputs used were the Company’s stock price on the date of grant, the expected volatility, the risk free interest rate and a revenue forecast. The Company updates the estimated expense, at the end of each reporting period. The expense is recognized on an accelerated basis over the requisite service period, which is generally the vesting period of the respective awards.

For performance based RSUs granted to employees which only have performance conditions, we recognized expense based on our best estimate of number of awards which are expected to vest upon achievement of performance conditions. We revisit this estimate periodically.

The fair value of each stock option and ESPP grant to employees was determined by the Company and its board of directors using the Black-Scholes option-pricing model and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment to determine.

Expected Term— The expected term represents the period that the Company’s stock-based awards are expected to be outstanding. The expected term is derived from historical data on employee exercises and post-vesting employment termination behavior taking into account the contractual life of the award. For ESPP grants, the expected term is based on the length of the offering period, which is six months.

Expected Volatility—The expected volatility was based on our historical volatilities. The volatility is over a period equal to the expected terms of the stock option grants and the offering period for employee stock purchase plan.

Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the grant’s expected term.

Expected Dividend— The Company has never paid dividends and does not expect to pay dividends.

A summary of the weighted-average assumptions is as follows:

 

 

 

Years Ended December 31

 

 

 

2017

 

 

2016

 

 

2015

 

Stock option grants:

 

 

 

 

 

 

 

 

 

 

 

 

Dividend rate

 

-

 

 

 

0

%

 

 

0

%

Risk-free interest rate

 

-

 

 

 

1.4

%

 

 

1.8

%

Expected term (in years)

 

-

 

 

 

6.0

 

 

 

6.1

 

Expected volatility

 

-

 

 

 

58

%

 

 

49

%

ESPP grants:

 

 

 

 

 

 

 

 

 

 

 

 

Dividend rate

 

 

0

%

 

 

0

%

 

 

0

%

Risk-free interest rate

 

 

1.3

%

 

 

0.5

%

 

 

0.4

%

Expected term (in years)

 

 

0.5

 

 

 

0.5

 

 

 

0.5

 

Expected volatility

 

 

49

%

 

 

58

%

 

 

65

%

 

The Company did not issue stock option grants for the year ended December 31, 2017. The weighted-average grant date fair value of the Company’s stock options granted during the years ended December 31, 2016 and 2015 was $29.23, and $23.75 per share, respectively. The aggregate grant date fair value of the Company’s stock options granted to employees during the years ended December 31, 2016 and 2015 was $1.4 million, and $16.6 million, respectively. The aggregate grant date fair value of the Company’s stock options vested during the years ended December 31, 2016, and 2015 was $11.9 million, and $11.7 million, respectively. The fair value of the Company’s RSUs vested during the year ended December 31, 2017, 2016 and 2015 was $33.2 million, $38.1 million and $31.4 million, respectively.

The aggregate intrinsic value of options exercised under the Plans was $6.2 million, $2.5 million, and $21.6 million for the years ended December 31, 2017, 2016 and 2015, respectively. The aggregate intrinsic value of options exercised is calculated as the difference between the fair market value of the Company’s common stock on the date of the exercise and the exercise price of each option.

As of December 31, 2017, total compensation cost related to unvested stock-based awards granted to employees under the Plans, but not yet recognized, was $83.7 million. As of December 31, 2017, this cost will be amortized to expense over a weighted-average remaining period of 2.6 years. Future option grants will increase the amount of compensation expense to be recorded in these periods.

88


 

Net cash proceeds from the exercise of stock options and the issuance of common stock in connection with the employee stock purchase plan were $9.5 million, $2.4 million, and $12.1 million for the years ended December 31, 2017, 2016 and 2015, respectively. There was no capitalized stock-based compensation cost during the years ended December 31, 2017, 2016 and 2015. Recognized stock-based compensation tax benefits during the year ended December 31, 2016 and 2015 was $0.1 million and $0.2 million, respectively. There was no stock-based compensation tax benefits recognized during the year ended December 31, 2017.

(j) Follow-On Public Offering

In March 2015, the Company completed a follow-on public offering whereby the Company sold 3,450,000 shares of common stock at a price of $39.00 per share, for aggregate net proceeds of $127.9 million, after deducting underwriting discounts, commissions and other offering costs of approximately $6.7 million.

 

 

11. Accumulated Other Comprehensive Income (Loss)

The changes in the balances of accumulated other comprehensive income (loss) by component are as follows (in thousands):

 

 

 

Years ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

Unrealized

gain (loss)

on cash flow

hedges

 

 

Unrealized

gain (loss) on

investments

 

 

Total

 

 

Unrealized

gain (loss) on

cash flow

hedges

 

 

Unrealized

gain (loss) on

investments

 

 

Total

 

 

Unrealized

gain (loss) on

cash flow

hedges

 

 

Unrealized

gain (loss) on

investments

 

 

Total

 

Balance at January 1

 

$

(1,065

)

 

$

(413

)

 

$

(1,478

)

 

$

(1,021

)

 

$

(310

)

 

$

(1,331

)

 

$

(1,428

)

 

$

(61

)

 

$

(1,489

)

Other comprehensive income (loss)

   before reclassifications

 

 

4,486

 

 

 

(202

)

 

 

4,284

 

 

 

(134

)

 

 

(103

)

 

 

(237

)

 

 

(565

)

 

 

(249

)

 

 

(814

)

Amounts reclassified to net loss

 

 

(3,261

)

 

 

-

 

 

 

(3,261

)

 

 

90

 

 

 

-

 

 

 

90

 

 

 

972

 

 

 

-

 

 

 

972

 

Change in other comprehensive

   income (loss)

 

 

1,225

 

 

 

(202

)

 

 

1,023

 

 

 

(44

)

 

 

(103

)

 

 

(147

)

 

 

407

 

 

 

(249

)

 

 

158

 

Balance at December 31

 

$

160

 

 

$

(615

)

 

$

(455

)

 

$

(1,065

)

 

$

(413

)

 

$

(1,478

)

 

$

(1,021

)

 

$

(310

)

 

$

(1,331

)

 

The following is a summary of reclassifications out of accumulated other comprehensive income (loss) for the years 2017, 2016, and 2015 (in thousands):

 

 

 

Year ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

Pre-Tax

Amount

 

 

Tax

Expense

(Benefit)

 

 

After-Tax

Amount

 

 

Pre-Tax

Amount

 

 

Tax

Expense

(Benefit)

 

 

After-Tax

Amount

 

 

Pre-Tax

Amount

 

 

Tax

Expense

(Benefit)

 

 

After-Tax

Amount

 

Unrealized gains (losses) on cash flow

   hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current period unrealized gain (loss)

 

$

4,486

 

 

$

-

 

 

$

4,486

 

 

$

(134

)

 

$

-

 

 

$

(134

)

 

$

(565

)

 

$

-

 

 

$

(565

)

Reclassification adjustments 1

 

 

(3,261

)

 

 

-

 

 

 

(3,261

)

 

 

90

 

 

 

-

 

 

 

90

 

 

 

972

 

 

 

-

 

 

$

972

 

Unrealized gains (losses) on cash flow

   hedges, net

 

 

1,225

 

 

 

-

 

 

 

1,225

 

 

 

(44

)

 

 

-

 

 

 

(44

)

 

 

407

 

 

 

-

 

 

 

407

 

Unrealized gains (losses) on investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current period unrealized gain (loss)

 

$

(202

)

 

 

-

 

 

 

(202

)

 

$

(103

)

 

 

-

 

 

 

(103

)

 

$

(249

)

 

 

-

 

 

 

(249

)

Unrealized gains (losses) on investments:

 

 

(202

)

 

 

-

 

 

 

(202

)

 

 

(103

)

 

 

-

 

 

 

(103

)

 

 

(249

)

 

 

-

 

 

 

(249

)

Other comprehensive income (loss)

 

$

1,023

 

 

$

-

 

 

$

1,023

 

 

$

(147

)

 

$

-

 

 

$

(147

)

 

$

158

 

 

$

-

 

 

$

158

 

 

1

Refer to Note 5 for the affected line items in the consolidated statement of operations

 

 

12. Income Taxes

The Company’s geographical breakdown of its loss before provision for income taxes is as follows (in thousands):

 

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Domestic

 

$

20,331

 

 

$

(72,139

)

 

$

(50,892

)

Foreign

 

 

2,999

 

 

 

3,032

 

 

 

2,692

 

Loss before provision for taxes

 

$

23,330

 

 

$

(69,107

)

 

$

(48,200

)

 

89


 

The components of the provision for income taxes are as follows (in thousands):

 

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Current

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

-

 

 

$

-

 

 

$

-

 

State

 

 

56

 

 

 

62

 

 

 

34

 

Foreign

 

 

2,139

 

 

 

1,654

 

 

 

857

 

Total current provision

 

 

2,195

 

 

 

1,716

 

 

 

891

 

Deferred

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

4

 

 

 

130

 

 

 

63

 

State

 

 

13

 

 

 

6

 

 

 

(1

)

Foreign

 

 

(1,751

)

 

 

(680

)

 

 

(271

)

Total deferred provision

 

 

(1,734

)

 

 

(544

)

 

 

(209

)

Total

 

$

461

 

 

$

1,172

 

 

$

682

 

 

Reconciliation of the provision for income taxes at the statutory rate to the Company’s provision for income tax is as follows (in thousands):

 

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Tax benefit at federal statutory tax rate

 

$

7,929

 

 

$

(23,496

)

 

$

(16,388

)

Tax benefit at state statutory tax rate

 

 

67

 

 

 

(1,008

)

 

 

(499

)

Foreign tax rate differential

 

 

(123

)

 

 

57

 

 

 

(826

)

Change in federal statutory tax rate and valuation allowance

   under U.S. Tax Reform

 

 

(185

)

 

 

-

 

 

 

-

 

Losses not benefitted/(benefitted)

 

 

(15,440

)

 

 

17,701

 

 

 

9,738

 

Subsidiary earnings taxed in the US

 

 

717

 

 

 

-

 

 

 

-

 

Meals and entertainment

 

 

309

 

 

 

222

 

 

 

44

 

Stock compensation

 

 

6,006

 

 

 

7,857

 

 

 

8,492

 

Foreign exchange (gains) and losses, net

 

 

(776

)

 

 

-

 

 

 

-

 

Reserve for tax exposure

 

 

1,893

 

 

 

-

 

 

 

-

 

Nondeductible expenses and other

 

 

64

 

 

 

(161

)

 

 

121

 

Provision for income taxes

 

$

461

 

 

$

1,172

 

 

$

682

 

 

The U.S. Tax Cuts and Jobs Act of 2017 (“Tax Act”) was enacted on December 22, 2017. ASC Topic 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment even though the effective date for most provisions is for tax years beginning after December 31, 2017, or in the case of certain other provisions of the law, January 1, 2018.

Given the significance of the legislation, the U.S. Securities and Exchange Commission (the "SEC") staff issued Staff Accounting Bulletin ("SAB") No. 118 (SAB 118), which allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. However, the measurement period is deemed to have ended earlier when the registrant has obtained, prepared, and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared, or analyzed.

 

The Company is still evaluating the provisions of the Tax Reform and amounts reflected in the financial statements for the year ended December 31, 2017 are provisional. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act. The accounting is expected to be completed in 2018.

The Tax Act reduces the U.S. statutory tax rate from 35% to 21% for years after 2017.  Accordingly, we have remeasured our U.S. deferred tax assets and liabilities as of December 31, 2017 to reflect the reduced rate that will apply in future periods when these deferred taxes will reverse, resulting in a reduction of our net deferred tax assets, by approximately $24.9 million, which is offset by

90


 

the change in valuation allowance by $25.1 million.  The net impact of $0.2 million of deferred tax benefit is principally related to the remeasurement of our deferred tax liabilities associated with indefinite-lived intangible assets that are deemed to reverse at the new 21% tax rate.  Absent this deferred tax liability, we are in a net deferred tax asset position that is offset by a full valuation allowance.

The Tax Act also includes a one-time mandatory repatriation transition tax on the net accumulated earnings and profits of a U.S. taxpayer’s foreign subsidiaries. We have not yet completed the analysis of the earnings and profits of our foreign subsidiaries.  However, we estimate that, as a result of foreign tax credits and net operating loss carryforward available to the Company, the impact of the one-time mandatory repatriation tax would not be material.

 

The Tax Act includes numerous provisions, including the repatriation provisions that would have significant impact of our U.S. deferred tax assets, which are generally subject to a full valuation allowance.  Although we have made a reasonable estimate of the gross amounts of the deferred tax assets disclosed, a final determination of the Tax Act’s impact on the deferred tax assets and related valuation allowance requirements remain incomplete pending a full analysis of the provisions and their interpretations.

Other significant provisions that are not yet effective but may impact income taxes in future years include: an exemption from U.S. tax on dividends of future foreign earnings, a limitation of the utilization of net operating losses generated after fiscal 2018 to 80 percent of taxable income, and a minimum tax on certain foreign earnings in excess of 10 percent of the foreign subsidiaries tangible assets (i.e., global intangible low-taxed income or “GILTI”). We are still evaluating whether to make a policy election to treat the GILTI tax as a period expense or to provide U.S. deferred taxes on foreign temporary differences that are expected to generate GILTI income when they reverse in future years.  

 

Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):

 

 

 

As of December 31,

 

 

 

2017

 

 

2016

 

Deferred tax assets:

 

 

 

 

 

 

 

 

Reserves and accruals

 

$

2,014

 

 

$

2,817

 

Deferred revenue

 

 

6,466

 

 

 

10,379

 

Stock-based compensation

 

 

3,747

 

 

 

7,361

 

Net operating loss carryforwards

 

 

35,404

 

 

 

47,452

 

Loss on OCI

 

 

231

 

 

 

370

 

Depreciation and amortization

 

 

565

 

 

 

721

 

Other

 

 

(3

)

 

 

67

 

Gross deferred tax assets

 

 

48,424

 

 

 

69,167

 

Valuation allowance

 

 

(46,125

)

 

 

(68,227

)

Total deferred tax assets

 

 

2,299

 

 

 

940

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

-

 

 

 

(21

)

Depreciation and amortization

 

 

(610

)

 

 

(964

)

Total deferred tax liabilities

 

 

(610

)

 

 

(985

)

Net deferred tax liability

 

$

1,689

 

 

$

(45

)

 

Recognition of deferred tax assets is appropriate when realization of these assets is more likely than not. Based upon the weight of available evidence, which includes the Company’s historical operating performance and the recorded cumulative net losses in all prior fiscal periods, the Company has provided a full valuation allowance against its U.S. deferred tax assets and Imperva Israel net operating loss generated. The Company’s valuation allowance (decreased) increased by ($22.1) million, $14.8 million, and $13.0 million in the years ended December 31, 2017, 2016 and 2015, respectively.

As of December 31, 2017, the Company had U.S. federal and state net operating loss carryforwards of approximately $142.9 million and $70.9 million, respectively. The U.S. federal net operating loss carryforwards will expire at various dates beginning in 2022 through 2037 if not utilized. Most state net operating loss carryforwards will expire at various dates beginning in 2018 through 2037.

Net operating loss carryforwards reflected above may be subject to limitations due to ownership changes as provided in the Internal Revenue Code and similar state provisions.

91


 

The Company has not provided U.S. income tax on certain foreign earnings that are deemed to be indefinitely invested outside the U.S. For fiscal years 2017, 2016, and 2015 the amount of accumulated unremitted earnings from the Company’s foreign subsidiaries is approximately $20.5 million, $9.7 million and $13.6 million, respectively. The amount of taxes attributable to the undistributed earnings is not practicably determinable.

 

 

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

 

 

 

2017

 

 

2016

 

 

2015

 

Balance at January 1

 

$

2,282

 

 

$

1,154

 

 

$

672

 

Additions based on tax positions taken during the current period

 

 

2,047

 

 

 

761

 

 

 

401

 

Reductions based on tax positions taken during the prior period

 

 

(28

)

 

 

(42

)

 

 

(50

)

Additions based on tax positions taken during a prior period

 

 

-

 

 

 

409

 

 

 

131

 

Decrease related to lapse of applicable statute of limitations

 

 

(181

)

 

 

-

 

 

 

-

 

Balance at December 31

 

$

4,120

 

 

$

2,282

 

 

$

1,154

 

 

As of December 31, 2017, 2016 and 2015, the Company had gross unrecognized tax benefits of approximately $4.1 million, $2.3 million and $1.2 million, respectively, all of which would impact the effective tax rate if recognized. While it is often difficult to predict the final outcome of any particular uncertain tax position, the Company does not believe that the amount of unrecognized tax benefits will change significantly in the next twelve months.

The Company recognizes interest accrued and penalties related to unrecognized tax benefits in its income tax provision. For the years ended December 31, 2017 and 2016, the Company accrued interest of $0.1 million and $0.2 million in income tax expense, respectively.

 

The Company's material income tax jurisdictions are the United States (federal), California and Israel. The Israeli Tax Authorities have now settled the audit of income tax returns of the Israeli subsidiary for the tax years 2006 through 2010. As a result of net operating loss carryforwards, the Company is subject to audit for tax years 2002 and forward for federal purposes and 2008 and forward for California purposes.  The Israeli Tax Authorities have settled the audit of income tax returns of the Israeli subsidiaries for the tax years 2006 through 2010. The Israeli tax authorities issued assessment orders to court for 2011 and 2012 tax years.  Tax years 2013 onwards are open for examination.

The Company's Israeli subsidiaries ("Israeli subsidiaries") research and development intercompany services activity ("R&D activity") have a "Beneficiary Enterprise" status for a separate investment program that was elected by the Israel subsidiaries starting 2012 under the Law for Encouragement of Capital Investments, 1959 (the "Investments Law), amended from time to time. The entitlement to the above benefits is conditional upon the Israeli subsidiaries fulfilling the conditions stipulated by the Investments Law and regulations published there under.

 

 

13. Segment Information

The Company operates its business in one operating segment, which is the development, marketing, sales, service and support of cyber-security solutions that protect business-critical data and applications whether in the cloud or on premises. Operating segments are defined as components of an enterprise that engage in business activities for which separate financial information is available and evaluated by the chief operating decision maker in deciding how to allocate resources and assessing performance. The chief operating decision maker is the Company’s Chief Executive Officer.

The Company’s services revenue was comprised of the following (in thousands):

 

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Maintenance and support

 

$

91,300

 

 

$

80,007

 

 

$

66,380

 

Professional services and training

 

 

13,918

 

 

 

13,693

 

 

 

14,084

 

Subscriptions

 

 

119,376

 

 

 

83,957

 

 

 

46,271

 

Total net services revenue

 

$

224,594

 

 

$

177,657

 

 

$

126,735

 

 

92


 

The Company’s revenue by geographic region, based on the customer’s location, is summarized as follows (in thousands):

 

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

United States

 

$

146,215

 

 

$

143,607

 

 

$

141,225

 

EMEA

 

 

63,884

 

 

 

50,838

 

 

 

47,429

 

APAC

 

 

63,959

 

 

 

48,391

 

 

 

30,180

 

Other

 

 

47,658

 

 

 

21,619

 

 

 

15,464

 

Total net revenue

 

$

321,716

 

 

$

264,455

 

 

$

234,298

 

 

The following table presents long-lived assets by location (in thousands):

 

 

 

As of December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

United States

 

$

23,697

 

 

$

20,525

 

 

$

9,913

 

Israel

 

 

4,640

 

 

 

9,344

 

 

 

10,224

 

Other

 

 

254

 

 

 

20

 

 

 

18

 

Total long-lived assets

 

$

28,591

 

 

$

29,889

 

 

$

20,155

 

 

 

14. Net Income (Loss) per Share

Basic and diluted net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. The computation of net income (loss) per share for each period, including the number of weighted-average shares outstanding, is shown on the face of the condensed consolidated statements of operations. Diluted earnings per share is calculated using our weighted-average outstanding common shares including the dilutive effect of stock awards as determined under the treasury stock method. In periods when the Company recognizes a net loss, the Company excludes the impact of outstanding stock awards from the diluted loss per share calculation as their inclusion would have an antidilutive effect.

The table below shows the reconciliation of the basic and diluted shares:

 

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Weighted average number of shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

33,724

 

 

 

32,284

 

 

 

29,849

 

Dilutive effects of:

 

 

 

 

 

 

 

 

 

 

 

 

Employee stock options, RSU’s and share based payment

   awards issued to employees

 

 

514

 

 

 

-

 

 

 

-

 

Diluted

 

 

34,238

 

 

 

32,284

 

 

 

29,849

 

 

The following table sets forth the computation of the Company’s basic and diluted net loss per share of common stock (in thousands, except per share amounts):

 

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Net income (loss)

 

$

22,869

 

 

$

(70,279

)

 

$

(48,882

)

Shares used in computing earnings

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

33,724

 

 

 

32,284

 

 

 

29,849

 

Diluted

 

 

34,238

 

 

 

32,284

 

 

 

29,849

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.68

 

 

$

(2.18

)

 

$

(1.64

)

Diluted

 

$

0.67

 

 

$

(2.18

)

 

$

(1.64

)

 

93


 

The following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have been antidilutive:

 

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Stock options to purchase common stock

 

 

259,744

 

 

 

1,570,765

 

 

 

1,949,089

 

Restricted stock units for common stock

 

 

95,794

 

 

 

1,994,790

 

 

 

1,898,025

 

Restricted stock issued in connection with Skyfence acquisition

 

 

-

 

 

 

110,897

 

 

 

118,961

 

 

 

15. Disposition of Business

 

On February 23, 2017, the Company completed the sale of the assets of its Skyfence cloud access security broker business (“Skyfence”) to Forcepoint LLC and its Israeli subsidiary for consideration of approximately $40 million in cash. Of the total consideration, approximately $5.0 million was remitted directly to escrow to secure the Company’s indemnification obligations. The escrow will be released in June 2018. This escrowed amount is recorded in prepaid expenses and other current assets on our consolidated balance sheet as of December 31, 2017, and represents a noncash item in our consolidated statement of cash flows. As a result of the sale, the Company recognized a gain of $35.9 million during the first quarter of 2017 included in gain on sale of Skyfence in our condensed consolidated statement of operations.

The following table presents the carrying amounts of Skyfence immediately preceding the disposition on February 23, 2017: 

 

 

 

(dollars in thousands)

 

Assets

 

 

 

 

Prepaid and other current assets

 

 

46

 

Property and equipment, net

 

 

219

 

Goodwill

 

 

1,058

 

Acquired intangible assets, net

 

 

4,496

 

Total assets

 

$

5,819

 

Liabilities:

 

 

 

 

Accounts payable

 

$

104

 

Accrued and other current liabilities

 

 

117

 

Deferred revenue

 

 

1,454

 

Total liabilities

 

$

1,675

 

 

The Company evaluated the disposition of Skyfence and determined it did not meet the criteria for classification as a discontinued operation and determined that the disposition is not expected to have a material impact to our quarterly consolidated operating loss and net income. However, the Company determined that the disposition does represent an individually significant component of our business. The following table presents certain amounts related to Skyfence in our consolidated results of operations through its disposal on February 23, 2017:

 

 

 

Years Ended December 31,

 

 

 

2017

 

 

2016

 

 

 

(dollars in thousands)

 

Operating loss

 

$

(3,567

)

 

$

(24,693

)

Loss before taxes

 

 

(3,648

)

 

$

(24,693

)

Net loss

 

 

(3,659

)

 

 

(24,693

)

 

16. Subsequent Event

 

In January 2018, we implemented a restructuring plan to improve customer experiences, fuel product innovation and increase operational effectiveness. We expect to incur restructuring charge during the first quarter of 2018 of $2.3 million to $2.9 million, substantially all of which are for cash severance costs. These actions are expected to be substantially completed by the end of the first quarter of 2018 and we do not expect material costs associated with the activity in future periods.

 

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

94


 

 

 

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation and supervision of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognizes that any 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 the aforementioned evaluation, our chief executive officer and chief financial officer have concluded that as of December 31, 2017, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that 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 chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017 based on the guidelines established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (COSO). Based on the results of this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2017 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors. The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included in Part II, Item 8 of this Annual Report on Form 10-K.

Changes in Internal Control over Financial Reporting

Regulations under the Exchange Act require public companies, including our company, to evaluate any change in our “internal control over financial reporting” as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) of the Exchange Act. In connection with their evaluation of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K, our chief executive officer and chief financial officer did not identify any changes in our internal control over financial reporting during our fourth quarter ended December 31, 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

None.

 

 

95


 

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Except as set forth below, the information required by this item is incorporated by reference to our Proxy Statement for our 2018 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2017.

We maintain a Code of Business Conduct and Ethics that incorporates our code of ethics applicable to all employees, including all officers. Our Code of Business Conduct and Ethics is published on the Investor Relations section of our website at www.imperva.com. We intend to disclose future amendments to certain provisions of our Code of Business Conduct and Ethics, or waivers of such provisions granted to the principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions on this website within four business days following the date of such amendment or waiver.

Item 11. Executive Compensation

The information required by this item is incorporated by reference to our Proxy Statement for our 2018 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2017.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is incorporated by reference to our Proxy Statement for our 2018 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2017.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this item is incorporated by reference to our Proxy Statement for our 2018 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2017.

Item 14. Principal Accountant Fees and Services

The information required by this item is incorporated by reference to our Proxy Statement for our 2018 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2017.

 

 

96


 

PART IV

Item 15. Exhibits, Financial Statement Schedules

(a)(1) Financial Statements: 

The financial statements filed as part of this Annual Report on Form 10-K are listed on the index to financial statements on page 58.

(2) Financial Statement Schedules:

No financial statement schedules are filed as part of this report because the information required to be in the schedules (i) is not present, (ii) is not present in amounts sufficient to require submission of the schedules, or (iii) is included in the Consolidated Financial Statements or Notes thereto.

(b) Exhibits:

The following exhibits are filed as part of or incorporated by reference into this Annual Report on Form 10-K.

 

 

 

 

 

Incorporated by Reference

Exhibit

Number

 

Exhibit Description

 

Form

 

File No.

 

Exhibit

 

Filing
Date

 

Provided
Herewith

 

 

 

 

 

 

 

 

 

 

 

 

 

3.1

 

Restated Certificate of Incorporation of Imperva, Inc., as currently in effect.

 

S-1/A

 

333-175008

 

3.3

 

10/28/11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.2

 

Amended and Restated Bylaws of Imperva, Inc., as currently in effect.

 

8-K

 

001-35338

 

3.1

 

12/20/2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.1

 

Specimen Certificate Evidencing Shares of Imperva, Inc. common stock.

 

S-1/A

 

333-175008

 

4.1

 

10/28/11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.1#

 

2011 Stock Option and Incentive Plan and subplan and form agreements thereunder.

 

8-K

 

001-35338

 

99.2

 

7/27/17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.2#

 

2011 Employee Stock Purchase Plan.

 

S-1/A

 

333-175008

 

10.19

 

10/28/11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.3#

 

2015 Equity Inducement Plan, as amended, and forms of agreements and subplan thereunder.

 

S-8

 

333-222380

 

99.1

 

1/2/18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.4#

 

Form of Inducement Stock Option Plan and Agreement between Imperva, Inc. and Anthony Bettencourt.

 

8-K

 

001-35338

 

10.5

 

8/18/14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.5#

 

Form of Inducement Restricted Stock Unit Plan and Agreement between Imperva, Inc. and Anthony J. Bettencourt.

 

8-K

 

001-35338

 

10.6

 

8/18/14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.6#

 

Form of Amended and Restated Indemnification Agreement.

 

S-1/A

 

333-175008

 

10.4

 

10/28/11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.7#

 

Imperva, Inc. Severance Plan.

 

8-K

 

001-35338

 

99.7

 

8/10/17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.8#

 

Offer Letter, dated August 10, 2017, between Imperva, Inc. and Christopher Hylen.

 

8-K

 

001-35338

 

99.2

 

8/10/17

 

 

10.9#

 

Offer Letter, dated September 30, 2014, between Imperva, Inc. and Michael Mooney.

 

10-Q

 

001-35338

 

10.1

 

5/11/15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.10#

 

Offer Letter, dated January 2, 2018, between Imperva, Inc. and Mike Burns.

 

8-K

 

001-35338

 

99.2

 

1/2/18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.11#

 

Offer Letter, dated August 13, 2014, between Imperva, Inc. and Anthony Bettencourt.

 

8-K

 

001-35338

 

10.1

 

8/18/14

 

 

10.12#

 

Offer Letter, dated June 10, 2011, between Imperva, Inc. and Trâm Phi.

 

10-Q

 

001-35338

 

10.01

 

5/11/12

 

 

97


 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.13#

 

Offer Letter, dated December 12, 2014 between Imperva, Inc. and Sunil D. Nagdev.

 

10-K

 

001-35338

 

10.15

 

2/26/2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.14#

 

Imperva, Inc. Change in Control Plan and Form Notice of Participation.

 

10-K

 

001-35338

 

10.26

 

3/28/12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.15#

 

Imperva, Inc. 2018 Senior Management Bonus Plan.

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

10.16†

 

OEM Agreement, dated September 9, 2009, between Imperva, Inc., Imperva, Ltd. and American Portwell Technology Inc.

 

S-1

 

333-175008

 

10.11

 

6/17/11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.17†

 

First Amendment to OEM Agreement dated as of June 14, 2012 among Imperva, Inc., Imperva, Ltd. and American Portwell Technology.

 

10-Q

 

001-35338

 

10.1

 

8/13/12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.18†

 

Second Amendment to OEM Agreement dated as of January 23, 2013 among Imperva, Inc., Imperva, Ltd. and American Portwell Technology.

 

10-K

 

001-35338

 

10.17

 

3/15/13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.19†

 

Third Amendment to OEM Agreement dated as of May 22, 2014 among Imperva, Inc., Imperva, Ltd. and American Portwell Technology.

 

10-Q

 

001-35338

 

10.1

 

8/8/14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.20

 

Lease Agreement, dated February 6, 2008, between Westport Office Park, LLC and Imperva, Inc.

 

S-1

 

333-175008

 

10.13

 

6/17/11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.21

 

First Amendment to Lease (Relocation), dated February 12, 2010, between Westport Office Park, LLC and Imperva, Inc.

 

S-1

 

333-175008

 

10.14

 

6/17/11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.22

 

Second Amendment to Lease (Expansion) effective as of May 16, 2012 between Westport Office Park, LLC and Imperva, Inc.

 

8-K

 

001-35338

 

10.2

 

5/30/12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.23

 

Third Amendment to Lease effective as of August 22, 2012 between Westport Office Park, LLC and Imperva, Inc.

 

10-Q

 

001-35338

 

10.1

 

11/13/12

 

 

10.24

 

Fourth Amendment to Lease (Expansion) effective as of May 6, 2015 between Westport Office Park, LLC and Imperva, Inc.

 

8-K

 

001-35338

 

10.1

 

5/12/15

 

 

10.25

 

Fifth Amendment to Lease (Expansion) effective as of October 28, 2015 between Westport Office Park, LLC and Imperva, Inc.

 

8-K

 

001-35338

 

10.1

 

10/29/15

 

 

10.26

 

Sixth Amendment to Lease effective as of October 28, 2015 between Westport Office Park, LLC and Imperva. Inc.

 

8-K

 

001-35338

 

10.1

 

10/29/15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.27

 

Seventh Amendment to Lease effective as of March 9, 2016 between Westport Office Park, LLC and Imperva. Inc.

 

10-Q

 

001-35338

 

10.1

 

5/9/16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.28

 

Eighth Amendment to Lease effective as of September 29, 2017 between Westport Office Park, LLC and Imperva. Inc.

 

10-Q

 

001-35338

 

10.4

 

11/9/17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21.1

 

Subsidiaries of Imperva, Inc.

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

98


 

23.1

 

Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

24.1

 

Power of Attorney (included on the signature page).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31.1

 

Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(a).

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

31.2

 

Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a).

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

32.1*

 

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 and Securities Exchange Act Rule 13a-14(b).

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

32.2*

 

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 and Securities Exchange Act Rule 13a-14(b).

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

101.CAL

 

XBRL Taxonomy Calculation Linkbase Document

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

101.LAB

 

XBRL Taxonomy Label Linkbase Document

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

 

 

 

 

 

X

 

Certain portions of this exhibit have been omitted and filed separately with the SEC pursuant to an order granting confidential treatment under Rule 406 of the Securities Act and Rule 24b-2 of the Securities Exchange Act.

#

Indicates management contract or compensatory plan or arrangement.

*

This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that Imperva, Inc. specifically incorporates it by reference.

 

 

99


 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, on February 23, 2018, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

 

IMPERVA, INC.

 

 

 

 

 

 

 

By:

/s/ Christopher S. Hylen

 

By:

/s/ Mike Burns

 

Christopher S. Hylen

 

 

Mike Burns

 

President and Chief Executive Officer

 

 

Chief Financial Officer

 

100


 

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Christopher S. Hylen and Mike Burns as his or her attorneys-in-fact, with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated.

 

Signature

Title

Date

 

 

 

/s/ Allan Tessler

Chairman of the Board

February 23, 2018

Allan Tessler

 

 

 

 

 

/s/ Christopher S. Hylen

President, Chief Executive Officer

February 23, 2018

Christopher S. Hylen

(Principal Executive Officer)

 

 

 

 

 

 

 

/s/ Mike Burns

Chief Financial Officer

February 23, 2018

Mike Burns

(Principal Accounting and

 

 

Financial Officer)

 

 

 

 

/s/ Geraldine Elliott

Director

February 23, 2018

Geraldine Elliott

 

 

 

 

 

/s/ Albert Pimentel

Director

February 23, 2018

Albert Pimentel

 

 

 

 

 

/s/ Roger Sippl

Director

February 23, 2018

Roger Sippl

 

 

 

 

 

/s/ Randall Spratt

Director

February 23, 2018

Randall Spratt

 

 

 

 

 

/s/ James Tolonen

Director

February 23, 2018

James Tolonen

 

 

 

 

 

 

 

101