As filed with the Securities and Exchange Commission on November 9, 2012
Registration No. 333-184674
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
FORM S-1
REGISTRATION STATEMENT
Under
the Securities Act of 1933
S ERVICE N OW , I NC .
(Exact name of registrant as specified in its charter)
Delaware | 7372 | 20-2056195 | ||||
(State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification Number) |
ServiceNow, Inc.
4810 Eastgate Mall
San Diego, California 92121
(858) 720-0477
(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)
Frank Slootman
President and Chief Executive Officer
ServiceNow, Inc.
4810 Eastgate Mall
San Diego, California 92121
(858) 720-0477
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Please send copies of all communications to:
Gordon K. Davidson, Esq. Robert A. Freedman, Esq. Dawn H. Belt, Esq. Fenwick & West LLP 801 California Street Mountain View, CA 94041 (650) 988-8500 |
Robert Specker, Esq. General Counsel ServiceNow, Inc. 4810 Eastgate Mall San Diego, California 92121 (858) 720-0477 |
Eric C. Jensen, Esq. John T. McKenna, Esq. Cooley LLP 3175 Hanover Street Palo Alto, CA 94304 (650) 843-5000 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. ¨
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ |
Accelerated filer ¨ |
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Non-accelerated filer x |
(Do not check if a smaller reporting company) |
Smaller reporting company ¨ |
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Securities to be Registered |
Amount to be Registered (1) |
Proposed Maximum Offering Price Per Share (2) |
Proposed Maximum Aggregate Offering Price (1)(2) |
Amount of Registration Fee (3) |
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Common Stock, $0.001 par value per share |
13,397,500 | $31.865 | $426,911,338 | $58,231 | ||||
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(1) |
Includes 1,747,500 additional shares that may be purchased pursuant to the option to be granted to the underwriters. |
(2) |
Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended, and is based on the average of the high and low sales price of our common stock as reported on the New York Stock Exchange on November 7, 2012. |
(3) |
The Registrant previously paid $40,920 of the total registration fee in connection with the previous filing of this Registration Statement. In accordance with Rule 457(a), an additional registration fee of $17,311 is being paid in connection with this amendment to the Registration Statement. |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and neither we nor the selling stockholders are soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
PROSPECTUS (Subject to Completion)
Issued November 9, 2012
11,650,000 Shares
COMMON STOCK
ServiceNow, Inc. is offering 1,650,000 shares of common stock and the selling stockholders are offering 10,000,000 shares of common stock. We will not receive any proceeds from the sale of shares by the selling stockholders.
Our common stock is listed on the New York Stock Exchange under the symbol NOW. On November 8, 2012, the last reported sale price of our common stock as reported on the New York Stock Exchange was $30.90 per share.
We are an emerging growth company as defined under the federal securities laws. Investing in our common stock involves risks. See Risk Factors beginning on page 10.
PRICE $ A SHARE
Price to
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Underwriting
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Proceeds to
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Proceeds to
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Per Share |
$ | $ | $ | $ | ||||
Total |
$ | $ | $ | $ |
We and the selling stockholders have granted the underwriters the right to purchase up to an additional 1,747,500 shares of common stock at the public offering price less the underwriting discount.
The Securities and Exchange Commission and state regulators have not approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares of common stock to purchasers on , 2012.
MORGAN STANLEY | CITIGROUP | DEUTSCHE BANK SECURITIES |
BARCLAYS | CREDIT SUISSE | UBS INVESTMENT BANK |
PACIFIC CREST SECURITIES | WELLS FARGO SECURITIES |
, 2012.
Page | ||||
1 | ||||
10 | ||||
28 | ||||
29 | ||||
30 | ||||
30 | ||||
30 | ||||
31 | ||||
32 | ||||
Managements Discussion and Analysis of Financial Condition and Results of Operations |
34 | |||
76 | ||||
86 |
Page | ||||
Executive Compensation | 93 | |||
121 | ||||
Principal and Selling Stockholders | 124 | |||
Description of Capital Stock | 127 | |||
Shares Eligible for Future Sale | 131 | |||
Certain Material U.S. Federal Income Tax Considerations for Non-U.S. Holders of Common Stock |
134 | |||
Underwriting | 138 | |||
143 | ||||
143 | ||||
143 | ||||
143 | ||||
F-1 |
You should rely only on the information contained in this prospectus or contained in any free writing prospectus filed with the Securities and Exchange Commission. Neither we, the selling stockholders nor the underwriters have authorized anyone to provide you with additional information or information different from that contained in this prospectus or in any free writing prospectus filed with the Securities and Exchange Commission. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the selling stockholders are offering to sell, and seeking offers to buy, our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.
For investors outside the United States: Neither we, the selling stockholders, nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside the United States.
i
The following summary highlights selected information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes included in this prospectus and the information set forth under the headings Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations.
SERVICENOW, INC.
Overview
ServiceNow is a leading provider of cloud-based services to automate enterprise information technology, or IT, operations. Our service includes a suite of applications built on our proprietary platform that automates workflow and integrates related business processes. We focus on transforming enterprise IT by automating and standardizing business processes and consolidating IT across the global enterprise. Organizations deploy our service to create a single system of record for enterprise IT, to lower operational costs and to enhance efficiency. Additionally, our customers use our extensible platform to build custom applications for automating activities unique to their business requirements.
We help transform IT organizations from reactive, manual and task-oriented, to pro-active, automated and service-oriented organizations. Our on-demand service enables organizations to define their IT strategy, design the systems and infrastructure that will support that strategy, and implement, manage and automate that infrastructure throughout its lifecycle. We provide a broad set of integrated applications that are highly configurable and can be efficiently implemented and upgraded. Further, our multi-instance architecture has proven scalability for global enterprises, as well as advantages in security, reliability and deployment location.
We offer our service under a Software-as-a-Service, or SaaS, business model. Customers can rapidly deploy our service in a modular fashion, allowing them to solve immediate business needs and access, configure and build new applications as their requirements evolve. Our service, which is accessed through an intuitive web-based interface, can be easily configured to adapt to customer workflow and processes. Upgrades to our service are designed to be efficient and compatible with configuration changes and applied with minimal disruption to ongoing operations.
We have achieved significant growth in recent periods. A majority of our revenues comes from large, global enterprise customers. Our total customers grew 58% from 852 as of September 30, 2011 to 1,346 as of September 30, 2012. Our customers operate in a wide variety of industries, including financial services, consumer products, IT services, health care and technology. For the fiscal years ended June 30, 2010 and 2011, our revenues grew 114% from $43.3 million to $92.6 million. We incurred a net loss of $29.7 million and generated net income of $9.8 million for the fiscal years ended June 30, 2010 and 2011, respectively. For the six months ended December 31, 2010 and 2011, our revenues grew 93% from $37.9 million to $73.4 million. We generated net income of $4.8 million and incurred a net loss of $6.7 million for the six months ended December 31, 2010 and 2011, respectively. For the nine months ended September 30, 2011 and 2012, our revenues grew 90% from $88.9 million to $168.6 million. We generated net income of $5.1 million and incurred a net loss of $27.4 million for the nine months ended September 30, 2011 and 2012, respectively.
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Our Industry
Enterprises Face Increasing Challenges in Managing and Automating IT Operations
For decades, enterprises have invested in IT to empower their workforces and enable business-critical functionality. This investment reflects enterprise dependence on a myriad of software applications, databases, operating systems, servers, networking equipment, personal computers, mobile devices, and a variety of other hardware and software assets. When managing the IT environment, enterprises face significant challenges:
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Complexity of IT environments . The accelerating adoption of cloud-based services, virtual servers and desktops, and mobile technologies has added to the complexity of enterprise IT environments. |
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Budget pressures . IT executives are consistently asked to deliver more value for less cost and to provide transparency regarding the true costs and business value of IT investments. The most recent downturn in the global economy has heightened these demands. |
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Alignment to business goals . IT organizations are increasingly asked to be proactive and design and develop new processes that span the entire enterprise, rather than support a set of discrete technologies and react to business changes. IT organizations must develop strategies to enable necessary business changes. This has resulted in a much greater need for alignment of IT strategy and performance with overall business performance. |
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Consumerization of IT . Individuals are spending more time interacting with intuitive, social and mobile consumer-oriented Internet services. These experiences have increased business users expectations that they can access and interact with corporate IT technologies in a similar, familiar way. IT organizations are struggling to respond to these increased demands in a cost-effective manner. |
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Integration and standardization . Enterprises need integrated and standardized solutions that work with their existing systems and follow the most recent Information Technology Infrastructure Library, or ITIL, standard, a set of recommended business processes designed and adopted by IT operations industry participants globally to maximize the availability and usability of IT assets and the efficiency of IT staff. |
Legacy IT Management Products Fall Short
Organizations have invested heavily in legacy software products to manage the inventory, cost and performance of IT resources. These traditional software products were originally architected in the 1980s and 1990s before the introduction of many of todays modern computing technologies. Shortcomings of these legacy products include:
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Disparate and redundant solutions . Many legacy IT management products were developed and widely deployed decades ago. Vendors of these products have in many cases relied upon acquisitions and partnerships to extend their offerings and have not re-architected their solutions to provide the seamless, integrated platform that customers desire. In addition, enterprises may have overlapping solutions in various business units, especially those that have grown by acquisition or that operate globally. As a result, many enterprises operate multiple systems and infrastructures. |
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Inflexible integration, customization and maintenance . Enterprises face numerous challenges when trying to customize legacy IT management products to meet their specific needs, as well as integrate them with third-party solutions. Due to their architectures and proprietary languages, these inflexible products often cannot be easily customized to meet customers business requirements and are difficult to integrate and maintain. As a result, enterprises may be required to adapt their business processes to the capabilities of the software. |
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Highly manual . Many legacy IT management products installed today are labor intensive, time-consuming, prone to error and prevent IT from rapidly responding to business needs. |
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Upgrade challenges and disruption of service . Once legacy IT management products have been installed, integrated and customized, upgrades can be challenging. As new versions of the software are released on a periodic basis, customers are often required to re-implement the updated software with limited ability to carry forward customizations. |
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Difficult to use and access . Many legacy IT management products lack a modern, easy to navigate user interface and were not originally designed to be accessed over the Internet or on mobile devices. |
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High total cost of ownership . Because legacy IT management products are often disparate, inflexible, highly manual, challenging to upgrade and difficult to use and access, we believe these products have a high total cost of ownership. |
Our Solution
Our cloud-based service includes the following key elements:
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Broad set of integrated functionality . Our suite of applications was developed to address core ITIL processes as well as additional business processes, and runs on a single extensible platform. Our platform includes workflow automation, notification, assignment and escalation, third-party integration capabilities, reporting and business intelligence, social and collaboration and administration capabilities. Our cloud-based service is designed to be deployed in a modular fashion, allowing customers to solve immediate business needs and access new application functionality as needs evolve. |
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Automation of IT operations . Our service automates the documentation, categorization, prioritization, assignment, notification and escalation of IT and other business processes. Additionally, our service automates routine and repeatable data center operations such as rebooting a server, cloning a database or deploying a virtualized environment. |
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Highly configurable and extensible to meet business needs . Our configuration features are designed to give customers the ability to easily alter the appearance and operation of the user interface, change and develop business rules to meet specific requirements, and extend the database schema to support the tracking and capturing of necessary data. As a result, our service enables management of IT operations without requiring changes to existing business processes. In addition, our customers and partners can use our platform to build applications to automate processes that are unique to their businesses. |
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Efficient implementations and integration . Our cloud-based model allows customers to quickly access and deploy our service without the need to install and maintain costly infrastructure hardware and software necessary for on-premises deployments. Our service is developed on an architecture that enables efficient integration with third-party architectures and other data sources. |
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Efficient upgrades . We design our upgrades to be compatible with customer configuration changes and applied rapidly with minimal disruption to ongoing operations, enabling customers to be on the most up-to-date version. |
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Scalable, secure and reliable multi-instance architecture . Our multi-instance architecture is designed to provide scalability, security and reliability for customers large, global businesses. By providing customers with dedicated applications and databases we ensure that customer data is not comingled. In addition, this architecture reduces risk associated with infrastructure outages, improves system scalability and security, and allows for flexibility in deployment location. |
Our cloud-based service provides the following business benefits:
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Single system of record for IT . We provide a single system of record for IT executives to track assets, activities and resources across the multiple systems and infrastructures currently in use in large |
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enterprises. This provides executives with the ability to execute their IT strategy by quickly assessing how well their IT infrastructure is supporting business processes, analyzing business needs real-time and developing business solutions as needs evolve. |
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Lower total cost of ownership . We assume complete responsibility for our service, including application set, hosting infrastructure, maintenance, monitoring, storage, security, customer support and upgrades, all of which free customer resources. Additionally, we manage, monitor and handle upgrades and patch deployments remotely, which can result in lower total cost of ownership to our customers compared to legacy IT management products. |
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Easy to use and widely accessible . Our suite of intuitive and easy-to-use applications provides users with a familiar experience based on business-to-consumer concepts. Users can access our service through a web-based interface anywhere an Internet connection is available, including through mobile devices. We believe this ease of use and accessibility result in increased user adoption of specified processes, enhancing efficiency. |
Our Growth Strategy
Our goal is to be the industry-recognized leading provider of cloud-based services to automate enterprise IT operations. Key elements of our growth strategy include:
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Expand our customer base . We believe the global market for next-generation enterprise IT operations management is large and underserved, and we intend to continue to make investments in our business to capture increasingly larger market share. To expand our customer base we intend to invest in our direct sales force and strategic resellers as well as our data center footprint. In particular, we grew our sales and marketing team from 206 as of September 30, 2011 to 330 as of September 30, 2012. |
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Further penetrate our existing customer base . We intend to increase the number of subscriptions purchased by our current customers as they deploy additional core ITIL and extended IT applications, and use our platform to develop custom applications to meet business needs outside of IT. Additionally, we believe there are significant cross-sell opportunities for our separately priced Discovery and Runbook Automation technologies. |
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Expand internationally . We have a large and growing international presence, and intend to grow our customer base in various regions. We are investing in new geographies, including investment in direct and indirect sales channels, data centers, professional services, customer support and implementation partners. |
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Continue to innovate and enhance our service offerings . We have made, and will continue to make, significant investments in research and development to strengthen our existing applications, expand the number of applications on our platform and develop additional automation technologies. We typically offer multiple upgrades each year that allow our customers to benefit from ongoing innovation. |
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Strengthen our customer community . We have an enthusiastic and engaged customer community that contributes to our success through their willingness to share their ServiceNow experiences with other potential customers. Customer needs drive our development efforts. We will continue to leverage our large and growing customer community to expose our existing customers to new use cases and increase awareness of our service. |
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Develop our partner ecosystem . We intend to further develop our existing partner ecosystem by establishing agreements with strategic resellers and system integrators to provide broader customer coverage, access to senior executives and solution delivery capabilities. As we expand our base of partners, we intend to grow our indirect sales team and marketing efforts to support our distribution network. |
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Further promote our extensible platform . We plan to grow investments in our platform to better enable the creation of custom applications to address specific business issues. We believe our platform provides substantial application development capabilities and we intend to further realize the potential of our platform as a strategy to penetrate large and growing markets. |
Selected Risks Associated with Our Business
Our business is subject to a number of risks and uncertainties, including those highlighted in the section titled Risk Factors immediately following this prospectus summary. Some of these risks are:
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We have a limited history of operating profits and, as our growth rates decline and our costs increase, may not achieve or maintain profitability in the future; |
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We have experienced rapid growth in recent periods and may not be able to manage this growth and expansion, or our business may not grow as we expect; |
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The market for enterprise IT operations management solutions is rapidly evolving and highly competitive; |
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Declines in customer renewal rates would harm our future operating results; |
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Defects or disruptions in our service or security breaches could diminish demand for our service and subject us to substantial liability; |
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We need to continue to invest in enhancements to our cloud infrastructure and if our required investments are greater than anticipated or fail to yield anticipated cost savings and performance benefits, our financial results will be negatively impacted; |
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Interruptions or delays in service from our third-party data center facilities could impair the delivery of our service and harm our business; |
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We may not timely and effectively scale and adapt our existing technology to meet our customers performance and other requirements. |
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Our quarterly results may fluctuate and, if we fail to meet the expectations of analysts or investors, our stock price and the value of your investment could decline substantially; and |
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Our directors, officers and principal stockholders beneficially owned approximately 77% of our outstanding stock prior to this offering, will beneficially own approximately 70% after this offering and therefore will continue to have the ability to determine all matters requiring stockholder approval. |
Corporate Information
We were incorporated as Glidesoft, Inc. in California in June 2004 and changed our name to Service-now.com in February 2006. In May 2012, we reincorporated into Delaware as ServiceNow, Inc. Our principal executive offices are located at 4810 Eastgate Mall, San Diego, California 92121, and our telephone number is (858) 720-0477. Our website address is www.servicenow.com. The information contained on, or that can be accessed through, our website is not a part of this prospectus. Investors should not rely on any such information in deciding whether to purchase our common stock. We have included our website address in this prospectus solely as an inactive textual reference.
Unless the context indicates otherwise, as used in this prospectus, the terms ServiceNow, we, us and our refer to ServiceNow, Inc., a Delaware corporation, and its subsidiaries taken as a whole, unless otherwise noted.
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In February 2012, we changed our fiscal year-end from June 30 to December 31. Throughout this prospectus, references to fiscal 2009, fiscal 2010 and fiscal 2011 are to the fiscal years ended June 30, 2009, 2010 and 2011, respectively.
We have registered the trademark SERVICENOW with the United States Patent and Trademark Office. Our ServiceNow logo, Discovery and Runbook Automation are unregistered trademarks or service marks of ServiceNow and are the property of ServiceNow. This prospectus also includes references to trademarks and service marks of other entities, and those trademarks and service marks are the property of their respective owners.
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THE OFFERING
Common stock offered By us |
1,650,000 shares |
By the selling stockholders |
10,000,000 shares |
Total |
11,650,000 shares |
Common stock to be outstanding after this offering |
125,021,566 shares |
Option to purchase additional shares granted by us |
247,500 shares |
Option to purchase additional shares granted by the selling stockholders |
1,500,000 shares |
Use of proceeds |
The principal purposes of this offering are to facilitate an orderly distribution of our shares by the selling stockholders, increase our public float, and increase our financial flexibility. We plan to use the net proceeds from this offering for working capital and other general corporate purposes. We will not receive any of the proceeds from the sale of shares of common stock by the selling stockholders. See Use of Proceeds. |
New York Stock Exchange symbol |
NOW |
The number of shares of our common stock to be outstanding after this offering is based on 123,371,566 shares of common stock outstanding as of September 30, 2012, and excludes:
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37,279,442 shares of common stock issuable upon the exercise of outstanding options with a weighted-average exercise price of $4.48 per share and 1,134,851 shares of common stock issuable pursuant to outstanding restricted stock units; |
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11,635,301 additional shares of common stock reserved for future issuance under our 2012 Equity Incentive Plan; and |
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5,000,000 shares of common stock reserved for future issuance under our 2012 Employee Stock Purchase Plan. |
Unless otherwise indicated, all information in this prospectus assumes no exercise by the underwriters of their option to purchase an additional 1,747,500 shares of common stock.
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following consolidated financial data should be read together with our consolidated financial statements and related notes and Managements Discussion and Analysis of Financial Condition and Results of Operations appearing elsewhere in this prospectus. We have derived the following consolidated statements of operations data for fiscal 2009, 2010 and 2011 and for the six months ended December 31, 2011 and the selected consolidated balance sheet data as of June 30, 2010 and 2011 and December 31, 2011 from our audited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated statement of operations data for the six months ended December 31, 2010 and the nine months ended September 30, 2011 and 2012, and the unaudited selected consolidated balance sheet data as of September 30, 2012 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited financial information on the same basis as the audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, we consider necessary for a fair statement of the financial information set forth in those statements. Our historical results are not necessarily indicative of our results to be expected for any future period.
Fiscal Year Ended June 30, |
Six Months Ended
December 31, |
Nine Months Ended
September 30, |
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2009 | 2010 | 2011 | 2010 | 2011 | 2011 | 2012 | ||||||||||||||||||||||
(in thousands, except share and per share data) | ||||||||||||||||||||||||||||
Consolidated Statements of Operations Data: |
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Revenues (1) : |
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Subscription |
$ | 17,841 | $ | 40,078 | $ | 79,191 | $ | 33,191 | $ | 64,886 | $ | 76,331 | $ | 141,640 | ||||||||||||||
Professional services and other |
1,474 | 3,251 | 13,450 | 4,753 | 8,489 | 12,563 | 26,910 | |||||||||||||||||||||
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Total revenues |
19,315 | 43,329 | 92,641 | 37,944 | 73,375 | 88,894 | 168,550 | |||||||||||||||||||||
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Cost of revenues (2)(3) : |
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Subscription |
3,140 | 6,378 | 15,311 | 6,096 | 15,073 | 15,538 | 43,182 | |||||||||||||||||||||
Professional services and other |
4,711 | 9,812 | 16,264 | 6,778 | 12,850 | 15,095 | 28,519 | |||||||||||||||||||||
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Total cost of revenues |
7,851 | 16,190 | 31,575 | 12,874 | 27,923 | 30,633 | 71,701 | |||||||||||||||||||||
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Gross profit |
11,464 | 27,139 | 61,066 | 25,070 | 45,452 | 58,261 | 96,849 | |||||||||||||||||||||
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Operating expenses (2)(3) : |
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Sales and marketing |
8,499 | 19,334 | 34,123 | 13,728 | 32,501 | 34,375 | 74,356 | |||||||||||||||||||||
Research and development |
2,433 | 7,194 | 7,004 | 2,758 | 7,030 | 7,003 | 26,098 | |||||||||||||||||||||
General and administrative |
6,363 | 28,810 | 9,379 | 3,417 | 10,084 | 10,471 | 24,441 | |||||||||||||||||||||
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Total operating expenses |
17,295 | 55,338 | 50,506 | 19,903 | 49,615 | 51,849 | 124,895 | |||||||||||||||||||||
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Income (loss) from operations |
(5,831 | ) | (28,199 | ) | 10,560 | 5,167 | (4,163 | ) | 6,412 | (28,046 | ) | |||||||||||||||||
Interest and other income (expense), net |
(27 | ) | (1,226 | ) | 606 | 289 | (1,446 | ) | (412 | ) | 1,148 | |||||||||||||||||
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Income (loss) before provision for income taxes |
(5,858 | ) | (29,425 | ) | 11,166 | 5,456 | (5,609 | ) | 6,000 | (26,898 | ) | |||||||||||||||||
Provision for income taxes |
48 | 280 | 1,336 | 653 | 1,075 | 852 | 519 | |||||||||||||||||||||
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Net income (loss) |
$ | (5,906 | ) | $ | (29,705 | ) | $ | 9,830 | $ | 4,803 | $ | (6,684 | ) | $ | 5,148 | $ | (27,417 | ) | ||||||||||
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Fiscal Year Ended June 30, |
Six Months Ended
December 31, |
Nine Months Ended
September 30, |
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2009 | 2010 | 2011 | 2010 | 2011 | 2011 | 2012 | ||||||||||||||||||||||
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Net income (loss) per share attributable to common stockholders ( 4 ) : |
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Basic |
$ | (0.17 | ) | $ | (1.31 | ) | $ | 0.09 | $ | 0.04 | $ | (0.33 | ) | $ | 0.05 | $ | (0.49 | ) | ||||||||||
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Diluted |
$ | (0.17 | ) | $ | (1.31 | ) | $ | 0.08 | $ | 0.04 | $ | (0.33 | ) | $ | 0.04 | $ | (0.49 | ) | ||||||||||
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Weighted-average shares used to compute net income (loss) per share attributable to common stockholders ( 4 ) : |
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Basic |
39,039,066 | 23,157,576 | 18,163,977 | 17,156,445 | 21,104,219 | 19,695,440 | 57,089,411 | |||||||||||||||||||||
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Diluted |
39,039,066 | 23,157,576 | 28,095,486 | 27,622,357 | 21,104,219 | 30,612,539 | 57,089,411 | |||||||||||||||||||||
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(1) |
Revenues for fiscal 2011, the six months ended December 31, 2010 and 2011 and the nine months ended September 30, 2011 and 2012 reflect the prospective adoption of new revenue accounting guidance commencing on July 1, 2010. As a result of this guidance, we separately allocate value for multiple element contracts between our subscription revenues and professional services revenues based on the best estimate of selling price. Additionally, we recognize professional services revenues as the services are delivered. Please refer to Note 2 to our consolidated financial statements for further discussion of our revenue recognition policies. |
(2) |
Stock-based compensation included in the statements of operations data above was as follows: |
Fiscal Year Ended June 30, |
Six Months Ended
December 31, |
Nine Months Ended
September 30, |
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2009 | 2010 | 2011 | 2010 | 2011 | 2011 | 2012 | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Cost of revenues: |
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Subscription |
$ | 6 | $ | 48 | $ | 548 | $ | 225 | $ | 674 | $ | 524 | $ | 2,514 | ||||||||||||||
Professional services and other |
11 | 28 | 117 | 37 | 193 | 151 | 964 | |||||||||||||||||||||
Sales and marketing |
45 | 277 | 1,004 | 431 | 2,010 | 1,373 | 6,852 | |||||||||||||||||||||
Research and development |
50 | 90 | 468 | 207 | 704 | 524 | 4,121 | |||||||||||||||||||||
General and administrative |
15 | 102 | 817 | 221 | 2,056 | 1,652 | 4,137 |
(3) |
Operating expenses for fiscal 2009 reflect compensation expense of $3.8 million related to the stock settlement of an outstanding promissory note in connection with our sale and issuance of Series C preferred stock. Cost of revenues and operating expenses for fiscal 2010 reflect compensation expense of $0.7 million and $30.1 million, respectively, related to the repurchase of shares from eligible stockholders in connection with our sale and issuance of Series D preferred stock. |
(4) |
Please refer to Note 13 to our consolidated financial statements for an explanation of the method used to calculate the historical net income (loss) per share attributable to common stockholders and the number of shares used in the computation of the per share amounts. |
As of June 30, |
As of
December 31, |
As of
September 30, |
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2010 | 2011 | 2011 | 2012 | |||||||||||||
Consolidated Balance Sheet Data: |
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Cash and cash equivalents |
$ | 29,402 | $ | 59,853 | $ | 68,088 | $ | 116,976 | ||||||||
Working capital, excluding deferred revenue |
33,080 | 75,801 | 95,033 | 294,159 | ||||||||||||
Total assets |
51,369 | 108,746 | 156,323 | 382,204 | ||||||||||||
Deferred revenue, current and non-current portion |
40,731 | 74,646 | 104,636 | 147,946 | ||||||||||||
Convertible preferred stock |
67,227 | 67,860 | 68,172 | | ||||||||||||
Total stockholders equity (deficit) |
(71,262 | ) | (58,381 | ) | (57,426 | ) | 191,268 |
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Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including the consolidated financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in shares of our common stock. If any of the following risks actually occurs, our business, financial condition, results of operations and future prospects could be harmed. In that event, the market price of our common stock could decline and you could lose part or even all of your investment.
Risks Related to Our Business and Industry
We have a limited history of operating profits, did not generate a profit in the six months ended December 31, 2011 or the nine months ended September 30, 2012, and may not achieve or maintain profitability in the future.
We have not been consistently profitable on a quarterly or annual basis. Although we had net income for fiscal 2011, we experienced net losses of $5.9 million, $29.7 million, $6.7 million and $27.4 million for fiscal 2009, fiscal 2010, the six months ended December 31, 2011 and the nine months ended September 30, 2012, respectively. As of September 30, 2012, our accumulated deficit was $95.6 million. While we have experienced significant revenue growth over recent periods, we may not be able to sustain or increase our growth or return to profitability in the future. Over the past year, we have significantly increased our expenditures to support the development and expansion of our business, which has resulted in increased losses. We plan to continue to invest for future growth, and as a result, we do not expect to be profitable for the foreseeable future. In addition, as a public company, we will continue to incur significant accounting, legal and other expenses that we did not incur as a private company. As a result of these increased expenditures, we will have to generate and sustain increased revenues to achieve future profitability. We may incur significant losses in the future for a number of reasons, including without limitation the other risks and uncertainties described in this prospectus. Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays and other unknown factors that may result in losses in future periods. If these losses exceed our expectations or our revenue growth expectations are not met in future periods, our financial performance will be harmed.
We have experienced rapid growth in recent periods. If we are not able to manage this growth and expansion, or if our business does not grow as we expect, our operating results may suffer.
We continue to experience rapid growth in our customer base and have significantly expanded our operations during the last several years. In particular, we are aggressively investing in: significant expansion of our cloud infrastructure and associated service capacity; our global sales, marketing and operations activities and personnel; and additional office facility lease commitments and administrative employees. Our employee headcount has increased from 491 as of September 30, 2011 to 963 as of September 30, 2012, and we plan on adding over 181 employees during the remainder of 2012. We signed new leases for a larger corporate office in San Diego in February 2012, additional office space in Amsterdam in September 2012 and San Jose in November 2012 and are currently seeking to further expand our London office. In addition, we hired new senior management in 2011 and 2012. Our rapid growth has placed, and will continue to place, a significant strain on our administrative and operational infrastructure facilities and other resources. Our ability to manage our operations and growth will require us to continue to expand our sales force, facilities, infrastructure and operations, and refine our operational, financial and management controls, human resource policies, and reporting systems and procedures. For instance, in 2012 we have been implementing a new financial enterprise resource planning system to help manage our future growth and are in the process of integrating that system with our customer relationship management system. If we fail to efficiently expand our sales force, operations, cloud infrastructure or IT and financial systems, or if we fail to implement or maintain effective internal controls and procedures, our costs and expenses may increase more than we plan and we may lose the ability to close customer opportunities, enhance our existing service, develop new applications, satisfy customer requirements, respond to competitive pressures or otherwise execute our business plan. Additionally, as our operating expenses increase in anticipation of the growth of our business, if such growth does not meet our expectations, our financial results likely would be harmed.
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Defects or disruptions in our service could diminish demand for our service, harm our financial results and subject us to substantial liability.
Our customers use our service for important aspects of their businesses, and any errors, defects, disruptions to our service or other performance problems with our service could hurt our reputation and may damage our customers businesses. From time to time, we have found defects in our service, and new errors in our existing service may be detected in the future. For example, recently a few of our largest customers have been experiencing reduced levels of availability, performance and functionality due to the scale at which they have implemented our service. We provide regular product updates, which frequently contain undetected errors when first introduced or released. Defects may also be introduced by our use of third-party software, including open-source software. Defects can be hard to detect and may result in disruptions to our service. In addition, our customers may use our service in ways that cause disruptions in service for other customers. Customers have delayed, and may in the future delay, payment to us, may elect not to renew, and may make service credit claims, warranty claims or other claims against us. As a result, we could lose future sales. Further, if we do not meet the stated service level commitments we have guaranteed to our customers or suffer extended periods of unavailability for our service, we have provided and in the future may be contractually obligated to provide these customers with credits for future service. The occurrence of payment delays, service credit, warranty or other claims against us could result in an increase in our bad debt expense, an increase in collection cycles for accounts receivable, an increase to our warranty provisions, or increased expenses or risks of litigation. We do not carry insurance sufficient to compensate us for the potentially significant losses that may result from claims arising from defects or disruptions in our service or the potential harm to the future growth of our business due to defects or disruptions.
If our security measures are breached or unauthorized access to customer data is otherwise obtained, our service may be perceived as not being secure, customers may curtail or stop using our service, and we may incur significant liabilities.
Our operations involve the storage and transmission of our customers confidential information, and security breaches, computer malware and computer hacking attacks could expose us to a risk of loss of this information, litigation, indemnity obligations and other liability. For example, our third-party data center facility in London was subjected to a distributed denial of service attack in January 2012 that prevented some of our customers hosted in that data center from using our service intermittently for a period of about three hours. While we have administrative, technical, and physical security measures in place, and try to contractually require third parties to whom we transfer data to implement and maintain appropriate security measures, if our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and, as a result, someone obtains unauthorized access to our customers data, including personally identifiable information regarding users, our reputation will be damaged, our business may suffer and we could incur significant liability. Additionally, third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our customers data or our data, including our intellectual property and other confidential business information, or our information technology systems. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until successfully launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose potential sales and existing customers.
We need to continue to invest in enhancements to our cloud infrastructure and if our required investments are greater than anticipated or fail to yield anticipated cost savings and performance benefits, our financial results will be negatively impacted.
We have made and will continue to make substantial investments in new equipment to support growth at our data centers, provide enhanced levels of service to our customers and reduce future costs of subscription revenues. In the nine months ended September 30, 2012, we purchased $18.8 million in equipment for use in our data centers. Ongoing improvements to our cloud infrastructure may be more expensive than we anticipate, and
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may not yield the expected savings in operating costs or the expected performance benefits. In addition, we may be required to re-invest any cost savings achieved from prior cloud infrastructure improvements in future infrastructure projects to maintain the levels of service required by our customers. We may not be able to maintain or achieve cost savings from our investments, which could harm our financial results.
We may not timely and effectively scale and adapt our existing technology to meet our customers performance and other requirements.
Our future growth is dependent upon our ability to continue to meet the needs of new customers and the expanding needs of our existing customers as their use of our service grows. As our customers gain more experience with our service, the number of users and transactions managed by our service, the amount of data transferred, processed and stored by us, the number of locations where our service is being accessed, and the number of processes and systems managed by our service on behalf of these customers have in some cases, and may in the future, expand rapidly. Recently, a few of our largest customers have been experiencing reduced levels of availability, performance and functionality due to the scale at which they have implemented our service. In order to meet the performance and other requirements of our customers, we intend to continue to make significant investments to develop and implement new technologies in our service and cloud infrastructure operations. These technologies, which include databases, applications and server optimizations, network and hosting strategies, and automation, are often advanced, complex, new and untested. We may not be successful in developing or implementing these technologies. In addition, it takes a significant amount of time to plan, develop and test improvements to our technologies and infrastructure, and we may not be able to accurately forecast demand or predict the results we will realize from such improvements. We are also dependent upon open source and other third-party technologies and may be unable to quickly effect changes to such technologies, which may prevent us from rapidly responding to evolving customer requirements. To the extent that we do not effectively scale our service and operations to meet the needs of our growing customer base and to maintain performance as our customers expand their use of our service, we may not be able to grow as quickly as we anticipate, our customers may reduce or cancel use of our services and we may be unable to compete as effectively and our business and operating results may be harmed.
Interruptions or delays in service from our third-party data center facilities could impair the delivery of our service and harm our business.
We currently serve our customers from third-party data center facilities, operated by several different providers, located around the world, with the largest located in Virginia, California, London and Amsterdam. Any damage to, or failure of, our systems, or those of our third-party data centers, could result in interruptions in our service. Impairment of or interruptions in our service may reduce our revenues, cause us to issue credits or pay penalties, subject us to claims and litigation, cause our customers to terminate their subscriptions and adversely affect our renewal rates and our ability to attract new customers. Our business will also be harmed if our customers and potential customers believe our service is unreliable.
We do not control, or in some cases have limited control over, the operation of the data center facilities we use, and they are vulnerable to damage or interruption from earthquakes, floods, fires, power loss and similar events. They may also be subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct, and to adverse events caused by operator error. We cannot rapidly switch to new data centers or move customers from one data center to another in the event of any adverse event. Despite precautions taken at these facilities, the occurrence of a natural disaster, an act of terrorism or other act of malfeasance, a decision to close the facilities without adequate notice or other unanticipated problems at these facilities could result in lengthy interruptions in our service and the loss of customer data.
If the market for our technology delivery model and SaaS develops more slowly than we expect, our growth may slow or stall, and our operating results would be harmed.
Use of SaaS applications to manage and automate enterprise IT is at an early stage. We do not know whether the trend of adoption of enterprise SaaS solutions we have experienced in the past will continue in the
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future. In particular, many organizations have invested substantial personnel and financial resources to integrate legacy software into their businesses over time, and some have been reluctant or unwilling to migrate to SaaS. Furthermore, some organizations, particularly large enterprises upon which we are dependent, have been reluctant or unwilling to use SaaS because they have concerns regarding the risks associated with the security of their data and the reliability of the technology delivery model associated with these solutions. In addition, if other SaaS providers experience security incidents, loss of customer data, disruptions in delivery or other problems, the market for SaaS solutions as a whole, including our service, will be negatively impacted. If the adoption of SaaS solutions does not continue, the market for these solutions may stop developing or may develop more slowly than we expect, either of which would harm our operating results.
The market in which we participate is intensely competitive, and if we do not compete effectively, our operating results could be harmed.
The market for enterprise IT operations management solutions is fragmented, rapidly evolving and highly competitive, with relatively low barriers to entry in some segments. Many of our competitors and potential competitors are larger and have greater name recognition, much longer operating histories, more established customer relationships, larger marketing budgets and significantly greater resources than we do. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. With the introduction of new technologies, the evolution of our service and new market entrants, we expect competition to intensify in the future. If we fail to compete effectively, our business will be harmed. Some of our principal competitors offer their products or services at a lower price, which has resulted in pricing pressures. If we are unable to achieve our target pricing levels, our operating results would be negatively impacted. In addition, pricing pressures and increased competition generally could result in reduced sales, reduced margins, losses or the failure of our service to achieve or maintain more widespread market acceptance, any of which could harm our business.
We face competition from in-house solutions, large integrated systems vendors and smaller companies with point solutions including SaaS offerings. Our competitors vary in size and in the breadth and scope of the products and services offered. Our primary competitors include BMC Software, Inc., CA, Inc., Hewlett-Packard Company and International Business Machines Corporation, all of which are much larger and have substantially more financial resources than we do, and have the operating flexibility to bundle competing products and services with other software offerings, including offering them at a lower price as part of a larger sale. In addition, many of our competitors offer SaaS solutions and may make acquisitions of businesses or assets that improve their service offerings. Further, other established SaaS providers not currently operating in enterprise IT operations management may expand their services to compete with our service. Many of our current and potential competitors have established marketing relationships, access to larger customer bases, pre-existing customer relationships and major distribution agreements with consultants, system integrators and resellers. In addition, some competitors may offer software that addresses one or a limited number of enterprise IT operation functions at lower prices or with greater depth than our service. Moreover, as we expand the scope of our service, we may face additional competition from platform and application development vendors. Additionally, some potential customers, particularly large enterprises, may elect to develop their own internal solutions. For all of these reasons, we may not be able to compete successfully against our current and future competitors.
Because our sales efforts are targeted at large enterprise customers, we face longer sales cycles, substantial upfront sales costs and less predictability in completing some of our sales. If our sales cycle lengthens, or if our substantial upfront sales investments do not result in sufficient sales, our operating results could be harmed.
We target our sales efforts at large enterprises, which we define as companies with over $750 million in revenues and a minimum of 200 IT employees. For instance, we derived approximately 10%, 12% and 11% of our revenues from large enterprise customers in the financial services industry for fiscal 2011, the six months ended December 31, 2011 and the nine months ended September 30, 2012, respectively. Because our large
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enterprise customers are often making an enterprise-wide decision to deploy our service, sometimes on a global basis, we face long sales cycles, complex customer requirements, substantial upfront sales costs and less predictability in completing some of our sales. Our sales cycle is generally six to nine months, but is variable and difficult to predict and can be much longer. Large enterprises often undertake a prolonged evaluation of our service, including whether the customer needs professional services performed by us or a third party for its unique IT and business process needs, and a comparison of our service to products offered by our competitors. Moreover, our large enterprise customers often begin to deploy our service on a limited basis, but nevertheless demand extensive configuration, integration services and pricing concessions, which increase our upfront investment in the sales effort with no guarantee that these customers will deploy our service widely enough across their organization to justify our substantial upfront investment. It is possible in the future we may experience even longer sales cycles, more complex customer needs, higher upfront sales costs and less predictability in completing some of our sales as we continue to expand our direct sales force and thereby increase the percentage of our sales personnel with less experience in selling our service, expand into new territories and expand into functional areas outside of the traditional ITIL processes. If our sales cycle lengthens or our substantial upfront sales and implementation investments do not result in sufficient sales to justify our investments, our operating results may be harmed.
Our business depends substantially on our customers renewing their subscriptions and purchasing additional subscriptions from us. Any decline in our customer renewals would harm our future operating results.
In order for us to maintain or improve our operating results, it is important that our customers renew their subscriptions when the initial contract term expires and add additional authorized users to their subscriptions. Our customers have no obligation to renew their subscriptions, and we cannot assure you that our customers will renew subscriptions with a similar contract period or with the same or a greater number of authorized users. Although our renewal rates have been historically high, some of our customers have elected not to renew their agreements with us and we cannot accurately predict renewal rates. Moreover, in some cases, some of our customers have the right to cancel their agreements prior to the expiration of the term.
Our renewal rates may decline or fluctuate as a result of a number of factors, including their satisfaction with our subscription service, our professional services, our customer support, our prices, the prices of competing solutions, mergers and acquisitions affecting our customer base, the effects of global economic conditions, or reductions in our customers spending levels. Our future success also depends in part on our ability to sell more subscriptions and additional professional services to our current customers. If our customers do not renew their subscriptions, renew on less favorable terms or fail to add more authorized users or fail to purchase additional professional services, our revenues may decline, and we may not realize improved operating results from our customer base.
If we are not able to develop enhancements and new applications that achieve market acceptance or that keep pace with technological developments, our business could be harmed.
Our ability to attract new customers and increase revenues from existing customers depends in large part on our ability to enhance and improve our existing service and to introduce new services. In order to grow our business, we must develop a service that reflects future updates to the ITIL framework and extends beyond the ITIL framework into other areas of enterprise IT operations management. The success of any enhancement or new service depends on several factors, including timely completion, adequate quality testing, introduction and market acceptance. Any new service that we develop may not be introduced in a timely or cost-effective manner, contain defects or may not achieve the broad market acceptance necessary to generate significant revenues. If we are unable to successfully develop new applications or enhance our existing service to meet customer requirements, our business and operating results will be harmed.
Because we designed our service to be provided over the Internet, we need to continuously modify and enhance our service to keep pace with changes in Internet-related hardware, software, communication and
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database technologies and standards. If we are unable to respond in a timely and cost-effective manner to these rapid technological developments and standards changes, our service may become less marketable and less competitive or obsolete and our operating results may be harmed.
If we fail to integrate our service with a variety of operating systems, software applications and hardware that are developed by others, our service may become less marketable and less competitive or obsolete, and our operating results would be harmed.
Our service must integrate with a variety of network, hardware and software platforms, and we need to continuously modify and enhance our platform to adapt to changes in cloud-enabled hardware, software, networking, browser and database technologies. Any failure of our service to operate effectively with future infrastructure platforms and technologies could reduce the demand for our service, resulting in customer dissatisfaction and harm to our business. If we are unable to respond to these changes in a cost-effective manner, our service may become less marketable and less competitive or obsolete and our operating results may be negatively impacted. In addition, an increasing number of individuals within the enterprise are utilizing mobile devices to access the Internet and corporate resources and to conduct business. If we cannot effectively make our service available on these mobile devices and offer the information, services and functionality required by enterprises that widely use mobile devices, we may experience difficulty attracting and retaining customers.
A portion of our revenues are generated by sales to government entities and heavily regulated organizations, which are subject to a number of challenges and risks.
A portion of our sales are to governmental agencies. Additionally, many of our current and prospective customers, such as those in the financial services and health care industries, are highly regulated and may be required to comply with more stringent regulations in connection with subscribing to and implementing our service. Selling to these entities can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that we will successfully complete a sale. Government and highly regulated entities often require contract terms that differ from our standard arrangements and impose compliance requirements that are complicated, require preferential pricing or most favored nation terms and conditions, or are otherwise time consuming and expensive to satisfy. Due to the additional requirements of the U.S. federal government, we are in the process of establishing compliance with the Federal Information Security Management Act and other federal standards relating to our operations, security controls, processes and architecture. Individual agencies also have unique requirements, such as requirements that we use U.S.-only personnel or a requirement to use our service in a non-hosted environment. We may not be able to meet these standards or requirements. Even if we do meet them, the additional costs associated with providing our service to government and highly regulated customers could harm our margins. Moreover, changes in the underlying regulatory conditions that affect these types of customers could harm our ability to efficiently provide our service to them and to grow or maintain our customer base.
Failure to effectively expand our sales and marketing capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our service.
Increasing our customer base and achieving broader market acceptance of our service will depend, to a significant extent, on our ability to effectively expand our sales and marketing operations and activities. We are substantially dependent on our direct sales force to obtain new customers. From September 30, 2011 to September 30, 2012, our sales and marketing organization increased from 206 to 330 employees. We plan to continue to expand our direct sales force both domestically and internationally. We believe that there is significant competition for direct sales personnel with the sales skills and technical knowledge that we require. Our ability to achieve significant revenue growth in the future will depend, in large part, on our success in recruiting, training and retaining a sufficient number of direct sales personnel. New hires require significant training and time before they achieve full productivity, particularly in new sales territories. Our recent hires and planned hires may not become as productive as quickly as we would like, and we may be unable to hire or retain
15
sufficient numbers of qualified individuals in the future in the markets where we do business. Because we do not have a long history of expansion in our sales force, we cannot predict whether or to what extent our sales will increase as we expand our sales force or how long it will take for sales personnel to become productive. Moreover, we do not have significant experience as an organization developing and implementing overseas marketing campaigns, and such campaigns may be expensive and difficult to implement. Our business will be harmed if our expansion efforts do not generate a significant increase in revenues.
Our current management team is new and if we lose key members of our management team or are unable to attract and retain executives and employees we need to support our operations and growth, our business may be harmed.
Each of our executive officers either joined us recently or has taken on a new role in the organization. These changes in our executive management team may be disruptive to our business. Our success depends substantially upon the continued services of this new group of executive officers, particularly Frank Slootman, our Chief Executive Officer, who joined us in May 2011, and Frederic B. Luddy, our founder and Chief Product Officer, who are critical to our vision, strategic direction, culture, services and technology. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives. Our executive officers are generally employed on an at-will basis, which means that our executive officers could terminate their employment with us at any time. The loss of one or more of our executive officers or the failure by our executive team to effectively work with our employees and lead our company could harm our business.
In the technology industry, there is substantial and continuous competition for engineers with high levels of experience in designing, developing and managing software and Internet-related solutions, as well as competition for sales executives and operations personnel. We may not be successful in attracting and retaining qualified personnel. We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. In particular, competition for experienced software and cloud infrastructure engineers in San Diego, San Jose, Seattle, London and Amsterdam, our primary operating locations, is intense. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be harmed.
Our quarterly results may fluctuate, and if we fail to meet the expectations of analysts or investors, our stock price and the value of your investment could decline substantially.
Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control. If our quarterly financial results fall below the expectations of investors or any securities analysts who follow our stock, the price of our common stock could decline substantially. Some of the important factors that may cause our revenues, operating results and cash flows to fluctuate from quarter to quarter include:
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our ability to retain and increase sales to existing customers, attract new customers and satisfy our customers requirements; |
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the number of new employees added; |
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the rate of expansion and productivity of our sales force; |
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changes in the relative and absolute levels of professional services we provide; |
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the cost, timing and management effort for the development of new services; |
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the length of the sales cycle for our service; |
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changes in our pricing policies whether initiated by us or as a result of competition; |
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the amount and timing of operating costs and capital expenditures related to the operations and expansion of our business; |
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significant security breaches, technical difficulties or interruptions with our service; |
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new solutions, products or changes in pricing policies introduced by our competitors; |
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changes in foreign currency exchange rates; |
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changes in effective tax rates; |
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general economic conditions that may adversely affect either our customers ability or willingness to purchase additional subscriptions, delay a prospective customers purchasing decision, reduce the value of new subscription contracts, or affect renewal rates; |
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changes in deferred revenue balances due to the seasonal nature of our customer invoicing, changes in the average duration of our customer agreements, the rate of renewals and the rate of new business growth; |
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the timing of customer payments and payment defaults by customers; |
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extraordinary expenses such as litigation or other dispute-related settlement payments; |
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the impact of new accounting pronouncements; and |
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the timing of stock awards to employees and the related adverse financial statement impact of having to expense those stock awards ratably over their vesting schedules. |
Many of these factors are outside of our control, and the occurrence of one or more of them might cause our operating results to vary widely. As such, we believe that quarter-to-quarter comparisons of our revenues, operating results and cash flows may not be meaningful and should not be relied upon as an indication of future performance.
We expect our revenue growth rate to decline, and as our costs increase, we may not be able to generate sufficient revenue to sustain our profitability over the long term.
From fiscal 2009 to fiscal 2011, our revenues grew from $19.3 million to $92.6 million, which represents a compounded annual growth rate of 119%. We expect that, in the future, as our revenues increase to higher levels, our revenue growth rate will decline. However, we may not be able to generate sufficient revenues to achieve and sustain profitability as we also expect our costs to increase in future periods. We expect to continue to expend substantial financial and other resources on:
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our technology infrastructure, including enhancements to our cloud architecture and hiring of additional employees for our research and development team; |
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software development, including investments in our software development team, the development of new features and the improvement of the scalability, availability and security of our service; |
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sales and marketing, including a significant expansion of our direct sales organization; |
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international expansion in an effort to increase our customer base and sales; and |
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general administration, including legal and accounting expenses related to being a public company. |
These investments may not result in increased revenues or growth in our business. If we fail to continue to grow our revenues and overall business, our operating results and business would be harmed.
Because we recognize revenues from our subscription service over the subscription term, downturns or upturns in new sales and renewals will not be immediately reflected in our operating results.
We generally recognize revenues from customers ratably over the terms of their subscriptions, which on average are approximately 30 months in duration for initial contract terms, although terms can range from 12 to 120 months. As a result, most of the revenues we report in each quarter are derived from the recognition of deferred revenues relating to subscriptions entered into during previous quarters. Consequently, a decline in new
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or renewed subscriptions in any single quarter will likely have only a small impact on our revenue results for that quarter. Such a decline, however, will negatively affect our revenues in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our service, and potential changes in our rate of renewals may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenues through additional sales in any period, as revenues from new customers must be recognized over the applicable subscription term. In addition, we may be unable to adjust our cost structure to reflect the changes in revenues.
If we are unable to successfully manage the growth of our professional services business and improve our profit margin from these services, our operating results will be harmed.
Our professional services business, which performs implementation and configuration of our subscription service for our customers, has grown as our revenues from subscriptions have grown. We believe our investment in professional services facilitates the adoption of our subscription service. As a result, our sales efforts have been focused primarily on our subscription service, rather than the profitability of our professional services business. Historically, our pricing for professional services was predominantly on a fixed-fee basis and the cost of the time and materials incurred to complete these services were greater than the amount charged to the customer. These factors contributed to our negative gross profit percentages from professional services and other of (220)%, (202)% and (21)% for fiscal 2009, 2010 and 2011, respectively, (43)% and (51)% for the six months ended December 31, 2010 and 2011, respectively, and (20)% and (6)% for the nine months ended September 30, 2011 and 2012, respectively. The improvement in gross profit percentages was due in part to the adoption of new revenue recognition accounting guidance commencing on July 1, 2010. In addition, in December 2011, we began shifting our pricing model to a time-and-materials basis and pricing our services predominantly based on the anticipated cost of those services. If we are unable to successfully transition to a time-and-materials based pricing model and manage the growth of our professional services business, our operating results, including our profit margins, will be harmed. In addition, the shift to this new pricing model may cause our sales cycle to lengthen.
We may be sued by third parties for alleged infringement of their proprietary rights.
There is considerable patent and other intellectual property development activity in our industry. Our success depends in part on not infringing upon the intellectual property rights of others. From time to time, our competitors or other third parties may claim that we are infringing upon their intellectual property rights, and we may be found to be infringing upon such rights. In the future, we may receive claims that our applications and underlying technology infringe or violate the claimants intellectual property rights. However, we may be unaware of the intellectual property rights of others that may cover some or all of our technology or services. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our service, or require that we comply with other unfavorable terms. We may also be obligated to indemnify our customers or business partners in connection with any such litigation and to obtain licenses, modify our service or refund fees, which could further exhaust our resources. In addition, we may pay substantial settlement costs to resolve claims or litigation, whether or not legitimately or successfully asserted against us, which could include royalty payments in connection with any such litigation and to obtain licenses, modify our service or refund fees, which could further exhaust our resources. Even if we were to prevail in the event of claims or litigation against us, any claim or litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations. Such disputes could also disrupt our service, causing an adverse impact to our customer satisfaction and related renewal rates.
Our use of open source software could harm our ability to sell our service and subject us to possible litigation.
A significant portion of the technologies licensed or developed by us incorporate so-called open source software, and we may incorporate open source software into other services in the future. We attempt to monitor
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our use of open source software in an effort to avoid subjecting our service to conditions we do not intend; however, there can be no assurance that our efforts have been or will be successful. There is little or no legal precedent governing the interpretation of the terms of open source licenses, and therefore the potential impact of these terms on our business is uncertain and enforcement of these terms may result in unanticipated obligations regarding our service and technologies. For example, depending on which open source license governs open source software included within our service or technologies, we may be subjected to conditions requiring us to offer our service to users at no cost; make available the source code for modifications and derivative works based upon, incorporating or using the open source software; and license such modifications or derivative works under the terms of the particular open source license.
If an author or other third party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal costs defending ourselves against such allegations, we could be subject to significant damages or be enjoined from the distribution of our service. In addition, if we combine our proprietary software with open source software in a certain manner, under some open source licenses we could be required to release the source code of our proprietary software, which could substantially help our competitors develop solutions that are similar to or better than our service.
Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.
Our success depends to a significant degree on our ability to protect our proprietary technology and our brand. We rely on a combination of copyright, trade secret and other intellectual property laws and confidentiality procedures to protect our proprietary rights. If we fail to protect our intellectual property rights adequately, our competitors may gain access to our technology and our business may be harmed. In addition, defending our intellectual property rights might entail significant expense. Any of our trademarks or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. We have only recently begun to develop a strategy to seek, and may be unable to obtain, patent protection for our technology. In addition, any patents issued in the future may not provide us with competitive advantages, or may be successfully challenged by third parties. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Effective patent, trademark, copyright and trade secret protection may not be available to us in every country in which our service is 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 may 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.
Our growth depends in part on the success of our strategic relationships with third parties and their continued performance.
We anticipate that we will continue to depend on various third-party relationships in order to grow our business. In particular, we depend on a limited number of third parties to provide a majority of our implementation services. Our strategy is to work with third parties to increase the breadth of capability and the depth of capacity for delivery of these services to our customers.
We intend to expand our relationships with third parties, such as implementation partners, systems integrators and managed services providers. Identifying these and other partners, and negotiating and documenting relationships with them, require significant time and resources. Our agreements with partners are
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typically non-exclusive and do not prohibit them from working with our competitors or from offering competing solutions. Our competitors may be effective in providing incentives to third parties, including our partners, to favor their solutions or to prevent or reduce subscriptions to our service either by disrupting our relationship with existing customers or by limiting our ability to win new customers. In addition, global economic conditions could harm the businesses of our partners, and it is possible that they may not be able to devote the additional resources we expect to the relationship. If we are unsuccessful in establishing or maintaining our relationships with these third parties, our ability to compete in the marketplace or to grow our revenues could be impaired and our operating results would suffer. Even if we are successful, we cannot assure you that these relationships will result in greater customer usage of our service or increased revenues.
If a customer is not satisfied with the quality of work performed by us or a third party, we could incur additional costs to address the situation, the profitability of that work might be impaired, and the customers dissatisfaction with our professional services could damage our ability to obtain additional revenues from that customer or prospective customers.
Sales to customers outside North America expose us to risks inherent in international sales.
Because we sell our service throughout the world, we are subject to risks and challenges that we would otherwise not face if we conducted our business only in North America. Sales outside of North America represented 25%, 29% and 29% of our total revenues for fiscal 2011, the six months ended December 31, 2011 and the nine months ended September 30, 2012, respectively, and we intend to continue to expand our international sales efforts. Our business and future prospects depend on increasing our international sales as a percentage of our total revenues, and the failure to grow internationally will harm our business. The risks and challenges associated with sales to customers outside North America are different in some ways from those associated with sales in North America and we have a limited history addressing those risks and meeting those challenges. The risks and challenges inherent with international sales include:
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localization of our service, including translation into foreign languages and associated expenses; |
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differing laws and business practices, which may favor local competitors; |
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longer sales cycles; |
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compliance with multiple, conflicting and changing governmental laws and regulations, including employment, tax, privacy and data protection laws and regulations; |
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treatment of revenues from international sources and changes to tax codes, including being subject to foreign tax laws and being liable for paying withholding, income or other taxes in foreign jurisdictions; |
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regional data privacy laws that apply to the transmission of our customers data across international borders; |
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foreign currency fluctuations and controls; |
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different pricing environments; |
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difficulties in staffing and managing foreign operations; |
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different or lesser protection of our intellectual property; |
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longer accounts receivable payment cycles and other collection difficulties; |
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regional economic conditions; and |
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regional political conditions. |
Any of these factors could negatively impact our business and results of operations.
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We face exposure to foreign currency exchange rate fluctuations.
We conduct significant transactions, including intercompany transactions, in currencies other than the United States dollar or the functional operating currency of the transactional entities. In addition, our international subsidiaries maintain significant net assets that are denominated in currencies other than the functional operating currencies of these entities. Accordingly, changes in the value of foreign currencies relative to the United States dollar can affect our revenues and operating results due to transactional and translational remeasurement that is reflected in our earnings. We do not currently maintain a program to hedge transactional exposures in foreign currencies. However, in the future, we may use derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments.
Weakened global economic conditions may harm our industry, business and results of operations.
Our overall performance depends in part on worldwide economic conditions, which may remain challenging for the foreseeable future. Global financial developments seemingly unrelated to us or the IT industry may harm us. The United States and other key international economies have been impacted by falling demand for a variety of goods and services, restricted credit, poor liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets, bankruptcies and overall uncertainty with respect to the economy. These conditions affect the rate of information technology spending and could adversely affect our customers ability or willingness to purchase our service, delay prospective customers purchasing decisions, reduce the value or duration of their subscriptions, or affect renewal rates, all of which could harm our operating results.
Changes in laws, regulations and standards related to the Internet may cause our business to suffer.
Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws and regulations affecting data privacy and the use of the Internet as a commercial medium. Industry organizations also regularly adopt and advocate for new standards in this area. For instance, we believe increased regulation is likely in the area of data privacy, and changing laws, regulations and standards applying to the solicitation, collection, processing or use of personal or consumer information could affect our customers ability to use and share data, potentially restricting our ability to store, process and share data with our customers. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the Internet, commerce conducted via the Internet or validation that particular processes follow the latest standards. These changes could limit the viability of Internet-based services such as ours. If we are not able to adjust to changing laws, regulations and standards related to the Internet, our business may be harmed.
Unanticipated changes in our effective tax rate could harm our future results.
We are subject to income taxes in the United States and various foreign jurisdictions, and our domestic and international tax liabilities are subject to the allocation of expenses in differing jurisdictions. Our effective tax rate could be adversely affected by changes in the mix of earnings and losses in countries with differing statutory tax rates, certain non-deductible expenses as a result of acquisitions, the valuation of deferred tax assets and liabilities and changes in federal, state or international tax laws and accounting principles. Increases in our effective tax rate would reduce our profitability or in some cases increase our losses.
In addition, we may be subject to income tax audits by many tax jurisdictions throughout the world, many of which have not established clear guidance on the tax treatment of SaaS-based companies. Although we believe our income tax liabilities are reasonably estimated and accounted for in accordance with applicable laws and principles, an adverse resolution of one or more uncertain tax positions in any period could have a material impact on the results of operations for that period.
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Natural disasters and other events beyond our control could harm our business.
Natural disasters or other catastrophic events may cause damage or disruption to our operations, international commerce and the global economy, and thus could have a strong negative effect on us. Our business operations are subject to interruption by natural disasters, fire, power shortages, pandemics and other events beyond our control. Although we maintain crisis management and disaster response plans, such events could make it difficult or impossible for us to deliver our service to our customers, and could decrease demand for our service. The majority of our research and development activities, corporate offices, information technology systems, and other critical business operations are located near major seismic faults in California. Customer data could be lost, significant recovery time could be required to resume operations and our financial condition and operating results could be harmed in the event of a major earthquake or catastrophic event.
We are an emerging growth company, and any decision on our part to comply with certain reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act enacted in April 2012, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although, if the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30 of any year starting with June 30, 2013, we could cease to be an emerging growth company as of the following December 31. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.
Under Section 107(b) of the Jumpstart Our Business Startups Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
We incur significant costs as a result of operating as a public company and our management has to devote substantial time to public company communications and compliance obligations.
As a public company and particularly after we cease to be an emerging growth company, we incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act and other legislation and rules implemented by the Securities and Exchange Commission, or SEC, and the New York Stock Exchange impose various requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel need to devote a substantial amount of time to these compliance requirements. These burdens may increase as new legislation is passed and implemented, including any new requirements that the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 may impose on public companies. Moreover, these rules and regulations, along with compliance with accounting principles and regulatory interpretations of such principles, have increased and will continue to increase our legal, accounting and financial compliance costs and have made and will continue to make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantial costs to maintain the same or similar coverage.
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These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or our board committees, or as executive officers.
If we do not remediate material weaknesses in our internal control over financial reporting or are unable to implement and maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected.
Prior to our initial public offering in June 2012, we were a private company and historically had limited accounting personnel to adequately execute our accounting processes and other supervisory resources with which to address our internal control over financial reporting. This lack of adequate accounting resources contributed to audit adjustments to our financial statements in the past.
In connection with our preparation of the financial statements for the year ended June 30, 2011 and the six months ended December 31, 2011, our independent registered public accounting firm identified control deficiencies in our internal control that constituted material weaknesses. A material weakness is defined under the standards issued by the Public Company Accounting Oversight Board as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected and corrected on a timely basis. The material weaknesses our independent registered public accounting firm identified related to the design and operation of policies and procedures for accounting and reporting control processes, performance of account review and analysis, the development and review of complex judgments and estimates, the preparation of the provision for income taxes and the identification, communication and accounting of significant contracts and agreements. These material weaknesses, which contributed to multiple audit adjustments, primarily resulted from our failure to maintain a sufficient number of personnel with an appropriate level of knowledge, experience and training in the application of U.S. generally accepted accounting principles, or GAAP.
We are in the process of implementing measures designed to improve our internal control over financial reporting to remediate these material weaknesses. During the six months ended December 31, 2011, we hired a new Chief Financial Officer, a new Vice President of Finance and several new finance and accounting managers which significantly increases our finance and accounting teams experience in GAAP and financial reporting for publicly traded companies. In September 2011, we engaged a third-party tax firm and in February 2012, we hired a Senior Manager of Internal Audit. In March 2012, we hired a Vice President of Tax to assist with the accounting for income taxes and review of complex tax accounting matters. In addition, we expect to retain consultants to advise us on making further improvements to our internal controls related to these accounting areas. We believe that these additional resources enable us to broaden the scope and quality of our internal review of underlying information related to financial reporting and to further enhance our financial review procedures, including both the accounting processes for income taxes and significant contracts and agreements.
We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to remediate the material weaknesses in our internal control over financial reporting or to avoid potential future material weaknesses.
The Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually and disclosure controls and procedures quarterly. In particular, beginning with the year ending on December 31, 2013, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404(a) of the Sarbanes-Oxley Act. Our independent registered public accounting firm is not required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act until the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Moreover, our testing, or the subsequent testing by our
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independent registered public accounting firm, that must be performed may reveal other material weaknesses or that the material weaknesses described above have not been fully remediated. If we do not remediate the material weaknesses described above, or if other material weaknesses are identified or we are not able to comply with the requirements of Section 404 in a timely manner, our reported financial results could be materially misstated or could subsequently require restatement, we could receive an adverse opinion regarding our internal controls over financial reporting from our independent registered public accounting firm and we could be subject to investigations or sanctions by regulatory authorities, which would require additional financial and management resources, and the market price of our stock could decline.
We may acquire or invest in companies, which may divert our managements attention, result in additional dilution to our stockholders, and we may be unable to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions or investments.
We may evaluate and consider potential strategic transactions, including acquisitions of, or investments in, businesses, technologies, services, products and other assets in the future. We also may enter into relationships with other businesses to expand our service offerings or our ability to provide services in international locations, which could involve preferred or exclusive licenses, additional channels of distribution, discount pricing or investments in other companies. An acquisition, investment or business relationship may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel or operations of the acquired companies, particularly if the key personnel of the acquired company choose not to work for us, their software is not easily adapted to work with ours, or we have difficulty retaining the customers of any acquired business due to changes in ownership, management or otherwise. Acquisitions may also disrupt our business, divert our resources and require significant management attention that would otherwise be available for development of our existing business. Moreover, the anticipated benefits of any acquisition, investment or business relationship may not be realized or we may be exposed to unknown risks or liabilities.
Negotiating these transactions can be time-consuming, difficult and expensive, and our ability to close these transactions may often be subject to approvals that are beyond our control. Consequently, these transactions, even if undertaken and announced, may not close. For one or more of those transactions, we may:
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issue additional equity securities that would dilute our stockholders; |
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use cash that we may need in the future to operate our business; |
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incur debt on terms unfavorable to us or that we are unable to repay; |
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incur large charges or substantial liabilities; |
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encounter difficulties retaining key employees of the acquired company or integrating diverse software codes or business cultures; and |
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become subject to adverse tax consequences, substantial depreciation or deferred compensation charges. |
Risks Relating to Ownership of Our Common Stock and this Offering
The market price of our common stock is likely to be volatile and could subject us to litigation.
The trading price of our common stock has been, and is likely to continue to be, volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. Since shares of our common stock were sold in our initial public offering in June 2012 at a price of $18.00 per share, our stock price has ranged from $22.62 to $41.77 through September 30, 2012. In addition, the trading prices of the securities of technology companies in general have been highly volatile, and the volatility in market price and
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trading volume of securities is often unrelated or disproportionate to the financial performance of the companies issuing the securities. Factors affecting the market price of our common stock include:
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variations in our operating results, earnings per share, cash flows from operating activities, deferred revenue, and other financial metrics and non-financial metrics, and how those results compare to analyst expectations; |
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forward-looking statements related to future revenues and earnings per share; |
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the net increases in the number of customers, either independently or as compared with published expectations of industry, financial or other analysts that cover our company; |
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changes in the estimates of our operating results or changes in recommendations by securities analysts that elect to follow our common stock; |
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announcements of technological innovations, new solutions or enhancements to services, strategic alliances or significant agreements by us or by our competitors; |
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announcements by us or by our competitors of mergers or other strategic acquisitions, or rumors of such transactions involving us or our competitors; |
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announcements of customer additions and customer cancellations or delays in customer purchases; |
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recruitment or departure of key personnel; |
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disruptions in our service due to computer hardware, software or network problems, security breaches, or other man-made or natural disasters; |
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the economy as a whole, market conditions in our industry, and the industries of our customers; |
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trading activity by a limited number of stockholders who together beneficially own a majority of our outstanding common stock; |
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the size of our market float; and |
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any other factors discussed herein. |
In addition, if the market for technology stocks or the stock market in general experiences uneven investor confidence, the market price of our common stock could decline for reasons unrelated to our business, operating results or financial condition. The market price of our common stock might also decline in reaction to events that affect other companies within, or outside, our industry even if these events do not directly affect us. Some companies that have experienced volatility in the trading price of their stock have been the subject of securities class action litigation. If we are the subject of such litigation, it could result in substantial costs and a diversion of our managements attention and resources.
We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.
Our management will have broad discretion in the application of the net proceeds from this offering, including for any of the purposes described in the section titled Use of Proceeds, and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. These investments may not yield a favorable return to our stockholders.
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We do not intend to pay dividends on our common stock so any returns will be limited to changes in the value of our common stock.
We have never declared or paid any cash dividends 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. In addition, our ability to pay cash dividends on our common stock may be prohibited or limited by the terms of any future debt financing arrangement. Any return to stockholders will therefore be limited to the increase, if any, of our stock price.
Our directors, officers and principal stockholders beneficially own a significant percentage of our stock and are able to exert significant control over matters subject to stockholder approval.
As of September 30, 2012, our directors, officers and five percent or greater stockholders and their respective affiliates beneficially owned in the aggregate approximately 77% of our outstanding voting stock and, upon completion of this offering, that same group will hold in the aggregate approximately 70% of our outstanding voting stock (assuming no exercise of the underwriters option to purchase additional shares), including approximately 37% controlled by persons affiliated with JMI Equity. Therefore, after this offering these stockholders will continue to have the ability to influence us through this ownership position. These stockholders may be able to determine all matters requiring stockholder approval. For example, these stockholders will be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.
Sales of a substantial number of shares of our common stock in the public market by our existing stockholders following this offering could cause our stock price to fall.
Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales might occur could depress the market price of our common stock and could may make it more difficult for you to sell your common stock at a time and price that you deem appropriate. We are unable to predict the effect that sales may have on the prevailing market price of our common stock.
As a result of the lock-up agreements described in Shares Eligible for Future Sale and Underwriting and certain transfer restrictions under our insider trading policy, shares will be available for sale in the public market at various times as follows, subject to the provisions of Rules 144 and 701 under the Securities Act:
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25,047,500 shares sold in this offering and in our initial public offering will be immediately available for sale in the public market; |
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5,008,688 shares will become eligible for sale in the public market beginning on December 26, 2012 (the date on which the lock-up agreements related to our initial public offering expire); |
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42,688,326 shares subject to transfer restrictions under our insider trading policy will be eligible for sale in the public market beginning on the second trading day following our earnings release for the year ended December 31, 2012, including shares held by our affiliates, assuming the shares are held by persons subject to our insider trading policy, such as directors, officers or employees; provided, if the holder of any shares ceases to be employed by us, such holders shares will become eligible for sale upon the expiration of the relevant lock-up agreement; |
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49,826,072 shares will become eligible for sale in the public market beginning on the 91 st day following the date of this prospectus upon expiration of lock-up agreements entered into in connection with this offering; and |
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2,450,980 shares will become eligible for sale in the public market beginning on February 21, 2013, all of which will be freely tradable under Rule 144. |
Certain holders of shares of our common stock are entitled to rights with respect to the registration of their shares under the Securities Act of 1933, as amended, or the Securities Act, subject to the lock-up arrangements
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described in Shares Eligible for Future Sale and Underwriting. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares held by our affiliates as defined in Rule 144 under the Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.
Provisions in our restated certificate of incorporation and restated bylaws and Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the market price of our common stock.
Our restated certificate of incorporation and restated bylaws contain provisions that could depress the market price of our common stock by acting to discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions among other things:
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establish a classified board of directors so that not all members of our board are elected at one time; |
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permit the board of directors to establish the number of directors; |
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provide that directors may only be removed for cause and only with the approval of 66 2/3% of our stockholders; |
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require super-majority voting to amend some provisions in our restated certificate of incorporation and restated bylaws; |
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authorize the issuance of blank check preferred stock that our board could use to implement a stockholder rights plan; |
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eliminate the ability of our stockholders to call special meetings of stockholders; |
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prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; |
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provide that the board of directors is expressly authorized to make, alter or repeal our restated bylaws; and |
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establish advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by stockholders at annual stockholder meetings. |
In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company. Section 203 imposes certain restrictions on merger, business combinations and other transactions between us and holders of 15% or more of our common stock.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. All statements, other than statements of historical fact, contained in this prospectus, including statements regarding our future results of operations, financial position and cash flows, our business strategy and plans and our objectives for future operations, are forward-looking statements. The words believe, may, will, estimate, continue, anticipate, would, could, should, intend and expect and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Risk Factors. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of these forward-looking statements after the date of this prospectus or to conform these statements to actual results or revised expectations.
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Unless otherwise indicated, information contained in this prospectus concerning our industry and the market in which we operate, including our general expectations, market position, market opportunity and market size, is based on information from various sources, including independent industry publications like those generated by Gartner, Inc. In presenting this information, we have also made assumptions based on such data and other similar sources and on our knowledge of, and our experience to date in, the markets for our service and related solutions. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. Although neither we nor the underwriters have independently verified the accuracy or completeness of any third-party information, we believe the market position, opportunity and market size information included in this prospectus is reliable and the conclusions contained in the third-party information are reasonable. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in Risk Factors and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.
The Gartner report, Forecast: Enterprise Software Markets, Worldwide, 2009-2016, 3Q12 Update, September, 2012, described herein, or the Gartner Report, represents data, research opinion or viewpoints published as part of a syndicated subscription service, by Gartner and are not representations of fact. The Gartner Report speaks as of its original publication date (and not as of the date of this prospectus) and the opinions expressed in the Gartner Report are subject to change without notice.
29
We estimate that our net proceeds from the sale of the shares of common stock offered by us will be approximately $47.8 million, assuming a public offering price of $30.90 per share, which is the last sale price of our common stock as reported on the New York Stock Exchange on November 8, 2012, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their option to purchase additional shares in full, we estimate that the net proceeds from this offering will be approximately $55.2 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of common stock by the selling stockholders.
The principal purposes of this offering are to facilitate an orderly distribution of our shares by selling stockholders, increase our public float, and increase our financial flexibility. While we have no specific plans at this time, we may use some of the proceeds from this offering to make additions to and expand our data center operations, and to build out our office facilities. We intend to use the net proceeds to us from this offering for working capital and other general corporate purposes. Additionally, we may choose to expand our current business through acquisitions of, or investments in, other businesses, products or technologies, using cash or shares of our common stock. However, we have no commitments with respect to any such acquisitions or investments at this time.
Pending the use of proceeds from this offering, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities. Our management will have broad discretion in the application of the net proceeds from this offering and investors will be relying on the judgment of our management regarding the application of the proceeds.
Our common stock has been listed on the New York Stock Exchange under the symbol NOW since June 29, 2012. Prior to that date, there was no public trading market for our common stock. Our initial public offering was priced at $18.00 per share on June 28, 2012. The following table sets forth for the periods indicated the high and low sales prices per share of our common stock as reported on the New York Stock Exchange:
Low | High | |||||||
Year ending December 31, 2012 |
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Second Quarter (beginning June 29, 2012) |
$ | 22.83 | $ | 24.75 | ||||
Third Quarter |
$ | 22.62 | $ | 41.77 | ||||
Fourth Quarter (through November 8, 2012) |
$ | 29.55 | $ | 38.14 |
On November 8, 2012, the last reported sale price of our common stock as reported on the New York Stock Exchange was $30.90 per share.
As of September 30, 2012, we had 200 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our board of directors.
30
The following table sets forth our cash, cash equivalents and short term investments, and our capitalization as of September 30, 2012:
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on an actual basis; and |
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on an as adjusted basis to reflect the sale and issuance of shares of common stock in this offering by us, and the receipt of the net proceeds from our sale of 1,650,000 shares at an assumed public offering price of $30.90 per share, which was the last reported sale price of our common stock on the New York Stock Exchange on November 8, 2012, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. |
The information below is illustrative only and our cash, cash equivalents and short term investments and our capitalization following the closing of this offering will be adjusted based on the actual public offering price and other terms of this offering determined at pricing. You should read the information in this table together with the section entitled Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.
As of September 30, 2012 | ||||||||
Actual | As Adjusted | |||||||
(in thousands) | ||||||||
Cash, cash equivalents and short term investments |
$ | 256,461 | $ | 304,307 | ||||
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Stockholders equity: |
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Preferred stock, $0.001 par value: 10,000,000 shares authorized, no shares issued or outstanding, actual and as adjusted |
$ | | $ | | ||||
Common stock, $0.001 par value: 600,000,000 shares authorized, 123,371,566 shares issued and outstanding, actual; 600,000,000 shares authorized and 125,021,566 shares issued and outstanding, as adjusted |
123 | 125 | ||||||
Additional paid-in capital |
286,376 | 334,426 | ||||||
Accumulated other comprehensive income |
326 | 326 | ||||||
Accumulated deficit |
(95,557 | ) | (95,763 | ) | ||||
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Total stockholders equity |
191,268 | 239,114 | ||||||
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Total capitalization |
$ | 191,268 | $ | 239,114 | ||||
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The number of shares of our common stock to be outstanding after this offering is based on 123,371,566 shares of common stock outstanding as of September 30, 2012, and excludes:
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37,279,442 shares of common stock issuable upon the exercise of outstanding options with a weighted-average exercise price of $4.48 per share and 1,134,851 shares of common stock issuable pursuant to outstanding restricted stock units; |
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11,635,301 additional shares of common stock reserved for future issuance under our 2012 Equity Incentive Plan; and |
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5,000,000 shares of common stock reserved for future issuance under our 2012 Employee Stock Purchase Plan. |
31
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read together with our consolidated financial statements and accompanying notes and Managements Discussion and Analysis of Financial Condition and Results of Operations appearing elsewhere in this prospectus. The selected consolidated financial data in this section are not intended to replace our consolidated financial statements and the related notes. Our historical results are not necessarily indicative of our future results.
The selected consolidated statements of operations data for fiscal 2009, 2010 and 2011 and for the six months ended December 31, 2011 and the selected consolidated balance sheet data as of June 30, 2010 and 2011 and as of December 31, 2011 are derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The consolidated balance sheet data as of June 30, 2009 is derived from our audited consolidated financial statements which are not included in this prospectus. The consolidated statement of operations data for the six months ended December 31, 2010 and the nine months ended September 30, 2011 and 2012, and the unaudited selected consolidated balance sheet data as of September 30, 2012 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for fiscal 2007 and 2008 and the consolidated balance sheet data as of June 30, 2007 and 2008 are derived from our unaudited consolidated financial statements which are not included in this prospectus. We have prepared the unaudited financial information on the same basis as the audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, we consider necessary for a fair statement of the financial information set forth in those statements.
Fiscal Year Ended June 30, |
Six Months Ended
December 31, |
Nine Months Ended
September 30, |
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2007 | 2008 | 2009 | 2010 | 2011 | 2010 | 2011 | 2011 | 2012 | ||||||||||||||||||||||||||||
(in thousands, except share and per share data) | ||||||||||||||||||||||||||||||||||||
Consolidated Statements of Operations Data: |
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Revenues (1) : |
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Subscription |
$ | 1,834 | $ | 8,644 | $ | 17,841 | $ | 40,078 | $ | 79,191 | $ | 33,191 | $ | 64,886 | $ | 76,331 | $ | 141,640 | ||||||||||||||||||
Professional services and other |
29 | 137 | 1,474 | 3,251 | 13,450 | 4,753 | 8,489 | 12,563 | 26,910 | |||||||||||||||||||||||||||
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Total revenues |
1,863 | 8,781 | 19,315 | 43,329 | 92,641 | 37,944 | 73,375 | 88,894 | 168,550 | |||||||||||||||||||||||||||
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Cost of revenues (2)(3) : |
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Subscription |
397 | 1,838 | 3,140 | 6,378 | 15,311 | 6,096 | 15,073 | 15,538 | 43,182 | |||||||||||||||||||||||||||
Professional services and other |
253 | 2,717 | 4,711 | 9,812 | 16,264 | 6,778 | 12,850 | 15,095 | 28,519 | |||||||||||||||||||||||||||
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Total cost of revenues |
650 | 4,555 | 7,851 | 16,190 | 31,575 | 12,874 | 27,923 | 30,633 | 71,701 | |||||||||||||||||||||||||||
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Gross profit |
1,213 | 4,226 | 11,464 | 27,139 | 61,066 | 25,070 | 45,452 | 58,261 | 96,849 | |||||||||||||||||||||||||||
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Operating expenses (2)(3) : |
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Sales and marketing |
2,314 | 6,142 | 8,499 | 19,334 | 34,123 | 13,728 | 32,501 | 34,375 | 74,356 | |||||||||||||||||||||||||||
Research and development |
2,682 | 2,098 | 2,433 | 7,194 | 7,004 | 2,758 | 7,030 | 7,003 | 26,098 | |||||||||||||||||||||||||||
General and administrative |
356 | 1,854 | 6,363 | 28,810 | 9,379 | 3,417 | 10,084 | 10,471 | 24,441 | |||||||||||||||||||||||||||
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Total operating expenses |
5,352 | 10,094 | 17,295 | 55,338 | 50,506 | 19,903 | 49,615 | 51,849 | 124,895 | |||||||||||||||||||||||||||
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Income (loss) from operations |
(4,139 | ) | (5,868 | ) | (5,831 | ) | (28,199 | ) | 10,560 | 5,167 | (4,163 | ) | 6,412 | (28,046 | ) | |||||||||||||||||||||
Interest and other income (expense), net |
170 | 10 | (27 | ) | (1,226 | ) | 606 | 289 | (1,446 | ) | (412 | ) | 1,148 | |||||||||||||||||||||||
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Income (loss) before provision for income taxes |
(3,969 | ) | (5,858 | ) | (5,858 | ) | (29,425 | ) | 11,166 | 5,456 | (5,609 | ) | 6,000 | (26,898 | ) | |||||||||||||||||||||
Provision for income taxes |
2 | 23 | 48 | 280 | 1,336 | 653 | 1,075 | 852 | 519 | |||||||||||||||||||||||||||
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Net income (loss) |
$ | (3,971 | ) | $ | (5,881 | ) | $ | (5,906 | ) | $ | (29,705 | ) | $ | 9,830 | $ | 4,803 | $ | (6,684 | ) | $ | 5,148 | $ | (27,417 | ) | ||||||||||||
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Net income (loss) per share attributable to common stockholders ( 4 ) : |
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Basic |
$ | (0.11 | ) | $ | (0.16 | ) | $ | (0.17 | ) | $ | (1.31 | ) | $ | 0.09 | $ | 0.04 | $ | (0.33 | ) | $ | 0.05 | $ | (0.49 | ) | ||||||||||||
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Diluted |
$ | (0.11 | ) | $ | (0.16 | ) | $ | (0.17 | ) | $ | (1.31 | ) | $ | 0.08 | $ | 0.04 | $ | (0.33 | ) | $ | 0.04 | $ | (0.49 | ) | ||||||||||||
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Weighted-average shares used to compute net income (loss) per share attributable to common stockholders ( 4 ) : |
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Basic |
40,000,000 | 40,115,383 | 39,039,066 | 23,157,576 | 18,163,977 | 17,156,445 | 21,104,219 | 19,695,440 | 57,089,411 | |||||||||||||||||||||||||||
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Diluted |
40,000,000 | 40,115,383 | 39,039,066 | 23,157,576 | 28,095,486 | 27,622,357 | 21,104,219 | 30,612,539 | 57,089,411 | |||||||||||||||||||||||||||
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32
(footnotes on next page)
(1) |
Revenues for fiscal 2011, the six months ended December 31, 2010 and 2011 and the nine months ended September 30, 2011 and 2012 reflect the prospective adoption of new revenue accounting guidance commencing on July 1, 2010. As a result of this guidance, we separately allocate value for multiple element contracts between our subscription revenues and professional services revenues based on the best estimate of selling price. Additionally, we recognize professional services revenues as the services are delivered. Please refer to Note 2 to our consolidated financial statements for further discussion of our revenue recognition policies. |
(2) |
Stock-based compensation included in the statements of operations data above was as follows: |
Fiscal Year Ended June 30, |
Six Months Ended
December 31, |
Nine Months Ended
September 30, |
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2007 | 2008 | 2009 | 2010 | 2011 | 2010 | 2011 | 2011 | 2012 | ||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||
Cost of revenues: |
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Subscription |
$ | | $ | 3 | $ | 6 | $ | 48 | $ | 548 | $ | 225 | $ | 674 | $ | 524 | $ | 2,514 | ||||||||||||||||||
Professional services and other |
1 | 5 | 11 | 28 | 117 | 37 | 193 | 151 | 964 | |||||||||||||||||||||||||||
Sales and marketing |
8 | 22 | 45 | 277 | 1,004 | 431 | 2,010 | 1,373 | 6,852 | |||||||||||||||||||||||||||
Research and development |
3 | 12 | 50 | 90 | 468 | 207 | 704 | 524 | 4,121 | |||||||||||||||||||||||||||
General and administrative |
5 | 14 | 15 | 102 | 817 | 221 | 2,056 | 1,652 | 4,137 |
(3) |
Operating expenses for fiscal 2009 reflect compensation expense of $3.8 million related to the stock settlement of an outstanding promissory note in connection with our sale and issuance of Series C preferred stock. Cost of revenues and operating expenses for fiscal 2010 reflect compensation expense of $0.7 million and $30.1 million, respectively, related to the repurchase of shares from eligible stockholders in connection with our sale and issuance of Series D preferred stock. |
(4) |
Please refer to Note 13 to our consolidated financial statements for an explanation of the method used to calculate the historical net income (loss) per share attributable to common stockholders and the number of shares used in the computation of the per share amounts. |
As of June 30, |
As of
December 31, |
As of
September 30, |
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2007 | 2008 | 2009 | 2010 | 2011 | 2011 | 2012 | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Consolidated Balance Sheet Data: |
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Cash and cash equivalents |
$ | 3,619 | $ | 4,772 | $ | 7,788 | $ | 29,402 | $ | 59,853 | $ | 68,088 | $ | 116,976 | ||||||||||||||
Working capital, excluding deferred revenue |
5,647 | 5,401 | 10,090 | 33,080 | 75,801 | 95,033 | 294,159 | |||||||||||||||||||||
Total assets |
6,341 | 7,725 | 15,327 | 51,369 | 108,746 | 156,323 | 382,204 | |||||||||||||||||||||
Deferred revenue, current and non-current portion |
4,207 | 9,867 | 16,778 | 40,731 | 74,646 | 104,636 | 147,946 | |||||||||||||||||||||
Convertible preferred stock |
8,187 | 8,810 | 15,342 | 67,227 | 67,860 | 68,172 | | |||||||||||||||||||||
Total stockholders equity (deficit) |
(6,650 | ) | (13,112 | ) | (21,690 | ) | (71,262 | ) | (58,381 | ) | (57,426 | ) | 191,268 |
33
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing at the end of this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should read the Risk Factors section of this prospectus for a discussion of important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
ServiceNow is a leading provider of cloud-based services to automate enterprise IT operations. Our service includes a suite of applications built on our proprietary platform that automates workflow and integrates related business processes. We focus on transforming enterprise IT by automating and standardizing business processes and consolidating IT across the global enterprise. Organizations deploy our service to create a single system of record for enterprise IT, to lower operational costs and to enhance efficiency. Additionally, our customers use our extensible platform to build custom applications for automating activities unique to their business requirements.
We offer our service under a SaaS business model. Our subscription fee includes the use of our service and our technical support and management of the hosting infrastructure. We provide a scaled pricing model based on the number of users, in which the subscription price per user decreases as the number of users increases. We generally bill our customers annually in advance. We generate sales through our direct sales team and indirectly through channel partners and third-party referrals. We also generate revenues from professional services for implementation and training.
Many customers initially subscribe to our service to solve a specific and immediate problem. Once their problem is solved, many of our customers deploy additional applications as they become more familiar with our service and apply it to new IT processes. In addition, some customers adopt our platform to build applications that automate various processes for business uses outside of IT such as human resources, facilities and quality control management. A majority of our revenues come from large global enterprise customers. Our total customers grew 58% from 852 as of September 30, 2011 to 1,346 as of September 30, 2012.
We were founded in 2004 and entered into our first commercial contract in 2005. To date, we have funded our business primarily with cash flows from operations. Additionally, we raised net proceeds of $173.3 million in our June 2012 initial public offering after deducting underwriting discounts and commissions and before deducting expenses in connection with the offering of $3.5 million. We continue to invest in the development of our service, infrastructure and sales and marketing to drive long-term growth. In 2011, we significantly changed our executive management team. We hired a new Chief Executive Officer in May 2011, and our founder became Chief Product Officer. We subsequently hired additional key executives across our entire organization including our Chief Financial Officer, Chief Technology Officer, Senior Vice President Worldwide Sales and Services, Senior Vice President Engineering, Vice President Human Resources, Vice President Marketing and Vice President Product Management. We increased our overall employee headcount from 491 as of September 30, 2011 to 963 as of September 30, 2012.
We have achieved significant revenue growth in recent periods. For the fiscal years ended June 30, 2010 and 2011, our revenues grew 114% from $43.3 million to $92.6 million. We incurred a net loss of $29.7 million and generated net income of $9.8 million for the fiscal years ended June 30, 2010 and 2011, respectively. For the six
34
months ended December 31, 2010 and 2011, our revenues grew 93% from $37.9 million to $73.4 million. We generated net income of $4.8 million and incurred a net loss of $6.7 million for the six months ended December 31, 2010 and 2011, respectively. For the nine months ended September 30, 2011 and 2012, our revenues grew 90% from $88.9 million to $168.6 million. We generated net income of $5.1 million and incurred a net loss of $27.4 million for the nine months ended September 30, 2011 and 2012, respectively.
Fiscal Year End
On February 3, 2012, our board of directors approved a change to our fiscal year-end from June 30 to December 31. Included in this prospectus is the transition period for the six months ended December 31, 2011. Accordingly, we present the consolidated balance sheets as of June 30, 2010 and 2011 and December 31, 2011, and the consolidated statements of comprehensive income (loss), changes in convertible preferred stock and stockholders deficit, and cash flows for the fiscal years ended June 30, 2009, 2010 and 2011 and the six months ended December 31, 2010 and 2011. References to fiscal 2009, fiscal 2010 and fiscal 2011 still refer to the fiscal years ended June 30, 2009, 2010 and 2011, respectively.
Key Factors Affecting Our Performance
Total customers . We believe total customers is a key indicator of our market penetration, growth and future revenues. We have aggressively invested in and intend to continue to invest in our direct sales force, as well as to pursue additional partnerships within our indirect sales channel. We generally define a customer as an entity with an active service contract as of the measurement date. In situations where there is a single contract that applies to entities with multiple subsidiaries or divisions, universities, or governmental organizations, each entity that has contracted for a separate production instance of our service is counted as a separate customer. Our total customers were 281, 460 and 771 as of June 30, 2009, 2010 and 2011, respectively, 602 and 974 as of December 31, 2010 and 2011, respectively and 852 and 1,346 as of September 30, 2011 and 2012, respectively.
Investment in growth . We have aggressively invested, and intend to continue to invest, in expanding our operations, increasing our headcount and developing technology to support our growth. We expect our total operating expenses to increase in the foreseeable future, particularly as we continue to expand our sales operations and cloud-based infrastructure. We continue to invest in our sales and marketing organization to drive additional revenues and support the growth of our customer base. Any investments we make in our sales and marketing organization will occur in advance of experiencing any benefits from such investments, so it may be difficult for us to determine if we are efficiently allocating our resources in these areas.
Renewal rate . We calculate our renewal rate by subtracting our attrition rate from 100%. Our attrition rate for a period is equal to the annual contract value from customers that are due for renewal in the period and did not renew, divided by the total annual contract value from all customers due for renewal during the period. Annual contract value is equal to the first twelve months of expected subscription revenues under a contract. We believe our renewal rate is an important metric to measure the long-term value of customer agreements and our ability to retain our customers. Our renewal rate was 94%, 95%, and 97% in fiscal 2009, 2010 and 2011, respectively, 99% and 97% in the six months ended December 31, 2010 and 2011, respectively, and 97% and 96% in the nine months ended September 30, 2011 and 2012, respectively.
Upsells . In order for us to continue to grow our business, it is important to generate additional revenue from existing customers. We believe there is significant opportunity to increase the number of subscriptions sold to current customers as customers become more familiar with our platform and adopt our applications to address additional business use cases. Our increase in subscriptions is driven by the increased number of users accessing our suite of on-demand applications, as well as our other enabling technologies, Discovery and Runbook Automation, that are separately priced on a per server basis. We believe our ability to upsell is a key factor affecting our ability to further penetrate our existing customer base. We monitor upsells by measuring the annual contract value of upsells signed in the period as a percentage of our total annual contract value of all contracts
35
signed in the period. Upsells as a percentage of total annual contract value signed was 20%, 25% and 27% in fiscal 2009, 2010 and 2011, respectively, 25% and 28% in the six months ended December 31, 2010 and 2011, respectively, and 29% in both the nine months ended September 30, 2011 and 2012.
Investment in infrastructure . We have made and will continue to make substantial investments in new equipment to support growth at our data centers and provide enhanced levels of service to our customers. During the fourth quarter of 2012, we expect to complete our transition from a managed service hosting model to a co-location model and invest in enhancements to our cloud architecture in our co-location data centers. Through the end of 2012, we will continue to incur double rent, accelerated depreciation for certain assets and additional co-location infrastructure investments. Beginning in the first quarter of 2013, we expect to no longer incur costs related to the managed service data centers that we are exiting. During 2013, we will continue to invest in enhancements to our cloud architecture, which are designed to provide our customers with enhanced scalability, data reliability and availability, including the purchase of additional networking infrastructure. We are also evaluating the expansion of our data center locations to address additional geographic markets, which will result in additional investments to our infrastructure if pursued. In addition, we will continue to enter into new office facility leases in the future to accommodate our projected headcount growth at various locations around the world. These new leases may require investments in leasehold improvements, as well as furniture and equipment to support our employees. If we add to our headcount at a faster rate than anticipated, we may incur substantial costs in terminating leases to enter into new leases for larger space.
Professional services model . We believe our investment in professional services facilitates the adoption of our subscription service. As a result, our sales efforts have been focused primarily on our subscription service, rather than the profitability of our professional services business. Historically, our pricing for professional services was predominantly on a fixed-fee basis and the cost of the time and materials incurred to complete these services was often greater than the amount charged to the customer. These factors contributed to our negative gross profit percentages from professional services of (220)%, (202)% and (21)% for fiscal 2009, 2010 and 2011, respectively, (43)% and (51)% for the six months ended December 31, 2010 and 2011, respectively, and (20)% and (6)% for the nine months ended September 30, 2011 and 2012, respectively. The improvement in gross profit percentages was due in part to the adoption of new revenue recognition accounting guidance commencing on July 1, 2010. In addition, in December 2011, we began shifting our pricing model to a time-and-materials basis and pricing our services predominantly based on the anticipated cost of those services.
Platform adoption . Our service includes access to our suite of applications, as well as access to our platform to create customer-built extensions to our suite of applications. Customers may also purchase the use of the platform to develop custom applications. Though in the near term we expect our revenue growth to be primarily driven by the pace of adoption and penetration of our suite of applications, we are investing resources to enhance the development capabilities of our platform. We believe the extensibility and simplicity of our platform is resulting in the broad use of our platform by our customers to create extensions of our applications or custom applications, and will enhance our ability to acquire new customers, increase upsells and sustain high renewal rates.
Components of Results of Operations
Revenues
Subscription revenues . Subscription revenues are primarily comprised of fees which give customers access to our suite of on-demand applications, as well as access to our platform to build custom applications. Pricing includes multiple instances, hosting and support services, data backup and disaster recovery services, as well as future upgrades offered during the subscription period. In addition, we offer two separately priced enabling technologies, Discovery and Runbook Automation. We typically invoice our customers for subscription fees in annual increments upon initiation of the initial contract or subsequent renewal. Our average initial contract term is approximately 30 months. Our contracts are generally non-cancelable, though customers can terminate for breach if we materially fail to perform.
36
We generate sales directly through our sales team and, to a lesser extent, through our channel partners. Sales to our channel partners are made at a discount and revenues are recorded at the discounted price when all revenue recognition criteria are met. In addition, in some cases, we pay referral fees to third parties typically ranging from 10% to 20% of the first years annual contract value. These fees are included in sales and marketing expense.
Professional services and other revenues . Professional services revenues consist of fees associated with the implementation and configuration of our subscription service. Other revenues include customer training and attendance and sponsorship fees for our Knowledge conferences. Historically, our pricing for professional services was predominantly on a fixed-fee basis. However, in December 2011, we began shifting our pricing model to a time-and-materials basis. Going forward, we anticipate the majority of our new business will be priced on a time-and-materials basis. Most of our professional services engagements span four to eight months. Historically, we billed for our fixed price professional services in two installments, with the first installment due up front and the second installment due at either a specified future date (usually approximately three months from the contract start date) or upon completion of the services. In December 2011, we changed these billing practices to bill for our fixed price professional services in installments based on milestones related to the completion of specified projects or specified dates. Our time-and-materials professional services are generally billed monthly in arrears based on actual hours and expenses incurred. Typical payment terms provide our customers pay us within 30 days of invoice.
Prior to fiscal 2011, we recorded revenues from our professional services over a period commensurate with our subscription service contracts. However, the cost associated with our professional services engagements was recorded as the services were delivered, resulting in lower gross profit percentages in fiscal 2009 and 2010. On July 1, 2010, we adopted new revenue recognition accounting guidance on a prospective basis that enabled us to separately allocate value for our multiple element arrangements between our subscription revenues and professional services revenues, based on the best estimate of selling price. As a result, professional services revenues are recognized as the services are delivered, which is substantially the same period as the associated costs are incurred. This shift resulted in an increase to professional services and other revenues of $5.5 million for fiscal 2011. Refer to Critical Accounting Policies and Significant Judgments and Estimates below for further discussion of our revenue recognition accounting policy.
Backlog . Backlog represents future amounts to be invoiced under our agreements. As of December 31, 2011 and September 30, 2012, we had backlog of approximately $210 million and $325 million, respectively. We expect backlog will change from period to period for several reasons, including the timing and duration of customer subscription and professional services agreements, varying billing cycles of subscription agreements, and the timing of customer renewals.
Overhead Allocation
Overhead associated with benefits, facilities, IT costs and depreciation, excluding depreciation related to our cloud-based infrastructure, is allocated to our cost of revenues and operating expenses based on headcount.
Cost of Revenues
Subscription cost of revenues . Cost of subscription revenues primarily consists of expenses related to hosting our service and providing support to our customers. These expenses are comprised of data center capacity costs; personnel and related costs directly associated with our cloud infrastructure and customer support, including salaries, benefits, bonuses and stock-based compensation; and allocated overhead.
Professional services and other cost of revenues . Cost of professional services and other revenues consists primarily of personnel and related costs directly associated with our professional services and training departments, including salaries, benefits, bonuses and stock-based compensation; the costs of contracted third-party vendors; and allocated overhead.
37
Professional services associated with the implementation and configuration of our subscription service are performed directly by our services team, as well as by contracted third-party vendors. Fees paid up-front to our third-party vendors are deferred and amortized to cost of revenues as the professional services are delivered. Fees owed to our third-party vendors are accrued over the same requisite service period. Cost of revenues associated with our professional services engagements contracted with third-party vendors as a percentage of professional services and other revenues was 52%, 135% and 54% for fiscal 2009, 2010 and 2011, respectively, 70% and 64% for the six months ended December 31, 2010 and 2011, respectively, and 52% and 27% for the nine months ended September 30, 2011 and 2012, respectively.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of personnel and related costs directly associated with our sales and marketing staff, including salaries, benefits, bonuses, commissions and stock-based compensation. Other costs included in this expense are third-party referral fees, marketing and promotional events, including our Knowledge conferences, online marketing, product marketing and allocated overhead.
Research and Development Expenses
Research and development expenses consist primarily of personnel and related costs directly associated with our research and development staff, including salaries, benefits, bonuses and stock-based compensation, and allocated overhead.
General and Administrative Expenses
General and administrative expenses primarily consist of personnel and related costs for our executive, finance, legal, human resources and administrative personnel, including salaries, benefits, bonuses and stock-based compensation; legal, accounting and other professional services fees; other corporate expenses; and allocated overhead.
Provision for Income Taxes
Provision for income taxes consists of federal, state and foreign income taxes. Due to cumulative losses, we maintain a valuation allowance against our deferred tax assets as of September 30, 2012. We consider all available evidence, both positive and negative, in assessing the extent to which a valuation allowance should be applied against our deferred tax assets.
38
Results of Operations
To enhance comparability, the following table sets forth our results of operations for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results.
Fiscal Year Ended June 30, |
Six Months Ended
December 31, |
Nine Months Ended
September 30, |
||||||||||||||||||||||||||
2009 | 2010 | 2011 | 2010 | 2011 | 2011 | 2012 | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Revenues (1) : |
||||||||||||||||||||||||||||
Subscription |
$ | 17,841 | $ | 40,078 | $ | 79,191 | $ | 33,191 | $ | 64,886 | $ | 76,331 | $ | 141,640 | ||||||||||||||
Professional services and other |
1,474 | 3,251 | 13,450 | 4,753 | 8,489 | 12,563 | 26,910 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total revenues |
19,315 | 43,329 | 92,641 | 37,944 | 73,375 | 88,894 | 168,550 | |||||||||||||||||||||
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|
|||||||||||||||
Cost of revenues (2)(3) : |
||||||||||||||||||||||||||||
Subscription |
3,140 | 6,378 | 15,311 | 6,096 | 15,073 | 15,538 | 43,182 | |||||||||||||||||||||
Professional services and other |
4,711 | 9,812 | 16,264 | 6,778 | 12,850 | 15,095 | 28,519 | |||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total cost of revenues |
7,851 | 16,190 | 31,575 | 12,874 | 27,923 | 30,633 | 71,701 | |||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Gross profit |
11,464 | 27,139 | 61,066 | 25,070 | 45,452 | 58,261 | 96,849 | |||||||||||||||||||||
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|
|
|
|
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|
|
|
|||||||||||||||
Operating expenses (2)(3) : |
||||||||||||||||||||||||||||
Sales and marketing |
8,499 | 19,334 | 34,123 | 13,728 | 32,501 | 34,375 | 74,356 | |||||||||||||||||||||
Research and development |
2,433 | 7,194 | 7,004 | 2,758 | 7,030 | 7,003 | 26,098 | |||||||||||||||||||||
General and administrative |
6,363 | 28,810 | 9,379 | 3,417 | 10,084 | 10,471 | 24,441 | |||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total operating expenses |
17,295 | 55,338 | 50,506 | 19,903 | 49,615 | 51,849 | 124,895 | |||||||||||||||||||||
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|
|
|||||||||||||||
Income (loss) from operations |
(5,831 | ) | (28,199 | ) | 10,560 | 5,167 | (4,163 | ) | 6,412 | (28,046 | ) | |||||||||||||||||
Interest and other income (expense), net |
(27 | ) | (1,226 | ) | 606 | 289 | (1,446 | ) | (412 | ) | 1,148 | |||||||||||||||||
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|
|
|
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Income (loss) before provision for income taxes |
(5,858 | ) | (29,425 | ) | 11,166 | 5,456 | (5,609 | ) | 6,000 | (26,898 | ) | |||||||||||||||||
Provision for income taxes |
48 | 280 | 1,336 | 653 | 1,075 | 852 | 519 | |||||||||||||||||||||
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|
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Net income (loss) |
$ | (5,906 | ) | $ | (29,705 | ) | $ | 9,830 | $ | 4,803 | $ | (6,684 | ) | $ | 5,148 | $ | (27,417 | ) | ||||||||||
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|
|
(1) |
Revenues for fiscal 2011, the six months ended December 31, 2010 and 2011 and the nine months ended September 30, 2011 and 2012 reflect the prospective adoption of new revenue accounting guidance commencing on July 1, 2010. As a result of this guidance, we separately allocate value for multiple element contracts between our subscription revenues and professional services revenues based on the best estimate of selling price. Additionally, we recognize professional services revenues as the services are delivered. Please refer to Note 2 to our consolidated financial statements for further discussion of our revenue recognition policies. |
(2) |
Stock-based compensation included in the statements of operations data above was as follows: |
Fiscal Year Ended June 30, |
Six Months Ended
December 31, |
Nine Months Ended
September 30, |
||||||||||||||||||||||||||
2009 | 2010 | 2011 | 2010 | 2011 | 2011 | 2012 | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Cost of revenues: |
||||||||||||||||||||||||||||
Subscription |
$ | 6 | $ | 48 | $ | 548 | $ | 225 | $ | 674 | $ | 524 | $ | 2,514 | ||||||||||||||
Professional services and other |
11 | 28 | 117 | 37 | 193 | 151 | 964 | |||||||||||||||||||||
Sales and marketing |
45 | 277 | 1,004 | 431 | 2,010 | 1,373 | 6,852 | |||||||||||||||||||||
Research and development |
50 | 90 | 468 | 207 | 704 | 524 | 4,121 | |||||||||||||||||||||
General and administrative |
15 | 102 | 817 | 221 | 2,056 | 1,652 | 4,137 |
(footnotes continue on next page)
39
(3) |
Operating expenses for fiscal 2009 reflect compensation expense of $3.8 million related to the stock settlement of an outstanding promissory note in connection with our sale and issuance of Series C preferred stock. Cost of revenues and operating expenses for fiscal 2010 reflect compensation expense of $0.7 million and $30.1 million, respectively, related to the repurchase of shares from eligible stockholders in connection with our sale and issuance of Series D preferred stock. |
Fiscal Year Ended
June 30, |
Six Months Ended
December 31, |
Nine Months Ended
September 30, |
||||||||||||||||||||||||||
2009 | 2010 | 2011 | 2010 | 2011 | 2011 | 2012 | ||||||||||||||||||||||
(as a percentage of revenues) | ||||||||||||||||||||||||||||
Revenues: |
||||||||||||||||||||||||||||
Subscription |
92 | % | 92 | % | 85 | % | 87 | % | 88 | % | 86 | % | 84 | % | ||||||||||||||
Professional services and other |
8 | 8 | 15 | 13 | 12 | 14 | 16 | |||||||||||||||||||||
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|||||||||||||||
Total revenues |
100 | 100 | 100 | 100 | 100 | 100 | 100 | |||||||||||||||||||||
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Cost of revenues: |
||||||||||||||||||||||||||||
Subscription |
16 | 15 | 16 | 16 | 20 | 17 | 26 | |||||||||||||||||||||
Professional services and other |
25 | 22 | 18 | 18 | 18 | 17 | 17 | |||||||||||||||||||||
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|
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Total cost of revenues |
41 | 37 | 34 | 34 | 38 | 34 | 43 | |||||||||||||||||||||
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|
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Gross profit |
59 | 63 | 66 | 66 | 62 | 66 | 57 | |||||||||||||||||||||
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Operating expenses: |
||||||||||||||||||||||||||||
Sales and marketing |
44 | 45 | 37 | 36 | 44 | 39 | 44 | |||||||||||||||||||||
Research and development |
12 | 17 | 8 | 7 | 10 | 8 | 15 | |||||||||||||||||||||
General and administrative |
33 | 66 | 10 | 9 | 14 | 12 | 15 | |||||||||||||||||||||
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|
|||||||||||||||
Total operating expenses |
89 | 128 | 55 | 52 | 68 | 59 | 74 | |||||||||||||||||||||
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|
|||||||||||||||
Income (loss) from operations |
(30 | ) | (65 | ) | 11 | 14 | (6 | ) | 7 | (17 | ) | |||||||||||||||||
Interest and other income (expense), net |
| (3 | ) | 1 | 1 | (2 | ) | | 1 | |||||||||||||||||||
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|
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Income (loss) before provision for income taxes |
(30 | ) | (68 | ) | 12 | 15 | (8 | ) | 7 | (16 | ) | |||||||||||||||||
Provision for income taxes |
1 | 1 | 1 | 2 | 1 | 1 | | |||||||||||||||||||||
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|
|||||||||||||||
Net income (loss) |
(31 | )% | (69 | )% | 11 | % | 13 | % | (9 | )% | 6 | % | (16 | )% | ||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30, |
Six Months Ended
December 31, |
Nine Months Ended
September 30, |
||||||||||||||||||||||||||
2009 | 2010 | 2011 | 2010 | 2011 | 2011 | 2012 | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Revenues by geography |
||||||||||||||||||||||||||||
North America |
$ | 14,062 | $ | 31,396 | $ | 69,333 | $ | 27,919 | $ | 51,901 | $ | 65,929 | $ | 120,124 | ||||||||||||||
Europe |
5,018 | 10,708 | 20,093 | 8,693 | 18,842 | 21,856 | 42,027 | |||||||||||||||||||||
Asia Pacific and other |
235 | 1,225 | 3,215 | 1,332 | 2,632 | 1,109 | 6,399 | |||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total revenues |
$ | 19,315 | $ | 43,329 | $ | 92,641 | $ | 37,944 | $ | 73,375 | $ | 88,894 | $ | 168,550 | ||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30, |
Six Months Ended
December 31, |
Nine Months Ended
September 30 |
||||||||||||||||||||||||||
2009 | 2010 | 2011 | 2010 | 2011 | 2011 | 2012 | ||||||||||||||||||||||
Revenues by geography |
||||||||||||||||||||||||||||
North America |
73 | % | 72 | % | 75 | % | 74 | % | 71 | % | 74 | % | 71 | % | ||||||||||||||
Europe |
26 | 25 | 22 | 23 | 26 | 25 | 25 | |||||||||||||||||||||
Asia Pacific and other |
1 | 3 | 3 | 3 | 3 | 1 | 4 | |||||||||||||||||||||
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|
|
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|
|||||||||||||||
Total revenues |
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||
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40
Comparison of the nine months ended September 30, 2011 and 2012
Revenues
Nine Months Ended September 30, | % Change | |||||||||||
2011 | 2012 | |||||||||||
(dollars in thousands) | ||||||||||||
Revenues: |
||||||||||||
Subscription |
$ | 76,331 | $ | 141,640 | 86 | % | ||||||
Professional services and other |
12,563 | 26,910 | 114 | % | ||||||||
|
|
|
|
|||||||||
Total revenues |
$ | 88,894 | $ | 168,550 | 90 | % | ||||||
|
|
|
|
|||||||||
Percentage of revenues: |
||||||||||||
Subscription |
86 | % | 84 | % | ||||||||
Professional services and other |
14 | 16 | ||||||||||
|
|
|
|
|||||||||
Total |
100 | % | 100 | % | ||||||||
|
|
|
|
Revenues increased $79.7 million, primarily due to the increase in subscription revenues of $65.3 million. Of the total increase in subscription revenues, 45% represented revenues from new customers acquired after September 30, 2011, and 55% represented revenues from existing customers at or prior to September 30, 2011. Our total customers increased 58% from 852 at September 30, 2011 to 1,346 at September 30, 2012. The average total revenues per customer increased from approximately $152,000 to $181,000 over this period primarily due to an increase in the number of subscriptions sold to existing customers.
Of the $65.3 million total increase in subscription revenues for the nine months ended September 30, 2012, 87% represented sales to customers by our direct sales organization and 13% represented revenues from channel partners. Subscription revenues in North America represented 68% of the $65.3 million total increase in subscription revenues and 32% represented subscription revenues outside North America. During the nine months ended September 30, 2012, we continued to increase our focus on international markets through the addition of new channel partners, the expansion of our direct sales organization and the opening of additional sales and marketing offices in Sweden and Israel.
The increase in professional services and other revenues of $14.3 million was primarily due to the growth in our customer base. We had revenues of $3.3 million associated with acceptances received during the period and an increase of $0.9 million associated with our annual Knowledge conference held in May 2012. Revenues in North America represented 69% of the $14.3 million total increase in professional services and other revenues. Revenues outside North America represented the remaining 31%.
41
Cost of Revenues and Gross Profit Percentage
Nine Months Ended September 30, | % Change | |||||||||||
2011 | 2012 | |||||||||||
(dollars in thousands) | ||||||||||||
Cost of revenues: |
||||||||||||
Subscription |
$ | 15,538 | $ | 43,182 | 178 | % | ||||||
Professional services and other |
15,095 | 28,519 | 89 | % | ||||||||
|
|
|
|
|||||||||
Total cost of revenues |
$ | 30,633 | $ | 71,701 | 134 | % | ||||||
|
|
|
|
|||||||||
Gross profit percentage: |
||||||||||||
Subscription |
80 | % | 70 | % | ||||||||
Professional services and other |
(20 | ) | (6 | ) | ||||||||
Total gross profit percentage |
66 | % | 57 | % | ||||||||
Gross profit |
$ | 58,261 | $ | 96,849 | 66 | % | ||||||
Headcount (at period end) |
||||||||||||
Subscription |
101 | 202 | 100 | % | ||||||||
Professional services and other |
76 | 159 | 109 | % | ||||||||
|
|
|
|
|||||||||
Total headcount |
177 | 361 | 104 | % | ||||||||
|
|
|
|
Cost of subscription revenues increased $27.6 million during the nine months ended September 30, 2012 as compared to the same period in the prior year. The overall increase in cost of subscription revenues was primarily attributed to increased personnel-related costs of $13.2 million, consisting of increased employee compensation, benefits and travel costs of $10.9 million and additional stock-based compensation of $2.0 million. These personnel-related cost increases were driven by headcount growth. We expect personnel-related costs to continue to increase as we continue to hire employees in our cloud infrastructure and support organizations to meet our growing customer demands. In addition, hosting fees for our network infrastructure increased $4.8 million as we increased data center capacity to migrate customers from our managed service data centers to our co-location data centers and to support our customer growth. We also opened eight new data centers since September 30, 2011. At September 30, 2012, we delivered our service from nine data centers in North America and eleven data centers internationally compared to six data centers in North America and six data centers internationally as of September 30, 2011. Additionally, outside services increased $1.7 million mostly due to costs incurred to enhance our data center security as we continue to invest in our data center capabilities. We expect to exit three of our managed services data centers in North America and four of our managed services data centers internationally by December 31, 2012. Depreciation expense also increased $5.9 million due to purchases of network infrastructure to support our new data centers and growth within our existing data centers, and accelerated depreciation of the assets located in our managed services data centers, which we commenced in the three months ended December 31, 2011 when we made the decision to exit these data centers by December 31, 2012. Depreciation expense related to our managed services data centers for the nine months ended September 30, 2012 was $2.3 million. We expect depreciation expense to continue to increase as we purchase new equipment to support our new customers.
By December 31, 2012, we plan on operating six data centers in North America and seven data centers internationally. We believe these data centers will enable us to provide our subscription service to our existing customers and accommodate anticipated growth in our existing geographies. In 2013, we anticipate a substantial portion of our capital expenditures on data center capacity will be on new equipment within existing data centers to accommodate growth, which generally requires less capital expenditure than provisioning the equivalent capacity in a new data center. We are evaluating the addition of new data centers in 2013 to expand into new geographies. We may also add data centers to meet regulatory requirements or accommodate growth.
42
Our subscription gross profit percentage decreased from 80% to 70% during the nine months ended September 30, 2012 as compared to the same period in the prior year. Beginning in the first quarter of 2013, we expect to stop incurring costs related to the managed service data centers that we are exiting. We also anticipate cost of subscription revenues to increase as we increase capacity and invest in ongoing infrastructure improvements in our existing co-location data centers which will partially offset the savings related to the exit of our managed service data centers. Cost of subscription revenues will also increase if we add new data centers. However, we anticipate the rate at which the cost of subscription revenues grows will be slower than our anticipated subscription revenue growth such that our gross profit percentage should improve during 2013.
Cost of professional services and other revenues increased $13.4 million during the nine months ended September 30, 2012 as compared to the same period in the prior year. The overall increase was primarily attributed to increased personnel-related costs of $10.9 million, consisting of increased employee compensation, benefits and travel costs of $9.7 million and additional stock-based compensation of $0.8 million driven by headcount growth. In addition, outside services costs increased $1.8 million primarily due to additional fees paid to third parties to provide implementation services.
Our professional services and other gross profit percentage improved from (20)% to (6)% during the nine months ended September 30, 2012 as compared to the same period in the prior year. The improved gross profit percentage was due in part to shifting our pricing model to a time-and-materials basis and our increased focus on scoping projects and resource utilization. Additionally, during the nine months ended September 30, 2012, we reduced the amount of work we sub-contracted to our partners. Professional services and other revenues includes $1.1 million and $2.0 million for our annual Knowledge conference for the nine months ended September 30, 2011 and 2012, respectively. Revenues from the Knowledge conference contributed 11 percentage points and 9 percentage points to the professional services and other gross profit percentage for the nine months ended September 30, 2011 and 2012, respectively. Costs associated with the conference are included in sales and marketing expense. Excluding the effects of the Knowledge conference, we expect our gross profit percentage from professional services and other to improve as we continue to realize the benefits of the shift in our pricing model to primarily time and materials.
Sales and Marketing
Nine Months Ended September 30, | % Change | |||||||||||
2011 | 2012 | |||||||||||
(dollars in thousands) | ||||||||||||
Sales and marketing |
$ | 34,375 | $ | 74,356 | 116 | % | ||||||
Percentage of revenues |
39 | % | 44 | % | ||||||||
Headcount (at period end) |
206 | 330 | 60 | % |
Sales and marketing expenses increased $40 million due to the expansion of our sales force and increases in marketing programs to address additional opportunities in new and existing markets. Total headcount in sales and marketing increased 60% from September 30, 2011 to September 30, 2012, contributing to a $26.6 million increase in personnel-related costs, consisting primarily of increased employee compensation, benefits and travel costs associated with our marketing team and direct sales force of $20.2 million and additional stock-based compensation of $5.5 million. In addition, we incurred an increase of $4.8 million in marketing and event costs primarily attributable to our annual Knowledge conference, which experienced a 102% increase in attendance year-over-year. Commissions increased $6.3 million in the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011, which was directly attributable to increased revenues and changes made to our commission plans. We expect sales and marketing expenses to increase and continue to be our largest component of costs and expenses, as we continue to expand our direct sales teams, increase our marketing activities, grow our international operations, build brand awareness and sponsor additional marketing events. We expect, in the long term, our revenue growth will offset this increase in spending.
43
Research and Development
Nine Months Ended September 30, | % Change | |||||||||||
2011 | 2012 | |||||||||||
(dollars in thousands) | ||||||||||||
Research and development |
$ | 7,003 | $ | 26,098 | 273 | % | ||||||
Percentage of revenues |
8 | % | 15 | % | ||||||||
Headcount (at period end) |
57 | 164 | 188 | % |
Research and development expenses increased $19.1 million primarily due to increased personnel-related costs of $17.5 million, consisting of increased employee compensation, benefits and travel costs associated with our research and development team of $13.9 million and additional stock-based compensation of $3.6 million. Total headcount in research and development increased 188% from September 30, 2011 to September 30, 2012 as we upgraded and extended our service offerings and developed new technologies.
We expect research and development expenses to increase as we improve the existing functionality of our service, develop new applications to fill market needs and continue to enhance our core platform. We expect, in the long term, our revenue growth will offset this increase in spending.
General and Administrative
Nine Months Ended September 30, | % Change | |||||||||||
2011 | 2012 | |||||||||||
(dollars in thousands) | ||||||||||||
General and administrative |
$ | 10,471 | $ | 24,441 | 133 | % | ||||||
Percentage of revenues |
12 | % | 15 | % | ||||||||
Headcount (at period end) |
51 | 108 | 112 | % |
General and administrative expenses increased $14.0 million primarily due to increased headcount. Personnel-related expenses increased $8.3 million, consisting of increased employee compensation, benefits and travel costs of $5.8 million and additional stock-based compensation of $2.5 million, as we added employees to support the growth of our business. Professional and outside service costs increased $2.4 million, comprised primarily of accounting fees related to our external audit and tax consulting fees associated with our international expansion. Costs from third-party software and service license agreements increased $1.2 million due to the implementation of additional systems to support the growth of our business. In August 2012, we relocated our office to another facility in San Diego, California. As part of this move, we incurred $2.9 million in lease abandonment costs, which included a loss on disposal of our leasehold improvements and furniture and fixtures of $2.7 million and a cease-use loss of $0.2 million, upon vacating our prior San Diego office.
We expect to incur higher general and administrative expenses as a result of both our growth and transition to a public company, including higher legal, corporate insurance and accounting expenses, and the additional costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act and related regulations. We expect the continued expansion of our operations will also contribute to higher general and administrative expenses. We may also incur lease abandonment costs in the future if our existing leases cannot accommodate our future headcount growth.
Interest and Other Income, net
Nine Months Ended September 30, | % Change | |||||||||||
2011 | 2012 | |||||||||||
(dollars in thousands) | ||||||||||||
Interest and other income, net |
$ | (412 | ) | $ | 1,148 | NM | ||||||
Percentage of revenues |
| % | 1 | % |
44
Interest and other income, net, primarily consists of foreign currency transaction gains and losses.
While we have not engaged in the hedging of our foreign currency transactions to date, we are presently evaluating the costs and benefits of initiating such a program and may hedge selected significant transactions denominated in currencies other than the U.S. dollar in the future.
Provision for Income Taxes
Nine Months Ended September 30, | % Change | |||||||||||
2011 | 2012 | |||||||||||
(dollars in thousands) | ||||||||||||
Income before income taxes |
$ | 6,000 | $ | (26,898 | ) | NM | ||||||
Provision for income taxes |
852 | 519 | (39 | )% | ||||||||
Effective tax rate |
14 | % | (2 | )% |
The provision for income taxes decreased $0.3 million, primarily as a result of a loss in our operations and a lower proportion of earnings in taxable jurisdictions in the nine months ended September 30, 2012 compared to the same period in the prior year.
We continue to maintain a full valuation allowance on our federal and state deferred tax assets, and the significant components of the tax expense recorded are current cash taxes in various jurisdictions. The cash tax expenses are impacted by each jurisdictions individual tax rates, laws on timing of recognition of income and deductions and availability of net operating losses and tax credits. In December 2011, we reorganized our international operations and established our non-U.S. headquarters in the Netherlands, which has an effective tax rate that is lower than the U.S. federal statutory rate. Given the full valuation allowance, sensitivity of current cash taxes to local rules and our foreign restructuring, we expect our effective tax rate could fluctuate significantly on a quarterly basis and could be adversely affected to the extent earnings are lower than anticipated in countries that have lower statutory rates and higher than anticipated in countries that have higher statutory rates. The earnings of our foreign subsidiaries are considered to be permanently reinvested outside of the United States.
Comparison of the six months ended December 31, 2010 and 2011
Revenues
Six Months Ended December 31, | % Change | |||||||||||
2010 | 2011 | |||||||||||
(dollars in thousands) | ||||||||||||
Revenues: |
||||||||||||
Subscription |
$ | 33,191 | $ | 64,886 | 95 | % | ||||||
Professional services and other |
4,753 | 8,489 | 79 | % | ||||||||
|
|
|
|
|||||||||
Total revenues |
$ | 37,944 | $ | 73,375 | 93 | % | ||||||
|
|
|
|
|||||||||
Percentage of revenues: |
||||||||||||
Subscription |
87 | % | 88 | % | ||||||||
Professional services and other |
13 | 12 | ||||||||||
|
|
|
|
|||||||||
Total |
100 | % | 100 | % | ||||||||
|
|
|
|
Revenues increased $35.4 million, primarily due to the increase in subscription revenues of $31.7 million. Of the total increase in subscription revenues, 55% represented revenues from new customers acquired after December 31, 2010, and 45% represented revenues from existing customers at or prior to December 31, 2010.
45
Our total customers increased 62% from December 31, 2010 to December 31, 2011. The average subscription revenues per customer increased 19% over this period primarily due to an increase in the number of subscriptions sold to existing customers.
Of the $31.7 million total increase in subscription revenues for the six months ended December 31, 2011, 81% represented sales to customers by our direct sales organization and 19% represented revenues from channel partners. Subscription revenues in North America represented 67% of the $31.7 million total increase in subscription revenues and 33% represented subscription revenues outside North America. The increase in revenues from channel partners was due primarily to increased market adoption of our subscription service through sales by our existing channel partners and to a lesser extent the addition of new channel partners. The increase in subscription revenues outside North America was due primarily to increased adoption of our subscription service through sales by our existing channel partners and direct sales organization, and to a lesser extent the addition of new channel partners and the expansion of our direct sales organization. During the six months ended December 31, 2011, we opened additional sales and marketing offices in Denmark and France, which did not account for a significant portion of increased revenues during the period.
The increase in professional services and other revenues of $3.7 million was primarily due to the growth in our customer base. Revenues in North America represented 73% of the $3.7 million total increase in professional services and other revenues. Revenues outside North America represented the remaining 27%.
Cost of Revenues and Gross Profit Percentage
Six Months Ended December 31, | % Change | |||||||||||
2010 | 2011 | |||||||||||
(dollars in thousands) | ||||||||||||
Cost of revenues: |
||||||||||||
Subscription |
$ | 6,096 | $ | 15,073 | 147 | % | ||||||
Professional services and other |
6,778 | 12,850 | 90 | % | ||||||||
|
|
|
|
|||||||||
Total cost of revenues |
$ | 12,874 | $ | 27,923 | 117 | % | ||||||
|
|
|
|
|||||||||
Gross profit percentage: |
||||||||||||
Subscription |
82 | % | 77 | % | ||||||||
Professional services and other |
(43 | ) | (51 | ) | ||||||||
Total gross profit percentage |
66 | % | 62 | % | ||||||||
Gross profit |
$ | 25,070 | $ | 45,452 | 81 | % | ||||||
Headcount (at period end): |
||||||||||||
Subscription |
51 | 119 | 133 | % | ||||||||
Professional services and other |
50 | 98 | 96 | % | ||||||||
|
|
|
|
|||||||||
Total headcount |
101 | 217 | 115 | % | ||||||||
|
|
|
|
Cost of subscription revenues increased $9.0 million during the six months ended December 31, 2011 as compared to the same period in the prior year. The overall increase in cost of subscription revenues was primarily attributed to increased personnel-related costs of $4.9 million, consisting of increased employee compensation, benefits and travel costs of $4.5 million and additional stock-based compensation of $0.4 million. These personnel-related costs increases were driven by headcount growth. In addition, hosting fees for our network infrastructure increased $1.6 million as we increased data center capacity to support our growth. At December 31, 2011, we delivered our service from seven data centers in North America and seven data centers internationally compared to three data centers in North America and five data centers internationally at December 31, 2010. Depreciation expense also increased $1.1 million as we started the transition of our network infrastructure from a managed services hosting model to a co-location model.
46
Our subscription gross profit percentage decreased from 82% to 77% during the six months ended December 31, 2011 as compared to the same period in the prior year primarily due to these increased costs.
Cost of professional services and other revenues increased $6.1 million during the six months ended December 31, 2011 as compared to the same period in the prior year. The overall increase was primarily attributed to increased personnel-related costs of $3.7 million, consisting of increased employee compensation, benefits and travel costs of $3.5 million and additional stock-based compensation of $0.2 million driven by headcount growth. In addition, outside services costs increased $1.9 million primarily due to additional fees paid to third-parties to provide implementation services.
Our professional services and other gross profit percentage decreased from (43)% to (51)% during the six months ended December 31, 2011 as compared to the same period in the prior year primarily due to these increased costs.
Sales and Marketing
Six Months Ended December 31, | % Change | |||||||||||
2010 | 2011 | |||||||||||
(dollars in thousands) | ||||||||||||
Sales and marketing |
$ | 13,728 | $ | 32,501 | 137 | % | ||||||
Percentage of revenues |
36 | % | 44 | % | ||||||||
Headcount (at period end) |
90 | 242 | 169 | % |
Sales and marketing expenses increased $18.8 million due to the expansion of our sales force and increases in marketing programs to address additional opportunities in new and existing markets. Total headcount in sales and marketing increased, 169% from December 31, 2010 to December 31, 2011, contributing to a $13.3 million increase in personnel-related costs, consisting primarily of increased employee compensation, benefits and travel costs associated with our direct sales force of $11.8 million, and additional stock-based compensation of $1.6 million. In addition, we incurred an increase of $3.1 million in commissions, which was directly attributed to increased revenues and changes made to our commissions plans in the six months ended December 31, 2011. Marketing and event costs increased $1.3 million due to our continued efforts to generate sales leads and build brand awareness.
Research and Development
Six Months Ended December 31, | % Change | |||||||||||
2010 | 2011 | |||||||||||
(dollars in thousands) | ||||||||||||
Research and development |
$ | 2,758 | $ | 7,030 | 155 | % | ||||||
Percentage of revenues |
7 | % | 10 | % | ||||||||
Headcount (at period end) |
34 | 83 | 144 | % |
Research and development expenses increased $4.3 million primarily due to increased personnel-related costs of $4.0 million, consisting of increased employee compensation, benefits and travel costs associated with our research and development team of $3.5 million and additional stock-based compensation of $0.5 million. Total headcount in research and development increased as we upgraded and extended our service offerings and developed new technologies.
General and Administrative
Six Months Ended December 31, | % Change | |||||||||||
2010 | 2011 | |||||||||||
(dollars in thousands) | ||||||||||||
General and administrative |
$ | 3,417 | $ | 10,084 | 195 | % | ||||||
Percentage of revenues |
9 | % | 14 | % | ||||||||
Headcount (at period end) |
25 | 61 | 144 | % |
47
General and administrative expenses increased $6.7 million primarily due to increased headcount. Personnel-related expenses increased $4.1 million, consisting of increased employee compensation, benefits and travel costs of $2.3 million and additional stock-based compensation of $1.8 million, as we added employees to support the growth of our business. Professional and outside service costs increased $1.6 million, comprised primarily of legal and accounting fees associated with our international expansion.
Interest and Other Income (Expense), net
Six Months Ended December 31, | % Change | |||||||||||
2010 | 2011 | |||||||||||
(dollars in thousands) | ||||||||||||
Interest and other income (expense), net |
$ | 289 | $ | (1,446 | ) | NM | ||||||
Percentage of revenues |
1 | % | (2 | )% |
Interest and other income (expense), net primarily consists of foreign currency transaction gains and losses. The decrease of $1.7 million is primarily due to unrealized losses on amounts invoiced to customers that are denominated in British Pounds and Euros as the U.S. Dollar strengthened over the six months ended December 31, 2011 as compared to the six months ended December 31, 2010.
Provision for Income Taxes
Six Months Ended December 31, | % Change | |||||||||||
2010 | 2011 | |||||||||||
(dollars in thousands) | ||||||||||||
Income before income taxes |
$ | 5,456 | $ | (5,609 | ) | NM | ||||||
Provision for income taxes |
653 | 1,075 | 65 | % | ||||||||
Effective tax rate |
12 | % | (19 | )% |
The provision for income taxes increased $0.4 million, primarily as a result of the increase in pre-tax income related to international operations and California taxes for the six months ended December 31, 2011 compared to the same period in the prior year. During the six months ended December 31, 2011, we recorded a provision for income taxes principally attributable to foreign taxes, U.S. federal taxes and California taxes.
We maintain a full valuation allowance on our federal and state deferred tax assets, and the significant components of the tax expense recorded are current cash taxes in various jurisdictions. The cash tax expenses are impacted by each jurisdictions individual tax rates, laws on timing of recognition of income and deductions and availability of net operating losses and tax credits. In December 2011, we reorganized our international operations and established our non-U.S. headquarters in the Netherlands, which has an effective tax rate that is lower than the U.S. federal statutory rate. Given the full valuation allowance, sensitivity of current cash taxes to local rules and our foreign restructuring, our effective tax rate fluctuates significantly on a quarterly basis and could be adversely affected to the extent earnings are lower than anticipated in countries that have lower statutory rates and higher than anticipated in countries that have higher statutory rates.
Comparison of Fiscal 2009, 2010 and 2011
Revenues
Fiscal Year Ended June 30, |
2009 to 2010
% Change |
2010 to 2011
% Change |
||||||||||||||||||
2009 | 2010 | 2011 | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Revenues: |
||||||||||||||||||||
Subscription |
$ | 17,841 | $ | 40,078 | $ | 79,191 | 125 | % | 98 | % | ||||||||||
Professional services and other |
1,474 | 3,251 | 13,450 | 121 | % | 314 | % | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total revenues |
$ | 19,315 | $ | 43,329 | $ | 92,641 | 124 | % | 114 | % | ||||||||||
|
|
|
|
|
|
|||||||||||||||
Percentage of revenues: |
||||||||||||||||||||
Subscription |
92 | % | 92 | % | 85 | % | ||||||||||||||
Professional services and other |
8 | 8 | 15 | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total |
100 | % | 100 | % | 100 | % | ||||||||||||||
|
|
|
|
|
|
48
Fiscal 2010 compared to fiscal 2011 . Revenues increased $49.3 million, primarily due to the increase in subscription revenues of $39.1 million. Of the total increase in subscription revenues, 46% represented revenues from new customers acquired after June 30, 2010, and 54% represented revenues from existing customers at or prior to June 30, 2010. Our total customers increased 68% from June 30, 2010 to June 30, 2011. The average subscription revenues per customer increased 19% over this period primarily due to an increase in the number of subscriptions sold to existing customers.
Of the $39.1 million total increase in subscription revenues for fiscal 2011, 87% represented sales to customers by our direct sales organization and 13% represented revenues from channel partners. Subscription revenues in North America represented 75% of the $39.1 million total increase in subscription revenues and 25% represented subscription revenues outside North America.
The increase in professional services and other revenues of $10.2 million was primarily due to the prospective adoption of new revenue accounting guidance resulting in an increase to professional services and other revenues of $5.5 million in fiscal 2011. The remaining increase of $4.7 million was attributable to the growth in our customer base. Revenues in North America represented 83% of the $10.2 million total increase in professional services and other revenues. Revenues outside North America represented 17% of the $10.2 million total increase in professional services and other revenues. The increase in subscription revenues outside North America was due primarily to increased adoption of our subscription service through sales from new channel partners and to a lesser extent sales by our existing channel partners and the expansion of our direct sales organization. During fiscal 2011, we opened additional sales and marketing offices in Australia and the Netherlands.
Fiscal 2009 compared to fiscal 2010 . Revenues increased $24.0 million, primarily due to the increase in subscription revenues of $22.2 million. Of the total increase in subscription revenues 57% represented revenues from new customers acquired after June 30, 2009, and 43% represented revenues from existing customers at or prior to June 30, 2009. Our total customers increased by 64% from June 30, 2009 to June 30, 2010. The average subscription revenues per customer increased 41% over this period primarily due to an increase in the average number of subscriptions sold to new customers.
Of the $22.2 million total increase in subscription revenues for fiscal 2010, 92% represented sales to customers by our direct sales organization and 8% represented revenues from channel. Subscription revenues in North America represented 72% of the $22.2 million total increase in subscription revenues and 28% represented subscription revenues outside North America. The increase in subscription revenues outside North America was due primarily to increased adoption of our subscription service through sales by our existing channel partners and to a lesser extent the addition of new channel partners and the expansion of our direct sales organization. During fiscal 2010, we opened an additional sales and marketing office in Germany, which did not account for a significant portion of increased revenues during the period.
The increase in professional services and other revenues of $1.8 million was primarily attributable to the growth in our customer base. Revenues in North America represented 79% of the $1.8 million total increase in professional services and other revenues. Revenues outside North America represented the remaining 21%.
49
Cost of Revenues and Gross Profit Percentage
Fiscal Year Ended June 30, |
2009 to 2010
% Change |
2010 to 2011
% Change |
||||||||||||||||||
2009 | 2010 | 2011 | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Cost of revenues: |
||||||||||||||||||||
Subscription |
$ | 3,140 | $ | 6,378 | $ | 15,311 | 103 | % | 140 | % | ||||||||||
Professional services and other |
4,711 | 9,812 | 16,264 | 108 | % | 66 | % | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total cost of revenues |
$ | 7,851 | $ | 16,190 | $ | 31,575 | 106 | % | 95 | % | ||||||||||
|
|
|
|
|
|
|||||||||||||||
Gross profit percentage: |
||||||||||||||||||||
Subscription |
82 | % | 84 | % | 81 | % | ||||||||||||||
Professional services and other |
(220 | ) | (202 | ) | (21 | ) | ||||||||||||||
Total gross profit percentage |
59 | % | 63 | % | 66 | % | ||||||||||||||
Gross profit |
$ | 11,464 | $ | 27,139 | $ | 61,066 | 137 | % | 125 | % | ||||||||||
Headcount (at period end): |
||||||||||||||||||||
Subscription |
18 | 30 | 83 | 67 | % | 177 | % | |||||||||||||
Professional services and other |
20 | 36 | 67 | 80 | % | 86 | % | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total headcount |
38 | 66 | 150 | 74 | % | 127 | % | |||||||||||||
|
|
|
|
|
|
Fiscal 2010 compared to fiscal 2011 . Cost of subscription revenues increased $8.9 million during fiscal 2011 as compared to the same period in the prior year. The overall increase in cost of subscription revenues was primarily attributed to increased personnel-related costs of $5.0 million, consisting of increased employee compensation, benefits and travel costs of $4.5 million and additional stock-based compensation of $0.5 million. These personnel-related cost increases were driven by headcount. In addition, hosting fees for our network infrastructure increased $2.1 million as we increased data center capacity to support our growth. At June 30, 2011, we delivered our service from six data centers in North America and five data centers internationally compared to three data centers in the United States and five data centers internationally at June 30, 2010. Depreciation expense also increased $0.8 million as we started the transition of our network infrastructure from a managed service hosting model to a co-location model.
Our subscription gross profit percentage decreased from 84% to 81% from June 30, 2010 to June 30, 2011 primarily due to these increased costs.
Cost of professional services and other revenues increased $6.5 million during fiscal 2011 as compared to the same period in the prior year. The overall increase in cost of professional services and other revenues was primarily attributed to increased employee compensation, benefits and travel costs of $3.1 million driven by headcount growth. In addition, outside services costs increased $3.1 million primarily due to additional fees paid to third parties to provide implementation services.
Our professional services and other gross profit percentage improved from (202)% to (21)% from June 30, 2010 to June 30, 2011, primarily due to increased revenues as a result of the prospective adoption of new revenue recognition accounting guidance. This guidance enabled us to recognize professional services revenues as the services are delivered.
Fiscal 2009 compared to fiscal 2010 . Cost of subscription revenues increased $3.2 million during fiscal 2010 as compared to the same period in the prior year. The overall increase in cost of subscription revenues was primarily attributed to an increase in our hosting fees for our network infrastructure of $1.5 million as we increased data center capacity to support our growth. At June 30, 2010, we delivered our service from three data centers in North America and five data centers internationally, compared to three data centers in North America and two data centers internationally at June 30, 2009. Personnel-related costs increased $1.1 million, consisting of increased employee compensation, benefits and travel costs. These personnel-related cost increases were driven by headcount.
50
Our subscription gross profit percentage increased from 82% to 84% from June 30, 2009 to June 30, 2010.
Cost of professional services and other revenues increased $5.1 million during fiscal 2010 as compared to the same period in the prior year. The overall increase in cost of professional services and other revenues was primarily attributable to increased outside services costs of $3.2 million primarily related to additional fees paid to third parties to provide implementation services. In addition, personnel-related costs increased $1.5 million, consisting primarily of increased employee compensation, benefits and travel costs of $1.4 million.
Our professional services and other gross profit percentage improved from (220)% to (202)% from June 30, 2009 to June 30, 2010.
Sales and Marketing
Fiscal Year Ended June 30, |
2009 to 2010
% Change |
2010 to 2011
% Change |
||||||||||||||||||
2009 | 2010 | 2011 | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Sales and marketing |
$ | 8,499 | $ | 19,334 | $ | 34,123 | 127 | % | 76 | % | ||||||||||
Percentage of revenues |
44 | % | 45 | % | 37 | % | ||||||||||||||
Headcount (at period end) |
40 | 72 | 140 | 80 | % | 94 | % |
Fiscal 2010 compared to fiscal 2011 . Sales and marketing expenses increased $14.8 million. Employee-related costs increased $13.3 million, consisting of increased employee compensation, benefits and travel costs in connection with our direct sales force of $11.5 million, increased commissions of $1.1 million, and an increase in stock-based compensation of $0.7 million, which was primarily driven by an increase in sales and marketing headcount. In addition, we incurred an increase of $2.7 million in marketing and event costs primarily attributable to our annual Knowledge conference, which experienced a 107% increase in attendance year-over-year. Offsetting these increases was a decrease of $2.0 million in compensation expense related to the fiscal 2010 repurchase of shares from eligible stockholders in connection with our sale and issuance of Series D preferred stock. Please see Note 9 to our consolidated financial statements for further explanation of this transaction.
Fiscal 2009 compared to fiscal 2010 . Sales and marketing expenses increased $10.8 million. Employee-related costs increased $7.6 million, consisting of increased employee compensation, benefits and travel costs in connection with our direct sales force of $4.7 million, increased commissions of $2.7 million, and an increase in stock-based compensation of $0.2 million, which was primarily driven by an increase in sales and marketing headcount. In addition, fiscal 2010 included $2.0 million in compensation expense related to the repurchase of shares from eligible stockholders in connection with our sale and issuance of Series D preferred stock. Marketing and event costs, primarily related to our Knowledge conference, increased $0.8 million.
Research and Development
Fiscal Year Ended June 30, |
2009 to 2010
% Change |
2010 to 2011
% Change |
||||||||||||||||||
2009 | 2010 | 2011 | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Research and development |
$ | 2,433 | $ | 7,194 | $ | 7,004 | 196 | % | (3 | )% | ||||||||||
Percentage of revenues |
13 | % | 17 | % | 8 | % | ||||||||||||||
Headcount (at period end) |
15 | 28 | 44 | 87 | % | 57 | % |
Fiscal 2010 compared to fiscal 2011 . Research and development expenses decreased $0.2 million. Personnel-related costs increased $2.8 million, consisting of increased employee compensation, benefits and travel costs of $2.4 million and increased stock-based compensation of $0.4 million, which was primarily driven by an increase in research and development headcount. In addition, outside services costs increased $0.4 million. Offsetting these increases was a decrease of $3.6 million in compensation expense related to the fiscal 2010 repurchase of shares from eligible stockholders in connection with our sale and issuance of Series D preferred stock.
51
Fiscal 2009 compared to fiscal 2010 . Research and development expenses increased $4.8 million primarily due to $3.6 million in compensation expense related to the repurchase of shares from eligible stockholders in connection with our sale and issuance of Series D preferred stock in fiscal 2010. In addition, personnel-related costs increased $1.1 million, primarily consisting of increased employee compensation, benefits and travel costs of $1.0 million, which was driven by an increase in research and development headcount.
General and Administrative
Fiscal Year Ended June 30, |
2009 to 2010
% Change |
2010 to 2011
% Change |
||||||||||||||||||
2009 | 2010 | 2011 | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
General and administrative |
$ | 6,363 | $ | 28,810 | $ | 9,379 | 353 | % | (67 | )% | ||||||||||
Percentage of revenues |
33 | % | 66 | % | 10 | % | ||||||||||||||
Headcount (at period end) |
8 | 12 | 41 | 50 | % | 242 | % |
Fiscal 2010 compared to fiscal 2011 . General and administrative expenses decreased $19.4 million. Personnel-related expenses increased $3.3 million, consisting of increased employee compensation, benefits and travel costs of $2.6 million and increased stock-based compensation of $0.7 million primarily driven by an increase in general and administrative headcount. Professional and outside service costs, comprised primarily of legal and accounting and auditing fees, increased $1.1 million. Offsetting these increases was a decrease of $24.5 million in compensation expense related to the fiscal 2010 repurchase of shares from eligible stockholders in connection with our sale and issuance of Series D preferred stock.
Fiscal 2009 compared to fiscal 2010 . General and administrative expenses increased $22.4 million primarily due to $24.5 million in compensation expense related to the repurchase of shares from eligible stockholders in connection with our sale and issuance of Series D preferred stock in fiscal 2010. The effects of the sale and issuance of Series D preferred stock were partially offset by a decrease of $3.8 million in compensation expense related to the fiscal 2009 stock settlement of an outstanding promissory note in connection with the sale and issuance of Series C preferred stock. Please see Note 9 to our consolidated financial statements for further discussion of these transactions. In addition, general and administrative expenses increased $1.7 million primarily due to an increase in general and administrative headcount. Personnel-related expenses increased by $0.8 million, consisting of increased employee compensation, benefits and travel costs of $0.7 million and increased stock-based compensation of $0.1 million. Professional and outside service costs, comprised mostly of legal and accounting and auditing fees, accounted for $0.6 million of the increase.
Interest and Other Income (Expense), net
Fiscal Year Ended June 30, |
2009 to 2010
% Change |
2010 to 2011
% Change |
||||||||||||||||||
2009 | 2010 | 2011 | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Interest and other income (expense), net |
$ | (27 | ) | $ | (1,226 | ) | $ | 606 | NM | NM | ||||||||||
Percentage of revenues |
| % | (3 | )% | 1 | % |
Fiscal 2010 compared to fiscal 2011 . The increase in interest and other income (expense), net of $1.8 million is due to losses on foreign currency transactions of $0.6 million during fiscal 2011 as compared to realized and unrealized gains of $0.5 million during fiscal 2010. Additionally, during fiscal 2010, we marked to market our preferred stock warrants and revalued them upon settlement as part of the sale and issuance of Series D preferred stock, resulting in additional expense of $0.7 million.
Fiscal 2009 compared to fiscal 2010 . The decrease in interest and other income (expense), net of $1.2 million is due to additional realized and unrealized losses on foreign currency transactions of $0.5 million coupled with the revaluation of our preferred stock warrants upon settlement resulting in a decrease of $0.7 million.
52
Provision for Income Taxes
Fiscal Year Ended June 30, |
2009 to 2010
% Change |
2010 to 2011
% Change |
||||||||||||||||||
2009 | 2010 | 2011 | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Income before income taxes |
$ | (5,858 | ) | $ | (29,425 | ) | $ | 11,166 | NM | NM | ||||||||||
Provision for income taxes |
48 | 280 | 1,336 | 483 | % | 377 | % | |||||||||||||
Effective tax rate |
(1 | )% | (1 | )% | 12 | % |
Fiscal 2010 compared to fiscal 2011 . The provision for income taxes increased $1.1 million primarily as a result of the increase in pre-tax income related to international operations and California taxes.
Fiscal 2009 compared to fiscal 2010 . The provision for income taxes increased $0.2 million primarily as a result of international operations.
We maintain a full valuation allowance on our U.S. federal and state deferred tax assets, and the significant components of the tax expense recorded are current cash taxes in various jurisdictions. The cash tax expenses are impacted by each jurisdictions individual tax rates, laws on timing of recognition of income and deductions and availability of net operating losses and tax credits. Given the full valuation allowance and sensitivity of current cash taxes to local rules, our effective tax rate fluctuates significantly on an annual basis and could be adversely affected to the extent earnings are lower than anticipated in countries that have lower statutory rates and higher than anticipated in countries that have higher statutory rates.
53
Quarterly Results of Operations
The following tables set forth our unaudited quarterly consolidated statements of operations data and our unaudited consolidated statements of operations data as a percentage of total revenues for each of the nine quarters in the period ended September 30, 2012. We have prepared the quarterly data on a consistent basis with the audited consolidated financial statements included in this prospectus. In the opinion of management, the financial information reflects all necessary adjustments, consisting of normal recurring adjustments, necessary for a fair statement of this data. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future periods.
For the Three Months Ended | ||||||||||||||||||||||||||||||||||||
Sep 30,
2010 |
Dec 31,
2010 |
March 31,
2011 |
June 30,
2011 |
Sep 30,
2011 |
Dec 31,
2011 |
March 31,
2012 |
June 30,
2012 |
Sep 30,
2012 |
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(in thousands) | ||||||||||||||||||||||||||||||||||||
Revenues: |
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Subscription |
$ | 14,816 | $ | 18,375 | $ | 21,224 | $ | 24,776 | $ | 30,331 | $ | 34,555 | $ | 39,541 | $ | 46,820 | $ | 55,279 | ||||||||||||||||||
Professional services and other |
1,773 | 2,980 | 3,988 | 4,709 | 3,866 | 4,623 | 7,890 | 9,954 | 9,066 | |||||||||||||||||||||||||||
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Total revenues |
16,589 | 21,355 | 25,212 | 29,485 | 34,197 | 39,178 | 47,431 | 56,774 | 64,345 | |||||||||||||||||||||||||||
Cost of revenues ( 1 ) : |
||||||||||||||||||||||||||||||||||||
Subscription |
2,711 | 3,385 | 4,451 | 4,764 | 6,323 | 8,750 | 11,012 | 14,239 | 17,931 | |||||||||||||||||||||||||||
Professional services and other |
2,653 | 4,125 | 4,763 | 4,723 | 5,609 | 7,241 | 10,224 | 8,652 | 9,643 | |||||||||||||||||||||||||||
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Total cost of revenues |
5,364 | 7,510 | 9,214 | 9,487 | 11,932 | 15,991 | 21,236 | 22,891 | 27,574 | |||||||||||||||||||||||||||
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Gross profit |
11,225 | 13,845 | 15,998 | 19,998 | 22,265 | 23,187 | 26,195 | 33,883 | 36,771 | |||||||||||||||||||||||||||
Operating expenses ( 1 ) : |
||||||||||||||||||||||||||||||||||||
Sales and marketing |
6,433 | 7,295 | 8,309 | 12,086 | 13,980 | 18,521 | 19,307 | 26,909 | 28,140 | |||||||||||||||||||||||||||
Research and development |
1,237 | 1,521 | 1,885 | 2,361 | 2,757 | 4,273 | 6,043 | 9,272 | 10,783 | |||||||||||||||||||||||||||
General and administrative |
1,453 | 1,964 | 2,680 | 3,282 | 4,509 | 5,575 | 6,427 | 6,819 | 11,195 | |||||||||||||||||||||||||||
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Total operating expenses |
9,123 | 10,780 | 12,874 | 17,729 | 21,246 | 28,369 | 31,777 | 43,000 | 50,118 | |||||||||||||||||||||||||||
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Income (loss) from operations |
2,102 | 3,065 | 3,124 | 2,269 | 1,019 | (5,182 | ) | (5,582 | ) | (9,117 | ) | (13,347 | ) | |||||||||||||||||||||||
Interest and other income (expense), net |
320 | (31 | ) | 252 | 65 | (729 | ) | (717 | ) | 492 | 41 | 615 | ||||||||||||||||||||||||
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Income (loss) before provision for income taxes |
2,422 | 3,034 | 3,376 | 2,334 | 290 | (5,899 | ) | (5,090 | ) | (9,076 | ) | (12,732 | ) | |||||||||||||||||||||||
Provision for income taxes |
290 | 363 | 385 | 298 | 169 | 906 | 550 | (352 | ) | 321 | ||||||||||||||||||||||||||
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Net income (loss) |
$ | 2,132 | $ | 2,671 | $ | 2,991 | $ | 2,036 | $ | 121 | $ | (6,805 | ) | $ | (5,640 | ) | $ | (8,724 | ) | $ | (13,053 | ) | ||||||||||||||
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(footnotes on next page)
(1) |
Stock-based compensation included in the statements of operations data above was as follows: |
For the Three Months Ended | ||||||||||||||||||||||||||||||||||||
Sep 30,
2010 |
Dec 31,
2010 |
March 31,
2011 |
June 30,
2011 |
Sep 30,
2011 |
Dec 31,
2011 |
March 31,
2012 |
June 30,
2012 |
Sep 30,
2012 |
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(in thousands) | ||||||||||||||||||||||||||||||||||||
Cost of revenues: |
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Subscription |
$ | 97 | $ | 128 | $ | 156 | $ | 167 | $ | 201 | $ | 473 | $ | 532 | $ | 706 | $ | 1,276 | ||||||||||||||||||
Professional services and other |
15 | 22 | 38 | 42 | 71 | 122 | 192 | 277 | 495 | |||||||||||||||||||||||||||
Sales and marketing |
192 | 239 | 288 | 285 | 800 | 1,210 | 1,471 | 2,482 | 2,899 | |||||||||||||||||||||||||||
Research and development |
95 | 112 | 143 | 118 | 263 | 441 | 661 | 1,541 | 1,919 | |||||||||||||||||||||||||||
General and administrative |
134 | 87 | 130 | 466 | 1,056 | 1,000 | 1,062 | 1,451 | 1,624 |
For the Three Months Ended | ||||||||||||||||||||||||||||||||||||
Sep 30,
2010 |
Dec 31,
2010 |
March 31,
2011 |
June 30,
2011 |
Sep 30,
2011 |
Dec 31,
2011 |
March 31,
2012 |
June 30,
2012 |
Sep 30,
2012 |
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(as a percentage of revenues) | ||||||||||||||||||||||||||||||||||||
Revenues: |
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Subscription |
89 | % | 86 | % | 84 | % | 84 | % | 89 | % | 88 | % | 83 | % | 82 | % | 86 | % | ||||||||||||||||||
Professional services and other |
11 | 14 | 16 | 16 | 11 | 12 | 17 | 18 | 14 | |||||||||||||||||||||||||||
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Total revenues |
100 | 100 | 100 | 100 | 100 | 100 | 100 | 100 | 100 | |||||||||||||||||||||||||||
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Cost of revenues: |
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Subscription |
16 | 16 | 18 | 16 | 18 | 22 | 23 | 25 | 28 | |||||||||||||||||||||||||||
Professional services and other |
16 | 19 | 19 | 16 | 17 | 19 | 22 | 15 | 15 | |||||||||||||||||||||||||||
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Total cost of revenues |
32 | 35 | 37 | 32 | 35 | 41 | 45 | 40 | 43 | |||||||||||||||||||||||||||
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Gross profit |
68 | 65 | 63 | 68 | 65 | 59 | 55 | 60 | 57 | |||||||||||||||||||||||||||
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Operating expenses: |
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Sales and marketing |
39 | 34 | 33 | 41 | 41 | 47 | 41 | 47 | 44 | |||||||||||||||||||||||||||
Research and development |
7 | 7 | 7 | 8 | 8 | 11 | 13 | 16 | 17 | |||||||||||||||||||||||||||
General and administrative |
9 | 9 | 11 | 11 | 13 | 14 | 13 | 12 | 17 | |||||||||||||||||||||||||||
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Total operating expenses |
55 | 50 | 51 | 60 | 62 | 72 | 67 | 75 | 78 | |||||||||||||||||||||||||||
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Income (loss) from operations |
13 | 15 | 12 | 8 | 3 | (13 | ) | (12 | ) | (15 | ) | (21 | ) | |||||||||||||||||||||||
Interest and other income (expense), net |
2 | | 1 | | (2 | ) | (2 | ) | 1 | | 1 | |||||||||||||||||||||||||
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Income (loss) before provision for income taxes |
15 | 15 | 13 | 8 | 1 | (15 | ) | (11 | ) | (15 | ) | (20 | ) | |||||||||||||||||||||||
Provision for income taxes |
2 | 2 | 1 | 1 | | (2 | ) | 1 | (1 | ) | | |||||||||||||||||||||||||
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Net income (loss) |
13 | % | 13 | % | 12 | % | 7 | % | 1 | % | (17 | )% | (12 | )% | (14 | )% | (20 | )% | ||||||||||||||||||
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Seasonality, Cyclicality and Quarterly Trends
We have historically experienced seasonality in terms of when we enter into customer agreements for our service. We sign a significantly higher percentage of agreements with new customers, as well as renewal agreements with existing customers, in the quarters ended June 30 and December 31. The increase in customer agreements for the quarters ended June 30 is primarily as a result of the historical terms of our commission plans to incentivize our direct sales force to meet their quotas by the end of the fiscal year. The increase in customer
55
agreements for the quarter ended December 31 can be attributed to large enterprise account buying patterns typical in the software industry. Furthermore, we usually sign a significant portion of these agreements during the last month, and often the last two weeks, of each quarter. This seasonality is reflected to a much lesser extent, and sometimes is not immediately apparent, in our revenues, due to the fact that we recognize subscription revenues over the term of the license agreement, which is generally 12 to 36 months. As a result of the change in our fiscal year end from June 30 to December 31 and changes to our commission plans to provide for earlier incentives, we may not see the same increase in new customer agreements for future quarters ended June 30. Although these seasonal factors are common in the technology industry, historical patterns should not be considered a reliable indicator of our future sales activity or performance.
Our revenues have increased over the periods presented due to increased sales to new customers, as well as upsells to existing customers. Our operating expenses have increased sequentially in every quarter primarily due to increases in headcount and other related expenses to support our growth. We anticipate these expenses will continue to increase in future periods as we continue to focus on investing in the long-term growth of our business.
Beginning in the quarter ended September 30, 2011, we accelerated investments in our headcount and infrastructure to drive our future growth. As a result, we generated net losses for each of the quarters in the period from the three months ended December 31, 2011 through the three months ended September 30, 2012 despite significant revenue growth in the period.
Liquidity and Capital Resources
Fiscal Year Ended June 30, |
Six Months Ended
December 31, |
Nine Months Ended
September 30, |
||||||||||||||||||||||||||
2009 | 2010 | 2011 | 2010 | 2011 | 2011 | 2012 | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Net cash provided by (used in) operating activities |
$ | 160 | $ | (7,532 | ) | $ | 37,468 | $ | 10,711 | $ | 13,220 | $ | 36,441 | $ | 32,095 | |||||||||||||
Net cash used in investing activities |
(851 | ) | (1,455 | ) | (8,383 | ) | (1,857 | ) | (7,959 | ) | (9,043 | ) | (172,245 | ) | ||||||||||||||
Net cash provided by financing activities |
3,701 | 30,672 | 1,227 | 222 | 2,154 | 2,787 | 189,593 | |||||||||||||||||||||
Net increase in cash and cash equivalents, net of impact of exchange rates on cash |
3,016 | 21,614 | 30,451 | 9,055 | 8,235 | 30,579 | 48,888 |
To date, we have funded our business primarily with cash flows from operating activities and the net proceeds from our initial public offering. At September 30, 2012, we had $117.0 million in cash and cash equivalents, of which $6.7 million represented cash located overseas. We also had $139.5 million in short-term investments consisting of commercial paper, corporate debt securities and U.S. government agency securities.
Our historical cash flows from operating activities have been significantly impacted by customer billings and payment terms, as well as operating expenses related to sales and marketing, research and development, and costs related to our cloud infrastructure and professional services.
Based on our current level of operations and anticipated growth, we believe our current cash, cash equivalents and short term investments, and cash flows from operating activities will be sufficient to fund our operating needs for at least the next 12 months, barring unforeseen circumstances.
Our primary short-term needs for cash, which are subject to change, include expenditures related to the growth of our cloud infrastructure, including the addition and expansion of data centers, and the acquisition of
56
fixed assets and investments in office facilities to accommodate our growth. We made capital expenditures of $29.8 million in the nine months ended September 30, 2012 and anticipate making capital expenditures of approximately $10.2 million during the remainder of fiscal 2012, primarily related to investments in leasehold improvements and furniture related to the expansion of our office facilities, the expansion of our IT infrastructure and equipment for use in our data centers.
Our short-term needs for cash also include expenditures related to:
|
the growth of our sales and marketing and professional services efforts; |
|
support of our sales and marketing efforts related to our current and future services and applications, including expansion of our direct sales force and support resources both in the United States and abroad; |
|
the continued advancement of research and development; and |
|
the expansion needs of our facilities, including costs of leasing additional facilities. |
To the extent existing cash and cash equivalents and cash from operations are not sufficient to fund our future activities, we may need to raise additional funds. Although we are not currently a party to any agreement or letter of intent with respect to potential investments in, or acquisitions of, complementary businesses, services or technologies, we may enter into these types of arrangements in the future, which could also require us to seek additional equity financing or use our cash resources. We have no present understandings, commitments or agreements to enter into any such acquisitions.
Depending on certain growth opportunities, we may choose to accelerate investments in sales and marketing, cloud infrastructure, professional services, and research and development, which may require the use of proceeds from our initial public offering.
Operating Activities
Net cash provided by operating activities in the nine months ended September 30, 2012 was $32.1 million, reflecting our net loss of $27.4 million, adjusted by non-cash charges including $18.6 million for stock-based compensation, $9.3 million for the amortization of deferred commissions, $8.8 million for depreciation and amortization and $2.9 million for lease abandonment costs, and changes in our working capital. The fluctuations in our working capital were primarily attributed to an increase of $43.1 million in deferred revenue, $4.6 million increase in accrued liabilities, $2.4 million in other long-term liabilities and a decrease of $4.2 million in prepaid expenses and other current assets, partially offset by an $11.1 million increase in accounts receivable, $20.5 million increase in deferred commissions and $3.0 million decrease in deferred rent. The increases in deferred revenue, deferred commissions and accounts receivable were primarily due to increased sales in the nine months ended September 30, 2012. The increase in accrued liabilities is due to the growth of our business and increased headcount of 60% during the nine months ended September 30, 2012. The decrease in prepaid expenses and other current assets was primarily due to the settlement of the founders outstanding receivable for withholding taxes associated with the sale of Series C and Series D preferred stock. The decrease in deferred rent is offset by the increase in other long-term liabilities related to the relocation of our San Diego office to another facility in San Diego in August 2012.
Net cash provided by operating activities in the nine months ended September 30, 2011 was $36.4 million, reflecting our net income of $5.1 million, adjusted by non-cash charges including $4.2 million for stock-based compensation, $3.9 million for the amortization of deferred commissions, and $1.8 million for depreciation, and changes in our working capital. The fluctuations in our working capital were primarily attributed to an increase of $28.6 million in deferred revenue, $4.2 million increase in accrued liabilities, $3.2 million increase in deferred rent and $1.9 million increase in accounts payable partially offset by an increase of $7.8 million in accounts receivable, $6.4 million increase in deferred commissions and $2.1 million increase in prepaid expenses and other current assets. The increase in deferred revenue, accounts receivable and deferred commissions was
57
primarily due to increased sales. The increase in deferred rent, accrued liabilities, accounts payable and prepaid expenses was primarily due to the growth of our business, increased headcount and the resulting move of our San Diego office to a new building during the period. Our total headcount increased 96% during the nine months ended September 30, 2011.
Net cash provided by operating activities in the six months ended December 31, 2011 reflected our net loss of $6.7 million, adjusted by non-cash charges including $5.6 million for stock-based compensation, $3.5 million for amortization of deferred commissions and $2.0 million for depreciation, and changes in our working capital. The fluctuations in our working capital were primarily attributed to a $30.0 million increase in deferred revenue and a $6.9 million increase in accrued liabilities, partially offset by a $20.4 million increase in accounts receivable and an $8.3 million increase in deferred commissions. The increase in deferred revenue, accounts receivable and deferred commissions was primarily due to increased sales. Our sales and marketing headcount increased 73% during the six months ended December 31, 2011. The increase in accrued liabilities was due to the growth in our business and increased headcount.
Net cash provided by operating activities in the six months ended December 31, 2010 reflected our net income of $4.8 million and changes in our working capital. The fluctuations in our working capital were primarily attributed to a $12.6 million increase in deferred revenue, partially offset by a $7.6 million increase in accounts receivable. The increase in deferred revenue and accounts receivable was primarily due to increased sales.
Net cash provided by operating activities in fiscal 2011 reflected our net income of $9.8 million, adjusted by non-cash charges including $4.0 million for the amortization of deferred commissions and $3.0 million for stock-based compensation, and changes in our working capital. The fluctuations in our working capital were primarily attributed to a $33.9 million increase in deferred revenue, a $5.4 million increase in accrued liabilities and a $3.2 million increase in deferred rent, partially offset by a $14.8 million increase in accounts receivable and a $5.6 million increase in deferred commissions. The increase in deferred revenue, accounts receivable and deferred commissions was primarily due to increased sales in fiscal 2011. The increase in accrued liabilities and deferred rent was primarily due to the growth of our business and the resulting move of our San Diego office to a new building during the period.
Net cash used in operating activities in fiscal 2010 reflected our net loss of $29.7 million, which included non-cash compensation expense of $30.8 million related to the premium paid to eligible stockholders for the repurchase of common stock in connection with the sale of Series D preferred stock, and the changes in our working capital. The fluctuations in our working capital were primarily attributed to a $24.0 million increase in deferred revenue and an $8.9 million increase in accrued liabilities, partially offset by a $5.3 million increase in deferred commissions, a $5.2 million increase in accounts receivable and a $4.9 million increase in prepaid expenses and other current assets. The increase in accrued liabilities included $4.5 million in withholding taxes associated with the repurchase of our founders shares as part of the sale and issuance Series D preferred stock, with a corresponding offset of $4.5 million for a receivable in prepaid expenses and other current assets owed to us by our founder. The remaining increase to accrued liabilities was due to the increase in headcount.
Net cash provided by operating activities in fiscal 2009 reflected our net loss of $5.9 million, which included non-cash compensation expense of $3.8 million related to the premium paid to our founder for the repurchase of common stock in connection with the sale of Series C preferred stock, and the changes in our working capital. The fluctuations in our working capital were primarily attributed to a $7.0 million increase in deferred revenue and a $2.4 million increase in accrued liabilities, partially offset by a $2.0 million increase in accounts receivable and a $1.7 million increase in deferred commissions. The increase in accrued liabilities included $0.7 million in withholding taxes associated with the repurchase of our founders shares as part of the sale and issuance Series C preferred stock, with a corresponding offset of $0.7 million for a receivable in prepaid expenses and other current assets owed to us by our founder.
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Investing Activities
In the nine months ended September 30, 2012, cash used in investing activities was primarily attributed to the purchase of $146.9 million in short-term investments. In addition, we paid cash for capital expenditures of $32.2 million primarily related to the purchase of servers, networking equipment and storage infrastructure to support the expansion of our data centers as well as investments in leasehold improvements and furniture and equipment to support our headcount growth. We expect these investments to continue to increase in 2013.
In the nine months ended September 30, 2011, the six months ended December 31, 2011 and 2010, and fiscal 2011, 2010 and 2009, our investing activities primarily consisted of capital expenditures related to the purchase of servers, networking equipment and storage infrastructure to support the expansion of our data centers and tenant improvements associated with the growth of our office facilities.
Financing Activities
Our financing activities have primarily consisted of equity issuances, including excess tax benefits from stock award activities.
In the nine months ended September 30, 2012, cash provided by financing activities primarily consisted of initial public offering proceeds of $169.8 million, net of paid underwriter discounts and commissions and issuance costs, $17.9 million in gross proceeds from the issuance of 1,750,980 shares of common stock at a price of $10.20 per share through a private placement with a new stockholder and $3.4 million in proceeds from the issuance of common stock through the exercise of employee stock options. These increases in cash were slightly offset by purchases of common stock and restricted stock from stockholders of $2.0 million.
In the nine months ended September 30, 2011, cash provided by financing activities primarily consisted of $2.8 million in proceeds from the issuance of common stock through the exercise of employee stock options.
In the six months ended December 31, 2011, cash provided by financing activities primarily consisted of $2.1 million in proceeds from the issuance of common stock through the exercise of employee stock options.
In the six months ended December 31, 2010, we had no significant financing activities.
In fiscal 2011, cash provided by financing activities primarily consisted of $1.1 million in proceeds from the issuance of common stock through the exercise of employee stock options.
In fiscal 2010, we received net proceeds of $51.2 million from the sale and issuance of Series D preferred stock, which was used to repurchase and subsequently cancel shares of common stock from eligible stockholders and warrants to purchase Series B preferred stock from a warrant holder.
In fiscal 2009, we received net proceeds of $5.9 million from the issuance of Series C preferred stock, which was used to repurchase and subsequently cancel shares of common stock from our founder.
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Contractual Obligations and Commitments
Contractual obligations represent future cash commitments and liabilities under agreements with third parties, and exclude orders for goods and services entered into in the normal course of business that are not enforceable or legally binding. The following table represents our contractual obligations as of December 31, 2011, aggregated by type:
Payments Due by Period | ||||||||||||||||||||
Contractual Obligations |
Total |
Less
Than 1 Year |
1 3
Years |
3 5
Years |
More
Than 5 Years |
|||||||||||||||
(in thousands) | ||||||||||||||||||||
Operating leases: |
||||||||||||||||||||
Data centers (1) |
$ | 20,338 | $ | 8,284 | $ | 11,857 | $ | 197 | $ | | ||||||||||
Facilities space (2) |
14,439 | 2,795 | 4,656 | 3,385 | 3,603 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total operating leases |
$ | 34,777 | $ | 11,079 | $ | 16,513 | $ | 3,582 | $ | 3,603 | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) |
Operating leases for data centers represent our principal commitment for co-location facilities for data center capacity. |
(2) |
Operating leases for facilities space represents our principal commitments, which consists of obligations under leases for office space. |
The following table represents our known contractual obligations as of September 30, 2012, aggregated by type:
Payments Due by Period | ||||||||||||||||||||
Contractual Obligations |
Total |
Less
Than 1 Year |
1 3
Years |
3 5
Years |
More
Than 5 Years |
|||||||||||||||
(in thousands) | ||||||||||||||||||||
Operating leases: |
||||||||||||||||||||
Data centers ( 1 ) |
$ | 17,016 | $ | 2,982 | $ | 13,488 | $ | 546 | $ | | ||||||||||
Facilities space ( 2 ) |
39,746 | 916 | 10,557 | 9,881 | 18,392 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total operating leases |
$ | 56,762 | $ | 3,898 | $ | 24,045 | $ | 10,427 | $ | 18,392 | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) |
Operating leases for data centers represent our principal commitment for co-location facilities for data center capacity. |
(2) |
Operating leases for facilities space represents our principal commitments, which consists of obligations under leases for office space. Lease commitments of $10.2 million related to the lease for our former San Diego office are also included in the table above. Upon vacating the building during the third quarter of 2012, we recorded a cease-use loss of $0.2 million. |
On November 8, 2012, we entered into a lease agreement for 148,704 square feet of office space located in San Jose. The lease is for a period of approximately 11 years and is anticipated to begin on or around March 1, 2013. Rent will be paid on a monthly basis and will increase incrementally over the term of the lease for total minimum lease payments of approximately $48.8 million.
Off-Balance Sheet Arrangements
During fiscal 2009, 2010, 2011, the six months ended December 31, 2011 and the nine months ended September 30, 2012, 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. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships.
Critical Accounting Policies and Significant Judgments and Estimates
Our managements discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally
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accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported
revenues and expenses during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our audited consolidated financial statements.
Revenue Recognition
We commence revenue recognition when all of the following conditions are met:
|
There is persuasive evidence of an arrangement; |
|
The service has been provided to the customer; |
|
The collection of related fees is reasonably assured; and |
|
The amount of fees to be paid by the customer is fixed or determinable. |
Signed agreements are used as evidence of an arrangement. If a signed contract by the customer does not exist, we have historically used either a purchase order or a signed order form as evidence of an arrangement. In cases where both a signed contract and either a purchase order or signed order form exist, we consider the signed contract to be the final persuasive evidence of an arrangement.
Subscription revenues are recognized ratably over the contract term beginning on the commencement date of each contract, which is the date we make our service available to our customers. Once our service is available to customers, amounts that have been invoiced are recorded in accounts receivable and in deferred revenue. Our professional services are priced either on a fixed-fee basis or on a time-and-materials basis. Professional services and other revenues are recognized as the services are delivered using a proportional performance model. Such services are delivered over a short period of time. In instances where final acceptance of the services are required before revenues are recognized, revenues and the associated costs are deferred until all acceptance criteria have been met.
We assess collectibility based on a number of factors such as past collection history and creditworthiness of the customer. If we determine collectibility is not reasonably assured, we defer revenue recognition until collectibility becomes reasonably assured. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. Our arrangements do not include general rights of return.
We have multiple element arrangements comprised of subscription fees and professional services. In October 2009, the Financial Accounting Standards Board, or FASB, ratified authoritative accounting guidance regarding revenue recognition for arrangements with multiple deliverables effective for fiscal periods beginning on or after June 15, 2010. The guidance affects the determination of separate units of accounting in arrangements with multiple deliverables and the allocation of transaction consideration to each of the identified units of accounting. Previously, a delivered item was considered a separate unit of accounting when (i) it had value to the customer on a stand-alone basis, (ii) there was objective and reliable evidence of the fair value of the undelivered items, and (iii) there was no general right of return relative to the delivered services or the performance of the
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undelivered services was probable and substantially controlled by the vendor. The new guidance eliminates the requirement for objective and reliable evidence of fair value to exist for the undelivered items in order for a delivered item to be treated as a separate unit of accounting. The guidance also requires arrangement consideration to be allocated at the inception of the arrangement to all deliverables using the relative-selling-price method and eliminates the use of the residual method of allocation. Under the relative-selling-price method, the selling price for each deliverable is determined using vendor-specific objective evidence, or VSOE, of selling price or third-party evidence, or TPE, of selling price if VSOE does not exist. If neither VSOE nor TPE of selling price exists for a deliverable, the guidance requires an entity to determine the best estimate of selling price, or BESP.
Prior to the adoption of this authoritative accounting guidance, we did not have objective and reliable evidence of fair value for the items in our multiple element arrangements. As a result, we accounted for subscription and professional services revenues as one unit of account and recognized total contracted revenues ratably over the contracted term of the subscription agreement.
We adopted the new guidance on a prospective basis for fiscal 2011. As a result, this guidance was applied to all revenue arrangements entered into or materially modified since July 1, 2010. Upon adoption of this authoritative accounting guidance, we have accounted for subscription and professional services revenues as separate units of accounting. To qualify as a separate unit of accounting, the delivered item must have value to the customer on a standalone basis. Our subscription service has standalone value as it is routinely sold separately by us. In determining whether professional services have standalone value, we consider the following factors for each professional services agreement: availability of the services from other vendors, the nature of the professional services, the timing of when the professional services contract was signed in comparison to the subscription service start date and the contractual dependence of the subscription service on the customers satisfaction with the professional services work. Our professional services, including implementation and configuration services, are not so unique and complex that other vendors cannot provide them. In some instances, our customers independently contract with third-party vendors to do the implementation and we regularly outsource implementation services to contracted third-party vendors. As a result, we concluded professional services, including implementation and configuration services, have standalone value. Our on-demand application is fully functional without any additional development, modification or customization. We provide customers access to our subscription service at the beginning of the contract term.
We determine the selling price of each deliverable in the arrangement using the relative-selling price method based on the selling price hierarchy. The selling price for each unit of account is based on the BESP since VSOE and TPE are not available for our subscription service or professional services and other. The BESP for each deliverable is determined primarily by considering the historical selling price of these deliverables in similar transactions as well as other factors, including, but not limited to, market competition, review of stand-alone sales and pricing practices. The total arrangement fee for these multiple element arrangements is then allocated to the separate units of account based on the relative selling price. The method used to determine the BESP for our subscription service is consistent with the method used to determine prices for our services that are sold regularly on a standalone basis. In determining the appropriate pricing structure, we consider the extent of competitive pricing of similar products, marketing analyses and other feedback from analysts. We price our subscription service based on the number of users with a defined process role, according to a tiered structure. The BESP for our subscription service is based upon the historical selling price of these deliverables. Prior to December 2011, our professional services were priced on a fixed-fee basis as a percentage of the subscription fee. We also prepared a standard build-up cost analysis to estimate the fixed fee for our professional services based on the estimated level of effort to complete the professional services. If professional services were priced below the expected range due to discounting, fees allocated to professional services were limited to the amount not contingent upon the delivery of our subscription service. In December 2011, we began shifting our pricing model for professional services to a time-and-materials basis.
In limited circumstances, we grant certain customers the right to deploy our subscription service on the customers own servers without significantly penalty. We have analyzed all of the elements in these particular
62
multiple element arrangements and determined we do not have sufficient VSOE of fair value to allocate revenue to our subscription service and professional services. We defer all revenue under the arrangement until the commencement of the subscription service and any associated professional services. Once the subscription service and the associated professional services have commenced, the entire fee from the arrangement is recognized ratably over the remaining period of the arrangement.
Deferred Commissions
We defer expenses associated with commission payments to our direct sales force and referral fees paid to independent third-parties. The commissions are deferred and amortized to sales expense over the non-cancelable terms of the related contracts with our customers. The commission payments are a direct and incremental cost of the revenue arrangements. The deferred commission amounts are recoverable through the future revenue streams under the non-cancelable customer contracts. We believe this is preferable to expensing sales commissions as incurred because the commission charges are so closely related to revenues they should be recorded as an asset and charged to expense over the same period the revenues are recognized. Additionally, we believe this policy election enhances the comparability of our consolidated financial statements to those of other companies in our industry.
Stock-Based Compensation
We measure compensation expense for all stock-based payments made to employees and directors based on the fair value of the award as of the date of grant. The expense is recognized, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. We estimate forfeitures based upon our historical experience. At each period end, we review the estimated forfeiture rate and make changes as factors affecting the forfeiture rate calculations and assumptions change.
We use the Black-Scholes option-pricing model to determine the fair value of our stock-based awards. The following assumptions were used for each respective period to calculate our stock-based compensation for each stock option grant:
Fiscal Year Ended June 30, |
Six Months Ended
December 31, |
Nine Months Ended
September 30, |
||||||||||||||||||||||||||
2009 | 2010 | 2011 | 2010 | 2011 | 2011 | 2012 | ||||||||||||||||||||||
Stock Options: |
||||||||||||||||||||||||||||
Expected volatility |
69% - 75 | % | 65 | % | 50% - 69 | % | 57% - 67 | % | 56% - 69 | % | 50% - 69 | % | 54% - 57 | % | ||||||||||||||
Expected term (in years) |
5.62 | 6.02 | 6.05 | 6.04 | 5.75 | 5.83 | 6.05 | |||||||||||||||||||||
Risk-free interest rate |
1.48% - 3.77 | % | 2.57% - 3.04 | % | 1.43% - 2.96 | % | 1.43% - 2.96 | % | 0% - 1.92 | % | 0% - 3.03 | % | 0.87% - 1.18 | % | ||||||||||||||
Dividend yield |
| % | | % | | % | | % | | % | | % | | % |
The following assumptions were used to calculate our stock-based compensation for each stock purchase right granted under the Employee Stock Purchase Plan (ESPP), which became effective on June 28, 2012:
Nine Months Ended,
September 30, 2012 |
||||
ESPP: |
||||
Expected volatility |
42 | % | ||
Expected term (in years) |
.58 | |||
Risk-free interest rate |
0.16 | % | ||
Dividend yield |
| % |
63
Determining the fair value under this model requires the use of inputs that are subjective and generally require significant analysis and judgment to develop. These inputs include the fair value of our common stock, expected volatility, expected term, risk-free interest rate, and expected dividend yield, which are estimated as follows:
|
Fair value of our common stock : Because our stock was not publicly traded prior to our initial public offering, we estimated the fair value of our common stock, as discussed in Common Stock Valuations below. Following our initial public offering in June 2012, our common stock was valued by reference to its publicly traded price. |
|
Expected volatility : We use the historic volatility of publicly traded peer companies as an estimate for our expected volatility. In considering peer companies, we assess characteristics such as industry, stage of development, size, and financial leverage. For each period, the peer group of publicly traded companies used to determine expected volatility was the same as the peer group used to determine the fair value of our common stock. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock share price becomes available. |
|
Expected term : We estimate the expected term using the simplified method due to the lack of historical exercise activity for our company. The simplified method calculates the expected term as the mid-point between the vesting date and the contractual expiration date of the award. |
|
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 the expected term of the stock-based award. |
|
Dividend yield : Our expected dividend yield is zero, as we have not and do not currently intend to declare dividends in the foreseeable future. |
If any assumptions used in the Black-Scholes model change significantly, stock-based compensation for future awards may differ materially compared with the awards granted previously.
Common Stock Valuations
Prior to our initial public offering, the fair value of the common stock underlying our stock options was determined by our board of directors, which intended all options granted to be exercisable at a price per share not less than the per share fair value of our common stock underlying those options on the date of grant. The valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation . The assumptions we used in the valuation model were based on future expectations combined with management judgment. In the absence of a public trading market, our board of directors with input from management exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our common stock as of the date of each option grant, including the following factors:
|
contemporaneous independent valuations performed at periodic intervals; |
|
the prices, rights, preferences and privileges of our convertible preferred stock relative to the common stock; |
|
recent sales of our common stock; |
|
our operating and financial performance and forecast; |
|
current business conditions; |
|
the hiring of key personnel; |
|
our stage of development; |
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|
the likelihood of achieving a liquidity event for the shares of common stock underlying these stock options, such as an initial public offering or sale of our company, given prevailing market conditions; |
|
any adjustment necessary to recognize a lack of marketability for our common stock; |
|
the market performance of comparable publicly traded technology companies; |
|
mergers and acquisition activity in our industry; and |
|
the U.S. and global capital market conditions. |
The following table summarizes, by grant date, information regarding shares of common stock subject to stock options and RSUs granted from July 1, 2010:
Grant Date |
Number of Shares
Underlying Options |
Exercise Price Per
Share |
Common Stock Fair
Value Per Share on Date of Grant |
Number
of Shares Underlying RSUs |
||||||||||||
July 2010 |
4,646,000 | $ | 1.50 | $ | 1.50 | | ||||||||||
October 2010 |
1,510,000 | 1.88 | 1.88 | | ||||||||||||
February 2011 |
1,578,000 | 2.20 | 2.20 | | ||||||||||||
March 2011 |
100,000 | 2.20 | 2.20 | | ||||||||||||
May 2011 |
7,568,456 | 2.60 | 2.60 | | ||||||||||||
July 2011 |
5,700,128 | 3.00 | 3.75 | | ||||||||||||
August 2011 |
3,438,044 | 3.00 | 3.75 | | ||||||||||||
September 2011 |
2,977,948 | 3.00 | 3.75 | | ||||||||||||
October 2011 |
1,151,000 | 3.00 | 3.75 | | ||||||||||||
November 2011 |
2,119,000 | 4.00 | 4.30 | | ||||||||||||
December 2011 |
1,669,000 | 4.65 | 5.00 | | ||||||||||||
January 2012 |
796,500 | 6.50 | 6.50 | | ||||||||||||
February 2012 |
1,500,750 | 9.40 | 9.40 | | ||||||||||||
March 2012 |
662,250 | 10.35 | 10.35 | 1,000,000 | ||||||||||||
April 2012 |
793,000 | 11.00 | 11.00 | | ||||||||||||
May 2012 |
799,750 | 12.45 | 12.45 | | ||||||||||||
June 2012 |
1,301,500 | 16.00 | 16.00 | 30,644 | ||||||||||||
June 2012 |
693,310 | 18.00 | 18.00 | 1,660 | ||||||||||||
August 2012 |
269,940 | 28.00 | 28.00 | 25,394 | ||||||||||||
September 2012 |
268,680 | 36.55 | 36.55 | 77,913 | ||||||||||||
October 2012 |
259,566 | 36.53 | 36.53 | 83,837 |
As of September 30, 2012, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock options was approximately $75.3 million. The weighted-average remaining vesting period of unvested stock options at September 30, 2012 was 2.82 years.
In order to determine the fair value of our common stock underlying award grants prior to our initial public offering, we considered contemporaneous valuations of our stock. We utilized the probability weighted expected return method, or PWERM, approach to allocate value to our common shares. The PWERM approach employs various market approach and income approach calculations depending upon the likelihood of various liquidation scenarios. For each of the various scenarios, an equity value is estimated and the rights and preferences for each stockholder class are considered to allocate the equity value to common shares. The common share value is then multiplied by a discount factor reflecting the calculated discount rate and the timing of the event. Lastly, the common share value is multiplied by an estimated probability for each scenario. The probability and timing of each scenario were based upon discussions between our board of directors and our management team. Under the PWERM, the value of our common stock was based upon four possible future events for our company:
|
initial public offering, or IPO; |
|
strategic merger or sale; |
|
remaining a private company; and |
|
dissolution. |
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The market approach uses similar companies or transactions in the marketplace. We utilized the guideline company method of the market approach for determining the fair value of our common stock under the initial public offering scenario. We identified companies similar to our business and used these guideline companies to develop relevant market multiples and ratios. We selected the peer group of companies based on their size, business model, industry, business description and developmental stage. While we believe that our proprietary platform to automate enterprise IT operations that we provide to our customers differentiates us from other software companies, we selected this peer group from publicly traded companies that are similarly viewed as being in the information technology industry and offering their services under a SaaS business model. We then applied these market multiples and ratios to our financial forecasts to create an indication of total equity value. Under the strategic merger or sale scenario, we utilized the guideline company method and the guideline transaction method of the market approach to determine the fair value of the common stock. The guideline transaction method compares the operating results and market value of the equity or invested capital of acquired companies similar to our business. The income approach, which we utilized to assess fair value of the common stock under the assumption we remained a private company, is an estimate of the present value of the future monetary benefits generated by an investment in that asset. Specifically, debt free cash flows and the estimated terminal value are discounted at an appropriate risk-adjusted discount rate to estimate the total invested capital value of the entity. Under the dissolution scenario, we assumed no value remained to be allocated to our common stockholders. We continually reviewed and updated the selection of companies in the peer group of publicly traded companies to better reflect the size and developmental stage of our company and to account for the acquisition of certain of the peer companies.
Significant factors considered by our board of directors in determining the fair value of our common stock underlying award grants issued prior to our initial public offering include:
July 2010 . The United States economy and the financial markets were continuing to recover from the global financial crisis that began in 2008 and continued in 2009. Because our service offered a cost effective alternative to legacy IT management products in a period where companies were looking to cut budgets, we continued to experience significant increases in revenue growth. We performed a contemporaneous valuation of our common stock and determined the fair value to be $1.50 per share. The valuation reflected a 35% probability of an IPO, 30% probability of a strategic merger or sale, 30% probability of remaining a private company, and 5% probability of dissolution. Based on the valuation and the factors described herein, our board of directors granted stock options with an exercise price of $1.50 per share. The valuation used a risk-adjusted discount rate of 30.0% and a non-marketability discount of 15%.
October 2010 . The United States economy and the financial markets continued to recover during the quarter. Consistent with our projections, revenues increased 14% during the quarter ended September 30, 2010 when compared to the prior quarter ended June 30, 2010. In addition, headcount increased 23% from June 30, 2010 to September 30, 2010 due to our continued focus on growth. We performed a contemporaneous valuation of our common stock and determined the fair value to be $1.88 per share as of September 30, 2010. The valuation continued to reflect a 35% probability of an IPO, 30% probability of a strategic merger or sale, 30% probability of remaining a private company, and 5% probability of dissolution. Based on the valuation and the factors described herein, our board of directors granted stock options with an exercise price of $1.88 per share. The valuation used a risk-adjusted discount rate of 30.0% and a non-marketability discount of 20%.
February 2011 and March 2011 . The United States economy and the financial markets continued to recover. During the quarter ended December 31, 2010, revenues and headcount increased 29% and 14%, respectively, from September 30, 2010 to December 31, 2010. Our board of directors commenced the search for a new Chief Executive Officer and we added two independent board members to our board of directors. We performed a contemporaneous valuation of our common stock and determined the fair value to be $2.20 per share as of February 4, 2011. The valuation continued to reflect a 35% probability of an IPO, 30% probability of a strategic merger, 30% probability of remaining a private company, and 5% probability of dissolution. Based on the valuation and the factors described herein, our board of directors granted stock options with an exercise price of $2.20 per share in February and March 2011. The valuation used a risk-adjusted discount rate of 32.5% and a non-marketability discount of 20%.
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May 2011 . The United States economy and the financial markets continued to recover. Consistent with prior quarters, we experienced sequential growth during the quarter ended March 31, 2011 as shown by the increase in revenues and headcount of 18% and 20%, respectively, from December 31, 2010 to March 31, 2011. Additionally, we hired a new Chief Executive Officer in early May 2011 who had experience with high growth companies in order to significantly expand our operations and build an infrastructure capable of meeting this growth. We performed a contemporaneous valuation of our common stock and determined the fair value to be $2.60 per share as of May 6, 2011. The probability weightings of the various scenarios were adjusted from prior valuations to 40% probability of an IPO and 60% probability of a strategic merger or sale. The implied revenue multiple resulting from the estimated exit value for the IPO liquidity event was 5.7x, which was between the minimum and the lower quartile of the last 12-month peer group revenue multiples. The implied revenue multiple resulting from the estimated exit value for the strategic merger or sale liquidity event was 5.2x, which exceeded the maximum private company transaction multiple and was between the upper quartile and the maximum transaction multiples for the public company transactions. Based on the valuation and the factors described herein, our board of directors granted stock options with an exercise price of $2.60 per share. The increase in our common stock valuation between March 2011 and May 2011 can be attributed primarily to improved market conditions and a shorter time to an expected liquidity event than was anticipated in March 2011. The valuation used a risk-adjusted discount rate of 23.4% and a non-marketability discount of 15%.
July 2011 . The United States economy and the financial markets began to experience volatilities related to certain global financial uncertainties. During the quarter ended June 30, 2011, our revenues increased 17%, compared to the prior quarter, as customers continued to view our service as a cost effective alternative to legacy IT management products. In addition, headcount increased 25% from March 31, 2011 to June 30, 2011. In addition, by July 2011, our new Chief Executive Officer had begun to develop his initial evaluation of our operations, management and prospects. Based on this evaluation, we determined to focus on long-term growth as an independent company, which would likely include an initial public offering, and de-emphasize pursuit of a strategic acquisition. We also identified a number of operational, infrastructure and process risks to our success in implementing that new focus, and changes that we would need to make in order to reduce these risks. We performed a contemporaneous valuation of our common stock and determined the fair value to be $3.00 per share as of July 22, 2011. The probability weightings of the various scenarios were 55% probability of an IPO, 15% probability of a strategic merger or sale, and 30% probability of remaining a private company. The median peer group revenue multiple declined from 9.9x in May 2011 to 8.3x in July 2011. This decline was representative of the general decline in the valuations of the peer group companies during this period. Our board of directors carefully considered the decline in the valuation of the peer group companies during this period. The implied revenue multiple resulting from the estimated exit value for the IPO liquidity event was 6.1x, which was between the lower quartile and the median of the last 12-month peer group revenue multiples. The implied revenue multiple resulting from the estimated exit value for the strategic merger or sale liquidity event was 6.7x, which exceeded the maximum private company transaction multiple and was between the mean and the upper quartile transaction multiples for the public company transactions. Based on the valuation and the factors described herein, our board of directors granted stock options with an exercise price of $3.00 per share. In connection with the preparation of our December 31, 2011 financial statements, we revised the valuation analysis of our common stock as of July 22, 2011 for changes to certain assumptions, primarily related to the selected discount rate, comparable companies and terminal value, and determined the fair value to be $3.75 per share for financial accounting and reporting purposes for these grants. The increase in our common stock valuation between May 2011 and July 2011 can be attributed primarily to our continued growth, strong financial performance and the addition of several new executives to the management team, despite the unfavorable market conditions encountered during this period. The revised valuation used a risk-adjusted discount rate of 24.0% and a non-marketability discount of 15%.
August 2011, September 2011, and October 2011 . Between June 2011 and November 2011, in order to address the operational, infrastructure and process challenges we identified, we hired a number of new executive officers, including a new Senior Vice President of Worldwide Sales and Services in June 2011, a new Chief Financial Officer in August 2011, a new Senior Vice President of Engineering in August 2011 and a new Chief Technology
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Officer in September 2011. Throughout this period, and with the assistance of the new executive officers, we continued to assess our operations and prospects and implemented several strategic initiatives in support of long-term growth. For example, our Senior Vice President of Worldwide Sales and Services led our effort to grow our sales and marketing organization from 140 employees on June 30, 2011 to 242 employees on December 31, 2011 and our Chief Technology Officer led an effort to redesign our data center strategy from a third-party hosted model to a co-location model and make several significant operational and efficiency improvements to our hosting infrastructure. Until the new executive officers had fully assessed our operations and prospects, and reviewed the impact of the operational changes we were initiating during this period, it was unclear to us whether our value or future prospects had changed. In addition, during the quarter ended September 30, 2011, annual contract value of orders during the quarter were 13% below our target. This shortfall was attributable to a significant number of new people in the sales organization and a slower than anticipated time to ramp new sales people to full productivity, and uncertainty in the financial markets in September 2011 which caused customers to delay orders. Based on our assessment of our performance and market conditions during this period, and the uncertainty regarding our new management teams ability to successfully implement our operational changes and strategies, our board of directors granted options with an exercise price of $3.00 per share in August 2011, September 2011 and October 2011. Because of this conclusion, we determined not to perform contemporaneous valuations of our common stock in August 2011, September 2011 or October 2011. In addition, as mentioned above, in connection with the preparation of our December 31, 2011 financial statements, we revised the valuation analysis of our common stock granted in August 2011, September 2011 and October 2011, and determined the fair value to be $3.75 per share for financial accounting and reporting purposes for these grants.
November 2011 . The United States economy and the financial markets began to stabilize from the uncertainty and high volatility. During the quarter ended September 30, 2011, revenues and headcount increased 16% and 31%, respectively, from June 30, 2011 to September 30, 2011. Headcount increased 12% during the month of October 2011. We performed a contemporaneous valuation of our common stock and determined the fair value to be $4.00 per share as of November 4, 2011. During this period our relatively new management team began reassessing the timelines for various liquidity scenarios. Consequently, the probability weightings of the various scenarios were adjusted from prior periods to 30% probability of an IPO, 20% probability of a strategic merger or sale and 50% probability of remaining a private company. The median peer group revenue multiple declined further from 8.3x in July 2011 to 7.0x in November 2011. This decline was representative of the continuing general decline in the valuations of the peer group companies during this period. On October 24, 2011, Oracle Corporation announced the acquisition of RightNow Technologies, Inc., one of the companies represented in our peer group, at an implied valuation of approximately 7.0x trailing revenue. This valuation reflected premiums of approximately 20%, 10%, and 37% over RightNow Technologies, Inc.s public trading values from one day, one week, and one month prior, respectively. Our board of directors carefully considered the general decline in the valuation of the peer group companies during this period as well as the acquisition of RightNow Technologies, Inc. The implied revenue multiple resulting from the estimated exit value for the IPO liquidity event was 6.4x, which was between the minimum and the lower quartile of the last 12-month peer group revenue multiples. The implied revenue multiple resulting from the estimated exit value for the strategic merger or sale liquidity event was 7.6x, which exceeded the maximum private company transaction multiple and was between the upper quartile and the maximum transaction multiples for the public company transactions. Additionally, we updated both our financial and growth projections. Based on the valuation and the factors described herein, our board of directors granted stock options with an exercise price of $4.00 per share. In connection with the preparation of our December 31, 2011 financial statements, we revised the valuation analysis of our common stock as of November 4, 2011 for changes to certain assumptions, primarily related to the selected discount rate, comparable companies and terminal value, and determined the fair value to be $4.30 per share for financial accounting and reporting purposes for these grants. The increase in our common stock valuation between July 2011 and November 2011 can be attributed primarily to improving market conditions, the increased visibility in our future operating performance afforded by our updated financial and growth projections prepared by the new management team, and the valuation of RightNow Technologies, Inc. These positive factors were offset by an extension in the timeline to an expected liquidity event resulting from managements reassessment of the timelines and weightings for the various liquidity scenarios. The revised valuation used a risk-adjusted discount rate of 34.4% and a non-marketability discount of 19%.
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The reduction in the probability of an IPO from 55% in July 2011 to 30% in November 2011 was primarily a result of an assessment by our board of directors of the readiness of our company to be a public company, including consideration of the tenure of the management team and the shortfall in targeted annual contract value of orders in the quarter ended September 30, 2011. The increase in the risk-adjusted discount rate from 24% in July 2011 to 34% in November 2011 reflects the additional risk associated with achieving our substantially more aggressive financial and growth projections developed in our revised operating plan that was approved by our board of directors in November 2011. The increase in the non-marketability discount from 15% in July 2011 to 19% in November 2011 reflects the extension of the timeline to a potential liquidity event resulting from managements reassessment of the timelines for the various liquidity scenarios.
December 2011 . The United States economy and the financial markets continued to stabilize from the uncertainty and high volatility. In addition, investor confidence in the IPO markets began to increase as a number of technology companies began expressing interest in IPOs. Furthermore, our revenues continued to increase month over month consistent with managements expectations. We performed a contemporaneous valuation of our common stock and determined the fair value to be $4.65 per share as of December 7, 2011. The probability weightings of the various scenarios were 55% probability of an IPO, 25% probability of a strategic merger or sale and 20% probability of remaining a private company. The median peer group revenue multiple increased from 7.0x in November 2011 to 7.8x in December 2011. This increase was representative of the general increase in the valuations of the peer group companies during this period. On December 3, 2011, SAP America, Inc. announced the acquisition of SuccessFactors, Inc., one of the companies represented in our peer group, at an implied valuation of approximately 12.0x trailing revenue. This valuation reflected premiums of approximately 52%, 77%, and 46% over SuccessFactors, Inc.s public trading values from one day, one week, and one month prior, respectively. Our board of directors carefully considered the general increase in the valuation of the peer group companies during this period as well as the acquisition of SuccessFactors, Inc. The implied revenue multiple resulting from the estimated exit value for the IPO liquidity event was 6.9x, which was between the lower quartile and the median of the last 12-month peer group revenue multiples. The implied revenue multiple resulting from the estimated exit value for the strategic merger or sale liquidity event was 7.2x, which exceeded the maximum private company transaction multiple and was between the mean and the upper quartile transaction multiples for the public company transactions. Based on the valuation and the factors described herein, our board of directors granted stock options with an exercise price of $4.65 per share. In connection with the preparation of our December 31, 2011 financial statements, we revised the valuation analysis of our common stock as of December 7, 2011 for changes to certain assumptions, primarily related to the selected discount rate, comparable companies and terminal value, and determined the fair value to be $5.00 per share for financial accounting and reporting purposes for these grants. The increase in our common stock valuation between November 2011 and December 2011 can be attributed primarily to the continued improvement in market conditions, our strong financial performance, an increase in the probability of an IPO or strategic merger or sale relative to remaining a private company, and the valuation of SuccessFactors, Inc. The revised valuation used a risk-adjusted discount rate of 34.2% and a non-marketability discount of 15%.
January 2012 . The financial markets strengthened at the end of December 2011 and continued to strengthen through early January 2012. We exited the quarter ended December 31, 2011 with record revenues, representing 15% growth over the quarter ended September 30, 2011. We also gained more confidence in our ability to forecast our business, as annual contract value of orders during the quarter ended December 31, 2011 were 109% of our target. However, a substantial portion of orders during the quarter were received in the last four weeks of the quarter, with 68% of the quarters orders received in the month of December, and 47% of the orders received in the last two weeks of December. Headcount increased 23% from September 30, 2011 to December 31, 2011, and the strategic objectives of our management team for a liquidity event began to focus more on an IPO. We performed a contemporaneous valuation of our common stock and determined the fair value to be $6.50 per share as of January 11, 2012. The probability weightings of the various scenarios were 75% probability of an IPO, 10% probability of a strategic merger or sale and 15% probability of remaining a private company. The median peer group revenue multiple declined from 7.8x in December 2011 to 7.7x in January 2012. This decline was representative of the slight decline in the valuations of the peer group companies during this period. Our board of
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directors carefully considered the slight decline in the valuation of the peer group companies during this period. The implied revenue multiple resulting from the estimated exit value for the IPO liquidity event was 7.7x, which was between the median and the upper quartile of the last 12-month peer group revenue multiples. The implied revenue multiple resulting from the estimated exit value for the strategic merger or sale liquidity event was 11.4x, which exceeded the maximum private company transaction multiple and was between the upper quartile and the maximum transaction multiples for the public company transactions. The valuation used a risk-adjusted discount rate of 28% and a non-marketability discount of 12%. Based on the valuation and the factors described herein, our board of directors granted stock options with an exercise price of $6.50 per share. The increase in our common stock valuation between December 2011 and January 2012 can be attributed primarily to the continued improvement in market conditions, our continued strong financial performance, and an increase in the probability of an IPO relative to other exit alternatives.
February 2012 . The United States economy and the financial markets continued with a strong start to 2012. We continued to see strength in our business and continued to rapidly expand our employee base, increasing headcount by 6% from December 2011 to January 2012. Given the strength in the financial markets as shown by the number of companies filing for an IPO, and the strength in our business and our board of directors confidence in the new management team, we commenced discussions with bankers to explore the potential of an IPO. We performed a contemporaneous valuation of our common stock and determined the fair value to be $9.40 per share as of February 3, 2012. The probability weightings of the various scenarios were 85% probability of an IPO, 10% probability of a strategic merger or sale and 5% probability of remaining a private company. The median peer group revenue multiple increased from 7.7x in January 2012 to 8.6x in February 2012. This increase was representative of the general increase in the valuations of the peer group companies during this period. On February 9, 2012, Oracle Corporation announced the acquisition of Taleo Corp., one of the companies represented in our peer group, at an implied valuation of approximately 5.70x trailing revenue. This valuation reflected premiums of approximately 18%, 24%, and 24% over Taleo Corp.s public trading values from one day, one week, and one month prior, respectively. Our board of directors carefully considered the general increase in the valuation of the peer group companies during this period as well as the acquisition of Taleo Corp. The implied revenue multiple resulting from the estimated exit value for the IPO liquidity event was 11.3x, which was between the median and the upper quartile of the last 12-month peer group revenue multiples. The implied revenue multiple resulting from the estimated exit value for the strategic merger or sale liquidity event was 13.2x, which exceeded the maximum private company transaction multiple and was between the upper quartile and the maximum transaction multiples for the public company transactions. The valuation used a risk-adjusted discount rate of 28% and a non-marketability discount of 11%. Based on the valuation and the factors described herein, our board of directors granted stock options with an exercise price of $9.40 per share. The increase in our common stock valuation between January 2012 and February 2012 can be attributed primarily to the continued improvement in market conditions, our continued strong financial performance, our commencement of discussions with bankers to explore the potential of an IPO, an increase in the probability of an IPO relative to other exit alternatives, and the valuation of Taleo Corp.
March 2012 . In February 2012 we held our organization meeting with investment bankers. On February 21, 2012, we sold and issued 1,750,980 shares of common stock at $10.20 per share in a private placement to entities associated with Greylock Partners. As part of the same transaction, Frederic B. Luddy sold 700,000 of his shares of common stock to Greylock at the same price. On March 9, 2012 we received notice from a former employee of his proposed sale of 100,000 shares of our common stock to an investor at a purchase price of $10.00 per share. On March 16, 2012 we received notice from a former employee of his proposed sale of 6,666 shares of our common stock to an investor at a purchase price of $12.00 per share. Pursuant to the 2005 Stock Plan Exercise Notices, we exercised our right of first refusal to purchase the shares. We continued to hire employees at a rapid pace growing our headcount by 8% in February 2012. We performed a contemporaneous valuation of our common stock and determined the fair value to be $10.35 per share as of March 9, 2012. The probability weightings of the various scenarios were 90% probability of an IPO, 5% probability of a strategic merger or sale and 5% probability of remaining a private company. The median peer group revenue multiple increased from 8.6x in February 2012 to 9.1x in March 2012. This increase was representative of the continuing increase in the
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valuations of the peer group companies during this period. Our board of directors carefully considered the continuing increase in the valuation of the peer group companies during this period. The implied revenue multiple resulting from the estimated exit value for the IPO liquidity event was 1l.8x, which was between the median and the upper quartile of the last 12-month peer group revenue multiples. The implied revenue multiple resulting from the estimated exit value for the strategic merger or sale liquidity event was 12.8x, which exceeded the maximum private company transaction multiple and was between the upper quartile and the maximum transaction multiples for the public company transactions. The valuation used a risk-adjusted discount rate of 28% and a non-marketability discount of 11%. Based on the valuation and the factors described herein, our board of directors granted stock options with an exercise price of $10.35 per share. The increase in our common stock valuation between February 2012 and March 2012 can be attributed primarily to the continued improvement in market conditions, our continued strong financial performance, our progress made toward a potential IPO, and an increase in the probability of an IPO relative to other exit alternatives.
April 2012 . We continued to see strength in the financial markets and in our business. Revenues grew 21% during the quarter ended March 31, 2012 as compared to the prior quarter ended December 31, 2011. On March 30, 2012, we filed our initial registration statement. We performed a contemporaneous valuation of our common stock and determined the fair value to be $11.00 per share as of April 9, 2012. The probability weightings of the various scenarios were 95% probability of an IPO, and 5% probability of a strategic merger or sale. The median peer group revenue multiple increased from 9.1x in March 2012 to 9.3x in April 2012. This increase was representative of the continuing general increase in valuations of the peer group companies during this period. Our board of directors carefully considered the continuing increase in the valuation of the peer group companies during this period. The implied revenue multiple resulting from the estimated exit value for the IPO liquidity event was 11.7x, which was between the median and the upper quartile of the last 12-month peer group revenue multiples. The implied revenue multiple resulting from the estimated exit value for the strategic merger or sale liquidity event was 12.3x, which exceeded the maximum private company transaction multiple and was between the upper quartile and the maximum transaction multiples for the public company transactions. The valuation used a risk-adjusted discount rate of 28% and a non-marketability discount of 8%. Based on the valuation and the factors described herein, our board of directors granted stock options with an exercise price of $11.00 per share. The increase in our common stock valuation between March 2012 and April 2012 can be attributed primarily to the continued improvement in market conditions, our continued strong financial performance, our progress made toward a potential IPO, and an increase in the probability of an IPO relative to other exit alternatives. Further, on April 10, 2012 we received notice from former employees of their proposed sale of an aggregate of 77,498 shares of our common stock to investors at a purchase price of $11.50 per share. Pursuant to our 2005 Stock Plan, we exercised our right of first refusal to purchase 42,498 shares.
May 2012 . We continued to see strength in our business, even though the financial markets began to show some weakness. We continued to rapidly expand our employee base, increasing headcount 17% from March 2012. We performed a contemporaneous valuation of our common stock and determined the fair value to be $12.45 per share as of May 7, 2012. The probability weightings of the various scenarios were 95% probability of an IPO, and 5% probability of a strategic merger or sale. The median peer group revenue multiple decreased from 9.3x in April 2012 to 8.2x in May 2012. This decrease was representative of the general decrease in valuations of the peer group companies during this period as well as other high growth technology companies. Our board of directors carefully considered the change in the valuation of the peer group companies during this period. The implied revenue multiple resulting from the estimated exit value for the IPO liquidity event was 12.1x, which was between the upper quartile and the maximum of the last 12-month peer group revenue multiples. The implied revenue multiple resulting from the estimated exit value for the strategic merger or sale liquidity event was 12.4x, which exceeded the maximum private company transaction multiple and was between the upper quartile and the maximum transaction multiples for the public company transactions. The valuation used a risk-adjusted discount rate of 28% and a non-marketability discount of 4%. Based on the valuation and the factors described herein, our board of directors granted stock options with an exercise price of $12.45 per share. The increase in our common stock valuation between April 2012 and May 2012 can be attributed primarily to our continued strong financial performance, our progress made toward a potential IPO, and an increase in the
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probability of an IPO relative to other exit alternatives. Further, pursuant to our 2005 Stock Plan, we exercised our right of first refusal to purchase 35,000 shares from a former employee at a purchase price of $11.50 per share on May 7, 2012.
June 2012 . We continued to see strength in our business, even though the financial markets began to show some weakness. We continued to rapidly expand our employee base, increasing headcount 21% from March 2012 to June 2012. We performed a contemporaneous valuation of our common stock as of June 11, 2012. The probability weightings of the various scenarios were 95% probability of an IPO, and 5% probability of a strategic merger or sale. The median peer group revenue multiple decreased from 8.2x in May 2012 to 8.0x in June 2012. This decrease was representative of the general decrease in valuations of the peer group companies during this period as well as other high growth technology companies. Our board of directors carefully considered the change in the valuation of the peer group companies during this period. The implied revenue multiple resulting from the estimated exit value for the IPO liquidity event was 14.6x, which exceeded the maximum of the last 12-month peer group revenue multiples. The implied revenue multiple resulting from the estimated exit value for the strategic merger or sale liquidity event was 14.7x, which exceeded both of the maximum multiples from the private company transactions and the public company transactions. The valuation used a risk-adjusted discount rate of 26.9% and a non-marketability discount of 2%. This valuation indicated a fair value per share of our common stock of $16.00 as of June 11, 2012, which also equaled the mid-point of the estimated pricing range based on preliminary indications of potential pricing ranges for our initial public offering. In addition, an existing company investor completed common stock share purchases in June 2012 from current and former employees at $16.00 and $17.00 per share. Based on the valuation and the factors described herein, our board of directors granted stock options with an exercise price of $16.00 per share.
Our board of directors granted additional options on June 28, 2012, the date of the pricing of our common stock to be sold in our initial public offering with an exercise price of $18.00 per share, which was equal to the initial public offering price.
We determined, after consultation with the underwriters of our initial public offering, that our anticipated initial offering price range was $15.00 to $17.00 per share. As of the date of our stock option grants on May 7, 2012, our board of directors determined the fair value of our common stock to be $12.45 per share based upon the objective and subjective factors described above. We believe the difference between these prices was a result of the following factors:
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the anticipated price range excluded any marketability or illiquidity discount for our common stock, which was appropriately taken into account in our board of directors fair value determination in and prior to early May 2012; and |
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the consideration of our growth prospects and the financial, trading and market statistics of comparable companies and a broader set of software companies, discussed between us and the underwriters as compared to the more narrow prior analysis applied and comparable companies used by the board of directors. |
Stock Options and RSUs Granted Subsequent to our Initial Public Offering
For stock options and RSUs granted subsequent to our initial public offering, our board of directors determined the fair value based on the closing price of our common stock as reported on the New York Stock Exchange on the date of grant.
Due to the grant of additional options and RSUs since September 30, 2012, we expect to recognize total incremental compensation expense of $7.5 million, net of estimated forfeitures. In future periods, we expect our stock-based compensation expense to increase as a result of our existing unrecognized stock-based compensation and as we issue additional stock awards to continue to attract and retain employees and independent directors.
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Income Taxes
Our provision for income taxes, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect our best assessment of estimated future taxes to be paid. Significant judgments and estimates based on interpretations of existing tax laws or regulations in the United States and the numerous foreign jurisdictions where we are subject to income tax are required in determining our provision for income taxes. Changes in tax laws, statutory tax rates, and estimates of our future taxable income could impact the deferred tax assets and liabilities provided for in the consolidated financial statements and would require an adjustment to the provision for income taxes.
Deferred tax assets are regularly assessed to determine the likelihood they will be recovered from future taxable income. A valuation allowance is established when we believe it is more likely than not the future realization of all or some of a deferred tax asset will not be achieved. In evaluating our ability to recover deferred tax assets within the jurisdiction in which they arise we consider all available positive and negative evidence. Factors reviewed include the cumulative pre-tax book income for the past three years, scheduled reversals of deferred tax liabilities, our history of earnings and reliable forecasting, projections of pre-tax book income over the foreseeable future, and the impact of any feasible and prudent tax planning strategies.
We recognize the impact of a tax position in our consolidated financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Tax authorities regularly examine our returns in the jurisdictions in which we do business and we regularly assess the tax risk of our return filing positions. Due to the complexity of some of the uncertainties, the ultimate resolution may result in payments that are materially different from our current estimate of the tax liability. These differences, as well as any interest and penalties, will be reflected in the provision for income taxes in the period in which they are determined.
Cease-Use Loss upon Exit of Facility
In August 2012, we relocated our San Diego office to another facility in San Diego. As part of this move, we incurred lease abandonment costs of $2.9 million, which primarily consists of a loss on disposal of assets of $2.7 million and a cease-use loss of $0.2 million recorded upon vacating our prior San Diego office. The lease on our prior headquarters facility expires in 2019. The cease-use loss was calculated as the present value of the remaining lease obligation offset by estimated sublease rental receipts during the remaining lease period, adjusted for deferred items and lease incentives. In calculating the cease-use loss, management is required to make significant judgments to estimate the present value of future cash flows from the assumed sublease. The key assumptions used in our discounted cash flow model include the amount and timing of estimated sublease rental receipts, and a credit-adjusted, risk-free discount rate of 5.08%. These assumptions are subjective in nature and the actual future cash flows could differ from our estimates, resulting in significant adjustments to the cease-use loss recorded or to be recorded.
Recent Adopted Accounting Standards
Revenue Recognition. In October 2009, the FASB issued Accounting Standards Update, or ASU, 2009-13, Revenue Recognition (Topic 605)Multiple-Deliverable Revenue Arrangementsa Consensus of the FASB Emerging Issues Task Force . This update provides amendments to the criteria in ASC 605, Revenue Recognition , for separating consideration in multiple-deliverable arrangements by establishing a selling price hierarchy. The selling price used for each deliverable will be based on VSOE if available, third-party evidence if VSOE is not available, or BESP if neither VSOE nor third-party evidence is available. ASU 2009-13 also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, the guidance expands the disclosure requirements for revenue recognition.
The guidance could be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted on a retrospective
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basis. We adopted the guidance prospectively on July 1, 2010, which resulted in a decrease to deferred revenue and a corresponding increase to total revenues as of and for the year ended June 30, 2011. The primary reason for the impact was the recognition of professional service revenue over the performance period, which is shorter than the estimated period over which customers benefited from initial consulting services.
The following table summarizes the effects of this new guidance on our consolidated balance sheets and statements of comprehensive income (loss) (in thousands):
As of and for the Fiscal Year Ended
June 30, 2011 |
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As
Reported |
Under
Previous Accounting Guidance |
Impact of
Adoption of ASU 2009-13 |
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Total deferred revenue |
$ | 74,646 | $ | 81,036 | $ | (6,390 | ) | |||||
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Revenues: |
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Subscription |
$ | 79,191 | $ | 78,305 | $ | 886 | ||||||
Professional services and other |
13,450 | 7,946 | 5,504 | |||||||||
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Total revenues |
$ | 92,641 | $ | 86,251 | $ | 6,390 | ||||||
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Comprehensive Income. In June 2011, the FASB issued Accounting Standards Update, or ASU, No. 2011-05, Presentation of Comprehensive Income. This update requires companies to present reclassification adjustments included in other comprehensive income on the face of the consolidated financial statements and allows companies to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. It also eliminates the option for companies to present the components of other comprehensive income as part of the statement of changes in stockholders equity. This guidance is effective for fiscal periods beginning after December 15, 2011, with earlier adoption permitted. We retroactively adopted this guidance during the six-month period ended December 31, 2011 to present the components of net income and the components of other comprehensive income in a single continuous statement of comprehensive income. Adoption of this ASU did not have a material effect on our financial position, results of operations or cash flows.
Qualitative and Quantitative Disclosures about Market Risk
Foreign Currency Exchange Risk
We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, primarily the Euro, British Pound Sterling, Canadian dollar, Swiss franc, and Australian dollar. Revenues outside of North America as a percentage of revenue was 27%, 28%, and 25% in fiscal 2009, 2010 and 2011, respectively, 26% and 29% during the six months ended December 31, 2010 and 2011, respectively, and 26% and 29% during the nine months ended September 30, 2011 and 2012, respectively. Changes in exchange rates may negatively affect our revenue and other operating results as expressed in U.S. dollars.
We have experienced and will continue to experience fluctuations in our net income as a result of transaction gains or losses related to revaluing certain current asset and current liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded. We recognized foreign currency gains of $0.5 million, $1.6 million and $0.9 million in fiscal 2010, the six months ended December 31, 2011 and the nine months ended September 30, 2012, respectively. We had an immaterial foreign currency loss in fiscal 2009 and we recognized a foreign currency loss of $0.3 million, $0.6 million and $0.5 million in the six months ended December 31, 2010 and fiscal 2011 and the nine months ended
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September 30, 2011, respectively. While we have not engaged in the hedging of our foreign currency transactions to date, we are presently evaluating the costs and benefits of initiating such a program and may in the future hedge selected significant transactions denominated in currencies other than the U.S. Dollar.
Interest Rate Sensitivity
In February 2012, we began investing in corporate debt securities. The primary objectives of our investment activities are the preservation of capital and supporting our liquidity requirements. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. Due to the short-term nature of our investment portfolio, however, we do not believe an immediate 10% increase or decrease in interest rates would have a material effect on the fair market value of our portfolio. We therefore do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates.
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Overview
ServiceNow is a leading provider of cloud-based services to automate enterprise IT operations. Our service includes a suite of applications built on our proprietary platform that automates workflow and integrates related business processes. We focus on transforming enterprise IT by automating and standardizing business processes and consolidating IT across the global enterprise. Organizations deploy our service to create a single system of record for enterprise IT, to lower operational costs and to enhance efficiency. Additionally, our customers use our extensible platform to build custom applications for automating activities unique to their business requirements.
We help transform IT organizations from reactive, manual and task-oriented, to pro-active, automated and service-oriented organizations. Our on-demand service enables organizations to define their IT strategy, design the systems and infrastructure that will support that strategy, and implement, manage and automate that infrastructure throughout its lifecycle. We provide a broad set of integrated applications that are highly configurable and can be efficiently implemented and upgraded. Further, our multi-instance architecture has proven scalability for global enterprises, as well as advantages in security, reliability and deployment location.
We offer our service under a Software-as-a-Service, or SaaS, business model. Customers can rapidly deploy our service in a modular fashion, allowing them to solve immediate business needs and access, configure and build new applications as their requirements evolve. Our service, which is accessed through an intuitive web-based interface, can be easily configured to adapt to customer workflow and processes. Upgrades to our service are designed to be efficient and compatible with configuration changes and applied with minimal disruption to ongoing operations.
We have achieved significant growth in recent periods. A majority of our revenues comes from large, global enterprise customers. Our total customers grew 58% from 852 as of September 30, 2011 to 1,346 as of September 30, 2012. Our customers operate in a wide variety of industries, including financial services, IT services, health care, technology and utilities. For the fiscal years ended June 30, 2010 and 2011, our revenues grew 114% from $43.3 million to $92.6 million. We incurred a net loss of $29.7 million and generated net income of $9.8 million for the fiscal years ended June 30, 2010 and 2011, respectively. For the six months ended December 31, 2010 and 2011, our revenues grew 93% from $37.9 million to $73.4 million. We generated net income of $4.8 million and incurred a net loss of $6.7 million for the six months ended December 31, 2010 and 2011, respectively. For the nine months ended September 30, 2011 and 2012, our revenues grew 90% from $88.9 million to $168.6 million. We generated net income of $5.1 million and incurred a net loss of $27.4 million for the nine months ended September 30, 2011 and 2012, respectively.
Our Industry
Enterprises Face Increasing Challenges in Managing and Automating IT Operations
For decades, enterprises have invested in IT to empower their workforces and enable business critical functionality. This investment reflects enterprise dependence on a myriad of software applications, databases, operating systems, servers, networking equipment, personal computers, mobile devices, and a variety of other hardware and software assets. When managing the IT environment, enterprises face significant challenges:
Complexity of IT environments . The accelerating adoption of cloud-based services, virtual servers and desktops, and mobile technologies has added to the complexity of enterprise IT environments.
Budget pressures . IT executives are consistently asked to deliver more value for less cost, and to provide transparency regarding the true costs and business value of IT investments. The most recent downturn in the global economy has heightened these demands.
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Alignment to business goals . IT organizations are increasingly asked to be proactive and design and develop new processes that span the entire enterprise, rather than support a set of discrete technologies and react to business changes. IT organizations must develop strategies to enable necessary business changes. This has resulted in a much greater need for alignment of IT strategy and performance with overall business performance.
Consumerization of IT . Individuals are spending more time interacting with intuitive, social and mobile consumer-oriented Internet services. These experiences have increased business users expectations that they can access and interact with corporate IT technologies in a similar, familiar way. IT organizations are struggling to respond to these increased demands in a cost-effective manner.
Integration and standardization . Enterprises need integrated and standardized solutions that work with their existing systems and follow the most recent Information Technology Infrastructure Library, or ITIL, standard, a set of recommended business processes designed and adopted by IT operations industry participants globally to maximize the availability and usability of IT assets and the efficiency of IT staff.
Legacy IT Management Products Fall Short
Organizations have invested heavily in legacy software products to manage the inventory, cost and performance of IT resources. These traditional software products were originally architected in the 1980s and 1990s before the introduction of many of todays modern computing technologies. Shortcomings of these legacy products include:
Disparate and redundant solutions . Many legacy IT management products were developed and widely deployed decades ago. Vendors of these products have in many cases relied upon acquisitions and partnerships to extend their offerings and have not re-architected their solutions to provide the seamless, integrated platform that customers desire. In addition, enterprises may have overlapping solutions in various business units, especially those that have grown by acquisition or that operate globally. As a result, many enterprises operate multiple systems and infrastructures. Moreover, we believe that in most large enterprises IT professionals and business users frustrated with the lack of integrated applications have created a large number of custom applications, spreadsheets and paper-based systems to address specific business needs. As a result of these disparate solutions, executives lack a single system of record to manage their IT operations.
Inflexible integration, customization and maintenance . Enterprises face numerous challenges when trying to customize legacy IT management products to meet their specific needs, as well as integrate them with third-party solutions. Due to their architectures and proprietary languages, these inflexible products often cannot be easily customized to meet customers business requirements and are difficult to integrate and maintain. As a result, enterprises may be required to adapt their business processes to the capabilities of the software.
Highly manual . Many legacy IT management products installed today require experienced and expensive IT staff to manually process service requests and manage IT operations. Database administrators, system administrators and network managers are often required to perform complex and repetitive tasks such as installing an application, applying a software patch, copying a production database, rebooting a server or provisioning a virtual machine. These manual tasks are labor intensive, time-consuming, prone to error and prevent IT from rapidly responding to business needs.
Upgrade challenges and disruption of service . Once legacy IT management products have been installed, integrated and customized, upgrades can be challenging. As new versions of the software are released on a periodic basis, customers are often required to re-implement the updated software with limited ability to carry forward customizations. The upgrade process for legacy solutions can be lengthy, and is frequently disruptive to the business.
Difficult to use and access . Many legacy IT management products lack a modern, easy to navigate user interface and were not originally designed to be accessed over the Internet or on mobile devices. These
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applications require a significant amount of user training and may have low rates of adoption across organizations, reducing return on investment. Further, if users do not adopt software, they may not execute processes in accordance with defined standards, which can lead to system failures.
High total cost of ownership . Because legacy IT management products are often disparate, inflexible, highly manual, challenging to upgrade, and difficult to use and access, we believe these products have a high total cost of ownership.
Requirements for Next-generation Enterprise IT Operations Management
We believe best-in-class, next generation enterprise IT operations management needs to incorporate the following key elements:
Complete, integrated solution . A single system of record for all IT assets, activities and resources across multiple systems and infrastructures currently in use in large enterprises.
Closed loop automation . An end-to-end, secure and auditable solution to automate service-oriented workflows and execute routine IT processes, both simple and complex.
Easily configurable and extensible . Highly configurable to accommodate unique customer-specific workflow, systems infrastructure, and organizational structure.
Efficient implementations . Immediate access and rapid deployment, and interoperable with other IT solutions.
Automated and non-disruptive upgrades . Allows upgrades to be applied by the vendor in an automated fashion, minimizing system downtime, costly professional services engagements and manual intervention by the customer, while preserving forward compatibility with future releases.
Scalable, secure and reliable . Scales to simultaneously and securely support the user and data capacity demands of the largest global enterprises.
Our Opportunity
Our service addresses a number of established enterprise IT management software markets. In particular, our service addresses such markets defined by Gartner as IT service desk, asset management, availability and performance management (distributed), project and portfolio management, workload automation and IT process automation (distributed), configuration management and network management (distributed). In aggregate, Gartner estimates that the software revenues in these markets will total $13.8 billion in 2012, growing to $19.4 billion in 2016. Beyond these markets, we believe our service has the potential to address a wide variety of additional enterprise application and infrastructure software markets.
Our Solution
We help transform IT organizations from reactive, manual and task-oriented, to pro-active, automated and service-oriented organizations. Our on-demand service includes a suite of applications that runs on a common extensible platform that enables organizations to define their IT strategy, design the systems and infrastructure that will support that strategy, and implement, manage and automate that infrastructure throughout its lifecycle. Our cloud-based service includes the following key elements.
Key Elements
Broad set of integrated functionality . Our suite of applications was developed to address core ITIL processes as well as additional business processes, and runs on a single extensible platform. Our platform includes workflow automation, notification, assignment and escalation, third-party integration capabilities,
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reporting and business intelligence, social and collaboration and administration capabilities. Our cloud-based service is designed to be deployed in a modular fashion, allowing customers to solve immediate business needs and access new application functionality as needs evolve.
Automation of IT operations . Our service automates the documentation, categorization, prioritization, assignment, notification and escalation of IT and other business processes. Additionally, our service automates routine and repeatable data center operations such as rebooting a server, cloning a database or deploying a virtualized environment. These elements of automation result in more consistent, reliable and secure execution, allowing the reallocation of expensive IT staff to more complex issues.
Highly configurable and extensible to meet business needs . Our configuration features are designed to give customers the ability to easily alter the appearance and operation of the user interface, change and develop business rules to meet specific requirements, and extend the database schema to support the tracking and capturing of necessary data. As a result, our service enables management of IT operations without requiring changes to existing business processes. In addition, our customers and partners can use our platform to build applications to automate processes that are unique to their businesses.
Efficient implementations and integration . Our cloud-based model allows customers to quickly access and deploy our service without the need to install and maintain costly infrastructure hardware and software necessary for on-premises deployments. We believe the average time that a customer requires to deploy our service is significantly shorter than for typical legacy IT management products. We also offer consulting and training services to assist customers in rapidly deploying and optimizing their use of our service. Our service is developed on an architecture that enables efficient integration to third-party architectures and other data sources.
Efficient upgrades . We design our upgrades to be compatible with customer configuration changes and applied rapidly with minimal disruption to ongoing operations, enabling customers to be on the most up-to-date version. Upgrades are included as part of the subscription service and do not require professional services to implement.
Scalable, secure and reliable multi-instance architecture . Our customers require scalability, security and reliability for their large, global businesses. Our multi-instance architecture is designed to meet these requirements. By providing customers with dedicated applications and databases we ensure that customer data is not comingled. In addition, this architecture reduces risk associated with infrastructure outages, improves system scalability and security, and allows for flexibility in deployment location. We believe this architecture is the best solution for the large global enterprises that rely on us for critical applications.
Business Benefits
Single system of record for IT . We provide a single system of record for IT executives to track assets, activities and resources across the multiple systems and infrastructures currently in use in large enterprises. This provides executives with the ability to execute their IT strategy by quickly assessing how well their IT infrastructure is supporting business processes, analyzing business needs real-time and developing business solutions as needs evolve.
Lower total cost of ownership . We assume complete responsibility for our service, including application set, hosting infrastructure, maintenance, monitoring, storage, security, customer support and upgrades, all of which free customer resources. Our service only requires a browser and an Internet connection to function. Additionally, we manage, monitor and handle upgrades and patch deployments remotely, which can result in lower total cost of ownership to our customers compared to legacy IT management products.
Easy to use and widely accessible . Our suite of intuitive and easy-to-use applications provides users with a familiar experience based on business-to-consumer concepts. In addition, users with knowledge of basic software applications are able to create custom applications on our platform to solve specific business issues. Users can
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access our service through a web-based interface anywhere an Internet connection is available, including through mobile devices. We believe this ease of use and accessibility result in increased user adoption. This enables businesses to earn higher return on investment and makes it more likely that users perform tasks based on standard defined processes, reducing system failure.
Our Growth Strategy
Our goal is to be the industry-recognized leading provider of cloud-based services to automate enterprise IT operations. Key elements of our growth strategy include:
Expand our customer base . We believe the global market for next-generation enterprise IT operations management is large and underserved, and we intend to continue to make investments in our business to capture increasingly larger market share. To expand our customer base we intend to invest in our direct sales force and strategic resellers as well as our data center footprint. In particular, we grew our sales and marketing team from 140 as of June 30, 2011 to 330 as of September 30, 2012.
Further penetrate our existing customer base . We intend to increase the number of subscriptions purchased by our current customers as they deploy additional core ITIL and extended IT applications, and use our platform to develop custom applications to meet business needs both inside and outside of IT. Additionally, we believe there are significant cross-sell opportunities for our separately priced Discovery and Runbook Automation technologies.
Expand internationally . We have a large and growing international presence, and intend to grow our customer base in various regions. We are investing in new geographies, including investment in direct and indirect sales channels, data centers, professional services, customer support and implementation partners. As of the end of September 2012, 32% of our direct sales force was located outside North America. We plan to increase our investment in our existing international locations in order to achieve scale efficiencies in our sales and marketing efforts, in addition to adding new geographies.
Continue to innovate and enhance our service offerings . We have made, and will continue to make, significant investments in research and development to strengthen our existing applications, expand the number of applications on our platform and develop additional automation technologies. We typically offer multiple upgrades each year that allow our customers to benefit from ongoing innovation. For example, we recently introduced end-to-end lifecycle automation for managing virtual machines and a new release of our IT service automation software that includes enhancements to the IT asset management application as well as new capabilities for agile software development.
Strengthen our customer community . We have an enthusiastic and engaged customer community that contributes to our success through their willingness to share their ServiceNow experiences with other potential customers. Customer needs drive our development efforts. To support our customer community and encourage collaboration, we host Knowledge, our annual user conference. Participation by our customers at Knowledge has grown ten-fold, with approximately 100 attendees at our first conference in 2007 growing to approximately 1,840 attendees in 2012. We will continue to leverage our large and growing customer community to expose our existing customers to new use cases and increase awareness of our service.
Develop our partner ecosystem . We intend to further develop our existing partner ecosystem by establishing agreements with strategic resellers, system integrators and independent software vendors to provide broader customer coverage, access to senior executives and solution delivery capabilities, as well as extending the breadth of application coverage through complementary partner offerings. As we expand our base of partners, we intend to grow our indirect sales team and marketing efforts to support our distribution network.
Further promote our extensible platform . We plan to grow investments in our platform to better enable the creation of custom applications to address specific business issues. We believe our platform is currently deployed to address a wide variety of non-IT use cases in areas such as human resources, facilities and quality control management. We believe our platform provides substantial application development capabilities and we intend to further promote the potential of our platform as a strategy to penetrate large and growing markets.
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Our Service
Our core applications are specifically designed to automate ITIL-based processes. We also offer extended IT applications and allow customers to build custom applications designed to automate processes unique to their businesses. All of these applications run on our platform and are provided as a hosted service under a SaaS business model.
Our service includes the following applications:
Core ITIL Applications
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Incident Management manages the process of restoring a failed service to an operational state. |
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Problem Management manages the process of resolving the root cause of recurring service outages or issues affecting multiple users. |
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Change Management manages the proposal and approval process for changes to be made to the IT infrastructure. |
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Release Management assigns, manages and monitors the various tasks comprising the actual implementation or execution of a proposed change. |
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Configuration Management Database, or CMDB, serves as the inventory repository of all hardware, software and network equipment comprising the IT infrastructure. |
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Service Catalog displays the various goods and services an IT department makes available to the rest of the organization. |
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Knowledge Management stores and displays knowledge articles or documents for use by the IT staff or broader supported employee base. |
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Service Portfolio Management presents business services offered to the enterprise by the IT organization in consumer-oriented fashion. |
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Service Level Agreement Management monitors and manages progress being made by IT staff on the completion of assigned tasks which have specific due dates. |
Extended IT Applications
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Project and Portfolio Management tracks and manages projects planned or being worked on by the IT staff. |
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IT Cost Management tracks and monitors staff work time, project-related expenses and labor costs. |
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IT Asset Management tracks the financial elements of IT infrastructure. |
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IT Governance Risk and Compliance details applications, databases, servers, network equipment and personnel for a regulatory or compliance audit. |
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Software Development Lifecycle Management tracks and manages new features and functions to be developed in upgrades or new software applications. |
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Discovery discovers the various hardware and software assets comprising the IT infrastructure as well as mapping the operational dependencies between those assets, and then populates and maintains that inventory in the CMDB application. Each of these processes occurs automatically. |
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Runbook Automation is designed to automatically execute complex yet routine and repeatable projects in the datacenter, allowing organizations to automate business and IT processes that would otherwise be done manually. |
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Custom Applications
Our customers and partners can purchase the use of our platform to build custom applications designed to automate processes that are unique to their businesses. Some examples include human resources, facilities and quality control management applications.
Platform
Our proprietary platform serves as the development environment for our suite of applications and custom applications, built by or for our customers and partners. Applications can leverage shared platform resources to increase system automation, process integration, interface usability and data consistency. Platform resources include workflow automation, notification, assignment and escalation, third-party integration capabilities, reporting and business intelligence, social and collaboration and administration capabilities.
Professional Services
Customers configure their implementation of our service to accommodate their unique organizational structures and workflows as well as to integrate our service with other technologies in their environments. We provide technical training and implementation services to customers through our professional services team and through a network of certified partners. Customers may also implement our service independently or use a third party. Our professional services include customer guidance on implementation, as well as comprehensive integration and implementation projects, and can include the development of custom applications. Customers typically implement applications in phases and each phase is governed by a separate statement of work. Typical professional service engagements vary in length from a few weeks to several months depending on the scope and size of the customer initiative.
Customer Support
We offer customer support from our offices in San Diego, California and London. Customers can call or email us at anytime to report issues with or ask questions regarding our service. We provide 24/7 support through phone, email, online documentation and an online forum. Our support staff is comprised of highly experienced and knowledgeable technicians that receive significant training on the deployment and maintenance of our service, as well as the operations of our data centers. There is no additional charge for customer support.
Technology
We designed our cloud-based service to support large global enterprises. The architecture, design, deployment and management of our service are focused on:
Scalability . Our service is designed to support concurrent user sessions within a global enterprise, processing thousands of record-producing transactions and managing multiple terabytes of data while continuing to deliver best-in-class transaction processing time.
Availability . Our customers are highly dependent on our service for the dayto-day operations of their IT infrastructure. Our service is designed as an always on solution.
Security . Our service hosts and manages a large quantity of highly sensitive customer data. We employ a number of technologies, policies and procedures to protect customer data. We offer data centers that have SSAE 16 or ISO 27001 attestations or equivalent attestations.
We have a standardized Java-based development environment with the majority of our software written in industry standard software programming languages. We also use Web 2.0 technologies like AJAX and HTML which give users an intuitive and familiar experience. Our hardware primarily consists of industry standard servers and network components. Our standard operating system and database are Linux and MySQL, respectively, and the system is highly portable across multiple platforms including Microsoft Windows, Microsoft SQL Server and Oracle databases.
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Unlike many SaaS vendors, we operate a multi-instance architecture that provides all customers with dedicated applications and databases. Most customers run on shared infrastructure servers while larger customers may run on dedicated servers. This architecture reduces risk associated with infrastructure outages, improves system scalability and security, and allows for flexibility in deployment location. We are also investing in enhancements to our cloud architecture, which are designed to provide all our customers with increased data reliability and availability.
We offer our customers the option to purchase dedicated hardware in our data centers. In addition, our multi-instance architecture gives us the added flexibility to deploy our applications on-premises at a customer data center in order to support regulatory or security requirements. When our software is installed at the customer site, we define the hardware requirements that the customer must install and manage. We then remotely install and maintain the applications in a similar way to how we manage customer instances deployed in our own managed data centers. A small percentage of our customers run an on-premises solution.
Sales and Marketing
We sell our product and services through direct field sales and indirect channel sales. Our primary sales channel in North America is direct sales, and we also partner with strategic resellers and system integrators. For international markets outside of the United Kingdom and Germany we have historically partnered with strategic resellers. In the past year we have made significant investments in direct sales in many markets.
Our marketing efforts and lead generation activities consist primarily of customer referrals, Internet advertising, trade shows and industry events and press releases. We also host Knowledge conferences and webinars where customers both participate in and present a variety of programs designed to help accelerate marketing success with our service and platform.
As of September 30, 2012 we had 330 employees in sales and marketing.
Customers
We primarily market our service to large enterprises, which we define as companies with over $750 million in revenues and a minimum of 200 IT employees, and public sector organizations. We have proven scalability supporting large enterprise wide deployments. As of September 30, 2012, we had 1,346 customers that operate in a wide variety of industries, including financial services, consumer products, IT services, health care and technology. Representative customers during the first nine months of 2012 included:
2e2 |
Dimension Data | Kimberly-Clark | ||
Advanced Micro Devices |
Ellucian | Ohio State University Medical Center | ||
Allina Health |
Flextronics | Orange Business Services | ||
Barclays |
Health Partners | Philip Morris International | ||
CompuCom |
JT International | Qualcomm | ||
Deutsche Bank |
Johnson & Johnson Services | Shaw Industries |
Data Center Operations
We currently run our service from twenty data centers around the world, including the United States, Canada, the United Kingdom, the Netherlands, Switzerland and Australia. We have substantially completed our transition from a managed service hosting model, where a third party manages many aspects of the operations of the hosting infrastructure, to a co-location model, where we will have more direct control over the infrastructure and its operation. By December 31, 2012, we expect to have thirteen data centers globally, two in each serving region operating in a mirrored configuration to provide high availability. For our U.S. federal government
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customers we are in the process of becoming compliant with the Federal Information Security Management Act. We may also add data centers to meet regulatory requirements or accommodate growth.
Research and Development
Our ability to compete depends in large part on our continuous commitment to research and development and our ability to timely introduce new products, technologies, features and functionality. Our research and development organization is responsible for the design, development, testing and certification of our products and services. Our efforts are focused on developing new products and core technologies and further enhancing the functionality, reliability, performance and flexibility of existing solutions. We focus our efforts on anticipating customer demand in bringing new products and new versions of existing products to market quickly in order to remain competitive in the marketplace.
As of September 30, 2012, we had 164 employees in our research and development group. Our research and development expenses were $2.4 million, $7.2 million and $7.0 million in fiscal 2009, 2010 and 2011, respectively, $2.8 million and $7.0 million in the six months ended December 31, 2010 and 2011, respectively, and $7.0 million and $26.1 million in the nine months ended September 30, 2011 and 2012, respectively.
Competition
The market for enterprise IT management solutions is fragmented, rapidly evolving and highly competitive. We face competition from in-house solutions, large integrated systems vendors and smaller companies with point solutions. Our competitors vary in size and in the breadth and scope of the products and services offered. Our primary competitors include BMC Software, Inc., CA, Inc., Hewlett-Packard Company and International Business Machines Corporation, all of which can bundle competing products and services with other software offerings, or offer them at a low price as part of a larger sale. With the introduction of new technologies, evolution of our product offerings and new market entrants, we expect competition to intensify in the future.
The principal competitive factors in our industry include total cost of ownership, product functionality, breadth of offerings, flexibility and performance. We believe that we compete favorably with our competitors on each of these factors. However, many of our primary competitors have greater name recognition, longer operating histories, more established customer relationships, larger marketing budgets and significantly greater resources than we do.
Intellectual Property
We rely upon a combination of copyright, trade secret and trademark laws and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our proprietary rights. We have only recently begun to develop a strategy to seek patent protections for our technology. We pursue the registration of our domain names and trademarks and service marks in the United States and in certain locations outside the United States.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or obtain and use our technology to develop products and services that provide features and functionality that are similar to our service offerings. Policing unauthorized use of our technology is difficult. The laws of the countries in which we market our service may offer little or no effective protection of our proprietary technology. Our competitors could also independently develop services equivalent to ours, and our intellectual property rights may not be broad enough for us to prevent competitors from doing so. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technology could enable third parties to benefit from our technology without paying us for it, which would significantly harm our business.
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We expect that we and others in our industry may be subject to third-party infringement claims as the number of competitors grows and the functionality of products and services overlaps. Our competitors could make a claim of infringement against us with respect to our service and underlying technology. Third parties may currently have, or may eventually be issued, patents upon which our current solution or future technology infringe. Any of these third parties might make a claim of infringement against us at any time.
Employees
As of September 30, 2012, we had 963 full-time employees worldwide, including 330 in sales and marketing, 361 in operations, professional services, training and customer support, 164 in research and development and 108 in general and administrative roles. None of our U.S. employees is represented by a labor union with respect to his or her employment. Employees in certain European countries have the benefits of collective bargaining arrangements at the national level. We have not experienced any work stoppages.
Facilities
Our principal office is located in San Diego, California. We also maintain offices in multiple locations in the United States and internationally, including San Jose, New York, Seattle, London, Amsterdam and Sydney. We are currently seeking additional space in London as needed to satisfy our growth.
Legal Proceedings
From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition or cash flows.
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Executive Officers and Directors
The following table sets forth information regarding our executive officers and directors as of September 30, 2012:
Name |
Age |
Position |
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Executive Officers: |
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Frank Slootman |
53 | President, Chief Executive Officer and Director | ||||
Frederic B. Luddy |
57 | Chief Product Officer and Director | ||||
Michael P. Scarpelli |
45 | Chief Financial Officer | ||||
David L. Schneider |
44 | Senior Vice President of Worldwide Sales and Services | ||||
Arne Josefsberg |
54 | Chief Technology Officer | ||||
Daniel R. McGee |
52 | Senior Vice President of Engineering | ||||
Directors: |
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Paul V. Barber (2) |
50 | Chairman of the Board of Directors | ||||
Ronald E. F. Codd (1)(3) |
57 | Director | ||||
Douglas M. Leone (2) |
55 | Director | ||||
Jeffrey A. Miller (1)(2) |
61 | Director | ||||
Charles E. Noell, III (3) |
60 | Director | ||||
William L. Strauss (1)(3) |
54 | Director |
(1) |
Member of the Audit Committee. |
(2) |
Member of the Compensation Committee. |
(3) |
Member of the Nominating and Governance Committee. |
Executive Officers
Frank Slootman has served as our President and Chief Executive Officer, and as a director, since May 2011. Mr. Slootman served as a partner with Greylock Partners, a venture capital firm, from March 2011 to April 2011, and served as an advisor to EMC Corporation, an information technology company, from January 2011 to February 2012. From July 2009 to December 2010, Mr. Slootman served as President of the Backup Recovery Systems Division at EMC. From July 2003 to July 2009, Mr. Slootman served as President and Chief Executive Officer of Data Domain, Inc., an electronic storage solution company, which was acquired by EMC in 2009. Prior to joining Data Domain, Mr. Slootman served as an executive at Borland Software Corporation from June 2000 to June 2003, most recently as Senior Vice President of Products. From March 1993 to June 2000, Mr. Slootman held management positions for two enterprise software divisions of Compuware Corporation. Mr. Slootman holds undergraduate and graduate degrees in Economics from the Netherlands School of Economics, Erasmus University Rotterdam. Our board believes that Mr. Slootmans business expertise, including his prior executive level leadership, gives him the operational expertise, breadth of knowledge and valuable understanding of our industry which qualifies him to serve as a member of our board of directors.
Frederic B. Luddy has served as our Chief Product Officer since May 2011. Mr. Luddy founded ServiceNow in June 2004 and served as our President and Chief Executive Officer from that time until May 2011 and as a director since June 2004. From April 1990 to October 2003, Mr. Luddy served as Chief Technology Officer of Peregrine Systems, Inc., an enterprise software company that filed for protection under Chapter 11 of the United States Bankruptcy Code in September 2002. Prior to joining Peregrine Systems, Mr. Luddy founded Enterprise Software Associates, a software company, and was employed by Boole and Babbage, Inc., a software
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company, and the Amdahl Corporation, an information technology company. Our board believes Mr. Luddys experience as the founder of ServiceNow, his knowledge of software and the software industry, as well his executive level experience and software and hardware development expertise give him the breadth of knowledge and leadership capabilities which qualify him to serve as a member of our board of directors.
Michael P. Scarpelli has served as our Chief Financial Officer since August 2011. From July 2009 to August 2011, Mr. Scarpelli served as Senior Vice President of Finance & Business Operations of the Backup Recovery Systems Division at EMC. From September 2006 to July 2009, Mr. Scarpelli served as Chief Financial Officer of Data Domain. Prior to joining Data Domain, Mr. Scarpelli served as Executive Vice President and Chief Financial Officer for Lexar Media, Inc., a flash memory manufacturer, from January 2006 until Lexar was acquired by Micron Technology, Inc. in August 2006. From January 2002 to December 2005, Mr. Scarpelli held senior positions at HPL Technologies, Inc., a provider of yield management software and test chip solutions, most recently as Senior Vice President and Chief Financial Officer. Mr. Scarpelli began his career at PricewaterhouseCoopers LLP from May 1989 to December 2001. Mr. Scarpelli holds a B.A. in Economics from the University of Western Ontario.
David L. Schneider has served as our Senior Vice President of Worldwide Sales and Services since June 2011. From July 2009 to March 2011, Mr. Schneider served as Senior Vice President of Worldwide Sales of the Backup Recovery Systems Division of EMC. From January 2004 to July 2009, Mr. Schneider held senior positions at Data Domain, most recently Senior Vice President of Worldwide Sales. Prior to joining Data Domain, Mr. Schneider served as Vice President of Alliances, Channel and OEM Sales for Borland Software from January 2003 to December 2003. From May 2002 to January 2003, Mr. Schneider served as Vice President of Western United States Sales for TogetherSoft Corporation (later acquired by Borland Software). From January 1999 to May 2002, Mr. Schneider was Western Regional Manager at Iona Technologies, Inc., an infrastructure software company. Mr. Schneider holds a B.A. in Political Science from the University of California, Irvine.
Arne Josefsberg has served as our Chief Technology Officer since September 2011. Prior to joining us, Mr. Josefsberg held various positions with Microsoft Corporation over the last 25 years, most recently as general manager of Windows Azure Infrastructure from November 2009 to September 2011, and as General Manager of Infrastructure Services, Global Foundation Services from March 2006 to October 2009. Mr. Josefsberg holds an M.S. in Physics from the Lund Institute of Technology in Sweden.
Daniel R. McGee has served as our Senior Vice President of Engineering since August 2011. From July 2009 to August 2011, Mr. McGee served as Senior Vice President of Engineering and Support of the Backup Recovery Systems Division of EMC. From February 2006 to July 2009, Mr. McGee held senior positions at Data Domain, most recently Senior Vice President of Engineering and Support. Prior to joining Data Domain, Mr. McGee served as Vice President of Engineering at Aventail Corporation from March 2004 to February 2006 and held various positions at Pinnacle Systems, Inc. from August 1999 to March 2004 including the joint position of Director of Network Solutions and General Manager of Distributed Broadcast Solutions. Mr. McGee holds a B.S. in Electrical Engineering & Computer Science from Oregon State University and an M.S. in Engineering Management from Stanford University.
Directors
Paul V. Barber has served on our board of directors since June 2005. In November 1998, Mr. Barber joined JMI Equity, a venture capital firm, where he now serves as a Managing General Partner. Mr. Barber also serves on the boards of directors of several private companies. From 1990 to 1998, Mr. Barber was the Managing Director and Head of the Software Investment Banking Practice at Alex. Brown & Sons. Mr. Barber received an A.B. in Economics from Stanford University and an M.B.A. from the Harvard Business School. Our board believes that Mr. Barbers management experience and his service on other boards of directors in the information technology industry, including his experience in finance, give him the breadth of knowledge and valuable understanding of our industry which qualify him to serve as a member of our board of directors.
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Ronald E. F. Codd has served on our board of directors since February 2012. Mr. Codd has been an independent business consultant since April 2002. From January 1999 to April 2002, Mr. Codd served as President, Chief Executive Officer and a director of Momentum Business Applications, Inc., an enterprise software company. From September 1991 to December 1998, Mr. Codd served as Senior Vice President of Finance and Administration and Chief Financial Officer of PeopleSoft, Inc. Mr. Codd has served as a member of the board of directors of Rocket Fuel, Inc. since February 2012. Mr. Codd has served on numerous information technology boards including most recently DemandTec, Inc., Interwoven, Inc. and Data Domain. Mr. Codd holds a B.S. in Accounting from the University of California, Berkeley and an M.M. in Finance and M.I.S. from the Kellogg Graduate School of Management at Northwestern University. Mr. Codd is also a member of the adjunct faculty at Golden Gate University in San Francisco, California. Our board believes that Mr. Codds management experience and his software industry experience, including his experience in finance, give him the breadth of knowledge and valuable understanding of our industry which qualify him to serve as a member of our board of directors.
Douglas M. Leone has served on our board of directors since November 2009. Mr. Leone has been a Managing Member of Sequoia Capital, a venture capital firm, since July 1988. Prior to joining Sequoia Capital, Mr. Leone held sales and sales management positions at Sun Microsystems, Inc., Hewlett-Packard Company and Prime Computer, Inc. Mr. Leone has served on the board of directors of Aruba Networks, Inc. since 2002. Mr. Leone holds a B.S. in Mechanical Engineering from Cornell University, an M.S. in Industrial Engineering from Columbia University and an M.S. in Management from the Massachusetts Institute of Technology. Our board believes that Mr. Leones investment experience in the Internet and software industries, as well as his background in sales and sales management, provide valuable insight regarding our business and qualify him to serve as a member of our board of directors.
Jeffrey A. Miller has served on our board of directors since February 2011. Mr. Miller has served as President and Chief Executive Officer of JAMM Ventures, a consulting and venture capital firm, since January 2002. Mr. Miller currently serves as a trustee for Santa Clara University since October 2012. From January 2002 to March 2006, Mr. Miller also served as a Venture Partner with Redpoint Ventures. Mr. Miller previously served on the board of directors of Data Domain from October 2006 to July 2009 and McAfee, Inc. from June 2008 to February 2011. Mr. Miller holds a B.S. in Electrical Engineering and Computer Science and an M.B.A. from Santa Clara University. Our board believes that Mr. Millers consulting and investment experience and his service on the boards of directors of other companies in the information technology industry give him the appropriate set of skills which qualify him to serve as a member of our board of directors.
Charles E. Noell, III has served on our board of directors since February 2012. From January 1992 through December 2010, Mr. Noell served as President and Chief Executive Officer of JMI Services, Inc. and since December 2010 has served as President of JMI Services, LLC, each a family office. Mr. Noell co-founded JMI Equity, a venture capital firm, in 1992, has served as a General Partner since its founding and has served as a Venture Partner since 2007. From March 1996 to August 2012, Mr. Noell served as a member of the Executive Committee of Padres, Inc., the general partner of Padres L.P., the owner of the San Diego Padres Major League Baseball franchise. Mr. Noell holds a B.A. in History from the University of North Carolina at Chapel Hill and an M.B.A. from Harvard University. Our board believes that Mr. Noells investment experience in the information technology industry gives him the breadth of knowledge and understanding of our industry which qualify him to serve as a member of our board of directors.
William L. Strauss has served on our board of directors since February 2011. From September 2011 to September 2012, Mr. Strauss served as Chief Executive Officer and director of Shoedazzle.com, Inc., an online fashion company. From November 1999 to September 2011, Mr. Strauss served as Chief Executive Officer and a director of Provide Commerce, Inc., an e-commerce marketplace of websites, which was acquired by Liberty Media Corporation in 2006. Mr. Strauss holds a B.A. in Accounting from Syracuse University. Our board believes that Mr. Strauss management experience gives him the appropriate set of skills which qualify him to serve as a member of our board of directors.
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Our executive officers are elected by, and serve at the discretion of, our board of directors. There are no family relationships among any of our directors or executive officers.
Board of Directors
The rules of the New York Stock Exchange require that a majority of the members of our board of directors be independent. Our board of directors has determined that six of our directors are independent as determined under the rules of the New York Stock Exchange: Messrs. Barber, Codd, Leone, Miller, Noell and Strauss.
Messrs. Barber, Leone, Luddy and Noell were appointed to our board of directors by certain of our stockholders pursuant to a voting agreement, which was terminated upon the closing of our initial public offering. The current members of our board of directors will continue to serve as directors until their resignation or until their successors are duly elected.
Our restated certificate of incorporation divides our board of directors into three classes, with staggered three-year terms:
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Class I directors, whose initial term will expire at the annual meeting of stockholders to be held in 2013; |
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Class II directors, whose initial term will expire at the annual meeting of stockholders to be held in 2014; and |
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Class III directors, whose initial term will expire at the annual meeting of stockholders to be held in 2015. |
At each annual meeting of stockholders after the initial classification, the successors to directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following election. Currently, the Class I directors consist of Messrs. Barber, Codd and Slootman; the Class II directors consist of Messrs. Noell and Strauss; and the Class III directors consist of Messrs. Leone, Luddy and Miller. As a result, only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms.
In addition, under our restated certificate of incorporation and restated bylaws, (1) our board of directors may set the authorized number of directors and (2) only our board of directors may fill vacancies on our board of directors. Any director appointed to fill a vacancy shall serve for the remaining term of the directorship that would have been served by the director he or she replaced. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the total number of directors.
The classification of our board of directors and provisions described above may have the effect of delaying or preventing changes in our control or management. See Description of Capital StockAnti-Takeover ProvisionsRestated Certificate of Incorporation and Restated Bylaw Provisions.
Board Leadership Structure
Our board of directors has an independent chairman, Mr. Barber. We believe that separation of the positions of chairman and chief executive officer reinforces the independence of our board of directors in its oversight of our business and affairs. In addition, we believe that having an independent board chairman creates an environment that is more conducive to objective evaluation and oversight of managements performance, increasing management accountability and improving the ability of our board of directors to monitor whether managements actions are in the best interests of our company and stockholders. As a result, we believe that having an independent board chairman enhances the effectiveness of the board of directors as a whole.
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Role of the Board in Risk Oversight
One of the key functions of our board of directors is informed oversight of our risk management process. Our board of directors does not have a standing risk management committee, but rather administers this oversight function directly as a whole, as well as through various standing committees of our board of directors that address risks inherent in their respective areas of oversight. In particular, our board of directors is responsible for monitoring and assessing strategic risk exposure and our Audit Committee has the responsibility to consider and discuss our major financial risk exposures and the steps our management has taken to monitor and control these exposures, including guidelines and policies to govern the process by which risk assessment and management are undertaken. The Audit Committee also monitors compliance with legal and regulatory requirements. Our Compensation Committee assesses and monitors whether any of our compensation policies and programs has the potential to encourage excessive risk-taking.
Board Committees
Our board of directors has an Audit Committee, a Compensation Committee and a Nominating and Governance Committee, each of which has the composition and responsibilities described below. Members serve on these committees until their resignations or until otherwise determined by our board of directors.
Audit Committee
Our Audit Committee comprises Mr. Codd, who is the chair of the Audit Committee, and Messrs. Miller and Strauss. The composition of our Audit Committee meets the requirements for independence under the current New York Stock Exchange and SEC rules and regulations. Each member of our Audit Committee is financially literate. In addition, our board of directors has determined that Mr. Codd is an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K promulgated under the Securities Act. The designation does not impose on Mr. Codd any duties, obligations or liabilities that are greater than are generally imposed on members of our Audit Committee and our board of directors. All audit services to be provided to us and all permissible non-audit services to be provided to us by our independent registered public accounting firm will be approved in advance by our Audit Committee. Our board of directors has adopted a revised charter for our Audit Committee. Our Audit Committee, among other things:
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selects a firm to serve as the independent registered public accounting firm to audit our financial statements; |
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helps ensure the independence of the independent registered public accounting firm; |
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discusses the scope and results of the audit with the independent registered public accounting firm, and review, with management and that firm, our interim and year-end operating results; |
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develops procedures for employees to anonymously submit concerns about questionable accounting or audit matters; |
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considers the adequacy of our internal accounting controls and audit procedures; and |
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approves or, as permitted, pre-approves all audit and non-audit services to be performed by the independent registered public accounting firm. |
Compensation Committee
Our Compensation Committee comprises Mr. Miller, who is the chair of the Compensation Committee, and Messrs. Barber and Leone. The composition of our Compensation Committee meets the requirements for independence under the current New York Stock Exchange and SEC rules and regulations. Each member of this committee is a non-employee director, as defined pursuant to Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, and an outside director, as defined pursuant to Section 162(m) of the Internal
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Revenue Code of 1986, as amended, or the Code. The purpose of our Compensation Committee is to discharge the responsibilities of our board of directors relating to compensation of our executive officers. Our board of directors has adopted a revised charter for our Compensation Committee. Our Compensation Committee, among other things:
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reviews and approves, or recommends that our board of directors approve, the compensation of our executive officers; |
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reviews and recommends to our board of directors the compensation of our directors; |
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reviews and approves the terms of any material agreements with our executive officers; |
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administers our stock and equity incentive plans; |
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reviews and makes recommendations to our board of directors with respect to incentive compensation and equity plans; and |
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establishes and reviews our overall compensation philosophy. |
Nominating and Governance Committee
Our Nominating and Governance Committee comprises Mr. Strauss, who is the chair of the Nominating and Governance Committee, Mr. Codd and Mr. Noell. The composition of our Nominating and Governance Committee meets the requirements for independence under the current New York Stock Exchange and SEC rules and regulations. Our board of directors has adopted a charter for our Nominating and Governance Committee. Our Nominating and Governance Committee, among other things:
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identifies, evaluates and recommends nominees to our board of directors and committees of our board of directors; |
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conducts searches for appropriate directors; |
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evaluates the performance of our board of directors; |
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considers and makes recommendations to our board of directors regarding the composition of our board of directors and its committees; |
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reviews related party transactions and proposed waivers of the code of conduct; |
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reviews developments in corporate governance practices; and |
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evaluates the adequacy of our corporate governance practices and reporting. |
We have posted the charters of our Audit, Compensation and Nominating and Governance Committees, and will post any amendments that may be adopted from time to time, on our website.
Compensation Committee Interlocks and Insider Participation
No member of our Compensation Committee is an executive officer or employee of ours. None of our officers currently serves, or has served during the last completed fiscal year, on the compensation committee or board of directors of any other entity that has one or more officers serving as a member of our board of directors or Compensation Committee. We have had a compensation committee since October 2010. Prior to establishing the Compensation Committee, our full board of directors made decisions relating to compensation of our officers.
Code of Business Conduct and Ethics
Our board of directors has adopted written codes of business conduct and ethics that apply to our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer, controller, or person performing similar functions. We have posted the codes of business conduct and ethics, and will post any amendments that may be adopted from time to time, on our website.
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Director Compensation
The following table sets forth information concerning the compensation that we paid or awarded during fiscal 2011 and the six months ended December 31, 2011 to each of our non-employee directors:
Name |
Period |
Fees Earned
or Paid in Cash ($) |
Option
Awards ($) (1) |
Total ($) | ||||||||||
Paul V. Barber |
* | | | | ||||||||||
2011 | | | | |||||||||||
Andrew M. Leitch (2) |
* | 20,000 | | 20,000 | ||||||||||
2011 | 20,000 | 165,140 | 185,140 | |||||||||||
Douglas M. Leone |
* | | | | ||||||||||
2011 | | | ||||||||||||
Jeffrey A. Miller |
* | | | | ||||||||||
2011 | | 278,980 | 278,980 | |||||||||||
William L. Strauss |
* | | | | ||||||||||
2011 | | 278,980 | 278,980 |
* |
Effective February 3, 2012, we changed our fiscal year-end from June 30 to December 31. Amounts in this row are for the six months ended December 31, 2011. |
(1) |
Amounts listed represent the aggregate fair value amount computed as of the grant date of each option and award during fiscal 2011 in accordance with FASB ASC Topic 718. Assumptions used in the calculation of these amounts are included in Note 12 to our consolidated financial statements. As required by SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. Our directors will only realize compensation to the extent the trading price of our common stock is greater than the exercise price of such stock options. |
(2) |
Mr. Leitch resigned from our board of directors in February 2012. |
Messrs. Codd and Noell were elected to our board of directors in February 2012 and did not receive any compensation for fiscal 2011 or the six months ended December 31, 2011.
For fiscal 2011 and the six months ended December 31, 2011, our board of directors adopted a compensation policy for our non-employee directors who are not affiliated with any holder of more than 10% of our common stock. The policy provided for an annual board service retainer of $20,000 to the director serving as the chair of the Audit Committee, payable upon the appointment as chairman and annually thereafter. In addition, any newly appointed eligible non-employee director was entitled to receive a nonqualified stock option for 200,000 shares, vesting in equal monthly installments over four years.
In April 2012, we adopted a new non-employee director compensation policy that became effective following the closing of our initial public offering. Under the new policy, each non-employee director receives a cash retainer of $25,000 per year and an annual stock option grant of 50,000 shares, vesting one year from the date of grant. In addition, any non-employee director acting as the chairperson of the Audit Committee, Compensation Committee or Nominating and Governance Committee receives an annual cash retainer of $20,000, $10,000 and $5,000, respectively. Any non-employee director serving as a member of the Audit Committee, Compensation Committee or Nominating and Governance Committee, other than the chairperson, receives an annual cash retainer of $5,000, $3,750 and $2,500, respectively. Further, any person first elected or appointed as a non-employee member of our board of directors following the closing of our initial public offering receives a stock option grant of 100,000 shares, vesting annually over three years. In connection with this policy, an initial stock option grant to purchase 100,000 shares with an exercise price equal to the initial public offering price of $18.00 per share, to vest annually over three years, was awarded to each of Messrs. Barber, Leone and Noell on June 28, 2012, the date of the pricing of our initial public offering. No director shall be entitled to per-meeting fees.
All directors are also entitled to reimbursement for reasonable travel expenses incurred in attending meetings of our board of directors and committees of the board of directors.
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Compensation Discussion and Analysis
Overview
The following discussion and analysis of compensation arrangements of our executive officers should be read together with the compensation tables and related disclosures set forth below. This discussion contains forward-looking statements that are based on our current plans, considerations, expectations and determinations regarding future compensation programs. The actual amount and form of compensation and the compensation programs that we adopt may differ materially from currently planned programs as summarized in this discussion.
This section discusses the principles underlying our executive compensation policies and decisions and the most important factors relevant to an analysis of these policies and decisions. In addition, we explain how and why our board of directors and the Compensation Committee of our board of directors arrived at specific compensation policies and decisions involving our executive officers during fiscal 2011 and the six months ended December 31, 2011.
This Compensation Discussion and Analysis provides information about the material components of our executive compensation program for the following executive officers, to whom we refer collectively in this prospectus as the named executive officers.
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Frank Slootman, our President and Chief Executive Officer, or CEO; |
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Michael P. Scarpelli, our Chief Financial Officer; |
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Frederic B. Luddy, our Chief Product Officer; |
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Arne Josefsberg, our Chief Technology Officer; |
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David L. Schneider, our Senior Vice President of Worldwide Sales and Services; |
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Daniel R. McGee, our Senior Vice President of Engineering; and |
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Andrew J. Chedrick, our former Chief Financial Officer. |
We hired Mr. Slootman as our President and CEO in May 2011. At that time, Mr. Luddy, our founder, who had been serving as our President and CEO, was appointed our Chief Product Officer. We hired Mr. Schneider as our Senior Vice President of Sales in June 2011.
We hired Mr. Scarpelli as our Chief Financial Officer in August 2011. At that time, Mr. Chedrick, who had been serving as our Chief Financial Officer, was appointed our Vice President, Finance. Mr. Chedrick resigned his position as an employee of our company effective January 2012.
We hired Mr. McGee as our Senior Vice President, Engineering in August 2011. We hired Mr. Josefsberg as our Chief Technology Officer in September 2011. To better reflect the scope of their roles and responsibilities, Mr. Schneiders title was subsequently changed to Senior Vice President of Worldwide Sales and Services and Mr. McGees title was subsequently changed to Senior Vice President of Engineering.
Executive Compensation Philosophy and Objectives
We believe in providing a competitive total compensation package to our executive officers through a combination of base salary, performance-based bonuses, equity incentive awards and broad-based welfare and health benefit plans. Our executive compensation program is designed to achieve the following objectives:
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attract, motivate and retain executive officers of outstanding ability and potential; |
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reward the achievement of key performance measures; and |
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ensure that executive compensation is meaningfully related to the creation of stockholder value. |
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We believe that our executive compensation program should include short-term and long-term components, including cash and equity incentive compensation, and should reward consistent performance that meets or exceeds expectations. We evaluate both performance and compensation to make sure that the compensation provided to our executive officers remains competitive relative to compensation paid by companies of similar size operating in the software services industry, taking into account our relative performance and our own strategic objectives.
Executive Compensation Design
Our current executive compensation program reflects our stage of development as a privately-held company. Accordingly, the compensation of our executive officers, including the named executive officers, has consisted of base salary, quarterly and annual cash bonus opportunities, equity compensation in the form of stock options and certain employee welfare and health benefits.
The key component of our executive compensation program has been equity awards in the form of options to purchase shares of our common stock. As a privately-held company, we have emphasized the use of equity to provide incentives for our executive officers to focus on the growth of our overall enterprise value and, correspondingly, to create value for our stockholders. Until March 2012, we used stock options as our sole equity award vehicle for all of our employees. In March 2012, we issued restricted stock units, or RSUs, for the first time. We believe that stock options and RSUs offer our executive officers, including the named executive officers, a valuable long-term incentive that aligns their interests with the long-term interests of our stockholders. Going forward, as we deem appropriate, we may introduce other forms of stock-based compensation awards into our executive compensation program to offer our executive officers additional types of long-term equity incentives that further this objective.
We also offer cash compensation in the form of base salaries and quarterly and annual cash bonus opportunities. Typically, we have structured our cash bonus opportunities to focus on the achievement of specific short-term financial objectives that will further our longer-term growth objectives.
We have not adopted any formal policies or guidelines for allocating compensation between current and long-term compensation, between cash and non-cash compensation, or among different forms of non-cash compensation. Instead, our board of directors and, since October 2010, the Compensation Committee, have reviewed each component of executive compensation separately and also take into consideration the value of each executive officers compensation package as a whole and its relative size in comparison to our other executive officers.
As we have transitioned from a privately-held company to a publicly-traded company, we continue to evaluate our philosophy and compensation programs as circumstances require. At a minimum, we will review executive compensation annually. As part of this review process, we expect to apply our values and the objectives outlined above, while considering the compensation levels needed to ensure our executive compensation program remains competitive. We will also review whether we are meeting our retention objectives and the potential cost of replacing a key employee.
Executive Compensation Process
Role of the Compensation Committee . The Compensation Committee, which is currently composed entirely of independent directors, was established in October 2010. Prior to establishing the Compensation Committee, our board of directors made all decisions concerning the compensation of our executive officers.
Upon establishing the Compensation Committee, our board of directors delegated to it responsibility for reviewing and approving the compensation of our executive officers. The role of the Compensation Committee
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was to oversee our compensation and benefit plans and policies, to administer our equity incentive plans, and to annually review and approve or recommend to the board of directors for approval of the compensation decisions for our executive officers, including the named executive officers.
Historically, the board of directors or the Compensation Committee, as applicable, conducted a review of the aggregate level of our executive compensation, as well as the mix of elements used to compensate our executive officers. As a privately-held company, we based this review primarily on the experience of the non-employee members of our Compensation Committee and board of directors that are affiliated with venture investment firms and who sit on the boards of directors of other companies in the software and information technology sectors.
Role of Executive Officers . Historically, our CEO evaluated the performance of our executive officers (other than his own performance) on an annual basis and made recommendations to our board of directors or the Compensation Committee, as applicable, with respect to base salary adjustments, target bonus opportunities, actual bonus payments and equity incentive awards. Our CEO intends to continue this practice going forward.
While the Compensation Committee considered these recommendations in its deliberations, it exercised its own independent judgment in approving the executive compensation of our executive officers.
Role of Compensation Consultant . In November 2010, the Compensation Committee retained Compensia, Inc., or Compensia, a national compensation consulting firm, to assist it in developing our overall executive compensation program. Among other things, the Compensation Committee directed Compensia to provide its analysis of whether our existing compensation strategy and practices were consistent with our compensation objectives and to assist it in modifying our compensation program for executive officers to better achieve our objectives. As part of its duties, Compensia has performed the following projects for the Compensation Committee:
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assisted in the development of a compensation peer group; |
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provided compensation data for similarly-situated executive officers at our peer group companies; and |
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updated the Compensation Committee on emerging trends and best practices in the area of executive compensation. |
Compensia does not provide any other services to us.
Competitive Positioning
Prior to the Compensation Committees engagement of Compensia, our board of directors used publicly-available data relating to the compensation practices and policies of other companies within and outside our industry as a reference source in determining executive compensation. Typically, our board of directors applied its subjective judgment to make compensation decisions and did not formally benchmark our executive compensation against any particular group of companies or use a formula to set our executive officers compensation in relation to this data.
In connection with its engagement, the Compensation Committee directed Compensia to assist it in the development of a compensation peer group. Compensia provided the Compensation Committee with a recommended list of peer companies for its consideration. This recommended list consisted of companies with a SaaS business model that Compensia and the Compensation Committee determined compete with us for talent, are in the same geographical area and have a similar number of employees.
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In February 2011, the Compensation Committee reviewed the following companies as the peer group to be used as a reference source in its executive compensation deliberations:
Art Technology Group Inc. |
Constant Contact, Inc. |
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DemandTec, Inc. |
Guidance Software, Inc. |
|
IntraLinks Holdings, Inc. |
Kenexa Corporation |
|
LivePerson, Inc. |
LogMeIn, Inc. |
|
NaviSite, Inc. |
NetSuite Inc. |
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OpenTable, Inc. |
RealPage, Inc. |
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RightNow Technologies, Inc. |
SuccessFactors, Inc. |
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Support.com, Inc. |
Vocus, Inc. |
Following the development of the peer group, Compensia provided the Compensation Committee and our CEO data and analysis of the executive compensation practices of the companies included in the peer group. As the Compensation Committee and CEO negotiated the employment agreements of our named executive officers in 2011, the information from Compensia was considered as part of the overall mix of information available to the Compensation Committee and our CEO. However, the elements of executive compensation, and the amounts of compensation agreed to, for each named executive officer were determined as a result of arms-length negotiations with the executive officers, and not as a result of any benchmarking against the peer group. In the future, the Compensation Committee may elect to formally benchmark the compensation of the named executive officers against a peer group of companies, and intends to review the peer group at least annually and make adjustments to its composition as necessary.
Elements of Executive Compensation
The compensation program for our executive officers consists of three principal components:
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base salary; |
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performance-based and discretionary bonuses; and |
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equity incentive compensation. |
Base Salary . The initial base salaries of our executive officers have been established through arms-length negotiation at the time the individual was hired, taking into account his or her qualifications, experience, the scope of his or her responsibilities, the competitive market compensation paid by other companies for similar positions within the industry and the base salaries of our other executive officers.
Thereafter, the base salaries of our executive officers, including the named executive officers, are reviewed annually, typically in connection with our annual performance review process, and adjusted from time to time to realign them with market levels after taking into account individual responsibilities, performance and experience. In making decisions regarding base salary adjustments, we may also draw upon the experience of members of our board of directors with other companies. The Compensation Committee has not previously applied specific formulas to determine base salary adjustments, although it may set future adjustments as a percentage of an executive officers then-current base salary.
The salaries paid to the named executive officers who were with our company in fiscal 2010 and 2011 were as follows:
Named Executive Officer |
Fiscal 2010
Salary |
Fiscal 2011
Salary |
||||||
Frederic B. Luddy |
$ | 330,000 | $ | 330,000 | ||||
Andrew J. Chedrick |
255,000 | 255,000 |
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In May 2011, we hired Mr. Slootman as our President and Chief Executive Officer. At that time, our board of directors set his annual base salary at $300,000. This amount was determined as part of the arms-length negotiation of the terms of Mr. Slootmans employment, which was conducted on our behalf by members of the Compensation Committee and subsequently approved by our board of directors.
In June 2011, we hired Mr. Schneider as our Senior Vice President of Sales. At that time, the Compensation Committee set his annual base salary at $250,000. This amount was determined as part of the arms-length negotiation of the terms of Mr. Schneiders employment, which was conducted on our behalf by our CEO and subsequently approved by the Compensation Committee.
In July 2011, the board of directors, based on the recommendation of the Compensation Committee, approved an adjustment to the base salary of Mr. Luddy from $330,000 to $300,000 to better reflect the scope of his role and responsibilities with our company. No changes were made to the base salaries of our CEO or Messrs. Chedrick and Schneider.
In August 2011, we hired Mr. Scarpelli as our Chief Financial Officer. At that time, the Compensation Committee set his annual base salary at $275,000. This amount was determined as part of the arms-length negotiation of the terms of Mr. Scarpellis employment, which was conducted on our behalf by our CEO and subsequently approved by the Compensation Committee.
In August 2011, we hired Mr. McGee as our Senior Vice President, Engineering. At that time, the Compensation Committee set his annual base salary at $260,000. This amount was determined as part of the arms-length negotiation of the terms of Mr. McGees employment, which was conducted on our behalf by our CEO and subsequently approved by the Compensation Committee.
In September 2011, we hired Mr. Josefsberg as our Chief Technology Officer. At that time, the Compensation Committees set his annual base salary at $275,000. This amount was determined as part of the arms-length negotiation of the terms of Mr. Josefsbergs employment, which was conducted on our behalf by our CEO and subsequently approved by the Compensation Committee.
The salaries paid to the named executive officers during the six months ended December 31, 2011 and fiscal 2011 are set forth in Summary Compensation Table below.
Cash Bonuses . We provide our executive officers, including the named executive officers, with the opportunity to earn quarterly and annual cash bonuses to encourage the achievement of corporate and individual objectives and to reward those individuals who significantly impact our corporate results. Our board of directors and, since October 2010, the Compensation Committee determine and approve our quarterly and annual bonus decisions.
For fiscal 2011, our board of directors adopted a bonus plan providing an opportunity for certain key employees, including our executive officers, to earn quarterly and annual cash bonuses. Beginning in October 2010, this bonus plan was administered by the Compensation Committee.
Fiscal 2011 Quarterly Bonuses . Under the fiscal 2011 bonus plan, the quarterly target bonus of each executive officer was equal to the product of (i) a dollar amount representing the maximum amount that the executive officer may be paid as a quarterly bonus payment, or the Target Quarterly Bonus, multiplied by (ii) a percentage representing the overall achievement of the target levels for the two performance measures for the quarter, or the Performance Goal Achievement. The Target Quarterly Bonus, the performance measures and related target levels, and the method for determining the Performance Goal Achievement for each executive officer were determined by our board of directors or the Compensation Committee, as applicable, after taking into consideration the recommendations of our CEO (for executive officers other than the CEO) at the time the performance measures and related target levels were determined for the executive officer.
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Each of the named executive officers was eligible to receive a quarterly bonus. The Target Quarterly Bonus for Mr. Luddy was $75,000, while the Target Quarterly Bonus for Mr. Chedrick was $30,000. The Target Quarterly Bonuses for Messrs. Slootman and Schneider were $37,500 and $17,123, respectively, reflecting the portion of the fourth quarter of fiscal 2011 during which they were employed by us.
For purposes of the fiscal 2011 bonus plan, our board of directors selected year-to-date consolidated revenues and year-to-date consolidated adjusted earnings before interest and taxes, or adjusted EBIT, as the two corporate performance measures that best supported our annual operating plan and enhanced long-term value creation. For purposes of the fiscal 2011 bonus plan, adjusted EBIT meant consolidated net income as calculated under generally accepted accounting principles, adjusted to eliminate interest, provision for taxes, stock-based compensation expense, financial exchange gain or loss, and expenses incurred in connection with our preparation for an initial public offering of our equity securities.
For fiscal 2011, the target levels for these two performance measures were set as follows:
Quarter |
Revenue
Target Level |
Adjusted EBIT
Target Level |
||||||
July 1, 2010September 30, 2010 |
$ | 15,248,000 | $ | 1,045,000 | ||||
October 1, 2010December 31, 2010 |
33,070,000 | 1,505,000 | ||||||
January 1, 2011March 31, 2011 |
54,001,000 | 3,897,000 | ||||||
April 1, 2011June 30, 2011 |
79,142,000 | 9,097,000 |
Our board of directors believed that achieving the target levels for these two performance measures would require a focused and consistent effort by our executive officers throughout fiscal 2011.
The Performance Goal Achievement for each quarter was the average of the performance achievement of each of the two performance goals described above (weighted equally) for such quarter. The level of achievement of each of the two performance goals was determined as follows:
If the actual company performance for the quarter was |
Then the performance goal
achievement for such quarter was |
|||
Equal to or greater than the corresponding target performance goal measure |
100 | % | ||
90% or greater but less than 100% of the corresponding target performance goal measure |
50%-100 | % (1) | ||
Less than 90% of the target performance goal measure |
0 | % |
(1) |
Between these values, determined on a straight-line basis. |
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The following table provides information regarding the quarterly bonus awards earned by the named executive officers who were with our company during fiscal 2011:
Performance
|
Target Quarterly
Bonus |
Performance
Goal Achievement |
Actual Quarterly
Bonus |
|||||||||||
Frederic B. Luddy |
First Quarter | $ | 75,000 | 100 | % | $ | 75,000 | |||||||
Second Quarter | 75,000 | 100 | 75,000 | |||||||||||
Third Quarter | 75,000 | 100 | 75,000 | |||||||||||
Fourth Quarter | 75,000 | 100 | 75,000 | |||||||||||
|
|
|||||||||||||
$ | 300,000 | |||||||||||||
|
|
|||||||||||||
Andrew J. Chedrick |
First Quarter | $ | 30,000 | 100 | % | $ | 30,000 | |||||||
Second Quarter | 30,000 | 100 | 30,000 | |||||||||||
Third Quarter | 30,000 | 100 | 30,000 | |||||||||||
Fourth Quarter | 30,000 | 100 | 30,000 | |||||||||||
|
|
|||||||||||||
$ | 120,000 | |||||||||||||
|
|
|||||||||||||
Frank Slootman |
First Quarter | $ | | | % | $ | | |||||||
Second Quarter | | | | |||||||||||
Third Quarter | | | | |||||||||||
Fourth Quarter | 37,500 | 100 | 37,500 | |||||||||||
|
|
|||||||||||||
$ | 37,500 | |||||||||||||
|
|
|||||||||||||
David L. Schneider |
First Quarter | $ | | | % | $ | | |||||||
Second Quarter | | | | |||||||||||
Third Quarter | | | | |||||||||||
Fourth Quarter | 17,123 | 100 | 17,123 | |||||||||||
|
|
|||||||||||||
$ | 17,123 | |||||||||||||
|
|
Fiscal 2011 Annual Bonuses . Under the fiscal 2011 bonus plan, our executive officers were also eligible to receive an annual bonus award. The Compensation Committee established a maximum bonus pool of $400,000. The actual amount available for payment as annual bonuses was based on a percentage of the difference between the increase in annual contract value for fiscal 2011 and the increase in annual contract value for fiscal 2010, and was $272,490. Messrs. Luddy and Chedrick, in their sole discretion after consulting with the Compensation Committee and other members of management as to the amount available for such bonuses, determined the amount of the annual bonus award for themselves and each other executive officer based on their subjective assessment of the individual performance of each executive officer for fiscal 2011. The determinations were subject to the final approval of the Compensation Committee.
Messrs. Luddy and Chedrick were eligible to receive annual bonus awards for fiscal 2011. In approving their individual annual bonuses, the Compensation Committee took into consideration the overall performance of each executive officer for the fiscal year, including his contributions to our companys overall success. The annual bonus amounts received by Messrs. Luddy and Chedrick for fiscal 2011 were $91,840 and $54,670, respectively.
Since they did not join our company until late in the fiscal year, Mr. Slootman and Mr. Schneider did not receive an annual bonus award for fiscal 2011.
Six Months Ended December 31, 2011 Quarterly Bonuses . In July 2011, upon the recommendation of the Compensation Committee, our board of directors adopted a new bonus plan providing an opportunity for our executive officers, including the named executive officers, to earn quarterly cash bonuses based on corporate performance.
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The amount of the bonus for each executive officer was equal to the product of (i) such executive officers Target Quarterly Bonus multiplied by (ii) the bonus payout percentage for the applicable quarter. The bonus payout percentage for each quarter was based on the increase in annual contract value during such quarter compared to the target increase in annual contract value during such quarter as set forth in our annual operating plan as follows.
If the actual company performance for the quarter was |
Then the bonus payout
percentage for such quarter was |
|||
Greater than the target increase in annual contract value |
Greater than 100% (1) | |||
80% or greater but less than or equal to 100% of the target increase in annual subscription value |
0%-100% ( 2 ) | |||
Less than 80% of the target increase in annual contract value |
0% |
(1) |
By an amount equal to two times the corresponding percentage of overachievement. |
(2) |
Between these two values, determined on a straight-line basis. |
In addition, the Compensation Committee had the discretion to adjust an individual bonus payout based on its evaluation of an executive officers individual performance or other corporate financial objectives.
The Compensation Committee selected increase in annual contract value as the appropriate corporate performance measure for the bonus plan since, in its view, it was the best indicator of our successful execution of our annual operating plan as we began to aggressively grow our business, as well as a measure of our ability to build a consistent revenue stream. The Compensation Committee set the target increase in annual contract value levels for the quarters from July 1, 2011 through September 30, 2011 and October 1, 2011 through December 31, 2011 at levels that would be difficult to achieve, in order to encourage a coordinated effort by our executive officers to identify and secure a significant number of existing and new customer relationships in a volatile economic environment. As evidence of the challenging nature of the increase in annual contract value measure, the target levels established for each quarter were our most aggressive to date and represented significant increases in the target levels for this measure as reflected in our annual operating plan in previous fiscal years. As further evidence of the challenging nature of these target levels, we fully achieved the target level in only one of the two quarters.
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The following table provides information regarding the quarterly bonus awards earned by the named executive officers for the six months ended December 31, 2011.
Performance Period |
Target
Quarterly
Bonus |
Bonus
Payout Percentage |
Actual Quarterly
Bonus |
|||||||||||||
Frank Slootman |
7/1/11-9/30/11 | $ | 75,000 | 36 | % | $ | 26,978 | |||||||||
10/1/11-12/31/11 | 75,000 | 119 | 89,240 | |||||||||||||
|
|
|||||||||||||||
$ | 116,218 | |||||||||||||||
|
|
|||||||||||||||
Michael P. Scarpelli |
7/1/11-9/30/11 | $ | 22,351 | 36 | % | $ | 8,040 | |||||||||
10/1/11-12/31/11 | 43,750 | 119 | 52,057 | |||||||||||||
|
|
|||||||||||||||
$ | 60,097 | |||||||||||||||
|
|
|||||||||||||||
Frederic B. Luddy |
7/1/11-9/30/11 | $ | 75,000 | 36 | % | $ | 26,978 | |||||||||
10/1/11-12/31/11 | 75,000 | 119 | 89,240 | |||||||||||||
|
|
|||||||||||||||
$ | 116,218 | |||||||||||||||
|
|
|||||||||||||||
Arne Josefsberg |
7/1/11-9/30/11 | $ | 4,402 | 36 | % | $ | 1,583 | |||||||||
10/1/11-12/31/11 | 33,750 | 119 | 40,158 | |||||||||||||
|
|
|||||||||||||||
$ | 41,741 | |||||||||||||||
|
|
|||||||||||||||
David L. Schneider |
7/1/11-9/30/11 | $ | 62,500 | 36 | % | $ | 22,482 | |||||||||
10/1/11-12/31/11 | 62,500 | 119 | 74,367 | |||||||||||||
|
|
|||||||||||||||
$ | 96,849 | |||||||||||||||
|
|
|||||||||||||||
Daniel R. McGee |
7/1/11-9/30/11 | $ | 17,880 | 36 | % | $ | 6,432 | |||||||||
10/1/11-12/31/11 | 35,000 | 119 | 41,645 | |||||||||||||
|
|
|||||||||||||||
$ | 48,077 | |||||||||||||||
|
|
The Target Quarterly Bonuses for Messrs. Scarpelli, Josefsberg and McGee were pro-rated to reflect their employment for a portion of the quarter ended September 30, 2011.
The cash bonuses earned by the named executive officers during six months ended December 31, 2011 and fiscal 2011 are set forth in Summary Compensation Table below.
Equity Incentive Compensation . We use equity awards to motivate and reward our executive officers, including the named executive officers, for long-term corporate performance based on the value of our common stock and, thereby, to align the interests of our executive officers with those of our stockholders. Through December 31, 2011, these equity awards have been granted in the form of stock options to purchase shares of our common stock. We believe that stock options, when granted with exercise prices equal to the fair market value of our common stock on the date of grant, provide an appropriate long-term incentive for our executive officers, because the stock options reward them only to the extent that our stock price grows and stockholders realize value following their grant date.
Historically, the size and form of the initial equity awards for our executive officers have been established through arms-length negotiation at the time the individual was hired. In making these awards, the Compensation Committee considered, among other things, the prospective role and responsibility of the individual executive, competitive factors, the cash compensation to be received by the executive officer, and the need to create a meaningful opportunity for reward predicated on the creation of long-term stockholder value.
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Prior to our initial public offering, we granted stock options through our 2005 Stock Plan, which was adopted by our board of directors and approved by our stockholders to permit the grant of stock options, stock bonuses, and restricted stock awards to our executive officers, directors, employees, and consultants. The material terms of our 2005 Stock Plan are further described under Employee Benefit Plans below.
In July 2010, our board of directors approved the grant of a stock option to purchase 300,000 shares of our common stock to Mr. Chedrick. This stock option had an exercise price equal to $1.50 per share, the fair market value of our common stock as determined by our board of directors on the date of grant, and a four-year time-based vesting schedule. Our board of directors determined the size of this stock option grant based on its review of the recommendations of our then-chief executive officer and its subjective assessment of the value of the total compensation package that it wanted to deliver to Mr. Chedrick for fiscal 2011 and the appropriate value of the long-term incentive compensation component of this package. Our board of directors decided not to grant Mr. Luddy a stock option in view of his significant equity stake in our company.
In May 2011, in connection with his joining our company as our President and Chief Executive Officer, the Compensation Committee approved the grant to Mr. Slootman of a stock option to purchase 6,550,456 shares of our common stock, with an exercise price equal to $2.60 per share, the fair market value of our common stock as determined by our board of directors on the date of grant, and a four-year time-based vesting schedule. This stock option grant is discussed in more detail in Grants of Plan-Based Awards Table below.
In July 2011, in connection with his joining our company as our Senior Vice President of Sales, the Compensation Committee approved the grant to Mr. Schneider of a stock option to purchase 1,379,044 shares of our common stock, with an exercise price equal to $3.00 per share, the fair market value of our common stock as determined by our board of directors on the date of grant, and a four-year time-based vesting schedule. In September 2011, our board of directors also approved the grant to Mr. Schneider of a stock option to purchase 275,808 shares of our common stock, with an exercise price equal to $3.00 per share, the fair market value of our common stock as determined by our board of directors on the date of grant, subject to a performance-based vesting schedule. This performance-based stock option vests on the same four-year vesting schedule as the time-based stock option, subject to an initial determination by the Compensation Committee as to our achievement of our worldwide sales goal for the twelve months ended June 30, 2012. If this worldwide sales goal is not achieved, the total number of shares that will vest under this option will be reduced such that: if the worldwide sales goal is achieved at less than an 80% level, no shares will vest; if the worldwide sales goal is achieved at the 100% level, 100% of the shares will vest; and if the worldwide sales goal is achieved at a level between 80% and 100%, between 0% and 100% will vest determined on a straight-line basis. These stock option grants are discussed in more detail in Grants of Plan-Based Awards Table below.
In August 2011, in connection with his joining our company as our Chief Financial Officer, the Compensation Committee approved the grant to Mr. Scarpelli of a stock option to purchase 1,379,044 shares of our common stock, with an exercise price equal to $3.00 per share, the fair market value of our common stock as determined by our board of directors on the date of grant, and a four-year time-based vesting schedule. In September 2011, the Compensation Committee also approved the grant to Mr. Scarpelli of a fully-vested stock option to purchase 275,808 shares of our common stock, with an exercise price equal to $3.00 per share, the fair market value of our common stock as determined by our board of directors on that date. These stock option grants are discussed in more detail in Grants of Plan-Based Awards Table below.
In August 2011, in connection with his joining our company as our Senior Vice President, Engineering, the Compensation Committee approved the grant to Mr. McGee of a stock option to purchase 1,200,000 shares of our common stock, with an exercise price equal to $3.00 per share, the fair market value of our common stock as determined by our board of directors on the date of grant, and a four-year time-based vesting schedule. This stock option grant is discussed in more detail in Grants of Plan-Based Awards Table below.
In September 2011, in connection with his joining our company as our Chief Technology Officer, the Compensation Committee approved the grant to Mr. Josefsberg of a stock option to purchase 1,350,000 shares of
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our common stock, with an exercise price equal to $3.00 per share, the fair market value of our common stock as determined by our board of directors on the date of grant, and a four-year time-based vesting schedule. This stock option grant is discussed in more detail in Grants of Plan-Based Awards Table below.
In the absence of a public trading market for our common stock, our board of directors determined the fair market value of our common stock in good faith based upon consideration of a number of relevant factors, including the status of our development efforts, financial status and market conditions. See Managements Discussion and AnalysisCritical Accounting Policies and Significant Judgments and EstimatesCommon Stock Valuation
Equity Award Grant Policy . Each of the stock options granted to our employees is granted with an exercise price that is equal to the fair market value of our common stock on the date of grant. The stock options granted to our executive officers typically vest either over four years, with one quarter of the shares subject to the option vesting on the first anniversary of the vesting commencement date and the remaining shares subject to the option vesting in equal monthly installments thereafter over three years, or over four years in equal monthly installments. Generally, stock options have a 10-year term.
We do not have any program, plan or obligation that requires us to grant equity compensation on specified dates. However, we typically make equity grants on the 7th day of each month. Because we have not been a publicly-traded company, we have not made equity awards in connection with the release or withholding of material non-public information.
The equity awards granted to the named executive officers during the period from July 1, 2011 through December 31, 2011 and fiscal 2011 are set forth in Summary Compensation Table and Grants of Plan-Based Awards Table below.
New Equity Incentive Plans . In connection with our initial public offering, our board of directors adopted a new equity incentive plan as described under Employee Benefit Plans below. This equity incentive plan replaced our 2005 Stock Plan immediately upon the signing of the underwriting agreement for the initial public offering and, as described below, affords the Compensation Committee much greater flexibility in making a wide variety of equity awards. For example, the new equity incentive plan authorizes the grant of stock appreciation rights if the Compensation Committee deems it advisable to do so.
Our board of directors also adopted an employee stock purchase plan for our employees, including our executive officers, in connection with our initial public offering.
Welfare and Other Employee Benefits . We have established a tax-qualified Section 401(k) retirement plan for all our U.S. employees, including our executive officers, who satisfy certain eligibility requirements, including requirements relating to age and length of service. We currently do not match any contributions made to the plan by our employees, including executive officers. We intend for the plan to qualify under Section 401(a) of the Code so that contributions by employees to the plan, and income earned on plan contributions, are not taxable to employees until withdrawn from the plan.
In addition, we provide other benefits to our executive officers on the same basis as all of our full-time employees. These benefits include health, dental and vision benefits, health and dependent care flexible spending accounts, short-term and long-term disability insurance, accidental death and dismemberment insurance, and basic life insurance coverage.
We design our employee benefits programs to be affordable and competitive in relation to the market, as well as compliant with applicable laws and practices. We adjust our employee benefits programs as needed based upon regular monitoring of applicable laws and practices, the competitive market and our employees needs.
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Perquisites and Other Personal Benefits . Historically, we have not provided perquisites and other personal benefits to our executive officers. In the future, we may provide perquisites or other personal benefits in limited circumstances, such as where we believe it is appropriate to assist an individual executive officer in the performance of his or her duties, to make our executive officers more efficient and effective, and for recruitment, motivation or retention purposes. We do not expect that these perquisites or other personal benefits will be a significant aspect of our executive compensation program. All future practices with respect to perquisites or other personal benefits will be approved and subject to periodic review by the Compensation Committee.
Employment Agreements
We have entered into employment agreements with our CEO and the other current named executive officers (other than Messrs. Luddy and Chedrick). Each of these arrangements provides for at will employment and sets forth the initial terms and conditions of employment of each executive officer, including base salary, target annual bonus opportunity, standard employee benefit plan participation, a recommendation for an initial stock option grant, opportunities for post-employment compensation and vesting acceleration terms. These offers of employment were each subject to execution of a standard proprietary information and invention agreement and proof of identity and work eligibility in the United States.
Each of these arrangements was approved on our behalf by the Compensation Committee or the board of directors at the recommendation of the Compensation Committee. We believe that these arrangements were necessary to induce these individuals to forego other employment opportunities or leave their current employer for the uncertainty of a demanding position in a new and unfamiliar organization.
In filling our executive positions, the Compensation Committee was aware that, in some situations, it would be necessary to recruit candidates with the requisite experience and skills to manage a growing business in a unique market niche. Accordingly, it recognized that it would need to develop competitive compensation packages to attract qualified candidates in a dynamic labor market. At the same time, the Compensation Committee was sensitive to the need to integrate new executive officers into the executive compensation structure that it was seeking to develop, balancing both competitive and internal equity considerations.
For a summary of the material terms and conditions of this employment arrangements, see Employment Arrangements below.
Post-Employment Compensation
The employment agreements of our CEO and Messrs. Scarpelli, Josefsberg, Schneider and McGee provide for certain protection in the event of their termination of employment under specified circumstances, including following a change in control of our company. We believe that these protections were necessary to induce these individuals to forego other opportunities or leave their current employment for the uncertainty of a demanding position in a new and unfamiliar organization. We also believe that these arrangements serve our executive retention objectives by helping these named executive officers to maintain continued focus and dedication to their responsibilities to maximize stockholder value, including in the event that there is a potential transaction that could involve a change in control of our company. The terms of these arrangements were determined by the Compensation Committee following an analysis of relevant market data for other companies with whom we compete for executive talent.
For a summary of the material terms and conditions of our post-employment compensation arrangements, see Potential Payments upon Termination or Change of Control below.
Other Compensation Policies
Stock Ownership Guidelines . We have not implemented a policy regarding minimum stock ownership requirements for our executive officers.
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Compensation Recovery Policy . Currently, we have not implemented a policy regarding retroactive adjustments to any cash or equity-based incentive compensation paid to our executive officers and other employees where the payments were predicated upon the achievement of financial results that were subsequently the subject of a financial restatement. We intend to adopt a general compensation recovery, or clawback, policy covering our annual and long-term incentive award plans and arrangements once the SEC adopts final rules implementing the requirement of Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Derivatives Trading and Hedging Policy . We have adopted a policy prohibiting the trading of derivatives or the hedging of our equity securities by our employees, including our executive officers, and directors.
Tax and Accounting Considerations
Deductibility of Executive Compensation
Section 162(m) of the Code generally disallows public companies a tax deduction for federal income tax purposes of remuneration in excess of $1 million paid to the chief executive officer and each of the three other most highly-compensated executive officers (other than the chief financial officer) in any taxable year. Generally, remuneration in excess of $1 million may only be deducted if it is performance-based compensation within the meaning of the Code. In this regard, the compensation income realized upon the exercise of stock options granted under a stockholder-approved stock option plan generally will be deductible so long as the options are granted by a committee whose members are non-employee directors and certain other conditions are satisfied.
Because we were not publicly-traded until June 29, 2012, our board of directors had not previously taken the deductibility limit imposed by Section 162(m) into consideration in setting compensation for our executive officers. We expect that, where reasonably practicable, the Compensation Committee will seek to qualify the variable compensation paid to our executive officers for the performance-based compensation exemption from the deductibility limit. As such, in approving the amount and form of compensation for our executive officers in the future, we will consider all elements of our cost of providing such compensation, including the potential impact of Section 162(m). In the future, the Compensation Committee may, in its judgment, authorize compensation payments that do not comply with an exemption from the deductibility limit when it believes that such payments are appropriate to attract and retain executive talent.
Taxation of Parachute Payments
Sections 280G and 4999 of the Code provide that executive officers and directors who hold significant equity interests and certain other service providers may be subject to significant additional taxes if they receive payments or benefits in connection with a change in control of our company that exceeds certain prescribed limits, and that we (or our successor) may forfeit a deduction on the amounts subject to this additional tax. We did not provide any executive officer, including any named executive officer, with a gross-up or other reimbursement payment for any tax liability that the executive officer might owe as a result of the application of Sections 280G or 4999 during 2011, and we have not agreed and are not otherwise obligated to provide any executive officer with such a gross-up or other reimbursement.
Accounting for Stock-Based Compensation
We follow Financial Accounting Standard Board Accounting Standards Codification, or ASC, Topic 718 for our stock-based compensation awards. ASC 718 requires companies to measure the compensation expense for all share-based payment awards made to employees and directors, including stock options, based on the grant date fair value of these awards. This calculation is performed for accounting purposes and reported in the compensation tables below, even though our executive officers may never realize any value from their awards.
105
Compensation-Related Risk
Our board of directors is responsible for the oversight of our risk profile, including compensation-related risks. Our board of directors monitors our compensation policies and practices as applied to our employees to ensure that these policies and practices do not encourage excessive and unnecessary risk-taking, and that the level of risk that they do encourage is not reasonably likely to have a material adverse effect on us.
Summary Compensation Table
The following table presents summary information regarding the total compensation awarded to, earned by, or paid to each of our named executive officers for services rendered in all capacities for the six months ended December 31, 2011 and fiscal 2011.
Name and Principal Position |
Year |
Salary
($) |
Bonus
(1)
($) |
Option
Awards (2) ($) |
Non-Equity
Incentive Plan Compensation ($) (3) |
All Other
Compensation (4) ($) |
Total
($) |
|||||||||||||||||||
Frank Slootman, |
* | 150,000 | | | 116,218 | | 266,218 | |||||||||||||||||||
President and Chief |
2011 | 52,500 | | 8,527,384 | 37,500 | | 8,617,384 | |||||||||||||||||||
Executive Officer (5) |
||||||||||||||||||||||||||
Michael P. Scarpelli, |
* | 104,183 | | 3,342,968 | 60,097 | | 3,507,248 | |||||||||||||||||||
Chief Financial |
2011 | | | | | | | |||||||||||||||||||
Officer (6) |
||||||||||||||||||||||||||
Frederic B. Luddy, |
* | 152,500 | | | 116,218 | 2,040 | 270,758 | |||||||||||||||||||
Chief Product |
2011 | 330,000 | 91,840 | | 300,000 | 3,840 | 725,680 | |||||||||||||||||||
Officer (7) |
||||||||||||||||||||||||||
Arne Josefsberg, |
* | 79,327 | | 3,105,270 | 41,741 | | 3,226,338 | |||||||||||||||||||
Chief Technology |
2011 | | | | | | | |||||||||||||||||||
Officer (8) |
||||||||||||||||||||||||||
David L. Schneider, |
* | 125,000 | | 3,690,379 | 96,849 | | 3,912,228 | |||||||||||||||||||
Senior Vice President |
2011 | 18,109 | | | 17,123 | | 35,232 | |||||||||||||||||||
of Worldwide Sales |
||||||||||||||||||||||||||
and Services (9) |
||||||||||||||||||||||||||
Daniel R. McGee, |
* | 98,500 | | 2,726,280 | 48,077 | | 2,872,857 | |||||||||||||||||||
Senior Vice President, |
2011 | | | | | | | |||||||||||||||||||
Engineering and |
||||||||||||||||||||||||||
Support (10) |
||||||||||||||||||||||||||
Andrew J. Chedrick, |
* | 127,500 | 5,000 | | 89,670 | 2,040 | 224,210 | |||||||||||||||||||
former Chief |
2011 | 255,000 | 54,670 | 247,380 | 120,000 | 3,840 | 680,890 | |||||||||||||||||||
Financial Officer and |
||||||||||||||||||||||||||
Vice President, |
||||||||||||||||||||||||||
Finance (11) |
* |
In February 2012, we changed our fiscal year-end from June 30 to December 31. The amounts reported in this row represent the compensation awarded to, earned by, and paid to the named executive officers for the six months ended December 31, 2011. |
(1) |
The amounts reported in the Bonus column represent the annual bonuses paid to the named executive officers, except for the amount reported for Mr. Chedrick for the six months ended December 31, 2011, which is a discretionary bonus. |
(2) |
The amounts reported in the Option Awards column represent the grant date fair value of the stock options granted to the named executive officers during fiscal 2011 and during the six months ended December 31, 2011 as computed in accordance with FASB ASC 718. The assumptions used in calculating the grant date fair value of the stock options reported in the Option Awards column are set forth |
(footnotes continue on next page)
106
in Note 12 to our consolidated financial statements. The amounts reported in this column exclude the impact of estimated forfeitures related to service-based vesting conditions, reflect the accounting cost for these stock options, and do not correspond to the actual economic value that may be received by the named executive officers from the options. |
(3) |
The amounts reported in the Non-Equity Incentive Plan Compensation column represent the quarterly bonuses paid to the named executive officers. |
(4) |
The amounts reported includes the payment of premiums for health insurance coverage. |
(5) |
Mr. Slootman became our President and Chief Executive Officer in May 2011. |
(6) |
Mr. Scarpelli became our Chief Financial Officer in August 2011. |
(7) |
Mr. Luddy served as our President and Chief Executive Officer until May 2011, at which time he was appointed our Chief Product Officer. |
(8) |
Mr. Josefsberg became our Chief Technology Officer in September 2011. |
(9) |
Mr. Schneider became our Senior Vice President of Worldwide Sales and Services in June 2011. |
(10) |
Mr. McGee became our Senior Vice President, Engineering in August 2011. |
(11) |
Mr. Chedrick served as our Chief Financial Officer until August 2011, at which time he became our Vice President, Finance. |
Grants of Plan-Based Awards Table
The following table presents, for each of the named executive officers, information concerning each grant of a cash or equity award made during fiscal 2011 and the six months ended December 31, 2011. This information supplements the information about these awards set forth in Summary Compensation Table.
Named Executive Officer |
Grant
Date |
Estimated Future
Payouts Under Non- Equity Incentive Plan Awards (Target) ($) |
All Other Option
Awards: Number of Securities Underlying Options (1) (#) |
Exercise or Base
Price of Option Awards (2) ($/sh) |
Grant Date Fair
Value of Stock and Option Awards (3) ($) |
|||||||||||||||
Frank Slootman |
| 150,000 | (4) | | | | ||||||||||||||
| 37,500 | (5) | | | | |||||||||||||||
05/06/2011 | | 6,550,456 | 2.60 | 8,527,384 | ||||||||||||||||
Michael P. Scarpelli |
| 66,101 | (4) | | | | ||||||||||||||
08/15/2011 | | 1,379,044 | 3.00 | 3,133,050 | ||||||||||||||||
09/09/2011 | | 275,808 | 3.00 | 209,917 | ||||||||||||||||
Frederic B. Luddy |
| 150,000 | (4) | | | | ||||||||||||||
| 300,000 | (5) | | | | |||||||||||||||
Arne Josefsberg |
| 38,152 | (4) | | | | ||||||||||||||
09/22/2011 | 1,350,000 | 3.00 | 3,105,270 | |||||||||||||||||
David L. Schneider |
| 125,000 | (4) | | | | ||||||||||||||
07/22/2011 | | 1,379,044 | 3.00 | 3,080,926 | ||||||||||||||||
| 17,123 | (5) | | | | |||||||||||||||
09/09/2011 | | 243,744 | ( 6 ) | 3.00 | 609,453 | |||||||||||||||
Daniel R. McGee |
| 52,880 | (4) | | | | ||||||||||||||
08/15/2011 | | 1,200,000 | 3.00 | 2,726,280 | ||||||||||||||||
Andrew J. Chedrick |
07/16/2010 | | 300,000 | 1.50 | 247,380 | |||||||||||||||
| 120,000 | (5) | | | |
(1) |
All stock options were granted under our 2005 Stock Plan with a four-year time-based vesting schedule, subject to acceleration as described in Potential Payments upon Termination or Change in Control. |
(2) |
Represents the per share fair market value of our common stock, as determined in good faith by our board of directors on the grant date. |
(3) |
Represents the aggregate fair value amount computed as of the grant date of each stock option in accordance with FASB ASC Topic 718. Assumptions used in the calculation of these amounts are included in Note 12 to our consolidated financial statements. As required by SEC rules, the amounts reported exclude the impact of estimated forfeitures related to service-based vesting conditions. The named executive officers will only realize compensation to the extent the market price of our common stock is greater than the exercise price of such stock options. |
(4) |
Represents the target award payable under our companys bonus plan for the six-month period from July 1, 2011 through December 31, 2011. |
(footnotes continue on next page)
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(5) |
Represents the target award payable under our companys bonus plan for fiscal 2011. |
(6) |
The vesting of this option was subject to an initial determination by our Compensation Committee as to our achievement of our worldwide sales goal for the twelve months ending June 30, 2012. The worldwide sales goal was achieved at the 97.675% level, and therefore 97.675% of the original 275,808 shares subject to this option will vest on a monthly basis over 48 months. |
Outstanding Equity Awards at December 31, 2011 Table
The following table presents, for each of the named executive officers, information regarding outstanding stock options and other equity awards held as of December 31, 2011.
Option Awards | Stock Awards | |||||||||||||||||||||||
Name |
Grant
Date (1) |
Number of
Securities Underlying Unexercised Options (#) Exercisable |
Option
Exercise Price ($) |
Option
Expiration Date |
Number of
Shares or Units of Stock That Have Not Vested (#) |
Market Value
of Shares or Units of Stock That Have Not Vested ($) (6) |
||||||||||||||||||
Frank Slootman |
5/6/2011 | 6,350,456 | (2) | 2.60 | 05/05/2021 | 200,000 | (3) | 3,600,000 | ||||||||||||||||
Michael P. Scarpelli |
8/15/11 | 1,379,044 | (2) | 3.00 | 08/14/2021 | | | |||||||||||||||||
Frederic B. Luddy |
9/9/09 | 240,000 | (4) | 0.34 | 09/9/2019 | | | |||||||||||||||||
Arne Josefsberg |
9/22/11 | 1,350,000 | (2) | 3.00 | 09/21/2021 | | | |||||||||||||||||
David L. Schneider |
7/22/11 | 1,379,044 | (2) | 3.00 | 07/21/2021 | | | |||||||||||||||||
9/9/11 | 243,744 | (2)(7) | 3.00 | 09/08/2021 | | | ||||||||||||||||||
Daniel R. McGee |
8/15/11 | 1,200,000 | (2) | 3.00 | 08/14/2021 | | | |||||||||||||||||
Andrew J. Chedrick |
2/7/07 | 220,000 | (2)(8) | 0.03 | 2/7/2017 | | | |||||||||||||||||
7/16/10 | 300,000 | (5) | 1.50 | 7/15/2020 | | |
(1) |
All of the outstanding equity awards described below were granted under our 2005 Stock Plan. |
(2) |
These stock options are immediately exercisable in full, subject to a right of repurchase in our favor, which lapses as the shares of our common stock underlying the option vests. The option shares vest over a four-year period as follows: 25% of the shares of our common stock underlying the options vest on the first anniversary of the individuals employment commencement date and, thereafter, the remaining shares of our common stock underlying the options vest in 36 equal monthly installments over the next three years provided that the named executive officer continues to be employed by or otherwise provides services to our company. In addition, the vesting of these stock options may be accelerated in the event of a change in control of our company as provided in the named executive officers employment agreement. |
(3) |
Mr. Slootman has exercised his outstanding stock option with respect to 200,000 shares of our common stock. These shares were subject to a right of repurchase in our favor which expired on May 12, 2012. |
(4) |
This stock option is immediately exercisable in full, subject to a right of repurchase in our favor which lapses as the shares of our common stock underlying the option vest. The option shares vest over a four-year period as follows: 1/48th of the shares of our common stock underlying the option vest on the first day of each month following July 1, 2009 for Mr. Luddy, provided that he continues to be employed by or otherwise provides services to our company on each such vesting date. In addition, the vesting of 100% of the option shares would have been accelerated had a change in control of our company occurred before July 1, 2010. |
(5) |
This stock option is immediately exercisable in full, subject to a right of repurchase in our favor which lapses as the shares of our common stock underlying the option vest. The option shares vest over a four-year period as follows: 1/48th of the shares of our common stock underlying the option vests on the first day of each month following July 1, 2007 for Mr. Chedrick, provided that he continues to be employed by or otherwise provides services to our company on each such vesting date. In addition, the vesting of 50% of the then unvested option shares would have been accelerated had Mr. Chedrick been terminated one month prior to or up to 13 months following a change in control of our company. |
(6) |
The market price for our common stock is based on the initial public offering price of $18.00 per share. |
(7) |
This stock option is also subject to performance-based vesting criteria as described in Grants of Plan-Based Awards Table. |
(8) |
Fully vested. |
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Option Exercises Table
The following table presents, for each of the named executive officers, the number of shares of our common stock acquired upon the exercise of stock options during the six months ended December 31, 2011, and the aggregate value realized upon the exercise of such awards. The value realized is based upon the fair market value of our common stock on the exercise date, as determined by our board of directors.
Name |
Option Awards
Number of Shares Acquired on Exercise (#) |
Option Awards
Value Realized on Exercise ($) |
||||||
Frank Slootman |
200,000 | $ | 80,000 | |||||
Michael P. Scarpelli |
275,808 | | ||||||
Frederic B. Luddy |
| | ||||||
Arne Josefsberg |
| | ||||||
David L. Schneider |
| | ||||||
Daniel R. McGee |
| | ||||||
Andrew J. Chedrick |
| |
During fiscal 2011, Mr. Chedrick acquired 80,000 shares of our common stock upon the exercise of stock options with an aggregate value realized of $147,500.
Pension Benefits
We did not sponsor any defined benefit pension or other actuarial plan for our executive officers during either the six months ended December 31, 2011 or fiscal 2011.
Nonqualified Deferred Compensation
We did not maintain any nonqualified defined contribution or other deferred compensation plans or arrangements for our executive officers during either the six months ended December 31, 2011 or fiscal 2011.
Employment Arrangements
We have entered into employment agreements with each of the named executive officers (other than Messrs. Luddy and Chedrick) in connection with his commencement of employment with us. Each of these arrangements was negotiated on our behalf by our Compensation Committee or our CEO.
Typically, these arrangements provides for at will employment and sets forth the initial terms and conditions of employment of each executive officer, including base salary, target annual bonus opportunity, standard employee benefit plan participation, a recommendation for an initial stock option grant, opportunities for post-employment compensation and vesting acceleration terms. These offers of employment were each subject to execution of a standard proprietary information and invention agreement and proof of identity and work eligibility in the United States.
Mr. Slootman
On May 2, 2011, Mr. Slootman joined us as our Chief Executive Officer. In hiring Mr. Slootman, our board of directors approved an employment agreement with a period of three years, setting forth the principal terms and conditions of his employment, including an initial annual base salary of $300,000 (subject to review by the Compensation Committee at least annually), a target annual cash bonus opportunity of $300,000 (based on his performance relative to one or more performance objectives established each year by the Compensation Committee), and, subject to the approval of our board of directors, a time-based stock option award to purchase 6,550,456 shares of our common stock. His stock option is described in more detail in Grants of Plan-Based Awards Table above.
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Mr. Scarpelli
On August 15, 2011, Mr. Scarpelli joined us as our Chief Financial Officer. In hiring Mr. Scarpelli, our board of directors approved an employment agreement with a period of three years, setting forth the principal terms and conditions of his employment, including an initial annual base salary of $275,000 (subject to review by our CEO and the Compensation Committee at least annually), a target annual cash bonus opportunity of $175,000 (based on his performance relative to one or more performance objectives established each year by our CEO and the Compensation Committee), subject to the approval of our board of directors, a time-based stock option award to purchase 1,379,044 shares of our common stock, and subject to the approval of our board of directors, a fully-vested stock option award to purchase 137,904 shares of our common stock. These stock options are described in more detail in Grants of Plan-Based Awards Table above.
Mr. Josefsberg
On September 19, 2011, Mr. Josefsberg joined us as our Chief Technology Officer. In hiring Mr. Josefsberg, our board of directors approved an employment agreement with a period of three years, setting forth the principal terms and conditions of his employment, including an initial annual base salary of $275,000 (subject to review by our CEO and the Compensation Committee at least annually), a target annual cash bonus opportunity of $135,000 (based on his performance relative to one or more performance objectives established each year by our CEO and the Compensation Committee), subject to the approval of our board of directors, a time-based stock option award to purchase 1,350,000 shares of our common stock. This stock option is described in more detail in Grants of Plan-Based Awards Table above.
Mr. Schneider
On June 6, 2011, Mr. Schneider joined us as our Senior Vice President of Sales. In hiring Mr. Schneider, our board of directors approved an employment agreement with a period of three years, setting forth the principal terms and conditions of his employment, including an initial annual base salary of $250,000 (subject to review by our CEO and the Compensation Committee at least annually), a target annual cash bonus opportunity of $250,000 (based on his performance relative to one or more performance objectives established each year by our CEO and the Compensation Committee), subject to the approval of our board of directors, a time-based stock option award to purchase 1,379,044 shares of our common stock, and subject to the approval of our board of directors, a performance-based stock option award to purchase 275,808 shares of our common stock. These stock options are described in more detail in Grants of Plan-Based Awards Table above.
Mr. McGee
On August 15, 2011, Mr. McGee joined us as our Senior Vice President, Engineering. In hiring Mr. McGee, our board of directors approved an employment agreement with a period of three years, setting forth the principal terms and conditions of his employment, including an initial annual base salary of $260,000 (subject to review by our CEO and the Compensation Committee at least annually), a target annual cash bonus opportunity of $140,000 (based on his performance relative to one or more performance objectives established each year by our CEO and the Compensation Committee), subject to the approval of our board of directors, and a time-based stock option award to purchase 1,200,000 shares of our common stock. This stock option is described in more detail in Grants of Plan-Based Awards Table above.
In the case of the named executive officers (other than Mr. Luddy), their employment agreements also contain provisions that provide for certain payments and benefits in the event of certain terminations of employment, including a termination of employment following a change in control of our company. For a summary of the material terms and conditions of these provisions, as well as an estimate of the potential payments and benefits payable to these named executive officers under their employment arrangements, see Potential Payments upon Termination or Change in Control below.
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Potential Payments upon Termination or Change in Control
The named executive officers (other than Mr. Luddy) are eligible to receive certain severance payments and benefits in connection with a termination of employment under various circumstances, including following a change in control of our company. The estimated potential severance payments and benefits payable to these named executive officers in the event of termination of employment as of December 31, 2011 pursuant to their employment agreements or stock option agreements, as applicable, are described below.
The actual amounts that would be paid or distributed to an eligible named executive officer as a result of a termination of employment occurring in the future may be different than those presented below as many factors will affect the amount of any payments and benefits upon a termination of employment. For example, some of the factors that could affect the amounts payable include the named executive officers base salary and the market price of our common stock. Although we have entered into a written agreement to provide severance payments and benefits in connection with a termination of employment under particular circumstances, we, or an acquirer, may mutually agree with the named executive officers to provide payments and benefits on terms that vary from those currently contemplated. In addition to the amounts presented below, each named executive officer would also be able to exercise any previously-vested stock options that he held. For more information about the named executive officers outstanding equity awards as of December 31, 2011, see Outstanding Equity Awards at Fiscal Year-End Table above. Finally, the named executive officers are eligible to receive any benefits accrued under our broad-based benefit plans, such as accrued vacation pay, in accordance with those plans and policies.
Involuntary Termination of EmploymentCash Severance
In the event of an involuntary termination of employment (a termination of employment by us without cause (as defined in the relevant employment agreement or employment offer letter)) or by the named executive officer for good reason (as defined in the relevant employment agreement or employment offer letter) at any time other than during the period that begins three months prior to and ends 12 months following the effective date of a change in control of our company (as defined in the relevant employment agreement or employment offer letter), the named executive officers are eligible to receive the following payments and benefits:
|
his then-annual base salary for a period of six months (12 months in the case of our CEO) from the date of termination; |
|
any portion of his annual target bonus opportunity which he would have received had he been employed on the last day of the fiscal year in which the termination of employment occurs pro-rated for a six-month period (12 months in the case of our CEO); and |
|
health insurance premiums for himself and his eligible dependents under our group health insurance plans as provided under the Consolidated Omnibus Budget Reconciliation Act, or COBRA, until the earliest of (i) the close of the six-month period (12 months in the case of our CEO) commencing on the date of his termination of employment, (ii) the expiration of his eligibility for continued coverage under COBRA, or (iii) the date when he becomes eligible for substantially equivalent health insurance coverage in connection with new employment or self-employment. |
The receipt of any payment termination-based payments or benefits is subject to the named executive officer executing (and not subsequently revoking) a waiver and release of claims in favor of us and continued compliance during the period in which he is receiving severance payments and benefits with certain post-termination non-solicitation and non-disparagement covenants.
Involuntary Termination of Employment in Connection with a Change in ControlCash Severance
In the event of an involuntary termination of employment (a termination of employment by us without cause or by the named executive officer for good reason) during the period that begins three months prior to
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and ends 12 months following the effective date of a change in control of our company, or the Change in Control Period, the named executive officers are eligible to receive the following payments and benefits:
|
a lump-sum payment equal to his then-annual base salary for a period of six months (12 months in the case of our CEO) from the date of termination; |
|
his annual target bonus opportunity without regard to achievement of any corporate performance goals; and |
|
health insurance premiums for himself and his eligible dependents under our group health insurance plans as provided under COBRA until the earliest of (i) the close of the six-month period (12 months in the case of our CEO) commencing on the date of his termination of employment, (ii) the expiration of his eligibility for continued coverage under COBRA or (iii) the date when he becomes eligible for substantially equivalent health insurance coverage in connection with new employment or self-employment. |
The receipt of any payment termination-based payments or benefits is subject to the named executive officer executing (and not subsequently revoking) a waiver and release of claims in favor of us and continued compliance during the period in which he is receiving severance payments and benefits with certain post-termination non-solicitation and non-disparagement covenants.
Outstanding Equity Awards
In the event of a change in control of our company prior to the closing of the first sale of shares of our common stock in a firm-commitment underwritten public offering of securities, or an IPO, 50% of the total number of shares of our common stock subject to outstanding and unvested equity awards held by the named executive officers (other than Mr. Luddy) will immediately vest. In the event of a change in control of our company on or after an IPO, 100% of the total number of shares of our common stock subject to outstanding and unvested equity awards held by the named executive officers (other than Mr. Luddy) will immediately vest.
In addition, in the event of an involuntary termination of employment (a termination of employment by us without cause or by the named executive officer for good reason) or if we terminate his employment following a material adverse change in his title or reporting relationships without his consent, the outstanding equity awards of the named executive officers (other than Mr. Luddy) will be subject to accelerated vesting as follows:
|
in the case of our CEO, 12.5% of the total number of shares of our common stock subject to outstanding equity awards will immediately vest if termination of employment occurs outside of the Change in Control Period, which will be increased to 25% if such termination of employment also occurs within the first 12 months of his employment; or |
|
in the case of the other named executive officers, 25% of the total number of shares of our common stock subject to outstanding equity awards will immediately vest if termination of employment occurs within the first 12 months of his employment, and outside of the Change in Control Period; or |
|
100% of the then-unvested shares of our common stock subject to outstanding equity awards will immediately vest if termination of employment occurs during the Change in Control Period. |
In the event of a change in control of our company, 25% of the total number of shares of our common stock subject to outstanding options held by Mr. Luddy will immediately vest.
Excise Taxes
Any payment or benefit provided under his employment agreement (in the case of our CEO) or his employment offer letter (in the case of the other named executive officers) in connection with a change in control
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of our company may be subject to an excise tax under Section 4999 of the Code. These payments and benefits also may not be eligible for a federal income tax deduction pursuant to Section 280G of the Code. If any of these payments or benefits are subject to the excise tax, they may be reduced to provide the affected named executive officer with the best after-tax result. Specifically, he will receive either a reduced amount so that the excise tax is not triggered, or he will receive the full amount of the payments and benefits and then be personally liable for any excise tax.
Potential Payments upon Termination or Change in Control Table
The following table sets forth the estimated payments that would be received by the named executive officers upon a change in control of our company, upon a termination of employment without cause or following a resignation for good reason, or in the event of a termination of employment without cause or following a resignation for good reason in connection with a change in control in our company. The table below reflects amounts payable to the named executive officers assuming that, if applicable, their employment was terminated on December 31, 2011 and, if applicable, a change in control of our company also occurred on that date.
Change of
Control Alone |
Upon Termination without Cause or
Resignation for Good Reason No Change in Control |
Upon Termination without Cause or
Resignation for Good Reason Change in Control |
||||||||||||||||||||||||||||||||||
Name |
Value
of
Accelerated Vesting (1) |
Cash
Severance |
Continuation
of Medical Benefits |
Value
of
Accelerated Vesting (1) |
Total |
Cash
Severance |
Continuation
of Medical Benefits |
Value
of
Accelerated Vesting (1) |
Total | |||||||||||||||||||||||||||
Mr. Slootman |
$ | 50,438,511 | $ | 300,000 | $ | 14,237 | $ | 25,219,256 | $ | 25,533,493 | $ | 300,000 | $ | 14,237 | $100,877,022 | $ | 101,191,259 | |||||||||||||||||||
Mr. Scarpelli |
10,342,830 | 225,000 | 9,046 | 5,171,415 | 5,405,461 | 225,000 | 9,046 | 20,685,660 | 20,919,706 | |||||||||||||||||||||||||||
Mr. Luddy |
1,059,372 | | | | | | | | | |||||||||||||||||||||||||||
Mr. Josefsberg |
10,125,000 | 205,000 | 9,046 | 5,062,500 | 5,276,546 | 205,000 | 9,046 | 20,250,000 | 20,464,046 | |||||||||||||||||||||||||||
Mr. Schneider |
12,411,390 | 250,000 | 9,046 | 6,205,695 | 6,464,741 | 250,000 | 9,046 | 24,822,780 | 25,081,826 | |||||||||||||||||||||||||||
Mr. McGee |
9,000,000 | 200,000 | 7,118 | 4,500,000 | 4,707,118 | 200,000 | 7,118 | 18,000,000 | 18,207,118 |
(1) |
The value of accelerated vesting is calculated based on the initial public offering price of $18.00 per share less, if applicable, the exercise price of each outstanding stock option. |
Mr. Chedrick
On December 14, 2011, Mr. Chedrick, our Vice President, Finance, resigned effective January 1, 2012. In connection with his resignation, and in exchange for his execution of a release and waiver of claims in favor of us, Mr. Chedrick continued to receive his base salary and accrued paid time off through his date of termination of employment. In addition, we agreed to pay the premiums for continued coverage under our group health insurance plans for him and his eligible dependents until the earliest of (i) the close of the six month period commencing on the date of his termination of employment, (ii) the expiration of his eligibility for continued coverage under COBRA or (iii) the date when he becomes eligible for substantially equivalent health insurance coverage in connection with new employment or self-employment. Finally, all of Mr. Chedricks outstanding stock options ceased vesting as of his date of termination of employment and the exercise of any vested portions of such stock options was governed by the relevant plan documents pursuant to which the options were granted.
Employee Benefit Plans
2005 Stock Plan
Our board of directors adopted, and our stockholders approved, our 2005 Stock Plan in March 2005. As of September 30, 2012, options to purchase 36,069,772 shares of our common stock and 1,030,644 RSUs were outstanding under our 2005 Stock Plan. The 2005 Stock Plan terminated as of our initial public offering in June 2012 and no further equity awards may be made under our 2005 Stock Plan. However, all stock options and RSUs outstanding under our 2005 Stock Plan as of the plans termination will continue to be governed by the terms of our 2005 Stock Plan.
Transferability . Incentive stock options may not be transferred, except by will or by the laws of descent or distribution. Generally, nonstatutory stock options and RSUs may not be transferred except by will or by the laws of descent or distribution. However, the plan administrator may, in its sole discretion, grant nonstatutory stock options, RSUs or stock purchase rights that may be transferred to immediate family members.
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Changes to Capitalization . In the event that there is a specified type of change in our capital structure not involving the receipt of consideration by us, such as a stock split, stock dividend or other recapitalization, the 2005 Stock Plan provides for the proportional adjustment of the number of shares reserved under the 2005 Stock Plan and the number of shares and exercise price or strike price, if applicable, of all outstanding stock awards.
Corporate Transactions . Unless otherwise provided in the award agreement, in the event of certain corporate transactions, any or all outstanding stock awards under the 2005 Stock Plan must be assumed or substituted for by any surviving entity. If the surviving entity elects not to assume or substitute for such awards, such stock awards will fully vest for a period of time to be determined by the plan administrator, following which they will be terminated. In the event of our dissolution or liquidation, all outstanding stock awards under the 2005 Stock Plan will terminate immediately prior to such event.
2012 Equity Incentive Plan
In April 2012, our board of directors adopted our 2012 Plan, which the stockholders approved in June 2012 and became effective on June 27, 2012. The 2012 Plan will terminate in 2022, unless sooner terminated by our board of directors. The purpose of the 2012 Plan is to attract, retain and motivate selected employees, consultants and directors through the granting of stock-based compensation awards and cash-based performance bonus awards. The 2012 Plan is also designed to permit us to make cash-based awards and equity-based awards intended to qualify as performance-based compensation under Section 162(m) of the Code.
Stock Awards . The 2012 Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, RSUs, performance-based stock awards and other forms of equity compensation, or collectively, stock awards. In addition, the 2012 Plan provides for the grant of performance cash awards. Incentive stock options may be granted only to employees, subject to certain limitations described below. All other awards may be granted to employees, including officers, as well as directors and consultants.
The principal features of the 2012 Plan are summarized below. This summary is qualified in its entirety by reference to the text of the 2012 Plan, which is included as an exhibit to the registration statement relating to this prospectus.
Share Reserve . We have initially reserved 9,600,000 shares of our common stock for issuance under the 2012 Plan plus the number of shares reserved but not issued or subject to outstanding awards under the 2005 Stock Plan at the time the 2012 Plan became effective. Then, the number of shares of our common stock reserved for issuance under the 2012 Plan will automatically increase on January 1 of each year, starting on January 1, 2013 and continuing through January 1, 2022, by (a) 5% of the total number of shares of our common stock outstanding on December 31 of the preceding calendar year or (b) such lesser number of shares of common stock as determined by our board of directors. The maximum number of shares that may be issued pursuant to the exercise of incentive stock options under the 2012 Plan is 50,000,000 shares.
No person may be granted stock awards covering more than 3,000,000 shares of our common stock under the 2012 Plan during any calendar year pursuant to stock options, stock appreciation rights, restricted stock awards or RSUs, other than a new employee of ours, who will be eligible to receive no more than 6,000,000 shares under the 2012 Plan in the calendar year in which the employee commences employment. Such limitations are designed to help assure that any deductions to which we would otherwise be entitled with respect to such stock awards will not be subject to the $1,000,000 limitation on the income tax deductibility of compensation paid per covered executive officer imposed by Section 162(m) of the Code.
If a stock award granted under the 2012 Plan expires or otherwise terminates without being exercised in full, or is settled in cash, the shares of our common stock not acquired pursuant to the stock award again become available for subsequent issuance under the 2012 Plan. In addition, the following types of shares under the 2005
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Stock Plan and 2012 Plan may become available for the grant of new stock awards under the 2012 Plan: (a) shares that are forfeited to or repurchased by us at the original exercise price prior to becoming fully vested; (b) shares withheld to satisfy income or employment withholding taxes; (c) shares used to pay the exercise price of an option in a net exercise arrangement; and (d) shares tendered to us to pay the exercise price of an option.
Administration . Our board of directors has delegated its authority to administer the 2012 Plan to our compensation committee. The compensation committee is required to consist of two or more outside directors within the meaning of Section 162(m) of the Code and two or more non-employee directors for the purposes of Rule 16b-3 under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Subject to the terms of the 2012 Plan, our board of directors or an authorized committee, referred to as the plan administrator, determines recipients, dates of grant, the numbers and types of stock awards to be granted and the terms and conditions of the stock awards, including the period of their exercisability and vesting. Subject to the limitations set forth below, the plan administrator will also determine the exercise price of options granted, the consideration (if any) to be paid for restricted stock awards and the strike price of stock appreciation rights.
The plan administrator has the authority to reprice any outstanding stock award (by reducing the exercise price of any outstanding option, canceling an option in exchange for cash or another equity award or any other action that may be deemed a repricing under generally accepted accounting provisions) under the 2012 Plan without the approval of our stockholders.
Stock Options . Incentive and nonstatutory stock options are granted pursuant to incentive and nonstatutory stock option agreements adopted by the plan administrator. The plan administrator determines the exercise price for a stock option, within the terms and conditions of the 2012 Plan, provided that the exercise price of a stock option cannot be less than 100% of the fair market value of our common stock on the date of grant, except where a higher exercise price is required in the case of certain incentive stock options, as described below. Options granted under the 2012 Plan vest at the rate specified by the plan administrator.
The plan administrator determines the term of stock options granted under the 2012 Plan, up to a maximum of 10 years, except in the case of certain incentive stock options, as described below. Unless the terms of an optionholders stock option agreement provide otherwise, if an optionholders relationship with us, or any of our affiliates, ceases for any reason other than for cause, disability or death, the optionholder may exercise any vested options for a period of three months following the cessation of service. If an optionholders service relationship with us is terminated for cause, then the option terminates immediately. If an optionholders service relationship with us or any of our affiliates ceases due to disability or death, or an optionholder dies within the period (if any) specified in the award agreement following cessation of service, the optionholder or a beneficiary may exercise any vested options for a period of 12 months in the event of disability or death. The option term may be extended in the event that exercise of the option following termination of service is prohibited by applicable securities laws. In no event, however, may an option be exercised beyond the expiration of its maximum term.
Acceptable consideration for the purchase of common stock issued upon the exercise of a stock option will be determined by the plan administrator and may include (a) cash, check, bank draft or money order, (b) a broker-assisted cashless exercise, (c) the tender of common stock previously owned by the optionholder, (d) cancellation of our indebtedness to the optionholder, (e) waiver of compensation due to the optionholder for services rendered and (f) other legal consideration approved by the plan administrator.
Unless the plan administrator provides otherwise, options generally are not transferable except by will, the laws of descent and distribution, or pursuant to a domestic relations order. An optionholder may, however, designate a beneficiary who may exercise the option following the optionholders death.
Limitations on Incentive Stock Options . Incentive stock options may be granted only to our employees. The aggregate fair market value, determined at the time of grant, of shares of our common stock with respect to incentive stock options that are exercisable for the first time by an optionholder during any calendar year under
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all of our stock plans may not exceed $100,000. No incentive stock option may be granted to any person who, at the time of the grant, owns or is deemed to own stock comprising more than 10% of our total combined voting power or that of any of our affiliates unless (a) the option exercise price is at least 110% of the fair market value of the stock subject to the option on the date of grant and (b) the term of the incentive stock option does not exceed five years from the date of grant.
Restricted Stock Awards . Restricted stock awards are granted pursuant to restricted stock award agreements adopted by the plan administrator. A restricted stock award is an offer by us to sell shares of our common stock subject to restrictions. The price, if any, of a restricted stock award will be determined by our Compensation Committee. Restricted stock awards may be granted in consideration for (a) cash, check, bank draft or money order, (b) past or future services rendered to us or our affiliates, or (c) any other form of legal consideration determined by our Compensation Committee. Shares of common stock acquired under a restricted stock award may, but need not, be subject to a share repurchase option or forfeiture restriction in our favor in accordance with a vesting schedule to be determined by the plan administrator. Rights to acquire shares under a restricted stock award may be transferred only upon such terms and conditions as set by the plan administrator. Except as otherwise provided in the applicable award agreement, restricted stock awards that have not vested will be forfeited or subject to repurchase upon the participants cessation of continuous service for any reason.
Restricted Stock Unit Awards . RSUs are granted pursuant to restricted stock unit award agreements adopted by the plan administrator. RSUs represent the right to receive shares of our common stock at a specified date in the future, subject to forfeiture of that right because of termination of the holders services to us or the holders failure to achieve certain performance conditions. If a RSU has not been forfeited, then on the date specified in the RSU agreement, we may deliver to the holder of the RSU whole shares of our common stock, which may be subject to additional restrictions, cash or a combination of our common stock and cash. Our Compensation Committee may also permit the holders of the RSUs to defer payment to a date or dates after the RSU is earned, provided that the terms of the RSU and any deferral satisfy the requirements of Section 409A of the Code.
Stock Appreciation Rights . Stock appreciation rights are granted pursuant to stock appreciation rights agreements adopted by the plan administrator. Stock appreciation rights provide for a payment, or payments, in cash or shares of our common stock, to the holder based upon the increase in the fair market value of our common stock on the date of exercise from the stated exercise price (subject to any maximum number of shares as may be specified in the applicable award agreement). The payment may occur upon the exercise of a stock appreciation right or deferred with such interest or dividend equivalent, if any, as our compensation committee determines, provided that the terms of the stock appreciation right and any deferral satisfy the requirements of Section 409A of the Code. The plan administrator determines the exercise price for a stock appreciation right which generally cannot be less than 100% of the fair market value of our common stock on the date of grant. Stock appreciation rights may vest based on time or achievement of performance conditions. Stock appreciation rights expire under the same rules that apply to stock options.
Performance Awards . The 2012 Plan permits the grant of performance stock awards and performance cash awards that may qualify as performance-based compensation that is not subject to the $1,000,000 limitation on the income tax deductibility of compensation paid per covered executive officer imposed by Section 162(m) of the Code. To assure that the compensation attributable to performance-based awards will so qualify, our committee can structure such awards so that stock will be issued or paid pursuant to such award only upon the achievement of certain pre-established performance goals during a designated performance period.
Other Stock Awards . The plan administrator may grant other awards based in whole or in part by reference to our common stock. The plan administrator will set the number of shares under the award and all other terms and conditions of such awards.
Changes to Capital Structure . In the event that there is a specified type of change in our capital structure, such as a stock split, appropriate adjustments will be made to (a) the class and maximum number of shares
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reserved under the 2012 Plan, (b) the class and maximum number of shares subject to options, stock appreciation rights and performance stock awards that can be granted in a calendar year, (c) the class and maximum number of shares that may be issued upon exercise of incentive stock options and (d) the number of shares and exercise price or strike price, if applicable, of all outstanding stock awards.
Corporate Transactions . The 2012 Plan provides that, in the event of a sale, lease or other disposition of all or substantially all of the assets of us or specified types of mergers or consolidations, or a corporate transaction, any surviving or acquiring corporation shall either assume awards outstanding under the 2012 Plan or substitute similar awards for those outstanding under the 2012 Plan. If any surviving corporation declines to assume awards outstanding under the 2012 Plan or to substitute similar awards, then, with respect to participants whose service with us has not terminated prior to the time of such corporate transaction, the vesting and the time during which such awards may be exercised will be accelerated in full, and all outstanding awards will terminate if the participant does not exercise such awards at or prior to the corporate transaction. With respect to any awards that are held by other participants that terminated service with us prior to the corporate transaction, the vesting and exercisability provisions of such awards will not be accelerated and such awards will terminate if not exercised prior to the corporate transaction.
Changes in Control . Our board of directors has the discretion to provide that a stock award under the 2012 Plan will immediately vest as to all or any portion of the shares subject to the stock award in the event a participants service with us or a successor entity is terminated actually or constructively within a designated period following the occurrence of certain specified change in control transactions. Stock awards held by participants under the 2012 Plan will not vest automatically on such an accelerated basis unless specifically provided in the participants applicable award agreement.
Plan Suspension or Termination . Our board of directors has the authority to suspend or terminate the 2012 Plan at any time provided that such action does not impair the existing rights of any participant.
Securities Laws and Federal Income Taxes . The 2012 Plan is designed to comply with various securities and federal tax laws as follows:
Securities Laws . The 2012 Plan is intended to conform to all provisions of the Securities Act of 1933, as amended, and the Exchange Act and any and all regulations and rules promulgated by the SEC thereunder, including, without limitation, Rule 16b-3. The 2012 Plan will be administered, and options will be granted and may be exercised, only in such a manner as to conform to such laws, rules and regulations.
Section 409A of the Code . Certain awards under the 2012 Plan may be considered nonqualified deferred compensation for purposes of Section 409A of the Code, which imposes certain additional requirements regarding the payment of deferred compensation. Generally, if at any time during a taxable year a nonqualified deferred compensation plan fails to meet the requirements of Section 409A, or is not operated in accordance with those requirements, all amounts deferred under the 2012 Plan and all other equity incentive plans for the taxable year and all preceding taxable years, by any participant with respect to whom the failure relates, are includible in gross income for the taxable year to the extent not subject to a substantial risk of forfeiture and not previously included in gross income. If a deferred amount is required to be included in income under Section 409A, the amount also is subject to interest and an additional income tax. The interest imposed is equal to the interest at the underpayment rate plus one percentage point, imposed on the underpayments that would have occurred had the compensation been includible in income for the taxable year when first deferred, or if later, when not subject to a substantial risk of forfeiture. The additional federal income tax is equal to 20% of the compensation required to be included in gross income. In addition, certain states, including California, have laws similar to Section 409A, which impose additional state penalty taxes on such compensation.
Section 162(m) of the Code . In general, under Section 162(m) of the Code, income tax deductions of publicly held corporations may be limited to the extent total compensation (including, but not limited to, base
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salary, annual bonus, and income attributable to stock option exercises and other non-qualified benefits) for certain executive officers exceeds $1,000,000 (less the amount of any excess parachute payments as defined in Section 280G of the Code) in any taxable year of the corporation. However, under Section 162(m), the deduction limit does not apply to certain performance-based compensation established by an independent compensation committee that is adequately disclosed to, and approved by, stockholders. In particular, stock options and stock appreciation rights will satisfy the performance-based compensation exception if the awards are made by a qualifying compensation committee, the 2012 Plan sets the maximum number of shares that can be granted to any person within a specified period and the compensation is based solely on an increase in the stock price after the grant date. Specifically, the option exercise price must be equal to or greater than the fair market value of the stock subject to the award on the grant date.
We have attempted to structure the 2012 Plan in such a manner that the compensation attributable to stock options, stock appreciation rights and other performance-based awards which meet the other requirements of Section 162(m) will not be subject to the $1,000,000 limitation. We have not, however, requested a ruling from the Internal Revenue Service or an opinion of counsel regarding this issue.
2012 Employee Stock Purchase Plan
In April 2012, our board of directors adopted the 2012 Purchase Plan, which the stockholders approved in June 2012 and became effective in connection with our initial public offering in June 2012. The purpose of the 2012 Purchase Plan is to assist us in retaining the services of new employees and securing the services of new and existing employees while providing incentives for such individuals to exert maximum efforts toward our success.
Share Reserve . The 2012 Purchase Plan initially authorizes the issuance of 5,000,000 shares of our common stock pursuant to purchase rights granted to our employees or to employees of our subsidiaries. The number of shares of our common stock reserved for issuance will automatically increase on January 1 of each calendar year, from January 1, 2013 through January 1, 2022, by the lesser of 1% of the total number of shares of our common stock outstanding on December 31 of the preceding calendar year or a number determined by our board of directors. The 2012 Purchase Plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Code. As of the date hereof, no shares of our common stock have been purchased under the 2012 Purchase Plan. No more than 25,000,000 shares of our common stock may be issued under our 2012 Purchase Plan, and no other shares may be added to this plan without the approval of our stockholders.
Administration . Our board of directors has delegated its authority to administer the 2012 Purchase Plan to our Compensation Committee. The 2012 Purchase Plan is implemented through a series of offerings of purchase rights to eligible employees. Under the 2012 Purchase Plan, we may specify offerings with durations of not more than 27 months, and may specify shorter purchase periods within each offering. Each offering will have one or more purchase dates on which shares of our common stock will be purchased for employees participating in the offering. An offering may be terminated under certain circumstances.
Payroll Deductions . Generally, all regular employees, including executive officers, employed by us or by any of our designated affiliates, may participate in the 2012 Purchase Plan and may contribute, normally through payroll deductions, up to 15% of their earnings for the purchase of our common stock under the 2012 Purchase Plan. Unless otherwise determined by our board of directors, common stock will be purchased for accounts of employees participating in the 2012 Purchase Plan at a price per share equal to the lower of (a) 85% of the fair market value of a share of our common stock on the first date of an offering or (b) 85% of the fair market value of a share of our common stock on the date of purchase.
Limitations . Employees may have to satisfy one or more of the following service requirements before participating in the 2012 Purchase Plan, as determined by our board of directors: (a) customarily employed for more than 20 hours per week, (b) customarily employed for more than five months per calendar year or
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(c) continuous employment with us or one of our affiliates for a period of time not to exceed two years. No holder will have the right to purchase our shares at a rate which, when aggregated with purchase rights under all our employee stock purchase plans that are also outstanding in the same calendar year(s), have a fair market value of more than $25,000, determined in accordance with Section 423 of the Code, for each calendar year in which that right is outstanding. In no event may an employee be permitted to purchase more than 1,500 shares in any one purchase period. Finally, no employee will be eligible for the grant of any purchase rights under the 2012 Purchase Plan if immediately after such rights are granted, such employee has voting power over 5% or more of our outstanding capital stock measured by vote or value pursuant to Code Section 424(d).
Changes to Capital Structure . In the event a change in our capital structure occurs through such actions as a stock split, merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or similar transaction, the board of directors will make appropriate adjustments to (a) the number of shares reserved under the 2012 Purchase Plan, (b) the maximum number of shares that may be issued under the 2012 Purchase Plan and the maximum number of shares an employee may purchase during any one purchase period and (c) the number of shares and purchase price of all outstanding purchase rights.
Corporate Transactions . In the event of a change in control transaction, each outstanding right to purchase shares under our 2012 Purchase Plan may be assumed or substituted by our successor. In the event that the successor refuses to assume or substitute the outstanding purchase rights, any offering periods that commenced prior to the closing of the proposed change in control transaction will be shortened and terminated on a new purchase date. The new purchase date will occur prior to the closing of the proposed change in control and our 2012 Purchase Plan will then terminate on the closing of the proposed change in control.
Plan Amendment or Termination . Our board has the authority to amend or terminate the 2012 Purchase Plan at any time. If our board determines that the amendment or termination of an offering is in our best interests and the best interests of our stockholders, then our board may terminate any offering on any purchase date, establish a new purchase date with respect to any offering then in progress, or terminate any offering and return any money contributed by participants that has not been used to purchase shares back to the participants. We will obtain stockholder approval of any amendment to the 2012 Purchase Plan as required by applicable law.
401(k) Plan
We maintain a defined contribution employee retirement plan for our U.S. employees. The plan is intended to qualify as a tax-qualified 401(k) plan so that contributions to the 401(k) plan, and income earned on such contributions, are not taxable to participants until withdrawn or distributed from the 401(k) plan. Participants may make pre-tax contributions to the 401(k) plan from their eligible earnings up to the statutorily prescribed annual limit on pre-tax contributions under the Code. The 401(k) plan provides that each participant may contribute up to 100% of eligible compensation on a pre-tax or, in the case of the Roth 401(k), after tax basis into their accounts. Participants who are at least 50 years old may also contribute additional amounts based on the statutory limits for catch-up contributions. Under the 401(k) plan, each employee is fully vested in his or her deferred salary contributions. Employee contributions are held and invested by the plans trustee. Although the 401(k) plan provides for a discretionary employer profit sharing contribution and a discretionary employer matching contribution, we have not made any such contributions on behalf of participating employees to date.
Limitation of Liability and Indemnification
Our restated certificate of incorporation contains provisions that limit the liability of our directors for monetary damages to the fullest extent permitted by Delaware law. Consequently, our directors will not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duties as directors, except liability for:
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any breach of the directors duty of loyalty to us or our stockholders; |
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any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law; |
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unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law; or |
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any transaction from which the director derived an improper personal benefit. |
Our restated certificate of incorporation provides that we are required to indemnify our directors and our restated bylaws provide that we are required to indemnify our directors and officers, in each case to the fullest extent permitted by Delaware law. Any repeal of or modification to our restated certificate of incorporation or restated bylaws may not adversely affect any right or protection of a director or officer for or with respect to any acts or omissions of such director or officer occurring prior to such amendment or repeal. Our restated bylaws also provide that we shall advance expenses incurred by a director or officer in advance of the final disposition of any action or proceeding, and permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in that capacity regardless of whether we would otherwise be permitted to indemnify him or her under the provisions of Delaware law. We have entered and expect to continue to enter into agreements to indemnify our directors, executive officers and other employees as determined by our board of directors. With certain exceptions, these agreements provide for indemnification for related expenses including, among other things, attorneys fees, judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding. We believe that these restated bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. We also maintain directors and officers liability insurance.
The limitation of liability and indemnification provisions in our restated certificate of incorporation and restated bylaws may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. They may also reduce the likelihood of derivative litigation against our directors and officers, even though an action, if successful, might benefit us and other stockholders. Further, a stockholders investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers as required by these indemnification provisions. At present, there is no pending litigation or proceeding involving any of our directors, officers or employees for which indemnification is sought, and we are not aware of any threatened litigation that may result in claims for indemnification.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In addition to the executive officer and director compensation arrangements discussed above under Management and Executive Compensation, the following is a description of transactions since January 1, 2009 to which we have been a participant, in which the amount involved in the transaction exceeds or will exceed $120,000 and in which any of our directors, executive officers or holders of more than 5% of our capital stock, or any immediate family member of, or person sharing the household with, any of these individuals, had or will have a direct or indirect material interest or such other persons as may be required to be disclosed pursuant to Item 404 of Regulation S-K, which we refer collectively refer to as related parties.
Preferred Stock Financings
In April 2009, we entered into a Series C Preferred Stock Purchase Agreement pursuant to which we issued and sold to JMI Equity Fund V, L.P. and its affiliates, or JMI Equity, an aggregate of 491,803 shares of Series C convertible preferred stock at a purchase price of $6.10 per share, for aggregate consideration of $2,999,998.30 and to JMI Incubator, L.P. and its affiliates, or JMI Incubator, an aggregate of 491,803 shares of Series C convertible preferred stock at a purchase price of $6.10 per share, for aggregate consideration of $2,999,998.30. These shares converted into 7,868,848 shares of common stock at the closing of our initial public offering. JMI Equity and JMI Incubator collectively hold more than 5% of our capital stock. Paul V. Barber and Charles E. Noell, III, two of our directors, are Managing Members of JMI Associates V, LLC, the general partner of JMI Equity. Mr. Noell is also a Managing Member of JMI Incubator Associates, LLC, the general partner of JMI Incubator. Additional detail regarding the equity holdings of persons affiliated with JMI Equity is provided in Principal Stockholders. The proceeds were used to offset an outstanding loan to Frederic B. Luddy in the amount of $6.0 million. Mr. Luddy subsequently settled the loan by delivering to us 7,868,848 shares of common stock.
In November 2009, we entered into a Series D Preferred Stock Purchase Agreement pursuant to which we issued and sold to Sequoia Capital U.S. Growth Fund IV, L.P. and its affiliates, or Sequoia Growth, an aggregate of 2,990,635 shares of Series D convertible preferred stock in multiple closings at a purchase price of $17.267333 per share, for aggregate consideration of $51,640,290. These shares converted into 23,925,080 shares of common stock at the closing of our initial public offering. Sequoia Growth collectively holds more than 5% of our capital stock. Douglas M. Leone, one of our directors, is a managing director of SCGF GenPar, Ltd., the sole general partner of SCGV IV Management, L.P., which is the sole general partner of Sequoia Capital U.S. Growth Fund IV, L.P. Additional detail regarding the equity holdings of Sequoia Growth is provided in Principal and Selling Stockholders.
In connection with the first closing of the sale and issuance of Series D convertible preferred stock in November 2009, we entered into agreements to repurchase an aggregate of 19,164,000 shares of our common stock held by Frederic B. Luddy, Andrew J. Chedrick, Robert Luddy and certain other employees at a purchase price of $2.1584166 per share. In connection with the second closing of the Series D convertible preferred stock financing in December 2009, we offered to purchase up to 11,064,216 shares of our common stock at a purchase price of $2.1584166 per share from our former and current employees that started their employment with us on or prior to November 1, 2009, of which 4,346,264 shares were repurchased. In addition, we repurchased two warrants to purchase an aggregate of 51,852 shares of our Series B convertible preferred stock at a price per warrant share of $16.013772 held by a financial institution. The following table presents the aggregate consideration paid to each related party pursuant to these stock repurchases:
Stockholder |
Common Stock
Repurchased |
Aggregate
Consideration |
||||||
Frederic B. Luddy (1) |
16,480,000 | $ | 35,570,706 | |||||
Andrew J. Chedrick (2) |
1,440,000 | 3,108,120 | ||||||
Robert Luddy (3) |
448,000 | 966,971 | ||||||
Laura Pierce (4) |
68,000 | 146,772 |
(footnotes on next page)
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(1) |
At the time of the stock repurchase, Mr. Luddy was serving as our President and Chief Executive Officer. |
(2) |
At the time of the stock repurchase, Mr. Chedrick was serving as our Chief Financial Officer. |
(3) |
Mr. Robert Luddy is the brother of Mr. Frederic B. Luddy. |
(4) |
Ms. Laura Pierce is the sister of Mr. Frederic B. Luddy. |
In connection with the sale and issuance of Series D convertible preferred stock, we entered into amended and restated investor rights, voting, and right of first refusal and co-sale agreements containing voting rights, information rights, rights of first refusal and registration rights, among other things, with certain holders of our convertible preferred stock and certain holders of our common stock. These stockholder agreements terminated upon the closing of our initial public offering, except for the registration rights granted under our third amended and restated investor rights agreement, as more fully described below in Description of Capital StockRegistration Rights.
Common Stock Financing
In February 2012, we entered into a Common Stock Purchase Agreement pursuant to which we issued and sold to Greylock XIII Limited Partnership and its affiliates, or Greylock, an aggregate of 1,750,980 shares of common stock at a purchase price of $10.20 per share, for aggregate consideration of $17,859,996. In connection with this transaction, Frederic Luddy, our Chief Product Officer, also sold 700,000 shares of our common stock to Greylock at a purchase price of $10.20 per share, for aggregate consideration of $7,140,000. We waived our right of first refusal in order to allow Mr. Luddy to complete this sale to Greylock.
Employment Agreements
We have entered into employment arrangements with our executive officers, as more fully described in Executive CompensationEmployment Agreements, Employment Arrangements, Post-Employment Compensation and Potential Payments upon Termination or Change in Control.
Equity Grants to Executive Officers and Directors
We have granted stock options to our executive officers and directors, as more fully described in the section entitled Executive Compensation. We granted 1,000,000 RSUs to Mr. Frederic B. Luddy in March 2012. These RSUs vest annually in four equal installments, on the anniversary of the date of grant. We granted options to purchase 100,000 shares of our common stock to each of Messrs. Barber, Leone and Noell in June 2012. These options vest annually over three years and have an exercise price of $18.00 per share.
Employment Arrangements with Immediate Family Members of Our Executive Officers and Directors
Robert Luddy, the brother of Frederic B. Luddy, our founder and Chief Product Officer, has been employed by us since July 1, 2005. During 2009, 2010, and 2011, Mr. Robert Luddy had total cash compensation, including base salary, bonus and other compensation, of $496,964, $535,476 and $541,944, respectively. During fiscal 2010 and 2011 we granted to Mr. Robert Luddy options to purchase 320,000 and 160,000 shares of common stock, respectively. He did not receive any grants in fiscal 2009 or the six months ended December 31, 2011.
Laura Pierce, the sister of Frederic B. Luddy, has been employed by us since January 1, 2007. During 2009, 2010, and 2011, Ms. Pierce had total cash compensation, including base salary, bonus and other compensation, of $109,643, $116,073 and $137,734. During fiscal 2011 and the six months ended December 31, 2011, we granted to Ms. Laura Pierce options to purchase 80,000 and 20,000 shares of common stock, respectively. She did not receive any grants in fiscal 2009 or 2010.
Indemnification Agreements
We have entered into indemnification agreements with each of our directors and executive officers, as described in Executive CompensationLimitation of Liability and Indemnification.
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Transaction and Related Expenses
We paid $201,736 of legal expenses incurred by stockholders affiliated with JMI Equity in connection with activities relating to our public offering of shares.
Review, Approval or Ratification of Transactions with Related Parties
The charter of our Audit Committee requires that any transaction with a related party that must be reported under applicable rules of the SEC, other than compensation related matters, must be reviewed and approved or ratified by our Audit Committee. The Audit Committee has not adopted policies or procedures for review of, or standards for approval of, these transactions.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding beneficial ownership of our capital stock outstanding as of September 30, 2012:
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Each person, or group of affiliated persons, known by us to beneficially own more than 5% of our common stock; |
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Each of our directors; |
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Each of our named executive officers; |
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All of our directors and executive officers as a group; and |
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Each of the selling stockholders. |
We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the table below have sole voting and investment power with respect to all shares of common stock that they beneficially own, subject to applicable community property laws.
Applicable percentage ownership prior to the offering is based on 123,371,566 shares of common stock outstanding at September 30, 2012. Applicable percentage ownership after the offering assumes that 1,650,000 shares of common stock will be sold in this offering by us and no exercise by the underwriters of their option to purchase an additional 1,747,500 shares of common stock from us and the selling stockholders. In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed to be outstanding all shares of common stock subject to options, warrants or other convertible securities held by that person or entity that are currently exercisable or will be exercisable within 60 days of September 30, 2012. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Except as otherwise noted below, the address for each person or entity listed in the table is c/o ServiceNow, Inc., 4810 Eastgate Mall, San Diego, California 92121.
Shares Beneficially
Owned Prior to the Offering |
Shares
Being Offered |
Shares Beneficially
Owned After the Offering |
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Name of Beneficial Owner |
Number | Percent | Number | Percent | ||||||||||||||||
5% or Greater Stockholders |
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Persons affiliated with JMI Equity (1) |
55,079,117 | 44.64 | % | 9,206,542 | 45,872,575 | 36.69 | % | |||||||||||||
Entities affiliated with Sequoia Capital (2) |
24,281,844 | 19.68 | | 24,281,844 | 19.42 | |||||||||||||||
Certain Other Stockholders |
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Entities affiliated with Greylock Partners (3) |
2,450,980 | 1.99 | | 2,450,980 | 1.96 | |||||||||||||||
Directors and Named Executive Officers |
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Frank Slootman (4) |
6,550,456 | 5.05 | | 6,550,456 | 4.99 | |||||||||||||||
Frederic B. Luddy (5) |
12,063,652 | 9.76 | | 12,063,652 | 9.63 | |||||||||||||||
Michael P. Scarpelli (6) |
1,654,852 | 1.33 | | 1,654,852 | 1.31 | |||||||||||||||
David L. Schneider (7) |
1,622,788 | 1.30 | | 1,622,788 | 1.28 | |||||||||||||||
Arne Josefsberg (8) |
1,350,000 | 1.08 | | 1,350,000 | 1.07 | |||||||||||||||
Daniel R. McGee (9) |
1,200,000 | * | | 1,200,000 | * | |||||||||||||||
Andrew J. Chedrick |
450,000 | * | | 450,000 | * | |||||||||||||||
Paul V. Barber (10) |
40,580,508 | 32.89 | 6,783,082 | 33,797,426 | 27.03 | |||||||||||||||
Ronald E. F. Codd (11) |
200,000 | * | | 200,000 | * | |||||||||||||||
Douglas M. Leone (12) |
24,281,844 | 19.68 | | 24,281,844 | 19.42 | |||||||||||||||
Jeffrey A. Miller (13) |
200,000 | * | | 200,000 | * | |||||||||||||||
Charles E. Noell, III (14) |
55,079,117 | 44.64 | 9,206,542 | 45,872,575 | 36.69 | |||||||||||||||
William L. Strauss (15) |
200,000 | * | | 200,000 | * | |||||||||||||||
All executive officers and directors as a group (13 persons) (16) |
104,852,709 | 77.17 | 9,206,542 | 95,646,167 | 69.55 |
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Shares Beneficially
Owned Prior to the Offering |
Shares
Being Offered |
Shares Beneficially
Owned After the Offering |
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Name of Beneficial Owner |
Number | Percent | Number | Percent | ||||||||||||||||
Other Selling Stockholders (17) |
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Rebecca Ann Moores Family Trust |
4,393,995 | 3.56 | 734,462 | 3,659,533 | 2.93 | |||||||||||||||
Chloe Dahl Moores Irrevocable Personal 2012 Trust |
88,240 | * | 14,749 | 73,491 | * | |||||||||||||||
Cyrus N. Moores Irrevocable Personal 2012 Trust |
88,240 | * | 14,749 | 73,491 | * | |||||||||||||||
John J. Moores III Irrevocable Personal 2012 Trust |
88,240 | * | 14,749 | 73,491 | * | |||||||||||||||
Kiev J. Moores Irrevocable Personal 2012 Trust |
88,240 | * | 14,749 | 73,491 | * |
* |
Represents beneficial ownership of less than one percent. |
(1) |
Consists of (i) 28,275,358 shares held by JMI Equity Fund V, L.P., (ii) 1,637,678 shares held by JMI Equity Fund V (AI), L.P., (iii) 7,494,302 shares held by JMI Equity Fund IV, L.P., (iv) 593,470 shares held by JMI Equity Fund IV (AI), L.P., (v) 2,393,038 shares held by JMI Euro Equity Fund IV, L.P., (vi) 186,662 shares held by JMI Equity Side Fund, L.P., (vii) 9,751,654 shares held by JMI Participating Partners, (viii) 4,272,259 shares held by JMI Services, LLC, and (ix) 474,696 shares held by Charles E. Noell, III. JMI Associates V, L.L.C. is the General Partner of each of JMI Equity Fund V, L.P. and JMI Equity Fund V (AI), L.P. Charles E. Noell III, Harry S. Gruner, Paul V. Barber, Robert F. Smith, Bradford D. Woloson, Peter C. Arrowsmith, Charles T. Dieveney and Jit Sinha are managing members of JMI Associates V, L.L.C. and may be deemed the beneficial owners of the shares beneficially owned by JMI Associates V, L.L.C. Messrs. Noell, Gruner, Barber, Smith, Woloson, Arrowsmith, Dieveney and Sinha disclaim beneficial ownership of the shares beneficially owned by JMI Equity Fund V, L.P., JMI Equity Fund V (AI), L.P. and JMI Associates V, L.L.C. JMI Associates IV, L.L.C. is the General Partner of each of JMI Equity Fund IV, L.P., JMI Equity Fund IV (AI), L.P. and JMI Euro Equity Fund IV, L.P. Messrs. Noell, Gruner, Barber, Smith, Woloson and Arrowsmith are managing members of JMI Associates IV, L.L.C. and may be deemed the beneficial owners of the shares beneficially owned by JMI Associates IV, L.L.C. Messrs. Noell, Gruner, Barber, Smith, Woloson and Arrowsmith disclaim beneficial ownership of the shares beneficially owned by JMI Equity Fund IV, L.P., JMI Equity Fund IV (AI), L.P., JMI Euro Equity Fund IV, L.P. and JMI Associates IV, L.L.C. JMI Side Associates, L.L.C. is the General Partner of JMI Equity Side Fund, L.P. Messrs. Noell, Gruner, Barber and Woloson are officers of JMI Side Associates, L.L.C. and may be deemed the beneficial owners of the shares beneficially owned by JMI Side Associates, L.L.C. Messrs. Noell, Gruner, Barber and Woloson disclaim beneficial ownership of the shares beneficially owned by JMI Equity Side Fund, L.P. and JMI Side Associates, L.L.C. El Camino Advisors, LLC is the Managing General Partner of JMI Participating Partners. Mr. Noell, John J. Moores and Bryant W. Burke are members of El Camino Advisors, LLC., the Managing General Partner of JMI Participating Partners, and may be deemed the beneficial owners (due to voting and investment power) of the shares beneficially owned by El Camino Advisors, LLC. Messrs. Noell, Moores and Burke disclaim beneficial ownership of the shares beneficially owned by El Camino Advisors, LLC and JMI Participating Partners. JMTX Manager, Inc. is the manager of JMI Services, LLC, and Mr. Moores owns all of the membership interests in JMI Services, LLC and all of the stock of JMTX Manager, Inc. Messrs. Noell, Moores and Burke are directors of, and Messrs. Noell and Burke are officers of, JMTX Manager, Inc. and may be deemed the beneficial owners of the shares beneficially owned by JMTX Manager, Inc. Messrs. Noell and Burke disclaim beneficial ownership of the shares beneficially owned by JMTX Manager, Inc. and JMI Services, LLC. The principal address for JMI Associates V, L.L.C., JMI Associates IV, L.L.C., JMI Equity Fund V, L.P., JMI Equity Fund V (AI), L.P., JMI Side Associates, L.L.C., JMI Equity Fund IV, L.P., JMI Equity Fund IV (AI), L.P., JMI Euro Equity Fund IV, L.P., and JMI Equity Side Fund, L.P. is 100 International Drive, Suite 19100, Baltimore, Maryland 21202. The principal address for JMI Services, LLC, JMI Participating Partners and Mr. Noell is 111 Congress Avenue, Suite 2600, Austin, Texas 78701. The 9,206,542 shares being offered by the persons affiliated with JMI Equity are being offered on a pro rata basis by each of the persons listed in the first sentence of this footnote. The persons affiliated with JMI Equity have granted the underwriters the right to purchase up to 1,380,983 additional shares of common stock on a pro rata basis. Certain persons affiliated with JMI Equity will contribute the shares they continue to hold after the sale of shares in this offering to the JMI Equity Fund V Trust, JMI Equity Fund V Associates Trust, JMI Equity Fund V (AI) Trust, JMI Equity Fund V (AI) Associates Trust, JMI Equity Fund IV Trust, JMI Equity Fund IV Associates Trust, JMI Equity Fund IV (AI) Trust, JMI Equity Fund IV (AI) Associates Trust, JMI Euro Equity Fund IV Trust, and JMI Euro Equity Fund IV Associates Trust as part of an internal restructuring, as described in Shares Eligible for Future Sale. If the underwriters exercise their option to purchase additional shares of common stock after these contemplated contributions are completed, the trusts would sell the portion of the shares subject to the option that would have otherwise been sold by the contributors to the trusts. |
(2) |
Consists of (i) 22,948,252 shares held by Sequoia Capital U.S. Growth Fund IV, LP (Growth IV), (ii) 996,092 shares held by Sequoia Capital USGF Principals Fund IV, LP (Principals IV), and (iii) 337,500 shares held by SC US GF V Holdings, Ltd (Sequoia Holdings). Douglas Leone is a managing director of SCGF GenPar, Ltd. (SCGF GenPar). SCGF GenPar is the sole general partner of SCGF IV Management, L.P. (SCGF IV Management), which is the sole general partner of Growth IV and Principals IV. By virtue of these relationships, Mr. Leone may be deemed to share voting and investment power with respect to the shares held by Growth IV and Principals IV. Douglas Leone is a managing director of SC GF V TT, Ltd. (SCGF V TT) and a director of Sequoia Holdings. SCGF V TT is the sole general partner of SCGF V Management, L.P. (SCGF V Management), which is the sole general partner of each of Sequoia Capital U.S. Growth Fund V, L.P. (Growth V) and Sequoia Capital USGF Principals Fund V, L.P. (Principals V). Growth V and Principals V together own 100% of the outstanding ordinary shares of Sequoia Holdings. By virtue of these relationships, Mr. Leone may be deemed to share voting and investment power with respect to the shares held by Sequoia Holdings. The address for the entities affiliated with Sequoia Capital is 3000 Sand Hill Road, 4-250, Menlo Park, CA 94025. |
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(3) |
Consists of 2,184,460 shares held by Greylock XIII Limited Partnership, 196,667 shares held by Greylock XIII-A Limited Partnership and 69,853 shares held by Greylock XIII Principals LLC. The address for the entities affiliated with Greylock is 1 Brattle Square, Cambridge, MA 02138. |
(4) |
Consists of (i) 100,000 shares held by the Slootman Living Trust dated September 8, 1999, of which Mr. Slootman is a co-trustee, (ii) 50,000 shares held by the CRB Irrevocable Trust, dated August 5, 2011, of which Mr. Slootman is a co-trustee, (iii) 50,000 shares held by the TJB Irrevocable Trust, dated August 5, 2011, of which Mr. Slootman is a co-trustee, and (iv) 6,350,456 shares subject to options held by Mr. Slootman that are exercisable within 60 days of September 30, 2012, of which 4,094,035 are unvested and early exercisable and would be subject to a right of repurchase in our favor upon Mr. Slootmans cessation of service prior to vesting. |
(5) |
Consists of (i) 1,250,000 shares held by the Luddy Family 2011 Dynasty Trust dated October 14, 2011 of which Mr. Luddy may be deemed to have voting and investment power, (ii) 240,000 shares subject to options held by Mr. Luddy that are exercisable within 60 days of September 30, 2012, of which 40,000 are unvested and early exercisable and would be subject to a right of repurchase in our favor upon Mr. Luddys cessation of service prior to vesting, and (iii) 10,573,652 shares of common stock held by Mr. Luddy. |
(6) |
Consists of (i) 1,379,044 shares subject to options held by Mr. Scarpelli that are exercisable within 60 days of September 30, 2012, of which 948,092 are unvested and early exercisable and would be subject to a right of repurchase in our favor upon Mr. Scarpellis cessation of service prior to vesting, and (ii) 275, 808 shares of common stock held by Mr. Scarpelli. |
(7) |
Consists of 1,622,788 shares subject to options held by Mr. Schneider that are exercisable within 60 days of September 30, 2012, of which 1,048,051 are unvested and early exercisable and would be subject to a right of repurchase in our favor upon Mr. Schneiders cessation of service prior to vesting. |
(8) |
Consists of 1,350,000 shares subject to options held by Mr. Josefsberg that are exercisable within 60 days of September 30, 2012, of which 956,250 are unvested and early exercisable and would be subject to a right of repurchase in our favor upon Mr. Josefsbergs cessation of service prior to vesting. |
(9) |
Consists of 1,200,000 shares subject to options held by Mr. McGee that are exercisable within 60 days of September 30, 2012, of which 825,000 are unvested and early exercisable and would be subject to a right of repurchase in our favor upon Mr. McGees cessation of service prior to vesting. |
(10) |
Consists of the shares referred to in footnote (1) above held by JMI Equity Fund V, L.P., JMI Equity Fund V (AI), L.P., JMI Equity Fund IV, L.P., JMI Equity Fund IV (AI), L.P., JMI Euro Equity Fund IV, L.P., and JMI Equity Side Fund, L.P. |
(11) |
Consists of (i) 150,000 shares subject to options held by Mr. Codd that are exercisable within 60 days of September 30, 2012, all of which are unvested and early exercisable and would be subject to a right of repurchase in our favor upon Mr. Codds cessation of service prior to vesting, and (ii) 50,000 shares of common stock held by Mr. Codd, 12,500 of which are subject to a right of repurchase in our favor upon Mr. Codds cessation of service prior to vesting. |
(12) |
Consists of the shares referred to in footnote (2) above. |
(13) |
Consists of 200,000 shares held by the Miller Living Trust, dtd 7/7/85, of which Mr. Miller is co-trustee, and 112,500 of which are subject to a right of repurchase in our favor upon Mr. Millers cessation of service prior to vesting. |
(14) |
Consists of the shares referred to in footnote (1) above. |
(15) |
Consists of 200,000 shares subject to options held by Mr. Strauss that are exercisable within 60 days of September 30, 2012, of which 1125,00 are unvested and early exercisable and would be subject to a right of repurchase in our favor upon Mr. Strauss cessation of service prior to vesting. |
(16) |
Consists of (i) 92,360,421 shares of common stock and (ii) 12,492,288 shares of common stock subject to options that are exercisable within 60 days of May 31, 2012. If the underwriters exercise their option to purchase additional shares, then executive officers and directors as a group would beneficially own shares of common stock after the offering, representing 68.43% of our outstanding common stock. |
(17) |
The other selling stockholders have granted the underwriters the right to purchase up to 119,017 additional shares of common stock on a pro rata basis. |
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General
Our authorized capital stock consists of 600,000,000 shares of common stock, $0.001 par value per share, and 10,000,000 shares of preferred stock, $0.001 par value per share. A description of the material terms and provisions of our restated certificate of incorporation and restated bylaws affecting the rights of holders of our capital stock is set forth below. The description is intended as a summary, and is qualified in its entirety by reference to our restated certificate of incorporation and our restated bylaws as currently in effect, which are included as exhibits to the registration statement relating to this prospectus.
As of September 30, 2012, there were:
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123,371,566 shares of common stock outstanding, held by 200 stockholders of record; |
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37,279,442 shares of common stock issuable upon the exercise of outstanding options with a weighted-average exercise price of $4.48 per share and 1,134,851 shares of common stock issuable pursuant to outstanding restricted stock units, or RSUs; |
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11,635,301 additional shares of common stock reserved for future issuance under our 2012 Equity Incentive Plan; and |
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5,000,000 shares of common stock reserved for future issuance under our 2012 Employee Stock Purchase Plan. |
Common Stock
Dividend Rights
Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of our common stock are entitled to receive dividends out of funds legally available if our board of directors, in its discretion, determines to issue dividends and only then at the times and in the amounts that our board of directors may determine.
Voting Rights
Each holder of common stock is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Our restated certificate of incorporation eliminates the right of stockholders to cumulate votes for the election of directors. Our restated certificate of incorporation establishes a classified board of directors, to be divided into three classes with staggered three-year terms. Only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms.
No Preemptive or Similar Rights
Our common stock is not entitled to preemptive rights and is not subject to conversion, redemption or sinking fund provisions.
Right to Receive Liquidation Distributions
Upon our dissolution, liquidation or winding-up, the assets legally available for distribution to our stockholders are distributable ratably among the holders of our common stock, subject to prior satisfaction of all outstanding debt and liabilities and the preferential rights and payment of liquidation preferences, if any, on any outstanding shares of preferred stock.
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Preferred Stock
We are authorized, subject to limitations prescribed by Delaware law, to issue preferred stock in one or more series, to establish from time to time the number of shares to be included in each series and to fix the designation, powers, preferences and rights of the shares of each series and any of its qualifications, limitations or restrictions. Our board of directors also can increase or decrease the number of shares of any series, but not below the number of shares of that series then outstanding, without any further vote or action by our stockholders. Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of the common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control of our company and may adversely affect the market price of our common stock and the voting and other rights of the holders of common stock. We have no current plan to issue any shares of preferred stock.
Equity Grants
As of September 30, 2012, 37,279,442 shares of our common stock were issuable upon exercise of outstanding options and 1,134,851 shares of common stock were issuable pursuant to outstanding RSUs
Registration Rights
Common and Preferred Stock
According to the terms of our third amended and restated investor rights agreement entered into in November 2009, certain investors are entitled to demand, piggyback and Form S-3 registration rights. The stockholders who are a party to the investor rights agreement will have registration rights with respect to an aggregate of 73,703,016 shares, or 59%, of our common stock upon the closing of this offering. Such stockholders have waived their registration rights with respect to this offering.
Demand Registration Rights . At any time beginning on November 25, 2012, the holders of at least 40% of the shares having demand registration rights have the right to make up to two demands that we file a registration statement to register all or a portion of their shares so long as the aggregate number of securities requested to be sold under such registration statement is at least $4,000,000, subject to specified exceptions.
Form S-3 Registration Rights . If we are eligible to file a registration statement on Form S-3, the holders of at least 40% of the shares having registration rights have the right to demand that we file a registration statement on Form S-3 so long as the aggregate value of the securities to be sold under the registration statement on Form S-3 is at least $1,000,000, subject to specified exceptions.
Piggyback Registration Rights . If we register any securities for public sale, holders of registration rights are entitled to written notice of the registration and will have the right to include their shares in the registration statement. The underwriters of any offering will have the right to limit the number of shares having registration rights to be included in the registration statement, but not below 25% of the total number of shares included in the registration statement.
Expenses of Registration . Generally, we are required to bear all registration and selling expenses incurred in connection with the demand, piggyback and Form S-3 registrations described above, other than underwriting discounts and commissions, stock transfer taxes and fees of counsel for any holder other than the reasonable fees of a single special counsel for the holders of registration rights.
Expiration of Registration Rights . The demand, piggyback and Form S-3 registration rights discussed above will terminate in July 2016. In addition, the registration rights discussed above will terminate with respect to any stockholder entitled to these registration rights on the date when such stockholder holds less than three percent of
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our common stock then outstanding and is able to sell all of its registrable common stock in a single 90-day period under Rule 144 of the Securities Act.
Anti-Takeover Provisions
The provisions of Delaware law, our restated certificate of incorporation and our restated bylaws may have the effect of delaying, deferring or discouraging another person from acquiring control of our company.
Delaware Law
We are governed by the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. This section prevents some Delaware corporations, including us, from engaging, under some circumstances, in a business combination, which includes a merger or sale of at least 10% of the corporations assets with any interested stockholder, meaning a stockholder who, together with affiliates and associates, owns or, within three years prior to the determination of interested stockholder status, did own 15% or more of the corporations outstanding voting stock, unless:
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the transaction is approved by the board of directors prior to the time that the interested stockholder became an interested stockholder; |
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upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced; or |
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at or subsequent to such time that the stockholder became an interested stockholder, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders by at least two-thirds of the outstanding voting stock not owned by the interested stockholder. |
A Delaware corporation may opt out of these provisions with an express provision in its original certificate of incorporation or an express provision in its certificate or incorporation or bylaws resulting from a stockholders amendment approved by at least a majority of the outstanding voting shares. We do not plan to opt out of these provisions. The statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us.
Restated Certificate of Incorporation and Restated Bylaw Provisions
Our restated certificate of incorporation and our restated bylaws include a number of provisions that may have the effect of deterring hostile takeovers or delaying or preventing changes in control, including the following:
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Board of Directors Vacancies . Our restated certificate of incorporation and restated bylaws authorize only our board of directors to fill vacant directorships. In addition, the number of directors constituting our board of directors is set only by resolution adopted by a majority vote of our entire board of directors. These provisions prevent a stockholder from increasing the size of our board of directors and gaining control of our board of directors by filling the resulting vacancies with its own nominees. |
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Classified Board . Our restated certificate of incorporation and restated bylaws provide that our board of directors is classified into three classes of directors. The existence of a classified board could delay a successful tender offeror from obtaining majority control of our board of directors, and the prospect of that delay might deter a potential offeror. |
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Stockholder Action; Special Meeting of Stockholders . Our restated certificate of incorporation provides that our stockholders may not take action by written consent, but may only take action at annual or special meetings of our stockholders. Stockholders are not permitted to cumulate their votes for the |
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election of directors. Our restated bylaws further provide that special meetings of our stockholders may be called only by a majority of our board of directors, the chairman of our board of directors, our chief executive officer or our president. |
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Advance Notice Requirements for Stockholder Proposals and Director Nominations . Our restated bylaws provide advance notice procedures for stockholders seeking to bring business before our annual meeting of stockholders, or to nominate candidates for election as directors at our annual meeting of stockholders. Our restated bylaws also specify certain requirements regarding the form and content of a stockholders notice. These provisions may preclude our stockholders from bringing matters before our annual meeting of stockholders or from making nominations for directors at our annual meeting of stockholders. |
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Issuance of Undesignated Preferred Stock . Our board of directors has the authority, without further action by the stockholders, to issue up to 10,000,000 shares of undesignated preferred stock with rights and preferences, including voting rights, designated from time to time by the board of directors. The existence of authorized but unissued shares of preferred stock enables our board of directors to render more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise. |
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Super Majority Vote to Amend Certificate of Incorporation and Bylaws . Our restated certificate of incorporation provides that if two-thirds of our board of directors approves the amendment of our certificate of incorporation and bylaws, or any provisions thereof, then such amendment need only be approved by stockholders holding a majority of our outstanding shares of common stock entitled to vote. Otherwise, such amendment must be approved by stockholders holding two-thirds of our outstanding shares of common stock entitled to vote. |
New York Stock Exchange Listing
Our common stock is listed on the New York Stock Exchange under the symbol NOW.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Computershare Trust Company, N.A.
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SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of shares of our common stock, including shares issued upon the exercise of outstanding options, in the public market after this offering, or the possibility of these sales occurring, could cause the prevailing market price for our common stock to fall or impair our ability to raise equity capital in the future.
Upon the closing of this offering, based on the number of shares outstanding as of September 30, 2012, a total of 125,021,566 shares of common stock will be outstanding, assuming no exercise of the underwriters option to purchase additional shares and no exercises of outstanding stock options or settlement of RSUs prior to the closing of this offering. Of these outstanding shares, all of the shares of common stock sold in this offering by us and the selling stockholders and the 13,397,500 shares of common stock sold in our initial public offering will be freely tradable in the public market without restriction or further registration under the Securities Act, unless these shares are held by affiliates, as that term is defined in Rule 144 under the Securities Act.
The remaining outstanding shares of common stock will be restricted securities, as that term is defined in Rule 144 under the Securities Act. These restricted securities are eligible for public sale only if they are registered under the Securities Act or if they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act, which are summarized below.
As a result of the lock-up agreements described below and certain transfer restrictions under our insider trading policy, subject to the provisions of Rules 144 and 701 under the Securities Act, these restricted securities will be available for sale in the public market as follows:
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no restricted shares will be eligible for sale in the public market immediately upon completion of this offering; |
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5,008,688 shares will become eligible for sale in the public market beginning on December 26, 2012 (the date on which the lock-up agreements related to our initial public offering expire); |
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42,688,326 shares subject to transfer restrictions under our insider trading policy will be eligible for sale in the public market on the second trading day following our earnings release for the year ended December 31, 2012, including shares held by our affiliates, assuming the shares are held by persons subject to our insider trading policy, such as directors, officers or employees; provided, if the holder of any shares ceases to be employed by us, such holders shares will become eligible for sale upon the expiration of the relevant lock-up agreement; |
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49,826,072 shares will become eligible for sale in the public market beginning on the 91 st day following the date of this prospectus upon expiration of lock-up agreements entered into in connection with this offering, as described below; and |
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2,450,980 shares will become eligible for sale in the public market beginning on February 21, 2013, all of which will be freely tradable under Rule 144. |
In addition, of the 37,279,442 shares of our common stock that were subject to stock options outstanding as of September 30, 2012, options to purchase 11,607,665 shares of common stock were vested as of September 30, 2012 and will be eligible for sale at various times beginning on December 26, 2012.
Promptly following the closing of this offering, each of JMI Equity Fund V, L.P., JMI Equity Fund V (AI), L.P., JMI Equity Fund IV, L.P., JMI Equity Fund IV (AI), L.P. and JMI Euro Equity Fund IV, L.P., who are selling shares of common stock in this offering, currently expect to contribute the remaining shares each holds to trusts as part of an internal restructuring. These funds, the trusts and their respective trustees will make filings with the SEC under Section 16 of the Exchange Act reflecting these contributions. The trusts and trustees will enter into lock-up agreements with the underwriters in connection with such contributions, which will have the
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same terms as the lock-up agreements the selling stockholders and the underwriters have entered into in connection with this offering. If the underwriters exercise their option to purchase additional shares after the contribution of the shares to the trusts, then the trusts, and not the funds, will sell such shares to the underwriters. Please see the section titled Principal and Selling Stockholders.
Following the closing of this offering, Mr. Frederic B. Luddy, our Chief Product Officer and founder, anticipates transferring approximately 350,000 shares of common stock to his spouse. Following the initial transfer of shares by Mr. Luddy, Mr. Luddys spouse anticipates transferring certain of these shares to a trust for gift purposes. The shares transferred to Mr. Luddys spouse and any trust will be subject to the lock-up agreements entered into in connection with our initial public offering and transfer restrictions under our insider trading policy and will be eligible for sale in the public market on the second trading day following our earnings release for the year ended December 31, 2012.
Rule 144
In general, under Rule 144 as currently in effect, a person who is not deemed to have been one of our affiliates for purposes of the Securities Act at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least six months, including the holding period of any prior owner other than our affiliates, is entitled to sell those shares without complying with the manner of sale, volume limitation or notice provisions of Rule 144, subject to compliance with the public information requirements of Rule 144. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than our affiliates, then that person is entitled to sell those shares without complying with any of the requirements of Rule 144.
In general, under Rule 144, as currently in effect, our affiliates or persons selling shares on behalf of our affiliates are entitled to sell upon the expiration of the lock-up agreements described below, within any three-month period beginning 90 days after the date of this prospectus, a number of shares that does not exceed the greater of:
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1% of the number of shares of common stock then outstanding, which will equal approximately 1,250,215 shares immediately after the offering, or |
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the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. |
Sales under Rule 144 by our affiliates or persons selling shares on behalf of our affiliates are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us.
Rule 701
In general, under Rule 701 as currently in effect, any of our employees, consultants or advisors who purchased shares of our common stock pursuant to a written compensatory plan or contract and who is not deemed to have been an affiliate of our company during the immediately preceding 90 days may sell these shares in reliance upon Rule 144 but without being required to comply with the public information, holding period, volume limitation or notice provisions of Rule 144. Rule 701 also permits affiliates of our company to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. However, substantially all Rule 701 shares are subject to market standoff agreements or lock-up agreements as described below.
Lock-Up Agreements
In connection with our initial public offering, all of our directors and officers and the holders of substantially all of our capital stock entered into and are subject to lock-up agreements or market standoff provisions that prohibit them from offering for sale, selling, contracting to sell, granting any option for the sale of, transferring or otherwise disposing of any shares of our common stock, options or warrants to acquire shares
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of our common stock or any security or instrument related to this common stock, option or warrant through December 25, 2012 without the prior written consent of Morgan Stanley & Co. LLC.
In addition, in connection with this offering, each of the selling stockholders have agreed to extend the restricted period for their shares of common stock for an additional period ending 90 days after the date of this prospectus as described in further detail in the section titled Underwriting. After this offering our officers and directors may enter into written trading plans that are intended to comply with Rule 10b5-1 under the Securities Exchange Act of 1934. Sales under these trading plans would not be permitted until the expiration of the lock-up agreements relating to this offering.
Registration Rights
Upon the closing of this offering, the holders of an aggregate of 73,703,016 shares of our common stock, or their permitted transferees, will be entitled to rights with respect to the registration of these shares under the Securities Act. Registration of these shares under the Securities Act would result in these shares becoming fully tradable without restriction under the Securities Act immediately upon the effectiveness of the registration statement, except for shares purchased by affiliates. See Description of Capital StockRegistration Rights for additional information.
Registration Statements
We have filed a registration statement on Form S-8 under the Securities Act covering all of the shares of common stock subject to equity grants outstanding and reserved for issuance under our stock plans. Accordingly, shares of our common stock issued under these plans will be eligible for sale in the public market, subject to vesting restrictions and the lock-up provisions described under Underwriting. However, resales of certain shares held by our affiliates registered on the Form S-8 will be subject to volume limitations, manner of sale, notice and public information requirements of Rule 144 and will not be eligible for resale until expiration of the lock-up provisions to which they are subject.
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CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK
This section summarizes certain United States federal income tax considerations relating to the ownership and disposition of common stock for a non-U.S. holder (as defined below). This summary does not provide a complete analysis of all potential tax considerations. The information provided below is based upon provisions of the Internal Revenue Code of 1986, as amended (Code), and Treasury regulations promulgated thereunder, administrative rulings and judicial decisions currently in effect. These authorities may change at any time, possibly on a retroactive basis, or the Internal Revenue Service, or IRS, might interpret the existing authorities differently. In either case, the tax considerations of owning or disposing of common stock could differ from those described below. As a result, we cannot assure you that the tax consequences described in this discussion will not be challenged by the IRS or will be sustained by a court if challenged by the IRS.
This summary does not address the tax considerations arising under the laws of any non-U.S., state or local jurisdiction, or under U.S. federal gift and estate tax laws, except to the limited extent provided below. In addition, this discussion does not address tax considerations applicable to an investors particular circumstances or to investors that may be subject to special tax rules, including, without limitation:
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banks, insurance companies or other financial institutions; |
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partnerships or entities or arrangements treated as partnerships or other pass-through entities for U.S. federal tax purposes (or investors in such entities); |
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corporations that accumulate earnings to avoid United States federal income tax; |
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persons subject to the alternative minimum tax; |
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tax-exempt organizations or tax-qualified retirement plans; |
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real estate investment trusts or regulated investment companies; |
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controlled foreign corporations or passive foreign investment companies; |
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persons who acquired our common stock as compensation for services; |
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dealers in securities or currencies; |
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traders in securities that elect to use a mark-to-market method of accounting for their securities holdings; |
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persons that own, or are deemed to own, more than 5% of our capital stock (except to the extent specifically set forth below); |
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certain former citizens or long-term residents of the United States; |
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persons who hold our common stock as a position in a hedging transaction, straddle, conversion transaction or other risk reduction transaction; |
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persons who do not hold our common stock as a capital asset within the meaning of Section 1221 of the Internal Revenue Code (generally, for investment purposes); or |
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persons deemed to sell our common stock under the constructive sale provisions of the Internal Revenue Code. |
In addition, if a partnership or entity classified as a partnership for U.S. federal income tax purposes holds our common stock, the tax treatment of a partner generally will depend on the status of the partner and upon the activities of the partnership. Accordingly, this summary does not address tax considerations applicable to partnerships that hold our common stock, and partners in such partnerships should consult their tax advisors.
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INVESTORS CONSIDERING THE PURCHASE OF OUR COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE UNITED STATES FEDERAL INCOME AND ESTATE TAX LAWS TO THEIR PARTICULAR SITUATIONS AND THE CONSEQUENCES OF FOREIGN, STATE OR LOCAL LAWS, AND TAX TREATIES.
Non-U.S. Holder Defined
For purposes of this summary, a non-U.S. holder is any holder other than an entity taxable as a partnership for United States federal income tax purposes or:
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an individual who is a citizen or resident of the United States; |
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a corporation, or other entity taxable as a corporation for United States federal income tax purposes, created or organized under the laws of the United States, any state or the District of Columbia; |
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a trust that (1) is subject to the primary supervision of a United States court and one or more United States persons have authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable United States Treasury regulations to be treated as a United States person; or |
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an estate whose income is subject to United States income tax regardless of source. |
If you are a non-U.S. citizen that is an individual, you may, in many cases, be deemed to be a resident alien, as opposed to a nonresident alien, by virtue of being present in the United States for at least 31 days in the calendar year and for an aggregate of at least 183 days during a three-year period ending in the current calendar year. For these purposes, all the days present in the current year, one-third of the days present in the immediately preceding year, and one-sixth of the days present in the second preceding year are counted. Resident aliens are subject to United States federal income tax as if they were United States citizens. Such an individual is urged to consult his or her own tax advisor regarding the United States federal income tax consequences of the sale, exchange of other disposition of common stock.
Dividends
We do not expect to declare or make any distributions on our common stock in the foreseeable future. If we do pay dividends on shares of our common stock, however, such distributions will constitute dividends for United States federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under United States federal income tax principles. Distributions in excess of our current and accumulated earnings and profits will constitute a return of capital that is applied against and reduces, but not below zero, a non-U.S. holders adjusted tax basis in shares of our common stock. Any remaining excess will be treated as gain realized on the sale or other disposition of our common stock. See Sale of Common Stock.
Any dividend paid to a non-U.S. holder on our common stock that is not effectively connected with a non-U.S. holders conduct of a trade or business in the United States will generally be subject to United States withholding tax at a 30% rate. The withholding tax might not apply, however, or might apply at a reduced rate, under the terms of an applicable income tax treaty between the United States and the non-U.S. holders country of residence. You should consult your tax advisors regarding your entitlement to benefits under a relevant income tax treaty. Generally, in order for us or our paying agent to withhold tax at a lower treaty rate, a non-U.S. holder must certify its entitlement to treaty benefits. A non-U.S. holder generally can meet this certification requirement by providing a Form W-8BEN (or any successor form) or appropriate substitute form to us or our paying agent. If the non-U.S. holder holds the stock through a financial institution or other agent acting on the holders behalf, the holder will be required to provide appropriate documentation to the agent. The holders agent will then be required to provide certification to us or our paying agent, either directly or through other intermediaries. For payments made to a foreign partnership or other pass-through entity, the certification requirements generally apply to the partners or other owners rather than to the partnership or other entity, and the partnership or other entity must provide the partners or other owners documentation to us or our paying agent.
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Dividends received by a non-U.S. holder that are effectively connected with a U.S. trade or business conducted by the non-U.S. holder, or, if an income tax treaty between the United States and the non-U.S. holders country of residence applies, are attributable to a permanent establishment maintained by the non-U.S. holder in the United States, are not subject to United States withholding tax. To obtain this exemption, a non-U.S. holder must provide us or our paying agent with an IRS Form W-8ECI properly certifying such exemption. Such effectively connected dividends, although not subject to withholding tax, are generally taxed at the same graduated rates applicable to U.S. persons, net of certain deductions and credits. In addition to being taxed at the graduated tax rates, dividends received by corporate non-U.S. holders that are effectively connected with a U.S. trade or business of the corporate non-U.S. holder may also be subject to a branch profits tax at a rate of 30% or such lower rate as may be specified by an applicable tax treaty.
If you are eligible for a reduced rate of United States federal withholding tax under an income tax treaty, you may obtain a refund or credit of any excess amounts withheld by filing an appropriate claim for a refund with the IRS in a timely manner.
Sale of Common Stock
Subject to the discussion below regarding the Foreign Account Tax Compliance Act, non-U.S. holders will generally not be subject to United States federal income tax on any gains realized on the sale, exchange or other disposition of common stock unless:
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the gain (1) is effectively connected with the conduct by the non-U.S. holder of a United States trade or business and (2) if an applicable income tax treaty between the United States and the non-U.S. holders country of residence applies, the gain is attributable to a permanent establishment (or, in the case of an individual, a fixed base) maintained by the non-U.S. holder in the United States (in which case the special rules described below apply); |
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the non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of the sale, exchange or other disposition of our common stock, and certain other requirements are met (in which case the gain would be subject to a flat 30% tax, or such reduced rate as may be specified by an applicable income tax treaty, which may be offset by U.S. source capital losses, even though the individual is not considered a resident of the United States); or |
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the rules of the Foreign Investment in Real Property Tax Act, or FIRPTA, treat the gain as effectively connected with a United States trade or business. |
The FIRPTA rules may apply to a sale, exchange or other disposition of our common stock if we are, or were within the shorter of the five-year period preceding the disposition and the non-U.S. holders holding period a U.S. real property holding corporation, or USRPHC. In general, we would be a USRPHC if interests in United States real estate comprised at least half of the value of our business assets. We do not believe that we are a USRPHC and we do not anticipate becoming one in the future. Even if we become a USRPHC, as long as our common stock is regularly traded on an established securities market, such common stock will be treated as United States real property interests only if a non-U.S. holder actually owns or constructively holds more than 5% of our outstanding common stock at any time during the applicable period that is specified in the Code.
If any gain from the sale, exchange or other disposition of common stock, (1) is effectively connected with a United States trade or business conducted by a non-U.S. holder and (2) if an income tax treaty between the United States and the non-U.S. holders country of residence applies, is attributable to a permanent establishment (or, in the case of an individual, a fixed base) maintained by such non-U.S. holder in the United States, then the gain generally will be subject to United States federal income tax at the same graduated rates applicable to U.S. persons, net of certain deductions and credits. If the non-U.S. holder is a corporation, under certain circumstances, that portion of its earnings and profits that is effectively connected with its United States trade or business, subject to certain adjustments, generally would be subject to a branch profits tax. The branch profits tax rate is 30%, although an applicable income tax treaty between the United States and the non-U.S. holders country of residence might provide for a lower rate.
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United States Federal Estate Tax
The estates of nonresident alien individuals generally are subject to United States federal estate tax on property with a United States situs. Because we are a United States corporation, our common stock will be United States situs property and therefore will be included in the taxable estate of a nonresident alien decedent, unless an applicable tax treaty between the United States and the decedents country of residence provides otherwise.
Backup Withholding and Information Reporting
The Code and the Treasury regulations require those who make specified payments to report the payments to the IRS. Among the specified payments are dividends and proceeds paid by brokers to their customers. The required information returns enable the IRS to determine whether the recipient properly included the payments in income. This reporting regime is reinforced by backup withholding rules. These rules require the payors to withhold tax from payments subject to information reporting if the recipient fails to cooperate with the reporting regime by failing to provide his taxpayer identification number to the payor, furnishing an incorrect identification number, or failing to report interest or dividends on his returns. The backup withholding tax rate is currently 28% for all payments made through December 31, 2012. The backup withholding rules do not apply to payments to corporations, whether domestic or foreign, provided that they establish such exemption.
Payments to non-U.S. holders of dividends on common stock generally will not be subject to backup withholding, and payments of proceeds made to non-U.S. holders by a broker upon a sale of common stock will not be subject to information reporting or backup withholding, in each case so long as the non-U.S. holder certifies its nonresident status (and we or our paying agent do not have actual knowledge or reason to know the holder is a United States person or that the conditions of any other exemption are not, in fact, satisfied) or otherwise establishes an exemption. The provision of a properly executed Form W-8BEN will generally satisfy the certification requirements necessary to avoid the backup withholding tax. We must report annually to the IRS any dividends paid to each non-U.S. holder and the tax withheld, if any, with respect to these dividends. Copies of these reports may be made available to tax authorities in the country where the non-U.S. holder resides.
Backup withholding is not an additional tax. Any amounts withheld from a payment to a holder of common stock under the backup withholding rules can be credited against any United States federal income tax liability of the holder and may entitle the holder to a refund, provided that the required information is furnished to the IRS in a timely manner.
Foreign Account Tax Compliance Act
The Foreign Account Tax Compliance Act, or FATCA, will impose a U.S. federal withholding tax of 30% on certain withholdable payments (including U.S. source dividends and the gross proceeds from the sale or other disposition of U.S. stock) to foreign financial institutions and other non-U.S. entities that fail to comply with certain certification and information reporting requirements. The obligation to withhold under FATCA is currently expected to apply to, among other items, (i) dividends on our common stock that are paid after December 31, 2013 and (ii) gross proceeds from the disposition of our common stock paid after December 31, 2016.
THE PRECEDING DISCUSSION OF UNITED STATES FEDERAL TAX CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY. IT IS NOT TAX ADVICE. EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR REGARDING THE PARTICULAR UNITED STATES FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF OUR COMMON STOCK, INCLUDING THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAWS.
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Under the terms and subject to the conditions in an underwriting agreement dated the date of this prospectus, the underwriters named below, for whom Morgan Stanley & Co. LLC is acting as representative, have severally agreed to purchase, and we and the selling stockholders have agreed to sell to them, severally, the number of shares indicated below:
Name |
Number of
Shares |
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Morgan Stanley & Co. LLC |
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Citigroup Global Markets, Inc. |
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Deutsche Bank Securities Inc. |
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Barclays Capital Inc. |
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Credit Suisse Securities (USA) LLC |
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UBS Securities LLC |
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Pacific Crest Securities LLC |
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Wells Fargo Securities, LLC |
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Total |
11,650,000 | |||
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The underwriters are offering the shares of common stock subject to their acceptance of the shares and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common stock offered by this prospectus if any such shares are taken. The offering of the shares by the underwriters is subject to receipt and acceptance and subject to the underwriters right to reject any order in whole or in part. In addition, the underwriters are not required to take or pay for the shares covered by the underwriters option to purchase additional shares described below.
The underwriters initially propose to offer part of the shares of common stock directly to the public at the public offering price listed on the cover page of this prospectus and part to certain dealers. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representative.
We and the selling stockholders have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to 1,747,500 additional shares of common stock at the public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of the additional shares of common stock as the number of shares listed next to the underwriters name in the preceding table bears to the total number of shares of common stock listed next to the names of all underwriters in the preceding table.
The following table shows the per share and total public offering price, underwriting discounts and commissions, and proceeds before expenses to us and the selling stockholders. These amounts are shown assuming both no exercise and full exercise of the underwriters option to purchase up to an additional shares of common stock from us and the selling stockholders.
Total | ||||||||||||
Per Share | No Exercise | Full Exercise | ||||||||||
Public offering price |
$ | $ | $ | |||||||||
Underwriting discounts and commissions to be paid by: |
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Us |
$ | $ | $ | |||||||||
The selling stockholders |
$ | $ | $ | |||||||||
Proceeds, before expenses, to us |
$ | $ | $ | |||||||||
Proceeds, before expenses, to selling stockholders |
$ | $ | $ |
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The estimated offering expenses payable by us, exclusive of the underwriting discounts and commissions, are approximately $1,100,000.
Our common stock is listed on the New York Stock Exchange under the trading symbol NOW.
In connection with our initial public offering, we and holders of substantially all of our securities then outstanding, including our officers and directors and the selling stockholders in the initial public offering, agreed that, without the prior written consent of Morgan Stanley & Co. LLC on behalf of the underwriters, we and they will not, during the period ending on December 25, 2012, or the IPO restricted period, subject to certain exceptions:
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offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase lend or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock; |
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file any registration statement with the SEC relating to the offering of any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or |
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enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock; |
whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise. The IPO restricted period will not be subject to extension.
In connection with this offering, the selling stockholders have agreed to extend the IPO restricted period for an additional period ending 90 days after the date of this prospectus, and that additional period will not be subject to further extension.
Morgan Stanley & Co. LLC, in its sole discretion, may release the common stock subject to the lock-up agreements described above in whole or in part at any time with or without notice. For the purposes of this offering, Morgan Stanley & Co. LLC intends to release, solely with respect to the shares being sold in this offering, the restrictions under these lock-up agreements applicable to the selling stockholders. In addition, in connection with this offering, Morgan Stanley & Co. LLC intends to grant a limited and specific waiver to the IPO restricted period so that, as a result, the IPO restricted period will not be subject to extension.
In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may sell more shares than they are obligated to purchase under the underwriting agreement, creating a short position. A short sale is covered if the short position is no greater than the number of shares available for purchase by the underwriters under the option to purchase additional shares. The underwriters can close out a covered short sale by exercising the option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out a covered short sale, the underwriters will consider, among other things, the open market price of shares compared to the price available under the option to purchase additional shares. The underwriters may also sell shares in excess of the option to purchase additional shares, creating a naked short position. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in this offering. As an additional means of facilitating this offering, the underwriters may bid for, and purchase, shares of common stock in the open market to stabilize the price of the common stock. These activities may raise or maintain the market price of the common stock above independent market levels or prevent or retard a decline in the market price of the common stock. The underwriters are not required to engage in these activities and may end any of these activities at any time. The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount
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received by it because the representative has repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.
We, the selling stockholders and the underwriters have agreed to severally indemnify each other against certain liabilities, including liabilities under the Securities Act.
A prospectus in electronic format may be made available on websites maintained by one or more underwriters, or selling group members, if any, participating in this offering. The representative may allocate a number of shares of common stock to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the representative to underwriters that may make Internet distributions on the same basis as other allocations.
The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. Certain of the underwriters and their respective affiliates have, from time to time, performed, and may in the future perform, various financial advisory and investment banking services for the issuer, for which they received or will receive customary fees and expenses.
In the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investment and securities activities may involve securities and instruments of the issuer. The underwriters and their respective affiliates may also make investment recommendations and publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long and short positions in such securities and instruments.
Selling Restrictions
European Economic Area
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive, or Relevant Member State, an offer to the public of any shares of our common stock may not be made in that Relevant Member State, except that an offer to the public in that Relevant Member State of any shares of our common stock may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:
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to any legal entity which is a qualified investor as defined in the Prospectus Directive; |
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to fewer than 100 or, if the Relevant Member State has implemented the relevant provisions of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the representative for any such offer; or |
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in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of shares of our common stock shall result in a requirement for the publication by us or any underwriter of a prospectus pursuant to Article 3 of the Prospectus Directive. |
For the purposes of this provision, the expression an offer to the public in relation to any shares of our common stock in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any shares of our common stock to be offered so as to enable an investor to decide to purchase any shares of our common stock, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, the expression Prospectus Directive means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive,
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to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State, and the expression 2010 PD Amending Directive means Directive 2010/73/EU.
United Kingdom
Each underwriter has represented and agreed that:
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it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000, as amended, or the FSMA) received by it in connection with the issue or sale of the shares of our common stock in circumstances in which Section 21(1) of the FSMA does not apply to us; and |
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it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the shares of our common stock in, from or otherwise involving the United Kingdom. |
Hong Kong
The shares may not be offered or sold by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong), or (ii) to professional investors within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a prospectus within the meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong), and no advertisement, invitation or document relating to the shares may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to professional investors within the meaning of the Securities and Futures Ordinance (Cap. 571 Laws of Hong Kong) and any rules made thereunder.
Singapore
This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the shares may not be circulated or distributed, nor may the shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore, or SFA, (ii) to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
Where the shares are subscribed or purchased under Section 275 by a relevant person which is: (a) a corporation (which is not an accredited investor) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor, shares, debentures and units of shares and debentures of that corporation or the beneficiaries rights and interest in that trust shall not be transferable for six months after that corporation or that trust has acquired the shares under Section 275 except: (1) to an institutional investor under Section 274 of the SFA or to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA; (2) where no consideration is given for the transfer; or (3) by operation of law.
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Japan
The securities have not been and will not be registered under the Financial Instruments and Exchange Law of Japan (the Financial Instruments and Exchange Law) and each underwriter has agreed that it will not offer or sell any securities, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Financial Instruments and Exchange Law and any other applicable laws, regulations and ministerial guidelines of Japan.
Notice to Prospective Investors in Switzerland
The shares may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange, or SIX, or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering or marketing material relating to the shares or the offering may be publicly distributed or otherwise made publicly available in Switzerland.
Neither this document nor any other offering or marketing material relating to the offering, our company, or the shares have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of shares will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA, and the offer of shares has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes, or CISA. The investor protection afforded to acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of the shares.
Notice to Prospective Investors in the Dubai International Financial Centre
This prospectus relates to an Exempt Offer in accordance with the Offered Securities Rules of the Dubai Financial Services Authority, or DFSA. This prospectus is intended for distribution only to persons of a type specified in the Offered Securities Rules of the DFSA. It must not be delivered to, or relied on by, any other person. The DFSA has no responsibility for reviewing or verifying any documents in connection with Exempt Offers. The DFSA has not approved this prospectus nor taken steps to verify the information set forth herein and has no responsibility for the prospectus. The shares to which this prospectus relates may be illiquid and subject to restrictions on their resale. Prospective purchasers of the shares offered should conduct their own due diligence on the shares. If you do not understand the contents of this prospectus you should consult an authorized financial advisor.
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The validity of the shares of common stock offered hereby will be passed upon for us by Fenwick & West LLP, Mountain View, California. Cooley LLP, Palo Alto, California, is acting as counsel to the underwriters.
On February 4, 2011, we retained PricewaterhouseCoopers LLP as our independent registered public accounting firm. Our independent registered public accounting firm was previously Grant Thornton LLP. The decision to dismiss Grant Thornton LLP and appoint PricewaterhouseCoopers LLP was approved by our audit committee on December 3, 2010. Subsequent to their appointment, we engaged PricewaterhouseCoopers LLP to reaudit our consolidated financial statements as of June 30, 2009 and 2010, and for each of the two years in the period then ended, which had previously been audited by Grant Thornton LLP.
The reports of Grant Thornton LLP on our consolidated financial statements did not contain any adverse opinion or disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope or accounting principles. We had no disagreements with Grant Thornton LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to its satisfaction, would have caused Grant Thornton LLP to make reference in connection with its opinion to the subject matter of the disagreement during its audits of the years ended June 30, 2010 and 2009 or the subsequent interim period through December 3, 2010. During the two most recent fiscal years preceding our discharge of Grant Thornton LLP, and the subsequent interim period through December 3, 2010, there were no reportable events as such term is defined in Item 304(a)(1)(v) of Regulation S-K.
During the two years ended June 30, 2010 and through the period ended February 4, 2011, we did not consult with PricewaterhouseCoopers LLP on matters that involved the application of accounting principles to a specified transaction, either completed or proposed, the type of audit opinion that might be rendered on our financial statements or any other matter that was the subject of a disagreement as that term is used in Item 304 (a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K or a reportable event as that term is used in Item 304(a)(1)(v) and the related instructions to Item 304 of Regulation S-K.
The consolidated financial statements as of June 30, 2010 and 2011 and December 31, 2011, for each of the three fiscal years in the period ended June 30, 2011 and for the six months ended December 31, 2011 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits filed with the registration statement. For further information about us and the common stock offered hereby, we refer you to the registration statement and the exhibits filed with the registration statement. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the registration statement. A copy of the registration statement and the filed exhibits may be inspected without charge at the public reference
143
room maintained by the SEC, located at 100 F Street, NE, Washington, DC 20549, and copies of all or any part of the registration statement may be obtained from that office at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the website is www.sec.gov.
We are subject to the information and reporting requirements of the Exchange Act and, in accordance with this law, are required to file periodic reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other information are available for inspection and copying at the SECs public reference facilities and the website of the SEC referenced above. We also maintain a website at http://www.servicenow.com. We make available free of charge, on or through the investor relations section of our website, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information found on our website, other than as specifically incorporated by reference in this prospectus, is not part of this prospectus.
144
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||||
F-2 | ||||
Consolidated Financial Statements |
||||
F-3 | ||||
F-4 | ||||
Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders Equity (Deficit) |
F-6 | |||
F-9 | ||||
F-10 |
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of ServiceNow, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of comprehensive income (loss), changes in convertible preferred stock and stockholders deficit, and cash flows present fairly, in all material respects, the financial position of ServiceNow, Inc. (formerly Service-now.com) and its subsidiaries at December 31, 2011, June 30, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2011 and the six months ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for multiple element revenue arrangements beginning July 1, 2010.
/s/ PricewaterhouseCoopers LLP
San Diego, California
March 30, 2012, except for Note 18, Subsequent Events, as to which the date is May 23, 2012.
F-2
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
June 30, |
December 31,
2011 |
September 30,
2012 |
||||||||||||||
2010 | 2011 | |||||||||||||||
(Unaudited) | ||||||||||||||||
Assets |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 29,402 | $ | 59,853 | $ | 68,088 | $ | 116,976 | ||||||||
Restricted cash |
395 | 45 | 45 | 37 | ||||||||||||
Short-term investments |
| | | 139,485 | ||||||||||||
Accounts receivable, net |
9,732 | 24,495 | 44,860 | 55,924 | ||||||||||||
Current portion of deferred commissions |
2,267 | 3,922 | 6,087 | 12,236 | ||||||||||||
Prepaid expenses and other current assets |
5,696 | 8,578 | 9,883 | 5,675 | ||||||||||||
Current portion of deferred tax assets |
| | 1,544 | 1,544 | ||||||||||||
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|
|||||||||
Total current assets |
47,492 | 96,893 | 130,507 | 331,877 | ||||||||||||
Deferred commissions, less current portion |
2,052 | 1,941 | 4,597 | 9,734 | ||||||||||||
Property and equipment, net |
1,698 | 9,467 | 20,695 | 39,086 | ||||||||||||
Other assets |
127 | 445 | 524 | 1,507 | ||||||||||||
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|
|||||||||
Total assets |
$ | 51,369 | $ | 108,746 | $ | 156,323 | $ | 382,204 | ||||||||
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|
|||||||||
Liabilities, Convertible Preferred Stock and Stockholders Equity (Deficit) |
||||||||||||||||
Current liabilities: |
||||||||||||||||
Accounts payable |
$ | 1,570 | $ | 2,098 | $ | 9,411 | $ | 5,680 | ||||||||
Accrued expenses and other current liabilities |
12,729 | 18,584 | 25,608 | 32,038 | ||||||||||||
Current portion of deferred revenue |
31,282 | 66,894 | 91,087 | 128,970 | ||||||||||||
Current portion of deferred rent |
113 | 410 | 455 | | ||||||||||||
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Total current liabilities |
45,694 | 87,986 | 126,561 | 166,688 | ||||||||||||
Deferred revenue, less current portion |
9,449 | 7,752 | 13,549 | 18,976 | ||||||||||||
Deferred rent, less current portion |
249 | 3,132 | 2,935 | 433 | ||||||||||||
Other long-term liabilities |
12 | 397 | 2,532 | 4,839 | ||||||||||||
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Total liabilities |
55,404 | 99,267 | 145,577 | 190,936 | ||||||||||||
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|
|||||||||
Commitments and contingencies |
||||||||||||||||
Convertible preferred stock: |
||||||||||||||||
Series C redeemable convertible preferred stock, $0.001 par value; 983,606 shares authorized, issued and outstanding at June 30, 2010 and 2011 and December 31, 2011; no shares authorized, issued or outstanding at September 30, 2012 (unaudited); liquidation preference of $6,000 at December 31, 2011; |
5,930 | 5,948 | 5,957 | | ||||||||||||
Series A redeemable convertible preferred stock, $0.001 par value; 2,500,000 shares authorized, issued and outstanding at June 30, 2010 and 2011 and December 31, 2011; no shares authorized, issued or outstanding at September 30, 2012 (unaudited); liquidation preference of $3,805 at December 31, 2011 |
3,504 | 3,704 | 3,805 | | ||||||||||||
Series B redeemable convertible preferred stock, $0.001 par value; 4,040,488 shares authorized; 3,988,636 shares issued and outstanding at June 30, 2010 and 2011 and December 31, 2011; no shares authorized, issued or outstanding at September 30, 2012 (unaudited); liquidation preference of $7,165 at December 31, 2011 |
6,548 | 6,963 | 7,165 | | ||||||||||||
Series D convertible preferred stock, $0.001 par value; 3,830,379 shares authorized at June 30, 2010 and 2011 and December 31, 2011; no shares authorized, issued or outstanding at September 30, 2012 (unaudited); liquidation preference of $51,640 at December 31, 2011 |
51,245 | 51,245 | 51,245 | | ||||||||||||
Stockholders equity (deficit): |
||||||||||||||||
Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued or outstanding |
| | | | ||||||||||||
Common stock $0.001 par value; 600,000,000 shares authorized; 16,493,488, 20,772,944 and 22,229,978 shares issued and outstanding at June 30, 2010 and 2011 and December 31, 2011, respectively; 123,371,566 shares issued and outstanding at September 30, 2012 (unaudited) |
16 | 21 | 22 | 123 | ||||||||||||
Additional paid-in capital |
| 2,936 | 9,793 | 286,376 | ||||||||||||
Accumulated other comprehensive income |
8 | 118 | 899 | 326 | ||||||||||||
Accumulated deficit |
(71,286 | ) | (61,456 | ) | (68,140 | ) | (95,557 | ) | ||||||||
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|
|||||||||
Total stockholders equity (deficit) |
(71,262 | ) | (58,381 | ) | (57,426 | ) | 191,268 | |||||||||
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|
|||||||||
Total liabilities, convertible preferred stock and stockholders equity (deficit) |
$ | 51,369 | $ | 108,746 | $ | 156,323 | $ | 382,204 | ||||||||
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See accompanying notes to consolidated financial statements
F-3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, except share and per share data)
Fiscal Years Ended June 30, |
Six Months Ended
December 31, |
Nine Months Ended
September 30, |
||||||||||||||||||||||||||
2009 | 2010 | 2011 | 2010 | 2011 | 2011 | 2012 | ||||||||||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||||||||||||||
Revenues: |
||||||||||||||||||||||||||||
Subscription |
$ | 17,841 | $ | 40,078 | $ | 79,191 | $ | 33,191 | $ | 64,886 | $ | 76,331 | $ | 141,640 | ||||||||||||||
Professional services and other |
1,474 | 3,251 | 13,450 | 4,753 | 8,489 | 12,563 | 26,910 | |||||||||||||||||||||
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|||||||||||||||
Total revenues |
19,315 | 43,329 | 92,641 | 37,944 | 73,375 | 88,894 | 168,550 | |||||||||||||||||||||
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Cost of revenues ( 1 ) : |
||||||||||||||||||||||||||||
Subscription |
3,140 | 6,378 | 15,311 | 6,096 | 15,073 | 15,538 | 43,182 | |||||||||||||||||||||
Professional services and other |
4,711 | 9,812 | 16,264 | 6,778 | 12,850 | 15,095 | 28,519 | |||||||||||||||||||||
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Total cost of revenues |
7,851 | 16,190 | 31,575 | 12,874 | 27,923 | 30,633 | 71,701 | |||||||||||||||||||||
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Gross profit |
11,464 | 27,139 | 61,066 | 25,070 | 45,452 | 58,261 | 96,849 | |||||||||||||||||||||
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Operating expenses ( 1 ) : |
||||||||||||||||||||||||||||
Sales and marketing |
8,499 | 19,334 | 34,123 | 13,728 | 32,501 | 34,375 | 74,356 | |||||||||||||||||||||
Research and development |
2,433 | 7,194 | 7,004 | 2,758 | 7,030 | 7,003 | 26,098 | |||||||||||||||||||||
General and administrative |
6,363 | 28,810 | 9,379 | 3,417 | 10,084 | 10,471 | 24,441 | |||||||||||||||||||||
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|
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Total operating expenses |
17,295 | 55,338 | 50,506 | 19,903 | 49,615 | 51,849 | 124,895 | |||||||||||||||||||||
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|
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Income (loss) from operations |
(5,831 | ) | (28,199 | ) | 10,560 | 5,167 | (4,163 | ) | 6,412 | (28,046 | ) | |||||||||||||||||
Interest and other income (expense), net |
(27 | ) | (1,226 | ) | 606 | 289 | (1,446 | ) | (412 | ) | 1,148 | |||||||||||||||||
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|||||||||||||||
Income (loss) before provision for income taxes |
(5,858 | ) | (29,425 | ) | 11,166 | 5,456 | (5,609 | ) | 6,000 | (26,898 | ) | |||||||||||||||||
Provision for income taxes |
48 | 280 | 1,336 | 653 | 1,075 | 852 | 519 | |||||||||||||||||||||
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|||||||||||||||
Net income (loss) |
(5,906 | ) | (29,705 | ) | 9,830 | 4,803 | (6,684 | ) | 5,148 | (27,417 | ) | |||||||||||||||||
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Net income (loss) per share attributable to common stockholders: |
||||||||||||||||||||||||||||
Basic |
$ | (0.17 | ) | $ | (1.31 | ) | $ | 0.09 | $ | 0.04 | $ | (0.33 | ) | $ | 0.05 | $ | (0.49 | ) | ||||||||||
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Diluted |
$ | (0.17 | ) | $ | (1.31 | ) | $ | 0.08 | $ | 0.04 | $ | (0.33 | ) | $ | 0.04 | $ | (0.49 | ) | ||||||||||
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Weighted-average shares used to compute net income (loss) per share attributable to common stockholders: |
||||||||||||||||||||||||||||
Basic |
39,039,066 | 23,157,576 | 18,163,977 | 17,156,445 | 21,104,219 | 19,695,440 | 57,089,411 | |||||||||||||||||||||
Diluted |
39,039,066 | 23,157,576 | 28,095,486 | 27,622,357 | 21,104,219 | 30,612,539 | 57,089,411 | |||||||||||||||||||||
Other comprehensive income (loss), before tax: |
||||||||||||||||||||||||||||
Foreign currency translation and remeasurement adjustments |
$ | 50 | $ | (43 | ) | $ | 167 | $ | (49 | ) | $ | 807 | $ | 439 | $ | (479 | ) | |||||||||||
Unrealized loss on investments |
| | | | | | (34 | ) | ||||||||||||||||||||
Provision for (benefit from) income taxes |
18 | (15 | ) | 57 | (14 | ) | 26 | 48 | 60 | |||||||||||||||||||
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Other comprehensive income (loss), net of tax |
32 | (28 | ) | 110 | (35 | ) | 781 | 391 | (573 | ) | ||||||||||||||||||
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Comprehensive income (loss) |
$ | (5,874 | ) | $ | (29,733 | ) | $ | 9,940 | $ | 4,768 | $ | (5,903 | ) | $ | 5,539 | $ | (27,990 | ) | ||||||||||
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See accompanying notes to consolidated financial statements
F-4
SERVICENOW, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (continued)
(in thousands, except share and per share data)
(1) |
Includes stock-based compensation as follows: |
Fiscal Years Ended
June 30, |
Six Months Ended
December 31, |
Nine Months Ended
September 30, |
||||||||||||||||||||||||||
2009 | 2010 | 2011 | 2010 | 2011 | 2011 | 2012 | ||||||||||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||||||||||||||
Cost of revenues: |
||||||||||||||||||||||||||||
Subscription |
$ | 6 | $ | 48 | $ | 548 | $ | 225 | $ | 674 | $ | 524 | $ | 2,514 | ||||||||||||||
Professional services and other |
11 | 28 | 117 | 37 | 193 | 151 | 964 | |||||||||||||||||||||
Sales and marketing |
45 | 277 | 1,004 | 431 | 2,010 | 1,373 | 6,852 | |||||||||||||||||||||
Research and development |
50 | 90 | 468 | 207 | 704 | 524 | 4,121 | |||||||||||||||||||||
General and administrative |
15 | 102 | 817 | 221 | 2,056 | 1,652 | 4,137 |
See accompanying notes to consolidated financial statements
F-5
CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITY (DEFICIT)
(in thousands, except shares)
Series C
Redeemable Convertible Preferred Stock |
Series A
Redeemable Convertible Preferred Stock |
Series B
Redeemable Convertible Preferred Stock |
Series D
Convertible Preferred Stock |
Common Stock |
Additional
Paid-in Capital |
Accumulated
Deficit |
Accumulated
Other Comprehensive Income (Loss) |
Total
Stockholders Equity (Deficit) |
||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2008 |
| $ | | 2,500,000 | $ | 3,092 | 3,988,636 | $ | 5,718 | | $ | | 40,487,504 | $ | 40 | $ | | $ | (13,156 | ) | $ | 4 | $ | (13,112 | ) | |||||||||||||||||||||||||||||||||
Stock option exercises |
| | | | | | | | 348,328 | 1 | 6 | | | 7 | ||||||||||||||||||||||||||||||||||||||||||||
Buyback and retirement of common stock |
| | | | | | | | (7,868,848 | ) | (8 | ) | (133 | ) | (2,072 | ) | | (2,213 | ) | |||||||||||||||||||||||||||||||||||||||
Issuance of series C redeemable convertible preferred stock, net of $93 issuance costs |
983,606 | 5,907 | | | | | | | | | | | | | ||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation |
| | | | | | | | | | 127 | | | 127 | ||||||||||||||||||||||||||||||||||||||||||||
Accretion of preferred stock dividends and issuance costs |
| 4 | | 206 | | 415 | | | | | | (625 | ) | | (625 | ) | ||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income |
| | | | | | | | | | | | 32 | 32 | ||||||||||||||||||||||||||||||||||||||||||||
Net loss |
| | | | | | | | | | | (5,906 | ) | | (5,906 | ) | ||||||||||||||||||||||||||||||||||||||||||
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Balance at June 30, 2009 |
983,606 | $ | 5,911 | 2,500,000 | $ | 3,298 | 3,988,636 | $ | 6,133 | | $ | | 32,966,984 | $ | 33 | $ | | $ | (21,759 | ) | $ | 36 | $ | (21,690 | ) | |||||||||||||||||||||||||||||||||
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Stock option exercises |
| $ | | | $ | | | $ | | | $ | | 7,036,768 | $ | 7 | $ | 234 | $ | | $ | | $ | 241 | |||||||||||||||||||||||||||||||||||
Buyback and retirement of common stock |
| | | | | | | | (23,510,264 | ) | (24 | ) | (779 | ) | (19,182 | ) | | (19,985 | ) | |||||||||||||||||||||||||||||||||||||||
Issuance of series D convertible preferred stock, net of $395 issuance costs |
| | | | | | 2,990,635 | 51,245 | | | | | | | ||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation |
| | | | | | | | | | 545 | | | 545 | ||||||||||||||||||||||||||||||||||||||||||||
Accretion of preferred stock dividends and issuance costs |
| 19 | | 206 | | 415 | | | | | | (640 | ) | | (640 | ) | ||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss |
| | | | | | | | | | | | (28 | ) | (28 | ) | ||||||||||||||||||||||||||||||||||||||||||
Net loss |
| | | | | | | | | | | (29,705 | ) | | (29,705 | ) | ||||||||||||||||||||||||||||||||||||||||||
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Balance at June 30, 2010 |
983,606 | $ | 5,930 | 2,500,000 | $ | 3,504 | 3,988,636 | $ | 6,548 | 2,990,635 | $ | 51,245 | 16,493,488 | $ | 16 | $ | | $ | (71,286 | ) | $ | 8 | $ | (71,262 | ) | |||||||||||||||||||||||||||||||||
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F-6
SERVICENOW, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS DEFICIT (continued)
(in thousands, except shares)
Series C
Redeemable Convertible Preferred Stock |
Series A
Redeemable Convertible Preferred Stock |
Series B
Redeemable Convertible Preferred Stock |
Series D
Convertible Preferred Stock |
Common Stock |
Additional
Paid-in Capital |
Accumulated
Deficit |
Accumulated
Other Comprehensive Income (Loss) |
Total
Stockholders Equity (Deficit) |
||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||
Stock option exercises |
| | | | | | | | 4,279,456 | 5 | 441 | | | 446 | ||||||||||||||||||||||||||||||||||||||||||||
Tax benefit from exercise of nonqualified stock options |
| | | | | | | | | | 138 | | | 138 | ||||||||||||||||||||||||||||||||||||||||||||
Vesting of early exercised stock options |
| | | | | | | | | | 36 | | | 36 | ||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation |
| | | | | | | | | | 2,954 | | | 2,954 | ||||||||||||||||||||||||||||||||||||||||||||
Accretion of preferred stock dividends and issuance costs |
| 18 | | 200 | | 415 | | | | | (633 | ) | | | (633 | ) | ||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income |
| | | | | | | | | | | | 110 | 110 | ||||||||||||||||||||||||||||||||||||||||||||
Net income |
| | | | | | | | | | | 9,830 | | 9,830 | ||||||||||||||||||||||||||||||||||||||||||||
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Balance at June 30, 2011 |
983,606 | $ | 5,948 | 2,500,000 | $ | 3,704 | 3,988,636 | $ | 6,963 | 2,990,635 | $ | 51,245 | 20,772,944 | $ | 21 | $ | 2,936 | $ | (61,456 | ) | $ | 118 | $ | (58,381 | ) | |||||||||||||||||||||||||||||||||
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Stock option exercises |
| $ | | | $ | | | $ | | | $ | | 1,469,118 | $ | 1 | $ | 1,283 | $ | | $ | | $ | 1,284 | |||||||||||||||||||||||||||||||||||
Tax benefit from exercise of nonqualified stock options |
| | | | | | | | | | 41 | | | 41 | ||||||||||||||||||||||||||||||||||||||||||||
Vesting of early exercised stock options |
| | | | | | | | | | 208 | | | 208 | ||||||||||||||||||||||||||||||||||||||||||||
Buyback of restricted common stock |
| | | | | | | | (12,084 | ) | | | | | | |||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation |
| | | | | | | | | | 5,637 | | | 5,637 | ||||||||||||||||||||||||||||||||||||||||||||
Accretion of preferred stock dividends and issuance costs |
| 9 | | 101 | | 202 | | | | | (312 | ) | | | (312 | ) | ||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income |
| | | | | | | | | | | | 781 | 781 | ||||||||||||||||||||||||||||||||||||||||||||
Net loss |
| | | | | | | | | | | (6,684 | ) | | (6,684 | ) | ||||||||||||||||||||||||||||||||||||||||||
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Balance at December 31, 2011 |
983,606 | $ | 5,957 | 2,500,000 | $ | 3,805 | 3,988,636 | $ | 7,165 | 2,990,635 | $ | 51,245 | 22,229,978 | $ | 22 | $ | 9,793 | $ | (68,140 | ) | $ | 899 | $ | (57,426 | ) | |||||||||||||||||||||||||||||||||
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F-7
SERVICENOW, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS DEFICIT (continued)
(in thousands, except shares)
Series C
Redeemable Convertible Preferred Stock |
Series A
Redeemable Convertible Preferred Stock |
Series B
Redeemable Convertible Preferred Stock |
Series D
Convertible Preferred Stock |
Common Stock |
Additional
Paid-in Capital |
Accumulated
Deficit |
Accumulated
Other Comprehensive Income (Loss) |
Total
Stockholders Equity (Deficit) |
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Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon initial public offering, net of offering costs (unaudited) |
| | | | | | | | 10,350,000 | 10 | 169,774 | | | 169,784 | ||||||||||||||||||||||||||||||||||||||||||||
Conversion of preferred stock to common stock upon initial public offering (unaudited) |
(983,606 | ) | (5,966 | ) | (2,500,000 | ) | (3,905 | ) | (3,988,636 | ) | (7,364 | ) | (2,990,635 | ) | (51,245 | ) | 83,703,016 | 84 | 68,396 | | | 68,480 | ||||||||||||||||||||||||||||||||||||
Stock option exercises (unaudited) |
| | | | | | | | 5,523,840 | 5 | 2,344 | | | 2,349 | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock, net of $12 issuance costs (unaudited) |
| | | | | | | | 1,750,980 | 2 | 17,846 | | | 17,848 | ||||||||||||||||||||||||||||||||||||||||||||
Tax benefit from exercise of nonqualified stock options (unaudited) |
| | | | | | | | | | 533 | | | 533 | ||||||||||||||||||||||||||||||||||||||||||||
Vesting of early exercised stock options (unaudited) |
| | | | | | | | | | 1,287 | | | 1,287 | ||||||||||||||||||||||||||||||||||||||||||||
Buyback of restricted common stock |
| | | | | | | | (2,084 | ) | | | | | | |||||||||||||||||||||||||||||||||||||||||||
Buyback and retirement of common stock (unaudited) |
| | | | | | | | (184,164 | ) | | (1,960 | ) | | | (1,960 | ) | |||||||||||||||||||||||||||||||||||||||||
Stock-based compensation (unaudited) |
| | | | | | | | | | 18,671 | | | 18,671 | ||||||||||||||||||||||||||||||||||||||||||||
Accretion of preferred stock dividends and issuance costs |
| 9 | | 100 | | 199 | | | | | (308 | ) | | | (308 | ) | ||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss (unaudited) |
| | | | | | | | | | | | (573 | ) | (573 | ) | ||||||||||||||||||||||||||||||||||||||||||
Net loss (unaudited) |
| | | | | | | | | | | (27,417 | ) | | (27,417 | ) | ||||||||||||||||||||||||||||||||||||||||||
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Balance at September 30, 2012 |
| $ | | | $ | | | $ | | | $ | | 123,371,566 | $ | 123 | $ | 286,376 | $ | (95,557 | ) | $ | 326 | $ | 191,268 | ||||||||||||||||||||||||||||||||||
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See accompanying notes to consolidated financial statements
F-8
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Years Ended
June 30, |
Six Months Ended
December 31, |
Nine Months Ended
September 30, |
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2009 | 2010 | 2011 | 2010 | 2011 | 2011 | 2012 | ||||||||||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||||||||||||||
Cash flows from operating activities: |
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Net income (loss) |
$ | (5,906 | ) | $ | (29,705 | ) | $ | 9,830 | $ | 4,803 | $ | (6,684 | ) | $ | 5,148 | $ | (27,417 | ) | ||||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
164 | 369 | 1,472 | 502 | 2,045 | 1,794 | 8,842 | |||||||||||||||||||||
Amortization of premiums on short-term investments, net |
| | | | | | 594 | |||||||||||||||||||||
Amortization of deferred commissions |
458 | 2,189 | 4,023 | 1,642 | 3,492 | 3,942 | 9,264 | |||||||||||||||||||||
Stock-based compensation |
127 | 545 | 2,954 | 1,121 | 5,637 | 4,224 | 18,588 | |||||||||||||||||||||
Tax benefit from exercise of stock options |
| | (138 | ) | (117 | ) | (41 | ) | (21 | ) | (533 | ) | ||||||||||||||||
Expense for preferred stock warrants |
61 | 702 | | | | | | |||||||||||||||||||||
Bad debt expense |
5 | 64 | | | | | 148 | |||||||||||||||||||||
(Gain) Loss on disposal of property and equipment |
| | 60 | | 72 | 60 | (1 | ) | ||||||||||||||||||||
Lease abandonment costs |
| | | | | | 2,922 | |||||||||||||||||||||
Changes in operating assets and liabilities: |
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Accounts receivable |
(1,981 | ) | (5,176 | ) | (14,762 | ) | (7,631 | ) | (20,365 | ) | (7,768 | ) | (11,065 | ) | ||||||||||||||
Deferred commissions |
(1,694 | ) | (5,271 | ) | (5,568 | ) | (2,180 | ) | (8,313 | ) | (6,419 | ) | (20,525 | ) | ||||||||||||||
Prepaid expenses and other current assets (1) |
(778 | ) | (4,851 | ) | (2,872 | ) | (560 | ) | (1,355 | ) | (2,092 | ) | 4,242 | |||||||||||||||
Other assets |
97 | (91 | ) | (308 | ) | (88 | ) | (90 | ) | (268 | ) | (35 | ) | |||||||||||||||
Accounts payable |
191 | 912 | 254 | (845 | ) | 1,490 | 1,866 | (106 | ) | |||||||||||||||||||
Accrued expenses and other current liabilities |
2,443 | 8,901 | 5,438 | 1,569 | 6,921 | 4,239 | 4,644 | |||||||||||||||||||||
Deferred rent |
62 | (85 | ) | 3,179 | (57 | ) | (151 | ) | 3,153 | (2,957 | ) | |||||||||||||||||
Deferred revenue |
6,911 | 23,953 | 33,915 | 12,557 | 29,990 | 28,589 | 43,081 | |||||||||||||||||||||
Other long-term liabilities |
| 12 | (9 | ) | (5 | ) | 572 | (6 | ) | 2,409 | ||||||||||||||||||
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Net cash provided by (used in) operating activities |
160 | (7,532 | ) | 37,468 | 10,711 | 13,220 | 36,441 | 32,095 | ||||||||||||||||||||
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Cash flows from investing activities: |
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Purchases of property and equipment |
(327 | ) | (1,584 | ) | (8,733 | ) | (2,057 | ) | (7,959 | ) | (9,193 | ) | (32,156 | ) | ||||||||||||||
Purchases of short-term investments |
| | | | | | (146,922 | ) | ||||||||||||||||||||
Sale of short-term investments |
| | | | | | 1,025 | |||||||||||||||||||||
Maturities of short-term investments |
| | | | | | 5,800 | |||||||||||||||||||||
Restricted cash |
(524 | ) | 129 | 350 | 200 | | 150 | 8 | ||||||||||||||||||||
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Net cash used in investing activities |
(851 | ) | (1,455 | ) | (8,383 | ) | (1,857 | ) | (7,959 | ) | (9,043 | ) | (172,245 | ) | ||||||||||||||
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Cash flows from financing activities: |
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Net proceeds from initial public offering |
| | | | | | 169,799 | |||||||||||||||||||||
Proceeds from exercise of stock options |
7 | 241 | 446 | 105 | 1,284 | 1,309 | 2,349 | |||||||||||||||||||||
Proceeds from early exercise of stock options |
| | 643 | | 844 | 1,457 | 1,024 | |||||||||||||||||||||
Tax benefit from exercise of stock options |
| | 138 | 117 | 41 | 21 | 533 | |||||||||||||||||||||
Net proceeds from issuance of convertible preferred stock |
5,907 | 51,245 | | | | | | |||||||||||||||||||||
Net proceeds from issuance of common stock |
| | | | | | 17,848 | |||||||||||||||||||||
Purchases of common stock and restricted stock from stockholders |
(2,213 | ) | (20,814 | ) | | | (15 | ) | | (1,960 | ) | |||||||||||||||||
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Net cash provided by financing activities |
3,701 | 30,672 | 1,227 | 222 | 2,154 | 2,787 | 189,593 | |||||||||||||||||||||
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Foreign currency effect on cash and cash equivalents |
6 | (71 | ) | 139 | (21 | ) | 820 | 394 | (555 | ) | ||||||||||||||||||
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Net increase in cash and cash equivalents |
3,016 | 21,614 | 30,451 | 9,055 | 8,235 | 30,579 | 48,888 | |||||||||||||||||||||
Cash at beginning of period |
4,772 | 7,788 | 29,402 | 29,402 | 59,853 | 38,457 | 68,088 | |||||||||||||||||||||
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Cash and cash equivalents at end of period |
$ | 7,788 | $ | 29,402 | $ | 59,853 | $ | 38,457 | $ | 68,088 | $ | 69,036 | $ | 116,976 | ||||||||||||||
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Supplemental disclosures of other cash flow information: |
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Interest paid |
$ | 4 | $ | 10 | $ | 5 | $ | 1 | $ | | $ | 4 | $ | 3 | ||||||||||||||
Taxes paid |
5 | 4 | 1,403 | | 360 | 1,758 | 1,241 | |||||||||||||||||||||
Non-cash investing and financing activities: |
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Property and equipment included in accounts payable and accrued expenses |
$ | 7 | $ | 196 | $ | 756 | $ | 369 | $ | 6,296 | $ | 1,785 | $ | 3,768 | ||||||||||||||
Property and equipment acquired under capital leases |
| 25 | | | | | | |||||||||||||||||||||
Vesting of early exercised stock options |
| | 36 | | 208 | 109 | 1,287 | |||||||||||||||||||||
Accretion of preferred stock dividends and issuance costs |
625 | 640 | 633 | 320 | 312 | 471 | 308 | |||||||||||||||||||||
Deferred offering costs not yet paid |
| | | | | | 15 |
(1) |
Includes $5.3 million payment received from our founder during the nine months ended September 30, 2012. Refer to Note 15. |
See accompanying notes to consolidated financial statements
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Description of the Business
ServiceNow, Inc. is a leading provider of cloud-based services to automate enterprise Information Technology, or IT operations. Our service includes a suite of applications built on our proprietary platform that automates workflow and integrates related business processes. We focus on transforming enterprise IT by automating and standardizing business processes and consolidating IT across the global enterprise. Organizations deploy our service to create a single system of record for enterprise IT, to lower operational costs and to enhance efficiency. Additionally, our customers use our extensible platform to build custom applications for automating activities unique to their business requirements.
(2) Summary of Significant Accounting Policies
Initial Public Offering (unaudited)
On July 5, 2012, we closed our initial public offering of 13,397,500 shares of common stock at an offering price of $18.00 per share. The offering included 10,350,000 shares sold and issued by us and 3,047,500 shares sold by our founder. The shares sold in the offering included 1,350,000 shares and 397,500 shares sold by us and our founder, respectively, pursuant to the underwriters full exercise of their overallotment option. The net proceeds to us from the offering were approximately $173.3 million after deducting underwriting discounts and commissions, and before deducting total estimated expenses in connection with the offering of $3.5 million.
Principles of Consolidation
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles, or GAAP, and include our accounts and the accounts of our wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated upon consolidation.
Stock Split
The consolidated financial statements reflect three 2-for-1 stock splits of our common stock with no corresponding change in par value, approved by the board of directors and stockholders, effective July 30, 2010, May 13, 2011 and December 15, 2011. Share and per share amounts have been retroactively restated to reflect the stock splits for all periods presented.
Per the terms of the convertible preferred stock, each stock split results in a proportional adjustment to the conversion ratio of each series of the convertible preferred stock. Upon the closing of our initial public offering on July 5, 2012, all of the outstanding 10,462,877 shares of convertible preferred stock converted into an aggregate of 83,703,016 shares of common stock.
Fiscal Year Change
On February 3, 2012, our board of directors approved a change to our fiscal year end from June 30 to December 31. Included in this report is the transition period for the six months ended December 31, 2011. Accordingly, we present the consolidated balance sheets as of June 30, 2010 and 2011, December 31, 2011 and September 30, 2012, and the consolidated statements of comprehensive income (loss), changes in convertible preferred stock and stockholders equity (deficit), and cash flows for the fiscal years ended June 30, 2009, 2010 and 2011, the six months ended December 31, 2010 and 2011 and the three months ended September 30, 2011 and 2012. References to fiscal 2009, 2010 and 2011 still refer to the fiscal years ended June 30, 2009, June 30, 2010 and June 30, 2011, respectively.
F-10
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Items subject to the use of estimates include revenue recognition, reserves for trade accounts receivable, useful lives of fixed assets, certain accrued liabilities including our facility exit obligation, the determination of the provision for income taxes, the fair value of stock awards and loss contingencies.
Unaudited Interim Financial Information
The accompanying consolidated statements of comprehensive income (loss) and cash flows for the six months ended December 31, 2010 and the nine months ended September 30, 2011 and 2012 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments necessary to state fairly our results of operations and cash flows for the six months ended December 31, 2010 and the nine months ended September 30, 2011 and 2012. The financial data and the other information disclosed in these notes to the consolidated financial statements related to the six-month period and the nine-month periods are unaudited.
Segments
We define the term chief operating decision maker to be our Chief Executive Officer. Our Chief Executive Officer reviews the financial information presented on a consolidated basis, accompanied by disaggregated information about revenue by geographic region for purposes of allocating resources and evaluation of financial performance. Accordingly, we have determined that we operate in a single reporting segment, enterprise IT operations management.
Foreign Currency Translation
The functional currencies for our foreign subsidiaries are their local currencies. Assets and liabilities of the wholly-owned foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at each period end. Amounts classified in stockholders equity (deficit) are translated at historical exchange rates. Revenues and expenses are translated at the average exchange rates during the period. The resulting translation adjustments are recorded in accumulated other comprehensive income as a component of stockholders equity (deficit).
Allocation of Overhead Costs
Overhead associated with benefits, facilities, IT costs and depreciation is allocated to cost of revenues and operating expenses based on headcount.
Revenue Recognition
We derive our revenues from two sources: (i) subscriptions and (ii) professional services and other. Subscription revenues are primarily comprised of fees which give customers access to our suite of on-demand applications, as well as access to our extensible platform to build custom applications. Our contracts typically do not give the customer the right to take possession of the software supporting the solution. Professional services and other revenues consist of fees associated with the implementation and configuration of our service. Professional services and other revenues also include customer training and attendance and sponsorship fees for Knowledge, our annual user conference.
F-11
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We commence revenue recognition when all of the following conditions are met:
|
There is persuasive evidence of an arrangement; |
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The service has been provided to the customer; |
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The collection of related fees is reasonably assured; and |
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The amount of fees to be paid by the customer is fixed or determinable. |
Signed agreements are used as evidence of an arrangement. If a signed contract by the customer does not exist, we have historically used either a purchase order or a signed order form as evidence of an arrangement. In cases where both a signed contract and either a purchase order or signed order form exist, we consider the signed contract to be the final persuasive evidence of an arrangement.
Subscription revenues are recognized ratably over the contract term beginning on the commencement date of each contract, which is the date we make our service available to our customers. Once our service is available to customers, amounts that have been invoiced are recorded in accounts receivable and in deferred revenue. Our professional services are priced either on a fixed-fee basis or on a time-and-materials basis. Professional services and other revenues are recognized as the services are delivered using a proportional performance model. Such services are delivered over a short period of time. In instances where final acceptance of the services are required before revenues are recognized, revenues and the associated costs are deferred until all acceptance criteria have been met.
We assess collectibility based on a number of factors such as past collection history with the customer and creditworthiness of the customer. If we determine collectibility is not reasonably assured, we defer revenue recognition until collectibility becomes reasonably assured. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. Our arrangements do not include general rights of return.
We have multiple element arrangements comprised of subscription fees and professional services. In October 2009, the Financial Accounting Standards Board, or FASB, ratified authoritative accounting guidance regarding revenue recognition for arrangements with multiple deliverables effective for fiscal periods beginning on or after June 15, 2010. The guidance affects the determination of separate units of accounting in arrangements with multiple deliverables and the allocation of transaction consideration to each of the identified units of accounting. Previously, a delivered item was considered a separate unit of accounting when (i) it had value to the customer on a stand-alone basis, (ii) there was objective and reliable evidence of the fair value of the undelivered items, and (iii) there was no general right of return relative to the delivered services or the performance of the undelivered services was probable and substantially controlled by the vendor. The new guidance eliminates the requirement for objective and reliable evidence of fair value to exist for the undelivered items in order for a delivered item to be treated as a separate unit of accounting. The guidance also requires arrangement consideration to be allocated at the inception of the arrangement to all deliverables using the relative-selling-price method and eliminates the use of the residual method of allocation. Under the relative-selling-price method, the selling price for each deliverable is determined using vendor-specific objective evidence, or VSOE, of selling price or third-party evidence, or TPE, of selling price if VSOE does not exist. If neither VSOE nor TPE of selling price exists for a deliverable, the guidance requires an entity to determine the best estimate of selling price, or BESP.
Prior to the adoption of this authoritative accounting guidance, we did not have objective and reliable evidence of fair value for the items in our multiple element arrangements. As a result, we accounted for subscription and professional services revenues as one unit of account and recognized total contracted revenues ratably over the contracted term of the subscription agreement.
F-12
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We adopted the new guidance on a prospective basis for fiscal 2011. As a result, this guidance was applied to all revenue arrangements entered into or materially modified since July 1, 2010. Upon adoption of this authoritative accounting guidance, we have accounted for subscription and professional services revenues as separate units of accounting. To qualify as a separate unit of accounting, the delivered item must have value to the customer on a standalone basis. Our subscription service has standalone value as it is routinely sold separately by us. In determining whether professional services have standalone value, we consider the following factors for each professional services agreement: availability of the services from other vendors, the nature of the professional services, the timing of when the professional services contract was signed in comparison to the subscription service start date and the contractual dependence of the subscription service on the customers satisfaction with the professional services work. Our professional services, including implementation and configuration services, are not so unique and complex that other vendors cannot provide them. In some instances, our customers independently contract with third-party vendors to do the implementation and we regularly outsource implementation services to contracted third-party vendors. As a result, we concluded professional services, including implementation and configuration services, have standalone value. Our on-demand application is fully functional without any additional development, modification or customization. We provide customers access to our subscription service at the beginning of the contract term.
We determine the selling price of each deliverable in the arrangement using the relative-selling price method based on the selling price hierarchy. The selling price for each unit of account is based on the BESP since VSOE and TPE are not available for our subscription service or professional services and other. The BESP for each deliverable is determined primarily by considering the historical selling price of these deliverables in similar transactions as well as other factors, including, but not limited to, market competition, review of stand-alone sales and pricing practices. The total arrangement fee for these multiple element arrangements is then allocated to the separate units of account based on the relative selling price. The method used to determine the BESP for our subscription service is consistent with the method used to determine prices for our services that are sold regularly on a standalone basis. In determining the appropriate pricing structure, we consider the extent of competitive pricing of similar products, marketing analyses and other feedback from analysts. We price our subscription service based on the number of users with a defined process role, according to a tiered structure. The BESP for our subscription service is based upon the historical selling price of these deliverables. Prior to December 2011, our professional services were priced on a fixed-fee basis as a percentage of the subscription fee. We also prepared a standard build-up cost analysis to estimate the fixed fee for our professional services based on the estimated level of effort to complete the professional services. If professional services were priced below the expected range due to discounting, fees allocated to professional services were limited to the amount not contingent upon the delivery of our subscription service. In December 2011, we began shifting our pricing model for professional services to a time-and-materials basis.
In limited circumstances, we grant certain customers the right to deploy our subscription service on the customers own servers without significant penalty. We have analyzed all of the elements in these particular multiple element arrangements and determined we do not have sufficient VSOE of fair value to allocate revenue to our subscription service and professional services. We defer all revenue under the arrangement until the commencement of the subscription service and any associated professional services. Once the subscription service and the associated professional services have commenced, the entire fee from the arrangement is recognized ratably over the remaining period of the arrangement.
Deferred Revenue
Deferred revenue consists primarily of payments received in advance of revenue recognition from our subscriptions and professional services and other described above and is recognized as the revenue recognition criteria are met. We generally invoice our customers in annual installments for subscription service. Accordingly,
F-13
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the deferred revenue balance does not represent the total contract value of annual or multi-year, non-cancelable subscription license agreements. Deferred revenue that will be recognized during the succeeding 12-month period is recorded as current portion of deferred revenue and the remaining portion is recorded as long-term.
Deferred Commissions
Deferred commissions are the incremental costs that are directly associated with our non-cancelable subscription contracts with customers and consist of sales commissions paid to our direct sales force and referral fees paid to independent third-parties. The commissions are deferred and amortized on a straight-line basis over the non-cancelable terms of the related customer contracts. Amortization of deferred commissions is included in sales and marketing expense in the consolidated statements of comprehensive income (loss).
Fair Value Measurements
Our financial instruments consist primarily of cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses. These financial instruments are stated at their respective carrying values, which approximate their fair values, due to their short-term nature.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We use a fair value hierarchy that is based on three levels of inputs, of which the first two are considered observable and the last unobservable. Our assets and liabilities are classified as Level 1, 2 or 3 within the following fair value hierarchy:
Level 1Quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access;
Level 2Inputs other than Level 1 that are directly or indirectly observable, such as quoted prices for identical or similar assets and liabilities, 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 assets or liabilities, such as interest rates, yield curves and foreign currency spot rates; and
Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less. Our cash and cash equivalents generally consist of investments in money market mutual funds and commercial paper. Cash and cash equivalents are stated at fair value.
Restricted Cash
Cash balances pledged as collateral for letters of credit are considered to be restricted cash and classified as such in the consolidated balance sheets. During fiscal 2010, we entered into fully secured letters of credit with a financial institution for two building lease arrangements in lieu of cash security deposits. These letter of credit agreements replaced our prior agreement with another financial institution, which was not terminated until fiscal 2011. As such, we had two letters of credit outstanding on the same building lease arrangement and a third letter of credit outstanding on another building lease arrangement as of June 30, 2010. These letters of credit were fully secured by certificates of deposit resulting in restricted cash of $0.4 million as of June 30, 2010.
F-14
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During fiscal 2011, we relocated our San Diego office and terminated the lease on our former premises. As a result, a letter of credit fully secured by a certificate of deposit was maintained for only one building lease arrangement at June 30, 2011, December 31, 2011 and September 30, 2012 (unaudited), resulting in an immaterial restricted cash balance for each period end.
Short-term Investments
Short-term investments consist of commercial paper, corporate notes and bonds and U.S. government agency securities. We classify short-term investments as available-for-sale at the time of purchase and reevaluate such classification as of each balance sheet date. All short-term investments are recorded at estimated fair value. Unrealized gains and losses for available-for-sale securities are in accumulated other comprehensive income, a component of stockholders equity (deficit). We evaluate our investments to assess whether those with unrealized loss positions are other than temporarily impaired. We consider impairments to be other than temporary if they are related to deterioration in credit risk or if it is likely we will sell the securities before the recovery of their cost basis. Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in interest and other income (expense), net in the consolidated statements of comprehensive income (loss).
Accounts Receivable
We record trade accounts receivable at the net invoice value and such receivables are non-interest bearing. We consider receivables past due based on the contractual payment terms. We review our exposure to accounts receivable and reserves for specific amounts if collectibility is no longer reasonably assured.
Property and Equipment
Property and equipment, net, are stated at cost, subject to review of impairment, and depreciated using the straight-line method over the estimated useful lives of the assets as follows:
Computer equipment and software |
35 years |
|
Furniture and fixtures |
35 years |
|
Leasehold improvements |
shorter of the lease term or estimated useful life |
When assets are sold, or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in operating expenses. Repairs and maintenance are charged to operations as incurred.
Long-Lived Assets
We assess the recoverability of long-lived assets whenever adverse events or changes in circumstances indicate impairment may have occurred. If the future undiscounted cash flows expected to result from the use of the related assets are less than the carrying value of such assets, an impairment has been incurred and a loss is recognized to reduce the carrying value of the long-lived assets to fair value, which is determined by discounting estimated future cash flows.
In addition to the recoverability assessment, we routinely review the remaining estimated lives of our long-lived assets. During fiscal 2009, 2010 and 2011, the six months ended December 31, 2010 (unaudited) and the nine months ended September 30, 2011 (unaudited), there was no change to useful lives and related depreciation expense as we believe these estimates are reflective of the period the assets will be used in operations. During the
F-15
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
six months ended December 31, 2011 and the nine months ended September 30, 2012 (unaudited), we reassessed the useful lives of our assets located in our managed service data centers and accelerated depreciation expense based on the decision to exit these data centers by December 31, 2012.
Capitalized Software Costs
Costs incurred to develop our internal administration, finance and accounting systems are capitalized during the application development stage and amortized over the softwares estimated useful life of three years. No software development costs were capitalized during fiscal 2009, 2010 and 2011, the six months ended December 31, 2010 (unaudited) and 2011 and the nine months ended September 30, 2011 (unaudited). $2.3 million in software development costs have been capitalized during the nine months ended September 30, 2012 (unaudited).
Leases
Leases are reviewed and classified as capital or operating at their inception. For leases that contain rent escalations or periods during the lease term where rent is not required, we record the total rent payable on a straight-line basis over the term of the lease but exclude lease extension periods. The difference between rent payments and straight-line rent expense is recorded as deferred rent in the consolidated balance sheets. Deferred rent that will be recognized during the succeeding 12-month period is recorded as the current portion of deferred rent and the remainder is recorded as long-term deferred rent.
Under certain leases, we also receive incentives for leasehold improvements, which are recognized as deferred rent, if we determine they are owned by us, and amortized on a straight-line basis over the shorter of the lease term or estimated useful life as a reduction to rent expense. The leasehold improvements are included in property and equipment, net.
During the nine months ended September 30, 2012 (unaudited), we relocated our San Diego office to another facility in San Diego. As part of this move, we incurred $2.9 million in lease abandonment costs, which primarily consists of a loss on disposal of assets of $2.7 million and a cease-use loss of $0.2 million, recorded upon vacating our prior headquarters facility in August 2012. As of September 30, 2012 (unaudited), we recorded a corresponding facility exit obligation of $3.0 million, of which $0.6 million is classified as current and included in accrued liabilities on the consolidated balance sheet and the remaining $2.4 million is recorded as other long-term liabilities. The lease on our prior headquarter facility does not expire until 2019. The cease-use loss was calculated as the present value of the remaining lease obligation offset by estimated sublease rental receipts during the remaining lease period, adjusted for deferred items and estimated lease incentives. The key assumptions used in our discounted cash flow model include the amount and timing of estimated sublease rental receipts, and a credit-adjusted, risk-free discount rate of 5.08%. Over the course of the remaining lease term of the former facility, we will record additional lease abandonment costs due to the accretion on the facility exit obligation and adjustments that may arise from changes in estimates for the sublease rental receipts. The lease abandonment costs are included in general and administrative expense on our consolidated statement of comprehensive income (loss).
Preferred Stock Warrants Liability
In connection with a line of credit with a financial institution, we issued warrants that allowed the holder to exercise the warrants into a fixed number of shares (subject to antidilution adjustments) of series B redeemable convertible preferred stock. These warrants provided for the issuance of shares that were redeemable at the option of the holder, therefore, the warrants were classified as a liability and initially measured at fair value. A corresponding offsetting debt discount was recorded and amortized as additional interest expense over the
F-16
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12-month term of the associated line of credit. We remeasured the warrants at subsequent reporting periods with the change in fair value reflected as interest and other income (expense), net in the consolidated statements of comprehensive income (loss). We continued to remeasure the warrants to fair value until they were net settled during fiscal 2010.
Convertible Preferred Stock
Prior to the close of our initial public offering, we had shares of series A redeemable convertible preferred stock (Series A), series B redeemable convertible preferred stock (Series B), series C redeemable convertible preferred stock (Series C) and series D convertible preferred stock (Series D) outstanding, which hereafter are collectively referred to as our convertible preferred stock. Series A, Series B and Series C included a contingent and optional redemption provision that may have required us to redeem the preferred shares. Additionally, the convertible preferred stock included certain redemption provisions upon liquidation. The holders of our convertible preferred stock, acting as a group, would have been able to elect the majority of our board of directors and control the outcome of any vote of our stockholders, including a change-in-control that would have triggered liquidation. As redemption of our convertible preferred stock was outside of our control, all shares of our convertible preferred stock were presented outside of stockholders equity (deficit) in our consolidated balance sheets and consolidated statements of changes in convertible preferred stock and stockholders deficit as of June 30, 2010 and 2011 and December 31, 2011.
Upon the closing of our initial public offering on July 5, 2012, all of the outstanding 10,462,877 shares of convertible preferred stock converted into an aggregate of 83,703,016 shares of common stock.
Stock-based and Other Compensation
We recognize compensation expense related to stock options and restricted stock units, or RSUs, on a straight-line basis over the requisite service period, which is generally the vesting term of four years. We recognize compensation expense related to shares issued pursuant to the employee stock purchase plan, or ESPP, on a straight-line basis over the offering period, which is generally six months. Compensation expense is recognized, net of forfeiture activity, estimated to be 4% annually. The fair value of awards is estimated using the Black-Scholes options pricing model. Refer to Note 12 for further information.
During fiscal 2009 and 2010, additional compensation expense was recorded as our employees and our founder sold shares of common stock back to us as part of the Series C and Series D financings. The transactions resulted in a premium paid to our employees and our founder in excess of fair value of $3.8 million and $30.8 million reflected as employee compensation for fiscal 2009 and 2010, respectively. There were no similar material charges for fiscal 2011, the six months ended December 31, 2010 (unaudited) and 2011 or the nine months ended September 30, 2011 (unaudited) and 2012 (unaudited).
Net Income (Loss) Per Share Attributable to Common Stockholders
We compute net income (loss) attributable to common stockholders using the two-class method required for participating securities. We consider our convertible preferred stock that was outstanding prior to the close of our initial public offering and shares of common stock subject to repurchase resulting from the early exercise of stock options to be participating securities since they contain nonforfeitable rights to dividends or dividend equivalents in the event we declare a dividend for common stock. In accordance with the two-class method, earnings allocated to these participating securities, are subtracted from net income after deducting preferred stock dividends and accretion to the redemption value of the Series A, Series B and Series C to determine total undistributed earnings to be allocated to common stockholders. The holders of our convertible preferred stock did not have a contractual obligation to share in our net losses and such shares were excluded from the computation of basic earnings per share in periods of net loss.
F-17
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Basic net income (loss) per share attributable to common stockholders is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period. All participating securities are excluded from basic weighted-average common shares outstanding. In computing diluted net income (loss) attributable to common stockholders, undistributed earnings are reallocated to reflect the potential impact of dilutive securities. Diluted net income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, adjusted for the effects of potentially dilutive common shares, which are comprised of outstanding common stock options, warrants, convertible preferred stock, RSUs, common stock subject to repurchase and ESPP obligations. The dilutive potential common shares are computed using the treasury stock method or the as-if converted method, as applicable. In periods where the effect of the conversion of preferred stock is dilutive, net income (loss) attributable to common stockholders is adjusted by the associated preferred dividends and accretions. The effects of outstanding common stock options, warrants, convertible preferred stock, RSUs, common stock subject to repurchase and ESPP obligations are excluded from the computation of diluted net income (loss) per common share in periods in which the effect would be antidilutive.
Concentration of Credit Risk and Significant Customers
Financial instruments potentially exposing us to credit risk consist primarily of cash equivalents, restricted cash, short-term investments and accounts receivable. We maintain cash, cash equivalents and short-term investments at financial institutions that management believes to have good credit ratings and represent minimal risk of loss of principal. Accounts located in the United States are secured by the Federal Deposit Insurance Corporation.
Credit risk arising from accounts receivable is mitigated due to our large number of customers and their dispersion across various industries. At June 30, 2010 and 2011, December 31, 2011 and September 30, 2012 (unaudited) there were no customers that represented more than 10% of our accounts receivable balance. We had one customer that accounted for approximately 11% of our revenues during fiscal 2009. During fiscal 2010 and 2011, the six months ended December 31, 2010 (unaudited) and 2011 and the nine months ended September 30, 2011 (unaudited) and 2012 (unaudited), there were no customers that individually exceeded 10% of our revenues.
We review the composition of the accounts receivable balance, historical write-off experience and the potential risk of loss associated with delinquent accounts to determine if an allowance for doubtful accounts is necessary. Individual accounts receivable are written off when we become aware of a specific customers inability to meet its financial obligation, and all collection efforts are exhausted. As of June 30, 2010 and 2011 and December 31, 2011, there was no allowance for doubtful accounts as historical write-offs had not been significant. The following table presents the changes in the allowance for doubtful accounts as of September 30, 2012 (in thousands):
September 30,
2012 |
||||
(Unaudited) | ||||
Allowance for doubtful accounts: |
||||
Balance at beginning of period |
$ | | ||
Add: bad debt expense |
160 | |||
Less: recoveries |
(12 | ) | ||
|
|
|||
Balance at end of period |
$ | 148 | ||
|
|
F-18
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Warranties and Indemnification
Our cloud-based service to automate enterprise IT operations is typically warranted to perform in a manner consistent with general industry standards that are reasonably applicable and materially in accordance with our online help documentation under normal use and circumstances.
We include service level commitments to our customers warranting certain levels of uptime reliability and performance and permitting those customers to receive credits in the event we fail to meet those levels. To date, we have not incurred significant costs as a result of such commitments and have not recorded any significant liabilities related to such obligations in the consolidated financial statements.
We have also agreed to indemnify our directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the persons service as a director or officer, including any action by us, arising out of that persons services as a director or officer of our company or that persons services provided to any other company or enterprise at our request. We maintain director and officer insurance coverage that may enable us to recover a portion of any future amounts paid. The fair values of these obligations are not material as of each balance sheet date.
Our arrangements include provisions indemnifying customers against liabilities if our products infringe a third-partys intellectual property rights. We have not incurred any costs as a result of such indemnifications and have not recorded any liabilities related to such obligations in the consolidated financial statements.
Income Taxes
We use the asset and liability method of accounting for income taxes in which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be reversed. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date. A valuation allowance is established if it is more likely than not that all or a portion of the deferred tax asset will not be realized.
Our tax positions are subject to income tax audits by multiple tax jurisdictions throughout the world. We recognize the tax benefit of an uncertain tax position only if it is more likely than not the position is sustainable upon examination by the taxing authority, based on the technical merits. The tax benefit recognized is measured as the largest amount of benefit which is more likely than not (greater than 50% likely) to be realized upon settlement with the taxing authority. We recognize interest accrued and penalties related to unrecognized tax benefits in our tax provision.
We calculate the current and deferred income tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed income tax returns are recorded when identified. The amount of income taxes paid is subject to examination by U.S. federal and state tax authorities. The estimate of the potential outcome of any uncertain tax issue is subject to managements assessment of relevant risks, facts and circumstances existing at that time. To the extent the assessment of such tax position changes, the change in estimate is recorded in the period in which the determination is made.
F-19
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Adoption of New Accounting Standards
Revenue Recognition . In October 2009, the FASB issued Accounting Standards Update, or ASU, 2009-13, Revenue Recognition (Topic 605)Multiple-Deliverable Revenue Arrangementsa Consensus of the FASB Emerging Issues Task Force . This update provides amendments to the criteria in ASC 605, Revenue Recognition , for separating consideration in multiple-deliverable arrangements by establishing a selling price hierarchy. The selling price used for each deliverable will be based on VSOE if available, third-party evidence if VSOE is not available, or BESP if neither VSOE nor third-party evidence is available. ASU 2009-13 also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, the guidance expands the disclosure requirements for revenue recognition.
The guidance could be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted on a retrospective basis. We adopted the guidance prospectively on July 1, 2010, which resulted in a decrease to deferred revenue and a corresponding increase to total revenues as of and for the year ended June 30, 2011. The primary reason for the impact was the recognition of professional service revenue over the performance period, which is shorter than the estimated period over which customers benefited from initial consulting services.
The following table summarizes the effects of this new guidance on our consolidated balance sheets and statements of comprehensive income (loss) (in thousands):
As of and for the Fiscal Year Ended
June 30, 2011 |
||||||||||||
As Reported |
Under
Previous Accounting Guidance |
Impact of
Adoption of ASU 2009-13 |
||||||||||
Total deferred revenue |
$ | 74,646 | $ | 81,036 | $ | (6,390 | ) | |||||
|
|
|
|
|
|
|||||||
Revenues: |
||||||||||||
Subscription |
$ | 79,191 | $ | 78,305 | $ | 886 | ||||||
Professional services and other |
13,450 | 7,946 | 5,504 | |||||||||
|
|
|
|
|
|
|||||||
Total revenues |
$ | 92,641 | $ | 86,251 | $ | 6,390 | ||||||
|
|
|
|
|
|
Comprehensive Income . On June 16, 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, which revises the manner in which companies present comprehensive income in their financial statements. This update requires companies to present components of comprehensive income in either (i) a continuous statement of comprehensive income or (ii) two separate but consecutive statements. It also eliminates the option for companies to present the components of other comprehensive income as part of the statement of changes in stockholders equity. This guidance is effective for fiscal periods beginning after December 15, 2011, with earlier adoption permitted. Accordingly, we retroactively adopted the provision of ASU 2011-05 during the six-month period ended December 31, 2011. The adoption of this guidance did not result in a material effect on our consolidated financial statements.
F-20
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(3) Short-term Investments
During the nine months ended September 30, 2012 (unaudited), we purchased commercial paper, corporate notes and bonds and U.S. government agency securities, all with maturities of less than twelve months. The following is a summary of our short-term investments (in thousands):
September 30, 2012 | ||||||||||||||||
(Unaudited) | ||||||||||||||||
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Estimated
Fair Value |
|||||||||||||
Available-for-sale securities: |
||||||||||||||||
Commercial paper |
$ | 36,659 | $ | 1 | $ | (12 | ) | $ | 36,648 | |||||||
Corporate notes and bonds |
100,806 | 30 | (22 | ) | 100,814 | |||||||||||
U.S. government agency securities |
2,022 | 1 | | 2,023 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available-for-sale securities |
$ | 139,487 | $ | 32 | $ | (34 | ) | $ | 139,485 | |||||||
|
|
|
|
|
|
|
|
As of September 30, 2012 (unaudited) we had certain available-for-sale securities in a gross unrealized loss position, all of which had been in such position for less than twelve months. There were no impairments considered other-than-temporary as it is more likely than not we will hold the securities until maturity or a recovery of the cost basis. The following table shows the fair values and the gross unrealized losses of these available-for-sale securities aggregated by investment category (in thousands):
September 30, 2012 | ||||||||
(Unaudited) | ||||||||
Fair Value |
Gross Unrealized
Losses |
|||||||
Commercial paper |
$ | 34,908 | $ | (12 | ) | |||
Corporate notes and bonds |
65,782 | (22 | ) | |||||
|
|
|
|
|||||
Total |
$ | 100,690 | $ | (34 | ) | |||
|
|
|
|
Realized gains and losses are determined based on the specific identification method and are reported in interest and other income (expense), net in our consolidated statements of comprehensive income (loss). For the nine months ended September 30, 2012 (unaudited), gross realized gains and losses on sales of our available-for-sale securities were immaterial.
(4) Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consists of the following (in thousands):
June 30, |
December
31,
2011 |
September
30,
2012 |
||||||||||||||
2010 | 2011 | |||||||||||||||
(Unaudited) | ||||||||||||||||
Founders receivable |
$ | 5,267 | $ | 5,267 | $ | 5,267 | $ | | ||||||||
Other |
429 | 3,311 | 4,616 | 5,675 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total prepaid expenses and other current assets |
$ | 5,696 | $ | 8,578 | $ | 9,883 | $ | 5,675 | ||||||||
|
|
|
|
|
|
|
|
Refer to Note 15 for further information regarding our founders receivable.
F-21
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(5) Property and Equipment
Property and equipment, net consists of the following (in thousands):
June 30, |
December
31,
2011 |
September
30,
2012 |
||||||||||||||
2010 | 2011 | |||||||||||||||
(Unaudited) | ||||||||||||||||
Computer equipment and software |
$ | 1,752 | $ | 6,562 | $ | 16,586 | $ | 41,919 | ||||||||
Furniture and fixtures |
192 | 1,230 | 1,755 | 3,017 | ||||||||||||
Leasehold improvements |
106 | 2,747 | 2,795 | 815 | ||||||||||||
Construction in progress |
298 | 1,031 | 3,740 | 4,955 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
2,348 | 11,570 | 24,876 | 50,706 | |||||||||||||
Less: accumulated depreciation |
(650 | ) | (2,103 | ) | (4,181 | ) | (11,620 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total property and equipment, net |
$ | 1,698 | $ | 9,467 | $ | 20,695 | $ | 39,086 | ||||||||
|
|
|
|
|
|
|
|
Construction in progress consists primarily of leasehold improvements and servers, networking equipment and storage infrastructure being provisioned in our new third-party data center hosting facilities. Depreciation expense for fiscal 2009, 2010 and 2011, the six months ended December 31, 2010 (unaudited) and 2011 and the nine months ended September 30, 2011 (unaudited) and 2012 (unaudited) was $0.2 million, $0.4 million, $1.5 million, $0.5 million, $2.0 million, $1.8 million and $8.8 million, respectively.
(6) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consists of the following (in thousands):
June 30, |
December
31,
2011 |
September
30,
2012 |
||||||||||||||
2010 | 2011 | |||||||||||||||
(Unaudited) | ||||||||||||||||
Taxes payable |
$ | 6,127 | $ | 6,851 | $ | 7,399 | $ | 3,376 | ||||||||
Bonuses and commissions |
3,176 | 3,613 | 6,080 | 6,710 | ||||||||||||
Accrued compensation |
891 | 1,856 | 3,570 | 5,895 | ||||||||||||
Accrued third-party professional services |
541 | 1,798 | 1,919 | 2,141 | ||||||||||||
Other employee expenses |
286 | 716 | 1,809 | 5,447 | ||||||||||||
Current portion of facility exit obligation |
| | | 597 | ||||||||||||
Other |
1,708 | 3,750 | 4,831 | 7,872 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total accrued expenses and other current liabilities |
$ | 12,729 | $ | 18,584 | $ | 25,608 | $ | 32,038 | ||||||||
|
|
|
|
|
|
|
|
Refer to Notes 14 and 15 for further information regarding taxes payable.
(7) Warrants for the Purchase of Series B Redeemable Convertible Preferred Stock
In June 2006 and 2007, we issued warrants exercisable for 19,943 and 31,909 shares of Series B, respectively, with an exercise price of $1.25 per share. The warrants were fully exercisable and each had a term of seven years from the date of issuance. The fair values of the warrants were determined on the date of issuance and subsequently using the Black-Scholes options pricing model until they were net settled during fiscal 2010. The assumptions used to determine the fair value of the warrants as of June 30, 2009 were as follows: estimated volatility of 70%, expected term of 4.61 years, risk-free interest rate of 2.37%, and expected dividend yield of zero. The weighted-average fair value of the warrants on the date of issuance was approximately $3.01 per share.
F-22
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(8) Fair Value Measurements
The following table presents our fair value hierarchy for our assets and liabilities measured at fair value on a recurring basis at September 30, 2012 (unaudited) (in thousands):
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Cash equivalents: |
||||||||||||||||
Money market funds |
$ | 35,309 | $ | | $ | | $ | 35,309 | ||||||||
Commercial paper |
| 40,932 | | 40,932 | ||||||||||||
Short-term investments: |
||||||||||||||||
Commercial paper |
| 36,648 | | 36,648 | ||||||||||||
Corporate notes and bonds |
| 100,814 | | 100,814 | ||||||||||||
U.S. government agency securities |
| 2,023 | | 2,023 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 35,309 | $ | 180,417 | $ | | $ | 215,726 | ||||||||
|
|
|
|
|
|
|
|
We determine the fair value of our security holdings based on pricing from our service provider. The service provider values the securities based on consensus pricing, using market prices from a variety of industry-standard independent data providers. Such market prices may be quoted prices in active markets for identical assets (Level 1 inputs) or pricing determined using inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs), such as yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures.
Our Level 3 financial liabilities consisted of long-term liabilities related to warrants issued for the purchase of preferred stock that were net settled during fiscal 2010. Measurement of fair values for the warrants is made utilizing the Black-Scholes options pricing model. The inputs used in determining the fair values are discussed in detail in Note 7. Level 3 activity is as follows (in thousands):
Level 3 | ||||
Balance at June 30, 2008 |
$ | 67 | ||
Interest and other income (expense), net for change in fair value of preferred stock warrants |
61 | |||
|
|
|||
Balance at June 30, 2009 |
128 | |||
Interest and other income (expense), net for change in fair value of preferred stock warrants |
702 | |||
Net settlement of preferred stock warrant liability |
(830 | ) | ||
|
|
|||
Balance at June 30, 2010 |
$ | | ||
|
|
(9) Convertible Preferred Stock
In April 2009, we entered into a Series C Preferred Stock Purchase Agreement, pursuant to which we issued and sold an aggregate of 983,606 shares of Series C, at a purchase price of $6.10 per share, for gross proceeds of approximately $6.0 million. The total gross proceeds were remitted to our founder in exchange for a non-interest bearing promissory note (the Note) in the amount of $6.0 million. The Note was settled through the exchange of 7,868,848 shares of common stock at $0.76 per share, which we subsequently cancelled. At the time the Note was settled, the estimated fair value of our common stock was $0.28 per share. This resulted in compensation expense of $3.8 million in fiscal 2009.
On November 20, 2009, we entered into a Series D Preferred Stock Purchase Agreement with a new stockholder. The new stockholder purchased 2,990,635 shares of Series D at a price of $17.27 per share, for gross proceeds of $51.6 million. Concurrent with the sale and issuance of Series D preferred stock, we repurchased and
F-23
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
subsequently cancelled 23,510,264 shares of common stock from eligible stockholders, including 16,480,000 shares of common stock from our founder, at a price of $2.16 per share. We also offered to repurchase 51,852 vested warrants from a financial institution for $17.27 per share, less the strike price of $1.25 per warrant. Gross proceeds from this transaction to our stockholders and warrant holders were $51.6 million. Eligible stockholders consist of all former and current employees whose employment commenced on or prior to November 1, 2009 and had vested shares as of December 2, 2009. Current employees were required to retain a minimum of 30% of their vested shares, while former employees could sell 100% of their shares.
At the time we repurchased the common stock and warrants, the estimated fair value of our common stock was $0.85 per share. The difference between the fair value and the price paid resulted in a premium paid to repurchase the common stock of approximately $30.8 million, of which $0.7 million, $2.0 million, $3.6 million and $24.5 million are reflected in cost of revenues, sales and marketing expenses, research and development expenses, and general and administrative expenses in the consolidated statement of comprehensive income (loss) for fiscal 2010, respectively. Additionally, the difference between the fair value and the price paid for the warrants resulted in a premium of $0.3 million reflected in interest and other income (expense), net in the consolidated statement of comprehensive income (loss) for fiscal 2010.
Upon the closing of our initial public offering (unaudited), all of the outstanding 10,462,877 shares of our convertible preferred stock automatically converted into an aggregate of 83,703,016 shares of common stock.
The rights, preferences and privileges of our convertible preferred stock were as follows:
Dividends
The holders of shares of the Series A and Series B were entitled to receive dividends of cash at the rate of 8% of the original issue price per annum, payable when and if declared by our board of directors or in connection with a liquidation event. The right to receive dividends was cumulative. As of June 30, 2010, and 2011 and December 31, 2011, no dividends were declared or paid.
Voting Rights
Each holder of convertible preferred stock was entitled to the number of votes equal to the number of whole shares of common stock into which the shares of convertible preferred stock held by such holder were then convertible.
Conversion
Each share of convertible preferred stock was convertible at any time at the option of the holder into eight shares of common stock (subject to customary adjustments to protect against dilution). In addition, each series of convertible preferred stock automatically converted into common stock upon the vote of the majority of the outstanding shares of such series and all series of convertible preferred stock automatically converted into common stock upon the closing of an IPO in which the cash proceeds, net of underwriting discounts and commissions, were at least $50.0 million.
Redemption
The Series A, Series B, and Series C had redemption provisions requiring us to redeem all of the then outstanding Series A, Series B, and Series C in three annual installments, beginning on a date no sooner than five years after November 25, 2009 if the holders of a majority of the Series A, the holders of a majority of the
F-24
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Series B, and the holders of a majority of the Series C all elect such a redemption. Upon redemption, the amount payable for each share of Series A, Series B and Series C shall be equal to the original issue price of such share plus, in the case of the Series A and Series B, an amount equal to 8% of the original issue price per annum on such share calculated from the date of issue of the first share of Series A or Series B, as applicable.
Due to the redemption provisions, the Series A, Series B and Series C were classified outside of permanent equity as mezzanine at their original fair value on the date of issue, net of issuance costs. Subsequent accretion charges were recorded to increase the net amount of these shares to the redemption amount, including the additional 8% per annum redemption amounts payable in respect of the Series A and Series B, at the earliest possible redemption date. The accretion charges were charged against additional paid-in capital as we did not have retained earnings, and to accumulated deficit once there was no additional paid-in capital available.
The combined aggregate amount of redemption requirements for all issuances of capital stock that were redeemable assuming exercise of redemption rights at the earliest possible date, was as follows as of December 31, 2011 (in thousands):
Series A | Series B | Series C | Total | |||||||||||||
Years Ended December 31, |
||||||||||||||||
2012 |
$ | | $ | | $ | | $ | | ||||||||
2013 |
| | | | ||||||||||||
2014 |
216 | 410 | 2,000 | 2,626 | ||||||||||||
2015 |
2,263 | 4,304 | 2,000 | 8,567 | ||||||||||||
2016 |
2,107 | 4,013 | 2,000 | 8,120 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total redemption requirements |
$ | 4,586 | $ | 8,727 | $ | 6,000 | $ | 19,313 | ||||||||
|
|
|
|
|
|
|
|
Liquidation Preference
Upon the liquidation, dissolution or winding up of our company, a consolidation or merger involving a change in control of our company or the conveyance of substantially all of our assets, the holders of Series C had a preference in liquidation over the Series A, Series B, Series D and common stockholders equal to the original issue price plus all declared and unpaid dividends. If our assets were insufficient to fulfill the Series C liquidation amount, the Series C stockholders would share in the distribution of the assets on a pro rata basis based on the full liquidation preference owed to each Series C stockholder.
After the payment in full of the liquidation preference of the Series C, the holders of the Series A and Series B had a preference in liquidation over the Series D and common stockholders equal to the original issue price plus all accrued or declared and unpaid dividends. If our assets were insufficient to fulfill the Series A and Series B liquidation amounts, the Series A and Series B stockholders would share in the distribution of the assets on a pari-passu, pro rata basis based on the full liquidation preference owed to each Series A and Series B stockholder.
After the payment in full of the liquidation preference of the Series C, Series A and Series B, the holders of the Series D had a preference in liquidation over the common stockholders equal to the original issue price plus all declared and unpaid dividends. If our assets were insufficient to fulfill the Series D liquidation amounts, the Series D stockholders would share in the distribution of the assets on a pro rata basis based on the full liquidation preference owed to each Series D stockholder.
After payment in full of the liquidation preference of the Series C, Series A, Series B and Series D, our assets that were legally available for distribution would be distributed ratably to the holders of common stock.
F-25
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All preferred stock liquidation preferences were subject to appropriate adjustment in the event of any stock dividends, combinations, splits, recapitalizations and the like affecting such shares.
Due to the liquidation provisions of Series D, these shares were also classified outside of permanent equity as mezzanine at the redemption value as the deemed liquidation events and related timing were not solely within our control.
(10) Common Stock
We are authorized to issue 600,000,000 shares of common stock at September 30, 2012 (unaudited). Holders of our common stock are not entitled to receive dividends unless declared by our board of directors.
On February 21, 2012, we issued and sold 1,750,980 shares of common stock at a price of $10.20 per share for gross proceeds of $17.9 million in a private placement with a new stockholder.
During the nine months ended September 30, 2012 (unaudited), we repurchased and subsequently cancelled 100,000 and 77,498 shares of common stock at a price of $10.00 and $11.50 per share, respectively, from former employees.
As of September 30, 2012 (unaudited), we had 123,371,566 shares of common stock outstanding and had reserved shares of common stock for future issuance as follows:
September 30,
2012
(Unaudited) |
||||
Stock option plan: |
||||
Options outstanding |
37,279,442 | |||
RSUs |
1,134,851 | |||
Stock awards available for future grants: |
||||
2005 Stock Option Plan (1) |
| |||
2012 Equity Incentive Plan (1) |
11,635,301 | |||
2012 Employee Stock Purchase Plan (1) |
5,000,000 | |||
|
|
|||
Total reserved shares of common stock for future issuance |
55,049,594 | |||
|
|
(1) |
Refer to Note 11 for a description of these plans. |
(11) Stock Awards
We have a 2005 Stock Option Plan, or 2005 Stock Plan, which provides for grants of stock awards, including options to purchase shares of common stock, stock purchase rights and RSUs to certain employees, officers, directors and consultants. As of September 30, 2012 (unaudited), we had 56,231,262 total shares of common stock reserved for issuance under the 2005 Stock Plan, which includes shares already issued under such plan and shares available for issuance pursuant to outstanding options and RSUs.
On April 27, 2012, the board of directors approved the 2012 Plan, and the 2012 Employee Stock Purchase Plan, or the 2012 ESPP, which became effective on June 27, 2012 and June 28, 2012, respectively.
The 2012 Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, RSUs, performance-based stock awards and other forms of equity compensation, or collectively, stock awards. In addition, the 2012 Plan provides for the grant of performance
F-26
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
cash awards. Incentive stock options may be granted only to employees. All other awards may be granted to employees, including officers, as well as directors and consultants. As of September 30, 2012 (unaudited), there were 12,949,178 total shares of common stock reserved for issuance under the 2012 Plan. The number of shares of common stock reserved for issuance under the 2012 Plan will automatically increase on January 1 of each year, starting on January 1, 2013 and continuing through January 1, 2022, by up to 5% of the total number of shares of the common stock outstanding on December 31 of the preceding calendar year as determined by the board of directors.
The 2012 ESPP authorizes the issuance of shares of common stock pursuant to purchase rights granted to our employees. As of September 30, 2012 (unaudited), we had 5,000,000 total shares of common stock reserved for issuance under the 2012 ESPP. The number of shares of common stock reserved for issuance will automatically increase on January 1 of each calendar year, from January 1, 2013 through January 1, 2022, by up to 1% of the total number of shares of the common stock outstanding on December 31 of the preceding calendar year.
Stock Options
The stock options are exercisable at a price equal to the market value of the underlying shares of common stock on the date of the grant as determined by our board of directors or, for those stock options issued subsequent to our IPO, the closing price of our common stock as reported on the New York Stock Exchange on the date of grant. Stock options granted under our 2005 Stock Plan and the 2012 Plan to new employees generally vest 25% one year from the date the requisite service period begins and continue to vest monthly for each month of continued employment over the remaining three years. Options granted to members of our board of directors and to employees who have previously been granted options generally vest in 48 equal monthly installments. Options that were granted to members of our board of directors in June 2012 vest in 3 equal annual installments. Options granted generally are exercisable for a period of up to 10 years. Option holders under the 2005 Stock Plan can exercise unvested options to acquire restricted stock. Upon termination of service, we have the right to repurchase at the original purchase price any unvested (but issued) shares of common stock. Shares of common stock purchased under our 2005 Stock Plan are subject to certain restrictions.
On September 9, 2011, we granted 275,808 stock options subject to performance-based vesting criteria to an executive officer. Vesting was contingent upon meeting certain board-approved financial performance targets over a period of one year ending June 30, 2012. As of September 30, 2012, the executive officer had achieved 98% of his target, resulting in 243,744 stock options eligible to vest. These stock options vest over a period of four years with 25% vesting one year from the date his requisite service period began and continue to vest monthly for each month of continued employment over the remaining three years. We recorded stock-based compensation expense of $0.8 million related to this grant for the nine months ended September 30, 2012, respectively, as part of sales and marketing expense on the consolidated statements of comprehensive income (loss).
F-27
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of the stock option activity for fiscal 2009, 2010 and 2011, the six months ended December 31, 2011 and the nine months ended September 30, 2012 (unaudited) is as follows:
Number of
Shares |
Weighted-
Average Exercise Price |
Weighted-
Average Remaining Contractual Term |
Aggregate
Intrinsic Value |
|||||||||||||
Outstanding at June 30, 2008 |
16,333,664 | $ | 0.03 | |||||||||||||
Granted |
4,160,000 | 0.21 | ||||||||||||||
Exercised |
(348,328 | ) | 0.02 | |||||||||||||
Forfeited |
(981,336 | ) | 0.05 | |||||||||||||
|
|
|||||||||||||||
Outstanding at June 30, 2009 |
19,164,000 | 0.07 | ||||||||||||||
Granted |
4,684,000 | 1.00 | ||||||||||||||
Exercised |
(7,036,768 | ) | 0.03 | |||||||||||||
Forfeited |
(290,248 | ) | 0.41 | |||||||||||||
|
|
|||||||||||||||
Outstanding at June 30, 2010 |
16,520,984 | 0.34 | ||||||||||||||
Granted |
15,402,456 | 2.15 | ||||||||||||||
Exercised |
(4,279,456 | ) | 0.25 | |||||||||||||
Forfeited |
(867,590 | ) | 0.87 | |||||||||||||
Cancelled |
(450,000 | ) | 0.18 | |||||||||||||
|
|
|||||||||||||||
Outstanding at June 30, 2011 |
26,326,394 | 1.40 | ||||||||||||||
Granted |
17,055,120 | 3.29 | ||||||||||||||
Exercised |
(1,469,118 | ) | 1.45 | |||||||||||||
Forfeited |
(2,310,756 | ) | 1.61 | |||||||||||||
|
|
|||||||||||||||
Outstanding at December 31, 2011 |
39,601,640 | 2.20 | ||||||||||||||
Granted (unaudited) |
7,085,680 | 13.48 | ||||||||||||||
Exercised (unaudited) |
(5,523,840 | ) | 0.61 | |||||||||||||
Forfeited (unaudited) |
(3,543,871 | ) | 3.22 | |||||||||||||
Cancelled (unaudited) |
(340,167 | ) | 1.90 | |||||||||||||
|
|
|||||||||||||||
Outstanding at September 30, 2012 |
37,279,442 | $ | 4.48 | 8.51 years | $ | 1,274,895,101 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Vested and expected to vest as of June 30, 2009 |
18,842,329 | $ | 0.06 | 7.76 years | $ | 4,079,780 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Vested and exercisable as of June 30, 2009 |
10,723,479 | $ | 0.03 | 7.06 years | $ | 2,748,003 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Vested and expected to vest as of June 30, 2010 |
16,175,929 | $ | 0.33 | 7.72 years | $ | 14,458,066 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Vested and exercisable as of June 30, 2010 |
7,895,777 | $ | 0.07 | 6.63 years | $ | 9,051,521 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Vested and expected to vest as of June 30, 2011 |
26,025,366 | $ | 1.39 | 8.37 years | $ | 31,601,963 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Vested and exercisable as of June 30, 2011 |
8,628,975 | $ | 0.35 | 6.53 years | $ | 19,421,343 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Vested and expected to vest as of December 31, 2011 |
38,723,419 | $ | 2.17 | 8.61 years | $ | 109,458,847 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Vested and exercisable as of December 31, 2011 |
10,123,858 | $ | 0.57 | 6.52 years | $ | 44,821,224 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Vested and expected to vest as of September 30, 2012 (unaudited) |
36,593,833 | $ | 4.43 | 8.50 years | $ | 1,253,278,350 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Vested and exercisable as of September 30, 2012 (unaudited) |
11,607,655 | $ | 1.77 | 7.58 years | $ | 428,488,416 | ||||||||||
|
|
|
|
|
|
|
|
F-28
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Aggregate intrinsic value represents the difference between the estimated fair value of our common stock and the exercise price of outstanding, in-the-money options. Our estimated fair value of common stock was $4,772 million as of September 30, 2012 (unaudited). The total intrinsic value of options exercised was approximately $0.1 million, $10.1 million, $7.5 million, $2.8 million, $3.3 million, $6.4 million and $52.0 million for fiscal 2009, 2010 and 2011, the six months ended December 31, 2010 (unaudited) and 2011 and the nine months ended September 30, 2011 (unaudited) and 2012 (unaudited), respectively. The weighted-average grant date fair value of options granted was $1.6 million, $2.9 million, $17.7 million, $5.4 million, $40.3 million, $40.8 million and $49.1 million for fiscal 2009, 2010 and 2011, the six months ended December 31, 2010 (unaudited) and 2011 and the nine months ended September 30, 2011 (unaudited) and 2012 (unaudited), respectively.
As of September 30, 2012 (unaudited), total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock options was approximately $75.3 million. The weighted-average remaining vesting period of unvested stock options at September 30, 2012 (unaudited) was 2.82 years.
Under our 2005 Stock Plan, we issue shares of restricted stock as a result of the cash exercise of unvested stock options. The proceeds initially are recorded as a liability from the early exercise of stock options and reclassified to common stock as our repurchase right lapses. A summary of the restricted stock activity for fiscal 2011, the six months ended December 31, 2011 and the nine months ended September 30, 2012 (unaudited) is as follows:
Number
Outstanding |
Weighted-average
Grant Date Fair Value |
|||||||
Balance at June 30, 2010 |
| $ | | |||||
Early exercised |
453,243 | 0.86 | ||||||
Vested |
(37,755 | ) | 0.58 | |||||
|
|
|||||||
Balance at June 30, 2011 |
415,488 | 0.89 | ||||||
Early exercised |
360,852 | 1.29 | ||||||
Vested |
(185,640 | ) | 0.66 | |||||
Repurchased |
(12,084 | ) | 0.74 | |||||
|
|
|||||||
Balance at December 31, 2011 |
578,616 | 1.21 | ||||||
Early exercised (unaudited) |
263,970 | 2.38 | ||||||
Vested (unaudited) |
(491,337 | ) | 1.50 | |||||
Repurchased (unaudited) |
(2,084 | ) | 0.11 | |||||
|
|
|||||||
Balance at September 30, 2012 |
349,165 | 1.69 | ||||||
|
|
RSUs
RSUs granted under the 2005 Stock Plan and the 2012 Plan to new employees generally vest annually over a four-year period. As of September 30, 2012 (unaudited), the weighted-average grant date fair value of the RSUs was $12.71 per share. The aggregate grant date fair value was $14.4 million which is expected to be recognized over four years. As of September 30, 2012 (unaudited), all of the RSUs were unvested.
We recognized compensation expense of $1.4 million related to RSUs for the nine months ended September 30, 2012 (unaudited). As of September 30, 2012 (unaudited), total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested RSUs was approximately $9.7 million and the weighted-average remaining vesting period was 3.49 years.
F-29
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
ESPP
The price at which common stock is purchased under the 2012 ESPP is equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. As the current offering period is June 28, 2012 through January 31, 2013, no shares were issued under the 2012 ESPP during the nine months ended September 30, 2012 (unaudited).
(12) Stock-Based Compensation
We use the Black-Scholes options pricing model to estimate the fair value of our stock-based awards. This model incorporates various assumptions including expected volatility, expected term, risk-free interest rates and expected dividend yields. The following weighted-average assumptions were used for each respective period to calculate our stock-based compensation for each stock option grant:
Fiscal Year Ended June 30, | Six Months Ended December 31, | Nine Months Ended September 30, | ||||||||||||||||||||||||||
2009 | 2010 | 2011 | 2010 | 2011 | 2011 | 2012 | ||||||||||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||||||||||||||
Stock Options: |
||||||||||||||||||||||||||||
Expected volatility |
69% - 75% | 65% | 50% - 69% | 57% - 67% | 56% - 69% | 50% - 69% | 54% - 57% | |||||||||||||||||||||
Expected term (in years) |
5.62 | 6.02 | 6.05 | 6.04 | 5.75 | 5.83 | 6.05 | |||||||||||||||||||||
Risk-free
|
1.48% - 3.77% | 2.57% - 3.04% | 1.43% - 2.96% | 1.43% - 2.96% | 0% - 1.92% | 0.00% - 3.03% | 0.87% - 1.18% | |||||||||||||||||||||
Dividend yield |
% | % | % | % | % | % | % |
The following weighted-average assumptions were used to calculate our stock-based compensation for each stock purchase right granted under the Employee Stock Purchase Plan (ESPP), which became effective on June 28, 2012:
Nine Months Ended,
September 30, 2012 |
||||
(Unaudited) | ||||
ESPP: |
||||
Expected volatility |
42 | % | ||
Expected term (in years) |
.58 | |||
Risk-free interest rate |
0.16 | % | ||
Dividend yield |
| % |
Expected volatility . We use the historic volatility of publicly traded peer companies as an estimate for expected volatility. In considering peer companies, characteristics such as industry, stage of development, size and financial leverage are considered. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock share price becomes available.
Expected term . We estimate the expected term using the simplified method due to the lack of historical exercise activity for our company. The simplified method calculates the expected term as the mid-point between the vesting date and the contractual expiration date of the award.
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 the expected term of the stock-based award.
Expected dividend yield . Our expected dividend yield is zero, as we have not and do not currently intend to declare dividends in the foreseeable future.
F-30
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Expected forfeiture rate . We consider our pre-vesting forfeiture history to determine our expected forfeiture rate.
Fair value of common stock . Prior to our initial public offering, the fair value of our common stock was determined by our board of directors, which intended all options granted to be exercisable at a price per share not less than the per share fair value of the common stock underlying those options on the date of grant. The valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation . The assumptions used in the valuation model are based on future expectations combined with management judgment.
Prior to March 2010, values for our shares of common stock were determined using an option pricing method. Estimates of the volatility were based on available information on the volatility of common stock of comparable, publicly traded companies. The common stock valuations were based on the discounted cash flow method, or DCF, under the income approach and the comparable company method and the recent transaction method under the market-based approach, which we used to estimate the total value of our company. The DCF method estimates enterprise value based on the estimated present value of future net cash flows the business is expected to generate over a forecasted period and an estimate of the present value of cash flows beyond that period, which is referred to as terminal value. The estimated present value is calculated using a discount rate known as the weighted-average cost of capital, which accounts for the time value of money and the appropriate degree of risks inherent in the business. The market-based approach considers multiples of financial metrics based on both acquisitions and trading multiples of a selected peer group of companies. These multiples are then applied to our financial metrics to derive a range of indicated values. If different estimates and assumptions had been used, the valuations could have been different.
Since March 2010, we utilized the probability weighted expected return method, or PWERM, approach to allocate value to our common shares. The PWERM approach employs various market approach and income approach calculations depending upon the likelihood of various liquidation scenarios. For each of the various scenarios, an equity value is estimated and the rights and preferences for each stockholder class are considered to allocate the equity value to common shares. The common share value is then multiplied by a discount factor reflecting the calculated discount rate and the timing of the event. Lastly, the common share value is multiplied by an estimated probability for each scenario. The probability and timing of each scenario was based upon discussions between our board of directors and our management team. Under the PWERM, the value of our common stock was based upon four possible future events for our company: an IPO; a strategic merger or sale; remaining a private company; and dissolution.
For stock options granted subsequent to our initial public offering, our board of directors determined the fair value based on the closing price of our common stock as reported on the New York Stock Exchange on the date of grant.
F-31
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(13) Net Income (Loss) Per Share Attributable to Common Stockholders
The following tables present the calculation of basic and diluted net income (loss) per share attributable to common stockholders (in thousands, except share and per share data):
Fiscal Years Ended June 30, |
Six Months Ended
December 31, |
Nine Months Ended
September 30, |
||||||||||||||||||||||||||
2009 | 2010 | 2011 | 2010 | 2011 | 2011 | 2012 | ||||||||||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||||||||||||||
Numerator: |
||||||||||||||||||||||||||||
Net income (loss) |
$ | (5,906 | ) | $ | (29,705 | ) | $ | 9,830 | $ | 4,803 | $ | (6,684 | ) | $ | 5,148 | $ | (27,417 | ) | ||||||||||
Accretion of redeemable convertible preferred stock |
(625 | ) | (640 | ) | (633 | ) | (320 | ) | (312 | ) | (471 | ) | (308 | ) | ||||||||||||||
Net income attributable to participating securities |
| | (7,558 | ) | (3,721 | ) | | (3,788 | ) | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Net income (loss) attributable to common stockholdersbasic |
$ | (6,531 | ) | $ | (30,345 | ) | $ | 1,639 | $ | 762 | $ | (6,996 | ) | $ | 889 | $ | (27,725 | ) | ||||||||||
|
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|
|
|
|
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|
|
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|
|
|
|||||||||||||||
Undistributed earnings reallocated to participating securities |
$ | | $ | | $ | 671 | $ | 349 | $ | | $ | 361 | $ | | ||||||||||||||
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|||||||||||||||
Net income (loss) attributable to common stockholders diluted |
$ | (6,531 | ) | $ | (30,345 | ) | $ | 2,310 | $ | 1,111 | $ | (6,996 | ) | $ | 1,250 | $ | (27,725 | ) | ||||||||||
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|||||||||||||||
Denominator: |
||||||||||||||||||||||||||||
Weighted-average shares outstanding Basic |
39,039,066 | 23,157,576 | 18,163,977 | 17,156,445 | 21,104,219 | 19,695,440 | 57,089,411 | |||||||||||||||||||||
Effect of potentially dilutive securities: |
||||||||||||||||||||||||||||
Common stock options |
| | 9,931,509 | 10,465,912 | | 10,917,099 | | |||||||||||||||||||||
|
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|
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|
|
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|
|||||||||||||||
Weighted-average shares outstanding Diluted |
39,039,066 | 23,157,576 | 28,095,486 | 27,622,357 | 21,104,219 | 30,612,539 | 57,089,411 | |||||||||||||||||||||
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|||||||||||||||
Net income (loss) per share attributable to common stockholders: |
||||||||||||||||||||||||||||
Basic |
$ | (0.17 | ) | $ | (1.31 | ) | $ | 0.09 | $ | 0.04 | $ | (0.33 | ) | $ | 0.05 | $ | (0.49 | ) | ||||||||||
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|
|||||||||||||||
Diluted |
$ | (0.17 | ) | $ | (1.31 | ) | $ | 0.08 | $ | 0.04 | $ | (0.33 | ) | $ | 0.04 | $ | (0.49 | ) | ||||||||||
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|
|
Potentially dilutive securities not included in the calculation of diluted net income (loss) per share because doing so would be antidilutive are as follows:
Fiscal Years Ended June 30, |
Six Months Ended
December 31, |
Nine Months Ended
September 30, |
||||||||||||||||||||||||||
2009 | 2010 | 2011 | 2010 | 2011 | 2011 | 2012 | ||||||||||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||||||||||||||
Common stock options |
19,164,000 | 16,520,984 | 7,635,190 | 7,890,844 | 39,601,640 | 8,548,888 | 37,279,442 | |||||||||||||||||||||
Warrants |
414,816 | | | | | | | |||||||||||||||||||||
Convertible preferred stock |
59,777,936 | 83,703,016 | 83,703,016 | 83,703,016 | 83,703,016 | 83,703,016 | | |||||||||||||||||||||
Restricted stock units |
| | | | | | 1,134,851 | |||||||||||||||||||||
Common stock subject to repurchase |
| | 83,551 | | 578,616 | 288,350 | 349,165 | |||||||||||||||||||||
ESPP obligations |
| | | | | | 468,704 | |||||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total potentially dilutive securities |
79,356,752 | 100,224,000 | 91,421,757 | 91,593,860 | 123,883,272 | 92,540,254 | 39,232,162 | |||||||||||||||||||||
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F-32
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(14) Income Taxes
The provision for income taxes consists of the following (in thousands):
Fiscal Years Ended June 30, |
Six Months Ended
December 31, |
|||||||||||||||||||
2009 | 2010 | 2011 | 2010 | 2011 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Current provision: |
||||||||||||||||||||
Federal |
$ | | $ | | $ | 62 | $ | 111 | $ | 325 | ||||||||||
State |
5 | 2 | 988 | 449 | 396 | |||||||||||||||
Foreign |
43 | 278 | 286 | 93 | 329 | |||||||||||||||
|
|
|
|
|
|
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|
|
|
|||||||||||
48 | 280 | 1,336 | 653 | 1,050 | ||||||||||||||||
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|
|
|
|||||||||||
Deferred provision: |
||||||||||||||||||||
Federal |
| | | | 22 | |||||||||||||||
State |
| | | | 3 | |||||||||||||||
Foreign |
| | | | | |||||||||||||||
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|||||||||||
| | | | 25 | ||||||||||||||||
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|
|||||||||||
Provision for income taxes |
$ | 48 | $ | 280 | $ | 1,336 | $ | 653 | $ | 1,075 | ||||||||||
|
|
|
|
|
|
|
|
|
|
The components of income (loss) from continuing operations before income taxes by United States and foreign jurisdictions were as follows (in thousands):
Fiscal Years Ended June 30, |
Six Months Ended
December 31, |
|||||||||||||||||||
2009 | 2010 | 2011 | 2010 | 2011 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
United States |
$ | (5,864 | ) | $ | (29,602 | ) | $ | 10,585 | $ | 5,368 | $ | (1,375 | ) | |||||||
Foreign |
6 | 177 | 581 | 88 | (4,234 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | (5,858 | ) | $ | (29,425 | ) | $ | 11,166 | $ | 5,456 | $ | (5,609 | ) | |||||||
|
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|
|
|
|
|
|
|
|
The effective income tax rate differs from the federal statutory income tax rate applied to the income (loss) before provision for income taxes due to the following (in thousands):
Fiscal Years Ended June 30, |
Six Months Ended
December 31, |
|||||||||||||||||||
2009 | 2010 | 2011 | 2010 | 2011 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Tax computed at the federal statutory rate |
$ | (1,991 | ) | $ | (10,005 | ) | $ | 3,799 | $ | 1,857 | $ | (1,907 | ) | |||||||
State taxes, net of federal benefit |
(312 | ) | (359 | ) | 250 | 122 | 82 | |||||||||||||
Tax rate differential for international subsidiaries (1) |
(1 | ) | (13 | ) | (47 | ) | (23 | ) | 1,589 | |||||||||||
Stock-based compensation |
50 | 149 | 727 | 244 | 978 | |||||||||||||||
Tax credits |
(677 | ) | (282 | ) | (409 | ) | (150 | ) | (378 | ) | ||||||||||
Tax contingencies |
194 | 265 | 171 | 74 | 178 | |||||||||||||||
Permanent differences |
226 | 411 | 305 | 120 | 244 | |||||||||||||||
Change in state rate |
32 | (1,170 | ) | 662 | 295 | 8 | ||||||||||||||
Other |
(15 | ) | 117 | 344 | 379 | 146 | ||||||||||||||
Valuation allowance |
2,542 | 11,167 | (4,466 | ) | (2,265 | ) | 135 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Provision for income taxes |
$ | 48 | $ | 280 | $ | 1,336 | $ | 653 | $ | 1,075 | ||||||||||
|
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(1) |
The change in the impact of the tax rate differential for international jurisdictions is primarily attributable to a change in the mix of income/loss from the United States to international jurisdictions with different income tax rates compared to the United States. |
F-33
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Significant components of our deferred tax assets as of June 30, 2010 and 2011 and December 31, 2011 are shown below (in thousands). A valuation allowance has been recognized to offset our deferred tax assets as realization for fiscal 2010 and 2011 and the six months ended December 31, 2011 of such deferred tax assets has not met the more likely than not threshold.
June 30, |
December
31,
2011 |
|||||||||||
2010 | 2011 | |||||||||||
Deferred tax assets: |
||||||||||||
Net operating losses |
$ | 15,731 | $ | 9,936 | $ | 4,182 | ||||||
Deferred revenue |
848 | 2,397 | 8,434 | |||||||||
Accrued state taxes |
| 286 | 28 | |||||||||
Accrued expenses |
416 | 363 | 672 | |||||||||
Deferred rent |
128 | 183 | 201 | |||||||||
Credit carryforwards |
781 | 858 | 1,357 | |||||||||
Incentive from lessor |
| 1,096 | 1,023 | |||||||||
Stock-based compensation |
| 345 | 1,333 | |||||||||
Other |
409 | 461 | 1,130 | |||||||||
|
|
|
|
|
|
|||||||
Total deferred tax assets |
18,313 | 15,925 | 18,360 | |||||||||
Less valuation allowance |
(18,160 | ) | (13,694 | ) | (13,829 | ) | ||||||
|
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|
|||||||
153 | 2,231 | 4,531 | ||||||||||
Deferred tax liabilities: |
||||||||||||
Accrued expenses |
| | | |||||||||
Property and equipment |
(153 | ) | (2,231 | ) | (4,531 | ) | ||||||
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|||||||
Net deferred tax assets |
$ | | $ | | $ | | ||||||
|
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|
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As of December 31, 2011, we had U.S. federal net operating losses and federal tax credit carryforwards of approximately $13.1 million and $0.9 million, respectively. The federal net operating loss carryforwards and federal tax credits will begin to expire in 2024 if not utilized. In addition, we had state net operating losses and state tax credit carryforwards of approximately $39.4 million and $0.9 million, respectively. The state net operating loss and tax credit carryforwards will begin to expire in 2018 if not utilized.
Approximately $6.8 million of federal net operating losses and $4.2 million of state net operating losses relate to stock-based compensation deductions in excess of book expense, the tax effect of which would be to credit additional paid-in capital, if realized.
We had research credit carryforwards of approximately $0.9 million for federal purposes and another $0.9 million for state purposes. If not utilized, the federal carryforward will begin to expire in 2024.
Due to cumulative losses, we maintain a valuation allowance against our deferred tax assets as of December 31, 2011. We consider all available evidence, both positive and negative, in assessing the extent to which a valuation allowance should be applied against deferred tax assets. Our valuation allowance increased $11.2 million for fiscal 2010 as compared to fiscal 2009, decreased $4.5 million for fiscal 2011 as compared to fiscal 2010, and increased $0.1 million during the six months ended December 31, 2011.
Section 382 imposes annual limitations on the utilization of NOL carryforwards and other tax attributes upon an ownership change. In general terms, an ownership change may result from transactions that increase the aggregate ownership of certain stockholders in our stock by more than 50 percentage points over a testing period (generally three years). We completed a Section 382 analysis. Based on this analysis, we do not believe that our NOLs and other tax attributes are limited under Section 382 as of December 31, 2011.
F-34
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We have not recorded a provision for deferred U.S. tax expense that could result from the remittance of foreign undistributed earnings since we intend to reinvest the earnings of these foreign subsidiaries indefinitely.
Our share of the undistributed earnings of foreign corporations not included in our consolidated federal income tax returns that could be subject to additional U.S. income tax if remitted was approximately $0.2 million, $0.8 million and $0.8 million at June 30, 2010 and 2011 and December 31, 2011, respectively. The determination of the amount of unrecognized U.S federal deferred income tax liability for undistributed earnings is not practicable.
We record liabilities, where appropriate, for all uncertain income tax positions. We recognize potential accrued interest and penalties related to unrecognized tax benefits as income tax expense.
A reconciliation of the beginning and ending balance of total unrecognized tax benefits is as follows (in thousands):
Fiscal Years Ended June 30, |
Six Months Ended
December 31, |
|||||||||||||||||||
2009 | 2010 | 2011 | 2010 | 2011 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Beginning balance |
$ | 98 | $ | 185 | $ | 374 | $ | 374 | $ | 519 | ||||||||||
Tax provisions taken in the period: |
||||||||||||||||||||
Additions |
87 | 189 | 145 | 73 | 191 | |||||||||||||||
Reductions |
| | | | | |||||||||||||||
|
|
|
|
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|
|
|
|
|||||||||||
Ending balance |
$ | 185 | $ | 374 | $ | 519 | $ | 447 | $ | 710 | ||||||||||
|
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|
|
|
|
|
|
|
As of July 1, 2011, we had total unrecognized tax benefit of approximately $0.5 million. During the six months ended December 31, 2011, we recognized approximately $0.2 million of interest and penalties associated with unrecognized tax benefits. We do not believe there will be a material change in our unrecognized tax positions over the next twelve months.
We file income tax returns with the U.S. federal, various states and certain foreign jurisdictions. Our tax years ending June 30, 2005 through December 31, 2011 remain open in most jurisdictions.
(15) Related Party Transactions
During fiscal 2009, we loaned $6.0 million to our founder in exchange for a non-interest bearing promissory note, which was settled in connection with our sale of Series C preferred stock. Refer to Note 9 for further discussion of this transaction. No loans were issued during fiscal 2010, 2011 or the six months ended December 31, 2011.
In connection with the sale and issuance of our Series D preferred stock, we repurchased and subsequently cancelled 23,510,264 shares of common stock from eligible stockholders, including a total of 18,436,000 shares from our founder and his family, and our former chief financial officer. Refer to Note 9 for further discussion of this transaction.
As part of our sale of Series C and Series D preferred stock, we recorded a liability of $5.3 million for withholding taxes associated with the repurchase of our founders shares plus potential interest and penalties that may be imposed by the tax authorities. We recorded an offsetting receivable of $5.3 million in prepaid expenses and other current assets at June 30, 2010 and 2011 and December 31, 2011 representing the total amount that was subsequently paid to us by our founder in February 2012 for these withholding taxes. In April 2012, we paid $5.3 million to the tax authorities for these withholding taxes.
F-35
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(16) Commitments and Contingencies
Leases
We lease managed and co-location facilities for data center capacity and office space under noncancellable operating lease agreements with various expiration dates. Our data centers are located in the United States, the Netherlands, the United Kingdom, Switzerland, Canada, and Australia. Expenses at our co-location facilities consist primarily of space, power, cooling and ancillary services. Our managed facilities include the same expenses as co-location facilities as well as expenses related to leases of equipment, such as servers, networking equipment, and storage infrastructure. Rent expense associated with these facilities, included in cost of revenues, was $1.3 million, $2.7 million, $4.8 million, $2.1 million, $3.7 million, $4.4 million and $9.2 million for fiscal 2009, 2010, 2011, the six months ended December 31, 2010 (unaudited) and 2011 and the nine months ended September 30, 2011 (unaudited) and 2012 (unaudited), respectively.
Our principal office is located in San Diego, California and we lease office space in the United States, the United Kingdom, Germany, Australia, the Netherlands, Canada, Denmark, France, Sweden and Israel. Rent expense associated with these leases was $0.9 million, $1.1 million, $2.3 million, $0.5 million, $1.2 million, $2.3 million and $3.0 million for fiscal 2009, 2010, 2011, the six months ended December 31, 2010 (unaudited) and 2011 and the nine months ended September 30, 2011 (unaudited) and 2012 (unaudited), respectively. During fiscal 2011, we relocated our San Diego office and terminated a lease on our former premises. The termination fee of $0.7 million is included in rent expense for fiscal 2011 and the nine months ended September 30, 2011 (unaudited).
Annual future minimum payments under these operating leases were as follows as of December 31, 2011 (in thousands):
Data Centers | Office Leases | Total | ||||||||||
Years Ended December 31, |
||||||||||||
2012 |
$ | 8,284 | $ | 2,795 | $ | 11,079 | ||||||
2013 |
8,587 | 2,247 | 10,834 | |||||||||
2014 |
3,270 | 2,409 | 5,679 | |||||||||
2015 |
197 | 1,724 | 1,921 | |||||||||
2016 |
| 1,661 | 1,661 | |||||||||
Thereafter |
| 3,603 | 3,603 | |||||||||
|
|
|
|
|
|
|||||||
Total minimum lease payments |
$ | 20,338 | $ | 14,439 | $ | 34,777 | ||||||
|
|
|
|
|
|
Subsequent to December 31, 2011, we signed additional leases. In February 2012, we signed a lease for our new San Diego office. The lease is for a 94,543 square-foot building with total minimum lease commitments of approximately $13.7 million. The lease is for a period of eight years and commenced on August 17, 2012.
In September 2012 (unaudited), we signed a lease for a total of 43,590 square-feet of office space located in Amsterdam. The square-footage for the first year is approximately 17,857 and increases incrementally over the term of the lease, with total minimum lease commitments of approximately $10.5 million. The lease is for a period of 10.5 years and commences on October 1, 2012.
F-36
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Annual future minimum payments under our operating leases were as follows as of September 30, 2012 (unaudited) (in thousands):
Data Centers | Office Leases | Total | ||||||||||
Fiscal Period: |
||||||||||||
Remaining three months ended December 31, 2012 |
$ | 2,982 | $ | 916 | $ | 3,898 | ||||||
2013 |
8,174 | 5,395 | 13,569 | |||||||||
2014 |
5,314 | 5,162 | 10,476 | |||||||||
2015 |
546 | 4,837 | 5,383 | |||||||||
2016 |
| 5,044 | 5,044 | |||||||||
Thereafter |
| 18,392 | 18,392 | |||||||||
|
|
|
|
|
|
|||||||
Total minimum lease payments |
$ | 17,016 | $ | 39,746 | $ | 56,762 | ||||||
|
|
|
|
|
|
Lease commitments of $10.2 million related to the lease for our former San Diego office are included in the table above. Upon vacating our former San Diego office in August 2012 (unaudited), we recorded a cease-use loss of $0.2 million and a corresponding facility exit obligation of $3.0 million, as we are further obligated for certain ongoing operating costs.
On November 8, 2012 (unaudited), we entered into a lease agreement for 148,704 square feet of office space located in San Jose. The lease is for a period of approximately 11 years and is anticipated to begin on or around March 1, 2013. Rent will be paid on a monthly basis and will increase incrementally over the term of the lease for total minimum lease payments of approximately $48.8 million.
Legal Proceedings
From time to time, we are party to litigation and other legal proceedings in the ordinary course of business. While the results of any litigation or other legal proceedings are uncertain, management does not believe the ultimate resolution of any pending legal matters is likely to have a material adverse effect on our financial position, results of operations or cash flows, except for those matters for which we have recorded a loss contingency. We accrue for loss contingencies when it is both probable that we will incur the loss and when the amount of the loss can be reasonably estimated.
Generally, our subscription agreements require us to indemnify our customers for third-party intellectual property infringement claims. Any adverse determination related to intellectual property claims or litigation could prevent us from offering our service and adversely affect our financial condition and results of operations.
(17) Information about Geographic Areas
Revenues by geographic area, based on the billing location of the customer, were as follows for the periods presented (in thousands):
Fiscal Year Ended June 30, |
Six Months Ended
December 31, |
Nine Months Ended
September 30, |
||||||||||||||||||||||||||
2009 | 2010 | 2011 | 2010 | 2011 | 2011 | 2012 | ||||||||||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||||||||||||||
Revenues by geography |
||||||||||||||||||||||||||||
North America |
$ | 14,062 | $ | 31,396 | $ | 69,333 | $ | 27,919 | $ | 51,901 | $ | 65,929 | $ | 120,124 | ||||||||||||||
Europe |
5,018 | 10,708 | 20,093 | 8,693 | 18,842 | 21,856 | 42,027 | |||||||||||||||||||||
Asia Pacific and other |
235 | 1,225 | 3,215 | 1,332 | 2,632 | 1,109 | 6,399 | |||||||||||||||||||||
|
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|
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|
|
|||||||||||||||
Total revenues |
$ | 19,315 | $ | 43,329 | $ | 92,641 | $ | 37,944 | $ | 73,375 | $ | 88,894 | $ | 168,550 | ||||||||||||||
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F-37
SERVICENOW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Long-lived assets by geographic area were as follows (in thousands):
June 30, |
December 31,
2011 |
September 30,
2012 |
||||||||||||||
2010 | 2011 | |||||||||||||||
(Unaudited) | ||||||||||||||||
Long-lived assets: |
||||||||||||||||
North America |
$ | 1,013 | $ | 7,859 | $ | 15,820 | $ | 28,561 | ||||||||
Europe |
500 | 1,391 | 4,537 | 9,320 | ||||||||||||
Asia Pacific and other |
185 | 217 | 338 | 1,205 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total long-lived assets |
$ | 1,698 | $ | 9,467 | $ | 20,695 | $ | 39,086 | ||||||||
|
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|
|
(18) Subsequent Events
On February 21, 2012, we issued and sold 1,750,980 shares of common stock at a price of $10.20 per share for gross proceeds of $17.9 million in a private placement with a new stockholder. As part of this private placement, our founder sold 700,000 shares of common stock at the same price per share to this new stockholder.
On February 24, 2012, our founder repaid $5.3 million to settle the outstanding receivable for withholding taxes associated with the sale of Series C and Series D preferred stock.
On March 27, 2012, we repurchased and subsequently cancelled 100,000 shares of common stock at a price of $10.00 per share from a former employee.
From January 1 through March 30, 2012, we granted stock options under our 2005 Stock Plan to certain employees and directors to purchase 2,959,500 shares of common stock, having exercise prices ranging from $6.50 to $10.35 per share. Additionally, we granted RSUs under our 2005 Stock Plan to Frederic B. Luddy to purchase 1,000,000 shares of common stock. The RSUs vest annually over a four year period.
In April and May 2012, we repurchased and subsequently cancelled 42,498 and 35,000 shares of common stock, respectively, at a price of $11.50 per share from former employees.
In April and May 2012, we granted stock options under our 2005 Stock Plan to certain employees to purchase 793,000 shares with an exercise price of $11.00 per share and 799,750 shares with an exercise price of $12.45 per share, respectively.
On April 27, 2012, our board of directors approved the Restated Certificate of Incorporation, Restated Bylaws, 2012 Equity Incentive Plan and the 2012 Employee Stock Purchase Plan, each to become effective in connection with the IPO.
In May 2012, we reincorporated into Delaware as ServiceNow, Inc.
(19) Subsequent Events (Unaudited)
On November 8, 2012, we entered into a lease agreement for 148,704 square feet of office space located in San Jose. The lease is for a period of approximately 11 years and is anticipated to begin on or around March 1, 2013. Rent will be paid on a monthly basis and will increase incrementally over the term of the lease for total minimum lease payments of approximately $48.8 million.
F-38
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. | Other Expenses of Issuance and Distribution. |
The following table sets forth all costs and expenses, other than underwriting discounts and commissions, paid or payable by us in connection with the sale of the common stock being registered. All amounts shown are estimates except for the SEC registration fee and the FINRA filing fee and:
Amount
|
|||||
SEC registration fee |
$ | 58,000 | |||
FINRA filing fee |
65,000 | ||||
Printing and engraving expenses |
200,000 | ||||
Legal fees and expenses |
400,000 | ||||
Accounting fees and expenses |
160,000 | ||||
Transfer agent and registrar fees and expenses |
8,000 | ||||
Miscellaneous expenses |
209,000 | ||||
|
|
||||
Total |
$ | 1,100,000 | |||
|
|
Item 14. | Indemnification of Directors and Officers. |
Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporations board of directors to grant, indemnity to directors and officers under certain circumstances and subject to certain limitations. The terms of Section 145 of the Delaware General Corporation Law are sufficiently broad to permit indemnification under certain circumstances for liabilities, including reimbursement of expenses incurred, arising under the Securities Act of 1933, as amended, or the Securities Act.
As permitted by the Delaware General Corporation Law, the Registrants restated certificate of incorporation contains provisions that eliminate the personal liability of its directors for monetary damages for any breach of fiduciary duties as a director, except liability for the following:
|
any breach of the directors duty of loyalty to the Registrant or its stockholders; |
|
acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; |
|
under Section 174 of the Delaware General Corporation Law (regarding unlawful dividends and stock purchases); or |
|
any transaction from which the director derived an improper personal benefit. |
As permitted by the Delaware General Corporation Law, the Registrants restated bylaws provide that:
|
the Registrant is required to indemnify its directors and executive officers to the fullest extent permitted by the Delaware General Corporation Law, subject to very limited exceptions; |
|
the Registrant may indemnify its other employees and agents as set forth in the Delaware General Corporation Law; |
|
the Registrant is required to advance expenses, as incurred, to its directors and executive officers in connection with a legal proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to very limited exceptions; and |
|
the rights conferred in the restated bylaws are not exclusive. |
II-1
The Registrant has entered into indemnification agreements with each of its current directors and executive officers to provide these directors and executive officers additional contractual assurances regarding the scope of the indemnification set forth in the Registrants restated certificate of incorporation and restated bylaws and to provide additional procedural protections. There is no pending litigation or proceeding involving a director or executive officer of the Registrant for which indemnification is sought. Reference is also made to Section 11 of the underwriting agreement to be filed as Exhibit 1.1 to this registration statement, which provides for the indemnification of executive officers, directors and controlling persons of the Registrant against certain liabilities. The indemnification provisions in the Registrants restated certificate of incorporation, restated bylaws and the indemnification agreements entered into or to be entered into between the Registrant and each of its directors and executive officers may be sufficiently broad to permit indemnification of the Registrants directors and executive officers for liabilities arising under the Securities Act.
The Registrant currently carries liability insurance for its directors and officers.
Three of Registrants directors (Paul V. Barber, Douglas M. Leone and Charles E. Noell, III) are also indemnified by their employers and certain other entities affiliated with their employers with regard to their service on the Registrants board of directors.
Reference is made to the following documents filed as exhibits to this Registration Statement regarding relevant indemnification provisions described above and elsewhere herein:
Exhibit Document |
Number | |||
Form of Underwriting Agreement. |
1.1 | |||
Restated Certificate of Incorporation. |
3.1 | |||
Restated Bylaws. |
3.2 | |||
Third Amended and Restated Investors Rights Agreement dated November 25, 2009 among the Registrant and certain of its stockholders, as amended. |
4.2 | |||
Form of Indemnification Agreement. |
10.1 |
Item 15. | Recent Sales of Unregistered Securities. |
Since October 31, 2009 through the date of this registration statement, the Registrant has issued and sold the following unregistered securities:
(1) From October 31, 2009 to June 28, 2012, we granted stock options under our equity incentive plans to purchase 37,187,387 shares of common stock (net of expirations, forfeitures and cancellations) to our employees, directors and consultants, having exercise prices ranging from $1.00 to $18.00 per share, as well as 1,032,304 RSUs to our employees under our equity incentive plans. Of these, options to purchase 2,718,327 shares of common stock have been exercised through June 28, 2012 for aggregate consideration of $5,700,994, at exercise prices ranging from $1.00 to $9.40 per share.
(2) In November 2009, we entered into a Series D Preferred Stock Purchase Agreement pursuant to which we issued and sold to accredited investors in multiple closings an aggregate of 2,990,635 shares of Series D preferred stock, at a purchase price of $17.267333 per share, for aggregate consideration of $51,640,290. These shares converted into 23,925,080 shares of common stock upon the closing of our initial public offering.
(3) In February 2012, we entered into a Common Stock Purchase Agreement pursuant to which we issued and sold to accredited investors an aggregate of 1,750,980 shares of common stock, at a purchase price of $10.20 per share, for aggregate consideration of $17,859,996.
The offers, sales and issuances of the securities described in paragraph (1) were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act or Rule 701 promulgated under the Securities Act. The recipients of such securities were our employees, directors or bona fide consultants
II-2
and received the securities under our 2005 Stock Plan. Appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions had adequate access, through employment, business or other relationships, to information about us.
The offers, sales and issuances of the securities described in paragraphs (2) and (3) were deemed to be exempt from registration under the Securities Act in reliance on Rule 506 of Regulation D in that the issuance of securities to the accredited investors did not involve a public offering. The recipients of securities in each of these transactions acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions was an accredited investor under Rule 501 of Regulation D.
II-3
Item 16. | Exhibits and Financial Statement Schedules. |
(a) Exhibits.
The list of exhibits filed with this registration statement is set forth in the Exhibit Index following the signature pages and is incorporated herein by reference.
Exhibit
|
Description of Document |
Incorporated by Reference |
Filed
Herewith |
|||||||||
Form | File No. | Exhibit |
Filing
Date |
|||||||||
1.1 | Form of Underwriting Agreement. | x | ||||||||||
3.1 | Restated Certificate of Incorporation. | 10-Q | 001-35580 | 3.1 | 8/10/12 | |||||||
3.2 | Restated Bylaws. | S-1 | 333-180486 | 3.4 | 5/4/12 | |||||||
4.1 | Form of Common Stock Certificate. | S-1 | 333-180486 | 4.1 | 6/19/12 | |||||||
4.2 | Third Amended and Restated Investors Rights Agreement dated November 25, 2009 among the Registrant and certain of its stockholders, as amended. | S-1 | 333-180486 | 4.2 | 3/30/12 | |||||||
5.1 | Opinion of Fenwick & West LLP. | x | ||||||||||
10.1 | Form of Indemnification Agreement. | S-1 | 333-180486 | 10.1 | 6/19/12 | |||||||
10.2 | 2005 Stock Plan, Forms of Stock Option Agreement and Form of Restricted Stock Unit Agreement thereunder. | S-1 | 333-180486 | 10.2 | 3/30/12 | |||||||
10.3 | 2012 Equity Incentive Plan, Forms of Stock Option Award Agreement, Restricted Stock Agreement, Stock Appreciation Right Award Agreement and Restricted Stock Unit Award Agreement thereunder. | S-1 | 333-180486 | 10.3 | 6/19/12 | |||||||
10.4 | 2012 Employee Stock Purchase Plan and Form of Subscription Agreement thereunder. | S-1 | 333-180486 | 10.4 | 6/19/12 | |||||||
10.5 | Employment Agreement dated May 2, 2011 among the Registrant and Frank Slootman. | S-1 | 333-180486 | 10.5 | 3/30/12 | |||||||
10.6 | Employment Agreement dated May 12, 2011 among the Registrant and Michael P. Scarpelli. | S-1 | 333-180486 | 10.6 | 3/30/12 | |||||||
10.7 | Employment Agreement dated May 21, 2011 among the Registrant and David L. Schneider. | S-1 | 333-180486 | 10.7 | 3/30/12 | |||||||
10.8 | Employment Agreement dated August 1, 2011 among the Registrant and Daniel R. McGee. | S-1 | 333-180486 | 10.8 | 3/30/12 | |||||||
10.9 | Employment Agreement dated August 15, 2011 among the Registrant and Arne Josefsberg. | S-1 | 333-180486 | 10.9 | 3/30/12 | |||||||
10.10 | Office Lease dated August 27, 2010 between the Registrant and Kilroy Realty, L.P. | S-1 | 333-180486 | 10.10 | 3/30/12 | |||||||
10.11 | Office Lease dated February 14, 2012 between the Registrant and The Irvine Company LLC. | S-1 | 333-180486 | 10.11 | 3/30/12 | |||||||
10.12 | Lease Agreement dated November 8, 2012 between the Registrant and Jay Ridge LLC. | x | ||||||||||
16.1 | Change in Certifying Accountant Letter. | S-1 | 333-184674 | 16.1 | 10/31/12 |
II-4
Exhibit
|
Description of Document |
Incorporated by Reference |
Filed
Herewith |
|||||||||
Form | File No. | Exhibit |
Filing
Date |
|||||||||
21.1 | Subsidiaries of the Registrant. | S-1 | 333-180486 | 21.1 | 3/30/12 | |||||||
23.1 | Consent of independent registered public accounting firm. | x | ||||||||||
23.2 | Consent of Fenwick & West LLP (included in Exhibit 5.1). | x | ||||||||||
24.1 | Power of Attorney. Reference is made to the signature page hereto. | S-1 | 333-184674 | 24.1 | 10/31/12 | |||||||
101.INS | XBRL Instance Document | x | ||||||||||
101.SCH | XBRL Taxonomy Schema Linkbase Document | x | ||||||||||
101.CAL | XBRL Taxonomy Calculation Linkbase Document | x | ||||||||||
101.DEF | XBRL Taxonomy Definition Linkbase Document | x | ||||||||||
101.LAB | XBRL Taxonomy Labels Linkbase Document | x | ||||||||||
101.PRE | XBRL Taxonomy Presentation Linkbase Document | x |
(b) Financial Statement Schedule.
No financial statement schedules are provided because the information called for is not required or is shown either in the financial statements or notes.
Item 17. | Undertakings. |
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, State of California, on this 9th day of November, 2012.
S ERVICE N OW , I NC . | ||
By: |
/s/ Frank Slootman |
|
Frank Slootman President and Chief Executive Officer |
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature |
Title |
Date |
||
/s/ Frank Slootman Frank Slootman |
President, Chief Executive Officer and Director (Principal Executive Officer) |
November 9, 2012 | ||
/s/ Michael P. Scarpelli Michael P. Scarpelli |
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
November 9, 2012 | ||
* Frederic B. Luddy |
Chief Product Officer and Director | November 9, 2012 | ||
* Paul V. Barber |
Director | November 9, 2012 | ||
* Ronald E. F. Codd |
Director | November 9, 2012 | ||
* Douglas M. Leone |
Director | November 9, 2012 | ||
* Jeffrey A. Miller |
Director | November 9, 2012 | ||
* Charles E. Noell, III |
Director | November 9, 2012 | ||
* William L. Strauss |
Director | November 9, 2012 |
*By: |
/s/ Michael P. Scarpelli Michael P. Scarpelli |
Attorney-in-Fact |
November 9, 2012 |
II-6
EXHIBIT INDEX
Exhibit
|
Description of Document |
Incorporated by Reference |
Filed Herewith |
|||||||||
Form |
File No. |
Exhibit |
Filing Date |
|||||||||
1.1 | Form of Underwriting Agreement. | x | ||||||||||
3.1 | Restated Certificate of Incorporation. | 10-Q | 001-35580 | 3.1 | 8/10/12 | |||||||
3.2 | Restated Bylaws. | S-1 | 333-180486 | 3.4 | 5/4/12 | |||||||
4.1 | Form of Common Stock Certificate. | S-1 | 333-180486 | 4.1 | 6/19/12 | |||||||
4.2 | Third Amended and Restated Investors Rights Agreement dated November 25, 2009 among the Registrant and certain of its stockholders, as amended. | S-1 | 333-180486 | 4.2 | 3/30/12 | |||||||
5.1 | Opinion of Fenwick & West LLP. | x | ||||||||||
10.1 | Form of Indemnification Agreement. | S-1 | 333-180486 | 10.1 | 6/19/12 | |||||||
10.2 | 2005 Stock Plan, Forms of Stock Option Agreement and Form of Restricted Stock Unit Agreement thereunder. | S-1 | 333-180486 | 10.2 | 3/30/12 | |||||||
10.3 | 2012 Equity Incentive Plan, Forms of Stock Option Award Agreement, Restricted Stock Agreement, Stock Appreciation Right Award Agreement and Restricted Stock Unit Award Agreement thereunder. | S-1 | 333-180486 | 10.3 | 6/19/12 | |||||||
10.4 | 2012 Employee Stock Purchase Plan and Form of Subscription Agreement thereunder. | S-1 | 333-180486 | 10.4 | 6/19/12 | |||||||
10.5 | Employment Agreement dated May 2, 2011 among the Registrant and Frank Slootman. | S-1 | 333-180486 | 10.5 | 3/30/12 | |||||||
10.6 | Employment Agreement dated May 12, 2011 among the Registrant and Michael P. Scarpelli. | S-1 | 333-180486 | 10.6 | 3/30/12 | |||||||
10.7 | Employment Agreement dated May 21, 2011 among the Registrant and David L. Schneider. | S-1 | 333-180486 | 10.7 | 3/30/12 | |||||||
10.8 | Employment Agreement dated August 1, 2011 among the Registrant and Daniel R. McGee. | S-1 | 333-180486 | 10.8 | 3/30/12 | |||||||
10.9 | Employment Agreement dated August 15, 2011 among the Registrant and Arne Josefsberg. | S-1 | 333-180486 | 10.9 | 3/30/12 | |||||||
10.10 | Office Lease dated August 27, 2010 between the Registrant and Kilroy Realty, L.P. | S-1 | 333-180486 | 10.10 | 3/30/12 |
II-7
Exhibit
|
Description of Document |
Incorporated by Reference |
Filed Herewith |
|||||||||
Form |
File No. |
Exhibit |
Filing Date |
|||||||||
10.11 | Office Lease dated February 14, 2012 between the Registrant and The Irvine Company LLC. | S-1 | 333-180486 | 10.11 | 3/30/12 | |||||||
10.12 | Lease Agreement dated November 8, 2012 between the Registrant and Jay Ridge LLC. | x | ||||||||||
16.1 | Change in Certifying Accountant Letter. | S-1 | 333-184674 | 16.1 | 10/31/12 | |||||||
21.1 | Subsidiaries of the Registrant. | S-1 | 333-180486 | 21.1 | 3/30/12 | |||||||
23.1 | Consent of independent registered public accounting firm. | x | ||||||||||
23.2 | Consent of Fenwick & West LLP (included in Exhibit 5.1). | x | ||||||||||
24.1 | Power of Attorney. Reference is made to the signature page hereto. | S-1 | 333-184674 | 24.1 | 10/31/12 | |||||||
101.INS | XBRL Instance Document | x | ||||||||||
101.SCH | XBRL Taxonomy Schema Linkbase Document | x | ||||||||||
101.CAL | XBRL Taxonomy Calculation Linkbase Document | x | ||||||||||
101.DEF | XBRL Taxonomy Definition Linkbase Document | x | ||||||||||
101.LAB | XBRL Taxonomy Labels Linkbase Document | x | ||||||||||
101.PRE | XBRL Taxonomy Presentation Linkbase Document | x |
II-8
Exhibit 1.1
Shares
ServiceNow, Inc.
Common Stock, $0.001 Par Value
UNDERWRITING AGREEMENT
, 2012
, 2012
Morgan Stanley & Co. LLC
Citigroup Global Markets, Inc.
Deutsche Bank Securities Inc.
Barclays Capital Inc.
Credit Suisse Securities (USA) LLC
UBS Securities LLC
c/o Morgan Stanley & Co. LLC
1585 Broadway
New York, New York 10036
Ladies and Gentlemen:
ServiceNow, Inc., a Delaware corporation (the Company ), proposes to issue and sell to the several Underwriters named in Schedule II hereto (the Underwriters ), and certain stockholders of the Company (the Selling Stockholders ) named in Schedule I hereto severally propose to sell to the several Underwriters, an aggregate of shares of the Common Stock, $0.001 par value per share of the Company (the Firm Shares ), of which shares are to be issued and sold by the Company and shares are to be sold by the Selling Stockholders, each Selling Stockholder selling the amount set forth opposite such Selling Stockholders name in Schedule I hereto.
The Company and the Selling Stockholders also propose to issue and sell to the several Underwriters not more than an additional shares of its Common Stock, $0.001 par value per share (the Additional Shares ) if and to the extent that you, as Managers of the offering, shall have determined to exercise, on behalf of the Underwriters, the right to purchase such shares of common stock granted to the Underwriters in Section 3 hereof. Up to of the Additional Shares are to be issued and sold by the Company and of the Additional Shares are to be issued and sold by the Selling Stockholders, in the amounts set forth opposite such Selling Stockholders name in Schedule I hereto under the column titled Additional Shares. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the Shares . The shares of Common Stock, $0.001 par value of the Company to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the Common Stock . The Company and the Selling Stockholders are hereinafter sometimes collectively referred to as the Sellers .
The Company has filed with the Securities and Exchange Commission (the Commission ) a registration statement, including a prospectus, relating to
1
the Shares. The registration statement as amended at the time it becomes effective, including the information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Securities Act of 1933, as amended (the Securities Act ), is hereinafter referred to as the Registration Statement ; the prospectus in the form first used to confirm sales of Shares (or in the form first made available to the Underwriters by the Company to meet requests of purchasers pursuant to Rule 173 under the Securities Act) is hereinafter referred to as the Prospectus . If the Company has filed an abbreviated registration statement to register additional shares of Common Stock pursuant to Rule 462(b) under the Securities Act (the Rule 462 Registration Statement ), then any reference herein to the term Registration Statement shall be deemed to include such Rule 462 Registration Statement.
For purposes of this Agreement, free writing prospectus has the meaning set forth in Rule 405 under the Securities Act, Time of Sale Prospectus means the preliminary prospectus together with the documents and pricing information set forth in Schedule III hereto, and broadly available road show means a bona fide electronic road show as defined in Rule 433(h)(5) under the Securities Act that has been made available without restriction to any person. As used herein, the terms Registration Statement, preliminary prospectus, Time of Sale Prospectus and Prospectus shall include the documents, if any, incorporated by reference therein as of the date hereof.
1. Representations and Warranties of the Company . The Company represents and warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or, to the Companys knowledge, threatened by the Commission.
(b) The Registration Statement, when it became effective, did not contain and, as amended or supplemented, if applicable, will not contain, as of the date of such amendment or supplement, any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (i) the Registration Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder, (ii) the Time of Sale Prospectus does not, and at the time of each sale of the Shares in connection with the offering when the Prospectus is not yet available to prospective purchasers and at the Closing Date (as defined in Section 5), the Time of Sale Prospectus, as then amended or supplemented by the Company, if applicable, will not, contain any
untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, (iii) each broadly available road show, if any, when considered together with the Time of Sale Prospectus, does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading and (iv) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain, as of its date and as of the Closing Date, any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in the Registration Statement, the Time of Sale Prospectus or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein.
(c) The Company is not an ineligible issuer in connection with the offering pursuant to Rules 164, 405 and 433 under the Securities Act. Any free writing prospectus that the Company is required to file pursuant to Rule 433(d) under the Securities Act has been, or will be, filed with the Commission in accordance with the requirements of the Securities Act and the applicable rules and regulations of the Commission thereunder. Each free writing prospectus that the Company has filed, or is required to file, pursuant to Rule 433(d) under the Securities Act or that was prepared by or on behalf of or used or referred to by the Company complies or will comply in all material respects with the requirements of the Securities Act and the applicable rules and regulations of the Commission thereunder. Except for the free writing prospectuses, if any, identified in Schedule III hereto, and electronic road shows, if any, each furnished to you before first use, the Company has not prepared, used or referred to, and will not, without your prior consent, prepare, use or refer to, any free writing prospectus.
(d) The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own or lease its property and to conduct its business as described in the Time of Sale Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole.
(e) Each subsidiary of the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Time of Sale Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole; all of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and are owned directly by the Company, free and clear of all liens, encumbrances, equities or claims.
(f) This Agreement has been duly authorized, executed and delivered by the Company.
(g) The authorized capital stock of the Company conforms to the description thereof contained in each of the Time of Sale Prospectus and the Prospectus.
(h) The shares of Common Stock (including the Shares to be sold by the Selling Stockholders) outstanding prior to the issuance of the Shares to be sold by the Company have been duly authorized and are validly issued, fully paid and non-assessable.
(i) The Shares to be sold by the Company have been duly authorized and, when issued and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights.
(j) With respect to the stock options granted pursuant to the stock-based compensation plans of the Company and its subsidiaries (the Company Stock Plans), (i) each grant of a stock option was duly authorized no later than the date on which the grant of such stock option was by its terms to be effective by all necessary corporate action, including, as applicable, approval by the board of directors of the Company (or a duly constituted and authorized committee thereof) and any required stockholder approval by the necessary number of votes or written consents, and the award agreement governing such grant (if any) was duly executed and delivered by each party thereto, and (ii) each such grant was made in accordance with the terms of the Company Stock Plans, and all applicable laws and regulatory rules or requirements, including all applicable federal securities laws.
(k) The execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement will not contravene any provision of (i) applicable law, (ii) the certificate of incorporation
or bylaws of the Company, (iii) any agreement or other instrument binding upon the Company or any of its subsidiaries that is material to the Company and its subsidiaries, taken as a whole, or (iv) any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company or any subsidiary, except that in the case of clauses (i) and (iv) as would not, individually or in the aggregate, have a material adverse effect on the Company or on the power and ability of the Company to perform its obligations under this Agreement; and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by the Company of its obligations under this Agreement, except such as may be required by the securities or Blue Sky laws of the various states or the rules and regulations of the Financial Industry Regulatory Authority (FINRA) in connection with the offer and sale of the Shares.
(l) There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, from that set forth in the Time of Sale Prospectus.
(m) The Company is not (i) in violation of its charter or bylaws or similar organizational documents; (ii) in default, and no event has occurred that, with notice or lapse of time or both, would constitute such a default, in the due performance or observance of any term, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company is subject; or (iii), to its knowledge, in violation of any law or statute or any judgment, order, rule or regulation of any court or arbitrator or governmental or regulatory authority, except, in the case of clauses (ii) and (iii) above, for any such default or violation that would not, individually or in the aggregate, have a material adverse effect on the Company and its subsidiaries, taken as a whole.
(n) There are no legal or governmental proceedings pending or, to the knowledge of the Company, threatened to which the Company or any of its subsidiaries is a party or to which any of the properties of the Company or any of its subsidiaries is subject (i) other than proceedings accurately described in all material respects in the Time of Sale Prospectus and proceedings that would not have a material adverse effect on the Company and its subsidiaries, taken as a whole, or on the power or ability of the Company to perform its obligations under this Agreement or to consummate the transactions contemplated by the Time of Sale Prospectus or (ii) that are required to be described in the Registration Statement or the Prospectus and are not so described in all material respects; and
there are no statutes, regulations, contracts or other documents to which the Company is subject or by which the Company is bound that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described in all material respects or filed as required.
(o) Each preliminary prospectus filed as part of the registration statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Securities Act, complied when so filed in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder.
(p) The Company is not, and after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus will not be, required to register as an investment company as such term is defined in the Investment Company Act of 1940, as amended.
(q) The Company and its subsidiaries b) are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ( Environmental Laws ), c) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and d) are in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on the Company and its subsidiaries, taken as a whole.
(r) There are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties) which would, singly or in the aggregate, have a material adverse effect on the Company and its subsidiaries, taken as a whole.
(s) Except as described in the Time of Sale Prospectus and the Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement.
(t) Neither the Company nor any of its subsidiaries or controlled affiliates, nor any director or officer, thereof, nor, to the Companys knowledge, any employee, agent or representative of the Company or of any of its subsidiaries or controlled affiliates, has taken or will take any action in furtherance of an offer, payment, promise to pay, or authorization or approval of the payment or giving of money, property, gifts or anything else of value, directly or indirectly, to any government official (including any officer or employee of a government or government-owned or controlled entity or of a public international organization, or any person acting in an official capacity for or on behalf of any of the foregoing, or any political party or party official or candidate for political office) to influence official action or secure an improper advantage; and the Company and its subsidiaries and affiliates have conducted their businesses in material compliance with applicable anti-corruption laws and have instituted and maintain and will continue to maintain policies and procedures designed to promote and achieve compliance with such laws and with the representation and warranty contained herein.
(u) The operations of the Company and its subsidiaries are and have been conducted at all times in material compliance with all applicable financial recordkeeping and reporting requirements, including those of the Bank Secrecy Act, as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), and the applicable anti-money laundering statutes of jurisdictions where the Company and its subsidiaries conduct business, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the Anti-Money Laundering Laws ), and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its subsidiaries with respect to the Anti-Money Laundering Laws is pending or, to the best knowledge of the Company, threatened.
(v) (i) Neither the Company nor any of its subsidiaries, nor any director, or officer thereof, nor, to the Companys knowledge, any employee, agent, controlled affiliate or representative of the Company or any of its subsidiaries, is an individual or entity ( Person ) that is, or is owned or controlled by a Person that is:
(A) the subject of any sanctions administered or enforced by the U.S. Department of Treasurys Office of Foreign Assets
Control ( OFAC ) , the United Nations Security Council ( UNSC ), the European Union ( EU ), Her Majestys Treasury ( HMT ), or other relevant sanctions authority (collectively, Sanctions ), nor
(B) located, organized or resident in a country or territory that is the subject of Sanctions (including, without limitation, Burma/Myanmar, Cuba, Iran, Libya, North Korea, Sudan and Syria).
(ii) The Company will not, directly or indirectly, use the proceeds of the offering, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other Person:
(A) to fund or facilitate any activities or business of or with any Person or in any country or territory that, at the time of such funding or facilitation, is the subject of Sanctions; or
(B) in any other manner that will result in a violation of Sanctions by any Person (including any Person participating in the offering, whether as underwriter, advisor, investor or otherwise).
(iii) For the past 5 years, the Company and its subsidiaries have not knowingly engaged in, are not now knowingly engaged in, and will not engage in, any dealings or transactions with any Person, or in any country or territory, that at the time of the dealing or transaction is or was the subject of Sanctions.
(w) Subsequent to the respective dates as of which information is given in each of the Registration Statement, the Time of Sale Prospectus and the Prospectus, e) the Company and its subsidiaries have not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction; (i) the Company has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock other than ordinary and customary dividends; and (ii) there has not been any material change in the capital stock, short-term debt or long-term debt of the Company and its subsidiaries, except in each case as described in each of the Registration Statement, the Time of Sale Prospectus and the Prospectus, respectively.
(x) The Company and its subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and its subsidiaries, in each case free and clear of all liens, encumbrances and defects
except such as are described in the Time of Sale Prospectus or such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and its subsidiaries; and any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries, in each case except as described in the Time of Sale Prospectus.
(y) The Company and its subsidiaries own or possess, or can acquire on reasonable terms, all material patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names currently employed by them in connection with the business now operated by them, and neither the Company nor any of its subsidiaries has received any notice of any claims, action, suit or proceeding of infringement of or conflict with asserted rights of others with respect to any of the foregoing which claims, action, suit or proceeding singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect on the Company and its subsidiaries, taken as a whole.
(z) No material labor dispute with the employees of the Company or any of its subsidiaries exists, except as described in the Time of Sale Prospectus, or, to the knowledge of the Company, is imminent; and the Company is not aware of any existing, threatened or imminent labor disturbance by the employees of any of its principal suppliers, manufacturers or contractors that could have a material adverse effect on the Company and its subsidiaries, taken as a whole.
(aa) The Company and each of its subsidiaries have complied, and are presently in compliance, in all material respects, with its privacy policies and third-party obligations regarding the collection, use, transfer, storage, protection, disposal and disclosure by the Company and its subsidiaries of personally identifiable information.
(bb) The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are, in the reasonable judgment of the Company, prudent and customary in the businesses in which they are engaged; neither the Company nor any of its subsidiaries has been refused any insurance coverage sought or applied for; and neither the Company nor any of its subsidiaries has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not have a material adverse effect on the Company and its subsidiaries, taken as a whole, except as described in the Time of Sale Prospectus.
(cc) The Company and its subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, except where the failure to obtain such certificates, authorizations and permits would not, individually or in the aggregate, be reasonably likely to have a material adverse effect on the Company and its subsidiaries, taken as a whole, and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect on the Company and its subsidiaries, taken as a whole, except as described in the Time of Sale Prospectus.
(dd) The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with managements general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with managements general or specific authorization; (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences; and (v) the interactive data in eXtensible Business Reporting Language included in the Registration Statement is accurate. Except as described in the Time of Sale Prospectus, since the end of the Companys most recent audited fiscal year, there has been (i) no material weakness in the Companys internal control over financial reporting (whether or not remediated) and (ii) no change in the Companys internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
(ee) Except as described in the Time of Sale Prospectus, the Company has not sold, issued or distributed any shares of Common Stock during the six-month period preceding the date hereof, including any sales pursuant to Rule 144A under, or Regulation D or S of, the Securities Act, other than shares issued pursuant to employee benefit plans, qualified stock option plans or other employee compensation plans or pursuant to outstanding options, rights or warrants.
(ff) The Company and each of its subsidiaries have filed all federal, state, local and foreign tax returns required to be filed through the date of this Agreement or have requested extensions thereof (except where the failure to file would not, individually or in the aggregate, have a material adverse effect) and have paid all taxes required to be paid thereon (except for cases in which the failure to file or pay would not have a material adverse effect, or, except as currently being contested in good faith and for which reserves required by U.S. GAAP have been created in the financial statements of the Company), and no tax deficiency has been determined adversely to the Company or any of its subsidiaries which has had (nor does the Company nor any of its subsidiaries have any notice or knowledge of any tax deficiency which could reasonably be expected to be determined adversely to the Company or its subsidiaries and which could reasonably be expected to have) a material adverse effect.
(gg) From April 5, 2012 through the date hereof, the Company has been and is an emerging growth company, as defined in Section 2(a) of the Securities Act (an Emerging Growth Company ).
(hh) The Company (i) has not engaged in any Testing-the-Waters Communication with entities that are qualified institutional buyers within the meaning of Rule 144A under the Securities Act or institutions that are accredited investors within the meaning of Rule 501 under the Securities Act and (ii) has not authorized anyone to engage in Testing-the-Waters Communications. The Company has not distributed any Written Testing-the-Waters Communications. Testing-the-Waters Communication means any oral or written communication with potential investors undertaken in reliance on Section 5(d) of the Securities Act. Written Testing-the-Waters Communication means any Testing-the-Waters Communication that is a written communication within the meaning of Rule 405 under the Securities Act.
(ii) Nothing has come to the attention of the Company that has caused the Company to believe that the statistical and market-related data included in the Registration Statement, the Time of Sale Prospectus and the Prospectus is not based on or derived from sources that are reliable and accurate in all material respects.
(jj) The Company has not taken, directly or indirectly, any action designed to or that would reasonably be expected to cause or result in any stabilization or manipulation of the price of the Shares.
(kk) Lock-up agreements between the Company and each of the Selling Stockholders relating to sales and certain other dispositions of shares of Common Stock or certain other securities are in full force and effect as of the date hereof and shall be in full force and effect as of the Closing Date.
(ll) The interactive data in eXtensible Business Reporting Language included in the Registration Statement fairly presents the information called for in all material respects and has been prepared in accordance with the Commissions rules and guidelines applicable thereto.
2. Representations and Warranties of the Selling Stockholders . Each Selling Stockholder, solely with respect to itself and not as to any other Selling Stockholder, represents and warrants to and agrees with each of the Underwriters that:
(a) This Agreement has been duly authorized, executed and delivered by or on behalf of such Selling Stockholder.
(b) The execution and delivery by such Selling Stockholder of, and the performance by such Selling Stockholder of its obligations under, this Agreement, the Custody Agreement signed by such Selling Stockholder and Computershare Trust Company, N.A., as Custodian, relating to the deposit of the Shares to be sold by such Selling Stockholder (the Custody Agreement ) and the Power of Attorney appointing certain individuals as such Selling Stockholders attorneys-in-fact to the extent set forth therein, relating to the transactions contemplated hereby and by the Registration Statement (the Power of Attorney ) will not contravene any provision of (i) applicable law (provided no representation is made with respect to compliance with federal, state or other applicable securities or antifraud laws (collectively, Securities Laws)), (ii) the certificate of incorporation or by-laws or similar organizational documents of such Selling Stockholder (if such Selling Stockholder is a corporation, limited liability company, partnership or other similar entity), (iii) any agreement or other instrument binding upon such Selling Stockholder or (iv) any judgment, order or decree of any governmental body, agency or court having jurisdiction over such Selling Stockholder, except in the case of clauses (i), (iii) and (iv) as would not, individually or in the aggregate, have a material adverse effect on the ability of the Selling Stockholder to consummate the transactions contemplated by this Agreement, the Custody Agreement and the Power of Attorney; and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by such Selling Stockholder of its obligations under this Agreement or the Custody Agreement or Power of Attorney of such Selling Stockholder, except such as may be required under the Securities Laws in connection with the offer and sale of the Shares, and except for such consents, approvals, authorizations, orders, or qualifications as would not, individually or in the aggregate, have a material adverse effect on the ability of the Selling Stockholder to consummate the transactions contemplated by this Agreement, the Custody Agreement and the Power of Attorney.
(c) With respect to any Shares to be sold by such Selling Stockholder that are outstanding on the date hereof, such Selling Stockholder has, and with respect to such Shares and any Additional Shares to be sold by such Selling Stockholder upon the exercise of options, on each Closing Date, such Selling Stockholder has or will have fully paid for such Shares, will have, valid title to, or a valid security entitlement within the meaning of Section 8-501 of the New York Uniform Commercial Code (the UCC ) in respect of, such Shares free and clear of all security interests, claims, liens, equities or other encumbrances and the legal right and power, and all authorization and approval required by law, to enter into this Agreement, the Custody Agreement and the Power of Attorney and to sell, transfer and deliver the Shares to be sold by such Selling Stockholder or a security entitlement in respect of such Shares.
(d) The Custody Agreement and the Power of Attorney have been duly authorized, executed and delivered by such Selling Stockholder and are valid and binding agreements of such Selling Stockholder, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors rights and to general equity principles.
(e) Upon payment for the Shares to be sold by such Selling Stockholder pursuant to this Agreement, delivery of such Shares, as directed by the Underwriters, to Cede & Co. ( Cede ) or such other nominee as may be designated by the Depository Trust Company ( DTC ), registration of such Shares in the name of Cede or such other nominee and the crediting of such Shares on the books of DTC to securities accounts of the Underwriters (assuming that neither DTC nor any such Underwriter has notice of any adverse claim (within the meaning of Section 8-105 of the UCC to such Shares), (A) DTC shall be a protected purchaser of such Shares within the meaning of Section 8-303 of the UCC, (B) under Section 8-501 of the UCC, the Underwriters will acquire a valid security entitlement in respect of such Shares and (C) no action based on any adverse claim, within the meaning of Section 8-102 of the UCC, to such Shares may be asserted against the Underwriters with respect to such security entitlement; for purposes of this representation, such Selling Stockholder may assume that when such payment, delivery and crediting occur, (x) such Shares will have been registered in the name of Cede or another nominee designated by DTC, in each case on the Companys share registry in accordance with its certificate of incorporation, bylaws and applicable law, (y) DTC will be registered as a clearing corporation within the meaning of Section 8-102 of the UCC and (z) appropriate entries to the accounts of the several Underwriters on the records of DTC will have been made pursuant to the UCC.
(f) Except as disclosed in the Time of Sale Prospectus, there are no contracts, agreements or understandings between such Selling Stockholder and any person that would give rise to a valid claim against such Selling Stockholder or any Underwriter for a brokerage commission, finders fee or other like payment in connection with the offer and sale of the Shares.
(g) Such Selling Stockholder has not distributed and will not distribute any prospectus or other offering material in connection with the offer and sale of the Shares.
(h) Such Selling Stockholder has executed a lock-up agreement, in the form acceptable to Morgan Stanley & Co. LLC, relating to sales and certain other dispositions of shares of Common Stock or certain other securities, that is in full force and effect as of the date hereof and shall be in full force and effect as of the Closing Date.
(i) Such Selling Stockholder is not prompted to sell its Shares pursuant to this Agreement by any material information concerning the Company or its subsidiaries which is not set forth in the Time of Sale Prospectus.
(j) (1) The Registration Statement, when it became effective, did not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (2) the Time of Sale Prospectus does not, and at the time of each sale of the Shares in connection with the offering when the Prospectus is not yet available to prospective purchasers and at the Closing Date (as defined in Section 5), the Time of Sale Prospectus, as then amended or supplemented by the Company, if applicable, will not, contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, (3) each broadly available road show, if any, when considered together with the Time of Sale Prospectus, does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading and (4) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, provided that all of the representations and warranties set forth in this paragraph 2(j) are limited exclusively to statements
or omissions of material facts made in reliance upon and in conformity with information relating to such Selling Stockholder furnished in writing by or on behalf of such Selling Stockholder expressly for use in the Registration Statement, the Time of Sale Prospectus, any broadly available road show, the Prospectus or any amendments or supplements thereto, taking into account any written updates to such information provided by such Selling Stockholder prior to the date of the Time of Sale Prospectus, it being understood and agreed that the only information furnished by or on behalf of such Selling Stockholder consists of the name of such Selling Stockholder, the number of offered Shares and the address and other information with respect to such Selling Stockholder (excluding percentages) that appear in the table (and corresponding footnotes) under the caption Principal and Selling Stockholders in the Prospectus and information regarding the proposed contribution of shares of Common Stock set forth under the caption Shares Eligible for Future SaleLock-Up Agreements in the Prospectus (the Selling Stockholder Information ).
3. Agreements to Sell and Purchase . Each Seller, severally and not jointly, hereby agrees to sell to the several Underwriters, and each Underwriter, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agrees, severally and not jointly, to purchase from such Seller at $ a share (the Purchase Price ) the number of Firm Shares (subject to such adjustments to eliminate fractional shares as you may determine) that bears the same proportion to the number of Firm Shares to be sold by such Seller as the number of Firm Shares set forth in Schedule II hereto opposite the name of such Underwriter bears to the total number of Firm Shares.
On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Sellers agree to sell to the Underwriters the Additional Shares, and the Underwriters shall have the right to purchase, severally and not jointly, up to Additional Shares at the Purchase Price, provided, however, that the amount paid by the Underwriters for any Additional Shares shall be reduced by an amount per share equal to any dividends declared by the Company and payable on the Firm Shares but not payable on such Additional Shares. You may exercise this right on behalf of the Underwriters in whole or from time to time in part by giving written notice not later than 30 days after the date of this Agreement. Any exercise notice shall specify the number of Additional Shares to be purchased by the Underwriters and the date on which such shares are to be purchased. Each purchase date must be at least one business day after the written notice is given and may not be earlier than the closing date for the Firm Shares or later than ten business days after the date of such notice. Additional Shares may be purchased as provided in Section 5 hereof solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. On each day, if any, that Additional Shares are to
be purchased (an Option Closing Date ), each Underwriter agrees, severally and not jointly, to purchase the number of Additional Shares (subject to such adjustments to eliminate fractional shares as you may determine) that bears the same proportion to the total number of Additional Shares to be purchased on such Option Closing Date as the number of Firm Shares set forth in Schedule II hereto opposite the name of such Underwriter bears to the total number of Firm Shares.
The Company hereby agrees that, without the prior written consent of Morgan Stanley & Co. LLC on behalf of the Underwriters, it will not, during the period ending 90 days after the date of the Prospectus, (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any other securities convertible into or exercisable or exchangeable for Common Stock or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise or (3) file any registration statement with the Commission relating to the offering of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock.
The restrictions contained in the preceding paragraph shall not apply to (i) the Shares to be sold hereunder, (ii) the issuance by the Company of shares of Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof and disclosed in the Time of Sale Prospectus and the Prospectus, (iii) the issuance by the Company of shares of, or options to purchase shares of, Common Stock or restricted stock units to employees, officers, directors, advisors or consultants of the Company pursuant to employee benefit plans described in the Time of Sale Prospectus and Prospectus, (iv) the filing by the Company of registration statements on Form S-8 with respect to the employee benefit plans described in the Time of Sale Prospectus and Prospectus, or (v) the sale or issuance of or entry into an agreement to sell or issue shares of Common Stock in connection with the Companys acquisition of one or more businesses, products or technologies (whether by means of merger, stock purchase, asset purchase or otherwise) or in connection with joint ventures, commercial relationships or other strategic transactions; provided, that, the aggregate number of shares of Common Stock that the Company may sell or issue or agree to sell or issue pursuant to this clause (v) shall not exceed 5% of the total number of shares of Common Stock issued and outstanding immediately following the completion of the transactions contemplated by this Agreement and provided further that the Company shall cause each recipient of such shares to execute and deliver to you, on or prior to such issuance, a lock up agreement, substantially in the form executed by the Selling Stockholders.
4. Terms of Public Offering . The Sellers are advised by you that the Underwriters propose to make a public offering of their respective portions of the Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable. The Sellers are further advised by you that the Shares are to be offered to the public initially at $ a share (the Public Offering Price ) and to certain dealers selected by you at a price that represents a concession not in excess of $ a share under the Public Offering Price.
5. Payment and Delivery . Payment for the Firm Shares to be sold by each Seller shall be made to such Seller in Federal or other funds immediately available in New York City against delivery of such Firm Shares for the respective accounts of the several Underwriters at 10:00 a.m., New York City time, on , 2012, or at such other time on the same or such other date, not later than , 2012, as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the Closing Date .
Payment for any Additional Shares shall be made to the Company in Federal or other funds immediately available in New York City against delivery of such Additional Shares for the respective accounts of the several Underwriters at 10:00 a.m., New York City time, on the date specified in the corresponding notice described in Section 3 or at such other time on the same or on such other date, in any event not later than , 2012, as shall be designated in writing by you.
The Firm Shares and Additional Shares shall be registered in such names and in such denominations as you shall request in writing not later than one full business day prior to the Closing Date or the applicable Option Closing Date, as the case may be. The Firm Shares and Additional Shares shall be delivered to you on the Closing Date or an Option Closing Date, as the case may be, for the respective accounts of the several Underwriters. The Purchase Price payable by the Underwriters shall be reduced by (i) any transfer taxes paid by, or on behalf of, the Underwriters in connection with the transfer of the Shares to the Underwriters duly paid and (ii) any withholding required by law.
6. Conditions to the Underwriters Obligations . The obligations of the Sellers to sell the Shares to the Underwriters and the several obligations of the Underwriters to purchase and pay for the Shares on the Closing Date are subject to the condition that the Registration Statement shall have become effective not later than 4:00 p.m. (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the following further conditions:
(a) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change that does not indicate the direction of the possible change, in the rating accorded any of the securities of the Company or any of its subsidiaries by any nationally recognized statistical rating organization, as such term is defined in Section 3(a)(62) of the Securities Exchange Act of 1934, as amended (the Exchange Act ); and
(ii) there shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, from that set forth in the Time of Sale Prospectus as of the date of this Agreement that, in your judgment, is material and adverse and that makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Time of Sale Prospectus.
(b) The Underwriters shall have received on the Closing Date a certificate, dated the Closing Date and signed by an executive officer of the Company, to the effect set forth in Section 6(a)(i) above and to the effect that the representations and warranties of the Company contained in this Agreement are true and correct as of the Closing Date and that the Company has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date.
The officer signing and delivering such certificate may rely upon the best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an opinion of Fenwick & West LLP, outside counsel for the Company, dated the Closing Date, in form and substance satisfactory to the Underwriters.
(d) The Underwriters shall have received on the Closing Date an opinion of Goodwin Procter LLP, counsel for the Selling Stockholders, dated the Closing Date, in form and substance satisfactory to the Underwriters.
(e) The Underwriters shall have received on the Closing Date an opinion of Cooley LLP, counsel for the Underwriters, dated the Closing Date in form and substance satisfactory to the Underwriters.
With respect to Section 6(c) above, Fenwick & West LLP, may state that their opinions and beliefs are based upon their participation in the preparation of the Registration Statement, the Time of Sale Prospectus and the Prospectus and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification, except as specified. With respect to Section 6(d) above, counsel for the Selling Stockholders may, with respect to factual matters and to the extent such counsel deems appropriate, rely upon the representations of each Selling Stockholder contained herein and in the Custody Agreement and Power of Attorney of such Selling Stockholder and in other documents and instruments; provided that copies of such Custody Agreements and Powers of Attorney and of any such other documents and instruments shall be delivered to you and shall be in form and substance satisfactory to your counsel.
The opinions of Fenwick & West LLP and counsel to the Selling Stockholders described in Sections 6(c) and 6(d) above shall be rendered to the Underwriters at the request of the Company or one or more of the Selling Stockholders, as the case may be, and shall so state therein.
(f) The Underwriters shall have received, on each of the date hereof and the Closing Date, a letter dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to the Underwriters, from PricewaterhouseCoopers LLP, independent registered public accounting firm, containing statements and information of the type ordinarily included in accountants comfort letters to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement, the Time of Sale Prospectus and the Prospectus; provided that the letter delivered on the Closing Date shall use a cut-off date not earlier than the date hereof.
(g) The lock-up agreements, each substantially in the form of Exhibit A hereto, between you and the Selling Stockholders relating to sales and certain other dispositions of shares of Common Stock or certain other securities, delivered to you on or before the date hereof, shall be in full force and effect on the Closing Date.
(h) The Underwriters shall have received, on the date hereof and the Closing Date, a certificate of the principal financial officer dated the date hereof, in form and substance satisfactory to the Underwriters, containing statements and information with respect to certain information contained in the Time of Sale Prospectus and the Prospectus.
The several obligations of the Underwriters to purchase Additional Shares hereunder are subject to the delivery to you on the applicable Option Closing Date of such documents as you may reasonably request with respect to the good standing of the Company, the due authorization and issuance of the Additional Shares to be sold on such Option Closing Date and other matters related to the issuance of such Additional Shares.
7. Covenants of the Company . The Company covenants with each Underwriter as follows:
(a) To furnish to you, without charge, four (4) signed copies of the Registration Statement (including exhibits thereto) and for delivery to each other Underwriter a conformed copy of the Registration Statement (without exhibits thereto) and to furnish to you in New York City, without charge, prior to 10:00 a.m. New York City time on the business day next succeeding the date of this Agreement and during the period mentioned in Section 7(e) or 7(f) below, as many copies of the Time of Sale Prospectus, the Prospectus and any supplements and amendments thereto or to the Registration Statement as you may reasonably request.
(b) Before amending or supplementing the Registration Statement, the Time of Sale Prospectus or the Prospectus, to furnish to you a copy of each such proposed amendment or supplement and not to file any such proposed amendment or supplement to which you reasonably object, and to file with the Commission within the applicable period specified in Rule 424(b) under the Securities Act any prospectus required to be filed pursuant to such Rule.
(c) To furnish to you a copy of each proposed free writing prospectus to be prepared by or on behalf of, used by, or referred to by the Company and not to use or refer to any proposed free writing prospectus to which you reasonably object.
(d) Not to take any action that would result in an Underwriter or the Company being required to file with the Commission pursuant to Rule 433(d) under the Securities Act a free writing prospectus prepared by or on behalf of the Underwriter that the Underwriter otherwise would not have been required to file thereunder.
(e) If the Time of Sale Prospectus is being used to solicit offers to buy the Shares at a time when the Prospectus is not yet available to prospective purchasers and any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Time of Sale Prospectus in order to make the statements therein, in the light of the circumstances, not misleading, or if any event shall occur or condition exist as a result of which the Time of Sale Prospectus conflicts with the information contained in the Registration Statement then on file, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Time of Sale Prospectus to comply with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to any dealer upon request, either amendments or supplements to the Time of Sale Prospectus so that the statements in the Time of Sale Prospectus as so amended or supplemented will not, in the light of the circumstances when the Time of Sale Prospectus is delivered to a prospective purchaser, be misleading or so that the Time of Sale Prospectus, as amended or supplemented, will no longer conflict with the Registration Statement, or so that the Time of Sale Prospectus, as amended or supplemented, will comply with applicable law.
(f) If, during such period after the first date of the public offering of the Shares as in the opinion of counsel for the Underwriters the Prospectus (or in lieu thereof the notice referred to in Rule 173(a) of the Securities Act) is required by law to be delivered in connection with sales by an Underwriter or dealer, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus (or in lieu thereof the notice referred to in Rule 173(a) of the Securities Act) is delivered to a purchaser, not misleading, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to the dealers (whose names and addresses you will furnish to the Company) to which Shares may have been sold by you on behalf of the Underwriters and to any other dealers upon request, either amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus (or in lieu thereof the notice referred to in Rule 173(a) of the Securities Act) is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with applicable law.
(g) To endeavor to qualify the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as you shall reasonably request.
(h) To make generally available to the Companys security holders and to you as soon as practicable an earning statement covering a period of at least twelve months beginning with the first fiscal quarter of the Company occurring after the date of this Agreement which shall satisfy the provisions of Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder.
(i) If any Seller is not a U.S. person for U.S. federal income tax purposes, the Company will deliver to each Underwriter (or its agent), on or before the Closing Date, (i) a certificate with respect to the Companys status as a United States real property holding corporation, dated not more than thirty (30) days prior to the Closing Date, as described in Treasury Regulations Sections 1.897-2(h) and 1.1445-2(c)(3), and (ii) proof of delivery to the IRS of the required notice, as described in Treasury Regulations 1.897-2(h)(2).
(j) The Company will promptly notify Morgan Stanley& Co. LLC if the Company ceases to be an Emerging Growth Company at any time prior to the later of (a) completion of the distribution of the Shares within the meaning of the Securities Act and (b) completion of the 90 day restricted period referred to in Section 3.
8. Covenants of the Selling Stockholders . Each Selling Stockholder, severally and not jointly, will deliver to each Underwriter (or its agent), prior to or at the Closing Date, a properly completed and executed Internal Revenue Service ( IRS ) Form W-9 or an IRS Form W-8, as appropriate, together with all required attachments to such form.
9. Expenses . Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, the Company agrees to pay or cause to be paid all expenses incident to the performance of the Sellers obligations under this Agreement, including: (i) the fees, disbursements and expenses of the Companys counsel, the Companys accountants and counsel for the Selling Stockholders in connection with the registration and delivery of the Shares under the Securities Act and all other fees or expenses in connection with the preparation and filing of the Registration Statement, any preliminary prospectus, the Time of Sale Prospectus, the Prospectus, any free writing prospectus prepared by or on behalf of, used by, or referred to by the Company and amendments and supplements to any of the foregoing, including all printing costs associated therewith, and the mailing and delivering of copies thereof to the Underwriters and dealers, in the quantities hereinabove specified, (ii) all costs and expenses related to the transfer and delivery of the Shares to the Underwriters, including any transfer or other taxes payable thereon, (iii) the cost of printing or producing any Blue Sky or Legal Investment memorandum in connection with the
offer and sale of the Shares under state securities laws and all expenses in connection with the qualification of the Shares for offer and sale under state securities laws as provided in Section 7(g) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky or Legal Investment memorandum, (iv) all filing fees and the reasonable fees and disbursements of counsel to the Underwriters incurred in connection with the review and qualification of the offering of the Shares by the Financial Industry Regulatory Authority, (v) all costs and expenses incident to listing the Shares on the NYSE, (vi) the cost of printing certificates representing the Shares, (vii) the costs and charges of any transfer agent, registrar or depositary, (viii) the costs and expenses of the Company relating to investor presentations on any road show undertaken in connection with the marketing of the offering of the Shares, including, without limitation, expenses associated with the preparation or dissemination of any electronic road show, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations with the prior approval of the Company, travel and lodging expenses of the representatives and officers of the Company and any such consultants, and fifty percent (50%) the cost of any aircraft chartered in connection with the road show (with the Underwriters agreeing to pay for the other fifty percent (50%)), (ix) the document production charges and expenses associated with printing this Agreement and (x) all other costs and expenses incident to the performance of the obligations of the Company hereunder for which provision is not otherwise made in this Section. It is understood, however, that except as provided in this Section, Section 11 entitled Indemnity and Contribution and the last paragraph of Section 14 below, the Underwriters will pay all of their costs and expenses, including fees and disbursements of their counsel, stock transfer taxes payable on resale of any of the Shares by them and any advertising expenses connected with any offers they may make.
The provisions of this Section shall not supersede or otherwise affect any agreement that the Sellers may otherwise have for the allocation of such expenses among themselves.
10. Covenants of the Underwriters . Each Underwriter severally covenants with the Company not to take any action that would result in the Company being required to file with the Commission under Rule 433(d) a free writing prospectus prepared by or on behalf of such Underwriter that otherwise would not be required to be filed by the Company thereunder, but for the action of the Underwriter.
11. Indemnity and Contribution .
(a) The Company agrees to indemnify and hold harmless each Underwriter, each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, and each affiliate of any Underwriter within the meaning of Rule 405 under the Securities Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus, the Time of Sale Prospectus or any amendment or supplement thereto, any issuer free writing prospectus as defined in Rule 433(h) under the Securities Act, any Company information that the Company has filed, or is required to file, pursuant to Rule 433(d) under the Securities Act, or the Prospectus or any amendment or supplement thereto, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein.
(b) Each Selling Stockholder agrees, severally and not jointly, to indemnify and hold harmless each Underwriter, each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, and each affiliate of any Underwriter within the meaning of Rule 405 under the Securities Act, from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus, the Time of Sale Prospectus or any amendment or supplement thereto, any issuer free writing prospectus as defined in Rule 433(h) under the Securities Act, any Company information that the Company has filed, or is required to file, pursuant to Rule 433(d) under the Securities Act, or the Prospectus or any amendment or supplement thereto, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided however, such indemnification shall only apply to statements or omissions of material facts made in reliance upon and in conformity with the Selling Stockholder Information relating to such Selling Stockholder furnished in writing by or on behalf of such Selling Stockholder expressly for use in the Registration Statement, any preliminary prospectus, the Time of Sale Prospectus, any issuer free writing prospectus, road show or the Prospectus or any
amendment or supplement thereto. The liability of each Selling Stockholder under the indemnity agreement contained in this paragraph, the contribution provisions of this Section 11, and in respect of any claim in respect of a breach of the representations and warranties of such Selling Stockholder contained in Section 2(j), shall be limited to an amount equal to the aggregate Public Offering Price (less underwriting discounts and commissions) of the Shares sold by such Selling Stockholder under this Agreement.
(c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, the Selling Stockholders, the directors of the Company, the officers of the Company who sign the Registration Statement and each person, if any, who controls the Company or any Selling Stockholder within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus, the Time of Sale Prospectus or any amendment or supplement thereto, any issuer free writing prospectus as defined in Rule 433(h) under the Securities Act, any Company information that the Company has filed, or is required to file, pursuant to Rule 433(d) under the Securities Act, or the Prospectus or any amendment supplement thereto, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only with reference to information relating to such Underwriter furnished to the Company in writing by such Underwriter through you expressly for use in the Registration Statement, any preliminary prospectus, the Time of Sale Prospectus, any issuer free writing prospectus, road show or the Prospectus or any amendment or supplement thereto.
(d) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to Section 11(a), 11(a) or 11(c), such person (the indemnified party ) shall promptly notify the person against whom such indemnity may be sought (the indemnifying party ) in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or the named parties to any
such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for (i) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Underwriters and all persons, if any, who control any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act or who are affiliates of any Underwriter within the meaning of Rule 405 under the Securities Act, (ii) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either such Section and (iii) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Selling Stockholders and all persons, if any, who control any Selling Stockholder within the meaning of either such Section, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Underwriters and such control persons and affiliates of any Underwriters, such firm shall be designated in writing by Morgan Stanley & Co. LLC. In the case of any such separate firm for the Company, and such directors, officers and control persons of the Company, such firm shall be designated in writing by the Company. In the case of any such separate firm for the Selling Stockholders and such control persons of any Selling Stockholders, such firm shall be designated in writing by the persons named as attorneys-in-fact for the Selling Stockholders under the Powers of Attorney. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding.
(e) To the extent the indemnification provided for in Section 11(a), 11(a) or 11(c) is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party or parties on the other hand from the offering of the Shares or (ii) if the allocation provided by clause 11(e)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 11(e)(i) above but also the relative fault of the indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Sellers on the one hand and the Underwriters on the other hand in connection with the offering of the Shares shall be deemed to be in the same respective proportions as the net proceeds from the offering of the Shares (before deducting expenses) received by each Seller and the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover of the Prospectus, bear to the aggregate Public Offering Price of the Shares. The relative fault of the Sellers on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Sellers or by the Underwriters and the parties relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Underwriters respective obligations to contribute pursuant to this Section 11 are several in proportion to the respective number of Shares they have purchased hereunder, and not joint. The liability of each Selling Stockholder under the contribution agreement contained in this paragraph and the indemnity contained in Section 11(b), and in respect of any claim in respect of a breach of the representations and warranties of such Selling Stockholder contained in Section 2(j), shall be limited to an amount equal to the aggregate Public Offering Price (less underwriting discounts and commissions) of the Shares sold by such Selling Stockholder under this Agreement.
(f) The Sellers and the Underwriters agree that it would not be just or equitable if contribution pursuant to this Section 11 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose)
or by any other method of allocation that does not take account of the equitable considerations referred to in Section 11(e). The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in Section 11(e) shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 11, (i) no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission and (ii) no Selling Stockholder shall be required to contribute an amount in excess of the amounts by which the proceeds of this offering (before payment of expenses but after deducting underwriting discounts and commissions) received by such Selling Stockholder exceeds the amount of any damages that such Selling Stockholder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 11 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity.
(g) The indemnity and contribution provisions contained in this Section 11 and the representations, warranties and other statements of the Company and the Selling Stockholders contained in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Underwriter, any person controlling any Underwriter or any affiliate of any Underwriter, any Selling Stockholder or any person controlling any Selling Stockholder, or the Company, its officers or directors or any person controlling the Company and (iii) acceptance of and payment for any of the Shares.
12. Termination . The Underwriters may terminate this Agreement by notice given by you to the Company, if after the execution and delivery of this Agreement and prior to the Closing Date (i) trading generally shall have been suspended or materially limited on, or by, as the case may be, either of the New York Stock Exchange or the NASDAQ Global Market, (ii) trading of any securities of the Company shall have been suspended on any exchange or in any over-the-counter market, (iii) a material disruption in securities settlement, payment or clearance services in the United States shall have occurred, (iv) any moratorium on commercial banking activities shall have been declared by Federal
or New York State authorities or (v) there shall have occurred any outbreak or escalation of hostilities, or any change in financial markets or any calamity or crisis that, in your judgment, is material and adverse and which, singly or together with any other event specified in this clause (v), makes it, in your judgment, impracticable or inadvisable to proceed with the offer, sale or delivery of the Shares on the terms and in the manner contemplated in the Time of Sale Prospectus or the Prospectus.
13. Effectiveness; Defaulting Underwriters . This Agreement shall become effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or an Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares that it has or they have agreed to purchase hereunder on such date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of the Shares to be purchased on such date, the other Underwriters shall be obligated severally in the proportions that the number of Firm Shares set forth opposite their respective names in Schedule II bears to the aggregate number of Firm Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as you may specify, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; provided that in no event shall the number of Shares that any Underwriter has agreed to purchase pursuant to this Agreement be increased pursuant to this Section 13 by an amount in excess of one-ninth of such number of Shares without the written consent of such Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Shares to be purchased on such date, and arrangements satisfactory to you, the Company and the Selling Stockholders for the purchase of such Firm Shares are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter, the Company or the Selling Stockholders. In any such case either you or the relevant Sellers shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement, in the Time of Sale Prospectus, in the Prospectus or in any other documents or arrangements may be effected. If, on an Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Additional Shares and the aggregate number of Additional Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Additional Shares to be purchased on such Option Closing Date, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase the Additional Shares to be sold on such Option Closing
Date or (ii) purchase not less than the number of Additional Shares that such non-defaulting Underwriters would have been obligated to purchase in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of them, because of any failure or refusal on the part of any Seller to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason any Seller shall be unable to perform its obligations under this Agreement, such non-performing Seller will reimburse the Underwriters or such Underwriters as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the fees and disbursements of their counsel) reasonably incurred by such Underwriters in connection with this Agreement or the offering contemplated hereunder. Notwithstanding anything in this Agreement to the contrary, if the Agreement is terminated pursuant to this Section 13 for any reason other than a failure, refusal or inability of any Seller described in this paragraph above, then any obligations of the Company to reimburse the expenses of the Underwriters set forth in clauses (iii) and (iv) of Section 9 of this Agreement are terminated and of no further effect.
14. Entire Agreement . (a) This Agreement, together with any contemporaneous written agreements and any prior written agreements (to the extent not superseded by this Agreement) that relate to the offering of the Shares, represents the entire agreement between the Company and the Selling Stockholders, on the one hand, and the Underwriters, on the other, with respect to the preparation of any preliminary prospectus, the Time of Sale Prospectus, the Prospectus, the conduct of the offering, and the purchase and sale of the Shares.
(b) The Company acknowledges that in connection with the offering of the Shares: (i) the Underwriters have acted at arms length, are not agents of, and owe no fiduciary duties to, the Company or any other person, (ii) the Underwriters owe the Company only those duties and obligations set forth in this Agreement and prior written agreements (to the extent not superseded by this Agreement), if any, and (iii) the Underwriters may have interests that differ from those of the Company. The Company waives to the full extent permitted by applicable law any claims it may have against the Underwriters arising from an alleged breach of fiduciary duty in connection with the offering of the Shares.
(c) The Selling Stockholders may assign their rights and obligations hereunder only with the prior written consent of Morgan Stanley & Co. LLC on behalf of the Underwriters.
15. Counterparts . This Agreement may be signed in two or more counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
16. Applicable Law . This Agreement shall be governed by and construed in accordance with the laws of the State of New York.
17. Headings . The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed a part of this Agreement.
18. Notices. All communications hereunder shall be in writing and effective only upon receipt and if to the Underwriters shall be delivered, mailed or sent to you in care of Morgan Stanley & Co. LLC, 1585 Broadway, New York, New York 10036, Attention: Equity Syndicate Desk, with a copy to the Legal Department; if to the Company shall be delivered, mailed or sent to 4810 Eastgate Mall, San Diego, CA 92121 , Attention: General Counsel with a copy to Fenwick & West LLP, 801 California Street, Mountain View, CA 94041, Attention: Robert A. Freedman, Esq.; and if to the Selling Stockholders shall be delivered, mailed or sent to the address listed on Schedule I hereto underneath such Selling Stockholders name.
[ Remainder of page intentionally left blank. ]
Very truly yours, | ||||
ServiceNow, Inc. | ||||
By: |
|
|||
Name: | Frank Slootman | |||
Title: | President and Chief Executive Officer |
[S IGNATURE PAGE TO U NDERWRITING A GREEMENT ]
The Selling Stockholders named in
|
||||
By: |
|
|||
Frank Slootman Attorney-in Fact |
[S IGNATURE PAGE TO U NDERWRITING A GREEMENT ]
Accepted as of the date hereof
Morgan Stanley & Co. LLC
Citigroup Global Markets, Inc.
Deutsche Bank Securities Inc.
Barclays Capital Inc.
Credit Suisse Securities (USA) LLC
UBS Securities LLC
Acting severally on behalf of themselves and
the several Underwriters named in
Schedule II hereto
By: | Morgan Stanley & Co. LLC | |||
By: |
|
|||
Name: | Cynthia Gaylor | |||
Title: | Managing Director |
[S IGNATURE PAGE TO U NDERWRITING A GREEMENT ]
SCHEDULE I
Selling Stockholder |
Number of Firm
Shares To Be Sold |
Additional Shares | ||
JMI Equity Fund V, L.P. |
||||
JMI Equity Fund V (AI), L.P. |
||||
JMI Equity Fund IV, L.P. |
||||
JMI Equity Fund IV (AI), L.P. |
||||
JMI Euro Equity Fund IV, L.P. |
||||
JMI Equity Side Fund, L.P. |
||||
JMI Participating Partners |
||||
JMI Services, LLC |
||||
Charles E. Noell |
||||
Rebecca Ann Moores Family Trust |
||||
Chloe Dahl Moores Irrevocable Personal 2012 Trust |
||||
Cyrus N. Moores Irrevocable Personal 2012 Trust |
||||
John J. Moores, III Irrevocable Personal 2012 Trust |
||||
Kiev J. Moores Irrevocable Personal 2012 Trust |
||||
|
|
|||
Total: |
||||
|
|
I-1
SCHEDULE II
Underwriter |
Number of Firm Shares
To Be Purchased |
|
Morgan Stanley & Co. LLC |
||
Citigroup Global Markets, Inc. |
||
Deutsche Bank Securities Inc. |
||
Barclays Capital Inc. |
||
Credit Suisse Securities (USA) LLC |
||
UBS Securities LLC |
||
Pacific Crest Securities LLC |
||
Wells Fargo Securities, LLC |
||
|
||
Total: |
||
|
II-1
SCHEDULE III
Time of Sale Prospectus
1. | Preliminary Prospectus issued [date] |
2. | [identify all free writing prospectuses filed by the Company under Rule 433(d) of the Securities Act] |
3. | [free writing prospectus containing a description of terms that does not reflect final terms, if the Time of Sale Prospectus does not include a final term sheet] |
4. | [orally communicated pricing information such as price per share and size of offering if a Rule 134 pricing term sheet is used at the time of sale instead of a pricing term sheet filed by the Company under Rule 433(d) as a free writing prospectus] |
III-1
Exhibit 5.1
November 9, 2012
ServiceNow, Inc.
12225 El Camino Real, Suite 100
San Diego, CA 92130
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-1 (Registration No. 333-184674) (the Registration Statement ) filed by ServiceNow, Inc., a Delaware corporation (the Company ), with the Securities and Exchange Commission (the Commission ) on October 31, 2012, as subsequently amended on November 9, 2012, in connection with the registration under the Securities Act of 1933, as amended (the Securities Act ), of an aggregate of up to 13,397,500 shares of the Companys Common Stock, $0.001 par value per share (the Stock ), consisting of (i) up to 1,897,500 shares of the Companys Common Stock (the Company Shares ) that will be issued by the Company and (ii) up to 11,500,000 presently issued and outstanding shares of the Companys Common Stock (the Selling Stockholders Shares ) that will be sold by certain selling stockholders of the Company (the Selling Stockholders ).
In rendering this opinion, we have examined such matters of fact as we have deemed necessary in order to render the opinion set forth herein, which included examination of the following:
(1) | the Companys Restated Certificate of Incorporation, as filed with the Delaware Secretary of State on July 5, 2012 (the Restated Certificate ); |
(2) | the Companys Restated Bylaws, as certified by the Companys Secretary on July 5, 2012 (the Restated Bylaws ); |
(3) | the Registration Statement, together with the Exhibits filed as a part thereof or incorporated therein by reference; |
(4) | the preliminary prospectus prepared in connection with the Registration Statement (the Prospectus ); |
(5) | the underwriting agreement to be entered into by and among the Company, the Selling Stockholders and Morgan Stanley & Co. LLC, as representative of the several underwriters; |
ServiceNow, Inc.
November 9, 2012
Page 2
(6) | the minutes of meetings and actions by written consent of the Companys Board of Directors (the Board ) and the Companys stockholders (the Stockholders ) provided to us by the Company relating to the adoption, approval, authorization and/or ratification of (i) the Restated Certificate and (ii) the Restated Bylaws; |
(7) | the minutes of meetings and actions by written consent of the Board and stockholders that are contained in the Companys minute books that are in our possession, together with resolutions to be adopted by the Board in connection with the sale and issuance of the Stock; |
(8) | the stock records that the Company has provided to us (consisting of a list of stockholders, optionholders and restricted stock unit holders that was prepared by the Company and dated of even date herewith, respecting the Companys capital stock and any rights to purchase capital stock and verifying the number of such issued and outstanding securities) and a certificate of Computershare Trust Company, N.A., the Companys transfer agent, dated November 9, 2012 regarding the Companys issued and outstanding shares of Common Stock as of October 30, 2012; |
(9) | the agreements pursuant to which the Selling Stockholders Shares were originally issued; |
(10) | a Certificate of Good Standing issued by the Secretary of State of the State of Delaware dated November 8, 2012, stating that the Company is in good standing and has a legal corporate existence under the laws of the State of Delaware (the Certificate of Good Standing ); |
(11) | a management certificate addressed to us and dated of even date herewith executed by the Company containing certain factual representations (the Management Certificate ); |
(12) | the forms of custody agreements and powers of attorney to be signed by the Selling Stockholders in connection with the sale of the Selling Stockholders Shares described in the Registration Statement; and |
(13) | the Certificate of Merger of Service-now.com, a California corporation, with and into the Company, as filed with the Delaware Secretary of State on May 22, 2012. |
In our examination of documents for purposes of this opinion, we have assumed, and express no opinion as to, the genuineness of all signatures on original documents, the authenticity and completeness of all documents submitted to us as originals, the conformity to originals and completeness of all documents submitted to us as copies, the legal capacity of all persons or entities executing the same, the lack of any undisclosed termination, modification, waiver or amendment to any document reviewed by us and the due authorization, execution and delivery of all documents by the Selling Stockholders where due authorization, execution and delivery are prerequisites to the effectiveness thereof.
ServiceNow, Inc.
November 9, 2012
Page 3
As to matters of fact relevant to this opinion, we have relied solely upon our examination of the documents referred to above and have assumed the current accuracy and completeness of the information obtained from the documents referred to above and the representations and warranties made by representatives of the Company to us, including but not limited to those set forth in the Management Certificate. We have made no independent investigation or other attempt to verify the accuracy of any of such information or to determine the existence or non-existence of any other factual matters.
We render this opinion only with respect to, and express no opinion herein concerning the application or effect of the laws of any jurisdiction other than, the existing laws of the United States of America and the State of California, the existing Delaware General Corporation Law, the Delaware Constitution and reported judicial decisions relating thereto.
With respect to our opinion expressed in paragraph (1) below as to the valid existence and good standing of the Company under the laws of the State of Delaware, we have relied solely upon the Certificate of Good Standing and representations made to us by the Company in the Management Certificate.
In connection with our opinions expressed below, we have assumed that, at or prior to the time of the delivery of any shares of Stock, the Registration Statement will have been declared effective under the Securities Act, that the shares of Stock will have been registered under the Securities Act pursuant to the Registration Statement and that such registration will not have been modified or rescinded, and that there will not have occurred any change in law affecting the validity of the issuance of such shares of Stock.
In accordance with Section 95 of the American Law Institutes Restatement (Third) of the Law Governing Lawyers (2000), this opinion letter is to be interpreted in accordance with customary practices of lawyers rendering opinions to third parties in connection with the filing of a registration statement with the Commission of the type described herein.
Based upon the foregoing, it is our opinion that:
(1) The Company is a corporation validly existing, in good standing, under the laws of the State of Delaware;
(2) The up to 1,897,500 Company Shares to be issued and sold by the Company pursuant to the Registration Statement, when issued, sold and delivered in the manner and for the consideration stated in the Registration Statement and the Prospectus, and in accordance with the resolutions adopted by the Board and to be adopted by the Pricing Committee of the Board, will be validly issued, fully paid and nonassessable; and
ServiceNow, Inc.
November 9, 2012
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(3) The up to 11,500,000 Selling Stockholders Shares to be sold by the Selling Stockholders pursuant to the Registration Statement are validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to all references to us, if any, in the Registration Statement, the Prospectus constituting a part thereof and any amendments thereto. In rendering the opinions set forth above, we are opining only as to the specific legal issues expressly set forth therein, and no opinion shall be inferred as to any other matter or matters.
This opinion is intended solely for use in connection with issuance and sale of shares subject to the Registration Statement and is not to be relied upon for any other purpose. This opinion is rendered as of the date first written above and based solely on our understanding of facts in existence as of such date after the aforementioned examination. We assume no obligation to advise you of any fact, circumstance, event or change in the law or the facts that may hereafter be brought to our attention whether or not such occurrence would affect or modify any of the opinions expressed herein.
Very truly yours, | ||||
FENWICK & WEST LLP | ||||
By: |
/s/ Robert A. Freedman |
|||
Robert A. Freedman, a Partner |
Exhibit 10.12
LEASE AGREEMENT
between
Jay Ridge LLC
(Landlord)
and
ServiceNow, Inc.
(Tenant)
3250, 3260, and 3270, Jay Street
Santa Clara, California
Table of Contents
Page | ||||||
1. |
Premises | 1 | ||||
2. |
Warm Shell Work | 1 | ||||
3. |
Delivery and Acceptance of Possession | 4 | ||||
4. |
Tenant Improvement Work | 5 | ||||
5. |
Allowance | 6 | ||||
6. |
Term | 7 | ||||
7. |
Rent | 9 | ||||
8. |
Prepaid Rent | 15 | ||||
9. |
Security Deposit | 15 | ||||
10. |
Utilities | 16 | ||||
11. |
Permitted Use, Restrictions on Use | 16 | ||||
12. |
Outdoor Areas | 17 | ||||
13. |
Compliance with Laws and Recorded Matters | 17 | ||||
14. |
Signs | 18 | ||||
15. |
Parking | 18 | ||||
16. |
Tenants Maintenance and Repair Responsibilities | 18 | ||||
17. |
Landlords Maintenance and Repair Responsibilities | 19 | ||||
18. |
Tenants Alterations | 19 | ||||
19. |
Liens | 20 | ||||
20. |
Insurance and Indemnification | 21 | ||||
21. |
Landlords Right to Enter | 22 | ||||
22. |
Damage or Destruction | 23 | ||||
23. |
Condemnation | 23 | ||||
24. |
Assignment, Subletting, and Change in Control | 24 | ||||
25. |
Events of Default | 25 | ||||
26. |
Remedies | 26 | ||||
27. |
Hazardous Materials | 31 | ||||
28. |
Subordination; Attornment; Notice to Mortgagee | 31 | ||||
29. |
Estoppel Certificates | 33 | ||||
30. |
Surrender | 33 | ||||
31. |
Holding Over | 34 | ||||
32. |
Notices | 35 | ||||
33. |
Satellite | 36 | ||||
34. |
Additional Provisions | 36 | ||||
EXHIBIT A-1 Site Plan Depicting Premises and Project |
42 | |||||
EXHIBIT A-2 Trees Tenant Desires to have Removed |
43 | |||||
EXHIBIT B Legal Description of the Land |
44 | |||||
EXHIBIT C Connector Concept Plan |
46 | |||||
EXHIBIT D Warm Shell Specifications |
47 | |||||
EXHIBIT E Credit to Tenant Improvement Allowance for Warm Shell Work Not Performed by Landlord |
50 | |||||
EXHIBIT F Outside Cafeteria Seating Area |
52 | |||||
EXHIBIT G Sign Plans |
53 |
Index of Defined Terms
3250 Building, 1 |
New Owner, 32 |
|
3260 Building, 1 |
Notice to Extend, 8 |
|
3270 Building, 1 |
Operating Costs, 10 |
|
Additional Rent, 13 |
Outdoor Areas, 17 |
|
Allowance, 6 |
Permitted Affiliate Lease Transfer, 24 |
|
Alterations, 19 |
Permitted Transferee, 24 |
|
Annual Statement, 12 |
Permitted Use, 16 |
|
Approved Tenant Improvement Plans, 5 |
Phase 1 Delivery Date, 4 |
|
Arbitration Deadline, 8 |
Phase 1 Free Rent Period, 9 |
|
Architect, 2 |
Phase 1 Months, 9 |
|
Assignment, 24 |
Phase 1 Premises, 1 |
|
Bankruptcy Code, 25 |
Phase 1 Rent Commencement Date, 7 |
|
Building, 1 |
Phase 1 Warm Shell Work, 1 |
|
Building Shell, 21 |
Phase 2 Delivery Date, 4 |
|
Connector, 1 |
Phase 2 Free Rent Period, 9 |
|
Connector Concept Plan, 1 |
Phase 2 Months, 10 |
|
Connector Warm Shell Permits, 2 |
Phase 2 Premises, 1 |
|
Connector Warm Shell Work, 2 |
Phase 2 Rent Commencement Date, 7 |
|
Contingency Failure, 3 |
Phase 2 Warm Shell Work, 2 |
|
Contingency Termination Date, 3 |
Premises, 1 |
|
Event of Default, 25 |
Prevailing Market Rate, 7 |
|
Events of Bankruptcy, 25 |
Project, 1 |
|
Existing Building, 1 |
Recorded Matters, 17 |
|
Existing Buildings Phase 2 Warm Shell
|
Reimbursable Earthquake Insurance
|
|
Extension Option, 7 |
Rent, 13 |
|
Extension Term, 7 |
Security Deposit, 15 |
|
Final Warm Shell Plans for the Connector, 2 |
Sign Plans, 18 |
|
Hazardous Materials, 31 |
Sublease, 24 |
|
HVAC, 5 |
Taking, 23 |
|
Initial Term, 7 |
Taxes, 12 |
|
Insolvency Laws, 25 |
Tenant, 1 |
|
Interest Rate, 14 |
Tenant Improvement Costs, 6 |
|
Land, 1 |
Tenant Improvement Work, 5 |
|
Landlord, 1 |
Tenant Improvements, 5 |
|
Landlords Broker, 38 |
Tenant Party, 17 |
|
Laws, 17 |
Tenants Broker, 38 |
|
Lease, 1 |
Tenants Pylon Sign, 18 |
|
Lease Transfer, 24 |
Tenants Share, 10 |
|
Loss, 22 |
Tenants Signs, 18 |
|
Minor Changes, 19 |
Term, 7 |
|
Mortgage, 32 |
Warm Shell Specifications, 1 |
|
Mortgagee, 32 |
Warm Shell Work, 1 |
|
Net Rent, 9 |
LEASE AGREEMENT
This Lease Agreement (this Lease ) is dated November 2012 and is between Jay Ridge LLC, a Delaware limited liability company ( Landlord ), and ServiceNow, Inc., a Delaware corporation ( Tenant ).
1. Premises . Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, the following Premises : (i) the existing building at 3250 Jay Street, Santa Clara, California (the 3250 Building or the Phase 1 Premises ); plus (ii) the two existing buildings at 3260 and 3270 Jay Street, Santa Clara, California (the 3260 Building and the 3270 Building ; each of these 3 buildings is an Existing Building ); plus (iii) a new two-story connector (the Connector ; each of the Existing Buildings and the Connector is a Building ) connecting the 3260 Building and the 3270 Building to be constructed substantially in accordance with the conceptual sketch in Exhibit C to this Lease (the Connector Concept Plan ). The 3260 Building, the 3270 Building, and the Connector are, collectively, the Phase 2 Premises . On the date of this Lease, each of the 3250 Building, the 3260 Building, and the 3270 Building contains 45,368 square feet of floor area, for a total of 136,104 square feet of floor area. Landlord and Tenant anticipate that the Connector will contain approximately 12,600 square feet of floor area. The Premises are on the land legally described in Exhibit B (the Land ). The Premises, together with the Land and all other improvements on the Land, are the Project . The Project, as it will exist at the completion of the Warm Shell Work and the Tenant Improvement Work, is depicted in the site plan in Exhibit A-1 .
2. Warm Shell Work . Warm Shell Work means the Phase 1 Warm Shell Work, the Phase 2 Warm Shell Work, the tree removal work in Section 2.c, and the screening work in Section 2.d.
a. Phase 1 . Landlord will, at Landlords sole cost, complete all work and improvements in the Phase 1 Premises described in the specifications (the Warm Shell Specifications ) in Exhibit D to this Lease plus all work required to (i) make the Phase 1 Premises and the Outdoor Areas comply with all applicable laws and regulations, including the Americans with Disabilities Act, Title 24 (the California Building Standards Code), and life safety and seismic codes, (ii) put the roof, structural components, and electrical, mechanical, plumbing systems, and elevators in the Phase 1 Premises in good working order, and (iii) put the parking lot and site lighting in good working order (the Phase 1 Warm Shell Work ).
b. Phase 2 . Landlord will, at Landlords sole cost, complete all work and improvements in the 3260 Building and the 3270 Building described in the Warm Shell Specifications plus all work required to (i) make the Phase 2 Premises comply with all applicable laws and regulations, including the Americans with Disabilities Act, Title 24 (the California Building Standards Code), and life safety and seismic codes, and (ii) put the roof, structural components, and electrical, mechanical, plumbing systems, and elevators in the Phase 2 Premises in good working order (the Existing Buildings Phase 2 Warm Shell Work ). In addition, Landlord will construct the Connector in accordance with this Section 2.b and Section 4. Landlord will cause Chang Architects ( Architect ) to prepare and submit to Tenant initial proposed plans and specifications
1 | ServiceNow, Inc. |
for the Connector substantially in accordance with the Connector Concept Plan and based on consultations with Tenant. Landlord will make reasonable efforts to cause Architect to deliver initial proposed plans and specifications to Tenant for the Connector by November 30, 2012. The Warm Shell Work with respect to the Connector (the Connector Warm Shell Work ) includes all work and improvements specified in the Warm Shell Specifications, but does not include the Tenant Improvement Work in the Connector or any other tenant improvements. Tenant will cooperate with Landlord and Architect in preparing the plans and specifications for the Connector Warm Shell Work and will not unreasonably withhold, condition, or delay its approval of the plans and specifications for the Connector Warm Shell Work. Landlord and Tenant agree to make reasonable efforts to agree on the final plans and specifications for the Connector Warm Shell Work in a form ready to submit to the City for permit approval by December 15, 2012. The final plans and specifications that Landlord and Tenant approve for the Connector Warm Shell Work are the Final Warm Shell Plans for the Connector . Landlord, with Tenants cooperation, will make reasonable efforts to obtain all governmental approvals, consents, and permits required to build the Connector in accordance with the Final Warm Shell Plans for the Connector, and the Warm Shell Specifications (the Connector Warm Shell Permits ). If necessary, Landlord and Tenant will cooperate with each other in good faith in making any alterations to the Final Warm Shell Plans for the Connector required to obtain the Connector Warm Shell Permits, and any such revised plans and specifications that Landlord and Tenant approve will then be the Final Warm Shell Plans for the Connector. If the Connector Warm Shell Permits are obtained, Landlord will construct the Connector Warm Shell Work in accordance with the Final Warm Shell Plans for the Connector, the Connector Warm Shell Permits, the Warm Shell Specifications, and all applicable Laws. The Existing Buildings Phase 2 Warm Shell Work and the Connector Warm Shell Work are, collectively, the Phase 2 Warm Shell Work .
c. Tree Removal . Tenant desires to have approximately 15 to 20 trees removed from the Project at the location shown in Exhibit A-2 . Tenant agrees to assist Landlord in its efforts to get the Citys approval and any other governmental approvals or permits that are required to remove the trees. If Landlord or Tenant obtains the Citys approval and any other required governmental approvals or permits, Landlord agrees to remove the trees at Landlords cost.
d. Screening . Tenant desires additional screening between the Premises and the neighboring buildings to the south, to have the existing trash enclosure removed, and to have additional screening for an outside cafeteria seating area as shown in Exhibit F to this Lease. Tenant agrees to assist Landlord in its efforts to get the Citys approval and any other governmental approvals or permits that are required to remove or relocate the trash enclosure and to plant landscaping or install a fence, wall, or screen. If the City does not permit the trash enclosure to be removed, Landlord and Tenant will determine whether it can be relocated to a better location. If the City grants the required approvals, Landlord and Tenant will agree on the final plans for any landscaping, fence, wall, or screen, and Landlord will install the approved alterations, at Landlords cost, subject to Landlords reasonable approval of the cost.
2 | ServiceNow, Inc. |
e. Measurement of Premises . Landlord and Tenant agree, for all purposes related to this Lease, that the 3250 Building, the 3260 Building, and the 3270 Building collectively contain 136,104 square feet of floor area. Within 90 days after the Phase 2 Delivery Date, Landlord will deliver to Tenant a certification by Architect of the gross floor area of the Connector measured from the exteriors of all exterior walls and surfaces, and Landlord and Tenant will sign and deliver a confirmation of the floor area of the Connector and the monthly Net Rent for the Phase 2 Premises based on that measurement.
f. Connector Contingency . If, despite Landlords and Tenants reasonable efforts, either (i) the City refuses to issue the Connector Warm Shell Permits and Landlord and Tenant have exhausted all reasonable remedies and appeals and either Landlord or Tenant gives the other written notice that the City has refused to issue the Connector Warm Shell Permits, or (ii) Landlord does not substantially complete the Warm Shell Work in the Phase 2 Premises by December 31, 2013 (either of such events is a Contingency Failure ), then Tenant has the right, as its sole right or remedy with respect to the Contingency Failure, upon 90 days notice written to Landlord given at any time within 90 days after the Contingency Failure occurs, to either (a) terminate this Lease as to all of the Premises, in which case this Lease will terminate on the earlier of the 270 th day after the date Tenant delivers the termination notice or the date Tenant vacates and surrenders possession of the Phase 1 Premises to Landlord in the condition this Lease requires at the expiration of the Term (the Contingency Termination Date ), with the same effect as if that were the scheduled expiration date of the Initial Term, provided that Tenant must pay Net Rent with respect to the Phase 1 Premises in the amount of $113,420 per month from the date Tenant delivers the termination notice until the Contingency Termination Date, or (b) lease the 3260 Building and the 3270 Building without the Connector, in which case Landlord and Tenant will promptly negotiate in good faith and enter into an amendment to this Lease that excludes the Connector from the Premises but includes the 3260 Building and the 3270 Building in the Premises at the same Net Rent per square foot as this Lease provides and otherwise on substantially the same terms as this Lease with respect to the 3250 Building, the 3260 Building, and the 3270 Building. If Tenant does not exercise its right under this Section 2.f to either terminate this Lease or lease the 3260 Building and 3270 Building within 90 days after a Contingency Failure occurs, this Lease will remain in full force and effect as to the Phase 1 Premises and Landlord and Tenant will promptly negotiate and enter into an amendment to this Lease that excludes the Phase 2 Premises from the Premises but is otherwise on substantially the same economic terms as this Lease with respect to the Phase 1 Premises. Notwithstanding the foregoing, if Tenant exercises its right under this Section 2.f to terminate this Lease because the City has refused to issue the Connector Warm Shell Permits, Landlord may nullify the termination by obtaining the Connector Warm Shell Permits within 90 days after receiving Tenants termination notice, in which case Tenant will have no further right to terminate this Lease or elect to lease the 3260 Building and 3270 Building without the Connector as a result of the Citys refusal to issue the Connector Warm Shell Permits.
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3. Delivery and Acceptance of Possession .
a. Phase 1 . Landlord estimates that Landlord will substantially complete the Phase 1 Warm Shell Work and the Phase 1 Tenant Improvement Work by approximately March 1, 2013. The date Landlord actually tenders possession of the Phase 1 Premises to Tenant with the Phase 1 Warm Shell Work and the Phase I Tenant Improvement Work substantially completed is the Phase 1 Delivery Date . Tenant agrees to accept possession of the Phase 1 Premises on the Phase 1 Delivery Date so long as the Phase 1 Warm Shell Work and the Phase 1 Tenant Improvement Work are then substantially complete, but otherwise in their as-is, where-is condition with all faults. Tenant, Landlord, and both contractors will do a joint walk-through inspection of the Phase 1 Premises at least 7 days before the Phase 1 Delivery Date and create a mutually approved punchlist of any items of the Phase 1 Warm Shell Work and Phase 1 Tenant Improvement Work that remain to be completed. Landlord will complete the punchlist items reasonably promptly.
b. Phase 2 . Landlord estimates that Landlord will substantially complete the Phase 2 Warm Shell Work and the Phase 2 Tenant Improvement Work by approximately July 1, 2013. The date Landlord actually tenders possession of the Phase 2 Premises to Tenant with the Phase 2 Warm Shell Work substantially completed is the Phase 2 Delivery Date . Tenant agrees to accept possession of the Phase 2 Premises on the Phase 2 Delivery Date so long as the Phase 2 Warm Shell Work and the Phase 2 Tenant Improvement Work are then substantially complete, but otherwise in their as-is, where-is condition with all faults. Tenant, Landlord, and both contractors will do a joint walk-through inspection of the Phase 2 Premises at least 7 days before the Phase 2 Delivery Date and create a mutually approved punchlist of any items of the Phase 2 Warm Shell Work and Phase 2 Tenant Improvement Work that remain to be completed. Landlord will complete the punchlist items reasonably promptly.
c. Warranty . Provided that Tenant performs all applicable servicing and maintenance this Lease requires it to perform, Landlord warrants that the roof, structural components, elevators, and electrical, mechanical, and plumbing systems in the Phase 1 Premises will remain in good working order for 12 months after the Phase 1 Delivery Date. Provided that Tenant performs all applicable servicing and maintenance this Lease requires it to perform, Landlord warrants that the roofs, structural components, elevators, and electrical, mechanical, and plumbing systems in the Phase 2 Premises will remain in good working order for 12 months after the Phase 2 Delivery Date. Following the delivery date for each part of the Premises, Landlord will, at Tenants request, assign to Tenant the right to enforce any system warranties that cover that part of the Premises, except that Landlord reserves the right to enforce those warranties at Tenants request.
d. Disclaimer . Landlord disclaims, and Tenant waives, any representation or warranty other than Landlords express representations and warranties in this Lease as to the suitability, safety, or fitness of the Premises for Tenants business or intended use of the Premises, or for any other purpose.
e. Early Access . Landlord agrees that Tenant may enter the Phase 1 Premises and the Phase 2 Premises before Landlord delivers possession of them to Tenant, without any rent or other charge, to install cabling, furniture, security systems,
4 | ServiceNow, Inc. |
and other personal property, provided that Tenant must give Landlord reasonable advance notice whenever it intends to do so, and provided that Tenant must not materially interfere with or delay any Warm Shell Work or Tenant Improvement Work.
4. Tenant Improvement Work . Landlord will plan and construct all tenant improvements in the Phase 1 Premises and the Phase 2 Premises that Tenant requires, plus the Tenants Signs (the Tenant Improvements ) in accordance with this Section; all work required to construct the Tenant Improvements is the Tenant Improvement Work ). Landlord will pay for the Tenant Improvement Work up to the amount of the Allowance; Tenant is responsible for all costs of the Tenant Improvement Work in excess of the Allowance.
a. Scope of Work . The Tenant Improvement Work includes, without limitation: all electrical, heating, ventilation and air conditioning ( HVAC ), plumbing, sprinkler, and fire safety system work other than the Warm Shell Work; and all other work to building systems and equipment serving the Premises other than the Warm Shell Work.
b. Plans and Specifications . Landlord will make reasonable efforts to have the Architect deliver initial proposed plans and specifications for the Tenant Improvement Work to Tenant by November 30, 2012. Tenant will cooperate fully with Landlord and the Architect in preparing the proposed plans and specifications in order to complete them as soon as is reasonably practicable. Tenant will approve or disapprove each set of proposed plans and specifications as soon as is reasonably practicable, but in any case within 10 business days after Landlord delivers them. Tenant acknowledges that if a final permit set of plans for the Phase 1 Tenant Improvements is not approved by Landlord and Tenant and ready to submit to the City for permits by December 15, 2012, Landlord will not be to deliver the Phase 1 Premises by March 1, 2013. Similarly, Tenant acknowledges that Landlord will not be able to deliver the Phase 2 Premises by July 1, 2013 if: (i) Architect is not able to deliver to Landlord and Tenant for approval an initial design development package of plans for the Connector Warm Shell Work and the Phase 2 Tenant Improvements by November 30, 2012, (ii) the final permit set of plans for the Connector Warm Shell Work is not approved by Landlord and Tenant and ready to submit to the City for permits by January 2, 2013, (iii) the final permit set of plans for the Phase 2 Tenant Improvements is not approved by Landlord and Tenant and ready to submit to the City by January 15, 2013. Landlord and Tenant agree to make all reasonable efforts to meet these dates. The plans and specifications that Landlord and Tenant approve for the Tenant Improvement Work are the Approved Tenant Improvement Plans . Landlords and Tenants review and approval of the plans and specifications for the Tenant Improvement Work is not an agreement or confirmation by either party that the Approved Tenant Improvement Plans or the Tenant Improvements are fit for any particular purpose. Landlord agrees to pay for Tenants space planning meetings with Architect for up to $10,000 worth of planning work; this cost is in addition to the Allowance. All other space planning and architectural costs are part of the Tenant Improvement Costs.
c. Contractors . Landlords contractor will complete the Warm Shell Work in the Phase 1 Premises and in the 3260 Building and the 3270 Building. Landlord will
5 | ServiceNow, Inc. |
employ Permian Builders as the general contractor for the rest of the Warm Shell Work. Landlord will have sole authority over the administration of the contracts for the Warm Shell Work. Landlord will employ Permian Builders for the Tenant Improvement Work, but Tenant, rather than Landlord, will be solely responsible for administering the contracts for the Tenant Improvement Work, including approving and signing change orders, with the same effect as if Tenant were the owner under the contracts for the Tenant Improvement Work. The contracts for the Tenant Improvement Work will contain a provision that implements this delegation of authority to Tenant and Tenant will, at Landlords request, sign any acknowledgment and assumption of the delegated authority that Landlord reasonably requests.
Subject to Landlords delegation to Tenant of authority as owner under the contracts for the Tenant Improvement Work, Landlord will construct the Tenant Improvements and otherwise comply with all of its obligations under this Section 4 at Tenants sole cost, except for the Allowance. Landlord has no right to charge any supervisory fee in connection with the Tenant Improvement Work.
5. Allowance . Landlord agrees to give Tenant credit, subject to the terms of this Section, for an allowance (the Allowance ) equal to (i) $25 per square foot of floor area in the Premises, as the base allowance, plus (ii) $150,000 for the cost of Tenants Pylon Sign, plus (iii) an amount, which Landlord and Tenant will agree to in good faith, as a credit to Tenant, equal to Landlords cost savings for not performing the items of work listed in Exhibit E , but only to the extent Landlord has not performed those items of work on the date of this Lease, plus (iv) $4 per square foot of floor area in the Premises, including the Connector, for electrical distribution. Tenant Improvement Costs means: (a) Landlords out-of-pocket costs for preparing the Approved Tenant Improvement Plans; (b) the cost of obtaining all permits and approvals for the Tenant Improvement Work; and (c) the cost of the Tenant Improvement Work, including all payments to the general contractor for the Tenant Improvement Work. If the Tenant Improvement Costs exceed the amount of the Allowance, Tenant is solely responsible for the excess cost, which it will pay to Landlord as follows: after Landlord has paid or incurred invoices equal to the amount of the Allowance, Landlord may submit any additional invoices it receives for Tenant Improvement Costs and Tenant will, within 25 days, either directly pay the person who issued the invoice, or, if Landlord has paid the invoice, reimburse Landlord. If the Tenant Improvement Costs are less than the total amount of the Allowance, Tenant is entitled, upon written request, to do one or both of the following: (A) use the unused Allowance for costs Tenant incurs for Alterations other than the Tenant Improvements that are constructed within 12 months after the Phase 2 Delivery Date; and (B) use the unused Allowance, in an amount up to $5 per square foot of floor area in the Premises, to purchase and install personal property and equipment in the Premises within 90 days after all of the Tenant Improvement Work is substantially complete and Tenant has occupied the Phase 2 Premises. If Tenant uses any part of the Allowance under the preceding sentence, Tenant must request reimbursement within 15 months after the Phase 2 Delivery Date for Alterations, and within 180 days after Tenant occupies the Phase 2 Premises, for personal property and equipment. To the extent Tenant does not use the entire Allowance for Tenant Improvement Costs and additional Alterations or personal property and equipment under the preceding two sentences, Tenant forfeits that unused portion of the Allowance and is not entitled to receive it as a rent credit or in any other form. Except for the Allowance, Landlord has no obligation to give Tenant any allowance or otherwise
6 | ServiceNow, Inc. |
pay or reimburse Tenant for any costs related to demolishing or constructing improvements in the Premises, moving, purchasing, or installing any fixtures, equipment, or inventory, or otherwise occupying and opening for business in the Premises.
6. Term .
a. Initial Term . Phase 1 Rent Commencement Date means the 366 th day after the earlier of (i) the Phase 1 Delivery Date or (ii) the 120 th day after Landlord substantially completes the Phase I Warm Shell Work in the 3250 Building. Phase 2 Rent Commencement Date means the 181 st day after the earlier of (a) the Phase 2 Delivery Date, or (b) the 120 th day after Landlord substantially completes the Phase 2 Warm Shell Work in the Phase 2 Premises. The initial term of this Lease (the Initial Term ) commences on the earlier of the Phase 1 Delivery Date or the Phase 2 Delivery Date and ends at 5:00 p.m. California time on the last day of the 120 th full calendar month after the later of the Phase 1 Rent Commencement Date or the Phase 2 Rent Commencement Date. If the later of the Phase 1 Rent Commencement Date or the Phase 2 Rent Commencement Date is not the first day of a calendar month, the Initial Term will be the initial partial month in which that date occurs plus the next 120 full calendar months. The Initial Term, together with the first or both Extension Terms, if Tenant exercises them, and any other extension or renewal of the term of this Lease, is the Term . Each of Landlord and Tenant will sign a letter within 10 days after request confirming the Phase 1 Delivery Date, and a second letter confirming the Phase 2 Delivery Date and the last day of the Initial Term.
b. Optional Extension Terms . On the condition that Tenant is then occupying all or substantially all of at least two of the three Existing Buildings for its business purposes in accordance with the Permitted Use and no Event of Default then exists, Tenant has two options (each, an Extension Option ) to extend the Term for 5 years each (each, an Extension Term ), with the first beginning immediately after the Initial Term, and the second beginning immediately after the first Extension Term. The terms of this Lease will remain the same during each Extension Term except that Tenant will pay Net Rent during each Extension Term at the prevailing market triple net base rent rate for premises of similar size, quality, and location, taking into account all relevant factors and determined as of 8 months before the Extension Term begins (the Prevailing Market Rate ). Tenant can exercise each Extension Option only by delivering a written notice to Landlord that it is exercising the Extension Option (a Notice to Extend ) at least 9 months but no more than 12 months before the end of the Initial Term, or the first Extension Term, as applicable. A Notice to Extend is irrevocable. The Extension Option being exercised will automatically terminate if Tenant does not exercise it at least 9 months before the Initial Term or the first Extension Term ends, as applicable, time being of the essence. The Extension Options are personal to ServiceNow, Inc. and a Permitted Transferee and are not transferrable or assignable to any other person, whether by an Assignment or otherwise, and any attempt do so will make the Extension Options null and void. If Tenant exercises an Extension Option and Landlord and Tenant do not agree in writing on the Prevailing Market Rate within 30 days after Tenant delivers the Notice to Extend (the Arbitration Deadline ), the Net Rent for that Extension Term will be determined as follows:
(i) Each of Landlord and Tenant will appoint its arbitrator by written notice to the other within 30 days after the Arbitration Deadline. If one party fails to appoint an arbitrator by notice to the other within 30 days after the Arbitration Deadline, and again fails to do so within 10 days after it receives a reminder notice from the other party, the one appointed arbitrator will make the determination alone. If both Landlord and Tenant appoint their arbitrators when required, those two arbitrators will, within 10 days after being appointed, appoint a third arbitrator by notice to both Landlord and Tenant. If the two arbitrators fail to appoint a third arbitrator within 10 days, then either Landlord or Tenant has the right to apply to the American Arbitration Association or any successor for the appointment of the third arbitrator.
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(ii) Within 30 days after the third arbitrator is appointed, the arbitrators appointed by Landlord and Tenant will attempt to agree on the Prevailing Market Rate using the definition of Prevailing Market Rate in this Section 6.b. If the two arbitrators agree on the Prevailing Market Rate within the required 30-day period, the Prevailing Market Rate they agree on is the Prevailing Market Rate for the purposes of this Lease. If the two arbitrators do not agree on the Prevailing Market Rate within the required 30-day period, Landlord and Tenant will, within 10 days after the 30-day period, provide to each other and the third arbitrator their determinations of the Prevailing Market Rate, and the third arbitrator will, within 10 business days, pick one of the two determinations provided by Landlord and Tenant as the Prevailing Market Rate.
(iii) The arbitrators determination of the Prevailing Market Rate in accordance with this Section 6.b is final and binding on Landlord and Tenant. Each party will pay the fees of the arbitrator it appoints, and they will split the fees of the third arbitrator. All arbitrators must be real estate brokers with at least 10 years of continuous experience as leasing brokers for office and industrial property in Silicon Valley. The arbitrators have no power or authority to add to, modify, or change any provision of this Lease.
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7. Rent .
a. Phase 1 Net Rent . The Phase 1 Free Rent Period is the 365-day period that begins on the Phase 1 Rent Commencement Date. Starting on the day after the Phase 1 Free Rent Period and throughout the rest of the Initial Term, Tenant agrees to pay to Landlord net rent ( Net Rent ) with respect to the Phase 1 Premises in the following amounts during the following periods:
Phase 1 Net Rent | ||||
Phase 1 Months | Monthly Net Rent |
Monthly Net Rent
per
square foot |
||
Phase 1 Free Rent Period |
None | None | ||
Phase 1 Rent Commencement Date through Phase 1 Month 24 |
$113,420 | $2.50 | ||
25-36 |
$115,688 | $2.55 | ||
37-48 |
$117,957 | $2.60 | ||
49-60 |
$120,225 | $2.65 | ||
61-72 |
$122,494 | $2.70 | ||
73-84 |
$125,216 | $2.76 | ||
85-96 |
$127,484 | $2.81 | ||
97-108 |
$130,206 | $2.87 | ||
109-120 |
$132,928 | $2.93 | ||
121-end of Initial Term |
$135,650 | $2.99 |
Phase 1 Months means full calendar months in the Initial Term starting with the first full calendar month after the Phase 1 Delivery Date. For example, if the Phase 1 Delivery Date is March 15, 2013, Phase 1 Month 1 will be April, 2013, the Phase 1 Free Rent Period will be March 15, 2013 through March 14, 2014, and Tenant will first owe Net Rent with respect to the Phase 1 Premises on March 15, 2014 in a prorated amount for the period from March 15 through March 31, 2014. And, if the Phase 1 Rent Commencement Date is the same day as or after the Phase 2 Rent Commencement Date, the Initial Term will end on March 31, 2024.
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b. Phase 2 Net Rent . The Phase 2 Free Rent Period is the 180-day period that begins on the Phase 2 Delivery Date. Starting on the day after the Phase 2 Free Rent Period and throughout the rest of the Initial Term, Tenant agrees to pay Net Rent to Landlord with respect to the Phase 2 Premises in the following amounts during the following periods:
Phase 2 Net Rent | ||
Phase 2 Months |
Monthly Net Rent per
square foot |
|
Phase 2 Free Rent Period |
None | |
Phase 2 Rent Commencement Date through Phase 2 Month 24 |
$2.50 | |
25-36 |
$2.55 | |
37-48 |
$2.60 | |
49-60 |
$2.65 | |
61-72 |
$2.70 | |
73-84 |
$2.76 | |
85-96 |
$2.81 | |
97-108 |
$2.87 | |
109-120 |
$2.93 | |
121-end of Initial Term |
$2.99 |
Phase 2 Months means full calendar months in the Initial Term starting with the first full calendar month after the Phase 2 Delivery Date. For example, if the Phase 2 Delivery Date is September 15, 2013, Phase 2 Month 1 will be October, 2013, the Phase 2 Free Rent Period will be September 15, 2013 through March 14, 2014, and Tenant will first owe Net Rent with respect to the Phase 2 Premises (the Phase 2 Rent Commencement Date) on March 15, 2014 in a prorated amount for the period from March 15, 2014 through March 31, 2014. And, if the Phase 2 Rent Commencement Date is the same day as or after the Phase 1 Rent Commencement Date, the Initial Term will end on March 31, 2024.
c. Operating Costs and Taxes . In addition to Net Rent, Tenant agrees to pay to Landlord Tenants Share of Operating Costs and Taxes, in monthly installments that are due and payable in advance on or before the first day of each calendar month, starting on the Phase 1 Delivery Date as to the Phase 1 Premises, and on the Phase 2 Delivery Date as to the Phase 2 Premises, and throughout the remainder of the Term, in the estimated amount or amounts Landlord for which Landlord invoices Tenant. Landlord estimates that the initial Operating Costs and Taxes will be 38¢ per square foot. If the Phase 1 Delivery Date or the Phase 2 Delivery Date is not the first day of a month, Tenants Share of Operating Costs will be prorated as appropriate.
(i) Tenants Share means 33.33% for the Phase 1 Premises and 66.67% for the Phase 2 Premises; Tenants Share for the entire Premises is 100%.
(ii) Subject only to the limitations in the second paragraph of this Section 7.c.(ii), Operating Costs ) means all costs of every nature that Landlord pays or becomes obligated to pay, because of or in connection with owning, managing, operating, maintaining, repairing, preserving, and replacing the Project. Operating Costs include, without limitation, all costs relating to the following: (1) insurance premiums and related costs for insurance that Landlord is obliged or elects to obtain, including earthquake insurance subject to the cost
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limitations in Section 20.b, plus all deductibles Landlord pays, which will be treated as a capital cost if the $20,000 cost for the deductible is exceeded; (2) sweeping, cleaning, gardening, and landscaping; (3) garbage collection and disposal from the Outdoor Areas; (4) electrical service and all other utility services consumed at the Project, but not including utility services consumed in the Premises, (5) police supervision, security, and traffic control; (6) compensation, including wages and medical benefits of personnel and employees employed or engaged in the operation, maintenance, repair, replacement, supervision, and management of the Project and all payroll taxes, workers compensation, unemployment insurance, disability benefits insurance, and similar contributions, and expenses incurred by such personnel and employees in carrying out the operation, maintenance, repair, replacement, supervision and management of the Project, and uniforms and related expenses for such personnel and employees; (7) the operation of, and maintenance, repairs, and replacements to, the Outdoor Areas and to the roof, exterior walls, foundations, floors, and other structural components of the Buildings, including, without limitation, maintaining all services and utilities and all repairs and replacements to all signs, machinery, equipment, facilities, systems, and property installed in or used in connection with the Project, including any repairs and replacements required to comply with then-current Laws after the delivery date for each of the Buildings, as applicable; (8) repairs and replacements to and maintenance and operation of signs for the Project, whether owned or rented by Landlord and whether or not located in the Project; (9) engineering, accounting, legal and other consulting and professional services related to operating the Project, including the cost of preparing statements respecting Project expenses; (10) costs Landlord incurs in connection with the Project, such as maintaining and sweeping and cleaning municipal sidewalks, bus-stop shelters, and other adjacent property; any and all other expenses, including equipment rental, related to the existence of the Outdoor Areas and their use by and for the benefit of Tenant and the Tenant Parties; and (11) a property management fee equal to 3% of the Net Rent.
Notwithstanding the definition of Operating Costs in the preceding paragraph, all capital costs that exceed $20,000 per item will be amortized over Landlords reasonable estimate of the economic life of each such item, together with interest on the unamortized cost at the rate of interest charged by Landlords Mortgagee, if any, or at Landlords cost of funds if it were to borrow the funds for the capital costs. Also notwithstanding anything in the definition in the preceding paragraph to the contrary, Operating Costs does not include the cost of any of the following: (a) the violation of any law by Landlord or any other tenant of the Project; (b) work paid for by insurance proceeds, by condemnation proceeds, by other tenants of the Project, or by any other person; (c) interest, amortization, or other payments on loans or ground leases; (d) the funding of any expense reserves; (e) leasing commissions and other similar payments paid to agents or employees of Landlord, independent brokers, and other persons; (f) attorney, accounting, consulting, and other professional fees for negotiating or enforcing leases, obtaining or negotiating financing, marketing or selling all or any part of the Project, or otherwise in connection with an activity unrelated to the operation
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or maintenance of the Project; (g) construction, renovation, or improvement of leasable space for other tenants of the Project; (h) items and services for which Tenant otherwise reimburses Landlord; (i) advertising, marketing, and publicity; (j) remediating Hazardous Materials, except for the cost of purchasing, using, handling, and disposing of Hazardous Materials in the ordinary course of operating, maintaining, and repairing the Project, including but not limited to cleaning chemicals, construction materials, batteries, and fluorescent tubes; (k) wages, compensation, and labor burden for any employee to the extent the employees time is not devoted to the Project; or (l) capital costs that are not (1) for items that replacing existing capital items with similar items, or (2) required by Laws (as hereinafter defined), or (3) incurred to increase efficiencies in utility usage but limited to the amount of the savings from the installation.
(iii) Taxes means all taxes, assessments, and other governmental charges, general and special, ordinary and extraordinary, of any kind and nature, including but not limited to assessments for public improvements or benefits against the Project that are payable to any lawful authority. Taxes also includes any tax, assessment, excise, or surcharge of any kind with respect to all or any part of the Rent or the parking areas or the number of parking spaces in the Project, and all costs of contesting or negotiating the valuation of the Project or the amount of Taxes, except that if Landlord obtains a refund, Landlord will apply it against the Taxes during the period covered by the refund and will pay Tenant any refund or credit that applies. Taxes does not include: (i) late payment penalties and past due interest; (ii) any succession, transfer, gift, capital levy, or corporation tax levied against Landlord; or (iii) any real estate transfer tax, mortgage lien tax, documentary stamp tax, or recording fees. Tenant waives all rights to contest any Taxes.
d. Annual Statements of Operating Costs and Taxes . Within 180 days after the end of each of Landlords fiscal years during the Term, Landlord will deliver to Tenant a reasonably detailed statement of the Operating Costs and Taxes for that fiscal year (the Annual Statement ). If an Annual Statement reveals that Tenant paid more for Operating Costs and Taxes than the actual Tenants Share of Operating Costs and Taxes for the year covered by the Annual Statement, Landlord will, at its option, within 30 days, either credit or reimburse Tenant for the excess, except that if the Term has expired, Landlord has the right to apply the excess to any unpaid Rent or to the cure of any default by Tenant, and Landlord will reimburse any remaining amount to Tenant within 30 days. If an Annual Statement reveals that Tenant paid less for Operating Costs and Taxes than the actual Tenants Share of Operating Costs and Taxes for the year covered by the Annual Statement, Tenant will, within 30 days after demand, pay the deficiency to Landlord. Landlords failure to accurately estimate Operating Costs and Taxes or to deliver an Annual Statement when required does not waive Landlords right to collect any of Tenants underpayment and does not affect Tenants right to collect any overpayment until Landlord delivers an Annual Statement. During the 90-day period starting on the day Tenant receives each Annual Statement, Tenant has the right to review Landlords records of Operating Costs and Taxes for the year covered by that Annual Statement and has the right to challenge the amount of any Operating Costs and Taxes
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according to that Annual Statement by delivering to Landlord a written notice specifically describing the item or items Tenant is challenging and the reason for its challenge within the 90-day period after receiving the Annual Statement. Except for any items Tenant expressly so challenges in writing within 90 days, each Annual Statement will become final and accepted by both Landlord and Tenant at the end of such 90-day period and Tenant will be deemed to have fully and forever waived any claim or demand with respect to Operating Costs and Taxes for the year covered by that Annual Statement.
e. Definition of Rent . Additional Rent means all of the following: (i) Tenants Share of Operating Costs and Taxes; (ii) all utility costs for which Tenant is responsible under Section 10; (iii) all late charges under Section 7.f; and (iv) all other fees, charges, and other amounts this Lease obligates Tenant to pay to or for Landlords benefit or to any person other than Landlord. Rent means, collectively, Net Rent and Additional Rent.
f. Payment of Rent and Application of Payments . Tenant agrees to pay all Rent to Landlord without any notice or demand except to the extent this Lease expressly provides to the contrary, and without any abatement, deduction, credit, or offset of any kind. Tenant will pay all Rent to the person and at the address that Landlord designates in writing. Landlords initial address for Rent payments by check is:
Jay Ridge LLC
c/o Eagle Ridge Partners, LLC
5753 Wayzata Boulevard
St. Louis Park, MN 55416
Tenant may pay Rent by ACH or wire transfer. Landlords initial account information for payment by ACH or wire transfer is:
Jay Ridge LLC
Minnesota Bank and Trust
7701 France Avenue, Suite 110
Edina, Minnesota 55435
Account number 0161003215
ABA routing number 073900535.
Landlord may change its address or addresses for Rent payment at any time upon written notice to Tenant. All Rent is expressed and due in U.S. Dollars. Tenants obligation to pay Rent is independent from all of Landlords obligations and liabilities under this Lease and from all of Landlords warranties and representations, express or implied, that relate in any manner to this Lease or the Premises. Landlord has the same rights under California law for any non-payment of Additional Rent as Landlord would have for non-payment of Net Rent, but Additional Rent is not rent for the purpose of any rent or similar tax. Landlord has the right, in its sole discretion, to apply any payments from Tenant (whether equal to or less amount than the amount Tenant owes) to any Rent or other debts Tenant then owes in any order Landlord elects in its sole discretion. No endorsement or statement on any check or other payment or in any letter accompanying
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any check or other payment will be deemed an accord and satisfaction or bind Landlord or limit Landlords rights in any manner. Landlords acceptance of any check or other payment in partial payment of any past-due Rent does not waive Landlords right to receive all past-due Rent in full and does not waive Landlords right to evict Tenant or exercise any other right or remedy Landlord has with respect to any past-due Rent or other default by Tenant.
g. Late Payment . If Landlord does not receive any regular monthly installment of Net Rent and Additional Rent on or before the first business day of the calendar month in which it is due, or if any other payment of Rent is past due and Landlord does not receive such other payment of Rent within 5 days after giving Tenant written notice that it is past due, Landlord has the right to elect, in its sole discretion, to charge as a late fee an additional sum equal to 5% of the delinquent amount to compensate Landlord for its costs incurred in connection with the late payment, and, after 30 days, interest accruing on the unpaid amount from the date due at a per-annum rate equal to Wall Street Journal Prime Rate for the first business day of the applicable calendar year plus 4% but not to exceed the legal rate on judgments (the Interest Rate ). Tenant will pay such amount to Landlord together with the next monthly installment of Rent coming due after Landlord gives Tenant written notice of the charge. Landlords election not to charge a late fee or impose any interest that it would be entitled to charge with respect to any particular month or period of months will not waive Landlords right to do so at any time in the future, regardless of the duration of any pattern of late payment by Tenant, and Tenant hereby waives any such defense to the payment of any late fee or interest that Landlord elects to charge under this Section 7.g. Nothing in this Section 7.g in any way authorizes or permits Tenant to pay any Rent after the date such Rent is due. The parties agree that such late fees and interest are liquidated damages for late payment and represent a fair and reasonable estimate of the costs that Landlord will incur because of late payment by Tenant. Landlords acceptance of any late fee or interest or any partial payment of any past-due Rent does not waive Tenants default with respect to the delinquent amount and does not prevent Landlord from exercising any of its other rights and remedies with respect to Tenants default under this Lease. Notwithstanding the foregoing, if Landlord has not delivered a written notice of late payment within the preceding 12 months, Landlord may not assess a late fee unless Landlord gives Tenant a written notice of such late payment and Tenant does not cure the default within 3 days after it receives the notice. No other notices will be required during the following 12 months for a late fee to be incurred.
h. Tenants Personal Property Taxes . Tenant agrees to pay, before delinquency, all taxes assessed or levied on its occupancy of the Premises, or on Tenants leasehold improvements, trade fixtures, furnishings, equipment, and all other personal property in the Premises, and when possible, Tenant will cause such leasehold improvements, trade fixtures, furnishings, equipment, and other personal property to be assessed and billed separately from the Project or Landlords property. If any or all of Tenants leasehold improvements, trade fixtures, furnishings, equipment, and other personal property, or Tenants occupancy of the Premises, is assessed and taxed with Landlords property, Tenant will pay to Landlord its share of such taxes within 10 days after Landlord delivers a written statement of the amount of such taxes that apply to Tenants personal property.
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8. Prepaid Rent . On the same day Tenant signs and delivers this Lease, Tenant will pay Landlord $130,660 as prepaid Rent with respect to the Phase 1 Premises. So long as no Event of Default exists, Landlord will apply the prepaid rent for the Phase 1 Premises to the next installments of Net Rent and Operating Costs and Taxes that are first due on and after the Phase 1 Free Rent Period. On or before the Phase 2 Delivery Date, Tenant will pay Landlord prepaid Rent for the Phase 2 Premises in the amount of the first full monthly installment of Net Rent and Operating Costs and Taxes that will be due with respect to the Phase 2 Premises. So long as no Event of Default exists, Landlord will apply the prepaid rent for the Phase 2 Premises to the next installments of Net Rent and Operating Costs and Taxes that are first due on and after the Phase 2 Free Rent Period. But at any time an Event of Default exists, Landlord has the right, but no obligation, to apply the prepaid rent to cure the Event of Default or to compensate Landlord for any damages the Event of Default causes. The prepaid rent is earned on the date due and Landlord has no obligation to escrow or deposit the prepaid rent in a segregated account or to hold it in trust for Tenant.
9. Security Deposit . On the same day Tenant signs and delivers this Lease, Tenant will pay Landlord $444,625 (the Security Deposit ) to secure Tenants payment and performance of its obligations and liabilities under this Lease. The Security Deposit is not an advance payment of Rent nor a measure or limit of Landlords damages for any default by Tenant. Landlord may, at any time an Event of Default exists, without prejudice to any other remedy, use all or a part of the Security Deposit to perform or satisfy any obligation or liability that Tenant fails to pay or perform under this Lease. Following any such application of the Security Deposit, Tenant will pay to Landlord on demand the amount Landlord applied in order to restore the Security Deposit to its original amount. If Tenant pays and performs all of its obligations and liabilities under this Lease, Landlord will, within 30 days after the later of the last day of the Term or the day Tenant fully pays and performs all of its obligations and liabilities, return to Tenant the unapplied portion of the Security. Landlord may commingle the Security Deposit with other funds, and no interest will accrue or be owed on the Security Deposit. If Landlord transfers its interest in the Premises and transfers the Security Deposit to the transferee, Landlord will have no obligation or liability to Tenant with respect to the return of the Security Deposit.
Tenant has the right, upon 90 days notice to Landlord, at Tenants sole cost, to replace the Security Deposit with an irrevocable, unconditional, standby letter of credit, in the same amount as the required amount of the Security Deposit on terms that are satisfactory to Landlord and its Mortgagee (such letter of credit, together with any renewal or replacement letters of credit delivered or to be delivered by Tenant under this Section are, collectively, the Letter of Credit ). Each Letter of Credit must be issued by a national bank (the LC Issuer ) acceptable to Landlord. If Landlord requests, the Letter of Credit must be made out to Landlords lender as the beneficiary or, if the LC Issuer will do it, to Landlord and its lender or lenders as co-beneficiaries, and Tenant will pay any additional charge by the LC Issuer for such change. Landlord has the right, upon any transfer of its interest in all or any part of the Premises, to require Tenant to deliver a replacement Letter of Credit designating Landlords successor as the beneficiary, provided that Landlords successor may not obtain possession of the replacement Letter of Credit until Landlord has surrendered the then-outstanding Letter of Credit. If the
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Letter of Credit expires before 60 days after the scheduled end of the Term , Tenant must extend or renew it or replace it by delivering to Landlord a new, renewed, or extended Letter of Credit at least 60 days before the expiration date of the then-current Letter of Credit. Except for any Letter of Credit that expires on or after the 60 th day after the scheduled end of the Term, no Letter of Credit, and no any renewal or extension of it, may have an expiration date less than 12 months from the date it is issued, renewed, or extended. The Letter of Credit secures Tenants obligations and liabilities under this Lease. The Letter of Credit must permit Landlord to make partial draws. At any time when any Rent is past due under this Lease or Tenant owes any other amount to Landlord in connection with this Lease or the Premises that is past the date when such amount is due, Landlord may make a partial or full draw or draws upon the Letter of Credit in the amount of such unpaid Rent or other amount and apply the proceeds of such draw against such amounts Tenant owes Landlord. Landlord is also entitled to draw on the full amount of the Letter of Credit at any time the Letter of Credit is not maintained, renewed, extended, replaced, or restored as this Section requires, in which case the proceeds of the draw will be the sole property of Landlord, which Landlord will hold and apply as a substitute for the Letter of Credit. Landlord is not required to exercise any other remedy available to it under this Lease or otherwise at law before drawing on the Letter of Credit in accordance with this Section, and no such draw upon the Letter of Credit will in any manner prejudice Landlords right to exercise any other remedy. Neither the Letter of Credit nor the proceeds of any draw upon the Letter of Credit constitute an advance rent deposit or a measure of Landlords damages with respect to any default by Tenant. No draw under the Letter of Credit waives or cures any default by Tenant under the Lease.
10. Utilities . Tenant will cause each utility provider to set up an account for the Phase 1 Premises as of the Phase 1 Delivery Date, and for the Phase 2 Premises as of the Phase 2 Delivery Date, in Tenants name and to bill Tenant directly for all utilities supplied to the Phase 1 Premises from the Phase 1 Delivery Date, and all utilities supplied to Phase 2 Premises from the Phase 2 Delivery Date, throughout the Term. Tenant agrees to pay when due for electrical service, water, sewer service, natural gas, telecommunications services, garbage removal, and all other utility services supplied to or consumed in, at, or from the Premises and all related access charges and connection fees. No discontinuance of any utility service to the Premises will entitle Tenant to terminate this Lease, to any abatement of or credit against any Rent, or to any damages or any other relief from Landlord.
11. Permitted Use, Restrictions on Use . Landlord hereby grants Tenant the right to use and occupy the Premises during the Term for general office and training purposes and related ancillary uses that are lawful (the Permitted Use ), and for no other purpose. Tenant will not use, and will not permit any other Tenant Party to use, the Premises for any retail, or residential purpose or for any purpose that is prohibited by or will cause a cancellation of any insurance policy that covers the Project, or that will increase the cost of any insurance that covers Project. Tenant will not commit, or permit any other Tenant Party to commit, any waste in the Premises, or any public or private nuisance, or any other act or thing that disturbs or offends Landlord or any other tenant in the Project or interferes with the quiet enjoyment of any other tenant. Tenant will not permit any objectionable odors, smoke, dust, gas, noise, or vibrations to emanate from the Premises. Tenant will not do anything in the Premises or anywhere else in the Project that will damage the Premises or the Project and Tenant will not overload the floor capacity of the Premises or the Project. Tenant will not, and will not permit any other Tenant Party to, use any
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machinery or equipment that in any manner injures, vibrates, or shakes the Premises. Tenant will not, and will not permit any other Tenant Party to, conduct any sale by auction, any fire sale, or any bankruptcy or going-out-of-business sale in the Premises. Tenant will not, and will not permit any other Tenant Party to, broadcast from the Premises any music, public addresses, or advertisements, or maintain or display in the Premises or in the Project any excessively bright lights, changing, flashing, or flickering lights or lighting devices other than signs Landlord approves. Tenant will not, and will not permit any other Tenant Party to, dump, place or leave any garbage or waste except in trash containers placed inside exterior enclosures that Landlord designates for that purpose. Tenant will not permit, and will not permit any other Tenant Party to, dispose of any Hazardous Materials through the plumbing or sewage system.
12. Outdoor Areas . All ground level exterior parking areas, drive aisles, driveways, sidewalks, and landscaped areas in the Project, but not including utility boxes, maintenance and utility areas, and similar areas not intended for use or access by Tenant Parties, are the Outdoor Areas . The Outdoor Areas do not include the roof of any of the Buildings or any underground area. Tenant has the exclusive right to use the Outdoor Areas, subject to Landlords right to enter the Outdoor Areas to perform all of its obligations and liabilities under this Lease, to exercise all of its rights under this Lease, and for all other purposes that do not materially interfere with Tenants rights under this Lease, including, without limitation, Tenants right to use all of the parking stalls at the Project. Landlord has the right to impose reasonable rules and regulations for the use of the Outdoor Areas at any time, as long as those rules and regulations do not materially impair or conflict with any of Tenants rights under this Lease. Landlord has the right to close off or restrict access to any part of the Outdoor Areas at any time to prevent the public or any other person from obtaining rights in the Outdoor Areas, by adverse possession or otherwise, to perform repairs and replacements, and to construct new improvements.
13. Compliance with Laws and Recorded Matters . Tenants right to use the Premises and the Outdoor Areas is subject to Tenants obligation to comply at its sole cost with, and to cause its subtenants, any other sub occupant of the Premises, and their employees, agents, representatives, licensees, contractors, and invitees (each of Tenant and such other persons is a Tenant Party ) to comply with, the following: (i) all statutes, laws, rules, regulations, ordinances, codes, permits and orders of all federal, state and local governments, departments and agencies that apply to the Premises, including but not limited to the condition of, and Tenants use, occupancy or alteration of the Premises (collectively, Laws ); (ii) all documents, matters, and instruments that have been or are in the future recorded in the real estate records (collectively, the Recorded Matters ), except that Tenant has no obligation to pay any fees or amounts the Recorded Matters obligate the owner of the encumbered land to pay, and except that Tenant will not be bound by the terms of any Recorded Matter first recorded after the date of this Lease to the extent such future Recorded Matter materially reduces Tenants rights or increases Tenants obligations under this Lease; and (iii) the requirements of any insurance underwriting board, inspection bureau or insurance carrier insuring the Premises or any other part of the Project. Tenant is solely responsible for ensuring that the Premises meet Tenants needs, and that each Tenant Partys occupancy and use of the Premises complies with all Laws and Recorded Matters throughout the Term. Tenant will perform, at its sole cost, any modifications to the Premises, the Outdoor Areas, or any other part of the Project that any Law requires because of Tenants special needs, use, or business. This Lease will remain in full force and effect notwithstanding any loss of use or other effect on Tenants enjoyment of the Premises as the result of any Laws that are now in effect or that first come into effect in the future.
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14. Signs . To the extent permitted by applicable Law, and subject to Landlords approval, which Landlord will not unreasonably withhold, Landlord will (i) build a pylon sign ( Tenants Pylon Sign ) substantially in accordance with the sign plans (the Sign Plans ) in Exhibit G to this Lease, (ii) place Tenants sign panels on the sign monuments substantially as shown on the Sign Plans, and (iii) place Tenants signs on the exterior of the Premises substantially as shown on the Sign Plans (collectively, all of these signs are the Tenants Signs ). Tenant acknowledges that the Sign Plans are preliminary and have not been approved by the city and that any revisions to the Sign Plans require Landlords approval, which Landlord will not unreasonably withhold. Tenant will pay all costs of installing Tenants Signs, either as a Tenant Improvement Cost, or otherwise. In addition, subject to Tenants obtaining all required governmental permits and licenses, Tenant has the right to install a temporary sign at the Project announcing that it will be Tenants future location. Tenant has the exclusive right to use Tenants Pylon Sign. Tenant will not place, or permit any other Tenant Party to place, any other sign, marquee, awning, banner, decoration, or other attachment on the roof, on the front or side exterior walls of the Premises, on the exterior windows of the Premises, or in any other area of the Project without Landlords approval, which shall not be unreasonably withheld. Landlord agrees to remove all San Tomas Technology Park signs from the Project. Landlord will, at its sole cost, obtain all required governmental permits and approvals for the installation of each Tenants Sign. Tenant will, at its sole cost, maintain all Tenants Signs in good condition, and will promptly perform all repairs and replacements needed to keep the Tenants Signs in good condition.
15. Parking . Tenant has the right to use, at no additional cost, all parking stalls available at the Project. Landlord agrees, in connection with the delivery of the Phase 2 Premises, to construct the parking and driveway areas at the Project substantially as shown in the site plan in Exhibit A-1 , and stripe the parking areas for parking stalls substantially as shown in Exhibit A-1 . Landlord agrees not to reduce the number of parking stalls at the Project below 449 unless required to do so by law or as the result of a taking or an alteration to the Outside Area required by any alteration Landlord makes to the Project at Tenants request. At Tenants discretion, it can require, as part of the Tenant Improvement Work and as a Tenant Improvement Cost, the marking of up to 10 parking stalls for visitor parking.
16. Tenants Maintenance and Repair Responsibilities . Tenant will, at its sole cost, perform all maintenance, repairs, and replacements to all parts of the Premises (excluding only the roof, the foundation, and the load-bearing portion of load-bearing walls) that are necessary to keep the Premises sanitary, neat, presentable, and in good working order, condition, and repair at all times. Without limiting the generality of the preceding sentence, Tenants maintenance, repair, and replacement obligations under this Section apply to, but are not limited to, all of Tenants signs; all windows, doors, truck doors, and other penetrations in the outer walls of the Premises; all portions of all walls other the exterior face of exterior walls and the load-bearing portions of walls; floor coverings, and ceilings; all HVAC equipment and systems that serve the Premises; all other mechanical, electrical, plumbing, lighting, life-safety, and utility systems, equipment, conduits, pipes, ducts, and lines that serve only the Premises; and all fixtures and appliances inside the Premises. Tenant will also repair, or reimburse Landlord for, any blockage of or damage to the sewer lines and sewer system at the Project that results from
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anything that enters the sewer lines from the Premises. Tenant will provide and pay for all garbage removal from the Premises Tenant will perform all repairs and replacements with first-class materials and with first-class workmanship. Tenant will, at Tenants sole cost, maintain throughout the Term a contract or contracts with a contractor or contractors specializing and experienced in the maintenance of HVAC equipment, for the maintenance of the HVAC equipment serving only the Premises, provided that the contract must require that the filters be changed at least every quarter. Notwithstanding the preceding sentences of this Section, if any maintenance, repair or replacement costs more than $20,000 per repair or replacement and has a useful life at least 3 years beyond the end of the then Term, Tenant must obtain Landlords approval, which Landlord will not unreasonably withhold, and Tenant will be responsible for such repair or replacement, but the cost will be treated as a capital cost under Section 7.c.(ii) except that the cost will be allocated so that Tenant will pay its amortized share covering the rest of the then Term in one lump sum and Landlord will pay the unamortized portion in one lump sum, and except that if Tenant subsequently extends the Term, Tenant must pay Landlord, in a lump sum due at the beginning of the extension of the Term, the portion of the cost that would be amortized over the extension term.
17. Landlords Maintenance and Repair Responsibilities . Landlord will, at its sole cost, but subject to reimbursement in accordance with this Lease for all such costs that are Operating Costs, maintain, repair, replace, and keep clean and in good working order: the Outdoor Areas; all other areas outside of the Premises; the exterior surface of all exterior walls, but not including any exterior improvements or elements installed by or for any Tenant Party; the load-bearing elements of load-bearing walls; the foundation of the Premises; and the structural elements of the roof of the Premises. If Tenant believes any part of the Premises needs repairs that Landlord is responsible for under this Lease, Tenant will give Landlord prompt written notice and Landlord will not be responsible for failing to make any such repairs until a commercially reasonable time has elapsed after Landlord received Tenants written notice. Landlords obligation under this Section is limited to only the repairs this Section requires Landlord to make and Landlord is not liable for any damage or injury arising out of any condition or occurrence that causes a need for such repairs. Tenant waives all rights under and benefits of California Civil Code Sections 1932(1), 1941, and 1942 and under any similar law, statute, or ordinance now or hereafter in effect.
18. Tenants Alterations . Alterations means all improvements any Tenant Party constructs in the Premises, all alterations and modifications any Tenant Party makes to the Premises, and all equipment and personal property that becomes a fixture upon being installed in or attached to the Premises in any manner by any Tenant Party. Tenant has no right to make any Alterations without Landlords written consent, except that Tenant does not need Landlords consent to make non-structural Alterations that do not affect building systems and cumulatively cost less than $75,000 per Alteration ( Minor Changes ). It is reasonable for Landlord to withhold or condition its consent to any Alteration that would affect the structure of any of the Buildings, any Alteration that would affect the structure of any of the Buildings and any alteration or improvement to the exterior of the Premises. Except for the Tenant Improvements, Landlord also has the right, in its sole discretion, to condition its consent to any Alterations upon the right to require Tenant to remove some or all of those Alterations at the time the Term or Tenants right to possession ends and, as to Minor Changes, Landlord will elect within 10 business days after request from Tenant whether the Minor Changes have to be removed at the
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end of the Term. Tenant will construct and install all Alterations at its sole risk and expense, in a first-class, good, and workmanlike manner, in accordance with any plans and specifications that Landlord has approved in writing, and in accordance with all Laws. Landlords approval of any plans and specifications for any Alterations is not a representation by Landlord that such Alterations comply with any Law. Tenant will not make any Alterations that results or would result in a labor dispute or otherwise would materially interfere with Landlords operation of the Project. Subject to applicable Law, if any work results in a labor dispute, Tenant will stop the work immediately, remove the workers, contractors, or mechanics responsible for the dispute, and replace them with workers, contractors and mechanics whose work will not result in a labor dispute. The Tenant Improvements and any other Alterations are Tenants property until the earlier of the end of the Term or the termination of Tenants right to possession, but upon the earlier of the end of the Term or the termination of Tenants right to possession, all Alterations will automatically become Landlords sole property without signing or delivering any document or taking any action, and without any additional payment or other consideration from Landlord. Notwithstanding the foregoing, Landlord is entitled to depreciation with respect to the Tenant Improvements in the amount of the Allowance and any other allowance Landlord pays. Except to the extent Landlord obligates Tenant to do so in accordance with Section 30, Tenant will not remove any Alterations from the Premises except removable trade fixtures that Tenant installs at its own cost. Tenant will repair any damage that results from removing any Alterations. Tenant will perform all such removals and repairs in a first-class, good, and workmanlike manner. If Tenant fails to remove any Alterations that Landlord has required it to remove, Tenant will reimburse Landlord for the cost of removing them and repairing all damage.
19. Liens . Before starting any work or services that could give rise to a lien, Tenant will post on the Premises a Notice of Non-Responsibility and give Landlord at least 10 days notice before the work starts so that Landlord can confirm that the Premises have been properly posted, and Tenant will maintain the posting as long as is necessary to give effective notice that Landlord has not authorized and is not responsible for any lienable work, materials, or services. Landlords consent to any work does not constitute Landlords authorization of such work or services for the purposes of any lien law, and will not subject Landlords interest in the Project to liability under any lien law. Tenant must pay when due all charges for all labor, material, and services provided to or for Tenants benefit in connection with the Premises, and Tenant will keep the Project free from any liens arising out of any labor, materials, or other services provided to or for Tenants benefit. Upon Tenants receipt of a preliminary 20-day notice filed by a claimant in accordance with California Civil Code Section 3097 or any successor or similar statute, Tenant will immediately give Landlord a copy of the notice. If any lien is recorded or otherwise placed on all or any part of the Project because of any such labor, materials, or services, Tenant will immediately give Landlord written notice of the lien and remove it of record within 10 days after it receives of notice of the lien. If Tenant fails to remove the lien within 10 days, Landlord has the right, but has no obligation to, remove the lien of record by bond, payment, or other means and Tenant will pay Landlord the full cost of removing the lien within 10 days after demand, including all attorney fees. Tenant is solely responsible for all work, materials, and other services provided with respect to the Premises during the Term except for any improvements Landlord has expressly agreed in this Lease to construct. If Tenant is required to post an improvement bond with a public agency in connection with any work performed by Tenant on or to the Premises, Tenant will include Landlord as an additional obligee.
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20. Insurance and Indemnification .
a. Tenants Insurance . Tenant will, at Tenants sole cost, but for the benefit of both Landlord and Tenant, obtain and maintain throughout the entire Term: (i) commercial general liability insurance on an occurrence form covering claims for bodily injury, death, personal injury or property damage occurring on, in or about the Premises with a combined single limit of not less than $3,000,000, including blanket contractual liability coverage to insure Tenants performance of its indemnity obligations under this Lease; (ii) special form property insurance coverage in the amount of the full replacement value of any Alterations other than the Tenant Improvements; (iii) workers compensation insurance as required by Law; (iv) employers liability insurance, as required by Law, in the amount of $1,000,000 each accident for bodily injury, $1,000,000 policy limit for bodily injury by disease and $1,000,000 each employee for bodily injury by disease; and (v) automobile liability insurance including coverage for owned, hired, and non-owned automobiles.
b. Landlords Insurance . Landlord will, maintain special form property insurance coverage in the amount of the full replacement value of the roof, exterior walls, exterior doors and windows, foundation, floor, and other structural components of the Buildings, including the Warm Shell Work (collectively, the Building Shell ), the Outdoor Areas, and the Tenant Improvements. Neither Tenant nor any of its affiliates or subtenants is liable to Landlord for any loss or damage (including loss of income), regardless of cause, resulting from any cause covered by the property insurance this Section requires Landlord to maintain. Landlords property insurance will include rent loss coverage and may include flood insurance, or earthquake insurance, but Landlord has no obligation to maintain any of those coverages, and provided that Tenants obligation to pay for the cost of any earthquake insurance premium will not exceed the lesser of the actual cost of such premium or 3.5 times the cost of the fire and all risk policy premium (the Reimbursable Earthquake Insurance Premium Cap ). Landlord is not obligated to insure any Alterations other than the Tenant Improvements.
c. Policy Requirements . All insurance policies this Lease requires either Landlord or Tenant to maintain must name the other party as an additional insured and must be written with insurance companies licensed to do business in the State of California, with an A.M. Bests rating of A-VII or better. In addition, Landlord has the right to require Tenant to have Landlords Mortgagee named as an additional insured or loss payee on the insurance this Lease obligates Tenant to maintain. Before the Phase 1 Delivery Date, Tenant will deliver to Landlord certificates of insurance evidencing that all insurance this Lease requires Tenant to maintain is in full force and effect. Each such certificate, or the insurance policy, must require the insurer to notify Landlord in writing 30 days before any cancellation or material change in coverage. Tenant must also deliver to Landlord, similar certificates of renewal policies of at least 10 days before each policy expires. All insurance this Lease requires Tenant to maintain must, except for workers compensation and employers liability insurance, be primary, without right of contribution from any insurance maintained by Landlord, whose insurance is excess insurance only. Any umbrella liability policy or excess liability policy, which must be in following form, must provide that if the underlying aggregate is exhausted, the excess
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coverage will drop down as primary insurance. The limits of insurance Tenant maintains do not limit Tenants liability under this Lease. The insurance this Lease requires Tenant to maintain must cover all damage or injury that results from Tenants operations of its business or any Tenant Partys use of the Premises or any other part of the Project, whether such events occur in the Premises or in any other part of the Project, so that Tenants insurance carriers, and not Landlords, bear such risks of loss.
d. Waiver . Landlord and Tenant each hereby releases the other from any claim for any injury to or death of any person or persons or damage to or theft, destruction, loss, or loss of use of any property, or for any loss or damage caused by fire or any other casualty (collectively, a Loss ), to the greater of the extent such Loss is insured against under any insurance policy the releasing party actually maintains, or to the extent such Loss would be insured by any insurance policy this Lease requires the releasing party to maintain, regardless of whether the negligence of the other party caused or contributed in any manner to such Loss, and regardless of whether the releasing party is self-insuring any such risk.
e. Increase in Premiums . Tenant will pay any increase in the premiums for any insurance policies Landlord maintains that results from any use Tenant makes of the Premises. In determining whether increased premiums are the result of Tenants use of the Premises, a schedule, issued by the organization making the insurance rate on the Premises, showing the various components of such rate, will be conclusive evidence of the items and charges that make up the insurance rate on the Premises. Tenant will reimburse Landlord for any such additional premiums within 30 days after receiving Landlords written invoice.
f. Indemnification . Landlord will indemnify and defend Tenant and its officers, directors, and employees from and against any and all losses, damages, claims, suits or actions, judgments and costs (including reasonable attorney fees) arising out of any injury to or death of persons or damage to property occurring in the Outdoor Areas, except to the extent caused by Tenants intentional acts or intentional omissions or Tenants breach of this Lease. Tenant will indemnify and defend Landlord, any Mortgagee, and their officers, directors, and employees from and against any and all losses, damages, claims, suits or actions, judgments and costs (including reasonable attorney fees) arising out of any injury to or death of persons or damage to property in the Premises, except to the extent caused by Landlords intentional acts or intentional omissions or Landlords breach of this Lease.
21. Landlords Right to Enter . Tenant grants Landlord and its authorized representatives the right, upon reasonable prior notice (generally 24 hours), except in the case of an emergency, to enter the Premises at all reasonable times to: (i) inspect the Premises; (ii) perform any obligations this Lease requires or permits Landlord; (iii) show the Premises to prospective purchasers, investors, lenders, tenants, and others (in the last 9 months of the Term); (iv) post notices; (v) maintain, repair, or alter the Premises or any other parts of the Buildings; and (vi) cure any breach of this Lease by Tenant. In entering the Premises under this Section, Landlord will make reasonable efforts to minimize any interference with Tenants business use of the Premises. Landlord has the right to use any and all means Landlord deems necessary to
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enter the Premises in an emergency. Tenant waives any claim for damages or for any injury or inconvenience to or interference with Tenants business, or any other loss caused by any entry by Landlord in the Premises except for any claim arising out of the intentional misconduct of Landlord or its agents, employees, contractors or invitees.
22. Damage or Destruction . If fire or any other casualty makes all or any part of the Premises untenantable and if the Building Shell and Tenant Improvements can reasonably be expected to be repaired within 270 days from the date of the casualty, Landlord will repair and restore the Building Shell and the Tenant Improvements to substantially the condition in which Landlord delivered them to Tenant and Tenant will, as soon as is reasonably practicable, restore the remainder of the Premises to substantially the same condition that existed before the casualty and reopen for business, and this Lease will remain in full force and effect, except that Rent will abate following such casualty and during Landlords repair and restoration work to extent the carrier providing rent loss coverage determines that the casualty damage has rendered the Premises untenantable. If fire or any other casualty makes all or any part of the Premises untenantable and the Building Shell and Tenant Improvements cannot reasonably be expected to be repaired within 270 days from the date of the casualty, or within 90 days during the last 12 months of the Term, either Landlord or Tenant, by written notice to the other within 90 days from the date of the casualty, has the right to terminate this Lease effective on a date within 30 days after the date of such notice. Landlords obligation to perform any repairs and restoration is limited to the amount of the actual net insurance proceeds it receives plus its deductible, or that it would have been entitled to receive if Landlord had maintained the property insurance this Lease requires it to maintain, plus deductible unless Tenant agrees to pay the portion of the repairs not covered by insurance. Accordingly, if any Mortgagee refuses to release the proceeds of any casualty insurance to be applied to the repair and restoration of the Premises, Landlord has the right to terminate this Lease upon written notice to Tenant. Each of Landlord and Tenant waives its rights under California Civil Code sections 1932(2) and 1933(4) (which permit the termination of a lease upon destruction of the leased premises), and agrees that this Section governs with respect to any damage to or destruction of the Premises or any other part of the Project.
23. Condemnation . If all or any part of the Premises is permanently taken or condemned under any Law, or by right of eminent domain, or by private purchase in lieu of condemnation (a Taking ), or a material portion of the Outdoor Areas is permanently taken and that Taking materially interferes with Tenants use of the Premises, the Term will end on the date possession is to be taken by the authority and Tenant will pay all Rent due up to that date, and Tenant hereby waives any claim against Landlord or the authority effecting the Taking for the value of the unexpired portion of the Term or for damages or for any other reason, except that Tenant reserves the right to make a claim against the authority effecting the Taking for reimbursement of its relocation expenses and for the value of its personal property in the Premises. If a Taking occurs and this Lease is not terminated under the preceding sentence, this Lease will remain in full force and effect and Tenant has no right to any part of any award. Tenants rights under this Section are its sole and exclusive rights with respect to any Taking. To the maximum extent permitted by Law, Tenant waives the benefits of any Law that gives Tenant any abatement or termination rights or any right to receive any payment or award in connection with any Taking other than the rights this Section expressly gives Tenant.
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24. Assignment, Subletting, and Change in Control . Lease Transfer means any of the following: (i) any assignment or other conveyance or transfer of any or all of Tenants rights or obligations under or interest in this Lease (an Assignment ); (ii) any sublease of all or any part of the Premises or other grant to any other person of any right to occupy or use all or any part of the Premises (a Sublease ); or (iii) any mortgage, security interest, or other lien or encumbrance on any or all of Tenants interest in this Lease or in the Premises. Tenant agrees not to cause or permit any Lease Transfer without Landlords prior written consent, except that Landlord agrees that Tenant may, without Landlords consent, enter into an Assignment or Sublease with or to a parent, subsidiary, or other entity that owns and controls, or is owned and controlled by Tenant, or is under common ownership and control with Tenant, as a result of a merger or otherwise, or acquires all or substantially all of Tenants assets and will continue to carry on Tenants business at the Premises (a Permitted Affiliate Lease Transfer ). The transferee of a Permitted Affiliate Lease Transfer is a Permitted Transferee . It is reasonable for Landlord to withhold or condition its consent to any Lease Transfer other than a Permitted Affiliate Lease Transfer if, among other things: (a) Tenant has requested a change in the Permitted Use; or (b) the Lease Transfer requires any Mortgagees consent and the Mortgagee does not consent. If Tenant enters into any Assignment, including any Permitted Affiliate Lease Transfer, the assignee must sign and deliver to Landlord an assumption of all of the tenants obligations and liabilities under this Lease that arise or relate to any time on and after the Assignment. If Tenant enters into any Assignment or Sublease other than a Permitted Affiliate Lease Transfer, Landlord is entitled to receive, as Additional Rent, 50% of the excess of (1) all sublease rent, any fee paid in connection with any assignment, and all other consideration or compensation of any nature whatsoever that Tenant receives for or in connection with any Assignment or Sublease for use of the Premises, less any brokers commission and attorneys fees Tenant pays as a result of the Assignment or Sublease, to the extent the commission does not exceed a market rate commission, less the reasonable cost of any work Tenant performs in the Premises or any tenant improvement allowance Tenant pays, and less unamortized TIs, over (2) the Rent allocable to the portion of the Premises covered by the Assignment or Sublease. Landlords consent to any particular Lease Transfer is not consent to any other Lease Transfer. This prohibition against assigning or subletting without consent includes a prohibition against any assignment or subletting by operation of law. If Tenant enters into any Assignment or Sublease, Landlord has the right to collect rent or receive rent directly from the assignee, subtenant, or occupant and apply the net amount collected to the Rent, but such collection or receipt of rent will not be deemed a consent to such Assignment or Sublease. Notwithstanding any Lease Transfer, including any Permitted Affiliate Lease Transfer, either without or without Landlords consent, Tenant and any guarantor of Tenants obligations under this Lease will remain fully and primarily liable for all of the obligations and liabilities of the tenant under this Lease throughout the remainder of the Term, as this Lease is extended, renewed, amended, supplemented, restated, or otherwise modified at any time, jointly and severally with the assignee or other transferee. Except pursuant to a public offering or if Tenant is publicly traded, if all or any part of the ultimate beneficial ownership interests in Tenant are transferred in any manner, in one or more transactions, including but not limited by sale, assignment, bequest, inheritance, merger, consolidation, redemption, issuance of new interests, operation of Law, or any disposition so as to result in a change in the present effective voting control of Tenant by the person or persons holding such voting control on the date of this Lease, that event will constitute an Assignment for the purposes of this Section. Tenant agrees to make available to Landlord or
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its lawful representatives all organizational books and records of Tenant for inspection at all reasonable times, to ascertain whether there has in fact been a change in control. If Tenant requests Landlords consent to any Lease Transfer, Tenant will pay Landlord $500 for Landlords internal costs for considering such request, and will also reimburse Landlord, promptly upon demand, for all of Landlords reasonable attorney fees incurred in connection with the request.
Other than for a Permitted Affiliate Lease Transfer, if Tenant requests Landlords consent to an Assignment of the Lease, or to a Sublease of substantially all of a Building for substantially all of the remaining Term, Landlord has the right to terminate the Lease, if the transfer is of the entire Premises, or recapture the applicable portion of the Premises, as applicable, upon written notice to Tenant. If Landlord exercises this right, the Lease will terminate, or the relevant portion of the Premises will be excluded from the Premises under this Lease, as applicable, effective on the date the proposed Assignment or Sublease would have occurred.
25. Events of Default . Any one or more of the following events will, at Landlords option, constitute an Event of Default under this Lease:
a. Rent Default . Tenant fails to pay any installment of Rent as and when due and the failure continues for 5 days.
b. Non-Rent Default . Tenant fails to comply with any term of this Lease other than its obligation to pay Rent and either: (i) Tenant fails to cure the default within 30 days after notice (or within any shorter cure period this Lease provides for), or (ii) if Tenant can reasonably cure the default but not within 30 days after notice, (a) Tenant does not promptly start to cure the default but not later than within 30 days after notice, (b) Tenant does not continue to diligently pursue a reasonable cure, (c) Tenant does not act in good faith, or (d) Tenant does not complete its cure of the default within 90 days after the written notice.
c. Insolvency . Any of the following (collectively, Events of Bankruptcy ): (i) Tenant or any guarantor of Tenants obligations under this Lease becomes insolvent, as that term is defined in Title 11 of the United States Code entitled Bankruptcy, 11 U.S.C. §101 et seq. (the Bankruptcy Code ), or under the insolvency Laws of any State, District, Commonwealth or territory of the United States ( Insolvency Laws ); (ii) the appointment of a receiver or custodian for any and all of the property or assets of Tenant or any guarantor of Tenants obligations under this Lease, or the institution of a foreclosure action upon any of the real or personal property of Tenant or any guarantor of Tenants obligations under this Lease; (iii) the filing of voluntary petition under the provisions of the Bankruptcy Code or Insolvency Laws by Tenant or any guarantor of Tenants obligations under this Lease; (iv) the filing of an involuntary petition against Tenant or any guarantor of Tenants obligations under this Lease as the subject debtor under the Bankruptcy Code or Insolvency Laws that either is not dismissed within 30 days of filing, or results in the issuance of an order for relief against the debtor, whichever is later; (v) the making or consenting to an assignment for the benefit of creditors or a common law composition of creditors by Tenant or any guarantor of Tenants obligations under this Lease; or (vi) the filing of petition or other action to
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reorganize or modify the capital structure of Tenant or any guarantor of Tenants obligations under this Lease if Tenant or such guarantor is a corporation or other business entity.
26. Remedies .
a. Remedies for an Event of Default . At any time after the occurrence of an Event of Default:
(i) Remain out of Possession . Landlord has the right to remain out of possession of the Premises and sue Tenant at any time for any and all past-due Rent, for specific performance of Tenants obligations under this Lease, and for any other damages or injunctive relief to which Landlord is entitled.
(ii) Terminate Right to Possession Only . Landlord has the right, without demand or notice to Tenant, to terminate Tenants right to possession of the Premises only without terminating this Lease or the Term, in which case Landlord has the option to pursue any one or more of the following remedies without any notice or demand whatsoever:
(1) Landlord is entitled to take possession of the Premises. If Tenant or any other Tenant Party fails to surrender possession, Landlord is entitled to evict such Tenant Party pursuant to California law without being liable for prosecution or any claim for damages. No eviction action, and no reentry or accepting or taking possession of the Premises by Landlord constitutes an election by Landlord to terminate this Lease, and Tenant waives any claim that Landlord has terminated this Lease unless Landlord delivers an express written notice of termination to Tenant.
(2) Landlord has the right to perform on Tenants behalf, and at Tenants cost, any action this Lease obligates Tenant to perform.
(3) Tenant must continue to pay all Rent as and when due, even if Landlord has relet any or all of the Premises.
(4) Landlord has the right to re-let all or any part of the Premises, in the name of Landlord or otherwise, for such term or terms (which may be greater or less than the period that would otherwise have constituted the balance of the Term) and on such other conditions (which may include concessions or free rent) that are satisfactory to Landlord in its sole discretion. Upon any re-letting, Landlord has the right to determine and collect and receive all rent. Landlord will make commercially reasonable efforts to mitigate its damages at any time after terminating Tenants right to possession and before terminating this Lease, but Landlord will be deemed to have satisfied any obligation to mitigate damages, whether under this Lease or any Law, if Landlord markets the Premises for lease in the ordinary course of business and uses its reasonable business judgment in determining whether to accept or reject
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any offer in the same manner it would if this Lease had expired on the scheduled expiration date and Tenant no longer had any obligation to pay any Rent or damages to Landlord.
(5) If Landlord relets any or all of the Premises, Tenant must pay Landlord, within 10 days after demand, the costs Landlord incurs in such reletting and in making alterations and repairs. Landlord will apply all rent it receives from any re-letting to any indebtedness Tenant owes Landlord other than Net Rent and Operating Costs and Taxes, to the cost of any repairs that are required to return the Premises to good condition, including the cost of alterations and the cost of storing any of Tenants property left on the Premises at the time of reletting, and to Net Rent and Operating Costs and Taxes that Tenant owes. Landlord will hold the residue, if any, and apply it to any future Rent or damages resulting from the termination of this Lease as those amounts become due and payable and Landlord is entitled to the balance, if any, at the end of the Term. If the monthly rent Landlord receives from any such reletting during any month is less than the Net Rent and Operating Costs and Taxes Tenant owes under this Lease for that month, Tenant must pay the deficiency to Landlord. Landlord will determine any such deficiency and Tenant will pay the deficiency monthly in advance. No such reletting will be construed as an election by Landlord to terminate this Lease unless Landlord gives Tenant an express written notice that it has terminated this Lease. Notwithstanding any such reletting without termination, Landlord has the right, at any time, to terminate this Lease for Tenants previous breach.
(6) Landlord has the right, in its sole discretion, at any time after having terminated Tenants right to possession only, to terminate this Lease in accordance with Section 26.a(iii).
(iii) Terminate Lease . Landlord has the right to terminate this Lease at any time after an Event of Default has occurred, including at any time after Tenants right to possession has been terminated, by delivering to Tenant a written notice expressly exercising Landlords right to terminate this Lease. If Landlord elects to terminate this Lease, Tenants right to possession of the Premises will terminate, to the extent it has not already terminated, Tenant must vacate and surrender possession of the Premises to Landlord in the condition this Lease requires upon the expiration of the Term, Landlord has the immediate right of entry and has the right to remove all persons and property from the Premises and all rights and remedies of a landlord under California Civil Code Section 1951.2 or any successor code section, and Tenant will pay to Landlord on demand, and Landlord has the right to recover from Tenant, all damages Landlord incurs as a result of Tenants default, including, without limitation, (i) the cost of recovering the Premises, (ii) the worth at the time of award of the unpaid Rent that had been earned at the time of termination; (iii) the worth at the time of award of the amount by which the unpaid Rent that would have been earned after
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termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; (iv) the worth at the time of the award of the amount by which the unpaid Rent for the balance of the Term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; and (v) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenants failure to perform its obligations under this Lease or that in the ordinary course of events would be likely to result from Tenants failure to perform its obligations under this Lease. The worth at the time of award of the amounts referred to in clauses (ii) and (iii) of the preceding sentence is computed by allowing interest at the rate of 10% per annum. The worth at the time of award of the amount referred to in clause (iv) above will be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus 1%. Tenant waives the provisions of Section 1179 of the California Code of Civil Procedure (which Section allows Tenant to petition a court of competent jurisdiction for relief against forfeiture of this Lease). Landlord may sore any property Landlord removes from the Premises in a public or private warehouse or elsewhere at the sole cost and expense of Tenant, which Tenant must pay within 10 days after demand. If Tenant does not pay the cost of storing such property after it has been stored for 30 days or more, Landlord has the right to sell any or all of the property at a public or private sale in such manner and at such times and places that Landlord, in its sole discretion, deems proper, without notice to or demand upon Tenant. Nothing in this Section 26 limits or prejudices Landlords right to prove and obtain damages in an amount equal to the maximum amount allowed by Law, regardless of whether such damages are greater than the amounts this Section obligates Tenant to pay. If the fair market rental value of the Premises for the remaining Term exceeds the Rent under this Lease, Landlord is solely entitled to receive the benefit of that excess after applying the excess to any remaining amounts Tenant owes under this Lease.
b. Landlords Right to Cure . If Tenant fails to perform any of its obligations under this Lease beyond any notice and cure period to which it is entitled, Landlord has the right, at Landlords option without any obligation to do so, and in its sole discretion as to whether it is necessary to do so, to perform any such obligation on Tenants behalf, without any liability or responsibility for any loss or damage to Tenant or anyone holding under or through Tenant sustains as a consequence. If Landlord so performs any of Tenants obligations under this Lease, Tenant must pay to Landlord all damages Landlord incurs as a result, including the cost of performing Tenants obligations on behalf of Tenant, within 10 days after demand.
c. Remedies are Cumulative . Landlord is entitled to exercise any other right or remedy allowed at law or in equity or by statute or otherwise, including, without limitation, all rights and remedies Landlord has under California Civil Code Section 1951.4 or any successor Code section or any other California statute. If Tenant breaches or threatens to breach this Lease, Landlord is entitled to enjoin such breach or threatened breach and has the right to invoke any right or remedy allowed at law or in equity or by statute or otherwise as though entry, reentry, summary proceedings and other remedies
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were not provided for in this Lease. Each remedy or right this Lease grants to Landlord is cumulative and is in addition to every other right or remedy this Lease grants Landlord, or now or hereafter existing at law or in equity or by statute or otherwise, and the exercise or the beginning of the exercise by Landlord of any one or more of such rights or remedies will not preclude the simultaneous or later exercise by Landlord of any or all other rights or remedies.
d. Enforcement Costs . If Tenant defaults under this Lease, Tenant must pay to Landlord, within 10 days after demand, all costs Landlord incurs in connection with enforcing Landlords rights or Tenants obligations under this Lease, including attorney fees, expert fees, court costs, and filing, service and recording fees. In the case of any other proceeding between the parties, the party that loses must pay the prevailing party all costs the prevailing party incurs in connection with the proceeding, including attorney fees, expert fees, court costs, and filing, service and recording fees.
e. Waivers . Tenant hereby waives and relinquishes, to the fullest extent permitted by Law, any and all right of redemption or reentry or repossession or to revive the validity and existence of this Lease if Tenant is dispossessed by a judgment or by order of any court having jurisdiction over the Premises or the interpretation of this Lease, in case of any entry, reentry or repossession by Landlord, or in case of any expiration or termination of this Lease. Landlord and Tenant hereby expressly waive any right to a jury trial in any matter relating to this Lease, the use or occupancy of the Premises or any other part of the Project, or any claim of injury, loss, or damage. Venue on any action instituted with respect to any matter related to this Lease or the Premises is proper only in Santa Clara County, California. Tenant waives the right to seek any injunctive relief that would stay, extend, or otherwise toll any time limitation in this Lease or in any notice delivered in connection with this Lease. If Tenant claims that Landlord has acted unreasonably or unreasonably delayed acting in any case where this Lease or any Law requires Landlord to act reasonably or promptly, Tenant agrees that Landlord is not liable for any monetary damages and that Tenants sole remedy is to commence an action seeking injunctive relief or a declaratory judgment.
f. Landlord Default . Landlord will not be deemed to be in default under this Lease unless Landlord fails to perform obligations required of Landlord within 30 days after written notice by Tenant to Landlord and to each Mortgagee whose name and address has then been delivered to Tenant in writing; provided that Landlord will diligently attempt to complete any emergency repairs it is obligated to perform under this Lease as soon as is commercially reasonable, and further provided that if the nature of Landlords obligations is such that more than 30 days are required for performance, then Landlord is not in default if Landlord commences performance within such 30-day period and thereafter diligently prosecutes the same to completion. Except to the extent this Lease expressly provides to the contrary, if Landlord fails to perform any of its obligations under this Lease, Tenants sole remedy is to sue Landlord in a court of competent jurisdiction; Tenant waives and agrees that it has no right to offset any amounts Landlord owes it against any Rent. Landlords liability to Tenant for any default by Landlord under this Lease is limited to Landlords actual interest in the Project and Tenant may look only to Landlords interest in the Project for the satisfaction of any
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liability. Tenant hereby waives and agrees not to seek any recourse against any partner, member, shareholder, director, governor, officer, manager, agent, or employee of Landlord.
g. Insolvency or Bankruptcy . Any Event of Bankruptcy gives Landlord the right to terminate this Lease by written notice to Tenant; provided, however, that this Section 26.g will have no effect while a case in which Tenant is the subject debtor under the Bankruptcy Code is pending, unless Tenant or its trustee in bankruptcy is unable to comply with the provisions of this Section 26.g. Otherwise, this Lease will automatically cease and terminate, and Tenant is immediately obligated to quit the Premises upon the giving of notice pursuant to this Section 26.g. Tenant hereby waives any other notice to quit or notice of Landlords intention to re-enter. If Landlord elects to terminate this Lease, all of Landlords obligations under this Lease will cease without prejudice, subject however, to the right of Landlord to recover from Tenant all Rent and other sums accrued up to the time of termination or recovery of possession by Landlord, whichever is later, and any other monetary damages or loss of Rent sustained by Landlord. If Tenant becomes the subject debtor in a case pending under the Bankruptcy Code, Landlords right to terminate this Lease pursuant to this Section 26 is subject to the rights of the trustee in bankruptcy to assume or assign this Lease. The trustee will not have the right to assume or assign this Lease unless the trustee promptly cures all defaults under this Lease, promptly compensates Landlord for monetary damages the default causes, and provides adequate assurance of future performance. Landlord and Tenant hereby agree in advance that adequate assurance of future performance, as used in this Section 26.g, will mean that all of the following minimum criteria must be met: (i) the trustee must pay to Landlord, at the time the next payment of Rent is then due under this Lease, in addition to such payment of Rent, an amount equal to the next three months Rent due under this Lease less the Security Deposit, to the extent the Security Deposit is unapplied, not subject to prior claims, and available to Landlord for use as a security deposit, and to the extent the requirement in this first criterion is enforceable, and Landlord will hold that amount in escrow until either the trustee or Tenant defaults in its payments of Rent or other obligations under this Lease (whereupon Landlord will have the right to draw upon such escrowed funds) or until the expiration of the Term (whereupon the funds will be returned to the trustee or Tenant); (ii) Tenant or the trustee must agree to pay to Landlord, at any time Landlord is authorized to and does draw on the funds escrowed pursuant to clause (i) of this Section 26.g, the amount necessary to restore such escrow account to the original level required by that provision; (iii) Tenant must pay its estimated pro rata share of the cost of all services provided by Landlord (whether or not the cost of such services is to be passed through to Tenant) in advance of the performance or provision of such services; (iv) the trustee must agree that Tenants business will be conducted in a first class manner, and that no liquidating sales, auctions, or other non-first class business operations will be conducted in the Premises; (v) the trustee must agree that the permitted use of the Premises as stated in this Lease will remain unchanged; and (vi) the trustee must agree that the assumption or assignment of this Lease will not violate or affect the rights of other tenants in the Project. If Tenant is unable to (A) cure its defaults, (B) reimburse Landlord for its monetary damages (C) pay the Rent due under this Lease, or any other payments required of Tenant under this Lease, on time (or within 5 days of the due date), or (d) meet the criteria and obligations imposed by this Section 26.g, then
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Tenant agrees in advance that it has not met its burden to provide adequate assurance of future performance, and Landlord has the right to terminate this Lease in accordance with this Section 26.g. Landlord and Tenant expressly acknowledge that the Project and the Premises are part of a Project within the meaning of 11 U.S.C. § 101 et seq .
27. Hazardous Materials . Tenant will not engage or permit any other Tenant Party to engage in any activity in the Premises or in the Project that involves the use, generation, transportation, treating, handling, storage, manufacture, emission, disposal, spill, release, leek, seepage, or discharge of any dangerous, toxic or hazardous pollutants, wastes or substances as defined in the Federal Comprehensive Environmental Response Compensation and Liability Act of 1980, the Federal Resource Conservation and Recovery Act of 1976, or any other federal, state or local environmental Laws now in effect, as hereafter amended, and as hereafter enacted ( Hazardous Materials ), in violation of any Law. Promptly after learning of the occurrence of any of the following, Tenant agrees to give Landlord written notice of the following, describing the occurrence and the steps Tenant has taken, is taking, and intends to take with respect to the following: (i) the spill, release, leak, seepage, discharge or clean-up of any Hazardous Material in the Project, (ii) any litigation, arbitration proceeding or governmental proceeding against Tenant that affects the Premises, (iii) the delivery of any notice from a governmental agency that Tenants operations in the Premises are not in compliance with environmental, health and safety Laws, (iv) the delivery of any notice that Tenant is subject to federal or state investigation evaluating whether any remedial action is needed to respond to the release of any Hazardous Material or other substance from the Premises into the environment, or (v) the delivery of any notice that the Premises are subject to a lien in favor of any governmental entity for any liability under federal or state environmental Laws or damages arising from or costs incurred by such governmental entity in response to a release of a Hazardous Material or other substance into the environment. Tenant will indemnify and defend Landlord against all claims, actions, damages, losses, liabilities and expenses including actual attorney fees incurred by Landlord as a result of any use, generation, transportation, treating, handling, storage, manufacture, emission, disposal, spill, release, leek, seepage, or discharge of Hazardous Materials inside the Premises during the Term by any person other than Landlord or its employees or agents, or anywhere in the Project outside the Premises during the Term by Tenant or its employees or agents. Landlord will indemnify and defend Tenant against all claims, damages, fines, judgments, penalties, costs, liabilities or losses (including, without limitation, any and all sums paid for settlement of claims, attorney fees, consultant fees, and expert fees) arising at any time from or in connection with the presence or release, or suspected presence or release, of Hazardous Materials in the Premises or anywhere else in the Project, except to the extent the presence or release, or suspected presence or release occurred inside the Premises during the Term or was caused by any Tenant Party. Tenants and Landlords obligations under this Section will survive the expiration of the Term or the earlier cancellation or termination of this Lease or Tenants right to possession.
28. Subordination; Attornment; Notice to Mortgagee . Landlord represents to Tenant that, on the date of this Lease is no deed of trust, mortgage, or other security instrument encumbers any part of the Project.
a. Subordination . This Lease is and will remain entirely subject and subordinate to the lien and the terms of any deed of trust, mortgage or other security instrument or any ground lease (each of such instruments, together with any
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replacements, renewals, amendments, modifications, or extensions is a Mortgage ), that on or at any time after the date of this Lease covers all or any part of the Premises (the mortgagee under any Mortgage such mortgage or the lessor under any such lease, and any person acquiring any interest in the Premises or this Lease by or through any such mortgagee or lessor is referred to in this Lease as a Mortgagee ), provided that, so long as this Lease is in full force and effect, Tenant is entitled to possession of the Premises, and Tenant is not then in default under this Lease beyond any grace or cure period this Lease grants Tenant, this Lease will not be extinguished or terminated by a proceeding to foreclose or otherwise enforce any Mortgage or by a conveyance in lieu of foreclosure, but rather, this Lease will continue in full force and effect as a direct lease between Tenant and the new owner of the Premises following a foreclosure sale or conveyance in lieu of foreclosure ( New Owner ) except that, notwithstanding anything else in this Lease to the contrary, Mortgagee and New Owner: (i) will not be bound by any amendment, supplement, termination, or other modification of this Lease that Mortgagee did not consent to in writing; (ii) will not be bound by any prepayment of Rent that Tenant has made in excess of the Rent then due for the next succeeding month; (iii) will not be liable for the return of any cash security deposit or other security for Tenants obligations except to the extent Mortgagee or New Owner actually received the cash security deposit or other security; (iv) will not be liable for any act, omission, or breach whatsoever by any landlord under this Lease that occurs before New Owner acquires title to and possession of the Premises; (v) will not be subject to any claim, right of set-off or defense that Tenant may have against any prior landlord, provided that New Owner will be obligated to cure any continuing default (other than a default that consists of a failure to pay to Tenant any money) that exists on such date, to the extent such default continues on and after such date; and (vi) will not be personally liable under this Lease, and New Owners liability will be limited to New Owners interest in the Project. Tenant will, within 15 days after request, sign and deliver to Landlord a Subordination, Non-Disturbance, and Attornment Agreement in favor of any Mortgagee on any commercially reasonable form the Mortgagee requests that is not materially less favorable to Tenant than the terms in the preceding sentences of this paragraph. Notwithstanding the foregoing, any Mortgagee has the right to elect, at any time, unilaterally, to make this Lease superior to its Mortgage by so notifying Tenant in writing. No Mortgagee will have any liability or responsibility under or pursuant to the terms of this Lease or otherwise after it ceases to own an interest in the Premises. No Mortgagee will have any liability or obligation whatsoever to Tenant with respect to environmental matters or releases of hazardous materials that occurred or at any time when the Mortgagee was not in possession of, operating, and making hazardous materials decisions with respect to the Project. No Mortgagee has any obligation to regulate Landlords use of the proceeds of any loan, and no amendment or other modification of any of the documents evidencing and securing any loan will affect Tenants obligations under this Lease. Any sale or other transfer by New Owner of its interest in the Premises will automatically release and discharge New Owner from all liability accruing under this Lease after the date of the transfer.
b. Attornment . Tenant agrees to attorn to any person who succeeds to Landlords interest in the Premises, whether by purchase, foreclosure, deed in lieu of foreclosure, power of sale, termination of lease, or otherwise, upon such persons request, and agrees to sign any agreements confirming the attornment that such person reasonably requests.
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c. Notice to Mortgagees . Tenant agrees not seek to enforce any remedy it may have for any default by Landlord without first giving written notice by certified mail, return receipt requested, specifying the default in reasonable detail, to any Mortgagee whose address has been given to Tenant, and affording such Mortgagee 30 days to perform Landlords obligations under this Lease. If Landlords default cannot be cured within such 30-day period, the time within which Mortgagee is entitled to cure will be extended as long as is reasonably necessary to complete the cure so long as Mortgagee proceeds promptly to effect a cure and thereafter pursues curing the default with diligence. Any Mortgagees cure of any default by Landlord will not constitute such Mortgagees assumption of any of Landlords obligations under this Lease.
29. Estoppel Certificates . Within 10 business days after each request, Tenant will sign and deliver an estoppel certificate addressed to Landlord and any Mortgagee, assignee of any Mortgagee, prospective purchaser, and other person Landlord specifies. Each estoppel certificate will contain the following information: (i) whether Tenant is in possession of the Premises and continuously conducting its business in the Premises for the Permitted Use and as otherwise required by this Lease; (ii) whether this Lease is unmodified and in full force and effect and, if there has been a modification of this Lease, the certificate will state that this Lease is in full force and effect as modified and will set forth the modification; (iii) whether, to the best of Tenants knowledge, there is then any default under this Lease by either Tenant or Landlord; (iv) whether Tenant then claims any existing set-offs or defenses against the enforcement of any right or remedy of Landlord (and if so, specifying the same); (v) the dates, if any, to which any Rent has been paid in advance; and (vi) such other matters Landlord requests. Landlord, Mortgagee, and any prospective purchaser or mortgagee of the Premises has the right to conclusively rely upon any such estoppel certificate delivered by Tenant. If Tenant fails to deliver such estoppel certificate within 10 business days after request, Landlord, Mortgagee, and any prospective purchaser or mortgagee of the Premises is entitled to rely upon the statements in the proposed estoppel certificate Landlord submitted to Tenant with the same effect as if Tenant had signed and delivered the estoppel certificate when required. Notwithstanding that Landlord and such other parties is entitled to rely upon an estoppel certificate that Tenant fails to return when required, Tenants failure to deliver an estoppel certificate when required is a default under this Lease and Tenant agrees to indemnify Landlord against any loss, cost, damage or expense, incidental, consequential, or otherwise, arising or accruing directly or indirectly, from any failure to sign and deliver to Landlord any such estoppel certificate, together with any and all Enforcement Expenses.
30. Surrender . At or before the end of the Term or the earlier termination of Tenants right to possession, Tenant will vacate and surrender possession of the Premises to Landlord in the condition this Lease requires Tenant will, before the end of the Term or Tenants right to possession: (i) remove and properly dispose of all removable equipment, inventory, furniture, furnishings, and any other personal property, garbage, or waste from the Premises and leave the Premises broom clean; (ii) remove all telecommunications equipment, including satellite dishes and wiring and cabling, that any Tenant Party has installed in or about the Premises, in accordance with Law; (iii) remove any part of any Alterations other than the Tenant
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Improvements that Landlord requires Tenant to remove in accordance with this Lease; and (iv) except to the extent Landlord gives Tenant express written notice that relieves Tenant of the obligation to do so, Tenant must put the Premises, including the HVAC and other building systems, in good working order, subject only to reasonable wear and tear and casualty or condemnation damage. For the purposes of the preceding sentence, reasonable wear and tear does not include any damage or deterioration that Tenant could have prevented by good maintenance and repair practice or that Tenant could otherwise have avoided by fully complying with its obligations under this Lease. At any time during or after the last 9 months of the Term, Tenant will, at Landlords request, deliver to Landlord copies of all: (1) surveys, plans, drawings and specifications that relate to the Premises, including the Tenant Improvements and any other Alterations; (2) records relating to the generation, transporting, storing, treating, or disposing of any Hazardous Materials from the Premises during the Term; (3) engineering reports, inspection reports, maintenance logs, inspection reports, and other information that relates to the maintenance, repair, and replacement of the HVAC system and other building systems in the Premises; and (4) warranties and guarantees that cover the Tenant Improvements and any other Alterations. In addition, Landlord has the right, in anticipation of the end of the Term or Tenants right to possession, to enter the Premises to inspect and test the HVAC and other building systems in the Premises. Tenant will repair any damage that results from removing any Alterations, trade fixtures, and personal property and restore the affected areas to a condition as good as their condition on the date Tenant took possession. Tenant will perform all such removals and repairs in a first-class, good, and workmanlike manner. If the Premises are not in the condition this Lease requires when Tenant surrenders possession, Tenant will, within 10 days after demand, pay Landlord the reasonable cost of all work required to put the Premises in the condition this Lease requires, regardless of whether Landlord actually performs any or all of such work, plus any other damages Landlord suffers as a result of Tenants default.
31. Holding Over . If Tenant remains in possession of all or any part of the Premises after the Term or Tenants right to possession ends, Landlord has the option, in its sole discretion, to evict Tenant or treat Tenant as a hold over tenant. If Landlord elects to evict Tenant, Tenant will pay, as liquidated damages for Landlords loss of use of the Premises, with respect to each full or partial month in which Tenant retains possession after its right to possession ends, 150% of the monthly Net Rent and 100% of the monthly Additional Rent that was due for the last full calendar month before Tenants right to possession ended, plus any additional damages Landlord incurs because it is unable to deliver all or any part of the Premises to a replacement occupant, plus all other damages and remedies to which Landlord is entitled. If Landlord elects to treat Tenant as a hold over tenant, Tenant will be a tenant of the Premises under a new month-to-month tenancy (and not under an extension or renewal of the term of this Lease) on all terms of this Lease except those that do not apply to or are inconsistent with a month-to-month hold over tenancy, and except that Tenant will pay, in addition to all other Rent, monthly Net Rent in the amount of 150% of the monthly Net Rent and 100% of the monthly Additional Rent that was due for the last full month before Tenants right to possession ended. This Section will survive the expiration of the Term or the earlier cancellation or termination of this Lease or Tenants right to Possession. This Section does not limit or waive any other rights or remedies Landlord has under this Lease, at law, or in equity.
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32. Notices . All notices and demands this Lease requires or permits must be in writing and must be sent by either: (i) certified or registered mail, postage prepaid; or (ii) personal delivery; or (iii) by an international next-business day delivery courier service; or (iv) by email, to the addresses below:
Notices to Landlord must be addressed to:
Jay Ridge LLC
5753 Wayzata Boulevard
St. Louis Park, MN 55416
with required copies addressed to:
Jay Ridge LLC
c/o United Capital Corp.
Suite 501
63 Bovet Road
San Mateo, CA 94402-3104
and to:
Fabyanske, Westra, Hart & Thomson, P.A.
Attn: Steven C. Cox
Suite 1900
800 LaSalle Avenue
Minneapolis, MN 55402
scox@fwhtlaw.com
Notices to Tenant must be addressed to:
Before the Term:
ServiceNow, Inc.
1732 N. First Street, 5 th Floor
San Jose, CA 95112
Attn: CFO
After the Phase 1 Delivery Date:
ServiceNow, Inc.
3250 Jay Street
Santa Clara, CA 95954
Attn: CFO
After the Phase 2 Delivery Date:
At the street address for the Phase 2
Premises that Tenant designates by
notice to Landlord
Attn: CFO
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In each case with copies to:
ServiceNow, Inc.
4810 Eastgate Mall
San Diego, CA 92121
Attn: CFO
and
Colliers International
5050 Hopyard Road, Suite 180
Pleasanton, CA 94588
Attn: Jim Abarta
and
Hopkins & Carley
200 Page Mill Road, Suite 200
Palo Alto, CA 94306
Attn: Garth E. Pickett
All notices so sent will be deemed to have been received by the recipient on the earlier of actual receipt, the third business day after mailing, the next business day after deposit with a courier service for next-business day delivery, or on the date the return receipt was signed or receipt was refused by the receiving person. Each of Landlord and Tenant has the right to change its address for notices by notice of the new address given in accordance with this Section.
33. Satellite . Tenant has the right, at Tenants cost, to install a satellite antenna or dish on the roof of the Premises, subject to Landlords reasonable requirements, subject to obtaining any required approval from the City, and subject to and in accordance with all applicable laws and ordinances. Landlord may reasonably require Tenant to screen the antenna or dish, and may impose reasonable height and width limits. If Tenant installs any satellite equipment on the roof, Tenant must remove all equipment, including cables, and repair all damage, before Tenant surrenders possession of the Premises to Landlord.
34. Additional Provisions .
a. Captions and Headings . The captions and headings in this Lease are for convenience only and do not in any way limit and should not be deemed to construe or interpret the terms and provisions of this Lease.
b. Time of the Essence . Time is of the essence of this Lease, except with respect to the delivery of possession of the Premises at the commencement of the Term, and except to the extent this Lease expressly provides to the contrary.
c. Joint and Several Liability . If Tenant is comprised of more than one person, all of such persons are jointly and severally liable.
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d. Nondisclosure of Lease Terms . The terms of this Lease are proprietary information of Landlords that Tenant agrees to keep confidential. Tenants disclosure of the terms of this Lease could impair Landlords ability to negotiate other leases or relationship with other tenants. Accordingly, Tenant agrees not to directly or indirectly disclose the terms of this Lease to any other tenant or prospective tenant of the Project or to any other person or entity other than Tenants employees and agents who have a legitimate need to know such information and who will also keep the information in confidence.
e. Entire Agreement . This Lease sets forth all the covenants, promises, agreements, conditions and understandings between Landlord and Tenant concerning the Premises, and it supersedes all prior agreements, representations, negotiations, and correspondence between the parties. No subsequent alteration, amendment, change, or addition to this Lease binds Landlord or Tenant unless it is in writing and both parties sign and deliver it.
f. Construction . Landlord and Tenant acknowledge that competent counsel represented them in negotiating, drafting, executing, and delivering this Lease and hereby waive the benefit of any principle that it should be construed against the party that drafted it.
g. No Partnership . Landlord is not, in any manner or for any purpose, a partner of Tenant in the conduct of its business, or otherwise, or a joint adventurer or a member of a joint enterprise with Tenant. Neither party is a fiduciary of the other, and each party hereby waives any claim that the other party owes it a fiduciary duty under or in connection with this Lease.
h. Force Majeure . If either party to this Lease is delayed or hindered in or prevented from performing any act this Lease requires by natural disasters, strikes, lock-outs, labor troubles, inability to procure materials, power blackouts, government restrictions, riots, war or other similar reasons that are not the fault of that party, then the obligation to perform that act will be postponed for the period of the delay. This Section does not excuse Tenant from its obligation to pay any Rent when due.
i. Severability . If any term, covenant or condition of this Lease or its application to any person or circumstance is, to any extent, invalid or unenforceable, the remainder of this Lease, or the application of such term, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable, will not be affected by such invalidity or unenforceability, and each term, covenant or condition of this Lease will be valid and enforced to the fullest extent permitted by Law.
j. Assignment by Landlord . Landlords obligations and liabilities under this Lease are limited to its actual period of ownership of the Project. Therefore, if Landlord sells or otherwise transfers its interest in the Project, Landlord will, without the need for any additional written agreement, be automatically released from all obligations and liabilities that arise under this Lease with respect to any period after the sale or other transfer, except that if the transferor does not transfer the unapplied balance of the Security Deposit to the transferee, the transferor will remain liable for the return of the unapplied balance of the Security Deposit.
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k. Successors and Assigns . Subject to Section 34.j, all of the terms, covenants, and conditions of this Lease bind and inure to the benefit of the heirs, executors, personal representatives, administrators, successors and assigns of the parties to this Lease, provided that this Section 34.k does not permit any assignment, subletting, occupancy or use that any other provision of this Lease prohibits.
l. No Waiver . Landlords waiver of any breach of any term, covenant, or condition in this Lease is not a continuing waiver of such term, covenant, or condition, and does not waive any subsequent breach of the same or any other term, covenant of condition in this Lease. Landlords acceptance of Rent under this Lease does not waive any preceding breach by Tenant of any term, covenant, or condition of this Lease, other than the failure of Tenant to pay the particular Rent so accepted, regardless of Landlords knowledge of such preceding breach at the time Landlord accepts such Rent.
m. No Merger . Tenants voluntary or other surrender of this Lease, or the parties cancellation of this Lease, will not work a merger, but will, at Landlords option, terminate all or any existing subleases or subtenancies, or operate as an assignment to Landlord of any or all such subleases or subtenancies. Notwithstanding the foregoing, Tenant acknowledges that it does not have the right voluntarily to surrender the Premises.
n. Survival . Except to the extent this Lease expressly states to the contrary, all of Tenants and Landlords rights, liabilities, and obligations under this Lease will survive the expiration of the Term or the earlier cancellation or termination of this Lease.
o. Memorandum of Lease . Tenant will not record this Lease or any memorandum, short form, or notice of this Lease in the real estate records.
p. Brokers . Craig L. Fordyce, Michael L. Rosendin, and Shane Minnis of Colliers International ( Landlords Broker ) have represented Landlord and Jim Abarta of Colliers International ( Tenants Broker ) has represented Tenant in connection with this Lease. Each of Landlord and Tenant represents and warrants to the other that, except for its broker listed in the preceding sentence, it has not employed any broker, agent, or finder in connection with the negotiation or execution of this Lease. Each of Landlord and Tenant will indemnify the other against any claim or claims for brokerage or other commissions arising from or out of any breach of the foregoing representation and warranty by the indemnifying party or any expenses including attorneys fees incurred by the indemnitee in enforcing the foregoing right to indemnification. Landlord is responsible for the commission owed to Landlords Broker pursuant to a separate written agreement between Landlord and Landlords Broker, and Landlords Broker will share its commission with Tenants Broker pursuant to separate written agreement between Landlords Broker and Tenants Broker.
q. Governing Law . The internal laws of the State of California govern the interpretation and enforcement of this Lease, without applying any conflict of laws principles.
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r. Telecommunications . Tenant and its telecommunications companies, including but not limited to local exchange telecommunications companies and alternative access vendor services companies have no right of access to or within the Project for the installation and operation of telecommunications systems, including but not limited to voice, video, data, and any other telecommunications services provided over wire, fiber optic, microwave, wireless, and any other transmission systems, for part or all of Tenants telecommunications within the Premises and from the Premises to any other location without Landlords prior written consent, which consent Landlord will not unreasonably withhold.
s. Disclaimer of Warranty . Landlord expressly disclaims any express or implied warranty that the Premises are suitable for Tenants intended use, and Tenant agrees that its obligation to pay Rent is not dependent upon the condition of the Premises or Landlords performance of any of its obligations under this Lease, and, except to the extent this Lease expressly provides to the contrary, Tenant must continue to pay all Rent, without abatement, set off or deduction, notwithstanding any breach by Landlord of its duties or obligations under this Lease, whether express or implied. Landlord expressly disclaims any express or implied warranty that any specific tenant or tenants will be open in any other space in the Project at any time during the Term, or that any particular type or number of tenants will be open in any other spaces in the Project at any time during the Term, and Tenant acknowledges and agrees that it is not entering into this Lease in reliance upon any such representation or warranty by or on behalf of Landlord.
t. Financial Statements . Within 15 days after Landlords request, Tenant will deliver to Landlord the most recent financial statements (including any notes) of Tenant and any guarantor of Tenants obligations under this Lease, or, if audited statements have not been prepared, reviewed or compiled financial statements (including any notes) prepared by an independent certified public accountant, if no such statements have been prepared, Tenants and any such guarantors internally-prepared financial statements. At any time when the shares or other ownership interests in Tenant or any guarantor of Tenants obligations under this Lease are publicly traded and listed with the Securities and Exchange Commission, Tenant has no obligation to provide financial statements to the extent such financial statements are publicly available on the SECs EDGAR website or any similar system. Landlord will not disclose any aspect of Tenants financial statements that Tenant designates to Landlord as confidential except to Landlords Mortgagee or prospective purchasers or mortgagees of the Project, in litigation between Landlord and Tenant, and to the extent required by law. Landlord will not require Tenant to deliver financial statements more than once in any 12-month period, except that Tenant will deliver such financial statements more frequently at Landlords request if an Event of Default occurs or if at the request of Landlords Mortgagee or a prospective buyer or mortgagee of the Project.
u. Consents and Approvals . Except to the extent this Lease expressly provides to the contrary, neither party will unreasonably withhold, condition or delay any consent or approval this Lease requires the other party to obtain from it
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Signature Page Follows
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Landlord and Tenant hereby sign this Lease Agreement.
Jay Ridge LLC | ||
By: |
/s/ John Scholz |
|
Name: |
John Scholz |
|
Title: |
Manager |
|
ServiceNow, Inc. | ||
By: |
/s/ Michael P. Scarpelli |
|
Name: |
Michael P. Scarpelli |
|
Title: |
CEO |
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EXHIBIT A-1
Site Plan Depicting Premises and Project
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EXHIBIT A-2
Trees Tenant Desires to have Removed
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EXHIBIT B
Legal Description of the Land
The real property in the City of Santa Clara, County of Santa Clara, State of California, described as follows:
PARCEL ONE:
ALL OF PARCEL 2, AS SHOWN UPON THAT CERTAIN MAP ENTITLED, PARCEL MAP ALL OF PARCEL OF LAND BOUNDED BY JAY STREET, BY SCOTT BOULEVARD, BY SAN TOMAS EXPRESSWAY AND DUANE AVENUE AS SHOWN ON THAT CERTAIN RECORD OF SURVEY RECORDED IN BOOK 238 OF MAPS, PAGE 32 S.C.C. RECORDS, WHICH MAP WAS FILED FOR RECORD IN THE OFFICE OF THE RECORDER OF THE COUNTY OF SANTA CLARA, STATE OF CALIFORNIA ON OCTOBER 4, 1977 IN BOOK 405 OF MAPS, AT PAGE 19.
EXCEPTING THEREFROM THAT PORTION THEREOF AS CONVEYED TO THE STATE OF CALIFORNIA, BY DEED RECORDED IN BOOK F963 PAGE 460, OFFICIAL RECORDS AND BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS:
A PORTION OF THE PARCEL OF LAND CONVEYED TO RICHARD T. PEERY, ET AL, BY DEED RECORDED NOVEMBER 23, 1976 IN BOOK C430 AT PAGE 747, OFFICIAL RECORDS OF SANTA CLARA COUNTY, SAID PORTION BEING DESCRIBED AS FOLLOWS:
COMMENCING AT A POINT ON THE BOUNDARY OF PARCEL H, AT THE NORTHEASTERLY TERMINUS OF THE COURSE DESIGNATED AS N. 69 07 54 E., 392.68 FEET, AS SAID PARCEL H AND COURSE ARE SHOWN UPON THAT CERTAIN RECORD SURVEY MAP FILED IN BOOK 238 OF MAPS AT PAGE 29, SANTA CLARA COUNTY RECORDS; THENCE ALONG SAID BOUNDARY S. 69 08 38 W. 29.52 FEET; THENCE FROM A TANGENT THAT BEARS N. 69 08 39 E. ALONG A CURVE TO THE RIGHT WITH A RADIUS OF 212.00 FEET, THROUGH AN ANGLE OF 37 15 26, AN ARC LENGTH OF 137.86 FEET TO SAID BOUNDARY OF PARCEL H; THENCE ALONG SAID BOUNDARY, FROM A TANGENT THAT BEARS N. 38 03 10 W., ALONG A CURVE TO THE LEFT WITH A RADIUS OF 50.00 FEET THROUGH AN ANGLE OF 54 53 26, AN ARC LENGTH OF 47.90 FEET AND ALONG A COMPOUND CURVE TO THE LEFT WITH A RADIUS OF 216.00 FEET, THROUGH AN ANGLE OF 17 54 45, AN ARC LENGTH OF 67.53 FEET TO THE POINT OF COMMENCEMENT.
PARCEL TWO:
ALL OF THAT PORTION OF THAT CERTAIN PARCEL OF LAND DESIGNATED AS PARCEL H UPON THAT RECORD OF SURVEY FILED FOR RECORD IN THE OFFICE OF THE COUNTY RECORDER, SANTA CLARA COUNTY, CALIFORNIA, IN BOOK 238 OF MAPS AT PAGES 29, 30, 31, AND 32 THEREIN, CONVEYED TO THE CITY OF SANTA CLARA BY THAT GRANT DEED FILED FOR RECORD AUGUST 21, 1968 IN BOOK 8236 OF OFFICIAL RECORDS AT PAGE 109, SANTA CLARA COUNTY RECORDS, LYING NORTHERLY OR WESTERLY OF A CURVE LINE, CONCAVE TO
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THE SOUTHEAST, HAVING A RADIUS OF 59.00 FEET, AND BEING TANGENT WITH THE WESTERLY LINE OF JAY STREET AS JAY STREET IS SHOWN UPON THAT PARCEL MAP FILED FOR RECORD OCTOBER 4, 1977 IN BOOK 405 OF MAPS AT PAGE 19, SAID COUNTY RECORDS, AND ALSO BEING TANGENT WITH A LINE PARALLEL WITH AND 50 FEET NORTHERLY OF THE SOUTHERLY LINE OF LAND AS DESCRIBED IN THE DEED FROM M. BRUCE ASHWILL, TO THE STATE OF CALIFORNIA, RECORDED APRIL 9, 1989 IN BOOK F257 OF OFFICIAL RECORDS AT PAGE 605, SAID COUNTY RECORDS.
PARCEL THREE:
THOSE PORTIONS OF PARCEL 4A OF RELINQUISHMENT NO. 22183 RECORDED ON OCTOBER 4, 1963 IN BOOK 6218 OF OFFICIAL RECORDS AT PAGE 82 AND PARCEL 6A OF RELINQUISHMENT NO. 22184 RECORDED ON OCTOBER 4, 1963 IN BOOK 6218 OF OFFICIAL RECORDS AT PAGE 73, LYING WESTERLY OF THE HEREINABOVE DESCRIBED CURVED LINE, AND LYING EASTERLY OF THE NORTHERLY PROLONGATION OF THAT COURSE BEARING NORTH 10 00 EAST IN THE WESTERLY BOUNDARY OF SAID PARCEL MAP RECORDED IN BOOK 405 AT PAGE 19, AS SHOWN ON THAT CERTAIN GRANT DEED RECORDED ON OCTOBER 15, 1982 IN BOOK H083 AT PAGE 525 OF OFFICIAL RECORDS.
APN: 224-09-172 and 224-09-173
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EXHIBIT D
Warm Shell Specifications
The Warm Shell Specifications for the 3250 Building, the 3260 Building, and the 3270 Building (but not the Connector) are the following:
A. |
Exterior walls |
B. |
Foundation |
C. |
Floor slabs |
D. |
Roof structure and membrane (that will support the units in question-no unusual specific requirements of Tenant) |
E. |
New glazing (full glass line) |
F. |
Exit doors |
G. |
Landscaping including walkways |
H. |
Parking and paving, including new strip and slurry, with new stenciled parking spaces |
I. |
Storm drain to parking areas |
J. |
Sanitary sewer line to each Existing Building |
K. |
Water line to each Existing Building |
L. |
Stairwells, including stairwell enclosures |
M. |
Parking lot lighting |
N. |
Concrete base for the street monument signs |
O. |
Installation of the main fire sprinkler trunks, installed, distributed and dropped. Enclose fire risers on 1 st floor, with a 5-year certification. |
P. |
Utilities; phone, gas, electric and plumbing stubbed to each Existing Building. Interconnect conduit provided to each Existing Building terminating in each Existing Buildings main electrical room. Enclose electrical room on 1 st floor of each of the Existing Buildings. |
Q. |
Electrical: From Santa Claras Silicon Valley Power: |
1. | 3250 Building: As-is; has 500KVA of available power at 480 volt 3-phase service. This equates to 600 amps of power. |
2. | 3260 Building and 3270 Building: These buildings share 750KVA of power. This equates to 900 Amps of power shared. If the design load calculation shows that the current electrical capacity is insufficient, Landlord will request that Silicon Valley Power upgrade the transformers, at no cost to Landlord or Tenant. If the secondary feeders in the 3260 Building and 3270 Building need to be upgraded as a result of an upgrade of the transformers, Landlord agrees to pay to upgrade the feeders, but only to the extent required for normal office use, and not a laboratory use or other higher load use. |
R. |
Replace the existing 60-ton units serving each Existing Building with new units sufficient for standard open plan office conditioning, up to a maximum cost of $1,115,750. |
S. |
Demolish existing HVAC distribution back to main plenums. |
T. |
Shell architect & engineering (including structural, interior, mechanical and plumbing design) |
U. |
Paint of exterior walls |
V. |
All permits for the shell and additional items above |
W. |
Roof screens |
X. |
Insulation in all exterior walls and all true ceilings |
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Y. |
Utility meters |
Z. |
Life safety systems |
AA. |
Elevators put into good working order and elevators and elevator equipment rooms brought into compliance with code. |
BB. |
Restrooms on all floors with high-end finishes. One additional toilet stall will be installed in each restroom, rather than the showers Landlord had previously planned. |
CC. |
Interior finishes per the following list: |
1. |
Lobby Floor Field Tile: Intertile Limestone Sea Grass, 12x24, honed finish |
2. |
Lobby Floor Accent Tile: Cold Springs Granite Kenorean Sage, 12x12, flamed finish |
3. |
Lobby Ceiling: Gyp. Board with accent on one (1) wall in the lobby area. |
4. |
Office Carpet: Shaw Contract, Catalyst tile, Marble color |
5. |
Doors, door frames, and door hardware: Maple veneer, plane-sliced with clear varnish |
6. |
Restroom Field Tile: DalTile, Vernada Series, Dune color |
7. |
Restroom Accent Tile: DalTile, Veranda Series, Gravel color |
8. |
Restroom Counters: Caesarstone, Lagos Blue |
9. |
Restroom Partitions: Plastic Laminate |
10. |
Restroom Sinks: Kohler Caxton undermount |
11. |
Restroom Faucets: Kohler Corolais single-lever |
12. |
Restroom Water Closets: Kohler Kingston wall hung |
13. |
Restroom ceiling height to be 9 feet, including the restroom vestibule area. |
14. |
All interior doors to be 9 feet tall, except those with already lower openings, such as the restrooms. |
DD. |
All work required to complete the main lobby on the first floor of the 3250 Building. |
EE. |
Complete drywall soffit, taping, and painting at perimeter soffit of 2 nd floor of each Existing Building. |
The Warm Shell Specifications for the Connector are the following:
A. |
Exterior walls |
B. |
Foundation |
C. |
Floor slabs |
D. |
Roof structure and membrane |
E. |
Glazing (full glass line) |
F. |
Exit doors |
G. |
Main fire sprinkler trunks, installed, distributed and dropped. |
H. |
Electrical |
I. |
HVAC sufficient for standard open plan office conditioning, with distribution to all dropped ceiling areas |
J. |
Shell architect & engineering (including structural, interior, mechanical and plumbing design) |
K. |
Paint of exterior walls |
L. |
All permits for the shell and additional items above |
M. |
Roof screens |
N. |
Insulation in all exterior walls and all true ceilings |
O. |
Life safety systems |
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P. |
Interior finishes per the following list: |
1. |
Office Carpet: Shaw Contract, Catalyst tile, Marble color |
2. |
Doors, door frames, and door hardware: Maple veneer, plane-sliced with clear varnish |
3. |
All interior doors to be 9 feet tall |
Q. |
Landscaping, including walkways |
R. |
Storm drain to parking areas |
S. |
Main fire sprinkler trunks, installed, distributed and dropped. |
Utilities for the Connector will be pulled from either the 3260 Building or the 3270 Building, and will not be separately metered for the Connector. The Warm Shell Work in the Connector does not include any work related to any lobby, stairwell, elevators, or restrooms, and all of that work in the Connector is part of the Tenant Improvement Work.
Without limitation, the Warm Shell Work does not include any special HVAC for server rooms (IDF/MDF) in any Building or any other rooms that require special HVAC conditioning.
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EXHIBIT E
Credit to Tenant Improvement Allowance for Warm Shell
Work Not Performed by Landlord
The component of the Allowance described in clause (iii) of Section 5 is based on the cost of the following work in the following parts of the Premises that Landlord has not performed on the date of this Lease or, with respect to the Connector, that Landlord does not install as part of the Warm Shell Work for the Connector:
3250 Building
All work related to enclosure of the rear stairs at both 1st and 2nd floor
All work related to enclosure of the front stairs at 2nd floor
Distribution value of HVAC at 1st and 2nd floor from what would have been market ready scope
Suspended ceiling at 1st and 2nd floor
Lighting at 1st and 2nd floor
Exit signage at 1st and 2nd floor
Modifications to fire sprinklers at 2nd floor (existing drops are at 9 and new proposed ceiling height is at 10)
Floor coverings and base at 1st and 2nd floor
Painting cost of columns at 1st and 2nd floor
Cost of all fire extinguishers, cabinets and their installation
Cost of final interior clean
3260 Building & 3270 Building:
All work related to the lobbies at both 1st and 2nd floor
All work related to enclosure of the rear stairs at both 1st and 2nd floor
All work related to enclosure of the front stairs at 2nd floor
Distribution value of HVAC at 1st and 2nd floor from what would have been market ready scope
Suspended ceiling at 1st and 2nd floor
Lighting at 1st and 2nd floor
Exit signage at 1st and 2nd floor
Modifications to fire sprinklers at 2nd floor (existing drops are at 9 and new proposed ceiling height is at 10)
Floor coverings and base at 1st and 2nd floor
Painting costs of columns at 1st and 2nd floor
Cost of all fire extinguishers, cabinets and their installation
Cost of final interior clean up
Connector, the following, except to the extent installed by Landlord:
Distribution value of HVAC from what would have been market ready scope
Suspended ceiling
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Lighting
Exit signage
Floor coverings
Fire extinguishers, cabinets and their installation
Final interior clean up
Painting cost of columns
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EXHIBIT F
Outside Cafeteria Seating Area
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EXHIBIT G
Sign Plans
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Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the use in this Amendment No. 1 to the Registration Statement on Form S-1 of ServiceNow, Inc. (formerly Service-now.com) of our report dated March 30, 2012, except for Note 18, Subsequent Events, as to which the date is May 23, 2012, relating to the consolidated financial statements of ServiceNow, Inc. (formerly Service-now.com), which appears in such Registration Statement. We also consent to the reference to us under the heading Experts in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
San Diego, California
November 9, 2012