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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

⌧

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

 

For the fiscal year ended December 31, 2018

 

OR

☐

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

FOR THE TRANSITION PERIOD FROM                      TO

Commission File Number 001-38297

 

SailPoint Technologies Holdings, Inc.

(Exact name of Registrant as specified in its Charter)

 

 

Delaware

 

47-1628077

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

11120 Four Points Drive, Suite 100,

Austin, TX

 

78726

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (512) 346-2000

 

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

 

Title of each class

 

Name of each exchange on which registered

Common stock, par value $0.0001 per share

 

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:  None

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

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ⌧    No ☐

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

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

 

Large accelerated filer

⌧

  

Accelerated filer

☐

 

 

 

 

 

Non-accelerated filer

☐ 

  

Smaller reporting company

☐

 

 

 

 

 

Emerging growth company

☐ 

 

 

 

 

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

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

 

On June 30, 2018, the last business day of the Registrant's most recently completed second fiscal quarter, the aggregate market value of the Common Stock, par value $0.0001 per share, held by non-affiliates of the Registrant was approximately $29,837,816, based upon the closing price on the New York Stock Exchange on such date.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement for its 2019 Annual Meeting of Stockholders (the “Proxy Statement”), to be filed within 120 days of the Registrant’s fiscal year ended December 31, 2018, are incorporated by reference in Parts II and III of this Report on Form 10-K. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part of this Form 10-K.

 

 

The registrant had 88,525,881 shares of common stock outstanding as of March 11, 2019.

 

 

 

 

 

Table of Contents

 

 

 

Page

PART I

 

Item 1.

Business

3

Item 1A.

Risk Factors

15

Item 1B.

Unresolved Staff Comments

40

Item 2.

Properties

40

Item 3.

Legal Proceedings

40

Item 4.

Mine Safety Disclosures

40

 

 

 

PART II

 

Item 5.

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

41

Item 6.

Selected Financial Data

43

Item 7.

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

45

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

69

Item 8.

Financial Statements and Supplementary Data

71

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

121

Item 9A.

Controls and Procedures

121

Item 9B.

Other Information

123

 

 

 

PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance

124

Item 11.

Executive Compensation

124

Item 12.

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

124

Item 13.

Certain Relationships and Related Transactions, and Director Independence

124

Item 14.

Principal Accounting Fees and Services

124

 

 

 

PART IV

 

Item 15.

Exhibits, Financial Statement Schedules

125

Item 16.

Form 10-K Summary

130

 

Signatures

131

 

 

 

i

 

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. All statements of historical fact included in this Annual Report on Form 10-K regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described in the section titled “Risk Factors” and elsewhere in this Annual Report on Form 10-K. These forward-looking statements are based on management’s current beliefs, based on currently available information, as to the outcome and timing of future events. Forward-looking statements contained in this Annual Report on Form 10-K include, but are not limited to, statements about:

 

 

•

our ability to attract and retain customers, including larger organizations;

 

•

our ability to deepen our relationships with existing customers;

 

•

our expectations regarding our customer growth rate;

 

•

our business plan and beliefs and objectives for future operations;

 

•

trends associated with our industry and potential market;

 

•

benefits associated with use of our platform and services;

 

•

our ability to develop or acquire new solutions, improve our platform and solutions and increase the value of our platform and solutions;

 

•

our ability to compete successfully against current and future competitors;

 

•

our ability to further develop strategic relationships;

 

•

our ability to achieve positive returns on investments;

 

•

our ability to acquire complementary businesses, products or technology;

 

•

our plans to further invest in and grow our business, and our ability to effectively manage our growth and associated investments;

 

•

our ability to timely and effectively scale and adapt our existing technology;

 

•

our ability to increase our revenue, our revenue growth rate and gross margin;

 

•

our ability to generate sufficient revenue to achieve and sustain profitability;

 

•

our future financial performance, including trends in revenue, cost of revenue, operating expenses, other income and expenses, income taxes, billings and customers;

 

•

the sufficiency of our cash and cash equivalents and cash generated from operations to meet our working capital and capital expenditure requirements;

 

•

our ability to raise capital and the loans of those financings;

 

•

our ability to attract, train and retain qualified employees and key personnel;

 

•

our ability to maintain and benefit from our corporate culture;

 

•

our ability to successfully identify, acquire and integrate companies and assets;

 

•

our ability to successfully enter new markets and manage our international expansion; and

 

•

our ability to maintain, protect and enhance our intellectual property and not infringe upon others’ intellectual property.

 

1

 

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Annual Report on Form 10-K.

 

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report on Form 10-K primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report on Form 10-K. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

 

The forward-looking statements made in this Annual Report on Form 10-K relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Annual Report on Form 10-K to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

 

2

 

PART I

ITEM 1. BUSINESS

Our Vision

Our fundamental belief is that identity is power. Our mission is to enable enterprises to grow and innovate, securely and efficiently. To do so, we have created our open identity platform that empowers users and governs their access to applications and data across complex, hybrid IT environments.

Overview

SailPoint Technologies Holdings, Inc. (“SailPoint” or “the Company”) is the leading provider of enterprise identity governance solutions. Our team of visionary industry veterans launched SailPoint to empower our customers to efficiently and securely govern the digital identities of employees, contractors, business partners and other users, and manage their constantly changing access rights to enterprise applications and data. Our open identity platform provides organizations with critical visibility into who currently has access to which resources, who should have access to those resources, and how that access is being used. We offer both software and cloud-based software as a service solution, which provide organizations with the intelligence required to empower users and govern their access to systems, applications and data across hybrid IT environments, spanning on-premises, cloud and mobile applications and file storage platforms. We help customers enable their businesses with more agile and innovative IT, enhance their security posture and better meet compliance and regulatory requirements. Our customers include many of the world’s largest and most complex organizations, including commercial enterprises, educational institutions and governments.

Organizations globally are investing in technologies such as cloud computing and mobility to improve employee productivity, business agility and competitiveness. Today, enterprise environments are more open and interconnected with their business partners, contractors, vendors and customers. Business users have driven a dramatic increase in the number of applications and data that organizations need to manage, much of which sits beyond the traditional network perimeter. Because of these trends, the attack surface is expanding while well-funded cyber attackers have significantly increased the frequency and sophistication of their attacks. As a result, IT professionals need to manage and secure increasingly complex hybrid IT environments within these extended enterprises.

Attackers frequently target the identity vector as it allows them to leverage user identities to gain access to high-value systems and data while concealing their activity and movements within an organization’s IT infrastructure. The consequences of a data breach can be extremely damaging, with organizations facing significant costs to remediate the breach and repair brand and reputational damage. In addition, governments and regulatory bodies have increased efforts to protect users and their data with a new wave of regulatory and compliance measures that are further burdening organizations and levying severe penalties for non-compliance. As a result of these trends, enterprises are struggling to efficiently manage and secure their digital identities.

We believe that our open identity platform is a critical, foundational layer of a modern cyber security strategy that complements and builds upon traditional perimeter- and endpoint-centric security solutions, which on their own are increasingly insufficient to secure organizations, and their applications and data. We deliver a user-centric security platform that combines identity and data governance solutions to form a holistic view of the enterprise. In combination with our technology partners, we create identity awareness throughout our customers’ environments by providing valuable insights into, and incorporating information from, a broad range of enterprise software and security solutions. Our governance platform provides a system of record for digital identities across our customers’ IT environments while allowing them to remain agile and competitive. Our adaptable solutions integrate seamlessly into existing technology stacks, allowing organizations to maximize the value of their technology investments. Our professionals work closely with customers throughout the implementation lifecycle, from documentation to development to integration.

Our solutions address the complex needs of global enterprises and mid-market organizations. Our go-to-market strategy consists of both direct sales and indirect sales through resellers, such as Optiv, and system integrators. Our mature system integrator channel includes global consultants such as Accenture, Deloitte, KPMG and PricewaterhouseCoopers (“PwC”), all of whom have dedicated SailPoint practices, with some dating back more than 8 years, and we most recently added Ernst & Young (“EY”). As of December 31, 2018, 1,173 customers across a wide variety of industries were using our products to enable and secure digital identities across the globe.

3

 

Our Growth Strategy

Key investments we are making to drive growth include:

 

•

Driving new customer growth within existing geographic markets. Based on data from S&P Global Market Intelligence, we believe we have penetrated less than 2% of over 65,000 companies in the countries where we have customers today. As a result, there is a significant opportunity to expand our footprint through both new, greenfield installations and displacement of competitive legacy solutions. We plan to expand our customer base in these countries by continuing to grow our sales organization, expand and leverage our channel partnerships and enhance our marketing efforts.

 

•

Continuing to expand our global presence. We believe there is a significant opportunity to grow our business internationally. Enterprises around the world are facing similar operational, security and compliance challenges, driving the need for identity governance. We have personnel in 24 countries and customers in over 45 countries as of December 31, 2018 and we generated 31% of our revenue outside of the United States in 2018. We plan to leverage our existing strong relationships with global system integrators and channel partners to grow our presence in Europe, Asia Pacific and other international markets.

 

•

Further penetrating our existing customer base. Our customer base of 1,173, as of December 31, 2018, provides a significant opportunity to drive incremental sales. Our customers have the flexibility to start with a single use case or project and expand over time. As they realize the value of their investment, new use cases and deployments are identified, allowing us to sell more products to existing customers and to expand the number of identities and governed systems we cover within their organizations. This is especially true when it comes to expanding the footprint of identity governance to cover file storage platforms and new types of non-human identities which need to be managed as part of a comprehensive approach. We believe strong customer satisfaction is fundamental to our ability to expand our customer relationships.

 

•

Expanding market and product investment across new and existing vertical markets. We believe there is significant opportunity to further penetrate our target vertical markets by providing vertical-specific identity solutions and focusing our marketing efforts to address the use cases of those customers. With this approach, we believe we will be better able to address opportunities in key industries, such as financial services, healthcare, and federal, state and local government.

 

•

Leveraging and expanding our network of partners. Our partnerships with global system integrators, such as Accenture, Deloitte, KPMG, PwC, and we most recently added EY, resellers, such as Optiv, have helped us extend our reach and serve our customers more effectively. We see a significant opportunity to offer comprehensive solutions to customers by collaborating with adjacent technology vendors. For example, we collaborate with leading access management vendors by adding our identity governance capabilities to their access management services. We intend to continue to invest in our partnership network as their influence on our sales is vital to the success of our business.

 

•

Continuing to invest in our platform. Innovation is a core part of our culture. We believe we have established a reputation as a technology leader and innovator in identity governance. In 2018, we enhanced IdentityIQ to govern “bot” access as part of helping organizations take a comprehensive approach to identity governance. IdentityNow launched a new Dynamic Discovery Engine to power governance controls such as separation-of-duty policy administration and access certifications. Another important area of innovation in 2018 was a new adaptive connectivity architecture in SecurityIQ (now IdentityIQ File Access Manager). As the amount of data stored in files increases at an exponential rate, SailPoint re-architected the connectivity framework to handle the increased performance requirements in large enterprise storage environments. As we have done in the past, we intend to continue investing to extend our position as the leader in identity governance by developing or acquiring new products and technologies.

Product, Subscription, and Support Offerings

We deliver an integrated set of products to address identity governance challenges for medium and large enterprises. This set of products supports all aspects of identity governance including provisioning, access request, compliance controls, password management and identity analytics for data stored in applications and files.

4

 

Our products deliver governance across the hybrid enterprise, extending from the mainframe to the cloud. We provide over 100 out-of-the-box connectors to enterprise applications such as SAP and Workday, which automate the collection, analysis and provisioning of identity data. We also provide governance over infrastructure components such as operating systems, directories, and databases and over vertical solutions, such as Epic, in the healthcare provider market.

Our solutions are built on our open identity platform which enables connectivity to a variety of security and operational IT applications such as access management (e.g., Microsoft, Okta and VMware), IT service management solutions (e.g., BMC Remedy and ServiceNow), privileged access management (e.g., CyberArk, BeyondTrust), enterprise mobility management (EMM), and security information and event management (SIEM). Our open identity platform extends the reach of our identity governance processes across customer environments and collects additional information to improve the application of identity governance controls.

IdentityIQ

IdentityIQ is our on-premises identity governance solution. It provides large, complex enterprise customers a unified and highly configurable identity governance solution that consistently applies business and security policies as well as role and risk models across applications and data on-premises or hosted in the cloud. IdentityIQ enables organizations to:

 

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Empower users to request and gain access to enterprise applications and data;

 

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Automate provisioning across the user lifecycle, from on-boarding, to transfers and promotions to off-boarding by simplifying processes for creating, modifying and revoking access;

 

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Enable business users to reset their passwords via self-service tools without the need for IT involvement;

 

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Provide on-demand visibility to IT, business and risk managers into “who has access to what resources” to help make business decisions, improve security and meet audit requirements;

 

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Improve security and eliminate common weak points associated with data breaches, including weak passwords, orphaned accounts, entitlement creep and separation-of-duties policy violations; and

 

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Manage compliance using automated access certifications and policy management.

We package and price IdentityIQ into three components: Governance Platform, Core Modules, and Advanced Integration Modules. The Governance Platform provides the base features of the solution, including the identity warehouse, workflow engine, and governance models. The four Core Modules include:

 

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Lifecycle Manager: This module provides a business-oriented solution that delivers access securely and cost effectively. The self-service access request capabilities feature an intuitive user interface that empowers business users to take an active role in managing changes to their access while greatly reducing the burden on IT organizations. Automated provisioning manages the business processes of granting, modifying and revoking access throughout a user’s lifecycle with an organization, whether that user is an employee, contractor or business partner. Changes to user access can be automatically provisioned via a large library of direct connectors for applications such as Workday and SAP or synchronized with IT service management solutions such as ServiceNow.

 

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Compliance Manager: This module enables the business to improve compliance and audit performance while lowering costs. It provides business user friendly access certifications and automated policy management controls (e.g., separation-of-duty violation reporting) that are designed to simplify and streamline audit processes across all applications and data. Built-in audit reporting and analytics give IT, business and audit teams visibility into, and management over, all compliance activities in the organization.

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File Access Manager: This module, a rebranded and repackaged version of the SecurityIQ product line, secures access to the growing amount of data stored in file servers, collaboration portals, mailboxes and cloud storage systems. The change was made to align the positioning and packaging of solutions with how our customers are purchasing and deploying a comprehensive identity governance strategy. It helps organizations identify where sensitive data resides, who has access to it, and how they are using it and then puts effective controls in place to secure it. File Access Manager is designed to interoperate with the Compliance Manager and Lifecycle Manager modules to provide comprehensive visibility and governance over user access to all data. By augmenting identity data from structured systems with data from unstructured data targets, organizations can more quickly identify and mitigate risks, spot compliance issues and make the right decisions when granting or revoking access to sensitive data.

 

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Password Manager: This module delivers a simple-to-use solution for managing user passwords to reduce operational costs and boost productivity. End users are empowered with a self-service interface for updating or resetting their password without having to contact the help desk. Configurable strong password policies enforce consistent security controls across on-premises and cloud applications. Password Manager has the capability to synchronize password changes across multiple applications, so they always remain consistent.

The Advanced Integration Modules provide connectivity to target application platforms such as SAP, mainframes, AWS and file storage systems.

IdentityNow

IdentityNow is our cloud-based, multi-tenant identity governance platform, which is delivered as a subscription service. IdentityNow provides customers with a set of fully-integrated services for compliance, provisioning and password management for applications and data hosted on-premises or in the cloud. IdentityNow meets the most stringent identity governance requirements and provides enterprise-grade services that meet scalability, performance, availability and security demands. IdentityNow provides the same benefits as IdentityIQ, but additionally enables organizations to:

 

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Automate identity governance processes in one unified solution delivered from the cloud;

 

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Accelerate deployment with built-in best practice policies, options and default settings; and

 

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Eliminate the need to buy, deploy and maintain hardware and software to run an identity governance solution.

We package and price IdentityNow into a Cloud Platform and Governance Services with unique functionality as outlined below:

 

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Cloud Platform: IdentityNow provides foundational components for identity governance in the cloud, including production and sandbox instances and the IdentityNow Cloud Gateway virtual appliance, which leverages our patented method for integrating with on-premises applications and data. IdentityNow also includes a large catalog of pre-built connectors and application profiles to on-premises and cloud applications, leveraging the intellectual property developed for IdentityIQ.

 

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User Provisioning: This module enables business users to be productive from day one. With IdentityNow user provisioning, organizations can streamline the on-boarding and off-boarding process with best practice configurations and workflows, enabling IT to immediately grant employees access to the applications and data they need to do their jobs.

 

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Access Request: This module empowers the entire enterprise with a robust self-service solution for requesting and approving access to applications and data. Automating the access request process quickly delivers business users the access they need to do their jobs.

 

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Access Certifications: This module automates the process of reviewing user access privileges across the organization. Using IdentityNow, organizations can quickly plan, schedule and execute certification campaigns to ensure the right users have the appropriate access to corporate resources.

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Separation-of-Duties: This module simplifies and speeds the process of investigating access, quickly uncovering any access-related conflicts of interest for review and mitigation. It also automates the creation of policies that ensure continuous compliance with internal and external audit requirements.

 

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Password Management: This module offers business users an intuitive, self-service experience for managing and resetting passwords from any device and from anywhere. This service enforces consistent and secure password policies for all users across all systems from the cloud to the data center.

In addition, we offer the IdentityIQ File Access Manager Module, and its supporting Advanced Integration Modules for file storage systems as a stand-alone add-on solution with IdentityNow.

IdentityAI

IdentityAI is designed to complement our IdentityIQ and IdentityNow solutions to help organizations detect areas of high risk, including potential threats, before they turn into security breaches. IdentityAI consolidates identity data from IdentityIQ and IdentityNow, including account and entitlement assignments, with real-time activity in its big data platform. It then applies machine learning technologies to identify suspicious or anomalous behaviors. As a result, we believe customers will gain a much deeper understanding of the risk associated with user access, allowing them to focus their governance controls to reduce that risk. We are continuing development of IdentityAI to enable organizations to:

 

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Scan massive amounts of identity data to identify risks without having to rely on a team of security experts;

 

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Detect and alert on anomalous behaviors and potential threats using artificial intelligence technology;

 

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Classify behavioral threats and focus controls on high-risk scenarios and conditions; and

 

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Improve operational efficiency of the IT organization and business productivity by automating identity governance activities for routine and low-risk access.

We are continuing to develop IdentityAI to provide the following core capabilities:

 

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Audit: IdentityAI tracks user access over time to determine historical patterns for individual digital identities. This allows for the system to quickly identify abnormal user access or activity patterns.

 

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Peer Group Analysis: IdentityAI dynamically builds peer groups based on user attributes and access patterns. Peer group analysis is then used to identify outliers which may pose additional risk due to out-of-band or exceptional access privileges.

 

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Behavioral Analysis: IdentityAI monitors user behaviors, including access requests and approvals and application access events, at individual and peer group levels to baseline normal patterns and alert when anomalies are detected.

 

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Risk Assessment: IdentityAI leverages machine learning algorithms to create a dynamic risk model that automatically evolves as data changes. Real-time risk analysis is used to identify potential threats and tune identity controls to focus on high-risk users and events while deprioritizing low-risk activities.

Technology

Our comprehensive, enterprise-grade identity governance platform is the result of both years of investment and the expertise of the company’s management and technical teams. Taking the lessons learned from our experiences with prior generation identity solutions, our engineers and architects designed a modern identity platform with internet scale, comprehensive hybrid environment coverage, and openness to optimize customers’ existing technology investments.

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Identity Cube Technology

Our Identity Cube technology establishes the 360-degree control essential to govern and secure digital identities in today’s complex IT environments. Our extensive data modeling capabilities allow us to understand how each identity relates to the full IT environment, whether on-premises or in the cloud. SailPoint’s account correlation and orphan account management capabilities allow IT security professionals and business managers to track and monitor the accounts that are most frequently under attack.

Identity Cubes track all relevant information about an identity and its relationships to applications and data. They create the “identity context” which is key to an identity-aware infrastructure in which identity information is shared across the extended enterprise. With identity context, operational and security systems can make informed decisions about access and perform key remediation and change requests on our open identity platform via our standardized application program interfaces (“APIs”) and software development kits (“SDKs”).

Model-Based Governance

Our model-based governance engine sits at the center of our platform and provides a comprehensive understanding of both the current state of who currently has access to what as well as the desired state of who should have access to what. The governance engine is responsible for managing the ongoing process of aligning these two states.

Governance and control models are used to drive our policy-based reconciliation service and to define how reconciliation and provisioning fulfillment actions are executed. These models are designed with graphical tools, enabling IT and business users to own and define the reconciliation and fine-grained access provisioning fulfillment processes for applications and data.

Dynamic Discovery Engine

The Dynamic Discovery Engine provides instant visibility to all applications and users across an organization and its IT systems. It works by enabling users to use natural language search to quickly find access-related information or identify potential risks in their environments. Searches can be saved for future use or quickly turned into automated governance policies for use in provisioning, access request, certification, and password management processes. In addition, an API framework is provided to enable machine queries of filtered identity data from external systems.

Provisioning Broker

Our provisioning broker provides separation between identity processes at the business level (e.g., requesting access to an application) and the actual fulfillment of that request on the target system. The provisioning broker is a specialized business process workflow execution engine that manages long-running provisioning tasks and provides tracking, monitoring and statistics for the end-to-end fulfillment process.

The decoupling capability of the provisioning broker maximizes our customers’ flexibility and allows for the reuse of their existing IT investments. For example, if access to an application can only be provided manually through the opening of a help desk ticket, the provisioning broker will send that request to the help desk and report back on the status of that request. Likewise, if a customer utilizes a legacy provisioning system, the provisioning broker can pass off a request to that legacy system for fulfillment. In addition, the provisioning broker provides us with a unique migration strategy for customers moving from a legacy system to our identity governance solutions.

Enterprise-Grade Cloud Gateway

To manage on-premises infrastructure, applications and data from the cloud, we employ a Cloud Gateway Server (“CGS”), delivered as virtual machine behind the customer’s firewall, which ensures that all SailPoint communications are highly secure. Our CGS technology is a high availability, secure, self-managed container that allows for controlled and automated updates of our connector infrastructure while ensuring the integrity of individual on-premises and cloud connections.

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Our CGS also provides an innovative and patented approach to protecting our customer’s credentials. Our “zero-knowledge encryption” technology allows us to store all of a customer’s passwords and security credentials inside the CGS behind their firewall. As a result, we protect the confidentiality of our customers’ system and end-user credentials, even if our cloud service provider were to be breached.

Data Ownership Assessment and Election

Verifying the business end-user who is the logical owner of information is a key challenge in managing growing volumes of unstructured data in the enterprise. We have developed a patent-pending approach to determine the rightful owner of files, so they can be integrated into governance control processes, such as access certifications and access approvals. Our solution leverages profile data to determine logical owners of information based on identity attributes and usage data. Once a set of logical owners is identified, we use a crowd-sourcing approach to allow other users familiar with the data to vote on the rightful owner of the file or file storage location. This enables organizations to efficiently identify and designate specific owners for sensitive information stored in files and incorporate them into identity governance processes.

Connectivity for the Hybrid IT Environment

Our extensive library of over 100 proprietary connectors provides interfaces to on-premises and cloud applications. These connectors are the means by which we provide governance over target systems. We support granular management of a wide range of systems, from mainframe security managers, including CA ACF2 and Top Secret, IBM and RACF, to traditional enterprise applications, including Oracle E-Business Suite and SAP, and pure SaaS business applications, such as Microsoft Office365, Salesforce and ServiceNow. The same connectors are used for both our on-premises and cloud-based products. This allows both solutions to leverage fully the over 400-man years we have invested in developing these connectors.

Open and Extensible Identity Platform

Our open identity platform is the result of over a decade of investment. Recognizing identity governance is at the center of critical enterprise business and IT processes, we developed a comprehensive set of services that go beyond simple APIs. In addition to our comprehensive API strategy, we deliver SDKs and plug-in frameworks which allow our partners and customers to create their own integrations and extensions to our core product capabilities. For example, we leverage our open identity platform to integrate with third-party user provisioning solutions, such as IBM Security Identity Manager and Oracle Identity Manager, and service desk solutions, such as BMC Remedy and ServiceNow, to implement account change requests. This enables SailPoint to govern access and provide identity context to downstream processes managed by these solutions. Another important open identity platform integration model is with privileged access management solutions (“PAM”). SailPoint provides a framework that enables organizations to use the same governance controls to oversee both privileged and standard account access.  We also collect activity and other information from third-party solutions to improve risk analytics and identity governance processes in our products, specifically in IdentityAI.

Our APIs and SDKs are compliant with System for Cross-domain Identity Management (“SCIM”) and both provide standards-based bi-directional runtime access to our identity context model. Many such integrations and extensions have already been built by partners and certified for commercialization on our open identity platform.

 

Seasonality

 

We generally experience seasonal fluctuations in demand for our products and services. Our quarterly sales are impacted by industry buying patterns. As a result, our sales have generally been highest in the fourth quarter of a calendar year and lowest in the first quarter.

Customers

As of December 31, 2018, we have 1,173 customers in over 45 countries. In the years ended December 31, 2018, 2017 and 2016, we generated 31%, 28% and 30%, respectively, of our revenue outside of the United States. No single customer represented more than 10% of our revenue for the years ended December 31, 2018, 2017 and 2016.

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Sales and Marketing

Sales

We sell our platform through our direct sales organization, which is comprised of field and inside sales personnel, as well as through channel partners. Our sales strategy relies on a “land-and-expand” business model, in which our initial deployment with a new customer typically addresses a limited number of use cases within a single business unit. Such initial deployments frequently expand across departments, divisions and geographies through a need for additional users, increased usage or extended functionality. As we expand our portfolio of solutions within our platform, we execute a growing number of “combination” deals that include two to three of our products in the initial transaction.

Our sales force is structured by geography, customer size, status (customer or prospect) and industry. By focusing some of our sales representatives on the specific needs of vertical industries, we have been able to drive significant results and establish ourselves as the identity governance leader for that industry. Our global sales organization is comprised of quota-carrying sales representatives supported by sales development representatives, sales engineers, partner managers, product and technical specialists and architects.

Partners constitute an essential part of our selling model. We have established a model designed to create zero conflict, and typically include our partners in all of our training and enablement efforts, including our annual sales kick-off events. As a result, our indirect sales model, executed through our global and regional system integrators, technology partners and value-added resellers, is a key factor in our overall success.

Marketing

Our marketing strategy is focused on building a strong brand through differentiated messaging and thought leadership, educating the market on the importance of identity, communicating our product advantages and generating pipeline for our sales force. Our data-driven approach to marketing is tightly aligned to our sales and channel strategy and provides agility to leverage market opportunities as they arise. Our awareness efforts focus on branding, digital and content marketing, public and analyst relations and social media, including blogs and bylines. Educational and pipeline maturation programs include global email campaigns and webinars, security events and customers round tables. Pipeline generation and maturation efforts focus on local events in our three major geographies: (i) Americas, (ii) Europe, the Middle East and Africa (“EMEA”) and (iii) Asia-Pacific (APAC). Audiences for such events are typically IT and security professionals, including CIOs and CISOs. We host geographic annual user conferences that bring together customers, prospects and our partners to learn about our platform as well as network and share best practices with each other. Our user conferences demonstrate our strong commitment to enabling our customers to succeed, while also serving as an opportunity to create pipeline for new sales to prospective customers and additional sales to existing customers.

Professional Services and Maintenance and Customer Support

Professional Services

We are primarily focused on ensuring that our professional services partners, who perform a majority of the implementations for our customers, are able to implement our solutions successfully. We provide “expert services” to partners and customers, including deployment best practices, architecture and code reviews, real time technical training, and complex implementation assistance. We provide instructor-led courses, self-paced e-learning and on-site training. We expect the use of SailPoint University, our e-learning service introduced in 2016, to grow at an accelerated pace in the coming years, making it more accessible for customers and partners to get trained on our products. We also lead direct implementations when requested by a customer. We believe our investment in professional services, as well as the investment our partners are making to grow their SailPoint professional services practices, will drive increased adoption of our platform.

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Maintenance and Customer Support

Our customers receive one year of software maintenance as part of their initial purchase of our on-premises solutions and may renew their maintenance agreement following the initial period. Our cloud-based solutions include customer support. For our on-premises solutions, our maintenance provides customers with the right to receive major releases of their purchased solutions, maintenance releases and patches and access to our technical support services during the term of the agreement. We provide our cloud-based solutions customers with technical support services and all aspects of infrastructure support. We maintain a customer support organization, which includes experienced, trained engineers, that offers multiple service levels for our customers based on their needs. These customers receive contractual response times, telephonic support and access to online support portals. Our highest levels of support provide 24x7x365 support for critical issues. Our customer support organization has global capabilities, a deep expertise in our solutions and, through select support partners, is able to deliver support in multiple languages.

Customer Success Management

Our customer success strategy centers around our investment in, and ownership of, the post-sale experience for our customers. Every customer has a dedicated Customer Success Manager (“CSM”), who is responsible for ensuring that return on investment and business results, committed during the sales cycle, are achieved. Through proactive and regular engagements, the CSM makes sure every customer is satisfied and is using their SailPoint products or services optimally. When necessary, the CSM coordinates cross-departmental resources to remove any barrier to success. In addition, our customer success team utilizes customer data to identify and present any cross-sell or upsell solutions aligned to a customer’s business objectives, thereby contributing to revenue expansion and increased product penetration. By proactively managing customer relationships, our CSM team nurtures client advocates, who become a powerful asset in closing new business.

Partnerships and Strategic Relationships

As a core part of our strategy, we have cultivated strong relationships with partners to help us increase our reach and influence, while providing a broader distribution of our software platform. We have developed a large partner network consisting of technology partners, system integrators, a growing network of value-added resellers and our alliance partners (Accenture, Deloitte, KPMG, PwC and most recently EY). In 2018, over 80% of our new customer transactions involved our partners. We believe that our extensive partnership network enables us to provide the most complete identity governance solution to our customers.

Technology Partners

We have partnered with industry leaders across a spectrum of technologies that enable organizations to integrate their entire security, mobility, cloud, and applications infrastructure into our platform so that breaches can be better identified, mitigated and contained, and operations can be streamlined. We believe that solutions from companies such as AWS, CyberArk, Microsoft, Okta, SAP, ServiceNow, VMware and Workday that are plugged into our open identity platform through APIs provide our customers value-added capabilities to build an identity-aware enterprise.

Value-Added Resellers

Value-added resellers bring product expertise and implementation best practices to our customers globally. They provide vertical expertise and technical advice in addition to reselling or bundling our software. All of our reseller partners have been trained to demonstrate and promote our identity platform. Our reseller channel ranges from large companies, like Optiv to regional resellers in our markets and territories. Our reseller program is designed to scale growth, help generate new opportunities, optimize customer experience and increase profitability as well as sales efficiency.

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System Integrators

We partner with many large and global system integrators. We have partnerships with global advisory firms such as Deloitte, KPMG, PwC, and most recently EY, with global system integrators such as Accenture and DXC, and with many regional system integrators in all three of our geographies. The focus of our system integrators program is to deliver pipeline growth and bookings, to help partners drive self-sufficiency and to foster transparency and collaboration through shared assets and resources. We have implemented joint business controls and metrics that provide a platform for discussion and partnership development and help us optimize our program and unified value proposition.

Identity+ Alliance

The SailPoint Identity+ Alliance is a technology partnering network that leverages familiar standards and methods—like SQL, SCIM and Representational State Transfer (“REST”)—that make it easy to share identity context and configure identity-specific policies across disparate systems. For example, when Privileged Account Management (PAM) systems are integrated with our solutions, enterprises can conduct regular audits of privileged users and automatically remediate any policy violations. Program offerings include access to SailPoint SDKs and APIs, developer support, and cloud-based certification services. After three years, the Identity+ Alliance comprises over fifty technology and implementation partners and has produced over thirty certified integrations.

Research and Development

Innovation is one of our core values, and it is at the heart of how we think and do business. We believe ongoing and timely development of new products and features is imperative to maintaining our competitive position. We continue to invest in both our cloud and on-premises solutions across our global innovation centers in Austin, Texas, Pune, India and Tel Aviv, Israel. Additionally, we have made significant investment in our connectors business, which is a key enabler to our open identity platform. As of December 31, 2018, our research and development team had 291 employees.

As part of our relentless drive toward innovation and technical market leadership, we created SailPoint Labs in 2011. SailPoint Labs is a dedicated, stand-alone technology investigation and engineering group that sits outside of the company’s core product development and delivery teams. The Labs team has two specific charters: Labs Research, which is focused on forward-looking technology prototyping, and targets mid-to-long term product enhancements and new service offerings; and Labs Runtime, which is focused on performance and scalability testing and ensuring that we deliver the best possible solutions. Examples of Labs Research prototypes that went into production are our plugin framework, our AD password recovery technology and our recent Privileged Account Management Integration module. In addition, the Labs Research team co-authored the SCIM open standard, which provides for an automated exchange of user identity information between identity domains, or IT systems. The Labs Runtime team is responsible for developing and continually advancing the performance and scalability of our products and solutions by establishing benchmarks and best practices for high-performance and extreme scalability scenarios.

Competition

We operate in a highly competitive market characterized by constant change and innovation. Our competitors include large enterprise software vendors such as CA Technologies, IBM and Oracle and pure-play data access governance vendors. Several vendors have either introduced new products or incorporated features into existing products that compete with our solutions.

We believe the principal competitive factors in our market include:

 

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Reliability and effectiveness in implementing identity governance policies;

 

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Comprehensiveness of visibility provided by implemented identity governance policies;

 

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Flexibility to deploy identity governance and administration as a software-based solution on-premises or in the cloud or as a SaaS solution;

 

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Adherence to government and industry regulations and standards;

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Comprehensiveness and interoperability of the solution with other IT and security applications;

 

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Security, scalability and performance;

 

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Ability to innovate and respond to customer needs rapidly;

 

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Quality and responsiveness of support organizations;

 

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Total cost of ownership;

 

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Ease of use; and

 

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Customer experience.

Some of our competitors have significantly greater financial, technical, and sales and marketing resources, as well as greater name recognition and more extensive geographic presence than we do. However, we believe we compete favorably with our competitors on the basis of all the factors above.

Intellectual Property

Our success depends in part on our ability to protect our intellectual property. We rely on copyrights and trade secret laws, confidentiality procedures, employment proprietary information and inventions assignment agreements, trademarks and patents to protect our intellectual property rights. We also license software from third parties for integration into our product solutions, including open source software and other software available on commercially reasonable terms.

We control access to and use of our product solutions and other confidential information through the use of internal and external controls, including contractual protections with employees, contractors, customers and partners, and our software is protected by U.S. and international copyright and trade secret laws. Despite our efforts to protect our trade secrets and proprietary rights through intellectual property rights, licenses and confidentiality agreements, unauthorized parties may still copy or otherwise obtain and use our software and technology.

We have twenty issued patents and seven patent applications pending in the United States relating to certain aspects of our technology. The expiration dates of our issued patents range from 2024 to 2036. We cannot assure you whether any of our patent applications will result in the issuance of a patent or whether the examination process will require us to narrow our claims. Any of our existing patents and any that may issue may be contested, circumvented, found unenforceable or invalidated, and we may not be able to prevent third parties from infringing them. In addition, we have international operations and intend to continue to expand these operations, and effective patent, copyright, trademark and trade secret protection may not be available or may be limited in foreign countries.

Legal Proceedings

We are not currently a party to any material legal proceedings. We are not aware of any inquiries or investigations into our business.

Employees

As of December 31, 2018, we had a total of 1,003 employees, including 291 involved in research and development activities, 346 in our sales and marketing organization, and 243 in professional services and customer support. As of December 31, 2017, we had a total of 806 employees, including 244 involved in research and development activities, 264 in our sales and marketing organization, and 211 in professional services and customer support. As of December 31, 2018, and 2017, respectively, approximately 32% and 33% of our employees were located outside of the United States. We consider our employee relations to be good.

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Corporate Information

SailPoint Technologies Holdings, Inc. was incorporated in the state of Delaware on August 8, 2014, in preparation for the purchase of SailPoint Technologies, Inc. The purchase occurred on September 8, 2014 and our certificate of incorporation was amended and restated as of such date. SailPoint Technologies, Inc. was formed July 14, 2004 as a Delaware corporation.

Our principal executive offices are located at 11120 Four Points Drive, Suite 100, Austin, Texas 78726, and our telephone number at that address is (512) 346-2000. Our website address is www.sailpoint.com. Information contained on, or that can be accessed through, our website does not constitute part of this Annual Report on Form 10-K, and inclusions of our website address in this Annual Report on Form 10-K are inactive textual references only.

The SailPoint design logo and our other registered or common law trademarks, service marks or trade names appearing in this Annual Report on Form 10-K are the property of SailPoint Technologies, Inc., our wholly owned subsidiary. Other trademarks and trade names referred to in this Annual Report on Form 10-K are the property of their respective owners.

Available Information

Our website is located at https://www.sailpoint.com, and our investor relations website is located at https://investors.sailpoint.com. The information posted on our website is not incorporated into this Annual Report on Form 10-K. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) are available free of charge on our investor relations website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. You may also access all of our public filings through the SEC’s website at https://www.sec.gov.

Investors and other interested parties should note that we use our media and investor relations website and our social media channels to publish important information about us, including information that may be deemed material to investors. We encourage investors and other interested parties to review the information we may publish through our media and investor relations website and the social media channels listed on our media and investor relations website, in addition to our SEC filings, press releases, conference calls and webcasts.

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ITEM 1A. RISK FACTORS

The nature of the business activities conducted by the Company subjects it to certain hazards and risks. The following is a summary of some of the material risks relating to the Company’s business activities. Other risks are described in “Part I, Item 1. Business—Competition” and “Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk.” These risks are not the only risks facing the Company. The Company’s business could also be affected by additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial. If any of these risks actually occurs, it could materially harm the Company’s business, financial condition or results of operations and impair the Company’s ability to implement business plans. In that case, the market price of the Company’s common stock could decline.

Risks Related to Our Business and Industry

Although we had positive net income of $3.7 million in 2018, we have a history of losses, and we may not be able to generate sufficient revenue to achieve and sustain profitability.

Until the year ended December 31, 2018, we have incurred net losses in each year prior since our inception, including net losses of $7.6 million and $3.2 million for the years ended December 31, 2017 and 2016, respectively. We expect our operating expenses to increase significantly as we continue to expand our sales and marketing efforts, continue to invest in research and development, and expand our operations in existing and new geographies and vertical markets. We also expect to continue to devote significant research and development resources to our on-premises solutions; if our customers and potential customers shift their IT infrastructures to the cloud faster than we anticipate, we may not realize our expected return from the costs we incur in developing our on-premises solutions. While our revenue has grown in recent years and we had positive net income in 2018, if our revenue declines or fails to grow at a rate faster than these increases in our operating expenses, we will not be able to maintain profitability in future periods. As a result, we may again generate losses. We cannot assure you that we will achieve profitability in the future or that we will be able to sustain profitability.

We have experienced rapid growth in recent periods, and our recent growth rates may not be indicative of our future growth.

We have experienced rapid growth in recent years. Our revenue grew from $132.4 million to $248.9 million from the year ended December 31, 2016 to the year ended December 31, 2018. In future periods, we may not be able to sustain revenue growth consistent with recent history, or at all. We believe our revenue growth depends on a number of factors, including, but not limited to:

 

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our ability to attract new customers and retain and increase sales to existing customers;

 

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our ability to, and the ability of our channel partners to, successfully deploy and implement our solutions, increase our existing customers’ use of our solutions and provide our customers with excellent customer support;

 

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our ability to develop our existing solutions and introduce new solutions;

 

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our ability to hire substantial numbers of new sales and marketing, research and development and general and administrative personnel, and expand our global operations; and

 

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our ability to increase the number of our technology partners.

If we are unable to achieve any of these requirements, our revenue growth will be adversely affected.

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Our future revenues and operating results will be harmed if we are unable to acquire new customers, if our customers do not renew their arrangements with us, or if we are unable to expand sales to our existing customers or develop new solutions that achieve market acceptance.

To continue to grow our business, it is important that we continue to acquire new customers to purchase and use our solutions. Our success in adding new customers depends on numerous factors, including our ability to (i) offer a compelling identity governance platform and solutions, (ii) execute an effective sales and marketing strategy, (iii) attract, effectively train and retain new sales, marketing, professional services and support personnel in the markets we pursue, (iv) develop or expand relationships with channel partners, including systems integrators, resellers and technology partners, (v) expand into new geographies and vertical markets, (vi) deploy our platform and solutions for new customers and (vii) provide quality customer support once deployed.

It is important to our continued growth that our customers renew their arrangements when existing contract terms expire. Our customers have no obligation to renew their maintenance, SaaS and/or term-license agreements, and our customers may decide not to renew these agreements with a similar contract period, at the same prices and terms or with the same or a greater number of identities. Although our customer retention rate has historically been strong, some of our customers have elected not to renew their agreements with us, and it is difficult to accurately predict long-term customer retention and expansion rates. Our customer retention and expansion may decline or fluctuate as a result of a number of factors, including our customers’ satisfaction with our solutions, our customer support and professional services, our prices and pricing plans, the competitiveness of other software products and services, reductions in our customers’ spending levels, user adoption of our solutions, deployment success, utilization rates by our customers, new product releases and changes to our product offerings. If our customers do not renew their maintenance, SaaS and/or term-license agreements, or renew on less favorable terms, our business, financial condition and operating results may be adversely affected.

Our ability to increase revenue also depends in part on our ability to increase the number of identities governed with our solutions and sell more modules and solutions to our existing and new customers. Our ability to increase sales to existing customers depends on several factors, including their experience with implementing and using our platform and the existing solutions they have implemented, their ability to integrate our solutions with existing technologies, and our pricing model.

If our new solutions do not achieve adequate acceptance in the market, our competitive position could be impaired, and our potential to generate new revenue or to retain existing revenue could be diminished. The adverse effect on our financial results may be particularly acute because of the significant research, development, marketing, sales and other expenses we will have incurred in connection with the new solutions, and our ability to introduce compelling new solutions that address the requirements of our customers in light of the dynamic identity governance market in which we operate.

If we are unable to successfully acquire new customers, retain our existing customers, expand sales to existing customers or introduce new solutions, our business, financial condition and operating results could be adversely affected.

If we are unable to maintain successful relationships with our channel partners, our ability to market, sell and distribute our solutions will be limited and our business, financial condition and operating results could be adversely affected.

We derive a significant portion of our revenue from sales influenced or made through our channel partner network and expect these sales to continue to grow for the foreseeable future. Our channel partners provide implementation and other services to our customers in exchange for fees paid by those customers. We may not achieve anticipated revenue growth from our channel partners if we are unable to retain our existing channel partners and expand their sales or add additional motivated channel partners.

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Our arrangements with our channel partners are generally non-exclusive, meaning they may offer customers the products of several different companies, including products that compete with our platform and solutions. If our channel partners do not effectively market and sell our solutions, choose to use greater efforts to market and sell our competitors’ products or services, or fail to meet the needs of our customers, our ability to grow our business and sell our solutions may be adversely affected. Our channel partners may cease marketing our products with limited or no notice and with little or no penalty. In addition, certain of our channel partners are subject to independence requirements that may prevent them from providing services to us or cooperating with us in our go-to-market efforts if they also provide services for entities where members of our board of directors or executive officers serve on such entities’ board of directors or similar governing body. If one or more of our channel partners determines that it is unable to both provide services to us or cooperate with us in our go-to-market efforts and also provide services to another entity, those channel partners may cease marketing our products or otherwise cease providing services to us or cooperating with us in our go-to-market efforts.

We also collaborate with adjacent technology vendors to offer comprehensive solutions to our customers. If we do not effectively collaborate with them, or if they elect to terminate their relationship with us or develop and market solutions that compete with our solutions, our growth may be adversely affected.

Our ability to generate revenue in the future will depend in part on our success in maintaining effective working relationships with our channel partners, in expanding our indirect sales channel, in training our channel partners to independently sell and/or deploy our solutions and in continuing to integrate our solutions with the products and services offered by our technology partners. If we are unable to maintain our relationships with these channel partners, our business, financial condition and operating results could be adversely affected.

Our quarterly results fluctuate significantly and may not fully reflect the underlying performance of our business.

We believe our quarterly revenue and operating results may vary significantly in the future. As a result, you should not rely on the results of any one quarter as an indication of future performance and period-to-period comparisons of our revenue and operating results may not be meaningful and, as a result, may not fully reflect the underlying performance of our business.

Our quarterly operating results may fluctuate as a result of a variety of factors, including, but not limited to, those listed below, many of which are outside of our control:

 

•

the loss or deterioration of our channel partner and other relationships influencing our sales execution;

 

•

the mix of revenue and associated costs attributable to licenses, subscription and professional services, which may impact our gross margins and operating income;

 

•

the mix of revenue attributable to larger transactions as opposed to smaller transactions and the associated volatility and timing of our transactions;

 

•

the growth in the market for our products;

 

•

our ability to attract new customers and retain and increase sales to existing customers;

 

•

changes in customers’ budgets and in the timing of their purchasing decisions, including seasonal buying patterns for IT spending;

 

•

the timing and success of new product introductions by our competitors and by us;

 

•

changes in our pricing policies or those of our competitors;

 

•

significant security breaches of, technical difficulties with, or interruptions to, the delivery and use of our platform;  

 

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changes in the legislative or regulatory environment;

 

•

foreign exchange gains and losses related to expenses and sales denominated in currencies other than the U.S. dollar or the function currencies of our subsidiaries;

 

•

increases in and timing of sales and marketing and other operating expenses that we may incur to grow and expand our operations and to remain competitive;

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•

costs related to the acquisition of businesses, talent, technologies or intellectual property, including potentially significant amortization costs and possible write-downs;

 

•

our ability to control costs, including our operating expenses;

 

•

the collectability of receivables from customers and channel partners, which may be hindered or delayed if these customers or channel partners experience financial distress;

 

•

economic conditions specifically affecting industries in which our customers participate;

 

•

natural disasters or other catastrophic events; and

 

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litigation related costs, settlements or adverse litigation judgments.

Our sales cycle is long and unpredictable, and our sales efforts require considerable time and expense.

The timing of our sales and related revenue recognition is difficult to predict because of the length and unpredictability of the sales cycle for our platform before a sale. We and our channel partners are often required to spend significant time and resources to better educate and familiarize potential customers with the value proposition of our platform and solutions. Customers often view the purchase of our solutions as a strategic decision and significant investment and, as a result, frequently require considerable time to evaluate, test and qualify our platform and solutions prior to purchasing our solutions. During the sales cycle, we expend significant time and money on sales and marketing and contract negotiation activities, which may not result in a sale. Additional factors that may influence the length and variability of our sales cycle include:

 

•

the discretionary nature of purchasing and budget cycles and decisions;

 

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lengthy purchasing approval processes;

 

•

the evaluation of competing products during the purchasing process;

 

•

time, complexity and expense involved in replacing existing solutions;

 

•

announcements or planned introductions of new products features or functionality by our competitors or of new solutions or modules by us;

 

•

the practice of large enterprises often driving their purchasing cycles based on internal factors rather than marketing cycles; and

 

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evolving functionality demands.

If our efforts in pursuing sales and customers are unsuccessful, or if our sales cycles lengthen, our revenue could be lower than expected, which would have an adverse effect on our business, operating results and financial condition.

We recognize some of our revenue ratably over the term of our agreements with customers and, as a result, downturns or upturns in sales may not be immediately reflected in our operating results.

We recognize revenue from our subscription offerings, including IdentityNow, ratably over the terms of our agreements with customers, which generally occurs over a three-year period. As a result, a portion of the revenue that we report in each period will be derived from the recognition of deferred revenue relating to agreements entered into during previous periods. Consequently, a decline in new sales or renewals in any one period may not be immediately reflected in our revenue results for that period. This decline, however, will negatively affect our revenue in future periods. Accordingly, the effect of significant downturns in sales and market acceptance of our products and potential changes in our rate of renewals may not be fully reflected in our operating results until future periods. Our model also makes it difficult for us to rapidly increase our subscription revenue through additional sales in any period, as revenue from new customers generally will be recognized over the term of the applicable agreement.

We expect to continue to invest in research and development, sales and marketing, and general and administrative functions and other areas to grow our subscription-related business. These subscription-related costs are generally expensed as incurred (with the exception of sales commissions), as compared to the corresponding revenue, substantially all of which is recognized ratably in future periods. We are likely to recognize the costs associated with these investments earlier than some of the anticipated benefits and the return on these investments may develop more slowly, or may be lower, than we expect, which could adversely affect our operating results.

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We face intense competition in our market, especially from larger, well established companies, and we may lack sufficient financial and other resources to maintain and improve our competitive position.

The market for identity and data governance solutions is intensely competitive and is characterized by constant change and innovation. We face competition from both traditional, larger software vendors offering enterprise-wide software frameworks and services and smaller companies offering point solutions for specific identity and data governance issues. We also compete with IT equipment vendors and systems management solution providers whose products and services address identity and data governance requirements. Our principal competitors vary depending on the product we offer and include CA Technologies, IBM, Oracle and several smaller vendors. Many of our existing competitors have, and some of our potential competitors could have, substantial competitive advantages such as:

 

•

greater name recognition and longer operating histories;

 

•

more comprehensive and varied products and services;

 

•

broader product offerings and market focus;

 

•

greater resources to develop technologies or make acquisitions;

 

•

more expansive intellectual property portfolios;

 

•

broader distribution and established relationships with distribution partners and customers;

 

•

greater customer support resources; and

 

•

substantially greater financial, technical and other resources.

Given their larger size, greater resources and existing customer relationships, our competitors may be able to compete and respond more effectively than we can to new or changing opportunities, technologies, standards or customer requirements. Our competitors may also seek to extend or supplement their existing offerings to provide identity and data governance solutions that more closely compete with our offerings. Potential customers may also prefer to purchase, or incrementally add solutions, from their existing suppliers rather than a new or additional supplier regardless of product performance or features.

In addition, with the recent increase in large merger and acquisition transactions in the technology industry, particularly transactions involving cloud-based technologies, there is a greater likelihood that we will compete with other large technology companies in the future. Some of our competitors have made acquisitions or entered into strategic relationships to offer a more comprehensive product than they individually had offered. Companies and alliances resulting from these possible consolidations and partnerships may create more compelling product offerings and be able to offer more attractive pricing, making it more difficult for us to compete effectively. In addition, continued industry consolidation may adversely impact customers’ perceptions of the viability of small and medium-sized technology companies and consequently their willingness to purchase from those companies.

New start-up companies that innovate and competitors that are making significant investments in research and development may invent similar or superior products and technologies that compete with our products, and our business could be materially and adversely affected if such technologies or products are widely adopted. Conditions in our market could change rapidly and significantly as a result of technological advancements, partnering by our competitors or continuing market consolidation. These competitive pressures in our market or our failure to compete effectively may result in price reductions, fewer orders, reduced revenue and gross margins, increased net losses, and loss of market share. Any failure to meet and address these factors could adversely affect our business, financial condition and operating results.

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We anticipate that our operations will continue to increase in complexity as we grow, which will add additional challenges to the management of our business in the future.

Our business has experienced significant growth and is becoming increasingly complex. We increased the number of our employees from 806 at December 31, 2017 to 1,003 at December 31, 2018. We have also experienced growth in the number of customers of our solutions from 695 at December 31, 2016 to 1,173 at December 31, 2018. At December 31, 2018, we had personnel in 24 countries, and we expect to expand into additional countries in the future. We expect this growth to continue and for our operations to become increasingly complex. To effectively manage this growth, we have made and plan to continue to make substantial investments to improve our operational, financial and management controls as well as our reporting systems and procedures. Our success will depend in part on our ability to manage this complexity effectively without undermining our corporate culture, which we believe has been central to our success. If we are unable to manage this complexity, our business, operations, operating results and financial condition may suffer.

As our customer base continues to grow, we likely will need to expand our professional services and other personnel, and maintain and enhance our existing partner network, to provide a high level of customer service. We also will need to effectively manage our direct and indirect sales processes as the number and type of our sales personnel and partner network continues to grow and become more complex and as we continue to expand into new geographies and vertical markets. This complexity is further driven by the various ways in which we sell our solutions, including on a per identity and per module basis through perpetual licenses and SaaS. If we do not effectively manage the increasing complexity of our business and operations, the quality of our solutions and customer service could suffer, and we may not be able to adequately address competitive challenges. These factors could impair our ability, and our channel partners’ ability, to attract new customers, retain existing customers, expand our customers’ use of existing solutions and adoption of more of our solutions and continue to provide high levels of customer service, all of which would adversely affect our reputation, overall business, operations, operating results and financial condition.

Interruptions with the delivery of our SaaS solutions, or third-party cloud-based systems that we use in our operations, may adversely affect our business, operating results and financial condition.

Our continued growth depends in part on the ability of our existing customers and new customers to access our platform and solutions, particularly our cloud-based deployments, at any time and within an acceptable amount of time. In addition, our ability to access certain third-party SaaS solutions is important to our operations and the delivery of our customer support and professional services, including our online training for customers, professional services partners and channel partners. We have experienced, and may in the future experience, service disruptions, outages and other performance problems both in the delivery of our SaaS solutions and in third-party SaaS solutions we use due to a variety of factors, including infrastructure changes, malicious actors, human or software errors or capacity constraints. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time. It may become increasingly difficult to maintain and improve the performance of our SaaS solutions as they become more complex. If our SaaS solutions are unavailable or if our customers are unable to access features of our SaaS solutions within a reasonable amount of time or at all, our business would be negatively affected. In addition, if any of the third-party SaaS solutions that we use were to experience a significant or prolonged outage or security breach, our business could be adversely affected.

We host our SaaS solutions using Amazon Web Services (“AWS”) data centers, a provider of cloud infrastructure services. All of our SaaS solutions reside on hardware owned or leased and operated by us in these locations. Our SaaS operations depend on protecting the virtual cloud infrastructure hosted in AWS by maintaining its configuration, architecture, features and interconnection specifications, as well as the information stored in these virtual data centers and which third-party internet service providers transmit. Although we have disaster recovery plans that utilize multiple AWS locations, any incident affecting their infrastructure that may be caused by fire, flood, severe storm, earthquake or other natural disasters, cyber-attacks, terrorist or other attacks, and other similar events beyond our control could negatively affect our SaaS platform. A prolonged AWS service disruption affecting our SaaS platform for any of the foregoing reasons would negatively impact our ability to serve our customers and could damage our reputation with current and potential customers, expose us to liability, cause us to lose customers or otherwise harm our business. We may also incur significant costs for using alternative equipment or taking other actions in preparation for, or in reaction to, events that damage the AWS services we use. In addition, AWS may terminate the agreement by providing 30 days’ prior written notice and may, in some cases, terminate the agreement immediately for cause upon notice. In the event that our AWS service agreements are terminated, or there is a lapse of service, elimination of AWS services or features that we utilize, interruption of internet service provider

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connectivity or damage to such facilities, we could experience interruptions in access to our platform as well as significant delays and additional expense in arranging or creating new facilities and services and/or re-architecting our SaaS solutions for deployment on a different cloud infrastructure service provider, which may adversely affect our business, operating results and financial condition.

If we fail to adapt and respond effectively to rapidly changing technology, evolving industry standards, changing regulations and changing customer needs, requirements or preferences, our platform and solutions may become less competitive.

The market in which we compete is relatively new and subject to rapid technological change, evolving industry standards and changing regulations, as well as changing customer needs, requirements and preferences. The success of our business will depend, in part, on our ability to adapt and respond effectively to these changes on a timely basis. In addition, as our customers’ technologies and business plans grow more complex, we expect them to face new and increasing challenges. Our customers require that our solution effectively identifies and responds to these challenges without disrupting the performance of our customers’ IT systems. As a result, we must continually modify and improve our products in response to changes in our customers’ IT infrastructures.

We may be unable to anticipate future market needs and opportunities or be unable to develop enhancements to our platform or existing solutions or new solutions to meet such needs or opportunities in a timely manner, if at all. Even if we are able to anticipate, develop and commercially introduce enhancements to our platform and existing solutions and new solutions, those enhancements and new solutions may not achieve widespread market acceptance. Our enhancements or new solutions could fail to attain sufficient market acceptance for many reasons, including:

 

•

delays in releasing platform or solutions enhancements or new solutions;

 

•

inability to interoperate effectively with existing or newly introduced technologies, systems or applications of our existing and prospective customers;

 

•

defects, errors or failures in our platform or solutions;

 

•

negative publicity about the performance or effectiveness of our platform or solutions;

 

•

introduction or anticipated introduction of competing products by our competitors;

 

•

installation, configuration or usage errors by our customers or partners; and

 

•

changing of regulatory requirements related to security.

If we were unable to enhance our platform or existing solutions or develop new solutions that keep pace with rapid technological and industry change, our business, operating results and financial condition could be adversely affected. If new technologies emerge that are able to deliver competitive products and services at lower prices, more efficiently, more conveniently or more securely, such technologies could adversely impact our ability to compete effectively.

Our failure to achieve and maintain an effective system of disclosure controls and internal control over financial reporting could adversely affect our financial position and lower our stock price.

As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), and the rules and regulations of the applicable listing standards of the New York Stock Exchange (the “NYSE”). The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight.

In finalizing our financial statements for our initial public offering, we identified a material weakness in our internal control over financial reporting. We continue to have this material weakness related to controls surrounding accounting and reporting for certain complex, non-routine transactions. We are taking measures to remediate this material weakness, including establishing more robust accounting policies and procedures, reviewing the adoption of new accounting positions and financial statement disclosures, and selecting and engaging consultants to assist us in determining positions and evaluating new accounting policies.

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Additionally, in connection with the preparation of our 2018 financial statements, management has identified a material weakness in our internal control over financial reporting related to controls surrounding the recording and processing of revenue transactions. We have developed and initiated a remediation plan designed to address the material weakness, including strengthening the design and level of precision of control activities related to revenue transactions, including enhancing our guidelines for how to document reviews of revenue transactions.

These remediation actions are subject to ongoing review by our management, as well as oversight by our Board of Directors. Although we plan to complete these remediation processes as quickly as possible, we cannot, at this time, estimate when such remediation may occur, and our initiatives may not prove successful in remediating these material weaknesses. We cannot assure you that these measures and any further measures that we implement will be sufficient to remediate our existing material weaknesses or to identify or prevent additional material weaknesses.

Our internal resources and personnel may in the future be insufficient to avoid accounting errors and there can be no assurance that we will not have additional material weaknesses in the future. Any failure to develop or maintain effective controls or any difficulties encountered implementing required new or improved controls could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we are required to include in our periodic reports that are filed with the Securities and Exchange Commission (the “SEC”). Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NYSE.

As a public company, we are required to comply with the SEC rules that implement Section 404 of the Sarbanes-Oxley Act and are therefore required to make a formal assessment of the effectiveness of our internal control over financial reporting. Our independent registered public accounting firm may issue, and as of December 31, 2018 has issued, a report that is adverse in connection with identified material weaknesses. Any failure to maintain effective disclosure controls and internal control over financial reporting could have an adverse effect on our business and operating results and could cause a decline in the price of our common stock.

Forecasting our estimated annual effective tax rate for financial accounting purposes is complex and subject to uncertainty, and there may be material differences between our forecasted and actual tax rates.

 

Forecasts of our income tax position and effective tax rate for financial accounting purposes are complex and subject to uncertainty because our income tax position for each year combines the effects of a mix of profits earned and losses incurred by us in various tax jurisdictions with a broad range of income tax rates, as well as changes in the valuation of deferred tax assets and liabilities, the impact of various accounting rules and changes to these rules and tax laws, the results of examinations by various tax authorities, and the impact of any acquisition, business combination or other reorganization or financing transaction. To forecast our tax rate, we estimate our pre-tax profits and losses by jurisdiction and forecast our tax expense by jurisdiction. If the mix of profits and losses, our ability to use tax credits, or effective tax rates by jurisdiction is different than those estimated, our actual tax rate could be materially different than forecasted, which could have a material impact on our results of business, financial condition and results of operations.

 

On December 22, 2017, U.S. Federal tax reform was enacted with the signing of the Tax Cuts and Jobs Act, or the (“TCJA”). Notable provisions of the TCJA include significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modification or repeal many business deductions and credits. 

 

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The U.S. Department of Treasury has broad authority to issue regulations and interpretative guidance that may significantly impact how we will apply the law and impact our results of operations in the period issued. As additional regulatory guidance is issued by the applicable taxing authorities, as accounting treatment is clarified, as we perform additional analysis on the application of the law, and as we refine estimates in calculating the effect, our final analysis, which will be recorded in the period completed, may be different from our current provisional amounts, which could materially affect our tax obligations and effective tax rate.

If we are not able to maintain and enhance our brand or reputation as an industry leader and innovator, our business and operating results may be adversely affected.

We believe that maintaining and enhancing our reputation as a leader and innovator in the market for identity and data governance solutions is critical to our relationship with our existing customers and commercial relationships and our ability to attract new customers and commercial relationships. The successful promotion of our brand attributes will depend on a number of factors, including our marketing efforts, our ability to continue to develop high-quality features and solutions for our platform and our ability to successfully differentiate our platform and solutions from competitive products and services. Our brand promotion activities may not be successful or yield increased revenue. In addition, independent industry analysts often provide reports of our platform and solutions, as well as products and services of our competitors, and perception of our platform and solutions in the marketplace may be significantly influenced by these reports. If these reports are negative, or less positive as compared to those of our competitors’ products and services, our reputation may be adversely affected. Additionally, the performance of our channel partners may affect our brand and reputation if customers do not have a positive experience with our solutions as implemented by our channel partners or with the implementation generally. The promotion of our brand requires us to make substantial expenditures, and we anticipate that the expenditures will increase as our market becomes more competitive, as we expand into new geographies and vertical markets, and as more sales are generated through our channel partners. To the extent that these activities yield increased revenue, this revenue may not offset the increased expenses we incur. If we do not successfully maintain and enhance our brand and reputation, our business and operating results may be adversely affected.

Real or perceived errors, failures, or disruptions, including those caused by cyber-attacks, in our platform and solutions could adversely affect our customers’ satisfaction with our solutions and/or our industry reputation and business could be harmed.

Our platform and solutions are very complex and have contained and may contain undetected defects, vulnerabilities or errors, especially when solutions are first introduced or enhanced. Our platform and solutions are often used in connection with large-scale computing environments with different operating systems, system management software, equipment and networking configurations, which may cause errors or failures of products, or other aspects of the computing environment into which our products are deployed. If our platform and solutions are not implemented or used correctly or as intended, inadequate performance and disruption in service may result. In addition, deployment of our platform and solutions into complicated, large-scale computing environments may expose errors, failures or vulnerabilities in our products. Any such errors, failures, or vulnerabilities may not be found until after they are deployed to our customers. We have experienced from time to time errors, failures and bugs in our platform that have resulted in customer downtime. While we were able to remediate these situations, we cannot assure you that we will be able to mitigate future errors, failures, vulnerabilities or bugs in a quick or cost-effective manner.

We have in the past experienced, and may in the future experience, performance issues due to a variety of factors, including infrastructure changes, human or software errors, website or third-party hosting disruptions or capacity constraints due to a number of potential causes including technical failures, cyber-attacks, security incidents, natural disasters or fraud. If our products or solutions or corporate security is compromised, our website, professional services, customer support or SaaS solutions are unavailable, our business could be negatively affected. Moreover, if our security measures, products or services are subject to cyber-attacks that degrade or deny the ability of users to access our website or other products or services, our products or services may be perceived as insecure, and we may incur significant legal and financial exposure. In particular, our cloud-based products may be especially vulnerable to interruptions, performance problems or cyber-attacks. We continue to invest in the personnel, infrastructure and third-party best practice software solutions and services necessary to mitigate these risks. However, if we are unable to attract and retain personnel with the necessary cybersecurity expertise, or fail to implement sufficient safeguarding measures, we may not be able to prevent, detect, and mitigate potentially disruptive events which could occur in the future. In some instances, we may not be able to identify the cause or causes of these events within an acceptable period of time. Our cloud-based products are hosted at third-party data centers that are not under our direct control. If these data centers were to be damaged or suffer disruption, our ability to provide products and services to our customers could be impaired and our reputation could be harmed and we may face legal action over the disruption or exposure and/or loss of data, as well as incur additional compliance and information security costs in order to mitigate future disruptions.

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If we or our partners or one or more customers were to suffer a highly publicized breach, even if our platform and solutions perform effectively, such a breach could cause our customers or potential customers to lose trust in our identity governance platform in general, which could cause us to suffer reputational harm, lose existing commercial relationships and customers or deter them from purchasing additional solutions and prevent new customers from purchasing our solutions.

Since our customers use our platform and solutions for important aspects of their security environment and operational business, any real or perceived errors, failures or vulnerabilities in our products, or disruptions in service or other performance problems, could hurt our reputation and may damage our customers’ businesses. Furthermore, defects, errors, vulnerabilities or failures in our platform or solutions may require us to implement design changes or software updates. Any defects, vulnerabilities or errors in our platform or solutions, or the perception of such defects, vulnerabilities or errors, could result in:

 

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

 

•

loss of existing or potential customers or channel partners;

 

•

delayed or lost revenue;

 

•

delay or failure to attain market acceptance;

 

•

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

 

•

negative publicity, which will harm our reputation;

 

•

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

 

•

harm to our operating results.

Although we have contractual protections, such as warranty disclaimers and limitation of liability provisions, in our standard terms and conditions of sale, they may not fully or effectively protect us from claims by customers, commercial relationships or other third parties. Any insurance coverage we may have may not adequately cover all claims asserted against us or cover only a portion of such claims. In addition, even claims that ultimately are unsuccessful could result in our expenditure of funds in litigation and the diverting of management’s time and other resources.

Breaches in our security, cyber-attacks or other cyber-risks could expose us to significant liabilities and cause our business and reputation to suffer.

Our operations involve transmission and processing of our customers' and their employees’ confidential, proprietary and sensitive information including, in some cases, personally identifiable information. We have legal and contractual obligations to protect the confidentiality and appropriate use of customer data. Despite our security measures, our information technology and infrastructure may be vulnerable to security risks, including but not limited to, unauthorized access to use or disclosure of customer data, theft of proprietary information, employee error or misconduct, denial of service attacks, loss or corruption of customer data, and computer hacking attacks or other cyber-attacks subsequently originated from our infrastructure. Such events could expose us to substantial litigation expenses and damages, indemnity and other contractual obligations, government fines and penalties, mitigation expenses and other liabilities. 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 reasonably 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, our brand and reputation could be impacted, we could lose potential sales and existing customers, our ability to operate our business could be impaired, and we may incur significant liabilities. Moreover, failure to maintain effective internal accounting controls related to data security breaches and cybersecurity in general could impact our ability to produce timely and accurate financial statements and could subject us to regulatory scrutiny.

 

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If our platform and solutions do not effectively interoperate with our customers’ existing or future IT infrastructures, installations could be delayed or cancelled, which would harm our business.

Our success depends on the interoperability of our platform and solutions with third-party operating systems, applications, data and devices that we have not developed and do not control. Any changes in such operating systems, applications, data or devices that degrade the functionality of our platform or solutions or give preferential treatment to competitive software could adversely affect the adoption and usage of our platform. We may not be successful in adapting our platform or solutions to operate effectively with these applications, data or devices. If it is difficult for our customers to access and use our platform or solutions, or if our platform or solutions cannot connect a broadening range of applications, data and devices, then our customer growth and retention may be harmed, and our business and operating results could be adversely affected.

Our success depends on the experience and expertise of our senior management team and key employees. If we are unable to hire, retain, train and motivate our personnel, our business, operating results and prospects may be harmed.

Our success has depended, and continues to depend, on the efforts and talents of our senior management team and key employees, including our engineers, product managers, sales and marketing personnel and professional services personnel. Our future success will also depend upon our continued ability to identify, hire and retain additional skilled and highly qualified personnel, which will require significant time, expense and attention.

Our officers and key employees are employed on an at-will basis, which means that they could terminate their employment with us at any time. The loss of one or more members of our senior management team, particularly if closely grouped, could adversely affect our ability to execute our business plan and thus, our business, operating results and prospects. We do not maintain key man insurance on any of our officers or key employees, and we may not be able to find adequate replacements. If we fail to identify, recruit and integrate strategic hires, our business, operating results and financial condition could be adversely affected.

We have from time to time experienced, and we expect to continue to experience, difficulty in hiring, and may in the future have difficulty retaining, employees with appropriate qualifications and many of the companies with which we compete for experienced personnel have greater resources than we have. In addition to hiring new employees, we must continue to focus on training, motivating and retaining our best employees, substantially all of whom are at-will employees, which means they may terminate their employment relationship with us at any time. Many of our employees may be able to receive significant proceeds from sales of our common stock in the public markets, which may reduce their motivation to continue to work for us. Conversely, employees may be more likely to leave us if the exercise prices of the stock options that they hold are significantly above the market price of our common stock. Competition for highly skilled personnel is intense, and we may need to invest significant amounts of cash and equity to attract and retain new employees, and we may never realize returns on these investments.

Competition for well-qualified employees in all aspects of our business, including sales personnel, professional services personnel and software engineers, is intense. Our primary recruiting competition are well-known, high-paying firms. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate existing employees. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business would be adversely affected.

Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity and teamwork fostered by our culture, which could adversely affect our business.

We believe that our culture has been and will continue to be a key contributor to our success. From January 1, 2017 to December 31, 2018, we have increased the size of our workforce by 241 employees domestically and 105 employees internationally, and we expect to continue to hire aggressively as we expand. In addition, we plan to continue to expand our international operations, which may affect our culture as we seek to find, hire and integrate additional international employees while maintaining our corporate culture. If we do not continue to maintain our corporate culture as we grow, we may be unable to continue to foster the innovation, integrity, and collaboration we believe we need to support our growth. Our substantial anticipated headcount growth, international expansion and our transition from a private company to a public company may result in a change to our corporate culture, which could adversely affect our business.

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Because our long-term success depends, in part, on our ability to expand the sales and marketing of our platform and solutions to customers located outside of the United States, and we perform a significant portion of our development outside of the United States, our business will be susceptible to risks associated with international operations.

At December 31, 2018, we had sales and marketing and product development personnel outside the United States in Australia, Canada, Denmark, France, Germany, Hong Kong, India, Israel, Italy, the Netherlands, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, Turkey, the United Arab Emirates and the United Kingdom, and we intend to expand our international sales and marketing operations.

Conducting international operations subjects us to risks that we do not generally face in the United States. These risks include:

 

•

encountering existing and new competitors with stronger brand recognition in the new markets;

 

•

challenges developing, marketing, selling and implementing our platform and solutions caused by language, cultural and ethical differences and the competitive environment;

 

•

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

 

•

political instability, war, armed conflict or terrorist activities;

 

•

currency fluctuations;

 

•

the risks of currency hedging activities to limit the impact of exchange rate fluctuations, should we engage in such activities in the future;

 

•

difficulties in managing systems integrators and technology providers;

 

•

laws imposing heightened restrictions on data usage and increased penalties for failure to comply with applicable laws, particularly in the European Union (“EU”);

 

•

risks associated with trade restrictions and foreign import requirements, including the importation, certification and localization of our solutions required in foreign countries, as well as changes in trade, tariffs, restrictions or requirements;

 

•

potentially different pricing environments, longer sales cycles and longer accounts receivable payment cycles and collections issues;

 

•

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

 

•

increased turnover of international personnel as compared to our domestic operations;

 

•

potentially adverse tax consequences, including multiple and possibly overlapping tax structures, the complexities of foreign value added tax systems, restrictions on the repatriation of earnings and changes in tax rates;

 

•

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

 

•

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

 

•

increased financial accounting and reporting burdens and complexities; and

 

•

lack of familiarity with local laws, customs and practices, and laws and business practices favoring local competitors or commercial parties.

The occurrence of any one of these risks could harm our international business and, consequently, our operating results. Additionally, operating in international markets requires significant management attention and financial resources. We cannot be certain that the investment and additional resources required to operate in other countries will produce desired levels of revenue or net income.

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In addition, general worldwide economic conditions could experience significant downturns and instability, including as a result of changes in global trade policies, such as how the United Kingdom's vote to exit the EU, commonly referred to as "Brexit," develops in the United Kingdom, trade disputes and increased tariffs between the United States and China, or other political or economic developments. For example, Brexit has created substantial economic and political uncertainty, the impact of which depends on the terms of the United Kingdom’s withdrawal from the EU. This uncertainty may cause some of our customers or potential customers to curtail spending and may ultimately result in new regulatory and cost challenges to our United Kingdom and global operations. These conditions make it extremely difficult for our customers and us to forecast and plan future business activities accurately, and they could cause our customers to reevaluate their decisions to purchase our products, which could delay and lengthen our sales cycles or result in cancellations of planned purchases. Furthermore, during challenging economic times and/or during times of rising interest rates, our customers may tighten their budgets and face issues in gaining timely access to sufficient and/or affordable credit, which could result in an impairment of their ability to make timely payments to us. In turn, we may be required to increase our allowance for doubtful accounts, which would adversely affect our financial results.

Adverse economic conditions may negatively impact our business.

Our business depends on the overall demand for information technology and on the economic health of our current and prospective customers. Any significant weakening of the economy in the United States or Europe and of the global economy, more limited availability of credit, a reduction in business confidence and activity, decreased government spending, economic uncertainty and other difficulties may affect one or more of the sectors or countries in which we sell our solutions. Global economic and political uncertainty may cause some of our customers or potential customers to curtail spending generally or IT and identity and data governance spending specifically and may ultimately result in new regulatory and cost challenges to our international operations. In addition, a strong dollar could reduce demand for our products in countries with relatively weaker currencies. These adverse conditions could result in reductions in sales of our solutions, longer sales cycles, slower adoption of new technologies and increased price competition. Any of these events could have an adverse effect on our business, operating results and financial position.

Forecasts of our market and market growth may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, there can be no assurance that our business will grow at similar rates, or at all.

Growth forecasts included in this Form 10-K relating to our market opportunity and the expected growth in that market are subject to significant uncertainty and are based on assumptions and estimates which may prove to be inaccurate. Even if this market meets our size estimate and experiences the forecasted growth, we may not grow our business at a similar rate, or at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties. Accordingly, the forecasts of market growth included in this Form 10-K should not be taken as indicative of our future growth.

Any failure to offer high-quality customer support may adversely affect our relationships with our customers and our financial results.

We typically bundle customer support with arrangements for our solutions. In deploying and using our platform and solutions, our customers typically require the assistance of our support teams to resolve complex technical and operational issues. We may be unable to modify the nature, scope and delivery of our customer support to compete with changes in product support services provided by our competitors. Increased customer demand for support, without corresponding revenue, could increase costs and adversely affect our operating results. We may also be unable to respond quickly enough to accommodate short-term increases in customer demand for support. Our sales are highly dependent on our reputation and on positive recommendations from our existing customers. Any failure to maintain high-quality customer support, or a market perception that we do not maintain high-quality product support, could adversely affect our reputation, and our ability to sell our solutions to existing and new customers.

27

 

If we fail to meet contractual commitments related to response time, service level commitments or quality of professional services, we could be obligated to provide credits for future service, or face contract termination, which could adversely affect our business, operating results and financial condition.

Depending on the products purchased, our customer agreements contain service level agreements, under which we guarantee specified availability of our platform and solutions. If we are unable to meet the stated service level commitments to our customers or suffer extended periods of unavailability of our SaaS platform or solutions, we may be contractually obligated to provide affected customers with service credits or customers could elect to terminate and receive refunds for prepaid amounts. In addition, if the quality of our professional services does not meet contractual requirements, we may be required to re-perform the services at our expense or refund amounts paid for the services. Any failure to meet these contractual commitments could adversely affect our revenue, operating results and financial condition and any failure to meet service level commitments or extended service outages of our SaaS solutions could adversely affect our business and reputation as customers may elect not to renew and we could lose future sales.

Our business depends, in part, on sales to the public sector, and significant changes in the contracting or fiscal policies of the public sector could have an adverse effect on our business.

We derive a portion of our revenue from sales of our solutions to federal, state, local and foreign governments, and we believe that the success and growth of our business will continue to depend in part on our successful procurement of government contracts. Factors that could impede our ability to maintain or increase the amount of revenue derived from government contracts include:

 

•

changes in fiscal or contracting policies;

 

•

decreases in available government funding;

 

•

changes in government programs or applicable requirements;

 

•

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

 

•

potential delays or changes in the government appropriations or other funding authorization processes.

The occurrence of any of the foregoing could cause governments and governmental agencies to delay or refrain from purchasing our solutions or otherwise have an adverse effect on our business, operating results and financial condition.

Any actual or perceived failure by us to comply with our privacy policy or legal or regulatory requirements in one or multiple jurisdictions could result in proceedings, actions or penalties against us.

Our customers’ storage and use of data concerning, among others, their employees, contractors, customers and partners is essential to their use of our platform and solutions. We have implemented various features intended to enable our customers to better comply with applicable privacy and security requirements in their collection and use of data, but these features do not ensure their compliance and may not be effective against all potential privacy and data security concerns.

A wide variety of domestic and foreign laws and regulations apply to the collection, use, retention, protection, disclosure, transfer, disposal and other processing of personal data. These data protection and privacy-related laws and regulations are evolving and may result in regulatory and public scrutiny and escalating levels of enforcement and sanctions. Our failure to comply with applicable laws and regulations, or to protect any personal data, could result in enforcement action against us, including fines, claims for damages by customers and other affected individuals, damage to our reputation and loss of goodwill (both in relation to existing customers and prospective customers), any of which could adversely affect our business, operating results, financial performance and prospects.

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In jurisdictions outside of the United States, we may face data protection and privacy requirements that are more stringent than those in place in the United States. In the EU, for example, Directive 95/46/EC (the “Directive”) has required EU member states to implement data protection laws to meet the strict privacy requirements of the Directive. Among other requirements, the Directive regulates transfers of personal data that is subject to the Directive (“Personal Data”) to third countries, such as the United States, that have not been found to provide adequate protection to such Personal Data. The safe harbor framework previously relied on to ensure compliance with the Directive is no longer deemed to be a valid method of compliance with requirements set forth in the Directive, and so we face uncertainty as to whether our efforts to comply with our obligations under European privacy laws are sufficient. We and our customers are at risk of enforcement actions taken by certain EU data protection authorities until such point in time that we may be able to ensure that all transfers of Personal Data to us in the United States from the EU are conducted in compliance with all applicable regulatory obligations, the guidance of data protection authorities and evolving best practices. The Directive was replaced with the European General Data Protection Regulation (“GDPR”), which entered into force on May 25, 2018, and which imposes additional obligations, costs and risk upon our business. The GDPR may increase substantially the penalties to which we could be subject in the event of any non-compliance. In addition, we may incur substantial expense in complying with the new obligations imposed by the GDPR and we may be required to make significant changes in our business operations, all of which may adversely affect our revenues and our business overall.

In addition, we are subject to certain contractual obligations and privacy policies and practices regarding the collection, use, storage, transfer, disclosure, disposal or processing of personal data. Even the perception of a failure by us to comply with such contractual obligations and/or privacy policies and practices or other privacy concerns, whether or not valid, may harm our reputation, inhibit adoption of our solutions by current and future customers or adversely impact our ability to attract and retain workforce talent.

Loss, retention or misuse of certain information and alleged violations of laws and regulations relating to privacy and data security, and any relevant claims, may expose us to potential liability and may require us to expend significant resources on data security and in responding to and defending such allegations and claims. In addition, future laws, regulations, standards and other obligations, and changes in the interpretation of existing laws, regulations, standards and other obligations could impair our customers’ ability to collect, use or disclose data relating to individuals, which could decrease demand for our platform and solutions, increase our costs and impair our ability to maintain and grow our customer base and increase our revenue.

Around the world, there are numerous lawsuits in process against various technology companies that process personal data. If those lawsuits are successful, it could increase the likelihood that our company may be exposed to liability for our own policies and practices concerning the processing of personal data and could hurt our business. Furthermore, the costs of compliance with, and other burdens imposed by laws, regulations and policies concerning privacy and data security that are applicable to the businesses of our customers may limit the use and adoption of our platform or solutions and reduce overall demand for them. Privacy concerns, whether or not valid, may inhibit market adoption of our platform. Additionally, concerns about security or privacy may result in the adoption of new legislation that restricts the implementation of technologies like ours or requires us to make modifications to our platform, which could significantly limit the adoption and deployment of our technologies or result in significant expense to modify our platform.

We publicly post our privacy policies and practices concerning our processing, use and disclosure of the personally identifiable information provided to us by our website visitors. Our publication of our privacy policies and other statements we publish that provide promises and assurances about privacy and security can subject us to potential state and federal action if they are found to be deceptive or misrepresentative of our actual policies and practices or if our practices are found to be unfair.

Evolving and changing definitions of what constitutes “Personal Information” and “Personal Data” within the EU, the United States and elsewhere, especially relating to classification of IP addresses, machine or device identification numbers, location data and other information, may limit or inhibit our ability to operate or expand our business, including limiting technology alliance relationships that may involve the sharing of data.

29

 

We use third-party licensed software in or with our solutions, and the inability to maintain these licenses or issues with the software we license could result in increased costs or reduced service levels, which would adversely affect our business.

Our solutions include software or other intellectual property licensed from third parties, and we otherwise use software and other intellectual property licensed from third parties in our business. We anticipate that we will continue to rely on such third-party software and intellectual property in the future. This exposes us to risks over which we may have little or no control. The third-party software we currently license may not always be available, and we may not have access to alternative third-party software on commercially reasonable terms. In addition, a third party may assert that we or our customers are in breach of the terms of a license, which could, among other things, give such third party the right to terminate a license or seek damages from us, or both. Our inability to obtain or maintain certain licenses or other rights or to obtain or maintain such licenses or rights on favorable terms, or the need to engage in litigation regarding these matters, could result in delays in releases of new solutions, and could otherwise disrupt our business, until equivalent technology can be identified, licensed or developed, if at all. Also, to the extent that our platform and solutions depend upon the successful operation of third-party software in conjunction with our software, any undetected errors or defects in such third-party software could prevent the deployment or impair the functionality of our platform, delay new feature introductions, result in a failure of our platform and injure our reputation.

Our failure to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies in the future could reduce our ability to compete successfully and harm our operating results.

We may need to raise additional funds, and we may not be able to obtain additional debt or equity financing on favorable terms, if at all. If we raise additional equity financing, our security holders may experience significant dilution of their ownership interests. If we engage in debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness, force us to maintain specified liquidity or other ratios or restrict our ability to pay dividends or make acquisitions. If we need additional capital and cannot raise it on acceptable terms, or at all, we may not be able to, among other things:

 

•

develop and enhance our products;

 

•

continue to expand our product development, sales and marketing organizations;

 

•

hire, train and retain employees;

 

•

respond to competitive pressures or unanticipated working capital requirements; or

 

•

pursue acquisition opportunities.

Our credit agreement contains restrictions that impact our business and could expose us to risks that could adversely affect our liquidity and financial condition.

Our credit agreement contains various covenants that, among other things, limit our and certain of our subsidiaries’ abilities to:

 

•

incur additional indebtedness or guarantee indebtedness of others;

 

•

create additional liens on our assets;

 

•

merge, consolidate or dissolve;

 

•

make loans or investments, including acquisitions;

 

•

sell assets;

 

•

engage in sale and leaseback transactions;

 

•

pay dividends and make other distributions on our capital stock, and redeem and repurchase our capital stock; or

 

•

enter into transactions with affiliates.

Our credit agreement also contains numerous affirmative covenants and a financial covenant. Any additional debt that we incur in the future could subject us to similar or additional covenants.

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Our credit agreement provides for an initial $150 million in commitments for revolving credit loans, with a $15 million letter of credit sublimit, which amount can be increased or decreased under specified circumstances. As of March 11, 2019, we had no outstanding revolving credit loans. Our credit agreement also provides for the ability to incur uncommitted term loan facilities if we meet certain requirements. We have historically relied on the availability of some amount of debt financing. If we experience a decline in cash flow due to any of the factors described in this “Risk Factors” section or otherwise, we could have difficulty paying interest and principal amounts due on our indebtedness and meeting the financial covenant set forth in our credit agreement. If we are unable to generate sufficient cash flow or otherwise to obtain the funds necessary to make required payments under our credit agreement, or if we fail to comply with the various requirements of our indebtedness, we could default under our credit agreement. Any such default that is not cured or waived could result in an acceleration of indebtedness then outstanding under our credit agreement, an increase in the applicable interest rates under our credit agreement, and require our subsidiaries that have guaranteed our borrowings under our credit agreement to pay the obligations in full, and would permit the lenders to exercise remedies with respect to all of the collateral that is securing our borrowings under the credit agreement, including substantially all of our and our subsidiary guarantors’ assets. Thus, any such default could have a material adverse effect on our liquidity and financial condition.

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

Our success will depend, in part, on our ability to expand our solutions and services and grow our business in response to changing technologies, customer demands and competitive pressures. In some circumstances, we may choose to do so through the acquisition of, or investment in, new or complementary businesses and technologies rather than through internal development. The identification of suitable acquisition or investment candidates can be difficult, time-consuming and costly, and we may not be able to successfully complete identified acquisitions or investments. The risks we face in connection with acquisitions and/or investments include:

 

•

an acquisition may negatively affect our operating results because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, may expose us to claims and disputes by stockholders and third parties, including intellectual property claims and disputes, or may not generate sufficient financial return to offset additional costs and expenses related to the acquisition;

 

•

we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, personnel or operations of any company that we acquire;

 

•

an acquisition or investment may disrupt our ongoing business, divert resources, increase our expenses and distract our management;

 

•

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

 

•

we may encounter difficulties in, or may be unable to, successfully sell any acquired products or effectively integrate them into or with our existing solutions;

 

•

our use of cash to pay for acquisitions or investments would limit other potential uses for our cash;

 

•

if we incur debt to fund any acquisitions or investments, such debt may subject us to material restrictions on our ability to conduct our business; and

 

•

if we issue a significant amount of equity securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease.

The occurrence of any of these risks could adversely affect our business, operating results and financial condition.

31

 

If we fail to adequately protect our proprietary rights, our competitive position could be impaired, and we may lose valuable assets, generate reduced revenue and incur costly litigation to protect our rights.

We rely on copyrights and trade secret laws, confidentiality procedures, employment proprietary information and inventions assignment agreements, trademarks and patents to protect our intellectual property rights. However, the steps we take to protect our intellectual property may not be adequate. To protect our trade secrets and proprietary information, we rely in significant part on confidentiality arrangements with our employees, licensees, independent contractors, advisers, channel partners, resellers and customers. These arrangements may not be effective to prevent disclosure of confidential information, including trade secrets, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, if others independently discover trade secrets and proprietary information, we would not be able to assert trade secret rights against such parties. To protect our intellectual property, we may be required to spend significant resources to obtain, monitor and enforce such rights. Litigation brought to enforce our intellectual property could be costly, time-consuming and distracting to management and could be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property, which may result in the impairment or loss of portions of our intellectual property. The laws of some foreign countries do not protect our intellectual property to the same extent as the laws of the United States, and effective intellectual property protection and mechanisms may not be available in those jurisdictions. We may need to expend additional resources to defend our intellectual property in these countries, and our inability to do so could impair our business or adversely affect our international expansion. Even if we are able to secure intellectual property, there can be no assurances that such rights will provide us with competitive advantages or distinguish our platform or solutions and services from those of our competitors or that our competitors will not independently develop similar technology.

We may be subject to intellectual property rights claims by third parties, which may be costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies.

Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement, misappropriation or other violations of intellectual property rights. We have in the past and may in the future be subject to notices that claim we have infringed, misappropriated or misused the intellectual property of our competitors or other third parties, including patent holding companies whose sole business is to assert such claims. To the extent we increase our visibility in the market, we face a higher risk of being the subject of intellectual property claims. Additionally, we do not have a significant patent portfolio, which could prevent us from deterring patent infringement claims through our own patent portfolio, and our competitors and others may now or in the future have significantly larger and more mature patent portfolios than we do.

Any intellectual property claims, with or without merit, could be time-consuming and expensive and could divert our management’s attention and other resources. These claims could also subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights. These claims could also result in our having to stop using technology found to be in violation of a third party’s rights. We might be required to seek a license for the intellectual property, which may not be available on reasonable terms or at all. Even if a license is available, we could be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require significant effort and expense. If we cannot license or develop technology for any aspect of our business that may ultimately be determined to infringe on or misappropriate the intellectual property rights of another party, we could be forced to limit or stop sales of licenses to our platform and solutions and may be unable to compete effectively. Furthermore, we may be subject to indemnification obligations with respect to third-party intellectual property pursuant to our agreements with our channel partners or customers. Any of these results would adversely affect our business, operating results and financial condition.

Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and other losses.

Our agreements with customers and other third parties may include indemnification provisions under which we agree to indemnify them or otherwise be liable for losses suffered or incurred as a result of claims of intellectual property infringement or misappropriation, damages caused by us to property or persons, or other liabilities relating to or arising from our platform, solutions, services or other contractual obligations. Some of these indemnity agreements provide for uncapped liability for which we would be responsible, and some indemnity provisions survive termination or expiration of the applicable agreement.

32

 

From time to time, customers also require us to indemnify or otherwise be liable to them for breach of confidentiality, violation of applicable law or failure to implement adequate security measures with respect to their data stored, transmitted or accessed using our platform. Although we normally seek contractual limitations to our liability with respect to the foregoing obligations, the existence of such a dispute may have adverse effects on our customer relationship and reputation and even if we contractually limit our liability with respect to such obligations, we may still incur substantial liability related to them. Any assertions by a third party, whether or not successful, with respect to any of these indemnification obligations could subject us to costly and time-consuming litigation, expensive remediation and licenses, divert management attention and financial resources, harm our relationship with that customer and other current and prospective customers, reduce demand for our platform and solutions, and harm our brand, business, operating results and financial condition. Any dispute with a customer with respect to such obligations could have adverse effects on our relationship with that customer and other existing customers and new customers and adversely affect our business and operating results.

We may be subject to damages resulting from claims that our employees or contractors have wrongfully used or disclosed alleged trade secrets of their former employers or other parties.

We could in the future be subject to claims that we, our employees or our contractors have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of our competitors or other parties. Litigation may be necessary to defend against these claims. If we fail in defending against such claims, a court could order us to pay substantial damages and prohibit us from using technologies or features that are essential to our solutions, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of these parties. In addition, we may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent our ability to develop, market and support potential solutions or enhancements, which could severely harm our business. Even if we are successful in defending against these claims, such litigation could result in substantial costs and be a distraction to management.

Our use of “open source” software could negatively affect our ability to sell our solutions and subject us to possible litigation.

Some aspects of our platform and solutions are built using open source software, and we intend to continue to use open source software in the future. From time to time, we contribute software source code to open source projects under open source licenses or release internal software projects under open source software licenses and anticipate doing so in the future. The terms of certain open source licenses to which we are subject have not been interpreted by U.S. or foreign courts, and there is a risk that open source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to monetize our products. Additionally, we may from time to time face claims from third parties claiming ownership of, or demanding release of, the open source software or derivative works that we developed using such software, which could include our proprietary source code, or otherwise seeking to enforce the terms of the applicable open source software license. These claims could result in litigation and could require us to make our software source code freely available, purchase a costly license or cease offering the implicated services unless and until we can re-engineer them to avoid infringement or violation. This re-engineering process could require significant additional research and development resources, and we may not be able to complete it successfully. In addition to risks related to license requirements, use of certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on the origin of software and, thus, may contain security vulnerabilities or broken code. Additionally, because any software source code we contribute to open source projects is publicly available, our ability to protect our intellectual property rights with respect to such software source code may be limited or lost entirely, and we may be unable to prevent our competitors or others from using such contributed software source code. Any of these risks could be difficult to eliminate or manage, and if not addressed, could have a negative effect on our business, operating results and financial condition.  

We may be required to defer or adjust recognition of some of our license revenue, which may harm our operating results in any given period.

We may be required to defer or adjust recognition of license revenue for a significant period of time after entering into an agreement due to a variety of factors, including, among other things, whether:

 

•

the transaction involves products or features that are under development;

 

•

the transaction involves extended payment terms; or

 

•

the transaction involves acceptance criteria.

33

 

Although we strive to enter into agreements that meet the criteria under GAAP for current revenue recognition on delivered performance obligations, our agreements are often subject to negotiation and revision based on the demands of our customers. The final terms of our agreements sometimes result in deferred revenue recognition well after the time of delivery, which may adversely affect our financial results in any given period.

Furthermore, the presentation of our financial results requires us to make estimates and assumptions that may affect revenue recognition, including determination of stand-alone selling price. In some instances, we could reasonably use different estimates and assumptions, and changes in estimates are likely to occur from period to period. Accordingly, actual results could differ significantly from our estimates.

If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our operating results could be adversely affected.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, capitalized internal-use software costs, income taxes, other non-income taxes, business combinations and valuation of goodwill and purchased intangible assets and stock-based compensation. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our common stock.

Changes in existing financial accounting standards or practices, or taxation rules or practices, may harm our operating results.

Changes in existing accounting or taxation rules or practices, new accounting pronouncements or taxation rules, or varying interpretations of current accounting pronouncements or taxation practice could harm our operating results or the manner in which we conduct our business. Further, such changes could potentially affect our reporting of transactions completed before such changes are effective.

GAAP is subject to interpretation by the Financial Accounting Standards Board (“FASB”), the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results and could affect the reporting of transactions completed before the announcement of a change.

Our business may be subject to additional obligations to collect and remit sales tax, value-added and other taxes, and we may be subject to tax liability for past sales. Any successful action by state, foreign or other authorities to collect additional or past sales tax could adversely affect our business.

States and some local taxing jurisdictions have differing rules and regulations governing sales and use taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of sales taxes to our platform in various jurisdictions is unclear. It is possible that we could face sales tax audits and that our liability for these taxes could exceed our estimates as state tax authorities could still assert that we are obligated to collect additional amounts as taxes from our customers and remit those taxes to those authorities. We could also be subject to audits in states and international jurisdictions for which we have not accrued tax liabilities. A successful assertion that we should be collecting additional sales or other taxes on our services in jurisdictions where we have not historically done so and do not accrue for sales taxes could result in substantial tax liabilities for past sales, discourage customers from purchasing our products or otherwise adversely affect our business, operating results and financial condition.

We file sales tax returns in certain states within the United States as required by law and certain customer contracts for a portion of the products that we provide. We do not collect sales or other similar taxes in other states and many of such states do not apply sales or similar taxes to the vast majority of the products that we provide. However, one or more states or foreign authorities could seek to impose additional sales, use or other tax collection and record-keeping obligations on us or may determine that such taxes should have, but have not been, paid by us. Liability for past taxes may also include substantial interest and penalty charges. Any successful action by state, foreign or other authorities to compel us to collect and remit sales tax, use tax or other taxes, either retroactively, prospectively or both, could adversely affect our business, operating results and financial condition.

34

 

If our products fail to help our customers achieve and maintain compliance with certain government regulations and industry standards, our business and operating results could be materially and adversely affected.

We believe we generate a portion of our revenues from our products and services because our customers use our products and services as part of their efforts to achieve and maintain compliance with certain government regulations and industry standards, and we expect that will continue for the foreseeable future. Examples of industry standards and government regulations include the Payment Card Industry Data Security Standard (“PCI-DSS”); the Federal Information Security Management Act (“FISMA”) and associated National Institute for Standards and Testing (“NIST”) Network Security Standards; the Sarbanes-Oxley Act; Title 21 of the U.S. Code of Federal Regulations, which governs food and drugs industries; the North American Electric Reliability Corporation Critical Infrastructure Protection Plan (“NERC-CIP”); the GDPR; the German Federal Financial Supervisory Authority (“BaFin”) Minimum Requirements for Risk Management; and the Monetary Authority of Singapore’s Technology Risk Management Notices. These industry standards may change with little or no notice, including changes that could make them more or less onerous for businesses. In addition, governments may also adopt new laws or regulations, or make changes to existing laws or regulations, that could affect whether our customers believe our solution assists them in maintaining compliance with such laws or regulations. If our solutions fail to expedite our customers’ compliance initiatives, our customers may lose confidence in our products and could switch to products offered by our competitors. In addition, if government regulations and industry standards related to IT security are changed in a manner that makes them less onerous, our customers may view compliance as less critical to their businesses, and our customers may be less willing to purchase our products and services. In either case, our sales and financial results would suffer.

Failure to comply with anti-bribery, anti-corruption, and anti-money laundering laws could subject us to penalties and other adverse consequences.

We are subject to the Foreign Corrupt Practices Act (“FCPA”), the U.K. Bribery Act and other anti-corruption, anti-bribery and anti-money laundering laws in various jurisdictions both domestic and abroad. The FCPA prohibits any U.S. individual or business from paying, offering, authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The U.K. Bribery Act is similar but even broader in scope in that it prohibits bribery of private (non-government) persons as well. The FCPA also obligates companies whose securities are listed in the United States to comply with certain accounting provisions requiring the company to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations. Our sales model presents some risk under these laws. We leverage third parties, including channel partners, to sell our solutions and conduct our business abroad. We and our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies, state-owned or affiliated entities and non-governmental commercial entities, and may be held liable for the corrupt or other illegal activities of these third-party intermediaries, our employees, representatives, contractors, channel partners and agents, even if we do not explicitly authorize such activities. While we have policies and procedure to address compliance with these laws, we cannot assure you that all of our employees and agents will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. Noncompliance with these laws could subject us to investigations, sanctions, settlements, prosecution, other enforcement actions, disgorgement of profits, significant fines, damages, other civil and criminal penalties or injunctions, adverse media coverage and other consequences. Any investigations, actions or sanctions could adversely affect our business, operating results and financial condition.

We are subject to governmental export controls and economic sanctions laws that could impair our ability to compete in international markets and subject us to liability if we are not in full compliance with applicable laws.

Our business activities are subject to various restrictions under U.S. export controls and trade and economic sanctions laws, including the U.S. Commerce Department’s Export Administration Regulations and economic and trade sanctions regulations maintained by the U.S. Treasury Department’s Office of Foreign Assets Control. The U.S. export control laws and U.S. economic sanctions laws include prohibitions on the sale or supply of certain products and services to U.S. embargoed or sanctioned countries, governments, persons and entities and also require authorization for the export of encryption items. We are also subject to Israeli export controls on encryption technology for SecurityIQ (now IndentityIQ File Access Manager). If the applicable U.S. or Israeli requirements regarding export of encryption technology were to change or if we change the encryption means in our products, we may need to satisfy additional requirements in the United States or Israel. There can be no assurance that we will be able to satisfy any additional requirements under these circumstances in either the United States or Israel.

35

 

In addition, various countries regulate the import of certain encryption technology, including through import permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our services or could limit our customers’ ability to implement our services in those countries. Although we take precautions to prevent our products from being provided in violation of such laws, our products may have been in the past, and could in the future be, provided inadvertently in violation of such laws, despite the precautions we take. If we fail to comply with these laws and regulations, we and certain of our employees could be subject to civil or criminal penalties, including the possible loss of export privileges and monetary penalties. Obtaining the necessary authorizations, including any required license, for a particular transaction may be time-consuming, is not guaranteed, and may result in the delay or loss of sales opportunities. Although we take precautions to prevent transactions with U.S. sanction targets, we could inadvertently provide our products to persons prohibited by U.S. sanctions. This could result in negative consequences to us, including government investigations, penalties and harm to our reputation.

Our corporate structure and intercompany arrangements are subject to the tax laws of various jurisdictions, and we could be obligated to pay additional taxes, which would harm our operating results.

Based on our current corporate structure, we may be subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents. In addition, the authorities in these jurisdictions could challenge our methodologies for valuing developed technology or intercompany arrangements, including our transfer pricing. The relevant taxing authorities may determine that the manner in which we operate our business does not achieve the intended tax consequences. If such a disagreement were to occur, and our position were not sustained, we could be required to pay additional taxes, interest and penalties. Such authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our subsidiaries. Any increase in the amount of taxes we pay or that are imposed on us could increase our worldwide effective tax rate and adversely affect our business and operating results.

Our ability to use net operating losses and other tax attributes to offset future taxable income may be subject to certain limitations.

In general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), a corporation that undergoes an “ownership change” is subject to an annual limitation on its ability to utilize its pre-change net operating losses (“NOLs”), tax credits or other tax attributes, to offset future taxable income or taxes. For these purposes, an ownership change generally occurs where the aggregate stock ownership of one or more stockholders or groups of stockholders who own at least 5% of a corporation’s stock increases its ownership by more than 50 percentage points over its lowest ownership percentage within a specified testing period. We recently performed a Section 382 study to determine if any of our existing NOLs, tax credits or other tax attributes would be subject to such limitation. Although we have determined, based on that study, that we underwent an “ownership change” during 2018, we believe the annual limitation will not result in the expiration of any NOLs, tax credits or other tax attributes prior to utilization. However, future changes in our stock ownership, many of which are outside of our control, could result in another “ownership change” and subsequently could substantially impair our ability to utilize any NOLs, tax credits or other tax attributes.

We function as a HIPAA “business associate” for certain of our customers and, as such, are subject to strict privacy and data security requirements. If we fail to comply with any of these requirements, we could be subject to significant liability, all of which can adversely affect our business as well as our ability to attract and retain new customers.

The Health Insurance Portability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), and their respective implementing regulations (“HIPAA”), imposes specified requirements relating to the privacy, security and transmission of individually identifiable health information. Among other things, HITECH makes HIPAA’s security standards directly applicable to “business associates.” We function as a business associate for certain of our customers that are HIPAA covered entities and service providers and, in that context, we are regulated as a business associate for the purposes of HIPAA. If we are unable to comply with our obligations as a HIPAA business associate, we could face substantial civil and even criminal liability. Modifying the already stringent penalty structure that was present under HIPAA prior to HITECH, HITECH created four new tiers of civil monetary penalties and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions. In addition, many state laws govern the privacy and security of health information in certain circumstances, many of which differ from HIPAA and each other in significant ways and may not have the same effect.

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The HIPAA covered entities and service providers to which we provide services require us to enter into HIPAA-compliant business associate agreements with them. These agreements impose stringent data security obligations on us. If we are unable to meet the requirements of any of these business associate agreements, we could face contractual liability under the applicable business associate agreement as well as possible civil and criminal liability under HIPAA, all of which can have an adverse impact on our business and generate negative publicity, which, in turn, can have an adverse impact on our ability to attract and retain new customers.

Risks Related to Ownership of Our Common Stock

The requirements of being a public company, including compliance with the reporting requirements of the Exchange Act, and the requirements of the Sarbanes-Oxley Act and the NYSE, may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost-effective manner.

As a public company, we are subject to laws, regulations and requirements with which we were not required to comply as a private company, including compliance with reporting requirements of the Exchange Act and the requirements of the Sarbanes-Oxley Act and the NYSE. As a newly public company, complying with these statutes, regulations and requirements occupies a significant amount of time of our board of directors and management and has significantly increased our costs and expenses as compared to when we were a private company. For example, as a newly public company, we have had to institute a more comprehensive compliance function, establish new internal policies, such as those relating to insider trading, and involve and retain to a greater degree outside counsel and accountants.  

Additionally, as a public company, we must comply with Section 404 of the Sarbanes-Oxley Act, including having our independent registered public accounting firm attest to the effectiveness of our internal controls. Our independent registered public accounting firm may issue a report attesting to the effectiveness of our internal controls that is adverse in the event it is not satisfied with the level at which our controls are documented, designed, operated or reviewed.  Compliance with these requirements may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost-effective manner.

 

Furthermore, being a public company subject to these rules and regulations has made it 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 substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers as compared to when we were a private company.  

The trading price of our common stock could be volatile, which could cause the value of your investment to decline.

Our initial public offering occurred in November 2017.  Therefore, there has only been a public market for our common stock for a short period of time.  Although our common stock is listed on the NYSE, an active trading market for our common stock may not develop or, if developed, be sustained.  Technology stocks have historically experienced high levels of volatility. Since shares of our common stock were sold in our initial public offering in November 2017 at a price of $12.00 per share, our stock price has fluctuated significantly. The trading price of our common stock may fluctuate substantially in response to numerous factors, many of which are beyond our control, including the factors listed below and other factors described in this “Risk Factors” section:

 

•

announcements of new products or technologies, commercial relationships, acquisitions or other events by us or our competitors;

 

•

changes in how customers perceive the benefits of our platform;

 

•

shifts in the mix of revenue attributable to perpetual licenses and to SaaS subscriptions from quarter to quarter;

 

•

departures of key personnel;

 

•

price and volume fluctuations in the overall stock market from time to time;

 

•

fluctuations in the trading volume of our shares or the size of our public float;

37

 

 

•

sales of large blocks of our common stock;

 

•

actual or anticipated changes or fluctuations in our operating results;

 

•

whether our operating results meet the expectations of securities analysts or investors;

 

•

changes in actual or future expectations of investors or securities analysts;

 

•

litigation involving us, our industry or both;

 

•

regulatory developments in the United States, foreign countries or both;

 

•

general economic conditions and trends;

 

•

major catastrophic events in our domestic and foreign markets;

 

•

cyber-attacks or incidents; and

 

•

“flash crashes,” “freeze flashes” or other glitches that disrupt trading on the securities exchange on which we are listed.

In addition, if the market for technology stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, operating results or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us.

In the past, following periods of volatility in the trading price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business. This could have an adverse effect on our business, operating results and financial condition.

An active public trading market may not continue to develop or be sustained.

Prior to the completion of our initial public offering in November 2017, no public market for our common stock existed. An active public trading market for our common stock may not continue to develop or be sustained. The lack of an active market may impair your ability to sell your shares of our common stock at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

If securities analysts or industry analysts were to downgrade our stock, publish negative research or reports or fail to publish reports about our business, our competitive position could suffer, and our stock price and trading volume could decline.

The trading market for our common stock, to some extent, depends on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us should downgrade our stock or publish negative research or reports, cease coverage of our company or fail to regularly publish reports about our business, our competitive position could suffer, and our stock price and trading volume could decline.

Our issuance of additional capital stock in connection with financings, acquisitions, investments, our stock incentive plans or otherwise will dilute all other stockholders.

We may issue additional capital stock in the future that will result in dilution to all other stockholders. We may also raise capital through equity financings in the future. As part of our business strategy, we may acquire or make investments in complementary companies, products or technologies and issue equity securities to pay for any such acquisition or investment. Any such issuances of additional capital stock may cause stockholders to experience significant dilution of their ownership interests and the per share value of our common stock to decline.

38

 

Our charter and bylaws contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable.

Our charter and bylaws contain provisions that could delay or prevent a change in control of our company. These provisions could also make it difficult for stockholders to elect directors who are not nominated by the current members of our board of directors or take other corporate actions, including effecting changes in our management. These provisions include:

 

•

a classified board of directors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of our board of directors;

 

•

removal of directors only for cause;

 

•

the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;

 

•

allowing only our board of directors to fill vacancies on, which prevents stockholders from being able to fill vacancies on our board of directors;

 

•

a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;

 

•

the requirement that a special meeting of stockholders may be called only by or at the direction of our board of directors, which could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;

 

•

the requirement for the affirmative vote of holders of at least 66 2/3% of the voting power of all of the then outstanding shares of the voting stock, voting together as a single class, to amend the provisions of our charter relating to the management of our business (including our classified board structure) or certain provisions of our bylaws, which may inhibit the ability of an acquirer to effect such amendments to facilitate an unsolicited takeover attempt;

 

•

the ability of our board of directors to amend the bylaws, which may allow our board of directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend the bylaws to facilitate an unsolicited takeover attempt;

 

•

advance notice procedures with which stockholders must comply to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us; and

 

•

a prohibition of cumulative voting in the election of our board of directors, which would otherwise allow less than a majority of stockholders to elect director candidates

Our charter also contains a provision that provides us with protections similar to Section 203 of the Delaware General Corporation Law (“DGCL”), and prevents us from engaging in a business combination, such as a merger, with an interested stockholder (i.e., a person or group who acquires at least 15% of our voting stock) for a period of three years from the date such person became an interested stockholder, unless (with certain exceptions) the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner.

We may issue preferred stock whose terms could adversely affect the voting power or value of our common stock.

Our charter authorizes us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designations, preferences, limitations and relative rights, including preferences over our common stock respecting dividends and distributions, as our board of directors may determine. The terms of one or more classes or series of preferred stock could adversely impact the voting power or value of our common stock. For example, we might grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred stock could affect the residual value of our common stock.

 

39

 

Our charter designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents.

Our charter provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, our charter or bylaws, or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine, in each such case subject to such Court of Chancery of the State of Delaware having personal jurisdiction over the indispensable parties named as defendants therein. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of, and consented to, the provisions of our charter described in the preceding sentence. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and such persons. Alternatively, if a court were to find these provisions of our charter inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or operating results.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

We have a lease for a new 164,818 square-feet corporate headquarters in Austin, Texas that has recently completed construction. The lease’s term commences in February 2019, and it expires approximately 10 years from such commencement date. Our current corporate headquarters occupy 44,633 square feet in Austin, Texas under a lease that expires 20 business days after the commencement date for the lease for our new corporate headquarters. In addition to our headquarters, we have additional office space in Austin, Texas, and office space in Pune, India and Tel Aviv, Israel. Consistent with our growth, we are currently consolidating our Austin offices in 2019.

We lease all of our facilities. We believe that our facilities are adequate for our current needs and anticipate that suitable additional space will be readily available to accommodate any foreseeable expansion of our operations.

We are not currently a party to, nor is our property currently subject to, any material legal proceedings. We are not aware of any inquiries or investigations into our business.

Item 4. Mine Safety Disclosures.

None.

 

 

40

 

PART II

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

Market Information

Our common stock is listed and traded on the NYSE under the symbol “SAIL.” On March 11, 2019, the closing sale price of our common stock on the NYSE was $28.46 per share.

Holders of Record

On March 11, 2019, there were 28 holders of record of our common stock including the Cede & Co, which holds shares of our common stock on behalf of an indeterminate number of beneficial owners. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial stockholders represented by these record holders.

Dividend Policy

We have never declared or paid any cash dividends on our common stock. We currently intend to retain all our earnings to finance the growth and development of our business. Any further determination to pay dividends on our common stock will be at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors considers relevant. In addition, our credit agreement places restrictions on our ability to pay cash dividends.

Stock Performance Graph

The following is not “soliciting material,” shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or incorporated by reference into any of our other filings under the Exchange Act or the Securities Act of 1933, as amended (the “Securities Act”), except to the extent we specifically incorporate it by reference into such filing.

The graph assumes that $100 was invested on initial trading of the Company’s common stock commenced on November 17, 2017, in the NYSE Composite Index and the S&P 600 Information Technology Index, and that all dividends were reinvested. The stock price performance on the following graph is required by the SEC and is not necessarily intended to forecast or be indicative of future stock price performance.

41

 

The closing price of our common stock on December 31, 2018 was $23.49 per share.

 

 

Company/Index

 

11/17/2017

 

 

12/31/2017

 

 

3/31/2018

 

 

6/30/2018

 

 

9/30/2018

 

 

12/31/2018

 

SAIL

 

$

100.00

 

 

$

111.54

 

 

$

159.15

 

 

$

188.77

 

 

$

261.69

 

 

$

180.69

 

NYSE Composite

 

$

100.00

 

 

$

104.23

 

 

$

101.92

 

 

$

103.08

 

 

$

108.50

 

 

$

94.91

 

S&P 600 IT Index

 

$

100.00

 

 

$

94.45

 

 

$

94.25

 

 

$

98.62

 

 

$

102.32

 

 

$

84.40

 

 

Recent Sale of Unregistered Securities

 

Year Ended December 31, 2018

 

(a) Total

Number of

Shares

 

 

(b) Average

Price Paid

per Share

 

 

(c) Total

Number of

Shares

Purchased

as Part of

Publicly

Announced

Plans or

Programs

 

(d) Maximum

Number of

Shares that

May Yet Be

Purchased

Under the

Plans or

Programs

March 1 through March 31, 2018

 

 

6,495

 

 

$

0.05

 

 

NA

 

NA

April 1 through April 30, 2018

 

 

9,570

 

 

$

0.05

 

 

NA

 

NA

September 1 through September 30, 2018

 

 

63

 

 

$

0.05

 

 

NA

 

NA

Total

 

 

16,128

 

 

$

0.05

 

 

NA

 

NA

 

The shares purchased for the year ended December 31, 2018, as noted above, were non-vested incentive units that were forfeited upon by the employees who departed the Company. The shares were part of the Incentive Unit Plan as described further in Note 10 of the accompanying Notes to Consolidated Financial Statements, included in Part II, Item 8 of this Annual Report on Form 10-K.

42

 

Use of Proceeds from Initial Public Offering of Common Stock

On November 16, 2017, the Registration Statement on Form S-1 (File No. 333-221036) relating to our initial public offering was declared effective by the SEC and we priced our initial public offering. Pursuant to the Registration Statement, we registered an aggregate of 23,000,000 shares of our common stock, of which 15,800,000 shares were sold by us and 7,200,000 shares were sold by certain selling stockholders named therein at a price to the public of $12.00 per share (for an aggregate offering price of $276.0 million). We received net proceeds of approximately $172.0 million, after deducting underwriting discounts and commissions of approximately $13.3 million and offering-related expenses of $4.4 million. No payments were made to our directors or officers or their associates, holders of 10% or more of any class of our equity securities or any affiliates. Morgan Stanley & Co. LLC, Citigroup Global Markets Inc., Jefferies LLC and RBC Capital Markets, LLC acted as book-running managers and KeyBanc Capital Markets Inc., Canaccord Genuity Inc. and Oppenheimer & Co. Inc. acted as co-managers (collectively, the “Underwriters”) for our initial public offering.

Our initial public offering closed in November 2017. There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus dated November 16, 2017 and filed with the SEC on November 17, 2017 pursuant to Rule 424(b) of the Securities Act.  As of December 31, 2018, we have used $160.0 million of the proceeds from our initial public offering to repay borrowings under our term loan facility and approximately $1.8 million of such proceeds to pay a related prepayment premium. As of December 31, 2018, the remaining net proceeds are held in cash and have not been deployed.

 

 

Item 6. Selected Financial Data

 

The following selected historical financial data has been derived from, and should be read in conjunction with, the audited Consolidated Financial Statements and the Notes to Consolidated Financial Statements and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K. Our selected consolidated financial data may not be indicative of our future financial condition or results of operations.

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-09, Revenue from Contracts with Customers (Accounting Standards Codification or ASC 606). “ASC 606”, the “revised standard” supersedes the revenue recognition requirements in Revenue Recognition (“ASC 605”) or “prior standard” and requires the recognition of revenue as promised goods or services are transferred to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. ASC 606 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires deferred recognition of the incremental costs of obtaining a contract with a customer over the life of the customer.

 

Our results of operations presented in the following tables include financial results for reporting periods during 2018, which are disclosed in compliance with the revised standard (ASC 606). We have elected the modified retrospective transition method; therefore, our historical financial results for reporting periods prior to 2018 have not been retroactively restated and are presented in conformity with the amounts previously reported under the prior standard (ASC 605). See Note 3 of the accompanying Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information related to our adoption of the revised standard (ASC 606).

43

 

Consolidated Statements of Operations Data:

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

with adoption

(ASC 606)

 

 

without adoption

(ASC 605)

 

 

as previously reported (ASC 605)

 

 

 

(In thousands, except share and per share data)

 

Total revenue

 

$

248,920

 

 

$

248,475

 

 

$

186,056

 

 

$

132,412

 

 

$

95,356

 

Gross profit

 

$

194,250

 

 

$

193,805

 

 

$

141,466

 

 

$

95,374

 

 

$

66,097

 

Income (loss) from operations

 

$

10,913

 

 

$

5,611

 

 

$

9,943

 

 

$

2,729

 

 

$

(8,173

)

Net income (loss)

 

$

3,670

 

 

$

(2,333

)

 

$

(7,592

)

 

$

(3,173

)

 

$

(10,807

)

Net income (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

$

0.04

 

 

$

(0.03

)

 

$

(0.55

)

 

$

(0.58

)

 

$

(0.74

)

Diluted:

 

$

0.04

 

 

$

(0.03

)

 

$

(0.55

)

 

$

(0.58

)

 

$

(0.74

)

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

86,495,301

 

 

 

86,495,301

 

 

 

52,339,804

 

 

 

45,933,218

 

 

 

43,929,159

 

Diluted:

 

 

90,002,752

 

 

 

86,495,301

 

 

 

52,339,804

 

 

 

45,933,218

 

 

 

43,929,159

 

Consolidated Balance Sheets Data:

 

 

 

As of December 31,

 

 

 

2018

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

with adoption

(ASC 606)

 

 

without adoption

(ASC 605)

 

 

(as previously reported ASC 605)

 

 

 

(In thousands)

 

Cash and cash equivalents

 

$

70,964

 

 

$

70,964

 

 

$

116,049

 

 

$

18,214

 

 

$

14,896

 

Working capital, excluding deferred revenue (1)

 

$

172,045

 

 

$

161,847

 

 

$

172,492

 

 

$

60,047

 

 

$

27,982

 

Total assets

 

$

534,434

 

 

$

512,500

 

 

$

506,433

 

 

$

387,410

 

 

$

371,504

 

Deferred revenue, current and non-current portion

 

$

114,301

 

 

$

124,187

 

 

$

83,125

 

 

$

55,104

 

 

$

34,888

 

Long-term debt

 

$

—

 

 

$

—

 

 

$

68,329

 

 

$

107,344

 

 

$

99,770

 

Total liabilities

 

$

156,741

 

 

$

162,570

 

 

$

178,036

 

 

$

177,307

 

 

$

160,465

 

Redeemable convertible preferred stock

 

$

—

 

 

$

—

 

 

$

—

 

 

$

223,987

 

 

$

222,898

 

Total stockholders' equity (deficit)

 

$

377,693

 

 

$

349,930

 

 

$

328,397

 

 

$

(13,884

)

 

$

(11,859

)

 

(1)

We define working capital as current assets less current liabilities, excluding deferred revenue.

44

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with the section titled “Selected Financial Data” and the consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those set forth in the section titled “Risk Factors” and in other parts of this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected for any period in the future, and our interim results are not necessarily indicative of the results we expect for the full fiscal year or any other period.

Overview

SailPoint is the leading provider of enterprise identity governance solutions. Our open identity platform provides organizations with critical visibility into who currently has access to which resources, who should have access to those resources, and how that access is being used.

We offer both on-premises software and cloud-based solutions, which empower our customers to efficiently and securely govern the digital identities of employees, contractors, business partners and other users, and manage their constantly changing access rights to enterprise applications and data across hybrid IT environments, whether comprised of on-premises, cloud or mobile applications. We help customers enable their businesses with more agile and innovative IT, enhance their security posture and better meet compliance and regulatory requirements. We believe that our open identity platform is a critical, foundational layer of a modern cyber security strategy that complements and builds upon traditional perimeter- and endpoint-centric security solutions, which on their own are increasingly insufficient to secure organizations, and their applications and data. Our customers include many of the world’s largest and most complex organizations, including commercial enterprises, educational institutions and governments.

We were founded by identity industry veterans to develop a new category of identity management solutions and address emerging identity governance challenges. Since our inception, we have focused on driving innovation in the identity market, with our key milestones including:

 

•

in 2007, we pioneered identity governance through our release of IdentityIQ, our on-premises identity governance solution;

 

•

in 2010, we revolutionized provisioning by integrating it with IdentityIQ into a single solution;

 

•

in 2013, we introduced our cloud-based identity governance solution, IdentityNow;

 

•

in 2015, we extended identity governance by adding our identity governance for data stored in files solution, SecurityIQ (now referred as the data access manager module within IdentityIQ), which manages user access to unstructured data, a rapidly growing area of risk; and

 

•

in 2017, we further extended identity governance with the introduction of our advanced identity analytics solution, IdentityAI, which is designed to use machine learning technologies to enable rapid detection of security threats before they turn into security breaches.

Our solutions address the complex needs of global enterprises and mid-market organizations. As of December 31, 2018, 1,173 customers across a wide variety of industries were using our products to enable and secure digital identities across the globe. No single customer represented more than 10% of our revenue for the years ended December 31, 2018, 2017 and 2016.

For the years ended December 31, 2018, 2017 and 2016, our revenue was $248.9 million, $186.1 million and $132.4 million, respectively. Purchase accounting adjustments related to the Acquisition (defined herein) reduced our revenue by $1.4 million for the year ended December 31, 2016. The impact of the Acquisition to revenue was not material for the years ended December 31, 2018 and 2017. For the year ended December 31, 2018, our net income was $3.7 million as compared to our net loss of $7.6 million and $3.2 million for the years ended December 31, 2017 and 2016, respectively. For the years ended December 31, 2018, 2017 and 2016, our net cash provided by operations was $37.5 million, $21.9 million and $6.5 million, respectively.

45

 

Our success is principally dependent on our ability to deliver compelling solutions to attract new customers and retain existing customers. Delivering these solutions is challenging because our customers have large, complex IT environments, often rely on both legacy and innovative technologies, and deploy different business models, including on-premises and cloud solutions. Rising security threats and evolving regulations and compliance standards for cyber security, data protection, privacy and internal IT controls create new opportunities for our industry and require us to adapt our solutions to be successful. Our ability to continue to maintain our historical growth rates is also challenging because our growth strategy depends in part on our ability to expand our global presence and invest in new vertical markets, while competing against much larger companies with more recognizable brands and financial resources. Although we seek to grow rapidly, we also focus on delivering positive net cash from operations while continuing to invest in our platform and to deliver innovative solutions to our customers. Additionally, our gross margins vary depending on the type of solution we sell, and a shift in the mix of our solutions could affect our performance relative to historical results.

Our Business Model

We deliver an integrated set of solutions that supports all aspects of identity governance, including provisioning, access request, compliance controls, password management and identity governance for data stored in files. Our solutions are built on an open identity platform, which offers connectivity to a variety of security and operational IT applications, extending the reach of our identity governance processes and enabling effective identity governance controls across customer environments.

Our set of solutions currently consists of (i) IdentityIQ, our on-premises identity governance solution, (ii) IdentityNow, our cloud-based, multi-tenant governance suite, which is delivered as a subscription service, and (iii) IdentityAI, our cloud-based, multi-tenant advanced identity analytics solution, which is delivered as a subscription service. See Part I, Item 1. “Business—Products” for more information regarding our solutions.

For our IdentityIQ solutions, our customers typically purchase a perpetual software license, which includes one year of maintenance. Our maintenance provides software maintenance as well as access to our technical support services during the maintenance term. After the initial maintenance period, customers with perpetual licenses may renew their maintenance agreement for an additional fee. For our cloud-based solutions, IdentityNow and IdentityAI, for a subscription fee, we offer customers access to these solutions and infrastructure support for the duration of their subscription agreement. Our standard subscription agreement for our cloud solution has a duration of three years.

Pricing for each of our solutions is dependent on the number of digital identities of employees, contractors, business partners and other users that the customer is entitled to govern with the solution. We also package and price our IdentityIQ, IdentityNow and IdentityAI solutions into modules. Each module has unique functionalities, and our customers are able to purchase one or more modules, depending on their needs. We also offer advanced integration modules for key applications and systems which can be purchased in addition to our base solution modules. They are also priced based on the total number of identities. Thus, our revenue from any customer is generally determined by the number of identities that the customer is entitled to govern as well as the number of modules (for our IdentityIQ and IdentityNow solutions) purchased by the customer.

Our go-to-market strategy consists of both direct sales and indirect sales through our partnership network of systems integrators, value-added resellers and adjacent technology vendors. We work closely with systems integrators, many of whom have dedicated SailPoint practices (including Accenture, Deloitte, KPMG, and PwC and most recently EY), with some dating back more than eight years, and resellers (including value-added resellers such as Optiv) to identify potential sales opportunities and help us increase our reach, and we frequently cooperate with systems integrators to make joint sales proposals to address our mutual customers’ requirements. We also collaborate with leading access management vendors by adding our identity governance capabilities to their access management services (e.g., Okta and VMware). We do not have any material payment obligations to systems integrators, resellers or our technology partners; nor do they have any material payment obligations to us, except that resellers typically purchase solutions directly from us and resell to customers. See Part I, Item 1. “Business—Partnerships and Strategic Relationships” for more information regarding our partnership network.

In addition to our solutions, we offer professional services to our customers and partners to configure and optimize the use of our solutions as well as training services related to the configuration and operation of our platform. Most of our professional services activity is in support of our partners, who perform a significant majority of all initial and follow-on implementation work for our customers. Most of our consulting services are priced on a time and materials basis; our training services are provided through multiple pricing models, including on a per-person basis (for courses provided at our headquarters and on-site at our customers’ offices) and a flat-rate basis (for our e-learning course).

46

 

We devote significant resources to acquire new customers, in both existing and new markets, in order to grow our customer base. In addition, we focus on three distinct opportunities to increase sales to existing customers: (i) expand the number of digital identities; (ii) up-sell additional modules or target storage systems, as applicable, within a single solution; and (iii) cross-sell additional solutions.

Key Factors Affecting Our Performance

Our historical financial performance has been, and we expect our financial performance in the future to be, driven by our ability to:

 

•

Add New Customers Within Existing Markets. Based on data from S&P Global Market Intelligence, we believe that we have penetrated less than 2% of over 65,000 companies in the countries where we have customers today and that as a result, there is significant opportunity to expand our footprint in our existing markets through new, greenfield installations and displacement of our competitors’ legacy solutions. To do so, we plan to grow our sales organization, increase and leverage our indirect channel partners and enhance our marketing efforts.

 

•

Generate Additional Sales to Existing Customers. We believe that our existing customer base provides us with a significant opportunity to drive incremental sales. In most cases, our customers initially purchase a subset of the modules or solutions we offer based on their immediate need. We focus on generating more revenue from the modules that our customers have already purchased from us as our customers grow the number of identities our solutions manage and govern and as our customers deploy our solutions across other business units or geographies within their organizations. Over time, we also identify up-selling and cross-selling opportunities and seek to sell additional modules and solutions to our existing customers.

 

•

Retain Customers. We believe that our ability to retain our customers is an important component of our growth strategy and reflects the long-term value of our customer relationships. For example, when we add a new customer, we generate new license revenue. If the customer renews, we generate incremental maintenance revenue. As we add new IdentityIQ customers, our high renewal rates result in incremental maintenance revenue. Our key strategies to maintain our high renewal rates include focusing on the quality and reliability of our solutions, customer service and support to ensure our customers receive value from our solutions, providing consistent software upgrades and having dedicated customer success teams.

 

•

Expand into New Markets. We expect to continue to invest significantly in sales, marketing and customer service, as well as our indirect channel partner network, to expand into new geographies and vertical markets. We believe that our market opportunity is large and growing and that the global cyber security market represents a significant growth opportunity for us. In 2018, we generated only 31% of our revenue outside of the United States.

Key Business Metrics

In addition to our GAAP financial information such as revenue and net income discussed above, we monitor the following key metrics to help us measure and evaluate the effectiveness of our operations:

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2018

 

 

2017

 

 

2016

 

 

 

with

adoption

(ASC 606)

 

 

without

adoption

(ASC 605)

 

 

as previously reported

(ASC 605)

 

Number of customers

 

 

1,173

 

 

 

1,173

 

 

 

933

 

 

 

695

 

Subscription revenue as a percentage of total revenue

 

 

42

%

 

 

43

%

 

 

38

%

 

 

37

%

Adjusted EBITDA (in thousands)

 

$

39,480

 

 

$

34,178

 

 

$

25,501

 

 

$

15,135

 

 

 

•

Number of Customers. We believe that the size of our customer base is an indicator of our market penetration and that our net customer additions are an indicator of the growth of our business and our future revenue opportunity. We define a customer as a distinct entity, division or business unit of an organization that receives support or has the right to use our cloud-based solutions as of the specified measurement date.

47

 

 

•

Subscription Revenue as a Percentage of Total Revenue. Subscription revenue is a portion of our total revenue and is derived from (i) IdentityNow, our cloud-based solution where customers enter into SaaS subscription agreements with us, and (ii) IdentityIQ maintenance and support agreements, but not licenses. As we generally sell our solutions on a per-identity basis, our subscription revenue for any customer is primarily determined by the number of identities that the customer is entitled to govern as part of a SaaS subscription, and the ongoing price paid per-identity under a maintenance and support agreement or SaaS subscription. Thus, we consider our subscription revenue to be the recurring portion of our revenue base and believe that its continued growth as a percentage of total revenue will lead to a more predictable revenue model and increase our visibility to future period total revenues. Because we recognize our subscription revenue ratably over the duration of those agreements, a portion of the revenue we recognize each period is derived from agreements we entered into in prior periods. In contrast, we typically recognize license revenue upon entering into the applicable license, the timing of which is less predictable and may cause significant fluctuations in our quarterly financial results.

 

•

Adjusted EBITDA. We believe that adjusted EBITDA is a measure widely used by securities analysts and investors to evaluate the financial performance of our company and other companies. We believe that adjusted EBITDA is an important measure for evaluating our performance because it facilitates comparisons of our core operating results from period to period by removing the impact of our capital structure (net interest income or expense from our outstanding debt), asset base (depreciation and amortization), tax consequences, purchase accounting adjustments, acquisition and sponsor related costs and stock-based compensation. In addition, we base certain of our forward-looking estimates and budgets on adjusted EBITDA. See the section titled “Non-GAAP Financial Measures” for more information regarding adjusted EBITDA, including the limitations of using adjusted EBITDA as a financial measure, and for a reconciliation of adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated in accordance with GAAP.

Non-GAAP Financial Measures

In addition to our financial information presented in accordance with GAAP, we use certain non-GAAP financial measures to clarify and enhance our understanding of past performance and future prospects. Generally, a non-GAAP financial measure is a numerical measure of a company’s operating performance, financial position or cash flow that includes or excludes amounts that are included or excluded from the most directly comparable measure calculated and presented in accordance with GAAP. As discussed below, we monitor the non-GAAP financial measures described below, and we believe they are helpful to investors. Our non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies in our industry because they may calculate non-GAAP financial results differently. In addition, there are limitations in using non-GAAP financial measures because they are not prepared in accordance with GAAP and exclude expenses that may have a material impact on our reported financial results. In particular, interest expense, which is excluded from adjusted EBITDA has been and will continue to be a significant recurring expense in our business for the foreseeable future. The presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with GAAP. We urge you to review the reconciliations of our non-GAAP financial measures to the comparable GAAP financial measures included below, and not to rely on any single financial measure to evaluate our business.

We exclude stock-based compensation expense because it is non-cash in nature and excluding this expense provides meaningful supplemental information regarding our operational performance and allows investors the ability to make more meaningful comparisons between our operating results and those of other companies. We also exclude amortization of acquired intangible assets, acquisition-related costs, the partial release of the valuation allowance due to acquisition, facility exit costs, and make adjustments related to a financing lease obligation from our non-GAAP financial measures because these are considered by management to be outside of our core operating results. Accordingly, we believe that excluding these expenses provides investors and management with greater visibility to the underlying performance of our business operations and may also facilitate comparison with the results of other companies in our industry.

48

 

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income (loss) adjusted to exclude income taxes, interest expense, net, depreciation and amortization, purchase accounting adjustments, acquisition and sponsor related costs and stock-based compensation expense.

We believe that adjusted EBITDA is a measure widely used by securities analysts and investors to evaluate the financial performance of our company and other companies. We believe that adjusted EBITDA is an important measure for evaluating our performance because it facilitates comparisons of our core operating results from period to period by removing the impact of our capital structure (net interest income or expense from our outstanding debt), asset base (depreciation and amortization), tax consequences, purchase accounting adjustments, acquisition and sponsor related costs and stock-based compensation. In addition, we base certain of our forward-looking estimates and budgets on adjusted EBITDA.

The following table reflects the reconciliation of GAAP to non-GAAP financial measures for the years ended December 31, 2018, 2017 and 2016:

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2018

 

 

2017

 

 

2016

 

 

 

with

adoption

(ASC 606)

 

 

without

adoption

(ASC 605)

 

 

as previously reported

(ASC 605)

 

 

 

(In thousands)

 

Net income (loss)

 

$

3,670

 

 

$

(2,333

)

 

$

(7,592

)

 

$

(3,173

)

Stock-based compensation (1)

 

 

19,209

 

 

 

19,209

 

 

 

4,514

 

 

 

568

 

Amortization of acquired intangibles

 

 

8,825

 

 

 

8,825

 

 

 

8,841

 

 

 

9,092

 

Depreciation

 

 

1,911

 

 

 

1,911

 

 

 

1,379

 

 

 

890

 

Purchase price accounting adjustment

 

 

68

 

 

 

68

 

 

 

141

 

 

 

1,373

 

Acquisition and sponsor related costs

 

 

—

 

 

 

—

 

 

 

1,142

 

 

 

1,093

 

Interest expense, net (2)

 

 

4,707

 

 

 

4,707

 

 

 

14,783

 

 

 

7,277

 

Income tax expense (benefit)

 

 

1,090

 

 

 

1,791

 

 

 

2,293

 

 

 

(1,985

)

Adjusted EBITDA

 

$

39,480

 

 

$

34,178

 

 

$

25,501

 

 

$

15,135

 

 

(1)

Stock-based compensation includes employer related payroll taxes.

(2)

Interest expense includes amortization of debt issuance costs, loss on the modification and extinguishment of debt and prepayment penalty.

 

The following table reflects the reconciliation of GAAP to non-GAAP financial measures for our unaudited quarterly consolidated statements of operations data for each of the quarters indicated:

 

 

 

Three Months Ended

 

 

 

12/31/2018

 

 

9/30/2018

 

 

6/30/2018

 

 

3/31/2018

 

 

12/31/2018

 

 

 

 

9/30/2018

 

 

 

 

6/30/2018

 

 

 

 

3/31/2018

 

 

 

with adoption (ASC 606)

 

 

without adoption (ASC 605)

 

 

 

(In thousands)

 

Net income (loss)

 

$

5,143

 

 

$

1,808

 

 

$

(979

)

 

$

(2,302

)

 

$

5,979

 

 

 

 

$

3,302

 

 

 

 

$

(5,647

)

 

 

 

$

(5,967

)

Stock-based compensation (1)

 

 

4,956

 

 

 

4,932

 

 

 

4,182

 

 

 

5,139

 

 

 

4,956

 

 

 

 

 

4,932

 

 

 

 

 

4,182

 

 

 

 

 

5,139

 

Amortization of acquired intangibles

 

 

2,207

 

 

 

2,206

 

 

 

2,206

 

 

 

2,206

 

 

 

2,207

 

 

 

 

 

2,206

 

 

 

 

 

2,206

 

 

 

 

 

2,206

 

Depreciation

 

 

552

 

 

 

493

 

 

 

445

 

 

 

421

 

 

 

552

 

 

 

 

 

493

 

 

 

 

 

445

 

 

 

 

 

421

 

Purchase price accounting adjustment

 

 

18

 

 

 

18

 

 

 

19

 

 

 

13

 

 

 

18

 

 

 

 

 

18

 

 

 

 

 

19

 

 

 

 

 

13

 

Acquisition and sponsor related costs

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

 

 

—

 

 

 

 

 

—

 

 

 

 

 

—

 

Interest expense, net (2)

 

 

527

 

 

 

202

 

 

 

2,800

 

 

 

1,178

 

 

 

527

 

 

 

 

 

202

 

 

 

 

 

2,800

 

 

 

 

 

1,178

 

Income tax (benefit) expense

 

 

5,177

 

 

 

2,385

 

 

 

(3,742

)

 

 

(2,730

)

 

 

380

 

 

 

 

 

618

 

 

 

 

 

441

 

 

 

 

 

352

 

Adjusted EBITDA

 

$

18,580

 

 

$

12,044

 

 

$

4,931

 

 

$

3,925

 

 

$

14,619

 

 

 

 

$

11,771

 

 

 

 

$

4,446

 

 

 

 

$

3,342

 

49

 

 

 

 

Three months ended

 

 

 

12/31/2017

 

 

9/30/2017

 

 

6/30/2017

 

 

3/31/2017

 

 

 

as previously reported (ASC 605)

 

 

 

(in thousands)

 

Net income (loss)

 

$

5,382

 

 

$

(6,387

)

 

$

(4,304

)

 

$

(2,283

)

Stock-based compensation (1)

 

 

3,970

 

 

 

201

 

 

 

185

 

 

 

158

 

Amortization of acquired intangibles

 

 

2,206

 

 

 

2,207

 

 

 

2,207

 

 

 

2,221

 

Depreciation

 

 

444

 

 

 

385

 

 

 

295

 

 

 

255

 

Purchase price accounting adjustment

 

 

15

 

 

 

16

 

 

 

55

 

 

 

55

 

Acquisition and sponsor related costs

 

 

164

 

 

 

322

 

 

 

328

 

 

 

328

 

Interest expense, net (2)

 

 

5,704

 

 

 

3,726

 

 

 

2,696

 

 

 

2,657

 

Income tax (benefit) expense

 

 

(769

)

 

 

2,906

 

 

 

395

 

 

 

(239

)

Adjusted EBITDA

 

$

17,116

 

 

$

3,376

 

 

$

1,857

 

 

$

3,152

 

 

(1)

Stock-based compensation includes employer related payroll taxes.

(2)

Interest expense includes amortization of debt issuance costs, loss on the modification and extinguishment of debt and prepayment penalty.

Components of Results of Operations

Revenue

License Revenue. We generate license revenue through the sale of our on-premises software license agreements to new customers and sales of additional licenses to the existing customers who can purchase additional users for existing licenses or purchase new licenses. Customers may also purchase term license agreements, under which we recognize the license fee upfront. License transactions generally include an amount for first-year maintenance, which we recognize as subscription revenue. We typically recognize license revenue upon delivering the applicable license. See the section titled “Critical Accounting Policies and Estimates—Revenue Recognition” for more information. Over time, we will continue to expect license revenue to decrease as a percentage of our total revenue as we continue to focus on increasing our subscription revenue as a key strategic priority.

Subscription Revenue. Our subscription revenue consists of fees for (i) ongoing maintenance and support of our licensed solutions and (ii) subscription fees for access to, and related support for, our cloud-based solution. We typically invoice subscription fees in advance, in annual installments, and recognize subscription revenue ratably over the term of the applicable agreement. See the section titled “Critical Accounting Policies and Estimates—Revenue Recognition” for more information. Over time, we expect subscription revenue will increase as a percentage of total revenue as we continue to focus on increasing subscription revenue as a key strategic priority.  

Services and Other Revenue. Services and other revenue consists primarily of fees from professional services provided to our customers and partners to configure and optimize the use of our solutions as well as training services related to the configuration and operation of our platform. Most of our professional services are priced on a time and materials basis, and we generally invoice customers monthly as the work is performed. We generally have standalone value for our professional services and recognize revenue as services are performed based on an estimated fair value as a separate unit of accounting. See the section titled “Critical Accounting Policies and Estimates—Revenue Recognition” for more information. Most of our professional services activity is in support of our partners, who perform the significant majority of all initial and follow-on configuration and optimization work for our customers. Over time, we expect our professional services revenue as a percentage of total revenue to decline as we increasingly rely on partners to help our customers deploy our software.

Impact of Purchase Accounting. On September 8, 2014, SailPoint Technologies Holdings, Inc. acquired all of the capital stock of SailPoint Technologies, Inc. We refer to this transaction as the “Acquisition”. As a result of the Acquisition, we applied purchase accounting and a new basis of accounting beginning on the date of the Acquisition. As such, we were required by GAAP to record all assets and liabilities, including deferred revenue and long-lived assets, at fair value as of the effective date of the Acquisition, which in some cases was different than their historical book values. This had the effect of reducing revenue and deferred revenue and increasing cost of revenue from that which would have otherwise been recognized, as described in more detail below.

50

 

We assessed the fair value of deferred revenue acquired in the Acquisition to be $10.2 million, representing a decrease of $12.6 million from its historical book value. Recognizing deferred revenue at fair value reduces revenue in the periods subsequent to the Acquisition. The impact of the Acquisition to revenue was $1.4 million for the year ended December 31, 2016. The impact of the Acquisition to revenue was not material for the years ended December 31, 2018 and 2017. The effect of the Acquisition on the deferred costs was not material.

Cost of Revenue

Cost of License Revenue. Cost of license revenue consists of amortization expense for developed technology acquired in business combinations and third-party royalties.

Cost of Subscription Revenue. Cost of subscription revenue consists primarily of employee compensation cost (which consists of salaries, benefits, bonuses and stock-based compensation), costs of our customer support organization, contractor costs to supplement our staff levels, allocated overhead, amortization expense for developed technology acquired in business combinations and third-party cloud-based hosting costs.

Cost of Services and Other Revenue. Cost of services and other revenue consists primarily of employee compensation costs of our professional services and training organizations, travel-related costs, contractor costs to supplement our staff levels and allocated overhead.

Gross Profit and Gross Margin

Gross profit is revenue less cost of revenue, and gross margin is gross profit as a percentage of total revenue. Gross profit has been and will continue to be affected by various factors, including the mix of our license, subscription, and services and other revenue, the costs associated with third-party cloud-based hosting services for our cloud-based subscriptions, and the extent to which we expand our customer support and services organizations. We expect that our overall gross margin will fluctuate from period to period depending on the interplay of these various factors. Also, we expect our investment in technology to expand the capability of our services, enabling us to improve our gross margin over time.

Operating Expenses

Research and Development Expenses. Research and development expenses consist primarily of employee compensation costs, allocated overhead and software and maintenance expenses, which includes cloud-based hosting costs related to the development of our cloud-based solution. We believe that continued investment in our offerings is vital to the growth of our business, and we intend to continue to invest in product development and in SailPoint Labs, our dedicated, stand-alone technology investigation and engineering group, to continue to innovate and offer our customers new solutions and to enhance our existing solutions as our business grows. See Part I, Item 1. “Business—Research and Development” for more information. We expect such investment to increase on a dollar basis as our business grows.

General and Administrative Expenses. General and administrative expenses consist primarily of employee compensation costs for corporate personnel, such as those in our executive, human resources, facilities, accounting and finance and information technology departments. In addition, general and administrative expenses include third-party professional fees and sponsor-related costs, as well as all other supporting corporate expenses not allocated to other departments. Our general and administrative expenses increase on a dollar basis as our business grows. Also, we have incurred increased general and administrative expenses as a result of becoming a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, and increased expenses for insurance, investor relations and professional services.

51

 

Sales and Marketing Expenses. Sales and marketing expenses consist primarily of employee compensation costs, sales commissions, costs of general marketing and promotional activities, travel-related expenses and allocated overhead. Under the revised standard, sales commissions earned by our sales force and the related payroll taxes, a primary component of “deferred contract acquisition costs”, which are considered incremental and recoverable costs of obtaining a contract with a customer are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be generally five years. Under the prior standard, the Company generally capitalized deferred contract costs associated with subscription revenues, which were subsequently amortized over the term of the subscription while deferred contract cost related to license revenues were previously recognized as incurred. We expect to continue to invest in our sales force for expansion to new geographic and vertical markets. We expect our sales and marketing expenses to increase on a dollar basis and continue to be our largest operating expense category for the foreseeable future. See Note 3 of the accompanying Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information related to our adoption of the revised standard (ASC 606).

Allocated Overhead. We allocate shared costs, such as facilities costs (including rent and utilities), information technology costs and recruiting costs, to all departments based on headcount. As such, allocated shared costs are reflected in each cost of revenue and operating expense category.

Other Expense, Net

Other expense, net consists primarily of interest expense and foreign currency transaction gains and losses related to the impact of transactions denominated in a foreign currency. As we have expanded our international operations, our exposure to fluctuations in foreign currencies has increased and we expect this to continue. Interest expense, net of interest income, consists primarily of interest on our term loan facility, amortization of debt issuance costs, loss on the modification and extinguishment of debt and prepayment penalties.

Income Tax Benefit (Expense)

Our provision for income taxes consists of U.S. and state income taxes and income taxes in certain foreign jurisdictions in which we conduct business. Our income tax rate varies from the federal statutory rate due to foreign withholding taxes; changing tax laws, regulations and interpretations in multiple jurisdictions in which we operate; changes to the financial accounting rules for income taxes; unanticipated changes in tax rates; differences in accounting and tax treatment of our stock-based compensation and the tax effects of purchase accounting for acquisitions. We expect this fluctuation in income tax rates, as well as its potential impact on our results of operations, to continue.

52

 

Results of Operations

 

The following table sets forth our results of operations for the periods indicated:

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

 

 

with

adoption

(ASC 606)

 

 

Impact of

adoption

 

 

without

adoption

(ASC 605)

 

 

as previously

reported

(ASC 605)

 

 

 

(In thousands)

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

$

105,000

 

 

$

3,307

 

 

$

101,693

 

 

$

79,209

 

 

$

54,395

 

Subscription

 

 

104,033

 

 

 

(2,499

)

 

 

106,532

 

 

 

71,007

 

 

 

49,364

 

Services and other

 

 

39,887

 

 

 

(363

)

 

 

40,250

 

 

 

35,840

 

 

 

28,653

 

Total revenue

 

 

248,920

 

 

 

445

 

 

 

248,475

 

 

 

186,056

 

 

 

132,412

 

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

 

4,634

 

 

 

—

 

 

 

4,634

 

 

 

4,561

 

 

 

4,278

 

Subscription (1)

 

 

20,734

 

 

 

—

 

 

 

20,734

 

 

 

16,406

 

 

 

13,051

 

Services and other (1)

 

 

29,302

 

 

 

—

 

 

 

29,302

 

 

 

23,623

 

 

 

19,709

 

Total cost of revenue

 

 

54,670

 

 

 

—

 

 

 

54,670

 

 

 

44,590

 

 

 

37,038

 

Gross profit

 

 

194,250

 

 

 

445

 

 

 

193,805

 

 

 

141,466

 

 

 

95,374

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development (1)

 

 

43,154

 

 

 

—

 

 

 

43,154

 

 

 

33,331

 

 

 

24,358

 

General and administrative (1)

 

 

34,781

 

 

 

—

 

 

 

34,781

 

 

 

17,678

 

 

 

9,680

 

Sales and marketing (1)

 

 

105,402

 

 

 

(4,857

)

 

 

110,259

 

 

 

80,514

 

 

 

58,607

 

Total operating expenses

 

 

183,337

 

 

 

(4,857

)

 

 

188,194

 

 

 

131,523

 

 

 

92,645

 

Income from operations

 

 

10,913

 

 

 

5,302

 

 

 

5,611

 

 

 

9,943

 

 

 

2,729

 

Other expense, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(4,707

)

 

 

—

 

 

 

(4,707

)

 

 

(14,783

)

 

 

(7,277

)

Other, net

 

 

(1,446

)

 

 

—

 

 

 

(1,446

)

 

 

(459

)

 

 

(610

)

Total other expense, net

 

 

(6,153

)

 

 

—

 

 

 

(6,153

)

 

 

(15,242

)

 

 

(7,887

)

Income (loss) before income taxes

 

 

4,760

 

 

 

5,302

 

 

 

(542

)

 

 

(5,299

)

 

 

(5,158

)

Income tax (expense) benefit

 

 

(1,090

)

 

 

701

 

 

 

(1,791

)

 

 

(2,293

)

 

 

1,985

 

Net income (loss)

 

$

3,670

 

 

$

6,003

 

 

$

(2,333

)

 

$

(7,592

)

 

$

(3,173

)

 

(1)

Includes stock-based compensation expense as follows:

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

 

 

(In thousands)

 

Cost of revenue - subscription

 

$

945

 

 

$

133

 

 

$

34

 

Cost of revenue - services and other

 

 

1,504

 

 

 

458

 

 

 

63

 

Research and development

 

 

3,026

 

 

 

658

 

 

 

118

 

General and administrative

 

 

7,798

 

 

 

2,062

 

 

 

96

 

Sales and marketing

 

 

5,702

 

 

 

1,203

 

 

 

257

 

Total stock-based compensation expense

 

$

18,975

 

 

$

4,514

 

 

$

568

 

 

53

 

The following table sets forth the consolidated statements of operations data for each of the periods presented as a percentage of total revenue:

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2018

 

 

2017

 

 

2016

 

 

 

with

adoption

(ASC 606)

 

 

without

adoption

(ASC 605)

 

 

as previously reported

(ASC 605)

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

 

42

%

 

 

41

%

 

 

43

%

 

 

41

%

Subscription

 

 

42

 

 

 

43

 

 

 

38

 

 

 

37

 

Services and other

 

 

16

 

 

 

16

 

 

 

19

 

 

 

22

 

Total revenue

 

 

100

 

 

 

100

 

 

 

100

 

 

 

100

 

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

 

2

 

 

 

2

 

 

 

2

 

 

 

3

 

Subscription

 

 

8

 

 

 

8

 

 

 

9

 

 

 

10

 

Services and other

 

 

12

 

 

 

12

 

 

 

13

 

 

 

15

 

Total cost of revenue

 

 

22

 

 

 

22

 

 

 

24

 

 

 

28

 

Gross profit

 

 

78

 

 

 

78

 

 

 

76

 

 

 

72

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

17

 

 

 

17

 

 

 

18

 

 

 

18

 

General and administrative

 

 

14

 

 

 

14

 

 

 

10

 

 

 

7

 

Sales and marketing

 

 

42

 

 

 

44

 

 

 

43

 

 

 

45

 

Total operating expenses

 

 

73

 

 

 

75

 

 

 

71

 

 

 

70

 

Income from operations

 

 

5

 

 

 

3

 

 

 

5

 

 

 

2

 

Other expense, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(2

)

 

 

(2

)

 

 

(8

)

 

 

(5

)

Other, net

 

 

(1

)

 

 

(1

)

 

0

 

 

0

 

Total other expense, net

 

 

(3

)

 

 

(3

)

 

 

(8

)

 

 

(5

)

Income (loss) before income taxes

 

 

2

 

 

 

0

 

 

 

(3

)

 

 

(3

)

Income tax (expense) benefit

 

0

 

 

 

(1

)

 

 

(1

)

 

 

1

 

Net income (loss)

 

 

2

%

 

 

(1

)%

 

 

(4

)%

 

 

(2

)%

 

Impact of ASC 606 on the Comparability of Our Results of Operations

Our results of operations presented in the following tables include financial results for reporting periods during 2018, which are disclosed in compliance with the revised standard (ASC 606). We have elected the modified retrospective transition method; therefore, our historical financial results for reporting periods prior to 2018 have not been retroactively restated and are presented in conformity with the amounts previously reported under the prior revenue standard (ASC 605). See Note 3 of the accompanying Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information related to our adoption of the revised standard (ASC 606).

54

 

Comparison of the Years Ended December 31, 2018 and 2017

Revenue

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2018

 

 

2017

 

 

2018 to 2017 $ and % variance

 

 

2018 to 2017 $ and % variance

 

 

 

with

adoption

(ASC

606)

 

 

without

adoption

(ASC 605)

 

 

with

adoption

(ASC 606)

 

 

without adoption

(ASC 605)

 

 

 

(In thousands, except percentages)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

$

105,000

 

 

$

101,693

 

 

$

79,209

 

 

$

25,791

 

 

33%

 

 

$

22,484

 

 

28%

 

Subscription

 

 

104,033

 

 

 

106,532

 

 

 

71,007

 

 

 

33,026

 

 

47%

 

 

 

35,525

 

 

50%

 

Services and other

 

 

39,887

 

 

 

40,250

 

 

 

35,840

 

 

 

4,047

 

 

11%

 

 

 

4,410

 

 

12%

 

Total revenue

 

$

248,920

 

 

$

248,475

 

 

$

186,056

 

 

$

62,864

 

 

34%

 

 

$

62,419

 

 

34%

 

 

License Revenue. ASC 605 license revenue increased by $22.5 million, or 28%, for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to increased demand for our products and services from new and existing customers. The revised standard impacts the timing of revenue recognition related to our term license. Prior to our adoption of the revised standard, we historically recognized revenue under ASC 605 related to term license agreements ratably over the license term as license revenues. Under the revised standard, revenue allocable to the license portion of the arrangement is recognized in license revenues upon delivery of the license, while revenues allocated to maintenance are recognized ratably as subscription revenues. During the year ended December 31, 2018, total ASC 605 revenue from new customers was $60.4 million and license revenue from existing customers was $41.3 million. See Note 3 of the accompanying Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information related to our adoption of the revised standard (ASC 606).

 

ASC 606 license revenue increased by $25.8 million, or 33%, for the year ended December 31, 2018 compared to the year ended December 31, 2017. License revenue from new customers was greater than license revenue from existing customers for the year ended December 31, 2018. The increase in total license revenue was attributable to both increases in license sales to our new customers as well as follow-on sales to our existing customers. During the year ended December 31, 2018, revenue from new customers was $67.2 million and license revenue from existing customers was $37.8 million. Our revenue from any single customer is determined by the number of identities the customer is entitled to govern as well as the number of modules and solutions purchased.

 

Subscription Revenue. ASC 605 subscription revenue increased by $35.5 million, or 50%, for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to increase in ongoing maintenance revenue from our increased installed base. Approximately 90% of growth in year over year revenue was attributable to existing customers.

 

ASC 606 subscription revenue increased by $33.0 million, or 47%, for the year ended December 31, 2018. The increase was primarily a result of an increase in ongoing maintenance renewals derived from our existing customers. Revenue from existing customers accounted for 88% of total subscription revenue during the year ended December 31, 2018. Our customer base increased by 240, or 26%, from 933 customers at December 31, 2017 to 1,173 customers at December 31, 2018.

 

Services and Other Revenue. ASC 605 service and other revenue increased by $4.4 million, or 12% for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to higher demand for services from an increased number of customers.

 

ASC 606 services and other revenue increased by $4.0 million, or 11%, for the year ended December 31, 2018 compared to the year ended December 31, 2017. The increase is primarily a result of an increase in the number of customers using our consulting and training services.

 

55

 

Geographic Regions. Our operations in the United States contributed the largest portion of our revenue in each year ended December 31, 2018 and 2017 because of our larger and more established sales force and partner network in the United States as compared to our other regions. Revenue from Europe, the Middle East and Africa (“EMEA”) and the rest of the world also increased for years ended December 31, 2018 and 2017, primarily due to our investment in increasing the size of our international sales force and strengthening partnerships with global system integrators and resellers worldwide.

 

The following table sets forth, for each of the periods presented, our consolidated total revenue by geography and the respective percentage of total revenue:

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2018

 

 

2017

 

 

 

with adoption

(ASC 606)

 

 

without adoption

(ASC 605)

 

 

as previously reported

(ASC 605)

 

 

 

$

 

 

% of

revenue

 

 

$

 

 

% of

revenue

 

 

$

 

 

% of

revenue

 

 

 

(In thousands, except percentages)

 

United States

 

$

171,497

 

 

 

69

%

 

$

169,927

 

 

 

68

%

 

$

134,676

 

 

 

72

%

EMEA (1)

 

 

49,871

 

 

 

20

%

 

 

49,854

 

 

 

20

%

 

 

33,097

 

 

 

18

%

Rest of the World (1)

 

 

27,552

 

 

 

11

%

 

 

28,694

 

 

 

12

%

 

 

18,283

 

 

 

10

%

Total revenue

 

$

248,920

 

 

 

100

%

 

$

248,475

 

 

 

100

%

 

$

186,056

 

 

 

100

%

 

(1)

No single country represented more than 10% of our consolidated revenue.

 

Gross Profit and Gross Margin

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2018

 

 

2017

 

 

2018 to 2017 $ and

% variance

 

 

2018 to 2017 $ and

% variance

 

 

 

with

adoption

(ASC

606)

 

 

without adoption

(ASC 605)

 

 

with adoption

(ASC 606)

 

 

without adoption

(ASC 605)

 

 

 

(In thousands, except percentages)

 

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

$

100,366

 

 

$

97,059

 

 

$

74,648

 

 

$

25,718

 

 

34%

 

 

$

22,411

 

 

30%

 

Subscription

 

 

83,299

 

 

 

85,798

 

 

 

54,601

 

 

 

28,698

 

 

53%

 

 

 

31,197

 

 

57%

 

Services and other

 

 

10,585

 

 

 

10,948

 

 

 

12,217

 

 

 

(1,632

)

 

(13)%

 

 

 

(1,269

)

 

(10)%

 

Total gross profit

 

$

194,250

 

 

$

193,805

 

 

$

141,466

 

 

$

52,784

 

 

37%

 

 

$

52,339

 

 

37%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

 

96

%

 

 

95

%

 

 

94

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription

 

 

80

%

 

 

81

%

 

 

77

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services and other

 

 

27

%

 

 

27

%

 

 

34

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross margin

 

 

78

%

 

 

78

%

 

 

76

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses. ASC 606 license gross profit increased by $25.7 million, or 34%, during the year ended December 31, 2018 compared to the year ended December 31, 2017. The increase was the result of increased license revenues with only minor increases in third-party royalties. ASC 605 license gross profit increased by $22.4 million, or 30%, during the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to increase in license revenue as the adoption of ASC 606 did not have any impact on cost of license revenues.

 

Subscription. ASC 605 subscription gross profit increased by $31.2 million, or 57%, during the year ended December 31, 2018 compared to the year ended December 31, 2017. Cost of subscription revenues under ASC 605 did not differ from cost of subscription revenues under ASC 606 during the year ended December 31, 2018.

 

56

 

ASC 606 subscription gross profit increased by $28.7 million, or 53%, during the year ended December 31, 2018 compared to the year ended December 31, 2017. The increase was the result of growth in subscription revenue, coupled with an increase in corresponding costs of subscription revenue at a rate lower than our revenue growth as we continue to build economies of scale within our customer support organization and our utilization of cloud-based hosting services. Approximately $1.2 million of the increase in cost of subscription revenue was due to increased cloud-based hosting costs for our cloud-based solution. Substantially all of the remaining year-over-year increase in cost of subscription revenue was due to increases in headcount, and related allocated overhead, to support the growth of our subscription cloud-based offering and ongoing maintenance for our expanding licensed customer base.

 

Services and Other. ASC 606 services and other gross profit decreased by $1.6 million, or 13%, during the year ended December 31, 2018 compared to the year ended December 31, 2017. This decrease was primarily attributable to the higher costs associated with expanding our infrastructure for our professional services and training organization to support an increasing number of customers for the year ended December 31, 2018. ASC 605 services and other gross profit decreased by $1.3 million, or 10%, during the year ended December 31, 2018 compared to the year ended December 31, 2017. Cost of services and other revenues under ASC 605 did not differ from cost of services and other revenues under ASC 606 during the year ended December 31, 2018.

Operating Expenses

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2018

 

 

2017

 

 

2018 to 2017 $ and

% variance

 

 

2018 to 2017 $ and

% variance

 

 

 

with

adoption

(ASC 606)

 

 

without adoption

(ASC 605)

 

 

with adoption

(ASC 606)

 

 

without adoption

(ASC 605)

 

 

 

(In thousands, except percentages)

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

43,154

 

 

$

43,154

 

 

$

33,331

 

 

$

9,823

 

 

29%

 

 

$

9,823

 

 

29%

 

General and administrative

 

 

34,781

 

 

 

34,781

 

 

 

17,678

 

 

 

17,103

 

 

97%

 

 

 

17,103

 

 

97%

 

Sales and marketing

 

 

105,402

 

 

 

110,259

 

 

 

80,514

 

 

 

24,888

 

 

31%

 

 

 

29,745

 

 

37%

 

Total operating expenses

 

$

183,337

 

 

$

188,194

 

 

$

131,523

 

 

$

51,814

 

 

39%

 

 

$

56,671

 

 

43%

 

 

Research and Development Expenses. Adoption of ASC 606 had no impact on research and development expenses. Research and development expenses increased by $9.8 million, or 29%, for the year ended December 31, 2018 compared to the year ended December 31, 2017. Approximately 81% of the increase was the result of an increase in headcount, and related allocated overhead, to optimize and expand our product offerings as well as pursue innovation in identity governance. Substantially all of the remaining increase in research and development expenses was the result of increased software and maintenance expenses, primarily cloud-based hosting costs related to the development of our cloud-based offering.

 

General and Administrative Expenses. Adoption of ASC 606 had no impact on general and administrative expenses. General and administrative expenses increased by $17.1 million, or 97%, for the year ended December 31, 2018, compared to the year ended December 31, 2017. Approximately 62% of the increase was the result of an increase in corporate headcount and related allocated overhead, to support the growth and scale of the business. In 2018, general and administrative expenses also increased by $6.3 million, or 37%, as a result of increased professional services expenses comprised of legal, accounting and consulting fees.

 

Sales and Marketing Expenses. ASC 606 sales and marketing expenses were $105.4 million for the year ended December 31, 2018 compared to ASC 605 sales and marketing expenses of $110.3 million. The difference of $4.9 million relates to the net impact of the deferral and subsequent amortization of contract acquisition cost under ASC 606.

 

57

 

ASC 606 sales and marketing expenses increased by $24.9 million, or 31%, for the year ended December 31, 2018 compared to the year ended December 31, 2017. Approximately $18.3 million, or 73%, of the increase was the result of our increased sales and marketing headcount and related allocated overhead, to support increased penetration into our existing customer base as well as expansion into new industry verticals and geographic markets. During the year ended December 31, 2018, as our headcount increased, we also experienced year-over-year increases in travel costs of $2.4 million. Advertising costs also increased by $1.4 million, for the year ended December 31, 2018. We adopted ASC 606 on January 1, 2018 and elected the modified retrospective transition method which included the capitalization and amortization of incremental costs of obtaining contracts. For the year ended December 31, 2018, deferred contract acquisition costs were $4.9 million lower than they would have been under the prior standard. See Note 3 of the accompanying Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information related to our adoption of the revised standard (ASC 606).

Interest Expense, Net

 

Adoption of ASC 606 had no impact on interest expense, net of interest income, Interest expense, net decreased by $10.1 million, or 68%, for the year ended December 31, 2018, compared to the year ended December 31, 2017. As of December 31, 2018, we had no debt balances outstanding. Our interest expense decreased as a result of paying down our debt; please refer to the discussion of our credit facility below. This decrease was partially offset by approximately a $1.8 million loss on the resulting modification and subsequent extinguishment of our debt, inclusive of $0.4 million of cash prepayment penalties.

 

Comparison of the Years Ended December 31, 2017 and 2016

 

Revenue

 

 

 

Year Ended December 31,

 

 

 

2017 (1)

 

 

2016 (1)

 

 

variance $

 

 

variance %

 

 

 

(In thousands, except percentages)

 

Revenue:

 

 

 

Licenses

 

$

79,209

 

 

$

54,395

 

 

$

24,814

 

 

 

46

%

Subscription

 

 

71,007

 

 

 

49,364

 

 

 

21,643

 

 

 

44

%

Services and other

 

 

35,840

 

 

 

28,653

 

 

 

7,187

 

 

 

25

%

Total revenue

 

$

186,056

 

 

$

132,412

 

 

$

53,644

 

 

 

41

%

 

(1)

The comparative information for years prior to 2018 has not been adjusted to reflect the adoption of the revised standard and is reported on an ASC 605 basis. For additional information see Note 3 of our accompanying Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

 

License Revenue. License revenue increased by $24.8 million, or 46%, for the year ended December 31, 2017 compared to the year ended December 31, 2016.  Although license revenue from new customers was greater than license revenue from existing customers for December 31, 2017 and 2016, the increase in total license revenue was primarily attributable to follow-on sales to our existing customers. During the years ended December 31, 2017 and 2016 revenue from new customers was $48.4 million and $42.2 million and license revenue from existing customers was $30.8 million and $12.2 million, respectively. Our revenue from any single customer is determined by the number of identities the customer is entitled to govern as well as the number of modules and solutions purchased.

 

Subscription Revenue. Subscription revenue increased by $21.6 million, or 44%, for the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase was primarily a result of an increase in ongoing maintenance renewals and an increase in maintenance revenue derived from new licenses. Our customer base increased by 238, or 34%, from 695 customers at December 31, 2016 to 933 customers at December 31, 2017. Approximately $1.2 million of the increase in subscription revenue is the result of a decrease in the purchase accounting write down of deferred revenue subsequent to the Acquisition.

 

58

 

Services and Other Revenue. Services and other revenue increased by $7.2 million, or 25%, for the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase is primarily a result of an increase in the number of customers using our consulting and training services.

 

Geographic Regions. Our operations in the United States were responsible for the largest portion of our revenue in each year ended December 31, 2017 and 2016 because of our larger and more established sales force and partner network in the United States as compared to our other regions. Revenue from both Europe, the Middle East and Africa (“EMEA”) and the rest of the world also increased for years ended December 31, 2017 and 2016, primarily due to our investment in increasing the size of our international sales force and strengthening partnerships with global system integrators and resellers worldwide.

 

The following table sets forth, for each of the periods presented, our consolidated total revenue by geography and the respective percentage of total revenue:

 

 

 

Year Ended December 31,

 

 

 

2017 (1)

 

 

2016 (1)

 

 

 

$

 

 

% of

revenue

 

 

$

 

 

% of

revenue

 

 

 

(In thousands, except percentages)

 

United States

 

$

134,676

 

 

 

72

%

 

$

92,116

 

 

 

70

%

EMEA (2)

 

 

33,097

 

 

 

18

%

 

 

25,668

 

 

 

19

%

Rest of the World (2)

 

 

18,283

 

 

 

10

%

 

 

14,628

 

 

 

11

%

Total revenue

 

$

186,056

 

 

 

100

%

 

$

132,412

 

 

 

100

%

 

(1)

The comparative information for years prior to 2018 has not been adjusted to reflect the adoption of the revised standard and is reported on an ASC 605 basis. For additional information see Note 3 of our accompanying Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

(2)

No single country represented more than 10% of our consolidated revenue.

Gross Profit and Gross Margin

 

 

 

Year Ended December 31,

 

 

 

2017 (1)

 

 

2016 (1)

 

 

variance $

 

 

variance %

 

 

 

(In thousands, except percentages)

 

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

$

74,648

 

 

$

50,117

 

 

$

24,531

 

 

 

49

%

Subscription

 

 

54,601

 

 

 

36,313

 

 

 

18,288

 

 

 

50

%

Services and other

 

 

12,217

 

 

 

8,944

 

 

 

3,273

 

 

 

37

%

Total gross profit

 

$

141,466

 

 

$

95,374

 

 

$

46,092

 

 

 

48

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

 

94

%

 

 

92

%

 

 

 

 

 

 

 

 

Subscription

 

 

77

%

 

 

74

%

 

 

 

 

 

 

 

 

Services and other

 

 

34

%

 

 

31

%

 

 

 

 

 

 

 

 

Total gross margin

 

 

76

%

 

 

72

%

 

 

 

 

 

 

 

 

 

(1)

The comparative information for years prior to 2018 has not been adjusted to reflect the adoption of the revised standard and is reported on an ASC 605 basis. For additional information see Note 3 of our accompanying Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

 

Licenses. License gross profit increased by $24.5 million, or 49%, during the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase was the result of increased license revenues with only minor increases in third party royalties.

 

59

 

Subscription. Subscription gross profit increased by $18.3 million, or 50%, during the year ended December 31, 2017, compared to the year ended December 31, 2016. The increase was the result of growth in subscription revenue, as described above, coupled with growth in costs of subscription revenue at a rate lower than our revenue growth as we continue to build economies of scale within our customer support organization and our utilization of cloud-based hosting services.

 

Services and Other. Services and other gross profit increased by $3.3 million, or 37%, during the year ended December 31, 2017, compared to the year ended December 31, 2016. This increase was the result of the volume and mix of services provided in the period yielding a higher price per hour as well as the headcount required to provide such professional services increasing at a slower rate as we continue to build economies of scale within our professional services and training organization.

Operating Expenses

 

 

 

Year Ended December 31,

 

 

 

2017 (1)

 

 

2016 (1)

 

 

variance $

 

 

variance %

 

 

 

(In thousands, except percentages)

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

33,331

 

 

$

24,358

 

 

$

8,973

 

 

 

37

%

General and administrative

 

 

17,678

 

 

 

9,680

 

 

 

7,998

 

 

 

83

%

Sales and marketing

 

 

80,514

 

 

 

58,607

 

 

 

21,907

 

 

 

37

%

Total operating expenses

 

$

131,523

 

 

$

92,645

 

 

$

38,878

 

 

 

42

%

 

(1)

The comparative information for years prior to 2018 has not been adjusted to reflect the adoption of the revised standard and is reported on an ASC 605 basis. For additional information see Note 3 of our accompanying Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

 

Research and Development Expenses. Research and development expenses increased by $9.0 million, or 37%, for the year ended December 31, 2017, compared to the year ended December 31, 2016. Approximately 81% of this increase was the result of an increase in headcount, and related allocated overhead, to optimize and expand our product offerings as well as pursue innovation in identity governance. Substantially all of the remaining increase in research and development expenses was the result of increased software and maintenance expenses, primarily cloud-based hosting costs related to the development of our cloud-based offering.

 

General and Administrative Expenses. General and administrative expenses increased by $8.0 million, or 83%, for the year ended December 31, 2017, compared to the year ended December 31, 2016. Approximately 77% of the increase was the result of an increase in corporate headcount, and related allocated overhead, to support the growth and scale of the business. In 2017, approximately $2.0 million of increase was related to stock-based compensation expense compared to 2016. Additionally, general and administrative expenses increased as a result of increase in professional services expenses comprised of legal, accounting and consulting fees.

 

Sales and Marketing Expenses. Sales and marketing expenses increased by $21.9 million, or 37%, for the year ended December 31, 2017, compared to the year ended December 31, 2016. Approximately $17.4 million, or 80%, of the increase was the result of our increased sales and marketing headcount, and related allocated overhead, to support increased penetration into our existing customer base as well as expansion into new industry verticals and geographic markets. As our headcount increased, we also experienced related increases in travel and advertising costs of $1.2 million and $1.7 million, respectively, for the year ended December 31, 2017, compared to the year ended December 31, 2016. Substantially all of the remaining increase in sales and marketing expenses was the result of increased partner commissions and consulting costs.

 

60

 

Interest Expense, Net

 

Interest expense, net of interest income, increased by $7.3 million, or 93%, for the year ended December 31, 2017, compared to the year ended December 31, 2016. These increases were the result of our entry into a new credit facility, effective in August 2016, which increased the stated interest rate from 3.7% to 9.0%, as well as our amendment in June of 2017, which increased the term loan principal by $50 million. Additionally, during the fourth quarter of 2017, we paid down $90.0 million of our debt resulting in approximately $1.4 million of cash prepayment penalties and $1.7 million in a non-cash loss on the resulting modification and partial extinguishment of our debt.

 

Selected Quarterly Financial Data (Unaudited)

 

The following table sets forth selected summarized unaudited quarterly financial information for the years ended December 31, 2018 and 2017. The information for each quarter has been prepared on a basis consistent with our audited consolidated financial statements, and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair presentation of the financial information contained in those statements. The following quarterly financial data should be read in conjunction with our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

2018:

 

 

 

Three Months Ended

 

 

 

12/31/2018

 

 

9/30/2018

 

 

6/30/2018

 

 

3/31/2018

 

 

12/31/2018

 

 

9/30/2018

 

 

6/30/2018

 

 

3/31/2018

 

 

 

with adoption (ASC 606)

 

 

without adoption (ASC 605)

 

 

 

(In thousands, except share and per share data)

 

Total revenue

 

$

80,588

 

 

$

65,735

 

 

$

53,656

 

 

$

48,941

 

 

$

77,782

 

 

$

66,419

 

 

$

54,560

 

 

$

49,714

 

Gross profit

 

$

66,078

 

 

$

51,721

 

 

$

40,280

 

 

$

36,171

 

 

$

63,272

 

 

$

52,405

 

 

$

41,184

 

 

$

36,944

 

Income (loss) from operations

 

$

11,189

 

 

$

4,783

 

 

$

(1,352

)

 

$

(3,707

)

 

$

7,228

 

 

$

4,510

 

 

$

(1,837

)

 

$

(4,290

)

Net income (loss)

 

$

5,143

 

 

$

1,808

 

 

$

(979

)

 

$

(2,302

)

 

$

5,979

 

 

$

3,302

 

 

$

(5,647

)

 

$

(5,967

)

Net income (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

$

0.06

 

 

$

0.02

 

 

$

(0.01

)

 

$

(0.03

)

 

$

0.07

 

 

$

0.04

 

 

$

(0.07

)

 

$

(0.07

)

Diluted:

 

$

0.06

 

 

$

0.02

 

 

$

(0.01

)

 

$

(0.03

)

 

$

0.07

 

 

$

0.04

 

 

$

(0.07

)

 

$

(0.07

)

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

87,171,161

 

 

 

86,825,168

 

 

 

86,246,056

 

 

 

85,719,240

 

 

 

87,171,161

 

 

 

86,825,168

 

 

 

86,246,056

 

 

 

85,719,240

 

Diluted:

 

 

90,234,993

 

 

 

90,355,212

 

 

 

86,246,056

 

 

 

85,719,240

 

 

 

90,234,993

 

 

 

90,355,212

 

 

 

86,246,056

 

 

 

85,719,240

 

 

2017:

 

 

 

Three months ended

 

 

 

12/31/2017

 

 

9/30/2017

 

 

6/30/2017

 

 

3/31/2017

 

 

 

as previously reported (ASC 605)

 

 

 

(in thousands, except share and per share data)

 

Total revenue

 

$

67,768

 

 

$

43,562

 

 

$

39,260

 

 

$

35,466

 

Gross profit

 

$

55,086

 

 

$

32,484

 

 

$

28,565

 

 

$

25,331

 

Income (loss) from operations

 

$

10,520

 

 

$

407

 

 

$

(1,183

)

 

$

199

 

Net income (loss)

 

$

5,382

 

 

$

(6,387

)

 

$

(4,304

)

 

$

(2,283

)

Net income (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

$

0.03

 

 

$

(0.24

)

 

$

(0.22

)

 

$

(0.18

)

Diluted:

 

$

0.03

 

 

$

(0.24

)

 

$

(0.22

)

 

$

(0.18

)

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

65,870,258

 

 

 

48,219,826

 

 

 

47,930,190

 

 

 

47,208,477

 

Diluted:

 

 

69,166,069

 

 

 

48,219,826

 

 

 

47,930,190

 

 

 

47,208,477

 

 

61

 

Seasonality and Quarterly Trends

 

Our quarterly results reflect seasonality in the sale of our products and services. 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 quarterly total revenue increased sequentially within each calendar year presented; however, we experienced a decline sequentially from the fourth quarter of each year to the first quarter of the subsequent year due to increased customer purchasing activity in each fourth quarter due to customer budget and purchasing trends. We continue to experience growth in revenue when comparing similar periods year over year as a result of our ability to attract new customers and expand our product offerings within our existing customer base.

 

Our operating expenses have generally increased sequentially as a result of our growth and are primarily related to increases in personnel-related costs to support our expanded operations and our continued investment in our platform infrastructure and service capabilities. Also, general and administrative expenses have increased as a result of being a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC and increased expenses for insurance, investor relations and professional services.

Quarterly Key Business Metrics

 

 

 

Three Months Ended

 

 

 

12/31/2018

 

 

9/30/2018

 

 

6/30/2018

 

 

3/31/2018

 

 

12/31/2017

 

 

 

 

9/30/2017

 

 

 

 

6/30/2017

 

 

 

 

3/31/2017

 

Number of customers

 

 

1,173

 

 

 

1,090

 

 

 

1,031

 

 

 

984

 

 

 

933

 

 

 

 

 

829

 

 

 

 

 

776

 

 

 

 

 

725

 

Subscription revenue as a

percentage of total revenue (1)

 

 

37

%

 

 

42

%

 

 

45

%

 

 

46

%

 

 

31

%

 

 

 

 

42

%

 

 

 

 

42

%

 

 

 

 

42

%

Adjusted EBITDA

(in thousands) (ASC 606) (1)

 

$

18,580

 

 

$

12,044

 

 

$

4,931

 

 

$

3,925

 

 

NA

 

 

 

 

NA

 

 

 

 

NA

 

 

 

 

NA

 

Adjusted EBITDA

(in thousands) (ASC 605)

 

$

14,619

 

 

$

11,771

 

 

$

4,446

 

 

$

3,342

 

 

$

17,116

 

 

 

 

$

3,376

 

 

 

 

$

1,857

 

 

 

 

$

3,152

 

 

(1)

The comparative information for years prior to 2018 has not been adjusted to reflect the adoption of the revised standard and is reported on an ASC 605 basis. For additional information see Note 3 of our accompanying Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

 

Our number of customers increased sequentially as of December 31, 2018 to 1,173 from 725 as of March 31, 2017. Our growth in customer count was driven by increased demand of our products and market acceptance of our subscription services as well as an increased presence of our product offerings across all of our geographies. The growth in our sales of product and services was consistent with our plans to continue expanding our global presence, through our channel partner network which allows us to target new customers while continuing to support our existing customers.

 

Our quarterly subscription revenue increased in each period presented primarily due to increases in maintenance renewals as a result of our expanding licensed customer base. Subscription revenue as a percentage of total revenue experienced a decline sequentially in fourth quarter of each year due to composition of revenue mix between license and subscription as well as timing of sales volume. For additional information see Seasonality and quarterly trend discussion above. Sales of subscriptions to our platform also continue to grow as a result of the expanding breadth and functionality of our platform, increasing brand awareness, and the success of our sales efforts with new and existing customers. We recognize revenue from maintenance and subscription fees ratably over the term of the contract period; therefore, changes in our sales activity in a period may not be as apparent as a change to our revenue until future periods.

 

62

 

Liquidity and Capital Resources

As of December 31, 2018, we had $71.0 million of cash and cash equivalents, of which, $3.4 million of cash and cash equivalents were held in our foreign subsidiaries. We do not consider the earnings of our foreign subsidiaries, with the exception of India, to be permanently reinvested in foreign jurisdictions. Prior to the Tax Cuts and Jobs Act, the Company had consistently applied Section 956 to its intercompany cash flows. Under the Act, beginning in 2018, global intangible low-taxed income (“GILTI”) provisions apply providing an incremental tax on low taxed foreign income. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. As a result of applying these provisions, the majority of the earnings in our foreign subsidiaries represent income that was previously taxed in the United States. As a result, there would be no material income tax consequences to repatriating the cash currently held in our foreign subsidiaries. In India, we continue to invest and grow our research and development activities and have no plans to repatriate undistributed earning held in India back to the U.S. parent company, and therefore consider earnings in India to be permanently reinvested.

We believe that existing cash and cash equivalents, any positive cash flows from operations and available borrowings under our credit agreement will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the continued expansion of sales and marketing activities and the introduction of new solutions and product enhancements. To the extent existing cash and cash equivalents are not sufficient to fund future activities, we may seek to raise additional funds through equity, equity-linked or debt financings. Any additional equity financing may be dilutive to our existing stockholders. We may enter into agreements or letters of intent with respect to potential investments in, or acquisitions of, complementary businesses, services or technologies, which could also require us to seek additional equity financing, incur indebtedness, or use cash resources. Also, as of December 31, 2018 and 2017, we had no material commitments for capital expenditures.

Since inception, we have financed operations primarily through license fees, maintenance fees, subscription fees, consulting and training fees, borrowings under our prior credit agreement and, to a lesser degree, the sale of equity securities. Our principal uses of cash are funding operations and capital expenditures. Over the past several years, revenue has increased significantly from year to year and, as a result, cash flows from customer collections have increased. However, operating expenses have also increased as we have invested in growing our business. Our operating cash requirements may increase in the future as we continue to invest in the strategic growth of our company.

Credit Agreement

On March 11, 2019, we, SailPoint Technologies, Inc., as borrower, and certain of our other wholly owned subsidiaries entered into a credit agreement with the lenders party thereto, Citibank, N.A., as administrative agent, sole lead arranger and sole bookrunner, and Royal Bank of Canada and Bank of America, N.A., as co-documentation agents. Our credit agreement provides for an initial $150 million in commitments for revolving credit loans, with a $15 million letter of credit sublimit, which amount can be increased or decreased under specified circumstances. As of March 11,2019, we had no outstanding revolving credit loans. In addition, our credit agreement provides for the ability to incur uncommitted term loan facilities if, among other things, the Senior Secured Net Leverage Ratio (as defined in our credit agreement), calculated giving pro forma effect to the requested term loan facility, is no greater than 3.50 to 1.00.

Borrowings under our credit agreement are scheduled to mature in March 2024. Any borrowing under our credit agreement may be repaid, in whole or in part, at any time and from time to time without premium or penalty other than customary breakage costs, and any amounts repaid may be reborrowed.

The interest rates applicable to revolving credit loans under our credit agreement are, at the borrower’s option, either (i) a base rate, which is equal to the greatest of (a) the Prime Rate (as defined in our credit agreement), (b) the Federal Funds Effective Rate (as defined in our credit agreement) plus 1/2 of 1%, and (c) the one-month Adjusted LIBO Rate (as defined in our credit agreement) plus 1%, in each case, plus an interest margin ranging from 0.25% to 0.75% based on the Senior Secured Net Leverage Ratio, or (ii) the Adjusted LIBO Rate plus an interest margin ranging from 1.25% to 1.75% based on the Senior Secured Net Leverage Ratio. The Adjusted LIBO Rate cannot be less than zero. The borrower will pay an unused commitment fee during the term of our credit agreement ranging from 0.20% to 0.30% per annum based on the Senior Secured Net Leverage Ratio.

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We were previously party to a credit and guaranty agreement by and among SailPoint Technologies, Inc., as the borrower, and SailPoint Technologies Intermediate Holdings, LLC and SailPoint International, Inc., as guarantors, the lenders party thereto from time to time and Goldman Sachs Bank USA, as administrative agent and collateral agent, (as amended, the “prior credit agreement”), which provided for a term loan facility and a revolving credit facility with a letter of credit sub-facility. As of December 31, 2017, the balance outstanding under the term loan facility was $70.0 million, and our revolving credit facility had a face value of $7.5 million (under which we had no outstanding borrowings and $6.0 million outstanding under a letter of credit facility. The term loan facility and the revolving credit facility both had interest based on the adjusted LIBOR rate, as defined in the prior credit agreement, with a 1% floor plus an applicable margin of 4.5%. The term loan facility and revolving credit facility had a stated maturity of August 16, 2021. 

On June 29, 2018, we voluntarily prepaid $60.0 million of the borrowings outstanding under the term loan facility to reduce the aggregate outstanding principal balance to $10.0 million. On November 29, 2018, we repaid the remaining balance of $10.0 million of borrowings outstanding under the term loan facility, cancelled the $6.0 million standby letter of credit (the “prior letter of credit”) and terminated the prior credit agreement. To replace the prior letter of credit, in November 2018, on behalf of the Company, U.S. Bank National Association issued an irrevocable, cash collateralized, unconditional standby letter of credit in an aggregate amount of $6.0 million under the Company’s corporate headquarters lease. See Item 2 “Properties” for more information regarding our new corporate headquarters lease.

Summary of Cash Flows

 

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

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2018

 

 

2017

 

 

2016

 

 

 

with adoption

(ASC 606)

 

 

without

adoption

(ASC 605)

 

 

as previously reported

(ASC 605)

 

 

 

(In thousands)

 

Net cash provided by operating activities

 

$

37,540

 

 

$

37,540

 

 

$

21,856

 

 

$

6,540

 

Net cash used in investing activities

 

 

(10,856

)

 

 

(10,856

)

 

 

(2,521

)

 

 

(1,255

)

Net cash (used in) provided by financing activities

 

 

(65,575

)

 

 

(65,575

)

 

 

78,520

 

 

 

(1,962

)

Net (decrease) increase in cash, cash equivalents and restricted cash

 

$

(38,891

)

 

$

(38,891

)

 

$

97,855

 

 

$

3,323

 

 

Cash Flows from Operating Activities

During 2018, cash provided by operating activities was $37.5 million, which consisted of ASC 606 net income of $3.7 million, adjusted by non-cash charges of $40.5 million and a net change of $6.7 million in our net operating assets and liabilities. The non-cash charges are primarily comprised of depreciation and amortization of $10.7 million, amortization of debt issuance costs of $0.2 million, amortization of contract acquisition costs of $7.8 million, losses on modification and subsequent extinguishment of debt of $1.8 million, bad debt expense of $2.3 million, stock-based compensation of $19.0 million and partially offset by a reduction in deferred tax liabilities of $1.3 million. The change in our net operating assets and liabilities was primarily as a result of an increase in accounts receivable of $31.3 million due to the timing of receipts of payments from customers, an increase in prepayments and other assets of $17.4 million due to deferral of contract acquisition costs, and a decrease in accrued expenses and other liabilities of $0.9 million, partially offset by an increase in deferred revenue of $39.9 million due to the timing of billings and cash received in advance of revenue recognition primarily for subscription and support services, an increase in accounts payable of $2.4 million due to timing of cash disbursements and, an increase in income taxes payable of $0.5 million.

During 2017, cash provided by operating activities was $21.9 million, which consisted of a net loss of $7.6 million, adjusted by non-cash charges of $20.2 million and a net change of $9.2 million in our net operating assets and liabilities. The non-cash charges are primarily comprised of depreciation and amortization of $10.2 million, amortization of debt issuance costs of $0.7 million, loss on modification and partial extinguishment of debt of $1.7 million, amortization of contract acquisition costs of $3.0 million and stock-based compensation of $4.5 million. The change in our net operating assets and liabilities was primarily as a result of an increase in deferred revenue of $28.0 million due to the timing of billings and cash received in advance of revenue recognition primarily for subscription

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and support services, an increase in accrued expenses of $10.9 million due primarily to accrual of additional commissions and bonuses, an increase in accounts payable of $1.4 million due to timing of cash disbursements, an increase in income taxes payable of $0.6 million, partially offset by an increase in prepayments and other assets of $5.2 million, and increase in other non-current assets of $2.5 million, and an increase in accounts receivable of $24.1 million due to the timing of receipts of payments from customers.

During 2016, cash provided by operating activities was $6.5 million, which consisted of a net loss of $3.2 million, adjusted by non-cash charges of $10.0 million and a net change of $0.3 million in our net operating assets and liabilities. The non-cash charges are primarily comprised of depreciation and amortization of $10.0 million, amortization of debt issuance costs of $0.7 million, amortization of contract acquisition costs of $1.3 million, and stock-based compensation of $0.6 million, partially offset by $2.5 million in deferred taxes. The change in our net operating assets and liabilities was primarily as a result of an increase in deferred revenue of $20.2 million due to the timing of billings and cash received in advance of revenue recognition primarily for subscription and support services and an increase in accrued expenses of $1.7 million related primarily to commissions on our subscription revenue, partially offset by an increase in accounts receivable of $17.2 million due to the timing of receipts of payments from customers, an increase in prepayments and other assets of $4.9 million due to payments for various services to be rendered in subsequent periods and a decrease in accounts payable of $0.3 million due to timing of cash disbursements.

Cash Flows from Investing Activities

During 2018, cash used in investing activities was $10.9 million, consisting of $2.5 million in acquisitions of intangibles and $8.4 million in purchases of property and equipment, partially offset by proceeds from sales of property and equipment.

During 2017, cash used in investing activities was $2.5 million, consisting of $2.7 million in purchases of property and equipment, partially offset by $0.2 million in proceeds from sales of property and equipment.

During 2016, cash used in investing activities was $1.3 million, consisting of purchases of property and equipment.

Cash Flows from Financing Activities

During 2018, cash used in financing activities was $65.6 million, consisting of $70.0 million in repayments of debt, $0.4 million in debt prepayment penalties, $0.3 million in vesting of restricted stock units, primarily related to tax payments funded in the form of net issuances for certain executive officers, partially offset by $3.3 million of proceeds from issuance of equity, primarily related to shares issues pursuant to our Employee Stock Purchase Plan, and $1.8 million of the proceeds from exercise of stock options.

During 2017, cash provided by financing activities was $78.5 million, consisting of $172.0 million of net proceeds from the issuance of common stock after deducting underwriting discounts and commissions of approximately $13.3 million, proceeds from borrowing of $50.0 million, $0.4 million of the proceeds from exercise of stock options, partially offset by $90.0 million in repayments of debt, $1.4 million of debt issuance cost, $50.4 million for preferred dividend payments, $1.4 million in debt prepayment and $0.7 million in purchase of equity shares.

During 2016, cash used in financing activities was $2.0 million, consisting of $3.1 million in debt issuance costs and $0.2 million for the repurchase of common and preferred stock, partially offset by $1.3 million in proceeds from the issuance of common and preferred stock.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities, which includes special purposes entities and other structured finance entities.

65

 

Contractual Obligations

 

Our principal commitments consist of obligations under leases for office space. The following table summarizes our non-cancellable contractual obligations as of December 31, 2018:

 

 

 

Payments Due by Period

 

 

 

 

 

 

 

Less Than

 

 

 

 

 

 

 

 

 

 

More than

 

 

 

Total

 

 

1 Year

 

 

1 to 3 Years

 

 

3 to 5 Years

 

 

5 Years

 

 

 

(In thousands)

 

Operating lease obligations (1)

 

$

49,611

 

 

$

3,112

 

 

$

9,451

 

 

$

9,473

 

 

$

27,575

 

Contractual commitments, including hosting service agreements (2)

 

 

8,713

 

 

 

6,006

 

 

 

2,707

 

 

 

—

 

 

 

—

 

Total

 

$

58,324

 

 

$

9,118

 

 

$

12,158

 

 

$

9,473

 

 

$

27,575

 

 

(1)

Consists of future non-cancelable minimum rental payments under operating leases for our offices, primarily our corporate headquarters in Austin. See Item 2 of this Annual Report for more information.

(2)

Our purchase orders represent authorizations to purchase rather than binding agreements and therefore not included in the table above. The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without significant penalty are not included in the table above.

 

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. Our estimates are based on our 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. Actual results may differ from these judgments and estimates under different assumptions or conditions and any such differences may be material. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

 

We believe that the accounting policies associated with revenue recognition, share-based compensation, income taxes and goodwill are the most significant areas involving management's judgments and estimates. Therefore, these are considered to be our critical accounting policies and estimates. For further information on all of our significant accounting policies, see Note 2 of our accompanying Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Revenue Recognition

Revenue consists of fees for perpetual and term licenses for our software products, post-contract customer support (referred to as maintenance), professional services which includes training, software as a service (“SaaS”) and other revenue. We derive revenue through the sale of our on-premises software license agreements. We typically recognize license revenue upon delivering the applicable license.

 

We apply judgment regarding contracts with multiple product and service obligations to determine whether each product or service is capable of being a distinct performance obligation in the contract. If products and services are not distinct, they are combined until a single distinct obligation is created. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. We have contracts with customers that may have multiple performance obligations, including some or all of the following, software licenses, maintenance, subscriptions, professional services.

 

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Judgment is required to determine the standalone selling price (“SSP") for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately. We use a range to determine SSP based on the selling price of the products and services when sold separately. The SSP range is used to allocate each performance obligation in a contract to the transaction price and to apply a discount that will be allocated based on the relative SSP of the various products and services. 

 

When we do not have a directly observable SSP for a particular good or service, we estimate SSP by our overall pricing objectives, taking into consideration market factors, pricing practices including historical discounting, historical standalone sales of similar products, customer demographics, geographic locations, and the number and types of users within our contracts. The determination of standalone selling price is made by the Company’s management.

 

We generally have standalone value for our professional services and recognize revenue as services are performed based on an estimated fair value as a separate performance obligation.

 

We allocate the transaction price to each performance obligation identified in the contract on a relative SSP and recognizes revenue when or as it satisfies a performance obligation by transferring control of a product or service to a customer.

 

We dos not incur shipping and handling for its goods as they are generally delivered to a customer electronically. We do not believe that it currently has any rights to return that would result in a material impact to revenues.

 

The revised standard related to revenue recognition, Accounting Standard Update (ASU) 2014-09, Revenue from Contracts with Customers (Accounting Standards Codification or ASC 606), had a material impact in our consolidated financial statements. Refer to Note 3 of our accompanying Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Stock-Based Compensation

We recognize stock-based compensation expense related to equity awards, including stock options, restricted stock units, employee stock purchase plans and incentive units, granted based on the estimated fair value of the awards on the date of grant, net of estimated forfeitures. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of stock-based awards is expensed on a straight-line basis over the period during which the employee is required to provide service in exchange for the award (generally the vesting period).

The Black-Scholes option-pricing model requires the input of highly subjective assumptions. Our assumptions are as follows:

 

•

Expected volatility. As we have been a public company for a limited amount of time and do not have a sufficiently long trading history for our common stock, the expected stock price volatility for our common stock is estimated by taking the average historical price volatility for industry peers over a period equivalent to the expected term of the stock option grants. We intend to continue to consistently apply this process until a sufficient amount of historical information regarding the volatility of our own common stock price becomes available.

 

•

Risk-free interest rate. The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group.

 

•

Expected dividend yield. We have never declared or paid any cash dividends to common stockholders and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero.

 

•

Expected term. The expected term represents the period that our stock-based awards are expected to be outstanding. As we do not have sufficient historical experience for determining the expected term of the stock option awards granted, we base our expected term for awards issued to employees or members of our board of directors on the simplified method, which represents the average period from vesting to the expiration of the stock option.

67

 

In addition to the assumptions used in the Black-Scholes option-pricing model, we also estimate a forfeiture rate to calculate the stock-based compensation for our equity awards. We will continue to use judgment in evaluating the expected volatility, expected terms and forfeiture rates used for our stock-based compensation calculations on a prospective basis.

We analyze the facts and circumstances of each equity instrument to determine if modification accounting is required.  This analysis includes a review of factors that influence the probability of vesting.  If circumstances arise that have changed the probability that an equity instrument will vest, or other factors have triggered a modification, the revised fair value is calculated, and additional stock-based compensation is recognized over the remaining service period of the modified option.

Historically, for all periods prior to our initial public offering, the fair values of the shares of common stock underlying our stock-based awards were estimated on each grant date by our board of directors. In order to determine the fair value of our common stock underlying option grants, our board of directors considered, among other things, enterprise value of comparable public companies evaluated on a quarterly basis and the overall market and economic environment.

For stock awards after the completion of our initial public offering, our board of directors determines the fair value of each share of underlying common stock based on the closing price of our common stock as reported on the date of grant.

The Company also offers an Employee Stock Purchase Plan (“ESPP”) that allows permitted employees to purchase shares by authorizing payroll deductions from 1% to 15% of employee’s eligible compensation during the semi-annual offering period, with an annual cap of $25,000. Unless an employee has previously withdrawn from the offering, the payroll deductions will be used to purchase shares of common stock after the closing of the offering period at a price equal to 85% of the fair market value of the closing price of the shares at the opening or closing of the semi-annual offering period, whichever is lower.

ESPP purchase rights have an expected volatility that is based on the historical volatility of the common stock of a collection of our peers in the market. The expected term represents the period of time the ESPP purchase rights are expected to be outstanding and approximates the offering period.

Income Taxes

We are subject to federal, state and local taxes in the United States as well as in other tax jurisdictions or countries in which we conduct business. Earnings from our non-U.S. activities are subject to local country income tax and may be subject to current federal and state income tax in the United States.

We account for uncertain tax positions based on those positions taken or expected to be taken in a tax return. We determine if the amount of available support indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. We then measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement. We adjust reserves for our uncertain tax positions due to changing facts and circumstances. To the extent that the final outcome of these matters is different than the amounts recorded, such differences will impact our tax provision in our consolidated statements of operations in the period in which such determination is made.

As of December 31, 2018, we have a deferred tax liability of approximately $4.1 million.

Goodwill

Goodwill represents the excess of acquisition cost over the fair value of net tangible and identified net assets acquired. Goodwill and intangible assets that have indefinite lives are not be amortized, but rather tested for impairment annually, or more often if and when events or circumstances indicate that the carrying value may not be recoverable. We have determined that we operate as one reporting unit and may first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is “more likely than not” that the fair value of the reporting unit is less than its carrying amount and whether the two-step impairment test on goodwill is required. Goodwill is tested using a two-step process. The first step of the goodwill impairment test, used

68

 

to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, and thus the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to the excess. The loss recognized cannot exceed the carrying amount of goodwill. After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill shall be its new accounting basis. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized equal to the difference. Goodwill is tested on an annual basis during the fourth quarter, or sooner if an indicator of impairment occurs. The company internally monitors business and market conditions for evidence of triggering events.  There were no triggering events for any of the asset types through October 31, 2018 or any material change in business trends indicating the need for impairment loss. As of October 31, 2018, the Company performed qualitative analysis and concluded impairment for goodwill, including intangibles, was not required. Hence, the first and second step was not required for 2018. There were no impairments of goodwill during the years ended December 31, 2018, 2017 and 2016.

The Jumpstart Our Business Startups Act (“JOBS”) Act Accounting Election

We were an emerging growth company (“EGC”), as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We had elected to take advantage of all of the reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards, until we are no longer an emerging growth company. Effective July 1, 2018, the Company lost its EGC status which accelerated the requirement of ASC 606 adoption. As a result, the Company adjusted its previously reported consolidated financial statements effective January 1, 2018 in this 10-K report and amendment to previously filed 10-Q reports were not required.

Recent Accounting Pronouncements

For a description of our recently adopted accounting pronouncements and recently issued accounting standards not yet adopted, see Note 2 of our accompanying Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Risk

We had cash and cash equivalents of $77.2 million and $116.1 million, including restricted cash of $6.3 million and $0.1 million as of December 31, 2018 and 2017, respectively. Our cash and cash equivalents are held in cash deposits and money market funds. Due to the short-term nature of these instruments, we do not believe that we have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates.

We did not have any current investments in marketable securities as of December 31, 2018 and 2017.

69

 

Foreign Currency Exchange Risk

Our reporting currency is the U.S. dollar. Due to our international operations, we have foreign currency risks related to operating expenses denominated in currencies other than the U.S. dollar, primarily the Euro, British Pound, Swiss Franc, Israeli Shekel and the Indian Rupee. As of December 31, 2018 and 2017, our cash and cash equivalents included $3.4 million and $3.2 million, respectively, held in currencies other than the U.S. dollar. Decreases in the relative value of the U.S. dollar to other currencies may negatively affect our operating results as expressed in U.S. dollars. These amounts are included in other expense, net on our consolidated statements of operations.

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates because, although substantially all of our revenue is generated in U.S. dollars, our expenses are generally denominated in the currencies of the jurisdictions in which we conduct our operations, which are primarily in the United States, Europe and Asia. Our results of operations and cash flows could therefore be adversely affected in the future due to changes in foreign exchange rates. We do not believe that an immediate 10% increase or decrease in the relative value of the U.S. dollar to other currencies would have a material effect on our results of operations or cash flows, and to date, we have not engaged in any hedging strategies with respect to foreign currency transactions. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in currency rates, and we may choose to engage in the hedging of foreign currency transactions in the future.

Inflation Risk

We do not believe that inflation has had a material effect on our business, financial condition or results of operations in 2018, 2017 or 2016 because substantially all of our sales are denominated in U.S. dollars, which have not been subject to material currency inflation, and our operating expenses that are denominated in currencies other than U.S. dollars have not been subject to material currency inflation.

 

70

 

Item 8. Financial Statements and Supplementary Data

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Reports of Independent Registered Public Accounting Firm

72

Consolidated Balance Sheets as of December 31, 2018 and 2017

75

Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016

76

Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the years ended December 31, 2018, 2017 and 2016

77

Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016

78

Notes to Consolidated Financial Statements

79

71

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Stockholders

SailPoint Technologies Holdings, Inc.

 

Opinion on the financial statements

 

We have audited the accompanying consolidated balance sheets of SailPoint Technologies Holdings, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2018 and 2017 and the related consolidated statements of operations, redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018 based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 18, 2019 expressed an adverse opinion.

 

Change in accounting principles

 

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for revenue from contracts with customers in 2018 due to the adoption of ASC 606 “Revenue from contracts with customers”. The Company adopted the new revenue standard using the modified retrospective approach with an adjustment to retained earnings as of January 1, 2018 for the cumulative effect of adoption.

 

Basis for opinion

 

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

 

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

 

/s/ GRANT THORNTON LLP

We have served as the Company’s auditor since 2010

Denver, Colorado

March 18, 2019

 

72

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Stockholders

SailPoint Technologies Holdings, Inc.

 

Opinion on internal control over financial reporting

 

We have audited the internal control over financial reporting of SailPoint Technologies Holdings, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2018, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, because of the effect of the material weaknesses described in the following paragraphs on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2018, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.

 

A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment.

 

 

•

There are ineffective internal controls related to the accounting for certain complex or non-routine transactions, including equity compensation and the adoption of new accounting standards.

 

 

•

Certain internal controls related to the recording and processing of revenue transactions are not designed or operating at a precise enough level to prevent or detect errors and insufficient documentation exists to support the operating effectiveness of these controls.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2018. The material weaknesses identified above were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2018 consolidated financial statements, and this report does not affect our report dated March 18, 2019 which expressed an unqualified opinion on those financial statements.

 

Basis for opinion

 

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

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and limitations of internal control over financial reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that

73

 

transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

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

 

/s/ GRANT THORNTON LLP

Denver, Colorado  

March 18, 2019

 

74

 

Sailpoint technologies HoldingS, Inc. and subsidiaries
Consolidated Balance Sheets

 

 

 

As of December 31,

 

 

 

2018

 

 

2017

 

 

 

(In thousands, except share and per share data)

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

70,964

 

 

$

116,049

 

Restricted cash

 

 

6,272

 

 

 

78

 

Accounts receivable

 

 

101,469

 

 

 

72,907

 

Prepayments and other current assets

 

 

21,850

 

 

 

10,013

 

Total current assets

 

 

200,555

 

 

 

199,047

 

Property and equipment, net

 

 

19,268

 

 

 

3,018

 

Deferred tax asset - non-current

 

 

—

 

 

 

264

 

Other non-current assets

 

 

20,374

 

 

 

3,542

 

Goodwill

 

 

219,377

 

 

 

219,377

 

Intangible assets, net

 

 

74,860

 

 

 

81,185

 

Total assets

 

$

534,434

 

 

$

506,433

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,636

 

 

$

2,231

 

Accrued expenses and other liabilities

 

 

21,731

 

 

 

22,636

 

Income taxes payable

 

 

2,143

 

 

 

1,688

 

Deferred revenue - current

 

 

95,919

 

 

 

73,671

 

Total current liabilities

 

 

124,429

 

 

 

100,226

 

Deferred tax liability - non-current

 

 

4,142

 

 

 

—

 

Long-term debt

 

 

—

 

 

 

68,329

 

Other long-term liabilities

 

 

9,788

 

 

 

27

 

Deferred revenue - non-current

 

 

18,382

 

 

 

9,454

 

Total liabilities

 

 

156,741

 

 

 

178,036

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value, authorized 300,000,000 shares, issued and outstanding 87,512,175 and 84,948,126 shares at December 31, 2018 and 2017, respectively

 

 

9

 

 

 

8

 

Preferred stock, $0.0001 par value, authorized 10,000,000 shares, no shares issued and outstanding at December 31, 2018 and 2017

 

 

—

 

 

 

—

 

Additional paid in capital

 

 

377,473

 

 

 

353,609

 

Retained earnings (accumulated deficit)

 

 

211

 

 

 

(25,220

)

Total stockholders' equity

 

 

377,693

 

 

 

328,397

 

Total liabilities and stockholders’ equity

 

$

534,434

 

 

$

506,433

 

 

See accompanying notes to consolidated financial statements.

75

 

Sailpoint technologies Holdings, Inc. and subsidiaries

Consolidated Statements of Operations

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

 

 

(In thousands, except share and per share data)

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

$

105,000

 

 

$

79,209

 

 

$

54,395

 

Subscription

 

 

104,033

 

 

 

71,007

 

 

 

49,364

 

Services and other

 

 

39,887

 

 

 

35,840

 

 

 

28,653

 

Total revenue

 

 

248,920

 

 

 

186,056

 

 

 

132,412

 

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

 

4,634

 

 

 

4,561

 

 

 

4,278

 

Subscription

 

 

20,734

 

 

 

16,406

 

 

 

13,051

 

Services and other

 

 

29,302

 

 

 

23,623

 

 

 

19,709

 

Total cost of revenue

 

 

54,670

 

 

 

44,590

 

 

 

37,038

 

Gross profit

 

 

194,250

 

 

 

141,466

 

 

 

95,374

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

43,154

 

 

 

33,331

 

 

 

24,358

 

General and administrative

 

 

34,781

 

 

 

17,678

 

 

 

9,680

 

Sales and marketing

 

 

105,402

 

 

 

80,514

 

 

 

58,607

 

Total operating expenses

 

 

183,337

 

 

 

131,523

 

 

 

92,645

 

Income from operations

 

 

10,913

 

 

 

9,943

 

 

 

2,729

 

Other expense, net:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(4,707

)

 

 

(14,783

)

 

 

(7,277

)

Other, net

 

 

(1,446

)

 

 

(459

)

 

 

(610

)

Total other expense, net

 

 

(6,153

)

 

 

(15,242

)

 

 

(7,887

)

Income (loss) before income taxes

 

 

4,760

 

 

 

(5,299

)

 

 

(5,158

)

Income tax (expense) benefit

 

 

(1,090

)

 

 

(2,293

)

 

 

1,985

 

Net income (loss)

 

$

3,670

 

 

$

(7,592

)

 

$

(3,173

)

Net income (loss) available to common stockholders

 

$

3,641

 

 

$

(28,721

)

 

$

(26,791

)

Net income (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.04

 

 

$

(0.55

)

 

$

(0.58

)

Diluted

 

$

0.04

 

 

$

(0.55

)

 

$

(0.58

)

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

86,495,301

 

 

 

52,339,804

 

 

 

45,933,218

 

Diluted

 

 

90,002,752

 

 

 

52,339,804

 

 

 

45,933,218

 

 

See accompanying notes to consolidated financial statements.

76

 

Sailpoint technologies Holdings, Inc. and subsidiaries

Consolidated Statements of Redeemable Convertible Preferred Stock and

Stockholders’ Equity (Deficit)

 

 

Redeemable Convertible

Preferred Stock

 

 

 

Common Stock

 

 

Treasury Stock

 

 

Additional

 

 

Retained

earnings

 

 

Stockholders'

 

 

Number

of shares

 

 

Amount

 

 

 

Number

of shares

 

 

Par

value

 

 

Number

of shares

 

 

Amount

 

 

paid in

capital

 

 

(accumulated

deficit)

 

 

equity

(deficit)

 

 

 

 

 

 

(In thousands, except share data)

 

Balance at December 31, 2015

 

222,898

 

 

$

222,898

 

 

 

 

44,736,300

 

 

$

4

 

 

 

—

 

 

$

—

 

 

$

2,592

 

 

$

(14,455

)

 

$

(11,859

)

Issuance of preferred and common stock, net

 

1,263

 

 

 

1,263

 

 

 

 

36,079

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

66

 

 

 

—

 

 

 

66

 

Repurchase of preferred and common stock

 

(174

)

 

 

(174

)

 

 

 

(62,402

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(52

)

 

 

—

 

 

 

(52

)

Exercise of stock options

 

—

 

 

 

—

 

 

 

 

10,568

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

18

 

 

 

—

 

 

 

18

 

Capital contribution

 

—

 

 

 

—

 

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

459

 

 

 

—

 

 

 

459

 

Stock-based compensation expense

 

—

 

 

 

—

 

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

568

 

 

 

—

 

 

 

568

 

Incentive units vested

 

—

 

 

 

—

 

 

 

 

1,676,824

 

 

 

1

 

 

 

—

 

 

 

—

 

 

 

88

 

 

 

—

 

 

 

89

 

Net loss

 

—

 

 

 

—

 

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(3,173

)

 

 

(3,173

)

Balance at December 31, 2016

 

223,987

 

 

$

223,987

 

 

 

 

46,397,369

 

 

$

5

 

 

 

—

 

 

$

—

 

 

$

3,739

 

 

$

(17,628

)

 

$

(13,884

)

Issuance of preferred and common stock, net

 

—

 

 

 

—

 

 

 

 

15,800,000

 

 

 

1

 

 

 

—

 

 

 

—

 

 

 

171,979

 

 

 

—

 

 

 

171,980

 

Conversion of preferred stock to common stock upon initial public offering

 

(223,816

)

 

 

(173,429

)

 

 

 

20,500,400

 

 

 

2

 

 

 

—

 

 

 

—

 

 

 

173,427

 

 

 

—

 

 

 

173,429

 

Repurchase of preferred and common stock

 

(171

)

 

 

(171

)

 

 

 

—

 

 

 

—

 

 

 

190,434

 

 

 

(487

)

 

 

—

 

 

 

—

 

 

 

(487

)

Exercise of stock options

 

—

 

 

 

—

 

 

 

 

160,680

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

359

 

 

 

—

 

 

 

359

 

Preferred dividend payment

 

—

 

 

 

(50,387

)

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Treasury stock activity

 

—

 

 

 

—

 

 

 

 

(112,772

)

 

 

—

 

 

 

(190,434

)

 

 

487

 

 

 

(487

)

 

 

—

 

 

 

—

 

Stock-based compensation expense

 

—

 

 

 

—

 

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4,514

 

 

 

—

 

 

 

4,514

 

Incentive units vested

 

—

 

 

 

—

 

 

 

 

2,202,449

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

78

 

 

 

—

 

 

 

78

 

Net loss

 

—

 

 

 

—

 

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(7,592

)

 

 

(7,592

)

Balance at December 31, 2017

 

—

 

 

$

—

 

 

 

 

84,948,126

 

 

$

8

 

 

 

—

 

 

$

—

 

 

$

353,609

 

 

$

(25,220

)

 

$

328,397

 

Cumulative effect adjustment from the adoption of ASC 606

 

—

 

 

 

—

 

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

21,761

 

 

 

21,761

 

Exercise of stock options

 

—

 

 

 

—

 

 

 

 

637,188

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,809

 

 

 

—

 

 

 

1,809

 

Stock-based compensation expense

 

—

 

 

 

—

 

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

18,975

 

 

 

—

 

 

 

18,975

 

Incentive units vested

 

—

 

 

 

—

 

 

 

 

1,502,726

 

 

 

1

 

 

 

—

 

 

 

—

 

 

 

77

 

 

 

—

 

 

 

78

 

Restricted stock units vested, net of tax settlement

 

—

 

 

 

—

 

 

 

 

256,325

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(348

)

 

 

—

 

 

 

(348

)

Common stock issued under employee stock plans

 

—

 

 

 

—

 

 

 

 

167,810

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

3,351

 

 

 

—

 

 

 

3,351

 

Net income

 

—

 

 

 

—

 

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

3,670

 

 

 

3,670

 

Balance at December 31, 2018

 

—

 

 

$

—

 

 

 

 

87,512,175

 

 

$

9

 

 

 

—

 

 

$

—

 

 

$

377,473

 

 

$

211

 

 

$

377,693

 

 

See accompanying notes to consolidated financial statements.

77

 

Sailpoint technologies HoldingS, Inc. and subsidiaries

Consolidated Statements of Cash Flows

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

 

 

(In thousands)

 

Operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

3,670

 

 

$

(7,592

)

 

$

(3,173

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

10,736

 

 

 

10,220

 

 

 

9,982

 

Amortization of loan origination fees

 

 

238

 

 

 

746

 

 

 

749

 

Amortization of contract acquisition costs

 

 

7,753

 

 

 

3,008

 

 

 

1,281

 

Loss on modification and extinguishment of debt

 

 

1,848

 

 

 

1,702

 

 

 

—

 

(Gain) loss on disposal of fixed assets

 

 

(20

)

 

 

(20

)

 

 

5

 

Bad debt expense

 

 

2,332

 

 

 

—

 

 

 

—

 

Stock-based compensation expense

 

 

18,975

 

 

 

4,514

 

 

 

568

 

Deferred taxes

 

 

(1,280

)

 

 

69

 

 

 

(2,537

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(31,249

)

 

 

(24,116

)

 

 

(17,245

)

Prepayments and other current assets

 

 

(13,742

)

 

 

(5,182

)

 

 

(4,060

)

Other non-current assets

 

 

(3,599

)

 

 

(2,453

)

 

 

(857

)

Accounts payable

 

 

2,406

 

 

 

1,443

 

 

 

(262

)

Accrued expenses and other liabilities

 

 

(882

)

 

 

10,882

 

 

 

1,712

 

Income taxes

 

 

455

 

 

 

614

 

 

 

161

 

Deferred revenue

 

 

39,899

 

 

 

28,021

 

 

 

20,216

 

Net cash provided by operating activities

 

 

37,540

 

 

 

21,856

 

 

 

6,540

 

Investing activities

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of intangibles

 

 

(2,500

)

 

 

—

 

 

 

—

 

Purchase of property and equipment

 

 

(8,389

)

 

 

(2,711

)

 

 

(1,263

)

Proceeds from sale of property and equipment

 

 

33

 

 

 

190

 

 

 

8

 

Net cash used in investing activities

 

 

(10,856

)

 

 

(2,521

)

 

 

(1,255

)

Financing activities

 

 

 

 

 

 

 

 

 

 

 

 

Repayments of line of credit

 

 

—

 

 

 

—

 

 

 

(10,000

)

Proceeds from term loan

 

 

—

 

 

 

50,000

 

 

 

115,000

 

Repayments of term loan

 

 

(70,000

)

 

 

(90,000

)

 

 

(105,000

)

Prepayment penalty and fees

 

 

(387

)

 

 

(1,390

)

 

 

—

 

Dividend payments

 

 

—

 

 

 

(50,387

)

 

 

—

 

Debt issuance costs

 

 

—

 

 

 

(1,384

)

 

 

(3,083

)

Proceeds from issuance of equity

 

 

3,351

 

 

 

171,980

 

 

 

1,329

 

Repurchase of equity shares

 

 

—

 

 

 

(658

)

 

 

(226

)

Taxes associated with net issuances of shares upon vesting of restricted stock units

 

 

(348

)

 

 

—

 

 

 

—

 

Exercise of stock options

 

 

1,809

 

 

 

359

 

 

 

18

 

Net cash (used in) provided by financing activities

 

 

(65,575

)

 

 

78,520

 

 

 

(1,962

)

Net (decrease) increase in cash, cash equivalents and restricted cash

 

 

(38,891

)

 

 

97,855

 

 

 

3,323

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

116,127

 

 

 

18,272

 

 

 

14,949

 

Cash, cash equivalents and restricted cash, end of period

 

$

77,236

 

 

$

116,127

 

 

$

18,272

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,780

 

 

$

13,250

 

 

$

5,848

 

Cash paid for income taxes

 

$

1,631

 

 

$

1,612

 

 

$

406

 

Tenant improvement allowance

 

$

9,787

 

 

$

—

 

 

$

—

 

Conversion of redeemable convertible preferred stock to common stock

 

$

—

 

 

$

173,429

 

 

$

—

 

Conversion of prepaid incentive units to common stock (Note 10)

 

$

78

 

 

$

78

 

 

$

89

 

Forgiveness of liability to controlling entity

 

$

—

 

 

$

—

 

 

$

459

 

 

See accompanying notes to consolidated financial statements

78

 

Sailpoint technologies HoldingS, Inc. and subsidiaries

Notes to Consolidated Financial Statements

1. Organization and Description of Business

SailPoint Technologies Holdings, Inc., (“we”, “our” or “the Company”) was incorporated in the state of Delaware on August 8, 2014, in preparation for the purchase of SailPoint Technologies, Inc. The purchase occurred on September 8, 2014 and our certificate of incorporation was amended and restated as of such date. SailPoint Technologies, Inc. was formed July 14, 2004 as a Delaware corporation. The Company designs, develops, and markets identity governance software that helps organizations govern user access to critical systems and data. The Company currently markets its products and services throughout North America, Europe and the Asia Pacific regions.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements, which include the accounts of the Company and its wholly owned subsidiaries, have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include the accounts of SailPoint Technologies Holdings, Inc. and its subsidiaries, SailPoint Technologies Intermediate Holdings, LLC, SailPoint Technologies, Inc., SailPoint Technologies UK LTD, SailPoint Holdings, Inc., SailPoint International, Inc., SailPoint Technologies India Private LTD, SailPoint Technologies Netherlands B.V., SailPoint Technologies Israel Ltd, SailPoint Technologies SARL, SailPoint Technologies GmbH, and SailPoint Technologies Pte. Ltd. and Whitebox Security Ltd. All intercompany accounts and transactions have been eliminated in consolidation.

The Company operates as one operating segment. The Company’s chief operating decision makers, who review financial information presented on a consolidated basis for purposes of making operating decisions, assess financial performance and allocate resources.

 

Accounting Principles

 

We adopted the revised revenue recognition accounting standard, codified as Accounting Standards Codification (“ASC”) 606, effective January 1, 2018 on a modified retrospective basis (see Recently Adopted Accounting Pronouncements). Financial results for reporting periods during 2018 are presented in compliance with the revised revenue recognition standard. Historical financial results for reporting periods prior to 2018 are presented in conformity with amounts previously disclosed under the prior revenue recognition standard, ASC 605. These financial statements include additional information regarding the impacts from the adoption of the revised revenue recognition standard on our financial results for the year ended December 31, 2018. This includes the presentation of financial results for the year ended December 31, 2018 under ASC 605 for comparison to the prior year.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Management periodically evaluates such estimates and assumptions for continued reasonableness. In particular, we make estimates with respect to the fair value allocation of multiple performance obligation in revenue recognition, the uncollectible accounts receivable, valuation of long-lived assets, stock-based compensation expense and income taxes. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such periodic evaluation. Actual results could differ from those estimates.

79

 

Cash, Cash Equivalents and Restricted Cash

 

We consider all highly liquid investments with an original maturity of three months or less from date of purchase to be cash equivalents. The Company is required to maintain a small amount of restricted cash to guarantee rent payments in a foreign subsidiary as well as $6.0 million of cash collateral for an unconditional standby letter of credit related to the Company’s corporate headquarters lease.

 

 

 

As of December 31,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Cash and cash equivalents per balance sheet

 

$

70,964

 

 

$

116,049

 

Restricted cash per balance sheet

 

 

6,272

 

 

 

78

 

Cash, cash equivalents and restricted cash per cash flow

 

$

77,236

 

 

$

116,127

 

 

Fair Value of Financial Instruments

Assets and liabilities recorded at fair value in the financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels which are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets or liabilities are as follows:

 

•

Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

•

Level 2: Observable inputs, other than Level 1 prices, such as quoted prices for similar assets or 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.

 

•

Level 3: Unobservable inputs reflecting our own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

The Company’s carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses are considered Level 1 and approximate their fair values due to their short maturities as of December 31, 2018 and 2017. The carrying value of the Company’s line of credit and long-term debt approximate fair value and were valued using a Level 1 input, specifically the borrowing rates available to the Company at December 31, 2017. There was no line of credit or long-term debt at December 31, 2018.

Concentration of Credit and Other Risks

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. The Company maintains its cash in bank deposit accounts that, at times, may exceed federally insured limits. As of December 31, 2018, approximately 11% of the Company’s accounts receivable was from one customer. Management considers concentration of credit risk to be minimal with respect to accounts receivable due to the positive historical collection experience of the Company despite the geographic concentrations related to the Company’s customers. There was no concentration of credit risk for customers as of December 31, 2017 as no individual entity represented more than 10% of the balance in accounts receivable. No customer represented more than 10% of revenue in the years ended December 31, 2018, 2017 and 2016. The Company does not experience concentration of credit risk in foreign countries as no foreign country represents more than 10% of the Company’s consolidated revenues or net assets.

80

 

The following tables sets forth the Company’s consolidated total revenue by geography:

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2018

 

 

2017 (1)

 

 

2016 (1)

 

 

 

with

adoption

(ASC 606)

 

 

without

adoption

(ASC 605)

 

 

as previously reported

(ASC 605)

 

 

 

(In thousands)

 

United States

 

$

171,497

 

 

$

169,927

 

 

$

134,676

 

 

$

92,116

 

EMEA (2)

 

 

49,871

 

 

 

49,854

 

 

 

33,097

 

 

 

25,668

 

Rest of the World (2)

 

 

27,552

 

 

 

28,694

 

 

 

18,283

 

 

 

14,628

 

Total revenue

 

$

248,920

 

 

$

248,475

 

 

$

186,056

 

 

$

132,412

 

 

(1)

The comparative information for years prior to 2018 has not been adjusted to reflect the adoption of the revised standard and is reported on an ASC 605 basis. For additional information see Note 3.

(2)

No single country represented more than 10% of consolidated revenue

Accounts Receivable and Allowance for Doubtful Accounts

The Company continuously assesses the collectability of outstanding customer invoices and in doing so, the Company assesses the need to maintain an allowance for estimated losses resulting from the non-collection of customer receivables. In estimating this allowance, the Company considers factors such as: historical collection experience, a customer’s current creditworthiness, customer concentrations, age of outstanding balances, both individually and in the aggregate, and existing economic conditions. Actual customer collections could differ from the Company’s estimates. The Company determined that an allowance for doubtful accounts was not required for the periods presented. The bad debt expense recognized for the year ended December 31, 2018 was $2.3 million. The bad debt expenses recognized for the years ended December 31, 2017 and 2016 were not material.

Property and Equipment, Net

Property and equipment, net, is stated at cost less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective assets, generally three to five years. Leasehold improvements are depreciated over the shorter of the useful lives of the assets or the related lease term. Repairs and maintenance costs are expensed as incurred.

Property and equipment are reviewed for impairment whenever events or circumstances indicate their carrying value may not be recoverable. When such events or circumstances arise, an estimate of future undiscounted cash flows produced by the asset, or the appropriate grouping of assets, is compared to the asset’s carrying value to determine if an impairment exists. If the asset is determined to be impaired, the impairment loss is measured based on the excess of the carrying value over the assets fair value. Assets to be disposed of are reported at the lower of carrying value or net realizable value. There were no impairments of property and equipment during the years ended December 31, 2018, 2017 or 2016.

Goodwill

Goodwill represents the excess of acquisition cost over the fair value of net tangible and identified net assets acquired. Goodwill and intangible assets that have indefinite lives are not be amortized, but rather tested for impairment annually, as of October 31, or more often if and when events or circumstances indicate that the carrying value may not be recoverable. The annual impairment test is completed using either: a qualitative “Step 0” assessment based on reviewing relevant events and circumstances; or a quantitative “Step 1” assessment, which determines the fair value of the reporting unit, using an income approach that discounts future cash flows based on the estimated future results of our reporting units and a market approach that compares market multiples of comparable companies to determine whether or not any impairment exists. The Step 1 of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, thus the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if any in an amount equal to the excess. The loss recognized cannot exceed the carrying amount of goodwill. After a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill shall be its new accounting basis.

81

 

The annual evaluation of goodwill requires the use of estimates about future operating results to determine its estimated fair value. Changes in forecasted operations can materially affect these estimates, which could materially affect our results of operations. The estimate of fair value requires significant judgment and we base our fair value estimates on assumptions that we believe to be reasonable; but that are unpredictable and inherently uncertain, including: estimates of future growth rates, operating margins and assumptions about the overall economic climate as well as the competitive environment. There can be no assurance that our estimates and assumptions made for purposes of our goodwill testing as of the time of testing will prove to be accurate predictions of the future. If our assumptions regarding business plans, competitive environments or anticipated growth rates are not correct, we may be required to record goodwill impairment charges in future periods, whether in connection with our next annual impairment testing, or earlier, if an indicator of an impairment is present prior to our next annual evaluation.

Goodwill is tested on an annual basis during the fourth quarter, or sooner if an indicator of impairment occurs. The company internally monitors business and market conditions for evidence of triggering events. There were no triggering events for any of the asset types during 2018, 2017 or 2016 or any material changes in business trend indicating the need for impairment loss. As of October 31, 2018, the Company performed a qualitative “Step 0” assessment and concluded no impairment for goodwill, was required. Hence, the first and second steps were not required to be performed for 2018. There were no impairments of goodwill during the years ended December 31, 2018, 2017 or 2016.

Intangible Assets

Intangible assets are amortized on a straight-line basis over their estimated useful lives. The Company periodically reviews the estimated remaining useful life of our intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization. Periodically, the Company evaluates the recoverability of its long-lived assets including intangible assets, for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of each asset, or related asset group, to the future undiscounted cash flows the asset is expected to generate. If the undiscounted cash flows used in the test for recoverability are less than the carrying amount of these assets, the carrying amount of such assets is reduced to fair value. The Company did not record any impairments of long-lived assets including intangible assets for the years ended December 31, 2018, 2017 or 2016.

Software Development Costs

Software development costs for products intended to be sold, leased or otherwise marketed are expensed as incurred until technological feasibility has been established, at which time such costs are capitalized until the product is available for general release to customers. Technological feasibility is established when a product design and working model have been completed and the completeness of the working model and its consistency with the product design have been confirmed by testing. To date, the establishment of technological feasibility of the Company’s products and general release of such software have substantially coincided. As a result, software development costs qualifying for capitalization have been insignificant. We have not capitalized any software development costs through December 31, 2018, all such costs have been recorded as research and development expenses, as incurred, in the consolidated statements of operations.

Comprehensive Income (Loss)

The Company has not entered into transactions that require presentation as other comprehensive income (loss). Total comprehensive income (loss) is equal to net income (loss) for all periods presented.

Liquidity

Our principal sources of liquidity have been the net proceeds we received through the sale of our common stock in our initial public offering, other equity financing, and cash generated from our operations. The Company had cash and cash equivalents of approximately $71.0 million at December 31, 2018, which we intend to use for working capital, operating expenses, and capital expenditures. We believe that our existing cash and cash equivalents, net operating cash flows, and revenues will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in Item 1A, Part I of this Annual Report on Form 10-K titled “Risk Factors.”

82

 

Revenue Recognition ASC 606

Revenue consists of fees for perpetual and term licenses for the Company’s software products, post-contract customer support (referred to as maintenance), software as a service (“SaaS”) and professional services including training and other revenue. We typically recognize license revenue upon delivering the applicable license. The following describes the nature of the Company’s primary types of revenues and the revenue recognition policies as they pertain to the types of transactions the Company enters into with its customers.

 

License Revenue

License revenue includes perpetual license fees and term license fees which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the use of software. Both revenues from perpetual license and term license performance obligations are generally recognized upfront at the point in time when the software license has been delivered. All license transactions generally include an amount for first-year maintenance at no additional charge, which we recognize as subscription revenue over the term.

 

Subscription Revenues

Our subscription revenue consists of (i) fees for ongoing maintenance and support of our licensed solutions and (ii) subscription fees for access to, and related support for, our cloud-based solution. We typically invoice subscription fees in advance in annual installments and recognize subscription revenue ratably over the term of the applicable agreement. Subscription revenue include arrangements for software maintenance and technical support for our products and subscription services. Maintenance contracts generally have a term of one year and subscription revenue contracts usually have a term of one to three years which is initially deferred and recognized ratably over the life of the contract. Maintenance services agreements consist of fees for providing software updates on a when and if available basis and for providing technical support for software products for a specified term. We believe that our if available software updates and technical support each have the same pattern of transfer to the customer and are substantially the same. Therefore, we consider these to be a single distinct performance obligation. Therefore, revenue allocated to maintenance services are recognized ratably over the contract term beginning on the delivery date of each offering. Expenses related to maintenance and subscription are recognized as incurred. Unearned maintenance and subscription revenue are included in deferred revenue. The Company’s subscription services arrangements are generally non-cancelable and do not contain refund-type provisions. In instances that subscription services arrangements are deemed cancellable, which is rare, the Company will adjust the transaction price and period for revenue recognition accordingly to be reflective of the contract term in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (ASC 606).

Services and Other Revenues

Services and other revenue consist primarily of fees from professional services provided to our customers and partners to configure and optimize the use of our solutions as well as training services related to the configuration and operation of our platform. The Company’s professional services contracts are either on a time and materials or “consumption based”, fixed fee or prepaid.

Services revenues are generally recognized over time as the services are performed. Revenues for fixed price services and prepaids are generally recognized over time applying input methods to estimate progress to completion.  Revenues for consumption-based services are generally recognized as the services are performed. Training revenues are recognized as the services are performed over time.

 

 

 

83

 

Deferred Contract Acquisition Costs

Under ASC 606, sales commissions paid to our sales force and the related employer payroll taxes, collectively “deferred contract acquisition costs”, are considered incremental and recoverable costs of obtaining a contract with a customer. The Company capitalizes and amortizes incremental costs of obtaining a contract, such as certain sales commission costs and related payroll taxes, over the remaining contractual term or over an expected period of benefit. The Company has determined the expected period of benefit to be approximately five years. The current portion of these capitalized costs are recorded in "prepayments and other current assets” and noncurrent portion is included in “other non-current assets”, in our consolidated balance sheet. Previously under ASC 605, the Company generally capitalized deferred contract costs associated with subscription revenues, which were subsequently amortized over the term of the subscription while deferred contract cost related to license revenues were previously recognized as incurred. We determined the period of benefit by taking into consideration our customer contracts, customer turnover rates, the life of our technology and other factors. The Company applies the practical expedient to expense costs as incurred if the expected amortization period is one year or less. Amortization of deferred contract acquisition costs is included in sales and marketing expenses in the accompanying consolidated statements of operations. There were no impairments to deferred contract acquisition costs for all periods presented.

 

Contract Balances

 

Deferred revenue

 

We typically invoice our customers for subscription, maintenance and support fees in advance on either an annual, two- or three-year basis, with payment due at the start of the subscription term. For subscription fees, which includes subscription and maintenance, the timing of payments is typically upfront. Therefore, a contract liability or deferred revenue, is created because payment is made in advance of performance and these performance obligations are satisfied over time. Timing may differ between the satisfaction of performance obligations and the invoicing and collection of amounts related to our contracts with customers. Liabilities are recorded for amounts that are collected in advance of the satisfaction of performance obligations. Invoice amounts for non-cancelable services starting in future periods are included in contract assets and deferred revenue. The portion of deferred revenue that we anticipate will be recognized within twelve months is recorded as current deferred revenue, and the remaining portion is recorded as non-current deferred revenue in the consolidated balance sheets.

 

Contract assets

 

Contract assets relate to the Company’s rights to consideration for performance obligations satisfied but not billed at the reporting date on contracts. Contract assets are transferred to accounts receivable when the rights become unconditional. Contract assets are included in prepayments and other current assets and other non-current assets in the consolidated balance sheets.

Revenue Recognition ASC 605

Our revenue recognition accounting policy for ASC 605 is shown below. We applied the revenue recognition accounting policy for ASC 605 to our disclosures in Note 3, which include amounts presented for 2018.

 

Revenue consists of fees for perpetual licenses for the Company’s software products, post-contract customer support (referred to as maintenance), professional services, software as a service (“SaaS”) and other revenue.

The Company recognizes revenue in accordance with the provisions of the Financial Accounting Standards Board (“FASB”) authoritative guidance on software revenue recognition and multiple element arrangements.

Revenue is recognized when:

 

•

Persuasive evidence of an arrangement exists

 

•

Delivery has occurred, or services have been rendered

 

•

The Company’s price to the buyer is fixed or determinable, and

 

•

Collectability is probable

84

 

The Company frequently enters into sales arrangements that contain multiple elements or deliverables. For arrangements that include both software and non-software elements, the Company allocates revenue to the software deliverables as a group and separable non-software deliverables as a group based on their relative selling prices. In such circumstances, the accounting principles establish a hierarchy to determine the selling price used for allocating revenue to the deliverables as follows: (i) Vendor Specific Objective Evidence (“VSOE”), (ii) third-party evidence of selling price (“TPE”) and (iii) the best estimate of the selling price (“ESP”). Cloud-based services, and professional services related to cloud-based services, are considered to be non-software elements in the Company’s arrangements.

VSOE of fair value for each element is based on the Company’s standard rates charged for the product or service when such product or service is sold separately or based upon the price established by the Company’s pricing committee when that product or service is not yet being sold separately. The Company establishes VSOE for maintenance and professional services using a “bell-shaped curve” approach. When applying the “bell-shaped curve” approach the Company analyzes all maintenance renewal transactions over the past twelve months for that category of license and plots those data points on a bell-shaped curve to ensure that a high percentage of the data points are within an acceptable margin of the established VSOE rate. This analysis is performed quarterly on a rolling 12-month basis.

When the Company is unable to establish a selling price for non-software arrangements using VSOE or TPE, the Company uses ESP in the allocation of arrangement consideration. The objective of ESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The determination of ESP is made through consultation with and formal approval by the Company’s management, taking into consideration the Company’s go-to-market strategy, pricing factors, and historical transactions.

The Company recognizes revenue for software arrangements that include undelivered elements using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and recognized as such elements are delivered to the customer and the remaining portion of the agreement fee is recognized as license revenue upon delivery. The determination of fair value of each undelivered element in software arrangements is based on VSOE. If VSOE has not been established for certain undelivered elements in an agreement, revenue is deferred until those elements have been delivered or their VSOE has been determined.

Revenue from maintenance and SaaS services is recognized ratably over the relevant contract period.

Service revenue includes consulting and training. The Company has determined that consulting and training services are not essential to the functionality of the Company’s software and SaaS offerings, and consulting and training services are typically listed separately in arrangements, are optional, and sold separately. As a result, the Company has established VSOE or ESP for consulting and training services and they therefore qualify for separate accounting.

In order to account for deliverables in a multiple-deliverable arrangement as separate unit of accounting, delivered elements must have standalone value. 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 software or SaaS arrangement and the contractual dependence of the arrangement on the customer’s satisfaction with the professional services. Professional services sold as part of arrangements generally qualify for separate accounting.

Consulting and training service revenue that qualifies for separate accounting is recognized as the services are performed using the proportional performance method for fixed fee consulting contracts, or when the right to the service expires. The majority of the Company’s consulting contracts are billed on a time and materials basis.

 

85

 

Cost of Revenue

Cost of revenue for licenses consists of amortization expense for developed technology acquired in business combinations and third-party royalties.

Cost of subscription revenue consists primarily of employee costs of our customer support organization (including salaries, benefits, bonuses and stock-based compensation), contractor costs to supplement our staff levels, third-party cloud-hosting costs, allocated overhead and amortization expense for developed technology acquired in business combinations.

Cost of revenue for services and other revenue consists primarily of personnel-related costs of our services and training departments, including salaries, commissions, benefits, bonuses and stock-based compensation, contractor costs to supplement our staff levels and allocated overhead.

Research and Development Expenses

Research and development costs are expensed as incurred. Research and development expenses consist primarily of personnel-related costs for the design and development of our platform and technologies, contractor costs to supplement our staff levels, third-party web services, consulting services, and allocated overhead.

Advertising Expenses

The Company expenses advertising costs as incurred. Advertising expenses were approximately $7.3 million, $6.0 million and $4.2 million for the years ended December 31, 2018, 2017 and 2016, respectively, and are included in sales and marketing expense.

Stock-Based Compensation

The Company measures stock-based compensation expense for equity instruments granted to employees based upon the estimated fair value of the award at the date of grant and the estimated number of shares ultimately expected to vest. The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model, which requires us to estimate the expected term, fair value of common stock, expected volatility, expected forfeitures, risk-free interest rate, and dividend yield. We use the simplified method in developing an estimate of the expected term of the stock options, which is calculated as the average of the time to vesting and the contractual life of the options. The expected volatility is based upon the average historical volatility of comparable companies over a period approximately equal to the expected term of the awards. The risk-free interest rate is based on the average interest rate for U.S. Treasury instruments whose term is consistent with the expected term of the options.

Stock-based compensation expense resulting from this valuation is recognized in the consolidated statements of operations on a straight-line basis over the period during which an employee provides the requisite service in exchange for the award. The Company analyzes the facts and circumstances of each equity instrument to determine if modification accounting is required. This analysis includes a review of factors that influence the probability of vesting. If circumstances arise that have changed the probability that an equity instrument will vest, or other factors have triggered a modification, the revised fair value is calculated, and additional stock-based compensation is recognized over the remaining service period of the modified instrument.

The Company estimates potential forfeitures of stock grants and adjust recorded stock-based compensation expense accordingly. The estimate of forfeitures is based on historical experience and is adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from the prior estimates. Changes in estimated forfeitures will be recognized in the period of change and will impact the amount of stock-based compensation expense to be recognized in future periods. To date, the company has experienced minimal forfeitures.

The Company also offers an Employee Stock Purchase Plan (ESPP) that allows permitted employees to purchase shares by authorizing payroll deductions from 1% to 15% of employee’s eligible compensation during the semi-annual offering period, with an annual cap of $25,000. Unless an employee has previously withdrawn from the offering, the payroll deductions will be used to purchase shares of common stock after the closing of the offering period at a price equal to 85% of the fair market value of the closing price of the shares at the opening or closing of the semi-annual offering period, whichever is lower.

86

 

ESPP purchase rights have an expected volatility that is based on the historical volatility of the common stock of a collection of our peers in the market. The expected term represents the period of time the ESPP purchase rights are expected to be outstanding and approximates the offering period.

Foreign Currency Translation

The functional currency of our non-U.S. subsidiaries is the U.S. Dollar; therefore, all gains and losses on currency transactions are expensed as incurred.

Income Taxes

The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Valuation allowances are provided if it is more likely than not that some or all of the deferred tax assets will not be realized.

The Company accounts for uncertainty of income taxes based on a “more-likely-than-not” threshold for the recognition and de-recognition of tax positions, which includes the accounting for interest and penalties relating to tax positions.

Net Income (Loss) Per Share

Basic net income (loss) per share attributable to common stockholders is calculated by dividing the net income (loss) attributable to common stockholders for the period, defined as net income (loss) minus the accretion of dividends on redeemable convertible preferred stock, by the weighted-average number of shares of common stock outstanding during the period, without consideration of potentially dilutive securities. Diluted earnings per share includes the dilutive effect of common stock equivalents and is calculated using the weighted-average number of common stock and the common stock equivalents outstanding during the reporting period. Diluted earnings per share for the years ended December 31, 2018, 2017 and 2016 excludes certain common stock equivalents because their inclusion would be anti-dilutive. In 2017 and 2016, the Company was in a loss position, hence all common stock equivalents were excluded due to their anti-dilutive effect. Our incentive stock units have the right to receive non-forfeitable dividends on an equal basis with common stock and therefore are considered participating securities that must be included in the calculation of net income (loss) per share using the two-class method. Under the two-class method, basic and diluted net income (loss) per share is determined by calculating net income (loss) per share for common stock and participating securities based on the cash dividends paid and participation rights in undistributed earnings.

Recently Issued Accounting Standards Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02 and subsequent updates thereafter in ASU 2017-13, ASU 2018-10 and ASU 2018-11, Leases (collectively, Accounting Standards Codification 842 or ASC 842). This standard requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The standard also expands the required quantitative and qualitative disclosures surrounding leases. For public companies, the new standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. The Company does not plan to early adopt, and therefore plans to adopt for the annual period beginning after December 15, 2018.

This standard will be adopted using a modified retrospective transition method with certain practical expedients available for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company currently expects that most of existing operating lease commitments will be subject to the new standard and will be recognized as operating lease liabilities and right-of-use (“ROU”) assets upon our adoption of ASC 842. The Company anticipates this standard will have a material impact on the consolidated balance sheets and will result in the recognition of ROU assets and lease liabilities for leases currently classified as operating leases that are not reported on the balance sheets. While the Company continues to assess the qualitative and quantitative impacts of adopting this standard, the most significant anticipated impact relates to physical office space leases.

87

 

In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (ASC 718): Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07), which simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. ASU 2018-07 is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than a company’s adoption date of ASC 606, Revenue from Contracts with Customers. The Company does not plan to early adopt, and therefore plans to adopt for the annual period beginning after December 15, 2018. The Company does not expect any impact upon adoption of ASU 2018-07 on the consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (ASU 2018-15), which clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for public entities, for annual periods, including interim periods within those annual periods, beginning after December 15, 2019, and earlier adoption is permitted. The Company does not plan to early adopt, and therefore plans to adopt for the annual period beginning after December 15, 2019. The Company is currently evaluating the impact of the pending adoption of ASU 2018-15 on the consolidated financial statements.

Recently Adopted Accounting Pronouncements

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (ASC 718). This standard clarifies which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under ASC 718. An entity is required to account for the effects of a modification unless all of the following conditions are met: (i) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or value using an alternative measurement method) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; (ii) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (iii) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The new standard is effective for annual period beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The company has adopted this standard retrospectively beginning with the reporting period ended after December 31, 2017. This adoption resulted in no material impact on the Company’s consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (ASC 740): Intra-Entity Transfers of Assets Other Than Inventory. This standard requires companies to account for the income tax effects of intercompany transfers of assets other than inventory when the transfer occurs. This guidance is effective for annual periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. The company has adopted this standard modified retrospectively beginning with the reporting period ended after December 31, 2017. This adoption resulted in no material impact on the Company’s consolidated financial statements.

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-09, Revenue from Contracts with Customers (ASC 606). ASC 606 supersedes the revenue recognition requirements in Revenue Recognition (ASC 605), also referred as the “prior standard” and requires the recognition of revenue as promised goods or services are transferred to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. ASC 606 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer. Collectively, we refer to ASC 606 and Subtopic 340-40 as the “revised standard”. As we adopted the revised standard, we updated our accounting policies, systems, internal controls and processes.

88

 

Effective July 1, 2018, the Company lost its emerging growth company (“EGC”) status which accelerated the requirement of ASC 606 adoption. As a result, the Company adjusted its previously reported consolidated financial statements effective January 1, 2018. On December 31, 2018, we adopted ASC 606, with an effective date of January 1, 2018 using the modified retrospective transition method, which requires us to evaluate whether any cumulative adjustment is required to be recorded to retained earnings (or accumulated deficit) as a result of applying the provisions set forth under ASC 606 for any existing arrangements not yet completed as of January 1, 2018. We recorded a cumulative adjustment in the amount of approximately $21.8 million, net of tax, to retained earnings (accumulated deficit) as of the January 1, 2018 as a result of applying the modified retrospective transition method. In addition, it is important to note that under the modified retrospective transition method, our prior period results were not re-casted to reflect the revised recognition standard. The reported results for three-month periods ended March 31, 2018, June 30, 2018, September 30, 2018 and December 31, 2018 reflect the application of the revised standard as indicated by the “as adjusted”, or “ASC 606”, while the comparative periods for 2017 and prior periods have not been revised to reflect the adoption of the revised standard and remain “as reported”, or “ASC 605”, under the prior standard. Except for the changes discussed with respect to revenue recognition and the related customer acquisition costs, the impact of which is summarized in the tables below, we have consistently applied our accounting policies to all periods presented in our consolidated financial statements for year ended December 31, 2018.

The adoption of the revised standard represents a change in accounting principle with the intent to align revenue recognition and provide financial statement readers with enhanced disclosures. In accordance with the revised standard, revenue is recognized when a customer has the right to obtain control of promised products and services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these products and services. To achieve this core principle, the Company applies the following five steps:

 

Identify the contract with a customer

A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the products and services to be transferred and identifies the payment terms related to these products and services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for products and services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, customer creditworthiness assessment and financial information at the outset of entering into the contract.

 

Identify the performance obligations in the contract

Performance obligations promised in a contract are identified based on the products and services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the products and services either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the products and services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised products and services, the Company applies judgment to determine whether promised products and services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised products and services are accounted for as a combined performance obligation. The Company will evaluate any additional promises for goods and services that may occur in its contracts with customers in accordance with the framework in order to determine if these promises represent performance obligations.

 

89

 

Determine the transaction price

The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring products and services to the customer. None of the Company's contracts as of January 1, 2018 contained a significant financing component. The Company considered whether there are any items within the contract that should be accounted for as variable consideration. The Company has elected to use the practical expedient for a service contract in which it bills a fixed amount for each hour of service provided, for time and materials services contracts as the amount corresponds with the value of the entity’s performance completed to date, which is needed to use this practical expedient. Because this practical expedient allows an entity to recognize revenue on the basis of invoicing, revenue is recognized by multiplying the price assigned to the goods or services delivered by the measure of progress (i.e., the quantities or units transferred). Therefore, the Company effectively bypasses the steps of determining the transaction price, allocating that transaction price to the performance obligations and determining when to recognize revenue when sold on a stand-alone basis. The Company has elected to utilize the practical expedient related to this performance obligation, if and when applicable.  

Fees related to time and materials service represents performance obligation with an undefined quantity of outputs but the contractual rate per output is fixed, the Company has enforceable rights and obligations and the consideration received is contingent upon the quantity completed, the total transaction price would be variable (related to this performance obligation) and the contract has a range of possible transaction prices, and the ultimate consideration will depend on the occurrence or non-occurrence of a future event even though the rate per unit is fixed. The Company noted no other variable consideration in the contracts existed as of the adoption date.

 

Determining the transaction price requires significant judgment, which is discussed in further detail below. The Company has determined that its contracts generally do not include a significant financing component. The primary purpose of the Company's invoicing terms is to provide customers with simplified and predictable ways of purchasing its solutions, not to receive financing from customers or to provide customers with financing. Examples of such terms include invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether transfer of control to customers has occurred.

 

Allocate the transaction price to the performance obligations in the contract

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past standalone transactions, the Company estimates the standalone selling price taking into account available information such as past transactions, market conditions and internally approved pricing guidelines related to the performance obligations.

 

Recognize revenue when or as the Company satisfies a performance obligation

The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised products and services to a customer.

 

Upon adoption of the revised standard, the Company’s revenue recognition policy was modified in the following ways:

 

The core principle of the standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services. The most significant impacts of the revised standard to the Company relate to the timing of revenue recognition for arrangements involving term licenses and treatment of deferred contract acquisition costs.

 

90

 

At contract inception, the Company assesses the products and services promised in its contracts with customers and identifies a performance obligation for each promise to transfer to the customer a product or service (or bundle of products or services) that is distinct – i.e., if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. The Company has contracts with customers that may have multiple performance obligations, including some or all of the following: software licenses, maintenance, subscriptions, professional services and or training. For these contracts, the Company accounts for individual performance obligations separately if they are distinct within the context of the contract by allocating the contract's total transaction price to each performance obligation in an amount based on the relative standalone selling price, or “SSP”, of each distinct good or service in the contract.

 

In order to determine the SSP of its promised goods or services, the Company conducts an annual analysis to determine whether its goods or services have an observable SSP. In determining SSP, the Company requires that a substantial majority of the standalone selling prices for a goods or service that fall within a reasonably narrow pricing range. If the Company does not have a directly observable standalone selling price for a particular good or service, then the Company estimates a standalone selling price by our overall pricing objectives, taking into consideration market factors, pricing practices including historical discounting, historical standalone sales of similar products, customer demographics, geographic locations, and the number and types of users within our contracts. The determination of standalone selling price is made by the Company’s management. Selling prices are analyzed at least on an annual basis to identify if the Company has experienced significant changes in its selling prices.

 

The Company allocates the transaction price to each performance obligation identified in the contract on a relative standalone selling price basis and recognizes revenue when or as it satisfies a performance obligation by transferring control of a product or service to a customer.

 

Taxes collected from customers and remitted to governmental authorities are not included in revenue. The Company does not incur shipping and handling for its goods as they are generally delivered to a customer electronically.

 

The Company notes that it does not believe that it currently has any rights to return that would result in a material impact to revenues.

 

Other considerations

The Company evaluates whether it is the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on a net basis) for vendor reseller agreements. Generally, the Company reports revenues from these types of contracts on a gross basis, meaning the amounts billed to customers are recorded as revenues, and direct expenses incurred are recorded as cost of revenues. Where the Company is the principal, it first obtains control of the inputs to the specific good or service and directs their use to create the combined output. The Company's control is evidenced by its involvement in the integration of the good or service on its platform before it is transferred to its customers and is further supported by the Company being primarily responsible to its customers and having a level of discretion in establishing pricing.

 

Practical expedients elected

The Company elected to use the following practical expedients upon adoption of the revised standard:

 

•

To use an output method to measure progress toward completion of a performance obligation that is satisfied for a service contract in which it bills a fixed amount for each hour of service provided, with respect to time and material and consumption-based services contracts.

 

•

To include analysis of significant financing components only if the time between when the company transfers promised goods or services to a customer and when the customer pays for that good or service extends beyond one year.

 

•

To account for shipping and handling activities performed after control of a good has been transferred to the customer as a fulfillment cost and not a performance obligation.

91

 

 

•

To immediately recognize expense for the contract acquisition costs when the asset that would have resulted from capitalizing such costs would have been amortized in one year or less.

 

•

To exclude sales taxes and similar taxes from the measurement of transaction price

Reclassifications

Certain reclassifications to December 31, 2017 and 2016 year end balances were made to conform to the current period presentation in the consolidated balance sheets and consolidated statements of cash flows. These reclassifications include amortization of contract acquisition costs and prepayments and other current assets.

 

 

3. Revenue Recognition

 

ASC 606 Adoption and Impact to Previously Reported Results

 

The Company adopted the revised standard as of January 1, 2018, utilizing the modified retrospective transition method for all contracts not completed as of the date of adoption. For contracts that were originated before the effective date, the Company reflected the aggregate effect of all modifications when identifying the performance obligations and allocating the transaction price in accordance with the practical expedients elected. As a result, the Company recognized the cumulative effect of initially applying the revised standard as an adjustment to the opening balance of retained earnings (accumulated deficit) on January 1, 2018. The comparative information for 2017 and prior periods has not been adjusted to reflect the adoption of the revised standard and remains as presented under the prior standard. The details of the revised policy with significant changes and quantitative impacts of the changes are described in a separate note below.

 

Effective July 1, 2018, the Company lost its EGC status which accelerated the requirement of ASC 606 adoption. As a result, the Company adjusted its previously reported interim financial statements effective January 1, 2018.  As of January 1, 2018, the adoption of the revised standard resulted in the following:

 

•

An increase in deferred customer acquisition cost of $16.2 million, of which $3.2 million is reported in prepayments and other current assets and $13.0 million is reported in other non-current assets

 

•

Recorded a contract asset of $2.8 million, of which $2.6 million is reported in prepayments and other current assets and $0.2 million is reclassed to other non-current assets

 

•

A decrease in accounts receivable of $0.4 million

 

•

A decrease in short-term deferred revenues of $9.5 million

 

•

An increase in long-term deferred revenues of $0.8 million

 

•

A net increase of $5.7 million in deferred tax liabilities,

 

•

A decrease of $21.8 million in accumulated deficit

 

92

 

These adjustments are as a result of the capitalization of customer acquisition costs, primarily deferred contract acquisition costs, and the upfront recognition of license revenues from term licenses. The cumulative impact to the Company’s accumulated deficit as of January 1, 2018 is a decrease of $21.8 million as prescribed in the table below (in thousands):

 

 

 

December 31,

2017

 

 

 

 

 

 

January 1,

2018

 

 

 

As reported

(ASC 605)

 

 

Impact of

adoption

 

 

As adjusted

(ASC 606)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

116,049

 

 

$

—

 

 

$

116,049

 

Restricted cash

 

 

78

 

 

 

—

 

 

 

78

 

Accounts receivable

 

 

72,907

 

 

 

(355

)

 

 

72,552

 

Prepayments and other current assets

 

 

10,013

 

 

 

5,848

 

 

 

15,861

 

Total current assets

 

 

199,047

 

 

 

5,493

 

 

 

204,540

 

Property and equipment, net

 

 

3,018

 

 

 

—

 

 

 

3,018

 

Deferred tax asset - non-current

 

 

264

 

 

 

(264

)

 

 

—

 

Other non-current assets

 

 

3,542

 

 

 

13,232

 

 

 

16,774

 

Goodwill

 

 

219,377

 

 

 

—

 

 

 

219,377

 

Intangible assets, net

 

 

81,185

 

 

 

—

 

 

 

81,185

 

Total assets

 

$

506,433

 

 

$

18,461

 

 

$

524,894

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,231

 

 

$

—

 

 

$

2,231

 

Accrued expenses and other liabilities

 

 

22,636

 

 

 

—

 

 

 

22,636

 

Income taxes payable

 

 

1,688

 

 

 

—

 

 

 

1,688

 

Deferred revenue - current

 

 

73,671

 

 

 

(9,508

)

 

 

64,163

 

Total current liabilities

 

 

100,226

 

 

 

(9,508

)

 

 

90,718

 

Deferred tax liability - non-current

 

 

—

 

 

 

5,422

 

 

 

5,422

 

Long-term debt

 

 

68,329

 

 

 

—

 

 

 

68,329

 

Other long-term liabilities

 

 

27

 

 

 

—

 

 

 

27

 

Deferred revenue - non-current

 

 

9,454

 

 

 

786

 

 

 

10,240

 

Total liabilities

 

 

178,036

 

 

 

(3,300

)

 

 

174,736

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value

 

 

8

 

 

 

—

 

 

 

8

 

Preferred stock, $0.0001 par value,

 

 

—

 

 

 

—

 

 

 

—

 

Additional paid in capital

 

 

353,609

 

 

 

—

 

 

 

353,609

 

Accumulated deficit

 

 

(25,220

)

 

 

21,761

 

 

 

(3,459

)

Total stockholders' equity

 

 

328,397

 

 

 

21,761

 

 

 

350,158

 

Total liabilities and stockholders’ equity

 

$

506,433

 

 

$

18,461

 

 

$

524,894

 

 

93

 

Unaudited consolidated statement of financial position which reflect the adoption of ASC 606 are as follows by quarter (in thousands):

 

 

 

March 31, 2018

 

 

June 30, 2018

 

 

 

As previously

reported

(ASC 605)

 

 

Impact of

adoption

 

 

As adjusted

(ASC 606)

 

 

As previously

reported

(ASC 605)

 

 

Impact of

adoption

 

 

As adjusted

(ASC 606)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

130,859

 

 

$

—

 

 

$

130,859

 

 

$

81,809

 

 

$

—

 

 

$

81,809

 

Restricted cash

 

 

126

 

 

 

—

 

 

 

126

 

 

 

120

 

 

 

—

 

 

 

120

 

Accounts receivable

 

 

55,997

 

 

 

(697

)

 

 

55,300

 

 

 

55,196

 

 

 

(689

)

 

 

54,507

 

Prepayments and other current assets

 

 

9,094

 

 

 

7,369

 

 

 

16,463

 

 

 

9,784

 

 

 

7,545

 

 

 

17,329

 

Income taxes receivable

 

 

—

 

 

 

1,164

 

 

 

1,164

 

 

 

—

 

 

 

5,841

 

 

 

5,841

 

Total current assets

 

 

196,076

 

 

 

7,836

 

 

 

203,912

 

 

 

146,909

 

 

 

12,697

 

 

 

159,606

 

Property and equipment, net

 

 

3,126

 

 

 

—

 

 

 

3,126

 

 

 

3,595

 

 

 

—

 

 

 

3,595

 

Deferred tax asset - non-current

 

 

264

 

 

 

(264

)

 

 

—

 

 

 

264

 

 

 

(264

)

 

 

—

 

Other non-current assets

 

 

3,106

 

 

 

13,090

 

 

 

16,196

 

 

 

3,328

 

 

 

14,101

 

 

 

17,429

 

Goodwill

 

 

219,377

 

 

 

—

 

 

 

219,377

 

 

 

219,377

 

 

 

—

 

 

 

219,377

 

Intangible assets, net

 

 

78,979

 

 

 

—

 

 

 

78,979

 

 

 

76,773

 

 

 

—

 

 

 

76,773

 

Total assets

 

 

500,928

 

 

 

20,662

 

 

 

521,590

 

 

 

450,246

 

 

 

26,534

 

 

 

476,780

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

 

1,872

 

 

 

—

 

 

 

1,872

 

 

 

2,894

 

 

 

—

 

 

 

2,894

 

Accrued expenses and other liabilities

 

 

12,012

 

 

 

(867

)

 

 

11,145

 

 

 

14,106

 

 

 

(1,467

)

 

 

12,639

 

Income taxes payable

 

 

1,918

 

 

 

(1,918

)

 

 

—

 

 

 

1,423

 

 

 

(1,423

)

 

 

—

 

Deferred revenue - current

 

 

75,883

 

 

 

(7,144

)

 

 

68,739

 

 

 

81,322

 

 

 

(6,079

)

 

 

75,243

 

Total current liabilities

 

 

91,685

 

 

 

(9,929

)

 

 

81,756

 

 

 

99,745

 

 

 

(8,969

)

 

 

90,776

 

Deferred tax liability - non-current

 

 

—

 

 

 

5,422

 

 

 

5,422

 

 

 

—

 

 

 

5,422

 

 

 

5,422

 

Long-term debt

 

 

68,321

 

 

 

—

 

 

 

68,321

 

 

 

9,640

 

 

 

—

 

 

 

9,640

 

Other long-term liabilities

 

 

65

 

 

 

—

 

 

 

65

 

 

 

51

 

 

 

—

 

 

 

51

 

Deferred revenue - non-current

 

 

13,175

 

 

 

(256

)

 

 

12,919

 

 

 

13,817

 

 

 

(12

)

 

 

13,805

 

Total liabilities

 

 

173,246

 

 

 

(4,763

)

 

 

168,483

 

 

 

123,253

 

 

 

(3,559

)

 

 

119,694

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value

 

 

9

 

 

 

—

 

 

 

9

 

 

 

9

 

 

 

—

 

 

 

9

 

Preferred stock, $0.0001 par value

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Additional paid in capital

 

 

358,858

 

 

 

—

 

 

 

358,858

 

 

 

363,818

 

 

 

—

 

 

 

363,818

 

Accumulated deficit

 

 

(31,185

)

 

 

25,425

 

 

 

(5,760

)

 

 

(36,834

)

 

 

30,093

 

 

 

(6,741

)

Total stockholders' equity

 

 

327,682

 

 

 

25,425

 

 

 

353,107

 

 

 

326,993

 

 

 

30,093

 

 

 

357,086

 

Total liabilities and stockholders’ equity

 

$

500,928

 

 

$

20,662

 

 

$

521,590

 

 

$

450,246

 

 

$

26,534

 

 

$

476,780

 

94

 

 

 

 

September 30, 2018

 

 

December 31, 2018

 

 

 

As previously

reported

(ASC 605)

 

 

Impact of

adoption

 

 

As adjusted

(ASC 606)

 

 

Presented

without adoption

(ASC 605)

 

 

Impact of

adoption

 

 

As adjusted

with adoption

(ASC 606)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

83,315

 

 

$

—

 

 

$

83,315

 

 

$

70,964

 

 

$

—

 

 

$

70,964

 

Restricted cash

 

 

121

 

 

 

—

 

 

 

121

 

 

 

6,272

 

 

 

—

 

 

 

6,272

 

Accounts receivable

 

 

71,316

 

 

 

(551

)

 

 

70,765

 

 

 

102,188

 

 

 

(719

)

 

 

101,469

 

Prepayments and other current assets

 

 

11,743

 

 

 

6,702

 

 

 

18,445

 

 

 

10,982

 

 

 

10,868

 

 

 

21,850

 

Income taxes receivable

 

 

—

 

 

 

3,399

 

 

 

3,399

 

 

 

—

 

 

 

—

 

 

 

—

 

Total current assets

 

 

166,495

 

 

 

9,550

 

 

 

176,045

 

 

 

190,406

 

 

 

10,149

 

 

 

200,555

 

Property and equipment, net

 

 

10,103

 

 

 

—

 

 

 

10,103

 

 

 

19,268

 

 

 

—

 

 

 

19,268

 

Deferred tax asset - non-current

 

 

264

 

 

 

(264

)

 

 

—

 

 

 

736

 

 

 

(736

)

 

 

—

 

Other non-current assets

 

 

3,236

 

 

 

15,107

 

 

 

18,343

 

 

 

7,853

 

 

 

12,521

 

 

 

20,374

 

Goodwill

 

 

219,377

 

 

 

—

 

 

 

219,377

 

 

 

219,377

 

 

 

—

 

 

 

219,377

 

Intangible assets, net

 

 

74,567

 

 

 

—

 

 

 

74,567

 

 

 

74,860

 

 

 

—

 

 

 

74,860

 

Total assets

 

 

474,042

 

 

 

24,393

 

 

 

498,435

 

 

 

512,500

 

 

 

21,934

 

 

 

534,434

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

 

3,036

 

 

 

—

 

 

 

3,036

 

 

 

4,636

 

 

 

—

 

 

 

4,636

 

Accrued expenses and other liabilities

 

 

18,623

 

 

 

(1,076

)

 

 

17,547

 

 

 

21,886

 

 

 

(155

)

 

 

21,731

 

Income taxes payable

 

 

2,099

 

 

 

(2,099

)

 

 

—

 

 

 

2,037

 

 

 

106

 

 

 

2,143

 

Deferred revenue - current

 

 

86,679

 

 

 

(6,432

)

 

 

80,247

 

 

 

102,996

 

 

 

(7,077

)

 

 

95,919

 

Current portion of long-term debt

 

 

9,669

 

 

 

—

 

 

 

9,669

 

 

 

—

 

 

 

—

 

 

 

—

 

Total current liabilities

 

 

120,106

 

 

 

(9,607

)

 

 

110,499

 

 

 

131,555

 

 

 

(7,126

)

 

 

124,429

 

Deferred tax liability - non-current

 

 

—

 

 

 

5,422

 

 

 

5,422

 

 

 

—

 

 

 

4,142

 

 

 

4,142

 

Long-term debt

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Other long-term liabilities

 

 

4,404

 

 

 

—

 

 

 

4,404

 

 

 

9,824

 

 

 

(36

)

 

 

9,788

 

Deferred revenue - non-current

 

 

13,976

 

 

 

(22

)

 

 

13,954

 

 

 

21,191

 

 

 

(2,809

)

 

 

18,382

 

Total liabilities

 

 

138,486

 

 

 

(4,207

)

 

 

134,279

 

 

 

162,570

 

 

 

(5,829

)

 

 

156,741

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value

 

 

9

 

 

 

—

 

 

 

9

 

 

 

9

 

 

 

—

 

 

 

9

 

Preferred stock, $0.0001 par value

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Additional paid in capital

 

 

369,079

 

 

 

—

 

 

 

369,079

 

 

 

377,473

 

 

 

—

 

 

 

377,473

 

(Accumulated deficit) retained earnings

 

 

(33,532

)

 

 

28,600

 

 

 

(4,932

)

 

 

(27,552

)

 

 

27,763

 

 

 

211

 

Total stockholders' equity

 

 

335,556

 

 

 

28,600

 

 

 

364,156

 

 

 

349,930

 

 

 

27,763

 

 

 

377,693

 

Total liabilities and stockholders’ equity

 

$

474,042

 

 

$

24,393

 

 

$

498,435

 

 

$

512,500

 

 

$

21,934

 

 

$

534,434

 

 

 

95

 

Select unaudited consolidated statement of operations which reflect the adoption of ASC 606 are as follows (in thousands, except share and per share data):

 

 

 

Three Month Ended

 

 

 

March 31, 2018

 

 

 

As previously

reported

(ASC 605)

 

 

Impact of

adoption

 

 

 

 

As adjusted

(ASC 606)

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

$

16,987

 

 

$

(179

)

 

 

 

$

16,808

 

Subscription

 

 

23,005

 

 

 

(500

)

 

 

 

 

22,505

 

Services and other

 

 

9,722

 

 

 

(94

)

 

 

 

 

9,628

 

Total revenue

 

 

49,714

 

 

 

(773

)

 

 

 

 

48,941

 

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

 

1,138

 

 

 

—

 

 

 

 

 

1,138

 

Subscription

 

 

4,658

 

 

 

—

 

 

 

 

 

4,658

 

Services and other

 

 

6,974

 

 

 

—

 

 

 

 

 

6,974

 

Total cost of revenue

 

 

12,770

 

 

 

—

 

 

 

 

 

12,770

 

Gross profit

 

 

36,944

 

 

 

(773

)

 

 

 

 

36,171

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

9,762

 

 

 

—

 

 

 

 

 

9,762

 

General and administrative

 

 

7,657

 

 

 

—

 

 

 

 

 

7,657

 

Sales and marketing

 

 

23,815

 

 

 

(1,356

)

 

 

 

 

22,459

 

Total operating expenses

 

 

41,234

 

 

 

(1,356

)

 

 

 

 

39,878

 

Loss from operations

 

 

(4,290

)

 

 

583

 

 

 

 

 

(3,707

)

Other expense, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(1,178

)

 

 

—

 

 

 

 

 

(1,178

)

Other, net

 

 

(147

)

 

 

—

 

 

 

 

 

(147

)

Total other expense, net

 

 

(1,325

)

 

 

—

 

 

 

 

 

(1,325

)

Loss before income taxes

 

 

(5,615

)

 

 

583

 

 

 

 

 

(5,032

)

Income tax (expense) benefit

 

 

(352

)

 

 

3,082

 

 

 

 

 

2,730

 

Net loss

 

$

(5,967

)

 

$

3,665

 

 

 

 

$

(2,302

)

Net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.07

)

 

$

0.04

 

 

 

 

$

(0.03

)

Diluted

 

$

(0.07

)

 

$

0.04

 

 

 

 

$

(0.03

)

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

85,719,240

 

 

 

—

 

 

 

 

 

85,719,240

 

Diluted

 

 

85,719,240

 

 

 

—

 

 

 

 

 

85,719,240

 

96

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2018

 

 

June 30, 2018

 

 

 

As

previously

reported

(ASC 605)

 

 

Impact of

adoption

 

 

As adjusted

(ASC 606)

 

 

As

previously

reported

(ASC 605)

 

 

Impact of

adoption

 

 

As adjusted

(ASC 606)

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

$

19,128

 

 

$

492

 

 

$

19,620

 

 

$

36,115

 

 

$

313

 

 

$

36,428

 

Subscription

 

 

25,051

 

 

 

(941

)

 

 

24,110

 

 

 

48,056

 

 

 

(1,441

)

 

 

46,615

 

Services and other

 

 

10,381

 

 

 

(455

)

 

 

9,926

 

 

 

20,103

 

 

 

(549

)

 

 

19,554

 

Total revenue

 

 

54,560

 

 

 

(904

)

 

 

53,656

 

 

 

104,274

 

 

 

(1,677

)

 

 

102,597

 

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

 

1,260

 

 

 

—

 

 

 

1,260

 

 

 

2,398

 

 

 

—

 

 

 

2,398

 

Subscription

 

 

4,919

 

 

 

—

 

 

 

4,919

 

 

 

9,577

 

 

 

—

 

 

 

9,577

 

Services and other

 

 

7,197

 

 

 

—

 

 

 

7,197

 

 

 

14,171

 

 

 

—

 

 

 

14,171

 

Total cost of revenue

 

 

13,376

 

 

 

—

 

 

 

13,376

 

 

 

26,146

 

 

 

—

 

 

 

26,146

 

Gross profit

 

 

41,184

 

 

 

(904

)

 

 

40,280

 

 

 

78,128

 

 

 

(1,677

)

 

 

76,451

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

10,115

 

 

 

—

 

 

 

10,115

 

 

 

19,877

 

 

 

—

 

 

 

19,877

 

General and administrative

 

 

7,743

 

 

 

—

 

 

 

7,743

 

 

 

15,400

 

 

 

—

 

 

 

15,400

 

Sales and marketing

 

 

25,163

 

 

 

(1,389

)

 

 

23,774

 

 

 

48,978

 

 

 

(2,745

)

 

 

46,233

 

Total operating expenses

 

 

43,021

 

 

 

(1,389

)

 

 

41,632

 

 

 

84,255

 

 

 

(2,745

)

 

 

81,510

 

Loss from operations

 

 

(1,837

)

 

 

485

 

 

 

(1,352

)

 

 

(6,127

)

 

 

1,068

 

 

 

(5,059

)

Other expense, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(2,800

)

 

 

—

 

 

 

(2,800

)

 

 

(3,978

)

 

 

—

 

 

 

(3,978

)

Other, net

 

 

(569

)

 

 

—

 

 

 

(569

)

 

 

(716

)

 

 

—

 

 

 

(716

)

Total other expense, net

 

 

(3,369

)

 

 

—

 

 

 

(3,369

)

 

 

(4,694

)

 

 

—

 

 

 

(4,694

)

Loss before income taxes

 

 

(5,206

)

 

 

485

 

 

 

(4,721

)

 

 

(10,821

)

 

 

1,068

 

 

 

(9,753

)

Income tax (expense) benefit

 

 

(441

)

 

 

4,183

 

 

 

3,742

 

 

 

(793

)

 

 

7,265

 

 

 

6,472

 

Net loss

 

$

(5,647

)

 

$

4,668

 

 

$

(979

)

 

$

(11,614

)

 

$

8,333

 

 

$

(3,281

)

Net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.07

)

 

$

0.06

 

 

$

(0.01

)

 

$

(0.14

)

 

$

0.10

 

 

$

(0.04

)

Diluted

 

$

(0.07

)

 

$

0.06

 

 

$

(0.01

)

 

$

(0.14

)

 

$

0.10

 

 

$

(0.04

)

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

86,246,056

 

 

 

—

 

 

 

86,246,056

 

 

 

85,984,103

 

 

 

—

 

 

 

85,984,103

 

Diluted

 

 

86,246,056

 

 

 

—

 

 

 

86,246,056

 

 

 

85,984,103

 

 

 

—

 

 

 

85,984,103

 

97

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2018

 

 

September 30, 2018

 

 

 

As

previously

reported

(ASC 605)

 

 

Impact of

adoption

 

 

As adjusted

(ASC 606)

 

 

As

previously

reported

(ASC 605)

 

 

Impact of

adoption

 

 

As adjusted

(ASC 606)

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

$

28,131

 

 

$

(108

)

 

$

28,023

 

 

$

64,246

 

 

$

205

 

 

$

64,451

 

Subscription

 

 

28,461

 

 

 

(545

)

 

 

27,916

 

 

 

76,517

 

 

 

(1,986

)

 

 

74,531

 

Services and other

 

 

9,827

 

 

 

(31

)

 

 

9,796

 

 

 

29,930

 

 

 

(580

)

 

 

29,350

 

Total revenue

 

 

66,419

 

 

 

(684

)

 

 

65,735

 

 

 

170,693

 

 

 

(2,361

)

 

 

168,332

 

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

 

1,145

 

 

 

—

 

 

 

1,145

 

 

 

3,543

 

 

 

—

 

 

 

3,543

 

Subscription

 

 

5,252

 

 

 

—

 

 

 

5,252

 

 

 

14,829

 

 

 

—

 

 

 

14,829

 

Services and other

 

 

7,617

 

 

 

—

 

 

 

7,617

 

 

 

21,788

 

 

 

—

 

 

 

21,788

 

Total cost of revenue

 

 

14,014

 

 

 

—

 

 

 

14,014

 

 

 

40,160

 

 

 

—

 

 

 

40,160

 

Gross profit

 

 

52,405

 

 

 

(684

)

 

 

51,721

 

 

 

130,533

 

 

 

(2,361

)

 

 

128,172

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

11,474

 

 

 

—

 

 

 

11,474

 

 

 

31,351

 

 

 

—

 

 

 

31,351

 

General and administrative

 

 

8,763

 

 

 

—

 

 

 

8,763

 

 

 

24,163

 

 

 

—

 

 

 

24,163

 

Sales and marketing

 

 

27,658

 

 

 

(957

)

 

 

26,701

 

 

 

76,636

 

 

 

(3,702

)

 

 

72,934

 

Total operating expenses

 

 

47,895

 

 

 

(957

)

 

 

46,938

 

 

 

132,150

 

 

 

(3,702

)

 

 

128,448

 

Income (loss) from operations

 

 

4,510

 

 

 

273

 

 

 

4,783

 

 

 

(1,617

)

 

 

1,341

 

 

 

(276

)

Other expense, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(202

)

 

 

—

 

 

 

(202

)

 

 

(4,180

)

 

 

—

 

 

 

(4,180

)

Other, net

 

 

(388

)

 

 

—

 

 

 

(388

)

 

 

(1,104

)

 

 

—

 

 

 

(1,104

)

Total other expense, net

 

 

(590

)

 

 

—

 

 

 

(590

)

 

 

(5,284

)

 

 

—

 

 

 

(5,284

)

Income (loss) before income taxes

 

 

3,920

 

 

 

273

 

 

 

4,193

 

 

 

(6,901

)

 

 

1,341

 

 

 

(5,560

)

Income tax (expense) benefit

 

 

(618

)

 

 

(1,767

)

 

 

(2,385

)

 

 

(1,411

)

 

 

5,498

 

 

 

4,087

 

Net income (loss)

 

$

3,302

 

 

$

(1,494

)

 

$

1,808

 

 

$

(8,312

)

 

$

6,839

 

 

$

(1,473

)

Net income (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.04

 

 

$

(0.02

)

 

$

0.02

 

 

$

(0.10

)

 

$

0.08

 

 

$

(0.02

)

Diluted

 

$

0.04

 

 

$

(0.02

)

 

$

0.02

 

 

$

(0.10

)

 

$

0.08

 

 

$

(0.02

)

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

86,825,168

 

 

 

—

 

 

 

86,825,168

 

 

 

86,267,539

 

 

 

—

 

 

 

86,267,539

 

Diluted

 

 

90,355,212

 

 

 

—

 

 

 

90,355,212

 

 

 

86,267,539

 

 

 

—

 

 

 

86,267,539

 

98

 

 

 

 

Three Months Ended

 

 

Year Ended

 

 

 

December 31, 2018

 

 

December 31, 2018

 

 

 

Presented

without

adoption

(ASC 605)

 

 

Impact of

adoption

 

 

As

adjusted

with adoption

(ASC 606)

 

 

Presented

without

adoption

(ASC 605)

 

 

Impact of

adoption

 

 

As

adjusted

with adoption

(ASC 606)

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

$

37,447

 

 

$

3,102

 

 

$

40,549

 

 

$

101,693

 

 

$

3,307

 

 

$

105,000

 

Subscription

 

 

30,015

 

 

 

(513

)

 

 

29,502

 

 

 

106,532

 

 

 

(2,499

)

 

 

104,033

 

Services and other

 

 

10,320

 

 

 

217

 

 

 

10,537

 

 

 

40,250

 

 

 

(363

)

 

 

39,887

 

Total revenue

 

 

77,782

 

 

 

2,806

 

 

 

80,588

 

 

 

248,475

 

 

 

445

 

 

 

248,920

 

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses

 

 

1,091

 

 

 

—

 

 

 

1,091

 

 

 

4,634

 

 

 

—

 

 

 

4,634

 

Subscription

 

 

5,905

 

 

 

—

 

 

 

5,905

 

 

 

20,734

 

 

 

—

 

 

 

20,734

 

Services and other

 

 

7,514

 

 

 

—

 

 

 

7,514

 

 

 

29,302

 

 

 

—

 

 

 

29,302

 

Total cost of revenue

 

 

14,510

 

 

 

—

 

 

 

14,510

 

 

 

54,670

 

 

 

—

 

 

 

54,670

 

Gross profit

 

 

63,272

 

 

 

2,806

 

 

 

66,078

 

 

 

193,805

 

 

 

445

 

 

 

194,250

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

11,803

 

 

 

—

 

 

 

11,803

 

 

 

43,154

 

 

 

—

 

 

 

43,154

 

General and administrative

 

 

10,618

 

 

 

—

 

 

 

10,618

 

 

 

34,781

 

 

 

—

 

 

 

34,781

 

Sales and marketing

 

 

33,623

 

 

 

(1,155

)

 

 

32,468

 

 

 

110,259

 

 

 

(4,857

)

 

 

105,402

 

Total operating expenses

 

 

56,044

 

 

 

(1,155

)

 

 

54,889

 

 

 

188,194

 

 

 

(4,857

)

 

 

183,337

 

Income from operations

 

 

7,228

 

 

 

3,961

 

 

 

11,189

 

 

 

5,611

 

 

 

5,302

 

 

 

10,913

 

Other expense, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(527

)

 

 

—

 

 

 

(527

)

 

 

(4,707

)

 

 

—

 

 

 

(4,707

)

Other, net

 

 

(342

)

 

 

—

 

 

 

(342

)

 

 

(1,446

)

 

 

—

 

 

 

(1,446

)

Total other expense, net

 

 

(869

)

 

 

—

 

 

 

(869

)

 

 

(6,153

)

 

 

—

 

 

 

(6,153

)

Income before income taxes

 

 

6,359

 

 

 

3,961

 

 

 

10,320

 

 

 

(542

)

 

 

5,302

 

 

 

4,760

 

Income tax expense (benefit)

 

 

(380

)

 

 

(4,797

)

 

 

(5,177

)

 

 

(1,791

)

 

 

701

 

 

 

(1,090

)

Net income (loss)

 

$

5,979

 

 

$

(836

)

 

$

5,143

 

 

$

(2,333

)

 

$

6,003

 

 

$

3,670

 

Net income per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.07

 

 

$

(0.01

)

 

$

0.06

 

 

$

(0.03

)

 

$

0.07

 

 

$

0.04

 

Diluted

 

$

0.07

 

 

$

(0.01

)

 

$

0.06

 

 

$

(0.03

)

 

$

0.07

 

 

$

0.04

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

87,171,161

 

 

 

—

 

 

 

87,171,161

 

 

 

86,495,301

 

 

 

—

 

 

 

86,495,301

 

Diluted

 

 

90,234,993

 

 

 

—

 

 

 

90,234,993

 

 

 

86,495,301

 

 

 

3,507,451

 

 

 

90,002,752

 

 

99

 

Adoption of the revised standard related to revenue recognition had no impact to financing or investing cash flows on the Company’s consolidated statements of cash flows. Selected unaudited consolidated statement of cash flows line items which reflect the adoption of ASC 606 are as follows (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31, 2018

 

 

 

As

previously

reported

(ASC 605)

 

 

Impact of

adoption

 

 

As

adjusted

(ASC 606)

 

Operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(5,967

)

 

$

3,665

 

 

$

(2,302

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

2,628

 

 

 

—

 

 

 

2,628

 

Amortization of loan origination fees

 

 

108

 

 

 

—

 

 

 

108

 

Amortization of contract acquisition costs

 

 

1,139

 

 

 

536

 

 

 

1,675

 

Gain on disposal of fixed assets

 

 

(4

)

 

 

—

 

 

 

(4

)

Stock-based compensation expense

 

 

5,139

 

 

 

—

 

 

 

5,139

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

16,910

 

 

 

342

 

 

 

17,252

 

Prepayments and other current assets

 

 

(220

)

 

 

(2,057

)

 

 

(2,277

)

Other non-current assets

 

 

436

 

 

 

142

 

 

 

578

 

Accounts payable

 

 

(358

)

 

 

—

 

 

 

(358

)

Accrued expenses and other liabilities

 

 

(10,651

)

 

 

(868

)

 

 

(11,519

)

Income taxes

 

 

230

 

 

 

(3,082

)

 

 

(2,852

)

Deferred revenue

 

 

5,932

 

 

 

1,322

 

 

 

7,254

 

Net cash provided by operating activities

 

$

15,322

 

 

$

—

 

 

$

15,322

 

 

 

 

Six Months Ended

 

 

 

June 30, 2018

 

 

 

As

previously

reported

(ASC 605)

 

 

Impact of

adoption

 

 

As

adjusted

(ASC 606)

 

Operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(11,614

)

 

$

8,333

 

 

$

(3,281

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

5,278

 

 

 

—

 

 

 

5,278

 

Amortization of loan origination fees

 

 

191

 

 

 

—

 

 

 

191

 

Amortization of contract acquisition costs

 

 

2,007

 

 

 

1,394

 

 

 

3,401

 

Loss on modification and partial extinguishment of debt

 

 

1,536

 

 

 

—

 

 

 

1,536

 

Gain on disposal of fixed assets

 

 

(48

)

 

 

—

 

 

 

(48

)

Stock-based compensation expense

 

 

9,255

 

 

 

—

 

 

 

9,255

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

17,711

 

 

 

333

 

 

 

18,044

 

Prepayments and other current assets

 

 

(1,778

)

 

 

(3,091

)

 

 

(4,869

)

Other non-current assets

 

 

214

 

 

 

(869

)

 

 

(655

)

Accounts payable

 

 

663

 

 

 

—

 

 

 

663

 

Accrued expenses and other liabilities

 

 

(8,557

)

 

 

(1,467

)

 

 

(10,024

)

Income taxes

 

 

(264

)

 

 

(7,265

)

 

 

(7,529

)

Deferred revenue

 

 

12,013

 

 

 

2,632

 

 

 

14,645

 

Net cash provided by operating activities

 

$

26,607

 

 

$

—

 

 

$

26,607

 

100

 

 

 

 

Nine Months Ended

 

 

 

September 30, 2018

 

 

 

As

previously

reported

(ASC 605)

 

 

Impact of

adoption

 

 

As

adjusted

(ASC 606)

 

Operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(8,312

)

 

$

6,839

 

 

$

(1,473

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

7,977

 

 

 

—

 

 

 

7,977

 

Amortization of loan origination fees

 

 

220

 

 

 

—

 

 

 

220

 

Amortization of contract acquisition costs

 

 

3,001

 

 

 

2,555

 

 

 

5,556

 

Loss on modification and partial extinguishment of debt

 

 

1,536

 

 

 

—

 

 

 

1,536

 

Gain on disposal of fixed assets

 

 

(36

)

 

 

—

 

 

 

(36

)

Bad debt

 

 

299

 

 

 

—

 

 

 

299

 

Stock-based compensation expense

 

 

14,138

 

 

 

—

 

 

 

14,138

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

1,292

 

 

 

195

 

 

 

1,487

 

Prepayments and other current assets

 

 

(4,731

)

 

 

(3,409

)

 

 

(8,140

)

Other non-current assets

 

 

306

 

 

 

(1,873

)

 

 

(1,567

)

Accounts payable

 

 

805

 

 

 

—

 

 

 

805

 

Accrued expenses and other liabilities

 

 

(4,078

)

 

 

(1,077

)

 

 

(5,155

)

Income taxes

 

 

411

 

 

 

(5,498

)

 

 

(5,087

)

Deferred revenue

 

 

17,530

 

 

 

2,268

 

 

 

19,798

 

Net cash provided by operating activities

 

$

30,358

 

 

$

—

 

 

$

30,358

 

 

 

 

Year Ended

 

 

 

December 31, 2018

 

 

 

Presented

without adoption

(ASC 605)

 

 

Impact of

adoption

 

 

As adjusted

with adoption

(ASC 606)

 

Operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

(2,333

)

 

$

6,003

 

 

$

3,670

 

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

10,736

 

 

 

—

 

 

 

10,736

 

Amortization of loan origination fees

 

 

238

 

 

 

—

 

 

 

238

 

Amortization of contract acquisition costs

 

 

3,889

 

 

 

3,864

 

 

 

7,753

 

Loss on modification and extinguishment of debt

 

 

1,848

 

 

 

—

 

 

 

1,848

 

(Gain) loss on disposal of fixed assets

 

 

(20

)

 

 

—

 

 

 

(20

)

Bad debt expense

 

 

2,332

 

 

 

—

 

 

 

2,332

 

Stock-based compensation expense

 

 

18,975

 

 

 

—

 

 

 

18,975

 

Deferred taxes

 

 

(471

)

 

 

(809

)

 

 

(1,280

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(31,613

)

 

 

364

 

 

 

(31,249

)

Prepayments and other current assets

 

 

(4,858

)

 

 

(8,884

)

 

 

(13,742

)

Other non-current assets

 

 

(4,310

)

 

 

711

 

 

 

(3,599

)

Accounts payable

 

 

2,406

 

 

 

—

 

 

 

2,406

 

Accrued expenses and other liabilities

 

 

(690

)

 

 

(192

)

 

 

(882

)

Income taxes

 

 

349

 

 

 

106

 

 

 

455

 

Deferred revenue

 

 

41,062

 

 

 

(1,163

)

 

 

39,899

 

Net cash provided by operating activities

 

 

37,540

 

 

 

—

 

 

 

37,540

 

 

 

Disaggregation of revenue

 

The Company’s revenue by geographic region based on the customer’s location is presented in Footnote 14.

101

 

The following table presents the Company’s revenue by timing of revenue recognition to understand the risks of timing of transfer of control and cash flows:

 

 

 

Year Ended December 31, 2018

 

 

 

License

 

 

Subscription

 

 

Services and

other

 

 

 

(in thousands)

 

Timing of revenue recognition

 

 

 

 

 

 

 

 

 

 

 

 

Revenue recognized at a point in time

 

$

105,000

 

 

$

—

 

 

$

—

 

Revenue recognized over time

 

 

—

 

 

 

104,033

 

 

 

39,887

 

Total revenue

 

$

105,000

 

 

$

104,033

 

 

$

39,887

 

 

Contract Balances

 

A summary of the activity impacting our contract balances during year ended December 31, 2018 is presented below (in thousands):

 

 

 

Contract acquisition costs

 

Balances at December 31, 2017

 

$

5,949

 

Adoption of ASC 606

 

 

16,199

 

Additional deferred contract acquisition costs

 

 

1,439

 

Amortization of deferred contract acquisition costs

 

 

(1,675

)

Balances at March 31, 2018

 

 

21,912

 

Additional deferred contract acquisition costs

 

 

3,096

 

Amortization of deferred contract acquisition costs

 

 

(1,726

)

Balances at June 30, 2018

 

 

23,282

 

Additional deferred contract acquisition costs

 

 

3,345

 

Amortization of deferred contract acquisition costs

 

 

(2,155

)

Balances at September 30, 2018

 

 

24,472

 

Additional deferred contract acquisition costs

 

 

5,768

 

Amortization of deferred contract acquisition costs

 

 

(2,197

)

Balances at December 31, 2018

 

$

28,043

 

 

 

 

Deferred revenue

(current)

 

 

Deferred revenue

(non-current)

 

Balances at December 31, 2017

 

$

73,671

 

 

$

9,454

 

Adoption of ASC 606

 

 

(9,508

)

 

 

786

 

Increase (decrease), net

 

 

4,576

 

 

 

2,679

 

Balances at March 31, 2018

 

 

68,739

 

 

 

12,919

 

Increase (decrease), net

 

 

6,504

 

 

 

886

 

Balances at June 30, 2018

 

 

75,243

 

 

 

13,805

 

Increase (decrease), net

 

 

5,004

 

 

 

149

 

Balances at September 30, 2018

 

 

80,247

 

 

 

13,954

 

Increase (decrease), net

 

 

15,672

 

 

 

4,428

 

Balances at December 31, 2018

 

$

95,919

 

 

$

18,382

 

 

The deferred revenue balance decreased as of January 1, 2018 primarily due to the impacts of upfront recognition of term license revenue which were delivered prior to January 1, 2018, and from allocation of transaction prices based on performance obligations on revised standalone selling price (SSP) methodologies. Under the prior standard, the entire transaction fee was recognized ratably, however the revised standard requires upfront recognition of a portion of the transaction price allocated to the term license delivered at the inception of the arrangement. Revenue recognized during the 2018 reporting period that was previously deferred at January 1, 2018 was $75.0 million. The difference between the opening and closing balances of the Company’s contract assets and deferred revenue primarily results from the timing difference between the Company’s performance and the customer billings.

102

 

 

Contract assets primarily relate to unbilled amounts, which are netted with deferred revenue at contract level, and typically result from sales contracts when revenue recognized exceeds the amount billed to the customer, and the right to payment is subject to more than the passage of time. The contract assets are transferred to accounts receivable when the rights become unconditional. During the year ended December 31, 2018, other significant changes to the opening and closing balances include contract assets of $6.3 million that were reclassified to receivables.  During the year ended December 31, 2018, there were no impairment losses recognized on contract assets.

 

Remaining performance obligation

 

The Company applied the practical expedient in accordance with ASC 606 to exclude contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. This primarily consists of professional services contracts that are on a time-and-material basis and for contracts with an original expected length of one year or less.

Our contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. Remaining performance obligations represent contracted revenue that has not yet been recognized and include deferred revenues, invoices that have been issued to customers but have not been recognized as revenues and amounts that will be invoiced and recognized as revenue in future periods. As of December 31, 2018, amounts allocated to these additional contractual obligations are $165.1 million, of which we expect to recognize $109.7 million as revenue over the next 12 months with the remaining amount thereafter.

 

Assets Recognized from the Costs to Obtain our Contracts with Customers

 

As of December 31, 2018, $8.4 million of our deferred contract acquisition costs that are expected to be amortized within the next 12 months and therefore are included in prepayments and other current assets. The remaining amount of our deferred contract acquisition costs are included in other non-current assets. There were no impairments of assets related to deferred contract acquisition costs during the year ended December 31, 2018.

 

The cumulative adjustment to our deferred cost balance as of January 1, 2018 represents the incremental cost to obtain contracts for contracts which were not complete as of the adoption date, that were expensed pursuant to the prior standard but require capitalization under the revised standard.

 

Deferred contract acquisition costs, which primarily consist of cumulative capitalized incremental costs to obtain contracts were $28.0 million as of December 31, 2018 and $22.1 million as of January 1, 2018, of which $16.2 million was due to the adoption of the revised standard. For the year ended December 31, 2018, amortization of deferred contract acquisition costs of $7.8 million were recorded, and there were no impairments of deferred contract acquisition costs.

4. Goodwill

Goodwill represents the excess of the purchase price over the identifiable tangible and intangible assets acquired plus liabilities assumed arising from business combinations. The carrying amount of goodwill was $219.4 million at December 31, 2018 and 2017 as there has been no acquisition activity in these periods. All goodwill balances are subject to annual goodwill impairment testing. As of October 31, 2018, the Company performed a qualitative analysis and concluded that no impairment for goodwill, including intangibles, was required. Hence, the step one and step two analysis were not performed for 2018. A two-step impairment analysis was conducted in the years ended December 31, 2017 and 2016. There were no impairments of goodwill during the years ended December 31, 2018, 2017 and 2016.

103

 

5. Intangible Assets

Total cost and amortization of intangible assets comprised of the following:

 

 

 

 

 

As of December 31,

 

 

 

Weighted Average

Useful Life

 

2018

 

 

2017

 

Intangible assets, net

 

(In years)

 

(In thousands)

 

Customer lists

 

15

 

$

42,500

 

 

$

42,500

 

Developed technology

 

9.6

 

 

42,000

 

 

 

42,000

 

Trade names and trademarks

 

17

 

 

24,500

 

 

 

24,500

 

Order backlog

 

1.5

 

 

1,100

 

 

 

1,100

 

Non-competition agreements and other related items

 

4.9

 

 

3,310

 

 

 

810

 

Total intangible assets

 

 

 

 

113,410

 

 

 

110,910

 

Less: Accumulated amortization

 

 

 

 

(38,550

)

 

 

(29,725

)

Total intangible assets, net

 

 

 

$

74,860

 

 

$

81,185

 

 

In December 2018, the Company purchased certain technology patents from an unrelated third party for approximately $2.5 million. These patents pertain to technology that the Company plans to use by incorporating into or expanding its current products and will be amortized on a straight-line basis over five years. Amortization expense is included in the consolidated statements of operations for each of the years ended December 31, 2018, 2017 and 2016, respectively, as follows:

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

 

 

(In thousands)

 

Cost of revenue - licenses

 

$

4,032

 

 

$

4,032

 

 

$

4,032

 

Cost of revenue - subscription

 

 

384

 

 

 

384

 

 

 

384

 

Research and development

 

 

136

 

 

 

149

 

 

 

162

 

General and administrative

 

 

—

 

 

 

—

 

 

 

100

 

Sales and marketing

 

 

4,273

 

 

 

4,276

 

 

 

4,414

 

Total amortization of intangibles

 

$

8,825

 

 

$

8,841

 

 

$

9,092

 

 

Periodically, the Company evaluates intangible assets for possible impairment. There were no impairments for intangible assets during the years ended December 31, 2018, 2017 and 2016.  

The total estimated future amortization expense of these intangible assets as of December 31, 2018 is as follows:

 

Year ending December 31,

 

(In thousands)

 

2019

 

$

9,325

 

2020

 

 

9,262

 

2021

 

 

9,189

 

2022

 

 

8,861

 

2023

 

 

8,475

 

Thereafter

 

 

29,748

 

Total amortization expense

 

$

74,860

 

 

104

 

6. Commitments and Contingencies

Operating Leases

The Company leases its facilities under non-cancelable operating lease agreements. The majority of these agreements include a renewal option, and/or require the Company to pay taxes, insurance, and maintenance costs, which are not included in the table below. Certain of these facility leases contain predetermined fixed escalations of the minimum rentals, and the Company recognizes expense for these leases on a straight-line basis. The difference between the recognized rental expense and amounts payable under the lease is recorded as deferred rent included in other long-term liabilities on the accompanying consolidated balance sheets.

Future minimum annual lease payments under these non-cancelable operating leases and contractual commitments, including hosting service agreements, as of December 31, 2018 are as follows (in thousands):

 

Year ending December 31,

 

Operating leases

 

 

Contractual commitments

 

2019

 

$

3,112

 

 

$

6,006

 

2020

 

 

4,454

 

 

 

2,577

 

2021

 

 

4,997

 

 

 

130

 

2022

 

 

4,921

 

 

 

—

 

2023

 

 

4,552

 

 

 

—

 

Thereafter

 

 

27,575

 

 

 

—

 

Total minimum lease payments

 

$

49,611

 

 

$

8,713

 

 

Rent expense under all operating leases was approximately $3.8 million, $2.9 million and $1.8 million, for the years ended December 31, 2018, 2017 and 2016, respectively. The Company had a deferred rent balance of approximately $1.4 million as of December 31, 2017, which is included in accrued expenses and other liabilities on the accompanying consolidated balance sheets. The deferred rent balance as of December 31, 2018 was $9.8 million, included in other long-term liabilities on the accompanying consolidated balance sheets.

Indemnification Arrangements

In the ordinary course of business, the Company enters into contractual arrangements under which it agrees to provide indemnification of varying scope and terms to customers, business partners and other parties with respect to certain matters, including, losses arising out of the breach of such agreements, intellectual property infringement claims made by third parties, and other liabilities with respect to our products and services and business. In these circumstances, payment may be conditional on the other party making a claim pursuant to the procedures specified in a particular contract.

The Company includes service level commitments to our cloud customers warranting certain levels of uptime reliability and performance and permitting those customers to receive credits in the event that we fail to meet those levels. To date, the Company has not incurred any material costs as a result of these commitments, and we expect the time between any potential claims and issuance of the credits to be short. As a result, we have not accrued any liabilities related to these commitments in our consolidated financial statements.

Litigation Claims and Assessments

The Company is subject to claims and suits that may arise from time to time in the ordinary course of business. In addition, some legal actions, claims and governmental inquiries may be instituted or asserted in the future against us and our subsidiaries. Although the outcome of our legal proceedings cannot be predicted with certainty and no assurances can be provided, based upon current information, we do not believe the liabilities, if any, which may ultimately result from the outcome of such matters, individually or in the aggregate, will have a material adverse impact on our consolidated financial statements.

105

 

7. Line of Credit and Long-Term Debt

 

In August 2016, the Company entered into a senior secured credit facility with a financial institution in the amount of $120.0 million, consisting of a term loan facility of $115.0 million and a revolving loan facility of up to $5.0 million. The credit facility established first security for the financial institution over all assets of the Company and is subject to certain financial covenants. Borrowings under this agreement bear interest based on the adjusted LIBOR rate, as defined in the agreement with a 1% floor, plus an applicable margin of 8.0%. The maturity date on the term loan was August 16, 2021, with principal payment due in full on maturity date, and interest payments due quarterly. The agreement also required prepayments in the case of certain events including: asset sales in excess of $1 million, proceeds from an initial public offering (“IPO”), proceeds in excess of $1 million from an insurance settlement, or proceeds from a new debt agreement. Beginning with the year ended December 31, 2017, an additional prepayment was incurred due related to excess cash flow for the respective measurement periods.

 

On June 28, 2017, the Company amended and restated its loan agreement to enter into a series of transactions in which the Company incurred $50.0 million of incremental debt which expanded the current facility to $167.5 million consisting of a $160.0 million term loan and a $7.5 million revolving credit facility, undrawn at close. Proceeds were used to partially fund $50.4 million in accumulated preferred stock dividends for shares of preferred stock through December 15, 2016. Borrowings bear interest based on the adjusted LIBOR rate, as defined in the agreement with a 1% floor, plus an applicable margin of 7.0%. The rate prevalent at December 31, 2017 was 8%, consisting of the 1% floor plus 7% margin. The maturity date on the term loan remained August 16, 2021, with principal payment due in full at maturity and interest payments due quarterly.  

 

In 2017, the Company amended its existing credit facility in connection with the consummation of its initial public offering. Such amendment required that the Company use a portion of its net proceeds to repay $90.0 million of borrowings outstanding under our term loan facility to reduce the aggregate outstanding principal amount thereof to $70.0 million. This repayment was subject to a prepayment premium of 1.50%, approximately $1.4 million, which is recorded as interest expense. As a result of this paydown, the Company incurred a $1.7 million loss on the modification and partial extinguishment of debt which was also recorded as interest expense in the accompanying consolidated statements of operations for the year ended December 31, 2017.

 

In 2017, the Company incurred total debt issuance costs of $4.5 million in connection with these loan and security agreements, of which $1.4 million relates to the modified agreement. These costs were to be amortized to interest expense over the life of the debt on a straight-line basis, which approximates the effective interest rate method. Amortization of debt issuance costs for existing loan and security agreement for the years ended December 31, 2018 and 2017 were approximately $0.2 million and $0.7 million respectively, was recorded in interest expense in the accompanying consolidated statements of operations. As of December 31, 2017, the consolidated balance sheet included unamortized debt issuance costs of approximately $1.8 million included in long-term debt.

 

The outstanding balance of the term loan at December 31, 2017 was $70.0 million. On June 29, 2018, the Company voluntarily prepaid $60.0 million of the borrowings outstanding under its remaining term loan to reduce the aggregate outstanding principal balance to $10.0 million. On November 29, 2018, the Company repaid the remaining balance of borrowings outstanding under the term loan facility and terminated the credit facility. The 2018 repayments were subject to a prepayment premium of 0.50%. The Company paid approximately $0.4 million in prepayment premiums as a result of the prepayments, which is recorded as interest expense in the consolidated statements of operations. In connection with the debt paydowns, the Company incurred a $1.8 million loss on the modification and extinguishment of debt which is also recorded as interest expense.

 

On October 5, 2017, in connection with our corporate headquarters lease, a standby letter of credit in the amount of $6.0 million was executed. On November 29, 2018, as a result of the prepayment of the term loan, the standby letter of credit was cancelled and replaced by the 2018 Letter of Credit on behalf of the Company by U.S. Bank National Association. The 2018 Letter of Credit is an irrevocable, cash collateralized, unconditional standby letter of credit in an aggregate amount of $6.0 million under the Company’s corporate headquarters lease. The cash used as collateral is included as restricted cash on the balance sheet as of December 31, 2018.

106

 

8. Related Party Transactions

In 2016, the Company entered into agreements totaling approximately $626,000 with certain non-executive employees related to their personal tax liabilities. These agreements will be forgiven over a three-year period, beginning in 2016, if the employees remain employed by the Company through the applicable dates. During the year ended December 31, 2016, $0.2 million were forgiven related to the agreement. All the remaining balances related to these agreements were forgiven in 2017. No amounts were forgiven during the year ended December 31, 2018.

In September 2014, the Company entered into an advisory services agreement (the “Consulting Agreement”) with its controlling entity. The Consulting Agreement required quarterly payments from September 8, 2014 through December 31, 2018 for business consulting services provided by the controlling entity. Consulting fees from the Consulting Agreement totaled $1.1 million and $1.0 million in the years ended December 31, 2017 and 2016, respectively, and are included in general and administrative expenses on the accompanying consolidated statements of operations. Upon completion of the Company’s initial public offering, the Consulting Agreement ceased, and the Company was no longer required to make future payments.

Throughout 2017 and 2016 the Company engaged in ordinary sales transactions of $858,000 and $37,000, and purchase transactions of $942,000 and $313,000, respectively, with entities affiliated with its controlling entity. At December 31, 2017, the accompanying consolidated balance sheets included accounts payable balances of $3,400, as well as accounts receivable balances $516,000, associated with these transactions. As of August 13, 2018, Thoma Bravo is no longer considered a controlling entity. Sales and purchase transactions were not considered material to the consolidated financial statements from January 1, 2018 through August 13, 2018.

9. Stockholders’ Equity

In November 2017, the board of directors and stockholders approved the Amended and Restated Certificate of Incorporation to increase the authorized capital stock to 310,000,000 shares, consisting of 300,000,000 shares of common stock and 10,000,000 shares of preferred stock, each with par value of $0.0001 per share.

Common stock

The Company’s Amended and Restated Certificate of Incorporation authorizes issuance of 300,000,000 shares of common stock with a par value of $0.0001 per share. The common stock confers upon its holders the right to participate in the general meetings of the Company, to vote at such meetings (each share represents one vote), to elect board members and to participate in any distribution of dividends, payments of the Company’s debts, other payments required by law, or other property and amounts payable upon shares of preferred stock, including the distribution of surplus assets upon liquidation equally on a per share basis. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that may be issued in the future.

Preferred stock

The company is authorized, subject to any limitations prescribed by law, without stockholder approval, to issue from up to an aggregate of 10,000,000 shares of preferred stock, in one or more series, each series to have such rights, preferences and limitations, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences as determined by the board of directors. As of December 31, 2018, the Company does not have any shares of preferred stock outstanding and currently has no plans to issue shares of preferred stock.

Redeemable Convertible Preferred Stock

Prior to the November 2017 Amended and Restated Certificate of Incorporation, the Company classified the redeemable convertible preferred stock outside of stockholders’ equity (deficit) as required by ASC 480-10-S99 since the shares possessed liquidation features which may have triggered a distribution that was not solely within the Company’s control. Pursuant to the Company’s Amended and Restated Certificate of Incorporation in effect prior to the IPO, a deemed liquidation event would have occurred upon the closing of the transfer of the Company’s securities to a person or a group of affiliated persons, in one or a series of related transactions, if immediately after such transaction, such person or group of affiliated persons would hold 50% or more of the outstanding voting stock of the Company. The holders of a majority of the outstanding preferred stock may elect to require that all or any portion of the preferred stock held by them be redeemed in connection with any of the following (each of which is defined as a “Fundamental Change”): (i) a change in control of the Company, (ii) a sale of 50% or more of the assets of the Company and its subsidiaries, and (iii) a merger or consolidation to which the Company is a party, except for a

107

 

merger where the Company is the surviving corporation, the terms of the preferred stock are not changed and the preferred stock is not exchanged for cash, securities or other properties, and the holders of a majority of the voting power (with respect to election of directors) of the Company’s capital stock immediately prior to the merger shall continue to hold a majority of the voting power following the merger. Upon such election, each other holder of preferred stock may also require that all or any portion of the preferred stock held by them be redeemed in connection with such Fundamental Change.

Upon the closing of the IPO on November 17, 2017, all shares of the Company’s outstanding redeemable convertible preferred stock automatically converted into shares of common stock. As of such date, no redeemable convertible preferred stock was authorized or issued and outstanding.

Dividends

Prior to November 2017, the holders of the Company’s redeemable convertible preferred stock were entitled to dividends when and if declared by the board of directors. Dividends were payable in preference and priority to any payment of any dividend on the Company’s common stock. Dividends on redeemable convertible preferred stock were cumulative and compounded daily at a rate of 9% per annum, equivalent to $90 per share of preferred stock. On June 27, 2017, the board of directors declared, and the Company paid, an aggregate cash dividend of $50.4 million on the issued and outstanding shares of the Company’s preferred stock. The accumulated payment was made to eligible stockholders effective through December 15, 2016 and was primarily funded with the proceeds from the financing arrangement as noted in Note 7.  Upon completing the initial public offering in November 2017, 223,816 shares of redeemable convertible preferred shares, with cumulative undeclared and unpaid dividends of $22.2 million, were converted to 20,500,400 shares of common stock.

Treasury Stock

During 2014, the Company entered into “Employee Purchase Agreements” with certain of its employees. Pursuant to the Employee Purchase Agreements, shares issued to the employee can be repurchased when the employee leaves the Company, subject to certain pricing parameters. Any shares purchased have been held in the Company’s treasury.

The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders’ equity (deficit). As of December 31, 2017, the Company had repurchased 190,434 shares, cumulatively, of its common stock for approximately $0.5 million, at an average cost of $2.56 per share. During the fourth quarter of 2017, all repurchased shares of treasury stock were retired. There was no treasury stock activity for the year ended December 31, 2018.

 

10. Stock Option Plans and Stock-Based Compensation

2015 Stock Option Plans

In 2015, the Company adopted (i) the Amended and Restated 2015 Stock Option and Grant Plan and (ii) the 2015 Stock Incentive Plan (together the “2015 Stock Option Plans”) under which it may grant incentive stock options (“ISOs”), nonqualified stock options (“NSOs”) for the right to purchase shares of common stock and grant restricted stock units. The 2015 Stock Option Plans reserve 5,000,000 shares of common stock for issuance as ISOs, 500,000 shares of restricted stock and 250,000 shares for issuance under the 2015 Stock Incentive Plan. Under the 2015 Stock Option Plans, ISOs may not be granted at less than fair market value on the date of the grant and generally vest over a four-year period based on continued service. Certain options are subject to vesting based on certain future performance targets. Options generally expire ten years after the grant date.

At December 31, 2018, 530,953 shares were available for issuance under the Amended and Restated 2015 Stock Option and Grant Plan. At December 31, 2018, 118,050 shares were available for issuance under the 2015 Stock Incentive Plan. The Company currently uses authorized and unissued shares to satisfy share award exercises.

108

 

2017 Long Term Incentive Plan

In November 2017, the Company’s board of directors adopted the 2017 Long Term Incentive Plan (the “2017 Plan”) under which it may grant stock options, nonqualified stock options to purchase shares of common stock and restricted stock units. As of December 31, 2018, the Company had reserved 8,856,876 shares of common stock available for issuance under the 2017 Plan to employees, directors, officers and consultants of the Company and its subsidiaries. The number of shares of common stock available for issuance under the 2017 Plan will be increased on each January 1 hereafter by 4,428,438 shares of common stock. Options and RSUs granted under the 2017 Plan generally vest over four years. Common stock subject to an award that expires or is canceled, forfeited, exchanged, settled in cash or otherwise terminated without delivery of shares, and shares withheld or surrendered to pay the exercise price of, or to satisfy the withholding obligations with respect to an award, will become available for future grants under the 2017 Plan. At December 31, 2018, 6,304,769 shares were available for issuance under the 2017 Plan. The Company currently uses authorized and unissued shares to satisfy share award exercises.

Employee Stock Purchase Plan

In November 2017, the Company’s board of directors adopted the Employee Stock Purchase Plan (the "ESPP"). The ESPP became effective November of 2017, after the date our registration statement was declared effective by the SEC. The first offering period opened July 1, 2018 and permitted eligible employees to purchase shares by authorizing payroll deductions from 1% to 15% of employee’s eligible compensation during the six-month offering period, with an annual cap of $25,000. Unless an employee has previously withdrawn from the offering, his or her accumulated payroll deductions will be used to purchase shares after the closing of the offering period at a price equal to 85% of the closing price of the shares at the opening or closing of the offering period, whichever is lower.

The Company initially reserved 1,771,375  shares of common stock for issuance under the ESPP. The number of shares available for issuance under the ESPP will increase each January 1 beginning in 2019 by 885,688  shares of common stock. The ESPP will continue in effect until October 30, 2020; unless terminated prior thereto by the Company’s board of directors or compensation committee, each of which has the right to terminate the ESPP at any time.

ESPP purchase rights have an expected volatility that is based on the historical volatility of the common stock of a collection of our peers in the market. The expected term represents the period of time the ESPP purchase rights are expected to be outstanding and approximates the offering period.

As of December 31, 2018, approximately 168,000 shares of common stock have been purchased or distributed pursuant to the ESPP.   Stock-based compensation expense associated with ESPP purchase rights is recognized on a straight-line basis over the offering period.

The fair value for the Company’s stock options and ESPP shares granted during the years ended December 31, 2018, 2017 and 2016 was determined using a Black Scholes option-pricing model with the following assumptions:

 

 

 

Time Based

 

 

Performance Based

 

Stock Options

 

December 31,

2018

 

 

December 31,

2017

 

 

December 31,

2016

 

 

December 31,

2017

 

 

December 31,

2016

 

Expected dividend rate

 

0%

 

 

0%

 

 

0%

 

 

0%

 

 

0%

 

Expected volatility

 

40.0% - 46.0%

 

 

40.9% - 49.0%

 

 

49.0%

 

 

40.9% - 49.0%

 

 

49.0%

 

Risk-free interest rate

 

2.63% - 2.97%

 

 

1.96% - 2.18%

 

 

1.31% - 2.24%

 

 

1.96% - 2.18%

 

 

1.27% - 2.16%

 

Expected term (in years)

 

 

6.25

 

 

 

6.25

 

 

5.50 - 6.25

 

 

5.50 - 6.29

 

 

5.75 - 6.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ESPP

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expected dividend rate

 

0%

 

 

NA

 

 

NA

 

 

NA

 

 

NA

 

Expected volatility

 

40.0% - 46.0%

 

 

NA

 

 

NA

 

 

NA

 

 

NA

 

Risk-free interest rate

 

2.00% - 2.56%

 

 

NA

 

 

NA

 

 

NA

 

 

NA

 

Expected term (in years)

 

 

0.50

 

 

NA

 

 

NA

 

 

NA

 

 

NA

 

 

109

 

The risk-free interest rate is based on the U.S. treasury yield curve for the term consistent with the life of the stock options as of the date of grant. The Company has elected to apply the “shortcut approach” in developing the estimate of expected term for “plain vanilla” stock options by using the mid-point between the vesting date and contractual termination date. The Company has not paid, and does not anticipate paying, cash dividends on its common stock; therefore, the expected dividend yield is assumed to be zero.

The Company has determined the volatility for stock options granted based on an analysis of reported data for a comparable peer group of companies that issued stock options with substantially similar terms.  The Company did not utilize its own historic volatility because, prior to November 2017, there was no public market for the Company’s common stock, and current time in the public market was not sufficiently long. The expected volatility of stock options granted has been determined using an average of the historical volatility measures of this peer group of companies consistent with the life of the options.

The Company expects all outstanding stock options at December 31, 2018 to fully vest. The weighted average grant date fair value per share for the year ended December 31, 2018, 2017 and 2016 was $10.35, $4.32 and $0.83, respectively. The total fair value of shares vested during the years ended December 31, 2018, 2017 and 2016 was approximately $2.4 million, $0.3 million and $0.6 million, respectively.

The following table summarizes activity for time-based stock options during the years ended December 31, 2018, 2017 and 2016:

 

 

 

Number

of Options

 

 

Weighted

Average

Exercise

Price

(per share)

 

 

Weighted

Average

Remaining

Contractual

Term

(years)

 

 

Aggregate

Intrinsic

Value

 

Balances at December 31, 2015

 

 

1,326,449

 

 

$

2.38

 

 

9.7

 

 

 

 

 

Granted

 

 

419,839

 

 

$

1.69

 

 

 

 

 

 

 

 

 

Exercised

 

 

(6,568

)

 

$

1.77

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(117,602

)

 

$

2.31

 

 

 

 

 

 

 

 

 

Balances at December 31, 2016

 

 

1,622,118

 

 

$

2.21

 

 

8.9

 

 

$

1,546,599

 

Options vested and expected to vest at December 31, 2016

 

 

1,622,118

 

 

$

2.21

 

 

8.9

 

 

$

1,546,599

 

Options vested and exercisable at December 31, 2016

 

 

416,265

 

 

$

2.36

 

 

8.7

 

 

$

340,334

 

Balances at December 31, 2016

 

 

1,622,118

 

 

$

2.21

 

 

8.9

 

 

$

1,546,599

 

Granted

 

 

1,592,370

 

 

$

9.54

 

 

 

 

 

 

 

 

 

Conversion of performance to time based

 

 

591,892

 

 

$

2.53

 

 

 

 

 

 

 

 

 

Exercised

 

 

(152,330

)

 

$

2.22

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(153,975

)

 

$

2.21

 

 

 

 

 

 

 

 

 

Balances at December 31, 2017

 

 

3,500,075

 

 

$

5.43

 

 

8.8

 

 

$

31,784,488

 

Options vested and expected to vest at December 31, 2017

 

 

3,500,075

 

 

$

5.43

 

 

8.8

 

 

$

31,784,488

 

Options vested and exercisable at December 31, 2017

 

 

926,614

 

 

$

2.28

 

 

7.9

 

 

$

11,324,729

 

Balances at December 31, 2017

 

 

3,500,075

 

 

$

5.43

 

 

8.8

 

 

$

31,784,488

 

Granted

 

 

82,549

 

 

$

23.17

 

 

 

 

 

 

 

 

 

Exercised

 

 

(637,188

)

 

$

2.84

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(128,110

)

 

$

3.20

 

 

 

 

 

 

 

 

 

Balances at December 31, 2018

 

 

2,817,326

 

 

$

6.64

 

 

 

8.0

 

 

$

47,589,066

 

Options vested and expected to vest at December 31, 2018

 

 

2,817,326

 

 

$

6.64

 

 

 

8.0

 

 

$

47,589,066

 

Options vested and exercisable at December 31, 2018

 

 

1,095,211

 

 

$

4.72

 

 

7.4

 

 

$

20,557,640

 

 

110

 

The following table summarizes the status of the Company’s non-vested time-based vesting stock options for the years ended December 31, 2018, 2017 and 2016:

 

 

 

Number of

Shares

 

 

Weighted

Average

Grant Date

Fair Value

 

Non-vested at December 31, 2015

 

 

1,315,668

 

 

$

1.15

 

Granted

 

 

401,094

 

 

$

0.81

 

Vested

 

 

(382,364

)

 

$

1.16

 

Forfeited

 

 

(117,602

)

 

$

1.12

 

Non-vested at December 31, 2016

 

 

1,216,796

 

 

$

1.05

 

Granted

 

 

1,592,370

 

 

$

4.13

 

Conversion of vested performance to time based

 

 

322,988

 

 

$

11.95

 

Vested

 

 

(437,829

)

 

$

1.04

 

Forfeited

 

 

(111,076

)

 

$

1.07

 

Non-vested at December 31, 2017

 

 

2,583,249

 

 

$

4.32

 

Granted

 

 

82,549

 

 

$

10.35

 

Vested

 

 

(816,454

)

 

$

2.99

 

Forfeited

 

 

(121,728

)

 

$

2.32

 

Non-vested at December 31, 2018

 

 

1,727,616

 

 

$

5.47

 

The total unrecognized compensation expense related to non-vested time-based vesting stock options granted is $7.5 million and is expected to be recognized over a weighted average period of 2.1 years as of December 31, 2018.

The following table summarizes activity of performance vesting stock options for the years ended December 31, 2017 and 2016. There was no activity of performance vesting stock options for the year ended December 31, 2018 as all performance vesting options were modified to become service-based vesting stock options during the fourth quarter of 2017.

 

 

 

Number

of Options

 

 

Weighted

Average

Exercise

Price

(per share)

 

 

Weighted

Average

Remaining

Contractual

Term

(years)

 

 

Aggregate

Intrinsic

Value

 

Balances at December 31, 2015

 

 

322,846

 

 

$

2.32

 

 

 

9.7

 

 

 

 

 

Options vested and expected to vest at December 31, 2015

 

 

322,846

 

 

$

2.32

 

 

 

9.7

 

 

 

 

 

Options vested and exercisable at December 31, 2015

 

 

33,613

 

 

$

2.33

 

 

 

9.5

 

 

 

 

 

Balances at December 31, 2015

 

 

322,846

 

 

$

2.32

 

 

 

9.7

 

 

 

 

 

Granted

 

 

101,427

 

 

$

1.77

 

 

 

 

 

 

 

 

 

Exercised

 

 

(4,000

)

 

$

1.36

 

 

 

 

 

 

$

1,942

 

Forfeited

 

 

(7,500

)

 

$

2.42

 

 

 

 

 

 

 

 

 

Balances at December 31, 2016

 

 

412,773

 

 

$

2.19

 

 

 

8.9

 

 

$

401,616

 

Options vested and expected to vest at December 31, 2016

 

 

412,773

 

 

$

2.19

 

 

 

8.9

 

 

$

401,616

 

Options vested and exercisable at December 31, 2016

 

 

142,391

 

 

$

2.22

 

 

 

8.8

 

 

$

134,871

 

Balances at December 31, 2016

 

 

412,773

 

 

$

2.19

 

 

 

8.9

 

 

$

401,616

 

Granted

 

 

187,469

 

 

$

3.27

 

 

 

 

 

 

 

 

 

Exercised

 

 

(8,350

)

 

$

2.38

 

 

 

 

 

 

$

101,178

 

Conversion of shares

 

 

(591,892

)

 

$

2.53

 

 

 

8.5

 

 

 

 

 

Options vested and expected to vest at December 31, 2017

 

 

—

 

 

$

—

 

 

 

—

 

 

$

—

 

Options vested and exercisable at December 31, 2017

 

 

—

 

 

$

—

 

 

 

—

 

 

$

—

 

 

111

 

The performance vesting stock options are subject to performance requirements, determined prior to the grant date, based on the Company meeting certain annual earnings before interest, taxes, depreciation and amortization, (“EBITDA”) targets as set by the Board of Directors for the applicable years. During the years ended December 31, 2017 and 2016, the Board of Directors waived the EBITDA criteria associated with the annual tranche of performance vesting stock options resulting in a modification. These modifications impacted 34 and 26 employees and resulted in incremental stock-based compensation expense of $45,000 and $98,000 for the years ended December 31, 2017 and 2016, respectively.

During the fourth quarter of 2017, all performance vesting options were modified to become time vesting stock options, affecting approximately 40 employees. No other terms of the options were modified. This modification resulted in recognition of incremental stock compensation expense of $74,000 in 2017 and incremental future stock-based compensation expense of $3.6 million to be recognized over the remaining vesting period of these options.

 

A summary of the status of the Company’s non-vested performance vesting stock options as of December 31, 2017 and 2016, and changes during the year ended December 31, 2017 and 2016 are presented below. There was no activity of performance non-vested stock options for the year ended December 31, 2018 as all performance non-vested options were modified to become service-based vesting stock options during the fourth quarter of 2017.

 

 

 

Number of

Shares

 

 

Weighted

Average

Grant Date

Fair Value

 

Non-vested at December 31, 2015

 

 

289,233

 

 

$

1.11

 

Granted

 

 

101,427

 

 

$

0.84

 

Vested

 

 

(106,903

)

 

$

0.99

 

Forfeited

 

 

(6,563

)

 

$

1.18

 

Non-vested at December 31, 2016

 

 

277,194

 

 

$

1.01

 

Granted

 

 

187,469

 

 

$

1.55

 

Vested

 

 

(141,675

)

 

$

1.54

 

Conversion of non-vested performance to time-based

 

 

(322,988

)

 

$

11.95

 

Non-vested at December 31, 2017

 

 

—

 

 

$

—

 

Incentive Unit Plan

In 2014 and 2015, the Company granted shares of the Company’s common stock (the “incentive units”) to certain members of management pursuant to restricted stock agreements (the “RSAs”).

The incentive units were granted with an exercise price equal to the fair market value on the date of grant, are subject to vesting, and if exercised in advance of vesting were subject to the Company’s right to repurchase. Upon vesting, the incentive units automatically convert to common stock. 50% of incentive units granted to executives vest based on performance meeting or exceeding EBITDA targets, as defined in the RSAs. Incentive units granted to non-executives and the remaining 50% of incentive units granted to executives vest 25% on the first anniversary date of the grant, and ratably over the remaining three years. The graded-vesting attribution method is used by the Company to determine the monthly stock-based compensation expense over the applicable vesting periods.

The liability for the cash paid to the Company prior to conversion of the incentive units to shares of common stock, was approximately $37,000 and $116,000 at December 31, 2018 and December 31, 2017. During the year ended December 31, 2017, the board of directors waived the EBITDA criteria associated with the annual tranche of performance vesting stock options resulting in a modification. This modification impacted 32 employees and resulted in incremental stock-based compensation expense of $2.4 million. During the fourth quarter of 2017, all incentive units originally granted with performance vesting criteria were modified to vest over time, impacting approximately 32 employees and resulting in incremental stock-based compensation expense of $0.6 million. Additionally, during the fourth quarter of 2017, the board of directors approved accelerated vesting of restricted stock for an exiting board member that resulted in an incremental stock-based compensation expense of approximately $154,000. There were no material modifications during the year ended December 31, 2018.

112

 

A summary of the Company’s non-vested incentive unit activity as of December 31, 2018, changes during the year ended December 31, 2018, 2017 and 2016 are presented below:  

 

 

 

Number

of Shares

 

 

Weighted-

average

exercise

price

 

 

 

(In thousands)

 

 

(per share)

 

Non-vested at December 31, 2015

 

 

5,526

 

 

$

0.0517

 

Granted

 

 

(1,677

)

 

$

0.0517

 

Vested

 

 

7

 

 

$

0.0517

 

Forfeited

 

 

(20

)

 

$

0.0517

 

Other (1)

 

 

291

 

 

$

0.0517

 

Non-vested at December 31, 2016

 

 

4,127

 

 

$

0.0517

 

Vested

 

 

(1,846

)

 

$

0.0517

 

Forfeited

 

 

(39

)

 

$

0.0517

 

Non-vested at December 31, 2017

 

 

2,242

 

 

$

0.0517

 

Vested

 

 

(1,503

)

 

$

0.0517

 

Forfeited

 

 

(16

)

 

$

0.0517

 

Non-vested at December 31, 2018

 

 

723

 

 

$

0.0517

 

 

(1)

The non-vested total from December 31, 2016 has been adjusted to include incentive units previously issued.

The company did not grant any additional incentive units during the year ended December 31, 2018.  The total unrecognized compensation expense related to non-vested incentive units granted is approximately $0.3 million and is expected to be recognized over a weighted-average period of 0.1 year as of December 31, 2018. The total intrinsic value of units unvested as of December 31, 2018, 2017 and 2016 was $17.0 million, $32.5 million and $8.5 million, respectively.    

Restricted Stock Units

During the year ended December 31, 2018, we awarded RSUs to certain employees, with a weighted-average grant date fair value of $19.30 per share. RSUs are generally subject to forfeiture if employment terminates prior to the vesting date. We expense the cost of the RSUs, which is determined to be the fair market value of the shares of common stock underlying the RSUs on the date of grant, ratably over the period during which the vesting restrictions lapse.

The following provides a summary of the restricted stock unit activity for the Company for the years ended December 31, 2018 and 2017:

 

 

 

Number of

Shares

 

 

Weighted

Average

Remaining

Contractual

Term

(years)

 

 

Aggregate

Intrinsic

Value

(In thousands)

 

 

Weighted

Average

Grant Date

Fair Value

 

Balances at December 31, 2016

 

 

—

 

 

 

 

 

 

 

 

 

 

$

—

 

Granted

 

 

897,284

 

 

 

 

 

 

 

 

 

 

$

12.18

 

Vested

 

 

—

 

 

 

 

 

 

 

 

 

 

 

—

 

Forfeited

 

 

—

 

 

 

 

 

 

 

 

 

 

 

—

 

Balances at December 31, 2017

 

 

897,284

 

 

 

9.9

 

 

$

186

 

 

$

12.18

 

Units expected to vest at December 31, 2017

 

 

897,284

 

 

 

9.9

 

 

$

186

 

 

$

12.18

 

Balances at December 31, 2017

 

 

897,284

 

 

 

9.9

 

 

$

186

 

 

$

12.18

 

Granted

 

 

576,798

 

 

 

 

 

 

 

 

 

 

$

19.30

 

Vested

 

 

(270,884

)

 

 

 

 

 

 

 

 

 

$

12.61

 

Forfeited

 

 

(55,195

)

 

 

 

 

 

 

 

 

 

$

17.58

 

Balances at December 31, 2018

 

 

1,148,003

 

 

 

1.8

 

 

$

26,967

 

 

$

15.40

 

Units expected to vest at December 31, 2018

 

 

1,148,003

 

 

 

1.8

 

 

$

26,967

 

 

$

15.40

 

 

113

 

The total unrecognized compensation expense related to restricted stock units is $15.4 million for December 31, 2018 and is expected to be recognized over a weighted average period of 3.0 years.

A summary of the Company’s stock-based compensation expense, which includes stock options, restricted stock units, employee stock purchase plan and incentive units, recognized is presented below:

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

 

 

(In thousands)

 

Stock options

 

$

3,943

 

 

$

1,011

 

 

$

508

 

Incentive units

 

 

8,582

 

 

 

3,185

 

 

 

60

 

RSUs

 

 

5,352

 

 

 

318

 

 

 

—

 

ESPP

 

 

1,098

 

 

 

—

 

 

 

—

 

Total stock-based compensation expense

 

$

18,975

 

 

$

4,514

 

 

$

568

 

 

A summary of the Company’s stock-based compensation expense as recognized on the consolidated statements of operations is presented below:

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

 

 

(In thousands)

 

Cost of revenue - subscription

 

$

945

 

 

$

133

 

 

$

34

 

Cost of revenue - services and other

 

 

1,504

 

 

 

458

 

 

 

63

 

Research and development

 

 

3,026

 

 

 

658

 

 

 

118

 

General and administrative

 

 

7,798

 

 

 

2,062

 

 

 

96

 

Sales and marketing

 

 

5,702

 

 

 

1,203

 

 

 

257

 

Total stock-based compensation expense

 

$

18,975

 

 

$

4,514

 

 

$

568

 

 

11. Balance Sheet Related Items

Property and Equipment, Net

The cost and accumulated depreciation of property and equipment are as follows:

 

 

 

As of December 31,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Property and equipment, net

 

 

 

 

 

 

 

 

Computer equipment

 

$

6,968

 

 

$

4,559

 

Buildout in progress

 

 

15,295

 

 

 

—

 

Other assets

 

 

1,218

 

 

 

833

 

Total property and equipment

 

 

23,481

 

 

 

5,392

 

Less: accumulated depreciation

 

 

(4,213

)

 

 

(2,374

)

Total property and equipment, net

 

$

19,268

 

 

$

3,018

 

 

Depreciation expense was $1.9 million, $1.4 million and $0.9 million for the years ended December 31, 2018, 2017 and 2016, respectively. There were no impairments of our property and equipment for the years ended December 31, 2018, 2017 and 2016. During the year ended December 31, 2018, we continued to build out our Company’s corporate headquarters resulting in $15.3 million in additions to property and equipment which will be placed in service in 2019. These assets are amortized over useful lives ranging from 3 to 10 years.

114

 

 

Accrued Expenses and Other Liabilities

 

Accrued expenses consisted of the following:

 

 

 

As of December 31,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Commissions

 

$

7,731

 

 

$

8,559

 

Bonus

 

 

4,829

 

 

 

5,063

 

Payroll and related benefits

 

 

2,209

 

 

 

2,640

 

Partner and customer programs

 

 

1,538

 

 

 

1,234

 

Sales and other taxes

 

 

2,798

 

 

 

1,373

 

Other

 

 

2,626

 

 

 

3,767

 

Total

 

$

21,731

 

 

$

22,636

 

 

Prepayments and Other Assets

Prepayments and other assets include the balance of prepaid expenses, deferred contract acquisition costs, contract assets and other assets. The current portion of these assets is included in prepayments and other current assets and the non-current portion is included in other non-current assets, both of which are contained within the accompanying consolidated balance sheets.

Prepayments and other current assets consisted of the following:

 

 

 

As of December 31,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Deferred contract acquisition costs

 

$

8,392

 

 

$

2,931

 

Prepaid expenses

 

 

7,159

 

 

 

4,376

 

Contract assets

 

 

2,464

 

 

 

—

 

Other

 

 

3,835

 

 

 

2,706

 

Total

 

$

21,850

 

 

$

10,013

 

 

Other non-current assets consisted of the following:

 

 

 

As of December 31,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Deferred contract acquisition costs

 

$

19,651

 

 

$

3,018

 

Prepaid expenses

 

 

276

 

 

 

192

 

Contract assets

 

 

84

 

 

 

—

 

Other

 

 

363

 

 

 

332

 

Total

 

$

20,374

 

 

$

3,542

 

 

115

 

12. Income Taxes

Tax Reform

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”). The TCJA makes broad and complex changes to the Code. The changes include, but are not limited to, lowering the U.S. corporate income tax rates, implementing a modified territorial tax system and imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries.

The Company has evaluated the impact of the TCJA for its year end income tax provision, the results of which are discussed below.

Rate Reduction

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 reverse. The TCJA reduces the U.S. federal corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. As a result, the Company has revalued its ending net deferred tax assets and liabilities at December 31, 2017 and recognized a $1.8 million tax benefit that was offset by a change in valuation allowance.

Deemed Repatriation Transition Tax

The TCJA provided for a one-time transition tax on the deemed repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”). Substantially all of the Company’s foreign subsidiaries’ earnings and profits have previously been included in the Company’s U.S. income tax returns via Section 956. As a result, we recognized tax expense of $0 related to the transition tax.

GILTI Tax

While the TCJA transitions from a worldwide to a modified territorial tax system, global intangible low-taxed income (“GILTI”) provisions will be applied for tax years beginning after December 31, 2017 imposing an incremental tax on low-taxed foreign income. GILTI is the excess of the stockholder’s “net CFC tested income” over the net deemed tangible income return.

Under GAAP, the Company is permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or to factor such amounts into the Company’s measurement of its deferred taxes (the “deferred method”). The Company elected the "period cost method" as its accounting policy with respect to the new GILTI tax rules.  For the year ended December 31, 2018, the Company determined it was in an aggregated test loss position with respect to its CFC’s. Thus, there is no GILTI tax liability as of December 31, 2018.

Income Taxes

The provision for income taxes is related to the profits generated in certain foreign jurisdictions by our consolidated subsidiaries.

The following table presents consolidated income (loss) before income taxes as follows:

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

 

 

(In thousands)

 

Domestic

 

$

6,951

 

 

$

(2,780

)

 

$

(2,435

)

Foreign

 

 

(2,191

)

 

 

(2,519

)

 

 

(2,723

)

Total income (loss) before income taxes

 

$

4,760

 

 

$

(5,299

)

 

$

(5,158

)

 

116

 

The provision (benefit) for income taxes consisted of:

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

 

 

(In thousands)

 

Current

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

—

 

 

$

293

 

 

$

—

 

State

 

 

630

 

 

 

189

 

 

 

21

 

Foreign

 

 

1,740

 

 

 

1,997

 

 

 

531

 

Total current

 

 

2,370

 

 

 

2,479

 

 

 

552

 

Deferred

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

(699

)

 

 

(293

)

 

 

(1,315

)

State

 

 

(581

)

 

 

202

 

 

 

(118

)

Foreign

 

 

—

 

 

 

(95

)

 

 

(1,104

)

Total deferred

 

 

(1,280

)

 

 

(186

)

 

 

(2,537

)

Provision (benefit)

 

$

1,090

 

 

$

2,293

 

 

$

(1,985

)

 

 

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred taxes are as follows: 

 

 

 

As of December 31,

 

 

2018

 

 

2017

 

 

 

 

(In thousands)

Deferred tax assets:

 

 

 

 

 

 

 

 

 

Research and development and other credits

 

$

4,461

 

 

$

6,187

 

 

Net operating loss carryforward

 

 

8,147

 

 

 

14,795

 

 

Charitable contributions

 

 

—

 

 

 

—

 

 

Deferred revenue

 

 

4,747

 

 

 

1,355

 

 

Stock compensation

 

 

1,046

 

 

 

125

 

 

Accrued expense

 

 

1,182

 

 

 

1,323

 

 

Depreciable and amortizable assets

 

 

54

 

 

 

29

 

 

Other

 

 

95

 

 

 

228

 

 

Total deferred tax assets

 

 

19,732

 

 

 

24,042

 

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

 

Prepaid expenses

 

 

(5,889

)

 

 

(1,249

)

 

Intangibles

 

 

(15,280

)

 

 

(17,232

)

 

Total deferred tax asset (liability), net

 

 

(1,437

)

 

 

5,561

 

 

Less valuation allowance for deferred tax assets

 

 

(2,705

)

 

 

(5,297

)

 

Net deferred tax assets (liabilities)

 

$

(4,142

)

 

$

264

 

 

 

As of December 31, 2018 and 2017, the Company had federal net operating loss carryforwards of approximately $23.2 million and $57.8 million, respectively, and research and development credits of approximately $5.3 million and $4.2 million, respectively, which will begin to expire beginning in 2034 and 2025, respectively, if not utilized prior to that time. Utilization of the net operating loss and research credit carryforwards is subject to an annual limitation due to the “change in ownership” provisions of the Internal Revenue Code. However, management has determined via a formal analysis that the annual limitation will not result in the expiration of net operating losses and research credit carryforwards prior to utilization.

 

As of December 31, 2018 and 2017, the Company’s deferred tax assets exceeded the Company’s reversing taxable temporary differences in that foreign jurisdiction. Given the Company’s lack of earnings history in that foreign jurisdiction, management determined it was not more likely than not that the benefit of the Company’s deferred tax assets that exceeded its reversing taxable temporary differences would be realized. Thus, a valuation allowance totaling $2.7 million and $1.7 million was recorded as of December 31, 2018 and 2017, respectively.

117

 

As of December 31, 2018, the Company’s U.S. reversing taxable temporary differences exceeded the Company’s U.S. gross deferred tax assets. As a result, management determined at December 31, 2018, that it was more likely than not that the benefit of the Company’s U.S. gross deferred tax assets would be realized. Thus, no valuation allowance was recorded as of December 31, 2018 and $3.6 million was recorded as of December 31, 2017 against the Company’s U.S. deferred tax assets that exceeded its reversing taxable temporary differences and the portion of state credits that are projected to expire unutilized.

The Company’s provision for income taxes differs from the expected tax expense (benefit) amount computed by applying the statutory federal income tax rate of 21% and 34% for the years ended December 31, 2018, 2017 and 2016, respectively, to income before income taxes primarily due to permanent items, the research and development credit, foreign taxes and the application of a valuation allowance for the years ended December 31, 2018, 2017 and 2016.

 

The following table reconciles the Company’s effective tax rate to the federal statutory tax rate:

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

U.S. federal taxes at statutory rate

 

 

21.0

%

 

 

34.0

%

 

 

34.0

%

Foreign tax rate differentials

 

 

16.7

 

 

 

(9.1

)

 

 

(11.8

)

Research and development credit

 

 

(26.2

)

 

 

17.8

 

 

 

18.2

 

Foreign tax credit

 

 

0.0

 

 

 

18.3

 

 

 

4.7

 

Amended federal return due to law change

 

 

(18.8

)

 

 

0.0

 

 

 

0.0

 

Stock options

 

 

(0.1

)

 

 

(23.6

)

 

 

(3.8

)

Permanent differences and other

 

 

3.8

 

 

 

(14.4

)

 

 

(7.8

)

State taxes, net of federal benefit

 

 

9.6

 

 

 

(4.0

)

 

 

(0.1

)

Change in state rate

 

 

0.0

 

 

 

(1.9

)

 

 

7.3

 

Change in valuation allowance due to operations

 

 

21.1

 

 

 

(58.4

)

 

 

(1.9

)

Other

 

 

(4.2

)

 

 

(2.0

)

 

 

(0.3

)

Total income tax (benefit) expense

 

 

22.9

%

 

 

(43.3

)%

 

 

38.5

%

 

 

The reconciliation of unrecognized tax benefits at the beginning and end of the year is as follows (in thousands):

 

Balance at December 31, 2015

 

$

686

 

Additions based on tax positions related to prior year

 

 

197

 

Balance at December 31, 2016

 

 

883

 

Additions based on tax positions related to prior year

 

 

507

 

Additions based on tax positions related to current year

 

 

473

 

Balance at December 31, 2017

 

 

1,863

 

Reductions based on tax positions related to prior year

 

 

(263

)

Additions based on tax positions related to current year

 

 

687

 

Balance at December 31, 2018

 

$

2,287

 

 

Beginning December 31, 2015, due to the existence of the valuation allowance, future changes in unrecognized tax benefits did not impact the Company’s effective tax rate. Included in the balance of unrecognized tax benefits as of December 31, 2018, 2017 and 2016 is $2.3 million, $1.9 million and $0.9 million, respectively, of tax benefits that, if recognized, would affect the Company’s effective tax rate.

The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. During the years ended December 31, 2018, 2017 and 2016 the Company did not record any material interest or penalties.

The Company files income tax returns in the U.S. federal, states, and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years before 2015 and is no longer subject to state, local and foreign income tax examinations by tax authorities for years before 2014. The Company is currently under audit for income tax audit in a single foreign jurisdiction. The audit is in its initial stages and is not expected to materially impact the financial statements. The Company has a FIN 48 reserve related to this foreign jurisdiction filing that should sufficiently cover any related assessment.

 

118

 

13. Net Income (Loss) Per Share Attributable to Common Stockholders

The following table sets forth the calculation of basic and diluted net income (loss) per share during the periods presented:

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2018

 

 

2017

 

 

2016

 

 

 

with

adoption

(ASC 606)

 

 

without

adoption

(ASC 605)

 

 

(as previously reported

(ASC 605)

 

 

 

(In thousands, except share data)

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

3,670

 

 

$

(2,333

)

 

$

(7,592

)

 

$

(3,173

)

Deemed dividends to preferred stockholders

 

 

—

 

 

 

—

 

 

 

(21,129

)

 

 

(23,618

)

Earnings allocated to participating securities

 

 

(29

)

 

 

(29

)

 

 

—

 

 

 

—

 

Net income (loss) available to common stockholders

 

$

3,641

 

 

$

(2,362

)

 

$

(28,721

)

 

$

(26,791

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

86,495,301

 

 

 

86,495,301

 

 

 

52,339,804

 

 

 

45,933,218

 

Diluted

 

 

90,002,752

 

 

 

86,495,301

 

 

 

52,339,804

 

 

 

45,933,218

 

Net income (loss) attributable to common stockholders per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.04

 

 

$

(0.03

)

 

$

(0.55

)

 

$

(0.58

)

Diluted

 

$

0.04

 

 

$

(0.03

)

 

$

(0.55

)

 

$

(0.58

)

 

 

(1)

The comparative information for years prior to 2018 has not been adjusted to reflect the adoption of the revised standard and is reported on an ASC 605 basis.

 

The following weighted average outstanding shares of common stock equivalents were excluded from the computation of the diluted net income (loss) per share attributable to common stockholders for the periods presented because their effect would have been anti-dilutive, and the convertible preferred stock is not included in these calculations as it is contingently convertible based upon a future event (see Note 9):

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

Stock options to purchase common stock

 

 

35,531

 

 

 

2,402,225

 

 

 

1,799,632

 

RSUs issued and outstanding

 

 

12,838

 

 

 

105,404

 

 

 

—

 

Non-vested incentive units

 

 

—

 

 

 

2,915,228

 

 

 

4,931,760

 

Total

 

 

48,369

 

 

 

5,422,857

 

 

 

6,731,392

 

 

119

 

14. Geographic Information and Major Customers

ASC 280, “Segment Reporting”, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision makers in deciding how to allocate resources and in assessing performance. The Company manages its business on the basis of one reportable segment, and derives revenues from licensing of software, sale of professional services, maintenance and technical support. The following are a summary of consolidated revenues within geographic areas:

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2018

 

 

2017

 

 

2016

 

 

 

with

adoption

(ASC 606)

 

 

without

adoption

(ASC 605)

 

 

as previously reported

(ASC 605)

 

 

 

(In thousands)

 

United States

 

$

171,497

 

 

$

169,927

 

 

$

134,676

 

 

$

92,116

 

EMEA (1)

 

 

49,871

 

 

 

49,854

 

 

 

33,097

 

 

 

25,668

 

Rest of the World (1)

 

 

27,552

 

 

 

28,694

 

 

 

18,283

 

 

 

14,628

 

Total revenue

 

$

248,920

 

 

$

248,475

 

 

$

186,056

 

 

$

132,412

 

 

 

(1)

No single country represented more than 10% of our consolidated revenue.

15. Employee Benefit Plans

The Company has established a defined contribution savings plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). The 401(k) Plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a percentage of their annual compensation as defined in the 401(k) Plan. To date, the Company has made no contributions to the 401(k) Plan.

 

16. Subsequent Events

 

On March 11, 2019, SailPoint Technologies, Inc., as borrower, and certain of our other wholly owned subsidiaries entered into a credit agreement with the lenders party thereto, Citibank, N.A., as administrative agent, sole lead arranger and sole bookrunner, and Royal Bank of Canada and Bank of America, N.A., as co-documentation agents. The credit agreement provides for an initial $150 million in commitments for revolving credit loans, with a $15 million letter of credit sublimit, which amount can be increased or decreased under specified circumstances. As of March 11, 2019, SailPoint had no outstanding revolving credit loans.

Borrowings under our credit agreement are scheduled to mature in March, 2024. Any borrowing under our credit agreement may be repaid, in whole or in part, at any time and from time to time without premium or penalty other than customary breakage costs, and any amounts repaid may be reborrowed.

The interest rates applicable to revolving credit loans under our credit agreement are, at the borrower’s option, either (i) a base rate, which is equal to the greatest of (a) the Prime Rate (as defined in our credit agreement), (b) the Federal Funds Effective Rate (as defined in our credit agreement) plus 1/2 of 1%, and (c) the one-month Adjusted LIBO Rate (as defined in our credit agreement) plus 1%, in each case, plus an interest margin ranging from 0.25% to 0.75% based on the Senior Secured Net Leverage Ratio, or (ii) the Adjusted LIBO Rate plus an interest margin ranging from 1.25% to 1.75% based on the Senior Secured Net Leverage Ratio. The Adjusted LIBO Rate cannot be less than zero. The borrower will pay an unused commitment fee during the term of our credit agreement ranging from 0.20% to 0.30% per annum based on the Senior Secured Net Leverage Ratio.

 

120

 

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

None

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) should be designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure. The Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of December 31, 2018 and, based on their evaluation, have concluded that the disclosure controls and procedures were not effective as of such date due to the material weaknesses in internal control over financial reporting, described below.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:

 

•

Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

 

•

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 

•

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, the risk.

Under the supervision of and with the participation of our management, we conducted an evaluation of the effectiveness of its internal control over financial reporting based on the criteria in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013. As a result of the material weaknesses in internal control over financial reporting described below, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2018 based on those criteria.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Based upon our management’s evaluation, we

121

 

identified the following material weaknesses as of December 31, 2018, in the Company’s internal control over financial reporting:

 

1.

We determined that we did not maintain adequate controls over the accounting and reporting for certain complex, non-routine transactions affecting the adoption of new accounting standards and equity compensation.

 

2.

Certain internal controls related to the recording and processing of revenue transactions are not designed or operating at a precise enough level to prevent or detect errors and insufficient documentation exists to support the operating effectiveness of these controls.

Notwithstanding the identified material weaknesses, management believes the consolidated financial statements as included in Part IV of this Annual Report on Form 10-K fairly represent, in all material respects, the Company’s financial condition, results of operations and cash flows as of and for the periods presented in accordance with generally accepted accounting principles in the United States. There were no changes to previously released financial results.

Grant Thornton LLP, an independent registered public accounting firm, has audited the Company’s internal control over financial reporting as of December 31, 2018 as stated in their report included within Item 8 of Part II of this Annual Report on Form 10-K under the heading “Report of Independent Registered Public Accounting Firm”.

Remediation Activities in Response to Material Weaknesses

In connection with our material weakness related to controls surrounding accounting and reporting for certain complex, non-routine transactions affecting the adoption of new accounting standards and the equity compensation, our management plans to establish more robust accounting policies and procedures, review the adoption of new or revised accounting positions and financial statement disclosures, and select and engage consultants to assist us in determining positions and evaluating new or revised accounting policies. This material weakness is a continuation of our previously reported material weakness.

We implemented Accounting Standard Codification, 606 Revenue from Contracts with Customers (“ASC 606”) and simultaneously enhanced disclosure controls and procedures and internal control over financial reporting required by Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), including our control activities related to revenue transactions, on an accelerated basis due to our loss of emerging growth company status on December 31, 2018.  In connection with our material weakness related to controls surrounding the recording and processing of revenue transactions, our management plans to continue to strengthen the design and level of precision of control activities related to revenue transactions, including enhancing our guidelines for how to document reviews of revenue transactions.

These actions are subject to ongoing review by our management, as well as oversight by our Board of Directors. Although we plan to complete these remediation processes as quickly as possible, we cannot, at this time, estimate when such remediation may occur, and our initiatives may not prove successful in remediating these material weaknesses. We cannot assure you that these measures and any further measures that we implement will be sufficient to remediate our existing material weaknesses or to identify or prevent additional material weaknesses.

Changes in Internal Control over Financial Reporting

Effective January 1, 2018, we adopted ASC 606, pursuant to which we updated our existing accounting policies, systems, internal controls and processes.

Except for the adoption of ASC 606 and the remediation efforts described above, there was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

122

 

Item 9B. Other Information

None

 

 

123

 

PART III

Item 10. Directors, Executive Officers and Corporate Governance

 

The information called for by this item will be included in our definitive proxy statement with respect to our 2019 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference.

Item 11. Executive Compensation

 

The information called for by this item will be included in our definitive proxy statement with respect to our 2019 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference.

 

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

 

The information called for by this item will be included in our definitive proxy statement with respect to our 2019 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference.

 

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

 

The information called for by this item will be included in our definitive proxy statement with respect to our 2019 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services

 

The information called for by this item will be included in our definitive proxy statement with respect to our 2019 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference.

124

 

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a) The following documents are filed as part of this Annual Report on Form 10‑K:

1. Financial Statements

 

Report of Grant Thornton, Independent Registered Public Accounting Firm

72

Consolidated Balance Sheets as of December 31, 2018 and 2017

75

Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016

76

Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the years ended December 31, 2018, 2017 and 2016

77

Consolidated Statements of Cash Flows for the years ended December 31, December 31, 2018, 2017 and 2016

78

Notes to Consolidated Financial Statements

79

2. Financial Statement Schedules

All schedules have been omitted as they are either not required or not applicable or the required information is included in the Consolidated Financial Statements or notes thereto.

3. See Item 15(b)

(b) Exhibits:

125

 

Exhibit Index

 

Exhibit

Number

 

Description

 

 

 

     3.1

 

Third Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (File No. 001-38297)).

 

 

 

     3.2

 

Second Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (File No. 001-38297)).

 

 

 

     4.1

 

Form of common stock certificate of the Company (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on November 6, 2017).

 

 

 

     4.2

 

Registration Rights Agreement, dated as of September 8, 2014, by and among the Company, Thoma Bravo Fund XI, L.P., Thoma Bravo Fund XI-A, L.P., Thoma Bravo Executive Fund XI, L.P. and certain other stockholders (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on October 20, 2017).

 

 

 

     4.3*

 

Amendment to Registration Rights Agreement, dated as of December 21, 2018, by and among the Company, Thoma Bravo XI, LP., Thoma Bravo Fund XI-A, L.P., Thoma Bravo Executive Fund XI, L.P. and certain other stockholders.

 

 

 

10.1

 

Office Lease, dated July 3, 2012, by and between New TPG-Four Points, L.P. and SailPoint Technologies, Inc. (incorporated by reference to Exhibit 10.21 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on October 20, 2017).

 

 

 

10.2

 

First Amendment to Office Lease, effective May 1, 2013, by and between New TPG-Four Points, L.P. and SailPoint Technologies, Inc. (incorporated by reference to Exhibit 10.22 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on October 20, 2017).

 

 

 

10.3

 

Second Amendment to Lease, dated October 2, 2017, by and between G&I VII Four Points LP and SailPoint Technologies, Inc. (incorporated by reference to Exhibit 10.23 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on October 20, 2017).

 

 

 

10.4

 

Lease, dated October 2, 2017, by and between BDN Four Points Land LP and SailPoint Technologies, Inc. (incorporated by reference to Exhibit 10.24 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on October 20, 2017).

 

 

 

  10.5+

 

Form of Indemnification Agreement between the Company and each of its directors and executive officers (incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on October 20, 2017).

 

 

 

  10.6+

 

SailPoint Technologies Holdings, Inc. 2017 Long Term Incentive Plan. (incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form S-1 (File No. 333-221679), filed with the Securities and Exchange Commission on May 21, 2018).

 

 

 

  10.7+

 

Form of Notice of Grant of Stock Option under the SailPoint Technologies Holdings, Inc. 2017 Long Term Incentive Plan (incorporated by reference to Exhibit 10.6 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on November 6, 2017).

126

 

Exhibit

Number

 

Description

 

 

 

   10.8+*

 

Form of Stock Option Agreement under the SailPoint Technologies Holdings, Inc. 2017 Long Term Incentive Plan.

 

 

 

  10.9+

 

Form of Notice of Stock Option Exercise under the SailPoint Technologies Holdings, Inc. 2017 Long Term Incentive Plan (incorporated by reference to Exhibit 10.8 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on November 6, 2017).

 

 

 

  10.10+

 

Form of Notice of Grant of Restricted Stock Units under the SailPoint Technologies Holdings, Inc. 2017 Long Term Incentive Plan (incorporated by reference to Exhibit 10.9 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on November 6, 2017).

 

 

 

  10.11+*

 

Form of Restricted Stock Unit Agreement under the SailPoint Technologies Holdings, Inc. 2017 Long Term Incentive Plan.

 

 

 

10.12+

 

Amended and Restated Senior Management and Restricted Stock Agreement, dated November 5, 2017, by and among SailPoint Technologies Holdings, Inc., SailPoint Technologies, Inc. and Mark McClain (incorporated by reference to Exhibit 10.12 to Amendment No. 3 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on November 14, 2017).

 

 

 

  10.13+

 

Offer Letter, dated February 21, 2011, by and between SailPoint Technologies, Inc. and Cam McMartin (incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (File No. 001-38297)).

 

 

 

10.14+

 

Offer Letter, dated May 14, 2014, by and between SailPoint Technologies, Inc. and Howard Greenfield (incorporated by reference to Exhibit 10.13 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on November 6, 2017).

 

 

 

   10.15+*

 

Offer Letter, dated July 2, 2015, by and between SailPoint Technologies, Inc. and Juliette Rizkallah.

 

 

 

  10.16+*

 

Offer Letter, dated November 19, 2018, by and between SailPoint Technologies, Inc. and Andrew Kahl.

 

 

 

 10.17+

 

Form of Amended and Restated Restricted Stock Agreement by and among SailPoint Technologies Holdings, Inc. and [Purchaser] (incorporated by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (File No. 001-38297)).

 

 

 

  10.18+

 

Form of Early Exercise Incentive Stock Option Agreement under the SailPoint Technologies, Holdings, Inc. Amended and Restated 2015 Stock Option Plan (incorporated by reference to Exhibit 10.17 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on November 6, 2017).

 

 

 

  10.19+

 

Sales Incentive Plan (incorporated by reference to Exhibit 10.18 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on November 6, 2017).

 

 

 

  10.20+

 

SailPoint Technologies Holdings, Inc. Amended and Restated 2015 Stock Option and Grant Plan (incorporated by reference to Exhibit 10.19 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on November 6, 2017).

127

 

Exhibit

Number

 

Description

 

 

 

  10.21+

 

Form of Non-qualified Stock Option Agreement under the SailPoint Technologies Holdings, Inc. 2015 Stock Option and Grant Plan (Time and Performance Vesting) (incorporated by reference to Exhibit 10.20 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on November 6, 2017).

 

 

 

  10.22+

 

Form of Non-qualified Stock Option Agreement under the SailPoint Technologies Holdings, Inc. 2015 Stock Option and Grant Plan (Time-Based Vesting) (incorporated by reference to Exhibit 10.25 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on November 6, 2017).

 

 

 

  10.23+

 

Form of Incentive Stock Option Agreement under the SailPoint Technologies Holdings, Inc. 2015 Stock Option and Grant Plan (Time and Performance Vesting) (incorporated by reference to Exhibit 10.26 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on November 6, 2017).

 

 

 

  10.24+

 

Form of Incentive Stock Option Agreement under the SailPoint Technologies Holdings, Inc. 2015 Stock Option and Grant Plan (Time-Based Vesting) (incorporated by reference to Exhibit 10.27 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on November 6, 2017).

 

 

 

  10.25+

 

Form of Restricted Stock Agreement under the SailPoint Technologies Holdings, Inc. 2015 Stock Option and Grant Plan (Time and Performance Vesting) (incorporated by reference to Exhibit 10.28 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on November 6, 2017).

 

 

 

  10.26+

 

Form of Restricted Stock Agreement under the SailPoint Technologies Holdings, Inc. 2015 Stock Option and Grant Plan (Time-Based Vesting) (incorporated by reference to Exhibit 10.29 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on November 6, 2017).

 

 

 

  10.27+

 

SailPoint Technologies Holdings, Inc. 2015 Stock Incentive Plan (incorporated by reference to Exhibit 10.30 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on November 6, 2017).

 

 

 

  10.28+

 

Form of Notice of Option Grant under the SailPoint Technologies Holdings, Inc. 2015 Stock Incentive Plan (incorporated by reference to Exhibit 10.31 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on November 6, 2017).

 

 

 

  10.29+*

 

Form of Notice of Grant of Restricted Share Units under the SailPoint Technologies Holdings, Inc. 2015 Stock Incentive Plan.

 

 

 

  10.30+*

 

Form of Restricted Share Unit Agreement under the SailPoint Technologies Holdings, Inc. 2015 Stock Incentive Plan.

 

 

 

  10.31+

 

Form of SailPoint Technologies Holdings, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.32 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on May 21, 2018).

 

 

 

  10.32+

 

Form of Employee Co-Invest Stock Purchase Agreement (incorporated by reference to Exhibit 10.33 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on November 6, 2017).

128

 

Exhibit

Number

 

Description

 

 

 

  10.33+

 

Form of Director Purchase Agreement (incorporated by reference to Exhibit 10.34 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on November 6, 2017).

 

 

 

  10.34+

 

Form of Notice of Grant of Restricted Stock Units (Non-Employee Directors) under the SailPoint Technologies Holdings, Inc. 2017 Long Term Incentive Plan (incorporated by reference to Exhibit 10.35 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on November 6, 2017).

 

 

 

  10.35+

 

Form of Restricted Stock Unit Agreement (Non-Employee Directors) under the SailPoint Technologies Holdings, Inc. 2017 Long Term Incentive Plan (incorporated by reference to Exhibit 10.36 to Amendment No. 2 to the Company’s Registration Statement on Form S-1 (File No. 333-221036), filed with the Securities and Exchange Commission on November 6, 2017).

 

 

 

  10.36+

 

Summary of Non-Employee Director Compensation (incorporated by reference to Exhibit 10.36 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (File No. 001-38297)).

 

 

 

  10.37+*

 

SailPoint Technologies Holdings, Inc. Severance Pay Plan, dated November 6, 2018.

 

 

 

10.38

 

Credit Agreement, dated as of March 11, 2019, among the Company, SailPoint Technologies, Inc., the other loan parties party thereto, the lenders party thereto, Citibank, N.A., as administrative agent, sole lead arranger and sole bookrunner, and Royal Bank of Canada and Bank of America, N.A., as co-documentation agents (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-38297), filed with the Securities and Exchange Commission on March 15, 2019).

 

 

 

21.1*

 

List of subsidiaries of the Company.

 

 

 

23.1*

 

Consent of Grant Thornton LLP, independent registered public accounting firm.

 

 

 

31.1*

 

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2*

 

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

  32.1**

 

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

  32.2**

 

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS*

 

XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

 

 

101.SCH*

 

XBRL Taxonomy Extension Schema Document.

 

 

 

101.CAL*

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.DEF*

 

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*

 

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*

 

XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

 

*

Filed herewith.

**

Furnished herewith (such certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates it by reference).

+

Management contract or compensatory plan or arrangement.

129

 

Item 16. Form 10-K Summary

None.

130

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

SailPoint Technologies Holdings, Inc.,

 

 

 

 

Date: March 18, 2019

 

By:

/s/ Mark McClain

 

 

 

Mark McClain

 

 

 

Chief Executive Officer and Director

 

 

 

 

Date: March 18, 2019

 

By:

/s/ Cam McMartin

 

 

 

Cam McMartin

 

 

 

Chief Financial Officer

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

 

Name

 

Title

 

Date

 

 

 

 

 

/s/ Mark McClain

 

Chief Executive Officer and Director

 

March 18, 2019

Mark McClain

 

(Principal Executive Officer)

 

 

 

 

 

 

 

/s/ Cam McMartin

 

Chief Financial Officer

 

March 18, 2019

Cam McMartin

 

(Principal Financial Officer)

 

 

 

 

 

 

 

/s/ Thomas Beck

 

Vice President, Finance

 

March 18, 2019

Thomas Beck

 

(Principal Accounting Officer)

 

 

 

 

 

 

 

/s/ William Gregory Bock

 

Director

 

March 18, 2019

William Gregory Bock

 

 

 

 

 

 

 

 

 

/s/ Heidi Melin

 

Director

 

March 18, 2019

Heidi Melin

 

 

 

 

 

 

 

 

 

/s/ James Michael Pflaging

 

Director

 

March 18, 2019

James Michael Pflaging

 

 

 

 

 

 

 

 

 

/s/ Michael J. Sullivan

 

Director

 

March 18, 2019

Michael J. Sullivan

 

 

 

 

 

/s/ Kenneth J. Virnig, II

 

Director

 

March 18, 2019

Kenneth J. Virnig, II

 

 

 

 

 

131

Exhibit 4.3

FIRST AMENDMENT TO REGISTRATION RIGHTS AGREEMENT

This First Amendment to Registration Rights Agreement (this “Amendment”) is made as of December 21, 2018 by and among SailPoint Technologies Holdings, Inc. (the “Company”), and the undersigned, which constitute a majority of the holders of Investor Registrable Securities (the “Requisite Holders”).

Capitalized terms used herein but not otherwise defined herein shall have the meanings ascribed to them in that certain Registration Rights Agreement, entered into as of September 8, 2014 (the “Registration Rights Agreement”), by and among the Company and the parties identified on the signature pages thereto.

RECITALS:

WHEREAS, Section 9(d) of the Registration Rights Agreement provides that the provisions of such agreement may be terminated, amended, waived or otherwise modified only upon the prior written consent of the Company and the Requisite Holders, and that such termination, amendment, waiver or other modification shall be binding on all Stockholders; and

WHEREAS, the undersigned constitute the Company and the Requisite Holders to amend the Registration Rights Agreement.

NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by each party hereto, the parties hereby agree as follows:

Section 1.Amendments to Registration Rights Agreement

(a)Amendment to Section 8.

 

i.

Section 8(h) of the Registration Rights Agreement is hereby deleted in its entirety and replaced with the following:

“(h)The term “Registrable Securities” means (i) any Common Stock issued pursuant to the Purchase Agreement or any Restricted Stock Agreement, (ii) any other Common Stock issued or issuable with respect to the securities referred to in clause (i) by way of a stock dividend or stock split or in connection with an exchange or combination of shares, recapitalization, merger, consolidation or other reorganization, and (iii) any other shares of Common Stock held by Persons holding securities described in clauses (i) and (ii), inclusive above, including, without limitation, any shares of Common Stock issued upon conversion of the Company’s preferred stock.  As to any particular Registrable Securities, such securities shall cease to be Registrable Securities when  they (a) have been  distributed to the public pursuant to an offering registered under the Securities Act, (b) have been  or sold to the public through a broker, dealer or market maker in compliance with Rule 144 under the

 

 

Securities Act (or any similar rule then in force) (“SEC Rule 144”), or (c) become eligible for sale pursuant to SEC Rule 144 without volume or manner-of-sale restrictions and without the requirement for the Company to be in compliance with the current public information requirement under SEC Rule 144(c)(1). For purposes of this Agreement, a Person shall be deemed to be a holder of Registrable Securities whenever such Person has the right to acquire such Registrable Securities (upon conversion of any capital stock or upon exercise of any options or warrants or in connection with a transfer of securities or otherwise, but disregarding any restrictions or limitations upon the exercise of such right), whether or not such acquisition has actually been effected.”

(b)Amendment to Section 9.

Section 9 of the Registration Rights Agreement is hereby amended to include the following Section 9(k):

“(k)Termination. This Agreement shall terminate and be of no further force or effect when there shall no longer be any Registrable Securities outstanding.”

 

Section 2.General Provisions.

(a)Amendment. No amendment of this Amendment shall be valid unless such amendment is made in accordance with Section 9(d) of the Registration Rights Agreement.

(b)Counterparts. This Amendment may be executed simultaneously in multiple counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together shall constitute one and the same Amendment.  Each party to this Amendment agrees that its own telecopied signature will bind it and that it accepts the telecopied signature of each other party to this Amendment.

(c)Governing Law. This Amendment shall be governed by and construed in accordance with the domestic laws of the State of Delaware, without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of Delaware or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Delaware.

(d)Severability of Provisions. Whenever possible, each provision of this Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Amendment is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Amendment.

 

 

(e)Effect of the Amendment. Except as amended by this Amendment, all other terms of the Registration Rights Agreement shall continue in full force and effect and remain unchanged and are hereby confirmed in all respects by each party.

[Signature Page Follows]

 

 

 

IN WITNESS WHEREOF, the parties hereto execute this Amendment, effective as of the date first written above.

 

SAILPOINT TECHNOLOGIES HOLDINGS, INC.

 

 

 

By:

 

/s/ Cam McMartin

Name:

 

Cam McMartin

Title:

 

Chief Financial Officer

 


Signature Page

First Amendment to Registration Rights Agreement

 

 

HOLDERS OF INVESTOR REGISTRABLE SECURITIES:

 

THOMA BRAVO FUND XI, L.P.

 

By:

 

Thoma Bravo Partners XI, L.P.

Its:

 

General Partner

 

By:

 

Thoma Bravo, LLC

Its:

 

General Partner

 

By:

 

/s/ Seth Boro

Name:

 

Seth Boro

Title

 

Managing Partner

 

THOMA BRAVO FUND XI-A, L.P.

 

By:

 

Thoma Bravo Partners XI, L.P.

Its:

 

General Partner

 

By:

 

Thoma Bravo, LLC

Its:

 

General Partner

 

 

 

 

By:

 

/s/ Seth Boro

Name:

 

Seth Boro

Title

 

Managing Partner

 

THOMA BRAVO EXECUTIVE FUND XI, L.P.

 

By:

 

Thoma Bravo Partners XI, L.P.

Its:

 

General Partner

 

 

 

By:

 

Thoma Bravo, LLC

Its:

 

General Partner

 

 

 

 

By:

 

/s/ Seth Boro

Name:

 

Seth Boro

Title

 

Managing Partner

 

Signature Page

First Amendment to Registration Rights Agreement

 

Exhibit 10.8

FORM OF

SAILPOINT TECHNOLOGIES HOLDINGS, INC.
2017 LONG TERM INCENTIVE PLAN

STOCK OPTION AGREEMENT

This Agreement is made and entered into as of the Date of Grant set forth in the Notice of Grant of Stock Option (“Notice of Grant”) by and between SailPoint Technologies Holdings, Inc., a Delaware corporation (the “Company”), and you:

WHEREAS, the Company, in order to induce you to enter into and continue in dedicated service to the Company and to materially contribute to the success of the Company, agrees to grant you an option to acquire an interest in the Company through the purchase of shares of stock of the Company;

WHEREAS, the Company adopted the SailPoint Technologies Holdings, Inc. 2017 Long Term Incentive Plan, as it may be amended from time to time (the “Plan”), under which the Company is authorized to grant stock options to certain employees and service providers of the Company;  

WHEREAS, a copy of the Plan has been furnished to you and shall be deemed a part of this stock option agreement (the “Agreement”) as if fully set forth herein and terms capitalized but not defined herein shall have the meaning set forth in the Plan; and

WHEREAS, you desire to accept the option created pursuant to the Agreement.

NOW, THEREFORE, in consideration of the mutual covenants set forth herein and for other valuable consideration hereinafter set forth, the parties agree as follows:

1.The Grant.  Subject to the conditions set forth below, the Company hereby grants to you, effective as of the Date of Grant set forth in the Notice of Grant, as a matter of separate inducement and not in lieu of any salary or other compensation for your services for the Company, the right and option to purchase (the “Option”), in accordance with the terms and conditions set forth herein and in the Plan, an aggregate of the number of shares of Stock set forth in the Notice of Grant (the “Option Shares”), at the Exercise Price set forth in the Notice of Grant.

2.Exercise.  

(a)Option Shares shall be deemed “Nonvested Shares” unless and until they have become “Vested Shares.”  The Option shall in all events terminate at the close of business on the tenth (10th) anniversary of the date of this Agreement (the “Expiration Date”).  Subject to other terms and conditions set forth herein, the Option may be exercised in cumulative installments in accordance with the vesting schedule set forth in the Notice of Grant, provided that you remain in the employ of or a service provider to the Company or its Subsidiaries until the applicable dates set forth therein.

 

 

(b)Subject to the relevant provisions and limitations contained herein and in the Plan, you may exercise the Option to purchase all or a portion of the applicable number of Vested Shares at any time prior to the termination of the Option pursuant to this Option Agreement.  No less than one (1) Vested Share may be purchased at any one time unless the number purchased is the total number of Vested Shares at that time purchasable under the Option.  In no event shall you be entitled to exercise the Option for any Nonvested Shares or for a fraction of a Vested Share.

(c)Any exercise by you of the Option shall be in writing addressed to the Secretary of the Company at its principal place of business.  Exercise of the Option shall be made by delivery to the Company by you (or other person entitled to exercise the Option as provided hereunder) of (i) an executed “Notice of Stock Option Exercise,” and (ii) payment of the aggregate purchase price for shares purchased pursuant to the exercise.

(d)Payment of the Exercise Price may be made, at your election, with the approval of the Company, (i) in cash, by certified or official bank check or by wire transfer of immediately available funds, (ii) by delivery to the Company of a number of shares of Stock having a Fair Market Value as of the date of exercise equal to the Exercise Price, or (iii) by net issue exercise, pursuant to which the Company will issue to you a number of shares of Stock as to which the Option is exercised, less a number of shares with a Fair Market Value as of the date of exercise equal to the Exercise Price.

(e)If you are on leave of absence for any reason, the Company may, in its sole discretion, determine that you will be considered to still be in the employ of or providing services for the Company, provided that rights to the Option will be limited to the extent to which those rights were earned or vested when the leave of absence began.

(f)The terms and provisions of the employment agreement, if any, between you and the Company or any Subsidiary (the “Employment Agreement”) that relate to or affect the Option are incorporated herein by reference.  Notwithstanding the foregoing provisions of this Section 2 or Section ‎3, in the event of any conflict or inconsistency between the terms and conditions of this Section 2 or Section ‎3 and the terms and conditions of the Employment Agreement, the terms and conditions of the Employment Agreement shall be controlling.

3.Effect of Termination of Service on Exercisability.  Except as provided in Sections 6 and 7 or an Employment Agreement, this Option may be exercised only while you continue to perform services for the Company or any Subsidiary and will terminate and cease to be exercisable upon termination of your service, except as follows:

(a)Termination on Account of Disability.  If your service with the Company or any Subsidiary terminates by reason of disability (within the meaning of section 22(e)(3) of the Code), this Option may be exercised by you (or your estate or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of your death) at any time during the period ending on the earlier to occur of (i) the date that is one year following such termination, or (ii) the Expiration Date, but only to the extent this Option was exercisable for Vested Shares as of the date your service so terminates.

(b)Termination on Account of Death.  If you cease to perform services for the Company or any Subsidiary due to your death, your estate, or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of your death, may exercise this Option at any time during the period ending on the earlier to occur of (i) the date that is one year following your death, or (ii) the Expiration Date, but only to the extent this Option was exercisable for Vested Shares as of the date of your death.

 

 

(c)Termination not for Cause.  If your service with the Company or any Subsidiary terminates for any reason other than as described in Sections 3(a) or (b), unless such service is terminated for Cause (as defined below), this Option may be exercised by you at any time during the period ending on the earlier to occur of (i) the date that is three months following your termination, or (ii) the Expiration Date, or by your estate (or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of your death) during a period of one year following your death if you die during such three-month period, but in each such case only to the extent this Option was exercisable for Vested Shares as of the date of your termination.  “Cause” means “cause” as defined in your Employment Agreement, or in the absence of such an agreement or such a definition, “Cause” will mean a vote of the board of directors of the Company (the “Board”) resolving that you should be dismissed as a result of (i) your conviction of a felony; (ii) you engaging in any other act of fraud, intentional misrepresentation, moral turpitude, misappropriation or embezzlement, illegality or unlawful harassment which, as determined by the Board in good faith and in light of all available facts, would:  (A) materially adversely affect the business or the reputation of the Company with its current or prospective customers, suppliers, lenders and/or other third parties with whom the Company does or might do business; or (B) expose the Company to a risk of material civil or criminal legal damages, liabilities or penalties; (iii) your repeated willful failure to follow the reasonable directives of the Board in connection with the business affairs of the Company; or (iv) any material breach by you of this Agreement or material violation of the Company’s policies; or (v) your willful and deliberate non-performance of duty in connection with the business affairs of the Company, provided, however, in the event of termination based on (iii), (iv) or (v), you will have a period of thirty (30) days after written notice to you from the Company to cure the circumstance, if curable.    

4.Transferability.  The Option, and any rights or interests therein will be transferable by you only to the extent approved by the Committee in conformance with Section 7(a) of the Plan.

5.Compliance with Securities Law.  Notwithstanding any provision of this Agreement to the contrary, the grant of the Option and the issuance of Stock will be subject to compliance with all applicable requirements of federal, state, and foreign securities laws and with the requirements of any stock exchange or market system upon which the Stock may then be listed.  The Option may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state, or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed.  In addition, the Option may not be exercised unless (a) a registration statement under the Securities Act of 1933, as amended (the “Act”), is at the time of exercise of the Option in effect with respect to the shares issuable upon exercise of the Option or (b) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Act.  YOU ARE CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED.  ACCORDINGLY, YOU MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED.  The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s legal counsel to be necessary to the lawful issuance and sale of any shares subject to the Option will relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority has not been obtained.  As a condition to the exercise of the Option, the Company may require you to satisfy any qualifications that may be necessary or appropriate to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect to such compliance as may be requested by the Company.

 

 

6.Extension if Exercise Prevented by Law.  Notwithstanding Section 3, if the exercise of the Option within the applicable time periods set forth in Section 3 is prevented by the provisions of Section 5, the Option will remain exercisable until 30 days after the date you are notified by the Company that the Option is exercisable, but in any event no later than the Expiration Date.  The Company makes no representation as to the tax consequences of any such delayed exercise.  You should consult with your own tax advisor as to the tax consequences of any such delayed exercise.

7.Extension if You are Subject to Section 16(b).  Notwithstanding Section 3, if a sale within the applicable time periods set forth in Section 3 of shares acquired upon the exercise of the Option would subject you to suit under Section 16(b) of the Securities Exchange Act of 1934, as amended, the Option will remain exercisable until the earliest to occur of (a) the 10th day following the date on which a sale of such shares by you would no longer be subject to such suit, (b) the 190th day after your termination of service with the Company and any Subsidiary, or (c) the Expiration Date.  The Company makes no representation as to the tax consequences of any such delayed exercise.  You should consult with your own tax advisor as to the tax consequences of any such delayed exercise.

8.Withholding Taxes.  The Committee may, in its discretion, require you to pay to the Company at the time of the exercise of an Option or thereafter, the amount that the Committee deems necessary to satisfy the Company’s current or future obligation to withhold federal, state or local income or other taxes that you incur by exercising an Option.  In connection with such an event requiring tax withholding, you may (a) direct the Company to withhold from the shares of Stock to be issued to you the number of shares necessary to satisfy the Company’s obligation to withhold taxes, that determination to be based on the shares’ Fair Market Value as of the date of exercise; (b) deliver to the Company sufficient shares of Stock (based upon the Fair Market Value as of the date of such delivery) to satisfy the Company’s tax withholding obligation; or (c) deliver sufficient cash to the Company to satisfy its tax withholding obligations.  If you elect to use a Stock withholding feature you must make the election at the time and in the manner that the Committee prescribes.  The Committee may, at its sole option, deny your request to satisfy withholding obligations through shares of Stock instead of cash.  In the event the Committee subsequently determines that the aggregate Fair Market Value (as determined above) of any shares of Stock withheld or delivered as payment of any tax withholding obligation is insufficient to discharge that tax withholding obligation, then you shall pay to the Company, immediately upon the Committee’s request, the amount of that deficiency in the form of payment requested by the Committee.

9.Status of Stock.  

(a)The Company has registered for issuance under the Securities Act of 1933, as amended (the “Act”), the shares of Stock acquirable upon exercise of the Option, and intends to keep such registration effective throughout the period the Option is exercisable. In the absence of such effective registration or an available exemption from registration under the Act, issuance of shares of Stock acquirable upon exercise of the Option will be delayed until registration of such shares is effective or an exemption from registration under the Act is available. The Company intends to use its reasonable best efforts to ensure that no such delay will occur. In the event exemption from registration under the Act is available upon an exercise of the Option, you (or the person permitted to exercise this Option in the event of your death or incapacity), if requested by the Company to do so, will execute and deliver to the Company in writing an agreement containing such provisions as the Company may require to assure compliance with applicable securities laws.

(b)You agree that the shares of Stock which you may acquire by exercising the Option will not be sold or otherwise disposed of in any manner which would constitute a violation of any applicable securities laws, whether federal or state. You also agree (i) that the certificates representing the shares of Stock purchased under the Option may bear such legend or legends as the Committee deems appropriate in

 

 

order to assure compliance with applicable securities laws, and (ii) that the Company may refuse to register the transfer of the shares of Stock purchased under the Option on the stock transfer records of the Company if such proposed transfer would in the opinion of counsel satisfactory to the Company constitute a violation of any applicable securities laws and (iii) that the Company may give related instructions to its transfer agent, if any, to stop registration of the transfer of the shares of Stock purchased under the Option.

10.Adjustments.  The terms of the Option shall be subject to adjustment from time to time, in accordance with the following provisions:

(a)If at any time, or from time to time, the Company shall subdivide as a whole (by reclassification, by a Stock split, by the issuance of a distribution on Stock payable in Stock, or otherwise) the number of shares of Stock then outstanding into a greater number of shares of Stock, then the number of shares of Stock (or other kind of securities) that may be acquired under the Option shall be increased proportionately and the Exercise Price for each share of Stock (or other kind of shares or securities) subject to the then outstanding Option shall be reduced proportionately, without changing the aggregate purchase price or value as to which the outstanding Option remains exercisable or subject to restrictions.

(b)If at any time, or from time to time, the Company shall consolidate as a whole (by reclassification, by a reverse Stock split, or otherwise) the number of shares of Stock then outstanding into a lesser number of shares of Stock,   the number of shares of Stock (or other kind of shares or securities) that may be acquired under the Option shall be decreased proportionately and the Exercise Price for each share of Stock (or other kind of shares or securities) subject to the then outstanding Option shall be increased proportionately, without changing the aggregate purchase price or value as to which the outstanding Option remains exercisable or subject to restrictions.

(c)Whenever the number of shares of Stock subject to the Option and the price for each share of Stock subject to the Option are required to be adjusted as provided in this Section 10, the Committee shall promptly prepare a notice setting forth, in reasonable detail, the event requiring adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the change in price and the number of shares of Stock, other securities, cash, or property purchasable by you pursuant to the exercise of the Option or subject to the Option after giving effect to the adjustments.  The Committee shall promptly give you such a notice.

(d)Adjustments under this Section 10 shall be made by the Committee, and its determination as to what adjustments shall be made and the extent thereof shall be final, binding, and conclusive.  No fractional interest shall be issued under the Plan on account of any such adjustments.

11.Legends.  The Company may at any time place legends, referencing any restrictions imposed on the shares pursuant to Section 10 of this Agreement, and any applicable federal, state or foreign securities law restrictions, on all certificates representing shares of Stock subject to the provisions of this Agreement.  

12.Notice of Sales Upon Disqualifying Disposition of ISO.  If the Option is designated as an Incentive Stock Option in the Notice of Grant, you must comply with the provisions of this Section 12.  You must promptly notify the Chief Financial Officer of the Company if you dispose of any of the shares acquired pursuant to the Option within one year after the date you exercise all or part of the Option or within two years after the Date of Grant.  Until such time as you dispose of such shares in a manner consistent with the provisions of this Agreement, unless otherwise expressly authorized by the Company, you must hold all shares acquired pursuant to the Option in your name (and not in the name of any nominee) for the one-year period immediately after the exercise of the Option and the two-year period immediately after the Date of Grant.  At any time during the one-year or two-year periods set forth above, the Company may

 

 

place a legend on any certificate representing shares acquired pursuant to the Option requesting the transfer agent for the Company’s stock to notify the Company of any such transfers.  Your obligation to notify the Company of any such transfer will continue notwithstanding that a legend has been placed on the certificate pursuant to the preceding sentence.

13.Right to Terminate Services.  Nothing contained in this Agreement shall confer upon you the right to continue in the employ of, or performing services for, the Company or any Subsidiary, or interfere in any way with the rights of the Company or any Subsidiary to terminate your employment or service relationship at any time.

14.Furnish Information.  You agree to furnish to the Company all information requested by the Company to enable it to comply with any reporting or other requirement imposed upon the Company by or under any applicable statute or regulation.

15.Remedies.  The Company shall be entitled to recover from you reasonable attorneys’ fees incurred in connection with the enforcement of the terms and provisions of this Agreement whether by an action to enforce specific performance or for damages for its breach or otherwise.

16.No Liability for Good Faith Determinations.  The Company and the members of the Committee and the Board shall not be liable for any act, omission or determination taken or made in good faith with respect to this Agreement or the Option granted hereunder.

17.Execution of Receipts and Releases.  Any payment of cash or any issuance or transfer of shares of Stock or other property to you, or to your legal representative, heir, legatee or distributee, in accordance with the provisions hereof, shall, to the extent thereof, be in full satisfaction of all claims of such persons hereunder. The Company may require you or your legal representative, heir, legatee or distributee, as a condition precedent to such payment or issuance, to execute a release and receipt therefore in such form as it shall determine.

18.No Guarantee of Interests.  The Board and the Company do not guarantee the Stock of the Company from loss or depreciation.

19.Company Records.  Records of the Company regarding your service and other matters shall be conclusive for all purposes hereunder, unless determined by the Company to be incorrect.

20.Notice.  Each notice required or permitted under this Agreement must be in writing and personally delivered or sent by mail and shall be deemed to be delivered on the date on which such notice is actually received by the person to whom it is properly addressed or if earlier the date sent via certified mail.  

21.Waiver of Notice.  Any person entitled to notice hereunder may, by written form, waive such notice.

22.Information Confidential.  As partial consideration for the granting of this Option, you agree that you will keep confidential all information and knowledge that you have relating to the manner and amount of your participation in the Plan; provided, however, that such information may be disclosed as required by law and may be given in confidence to your spouse, tax and financial advisors.  In the event any breach of this promise comes to the attention of the Company, it shall take into consideration that breach in determining whether to recommend the grant of any future similar award to you, as a factor weighing against the advisability of granting any such future award to you. Nothing in this Agreement will prevent you from: (a) making a good faith report of possible violations of applicable law to any

 

 

governmental agency or entity or (b) making disclosures that are protected under the whistleblower provisions of applicable law. For the avoidance of doubt, nothing herein shall prevent you from making a disclosure that: (i) is made (A) in confidence to a federal, state or local government official, either directly or indirectly, or to an attorney; and (B) solely for the purpose of reporting or investigating a suspected violation of law; or (ii) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. Further, an individual who files a lawsuit for retaliation by an employer of reporting a suspected violation of law may make disclosures without violating this Section 22 to the attorney of the individual and use such information in the court proceeding.

23.Successors.  This Agreement shall be binding upon you, your legal representatives, heirs, legatees and distributees, and upon the Company, its successors and assigns.

24.Severability.  If any provision of this Agreement is held to be illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions hereof, but such provision shall be fully severable and this Agreement shall be construed and enforced as if the illegal or invalid provision had never been included herein.

25.Company Action.  Any action required of the Company shall be by resolution of the Board or by a person authorized to act by resolution of the Board.

26.Headings.  The titles and headings of paragraphs are included for convenience of reference only and are not to be considered in construction of the provisions hereof.

27.Governing Law.  All questions arising with respect to the provisions of this Agreement shall be determined by application of the laws of Delaware without giving any effect to any conflict of law provisions thereof, except to the extent Delaware state law is preempted by federal law.  The obligation of the Company to sell and deliver Stock hereunder is subject to applicable laws and to the approval of any governmental authority required in connection with the authorization, issuance, sale, or delivery of such Stock.

28.Consent to Texas Jurisdiction and Venue.  You hereby consent and agree that state courts located in Travis County, Texas and the United States District located in Travis County, Texas each shall have personal jurisdiction and proper venue with respect to any dispute between you and the Company arising in connection with the Option or this Agreement. In any dispute with the Company, you will not raise, and you hereby expressly waive, any objection or defense to any such jurisdiction as an inconvenient forum.

29.Word Usage.  Words used in the masculine shall apply to the feminine where applicable, and wherever the context of this Agreement dictates, the plural shall be read as the singular and the singular as the plural.

30.No Assignment.  You may not assign this Agreement or any of your rights under this Agreement without the Company’s prior written consent, and any purported or attempted assignment without such prior written consent shall be void.

31.Miscellaneous.  

(a)This Agreement is subject to all the terms, conditions, limitations and restrictions contained in the Plan.  In the event of any conflict or inconsistency between the terms hereof and the terms of the Plan, the terms of the Plan shall be controlling.

 

 

(b)The Option may be amended by the Board or by the Committee at any time (i) if the Board or the Committee determines, in its sole discretion, that amendment is necessary or advisable in light of any addition to or change in any federal or state, tax or securities law or other law or regulation, which change occurs after the Date of Grant and by its terms applies to the Option; or (ii) other than in the circumstances described in clause (i) or provided in the Plan, with your consent.  

(c)If this Option is intended to be an incentive stock option designed pursuant to section 422 of the Code, then in the event the Option Shares (and all other options designed pursuant to section 422 of the Code granted to you by the Company or any parent of the Company or Subsidiary) that first become exercisable in any calendar year have an aggregate fair market value (determined for each Option Share as of the Date of Grant) that exceeds $100,000, the Option Shares in excess of $100,000 shall be treated as subject to a Nonstatutory Stock Option.

32.No Entitlement or Claims for Compensation.  In connection with the acceptance of the grant of the Option under this Agreement, you acknowledge the following:

(a)the Plan is established voluntarily by the Company, the grant of the Option under the Plan is made at the discretion of the Committee and the Plan may be modified, amended, suspended or terminated by the Company at any time;

(b)the grant of the Option under the Plan is voluntary and occasional and does not create any contractual or other right to receive future grants of equity awards, or benefits in lieu of them, even if equity awards have been granted repeatedly in the past;

(c)all decisions with respect to future grants of awards, if any, will be at the sole discretion of the Committee;

(d)you are voluntarily participating in the Plan and acknowledge you have received a copy of the Plan;

(e)the Option and any amounts payable or property transferred under the Option are extraordinary items that do not constitute compensation of any kind for services of any kind rendered to the Company and which are outside the scope of your employment contract, if any;

(f)the Option and any amounts payable under the Option are not to be considered part of your normal or expected compensation or salary for any purpose, including, but not limited to, calculating any severance, resignation, termination, payment in lieu of notice, redundancy, end of service payments, bonuses, long-service awards, pension or retirement or welfare benefits or similar payments;

(g)the Option and any amounts payable under the Option are not intended to replace any pension rights or compensation;

(h)the grant of the Option and your participation in the Plan will not be interpreted to form an employment contract or relationship with the Company;

(i)the future value of the underlying Shares is unknown and cannot be predicted with certainty;

 

 

(j)you understand that the Company is not responsible for any foreign exchange fluctuation between the United States Dollar and your local currency that may affect the value of the Option or the Shares;

(k)in consideration of the grant of the Option, you shall have no rights, claim or entitlement to compensation or damages from the forfeiture of the Option or payments under the Option or diminution in the value of the Option as a result of your cessation of employment for any reason whatsoever (whether or not in breach of contract or local labor law) or notice to terminate employment having been given by either you or the Company, and you irrevocably release the Company from any such rights, entitlement or claim that may arise.  If, notwithstanding the foregoing, any such right or claim is found by a court of competent jurisdiction to have arisen, then, by accepting the Notice of Grant, you shall be deemed to have irrevocably waived your entitlement to pursue such rights or claim;

(l)your termination will result in loss of any unvested rights; and

(m)it is your express wish that this Agreement, as well as any other documents relating to this Agreement, have been and shall be drawn up in the English language only.

33.Country-Specific Terms.  Notwithstanding anything to the contrary herein, the Option shall be subject to the Country-Specific Terms attached hereto as Addendum A.  In addition, if you relocate to one of the countries included in the Country-Specific Terms, the special terms and conditions for such country will apply to you to the extent the Company determines that the application of such terms and conditions is necessary or advisable in order to comply with local law or facilitate the administration of the Plan.  The Country-Specific Terms constitute part of this Agreement and are incorporated herein by reference.

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ADDENDUM A to THE stock OPTION AGREEMENT

country-specific terms
for Participants outside the U.S.

These Country-Specific Terms include additional terms and conditions that govern the Stock Option Award (the “Award”) granted to you under the Plan if you reside in one of the countries listed below.  Capitalized terms used but not defined in these Country-Specific Terms are defined in the Plan or the Agreement and have the meanings set forth therein.

FRANCE

Foreign Exchange Notification

You must declare the transfer of currency to or from France.

Entitlements

Should a discrepancy exist between provisions of the Agreement, the Plan or the Notice of Grant and minimum entitlements provided for under federal or provisional employment standards legislation, the minimum entitlements provided for under employment standards legislation will prevail.  

Settlement

Notwithstanding any discretion in the Plan or anything to the contrary in this Agreement, the grant of the Award does not provide you any right to receive a cash payment, and the Award may be settled only in Shares.

GERMANY

Foreign Exchange Controls

The Foreign Trade Regulation requires that German nationals or residents notify the German Central Bank of payments exceeding €12,500 to nonresident persons and entities.

 

Settlement

Notwithstanding any discretion in the Plan or anything to the contrary in this Agreement, the grant of the Award does not provide you any right to receive a cash payment, and the Award may be settled only in Shares.

 

 

INDIA

Foreign Exchange Controls

Resident individuals may remit up to US $250,000 per financial year for any permitted current or capital account transaction but need to remit the funds separately from their personal accounts, after filing Form A-2 with their authorized dealer bank, and directly acquire foreign shares.

Alternatively, “general permission” has been given under Indian foreign exchange regulations, for an employee of the Indian subsidiary of a foreign company to indirectly acquire shares of the foreign parent company, as long as the conditions mentioned in the general permission are complied with. If these conditions are not met, Reserve Bank of India’s approval will need to be obtained.  Annual reporting is also required in case the “general permission” route is followed.

Generally, sale proceeds must be repatriated within 90 days of the transaction.

Tax Issues

Shares must be valued pursuant to applicable guidelines by a Securities and Exchange Board of India-registered, Category-1 merchant banker.

Settlement

Notwithstanding any discretion in the Plan or anything to the contrary in this Agreement, the grant of the Award does not provide you any right to receive a cash payment, and the Award may be settled only in Shares.

ISRAEL

Settlement

Notwithstanding any discretion in the Plan or anything to the contrary in this Agreement, the grant of the Award does not provide you any right to receive a cash payment, and the Award may be settled only in Shares.

Tax Issues

Under Section 102 of the Israeli Income Tax Ordinance, preferential tax rates may apply to certain types of trustee capital gains plans.  The Plan is not currently approved to provide preferential tax treatment under Section 102.

SINGAPORE

None

U.K.

Settlement

Notwithstanding any discretion in the Plan or anything to the contrary in this Agreement, the grant of the Award does not provide you any right to receive a cash payment, and the Award may be settled only in Shares.

 

Exhibit 10.11

FORM OF

SAILPOINT TECHNOLOGIES HOLDINGS, INC.
2017 LONG TERM INCENTIVE PLAN

RESTRICTED STOCK UNIT AGREEMENT

This Agreement is made and entered into as of the Date of Grant set forth in the Notice of Grant of Restricted Stock Units (“Notice of Grant”) by and between SailPoint Technologies Holdings, Inc., a Delaware corporation (the “Company”), and you;

WHEREAS, the Company, as part of your compensation as an employee and in order to induce you to materially contribute to the success of the Company, agrees to grant you this restricted stock unit award;

WHEREAS, the Company adopted the Plan (as defined in the Notice of Grant) under which the Company is authorized to grant restricted stock units to certain employees, directors and other service providers of the Company;

WHEREAS, a copy of the Plan has been furnished to you and shall be deemed a part of this Restricted Stock Unit Agreement (Employee Award) (“Agreement”) as if fully set forth herein and the terms capitalized but not defined herein shall have the meanings set forth in the Plan; and

WHEREAS, you desire to accept the restricted stock unit award made pursuant to this Agreement.

NOW, THEREFORE, in consideration of and mutual covenants set forth herein and for other valuable consideration hereinafter set forth, the parties agree as follows:

1.The Grant.  Subject to the conditions set forth below, the Company hereby grants you effective as of the Date of Grant set forth in the Notice of Grant, as a matter of separate inducement but not in lieu of any cash or other compensation for your services for the Company, an award (the “Award”) consisting of the aggregate number of Shares set forth in the Notice of Grant in accordance with the terms and conditions set forth herein and in the Plan, plus the additional rights to receive possible dividend equivalents, in accordance with the terms and conditions set forth herein.  

2.No Shareholder Rights.  The Restricted Stock Units (“RSUs”) granted pursuant to this Agreement do not and shall not entitle you to any rights of a holder of Shares prior to the date shares of Stock are issued to you in settlement of the Award.  

3.Dividend Equivalents.  In the event that the Company declares and pays a dividend in respect of its outstanding Shares on or after the Date of Grant and, on the record date for such dividend, you hold RSUs granted pursuant to this Agreement that have not been settled, the Company shall pay to you an amount in cash equal to the cash dividends you would have received if you were the holder of record as of such record date, of the number of Shares related to the portion of your RSUs that have not been settled as of such record date, such payment (“Dividend Equivalents”) to be made on or promptly following the date that the Company pays such dividend (however, in no event shall the Dividend Equivalents be paid later than 30 days following the date on which the Company pays such dividend to its shareholders generally).  

4.Restrictions; Forfeiture.  The RSUs are restricted in that they may not be sold, transferred or otherwise alienated or hypothecated until Shares are issued pursuant to Section 6 following the removal or expiration of the restrictions as contemplated in Section 5 of this Agreement and as described in the Notice of Grant.  In the event you cease to be an employee of the Company or its Affiliates for any reason prior to the applicable date(s) and time(s) set forth in the Notice of Grant, the RSUs that are not Vested on the date of such cessation of employment or service shall be immediately forfeited. With respect to the Award, the Company may, in its sole discretion, determine that if you are on leave of absence for any reason you will be considered to still be in the employ of the Company or its Affiliates, provided that rights to the RSUs during a leave of absence will be limited to the extent to which those rights were Vested when the leave of absence began.

5.Expiration of Restrictions and Risk of Forfeiture.  The restrictions on the RSUs granted pursuant to this Agreement will expire and the RSUs will become nonforfeitable as set forth in the Notice of Grant, provided that you remain an employee of the Company or its Affiliates until the applicable dates and times set forth therein.  RSUs that have become vested and non-forfeitable as provided in this Agreement are referred to herein as “Vested.”  

6.Issuance of Stock.  Shares shall be issued to you in settlement of your RSUs to the extent your Award is Vested within 30 days following the date or event that caused the Award to become Vested.  At the time of settlement, the Company shall cause to be issued Shares registered in your name in payment of the Award.  The Company shall evidence the Stock to be issued in payment of the RSUs in the manner it deems appropriate.  The value of any fractional RSU shall be rounded down at the time Shares are issued to you.  No fractional Shares, nor the cash value of any fractional Shares, will be issuable or payable to you pursuant to this Agreement.  The value of Shares shall not bear any interest owing to the passage of time.  Neither this Section 6 nor any action taken pursuant to or in accordance with this Section 5 shall be construed to create a trust or a funded or secured obligation of any kind.  

7.Payment of Taxes.  The Company may require you to pay to the Company (or the Company’s Affiliate if you are an employee of an Affiliate of the Company), an amount the Company deems necessary to satisfy its (or its Affiliate’s) current or future obligation to withhold federal, state or local income or other taxes that you incur as a result of the Award.  With respect to any tax withholding and to the extent permissible pursuant to Rule 16b-3 under the Exchange Act, you may (a) direct the Company to withhold from the Shares to be issued to you under this Agreement the number of Shares necessary or appropriate to satisfy the Company’s obligation to withhold taxes, which determination will be based on the Shares’ Fair Market Value at the time such determination is made; (b) deliver to the Company Shares sufficient to satisfy the Company’s tax withholding obligations, based on the Shares’ Fair Market Value at the time such determination is made; or (c) deliver cash to the Company sufficient to satisfy its tax withholding obligations.  If you desire to elect to use the stock withholding option described in subparagraph (a), you must make the election at the time and in the manner the Company prescribes.  The Company, in its discretion, may deny your request to satisfy its tax withholding obligations using a method described under subparagraph (a) or (b).  In the event the Company determines that the aggregate Fair Market Value of the Shares withheld as payment of any tax withholding obligation is insufficient to discharge that tax withholding obligation, then you must pay to the Company, in cash, the amount of that deficiency immediately upon the Company’s request.

8.Compliance with Securities Law.  Notwithstanding any provision of this Agreement to the contrary, the issuance of Shares will be subject to compliance with all applicable requirements of federal, state, or foreign law with respect to such securities and with the requirements of any stock exchange or market system upon which the Shares may then be listed.  No Shares will be issued hereunder if such issuance would constitute a violation of any applicable federal, state, or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Shares may then be listed.  In addition, Shares will not be issued hereunder unless (a) a registration statement under the Securities Act, is at the time of issuance in effect with respect to the shares issued or (b) in the opinion of

legal counsel to the Company, the shares issued may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act.  The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s legal counsel to be necessary to the lawful issuance and sale of any shares subject to the Award will relieve the Company of any liability in respect of the failure to issue such shares as to which such requisite authority has not been obtained.  As a condition to any issuance hereunder, the Company may require you to satisfy any qualifications that may be necessary or appropriate to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect to such compliance as may be requested by the Company.  From time to time, the Board and appropriate officers of the Company are authorized to take the actions necessary and appropriate to file required documents with governmental authorities, stock exchanges, and other appropriate Persons to make Shares available for issuance.

9.Legends.  The Company may at any time place legends referencing any restrictions imposed on the shares pursuant to Sections 4 and 8 of this Agreement on all certificates representing Shares issued with respect to this Award.

10.Right of the Company and Affiliates to Terminate Services.  Nothing in this Agreement confers upon you the right to continue in the employ of or performing services for the Company or any Affiliate, or interfere in any way with the rights of the Company or any Affiliate to terminate your employment or service relationship at any time.

11.Furnish Information.  You agree to furnish to the Company all information requested by the Company to enable it to comply with any reporting or other requirements imposed upon the Company by or under any applicable statute or regulation.

12.Remedies.  The parties to this Agreement shall be entitled to recover from each other reasonable attorneys’ fees incurred in connection with the successful enforcement of the terms and provisions of this Agreement whether by an action to enforce specific performance or for damages for its breach or otherwise.

13.No Liability for Good Faith Determinations.  The Company and the members of the Board shall not be liable for any act, omission or determination taken or made in good faith with respect to this Agreement or the RSUs granted hereunder.

14.Execution of Receipts and Releases.  Any payment of cash or any issuance or transfer of RSUs or other property to you, or to your legal representative, heir, legatee or distributee, in accordance with the provisions hereof, will, to the extent thereof, be in full satisfaction of all claims of such Persons hereunder. In addition, the Company may require you or your legal representative, heir, legatee or distributee, as a condition precedent to such payment or issuance, to execute a general release of all claims in favor of the Company, any Affiliate and the employees, officers, stockholders or board members of the foregoing in such form as the Company may determine; provided, however, that any review period under such release will not modify the date of settlement with respect to your Award.

15.No Guarantee of Interests.  The Board and the Company do not guarantee the Stock of the Company from loss or depreciation.

16.Company Records.  Records of the Company or its Affiliates regarding your period of service, termination of service and the reason(s) therefor, and other matters shall be conclusive for all purposes hereunder, unless determined by the Company to be incorrect.

17.Notice.  All notices required or permitted under this Agreement must be in writing and personally delivered or sent by mail and shall be deemed to be delivered on the date on which it is actually received by the person to whom it is properly addressed or if earlier the date it is sent via certified United States mail.

18.Waiver of Notice.  Any person entitled to notice hereunder may waive such notice in writing.

19.Information Confidential.  As partial consideration for the granting of the Award hereunder, you hereby agree to keep confidential all information and knowledge, except that which has been disclosed in any public filings required by law, that you have relating to the terms and conditions of this Agreement; provided, however, that such information may be disclosed as required by law and may be given in confidence to your spouse and tax and financial advisors.  In the event any breach of this promise comes to the attention of the Company, it shall take into consideration that breach in determining whether to recommend the grant of any future similar award to you, as a factor weighing against the advisability of granting any such future award to you.  Nothing in this Agreement will prevent you from: (a) making a good faith report of possible violations of applicable law to any governmental agency or entity or (b) making disclosures that are protected under the whistleblower provisions of applicable law. For the avoidance of doubt, nothing herein shall prevent you from making a disclosure that: (i) is made (A) in confidence to a federal, state or local government official, either directly or indirectly, or to an attorney; and (B) solely for the purpose of reporting or investigating a suspected violation of law; or (ii) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. Further, an individual who files a lawsuit for retaliation by an employer of reporting a suspected violation of law may make disclosures without violating this Section 19 to the attorney of the individual and use such information in the court proceeding.

20.Successors.  This Agreement shall be binding upon you, your legal representatives, heirs, legatees and distributees, and upon the Company, its successors and assigns.

21.Severability.  If any provision of this Agreement is held to be illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions hereof, but such provision shall be fully severable and this Agreement shall be construed and enforced as if the illegal or invalid provision had never been included herein.

22.Company Action.  Any action required of the Company shall be by resolution of the Board or by a person or entity authorized to act by resolution of the Board.

23.Headings.  The titles and headings of Sections are included for convenience of reference only and are not to be considered in construction of the provisions hereof.

24.Governing Law.  All questions arising with respect to the provisions of this Agreement shall be determined by application of the laws of Delaware, without giving any effect to any conflict of law provisions thereof, except to the extent Delaware state law is preempted by federal law.  The obligation of the Company to sell and deliver Shares hereunder is subject to applicable laws and to the approval of any governmental authority required in connection with the authorization, issuance, sale, or delivery of such Shares.

25.Amendment.  This Agreement may be amended the Board or by the Committee at any time (a) if the Board or the Committee determines, in its sole discretion, that amendment is necessary or advisable in light of any addition to or change in any federal or state, tax or securities law or other law or regulation, which change occurs after the Date of Grant and by its terms applies to the Award; or (b) other than in the circumstances described in clause (a) or provided in the Plan, with your consent.  

26.Consent to Texas Jurisdiction and Venue.  You hereby consent and agree that state courts located in Travis County, Texas and the United States District Court located in Travis County, Texas each shall have personal jurisdiction and proper venue with respect to any dispute between you and the Company arising in connection with the Award or this Agreement.  In any dispute with the Company, you will not raise, and you hereby expressly waive, any objection or defense to any such jurisdiction as an inconvenient forum.  

27.The Plan.  This Agreement is subject to all the terms, conditions, limitations and restrictions contained in the Plan.

28.Nonqualified Deferred Compensation Rules.  This Agreement is not intended to constitute a deferral of compensation within the meaning of Section 409A of the Code and shall be construed and interpreted in accordance with such intent.  Payment under this Agreement shall be made in a manner that will be exempt from or, notwithstanding the preceding sentence, comply with Section 409A of the Code, including regulations or other guidance issued with respect thereto, except as otherwise determined by the Committee.  The applicable provisions of Section 409A of the Code are hereby incorporated by reference and shall control over any contrary provisions herein that conflict therewith.  

29.No Entitlement or Claims for Compensation.  In connection with the acceptance of the grant of the Award under this Agreement, you acknowledge the following:

(a)the Plan is established voluntarily by the Company, the grant of the Award under the Plan is made at the discretion of the Committee and the Plan may be modified, amended, suspended or terminated by the Company at any time;

(b)the grant of the Award under the Plan is voluntary and occasional and does not create any contractual or other right to receive future grants of equity awards, or benefits in lieu of them, even if equity awards have been granted repeatedly in the past;

(c)all decisions with respect to future grants of awards, if any, will be at the sole discretion of the Committee;

(d)you are voluntarily participating in the Plan and acknowledge you have received a copy of the Plan;

(e)the Award and any amounts payable or property transferred under the Award are extraordinary items that do not constitute compensation of any kind for services of any kind rendered to the Company and which are outside the scope of your employment contract, if any;

(f)the Award and any amounts payable under the Award are not to be considered part of your normal or expected compensation or salary for any purpose, including, but not limited to, calculating any severance, resignation, termination, payment in lieu of notice, redundancy, end of service payments, bonuses, long-service awards, pension or retirement or welfare benefits or similar payments;

(g)the Award and any amounts payable under the Award are not intended to replace any pension rights or compensation;

(h)the grant of the Award and your participation in the Plan will not be interpreted to form an employment contract or relationship with the Company;

(i)the future value of the underlying Shares is unknown and cannot be predicted with certainty;

(j)you understand that the Company is not responsible for any foreign exchange fluctuation between the United States Dollar and your local currency that may affect the value of the Award or the Shares;

(k)in consideration of the grant of the Award, you shall have no rights, claim or entitlement to compensation or damages from the forfeiture of the Award or payments under the Award or diminution in the value of the Award as a result of your cessation of employment for any reason whatsoever (whether or not in breach of contract or local labor law) or notice to terminate employment having been given by either you or the Company, and you irrevocably release the Company from any such rights, entitlement or claim that may arise.  If, notwithstanding the foregoing, any such right or claim is found by a court of competent jurisdiction to have arisen, then, by accepting this Notice of Grant, you shall be deemed to have irrevocably waived your entitlement to pursue such rights or claim;

(l)your termination will result in loss of any unvested rights; and

(m)it is your express wish that this Agreement, as well as any other documents relating to this Agreement, have been and shall be drawn up in the English language only.

30.Country-Specific Terms.  Notwithstanding anything to the contrary herein, the Award shall be subject to the Country-Specific Terms attached hereto as Addendum A.  In addition, if you relocate to one of the countries included in the Country-Specific Terms, the special terms and conditions for such country will apply to you to the extent the Company determines that the application of such terms and conditions is necessary or advisable in order to comply with local law or facilitate the administration of the Plan.  The Country-Specific Terms constitute part of this Agreement and are incorporated herein by reference.

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ADDENDUM A to THE restricted stock unit AGREEMENT

country-specific terms
for Participants outside the U.S.

These Country-Specific Terms include additional terms and conditions that govern the Restricted Stock Unit Award (the “Award”) granted to you under the Plan if you reside in one of the countries listed below.  Capitalized terms used but not defined in these Country-Specific Terms are defined in the Plan or the Agreement and have the meanings set forth therein.

AUSTRALIA

Foreign Exchange Notification

Reporting required for cash transactions in excess of A$10,000 and international fund transfers of any amount.

Settlement

Notwithstanding any discretion in the Plan or anything to the contrary in this Agreement, the grant of the Award does not provide you any right to receive a cash payment, and the Award may be settled only in Shares.

CANADA

Entitlements

Should a discrepancy exist between provisions of the Agreement, the Plan or the Notice of Grant and minimum entitlements provided for under federal or provisional employment standards legislation, the minimum entitlements provided for under employment standards legislation will prevail.  

Settlement

Notwithstanding any discretion in the Plan or anything to the contrary in this Agreement, the grant of the Award does not provide you any right to receive a cash payment, and the Award may be settled only in Shares.

FRANCE

Foreign Exchange Notification

You must declare the transfer of currency to or from France.

Entitlements

Should a discrepancy exist between provisions of the Agreement, the Plan or the Notice of Grant and minimum entitlements provided for under federal or provisional employment standards legislation, the minimum entitlements provided for under employment standards legislation will prevail.  

Settlement

Notwithstanding any discretion in the Plan or anything to the contrary in this Agreement, the grant of the Award does not provide you any right to receive a cash payment, and the Award may be settled only in Shares.

GERMANY

Foreign Exchange Controls

The Foreign Trade Regulation requires that German nationals or residents notify the German Central Bank of payments exceeding €12,500 to nonresident persons and entities.

Settlement

Notwithstanding any discretion in the Plan or anything to the contrary in this Agreement, the grant of the Award does not provide you any right to receive a cash payment, and the Award may be settled only in Shares.

HONG KONG

Settlement

Notwithstanding any discretion in the Plan or anything to the contrary in this Agreement, the grant of the Award does not provide you any right to receive a cash payment, and the Award may be settled only in Shares.

INDIA

Foreign Exchange Controls

Resident individuals may remit up to US $250,000 per financial year for any permitted current or capital account transaction but need to remit the funds separately from their personal accounts, after filing Form A-2 with their authorized dealer bank, and directly acquire foreign shares.

Alternatively, “general permission” has been given under Indian foreign exchange regulations, for an employee of the Indian subsidiary of a foreign company to indirectly acquire shares of the foreign parent company, as long as the conditions mentioned in the general permission are complied with. If these conditions are not met, Reserve Bank of India’s approval will need to be obtained.  Annual reporting is also required in case the “general permission” route is followed.

Generally, sale proceeds must be repatriated within 90 days of the transaction.

Tax Issues

Shares must be valued pursuant to applicable guidelines by a Securities and Exchange Board of India-registered, Category-1 merchant banker.

Settlement

Notwithstanding any discretion in the Plan or anything to the contrary in this Agreement, the grant of the Award does not provide you any right to receive a cash payment, and the Award may be settled only in Shares.

ISRAEL

Settlement

Notwithstanding any discretion in the Plan or anything to the contrary in this Agreement, the grant of the Award does not provide you any right to receive a cash payment, and the Award may be settled only in Shares.

Tax Issues

Under Section 102 of the Israeli Income Tax Ordinance, preferential tax rates may apply to certain types of trustee capital gains plans.  The Plan is not currently approved to provide preferential tax treatment under Section 102.

JAPAN

Foreign Exchange Notification

If an employee pays ¥30,000,000 or more, then a payment report must be filed with the Ministry of Finance via the Bank of Japan.  

Settlement

Notwithstanding any discretion in the Plan or anything to the contrary in the Agreement, the grant of the Award does not provide you any right to receive a cash payment, and the Award may be settled only in Shares.

NETHERLANDS

Settlement

Notwithstanding any discretion in the Plan or anything to the contrary in this Agreement, the grant of the Award does not provide you any right to receive a cash payment, and the Award may be settled only in Shares.

SINGAPORE

None

SWEDEN

Foreign Exchange Controls

Transfers out of Sweden exceeding SEK 150,000 are subject to notice requirements.

Settlement

Notwithstanding any discretion in the Plan or anything to the contrary in this Agreement, the grant of the Award does not provide you any right to receive a cash payment, and the Award may be settled only in Shares.

SWITZERLAND

Settlement

Notwithstanding any discretion in the Plan or anything to the contrary in this Agreement, the grant of the Award does not provide you any right to receive a cash payment, and the Award may be settled only in Shares.

U.K.

Settlement

Notwithstanding any discretion in the Plan or anything to the contrary in this Agreement, the grant of the Award does not provide you any right to receive a cash payment, and the Award may be settled only in Shares.

 

Exhibit 10.15

 

July 2, 2015

 

Juliette Rizkallah

263 Coronado

San Carlos, California 94070

Dear Juliette:

I am excited about the prospect of you joining SailPoint Technologies, Inc. (“SailPoint”). Your skills and abilities will be a great addition to the team and I look forward to working with you. This letter confirms the details of SailPoint’s offer of employment as the Chief Marketing Officer with a proposed start date on or before July 27, 2015.

 

 

1.

Compensation. Your annual base salary will be $260,000; paid semi-monthly (on the 15th and last day of each month) consistent with our standard payroll procedures, and reduced by payroll deductions and all required withholdings.

 

You will also be eligible for a bonus of 35% of your annual salary based on achievement of corporate goals as set forth by the SailPoint Board of Directors Compensation Committee.

 

 

2.

Stock Options. Subject to approval by SailPoint’s Board of Directors, you will be granted an option to purchase 150,000 shares of SailPoint Common Stock at the fair market value on the date the Board approves the option grant. Half of these shares (50%) will vest based on a time- based schedule and half (50%) will vest on a performance-based schedule.

 

When approved by the Board of Directors, your grant will include the following change of control provision:

 

“In the event both (i) a Sale of the Company occurs and (ii) Purchaser’s continuous status as a Service Provider is terminated either (A) by the Company or the acquiring entity without Cause or (B) by Purchaser for Good Reason, in either case, within the twelve month period immediately following such Sale of the Company, then 100% of the Unvested Restricted Stock shall become vested as of the termination of Purchaser’s status as a Service Provider; provided, however, that if Purchaser’s continuous status as a Service Provider ceases prior to any Sale of the Company, then no Unvested Restricted Stock shall vest.”

 

Additionally, language will be included in your stock option agreement that is similar in substance to the following terms:

 

For a partial year of service, an employee will receive partial year vesting credit for shares subject to achievement of the EBITDA target, upon achievement of that target. Vesting will be calculated based upon the number of service months in the initial year of service (based on the calendar year).

 

 

 

 

Please refer to the Stock Option agreement for specific details regarding vesting schedules and change of control terms.

 

“Cause” means that employee should be dismissed as a result of (i) employee’s conviction of a felony (ii) employee engaging in any other act of fraud, intentional misrepresentation, moral turpitude, misappropriation or embezzlement, illegality or unlawful harassment which, as determined by the Chief Executive Officer in good faith and in light of all available facts, would: (A) materially adversely affect the business or the reputation of the Company with its current or prospective customers, suppliers, lenders and/or other third parties with whom the Company does or might do business; or

(B) expose the Company to a risk of material civil or criminal legal damages, liabilities or penalties; (iii) the repeated willful failure by employee to follow the reasonable directives of the Board or Chief Executive Officer in connection with the business affairs of the Company, or (iv) any material breach by employee of this Agreement or material violation of the Company’s policies or (v) willful and deliberate non-performance of duty by employee in connection with the business affairs of the Company, provided, however, in the event of termination based on (iii), (iv) or (v), employee will have a period of thirty

(30) days after written notice to employee from the Company to cure the circumstance, if curable.

“Good Reason” shall be deemed to occur if: (1) (a) there is a reduction of more than ten percent (10%) of your base compensation unless in connection with similar decreases in the base compensation of other executive officers of the Company, or (b) the company relocates your primary work location outside of the Austin, Texas metropolitan area without your written consent, or (3) there is a change of title, or material reduction in your duties or responsibilities that is inconsistent with your position and (2) within the thirty (30) day period immediately following such event you notify the Company of the occurrence of the event constituting Good Reason and that you are electing to terminate your employment relationship with the Company if the Company fails to cure such event. The Company shall have a thirty (30) day period to cure such event. If the Company affects a cure within such period, you shall not be eligible to terminate for Good Reason.

 

 

3.

Moving Expense Reimbursement. SailPoint agrees to reimburse you for up to $25,000 of your actual, documented “qualified” (per IRS rules) moving expenses (“Moving Expense Reimbursement”). You will be reimbursed for any such expenses reasonably incurred by you and submitted with reasonable documentation to SailPoint on or before October 1, 2015. Should you resign or be terminated for cause within twelve (12) months of your start date, you will be required to reimburse SailPoint 100% of the Moving Expense Reimbursement paid to you. Your signature below authorizes SailPoint to deduct reimbursement of the moving expenses from any monies owed to you upon your termination. For avoidance of doubt, SailPoint does not reimburse for costs incurred related to buying or selling of residential property.

 

In the event that your continuous status as an employee is terminated by the Company without Cause within twelve months of your start date, you will be eligible for reimbursement of up to $25,000 of your actual, documented, “qualified” (per IRS rules) moving expenses for return relocation to your home state of California.

 

4.

Benefits. You will be eligible to participate in a comprehensive package of employee benefits, which includes medical, dental, vision, group life insurance and a 401(k) plan. Details of these and other benefit options will be provided to you at the New Hire Orientation session, scheduled for

2

 

 

your first day.

 

 

5.

Work Authorization. In compliance with Federal Immigration law, this offer of employment is contingent upon your ability to provide proof of eligibility and right to work in the United States. This documentation must be provided within 3 business days of  the effective date of your employment.

 

 

6.

Background Check. As a condition of accepting this offer of employment, you may be required to submit to a background screening. Unsatisfactory results from, refusal to cooperate with, or any attempt to affect the results of this check may result in termination of employment.

 

 

7.

Employment, Proprietary Information, and Invention Assignment Agreement. As a condition of accepting this offer of employment, you will be required to complete, sign and return SailPoint Employment, Proprietary Information, and Invention Assignment Agreement.

 

 

8.

General. This offer letter, the Employment, Confidential Information and Invention Assignment Agreement, when signed by you, set forth the terms of your employment with SailPoint. This agreement can only be amended in writing, signed by you and an officer of SailPoint.

 

This offer is valid for a period of three business days at which time you must have returned the signed offer and SailPoint Employment, Proprietary Information, and Invention Assignment Agreement.

 

Your employment with SailPoint is at will and may be terminated by you or by SailPoint at any time and for any reason, with or without cause. No statement on this letter, any SailPoint booklet, brochure, guideline, manual, policy or plan should be construed as creating an employment contract for any specific duration.

 

If these terms are agreeable, please indicate your acceptance by signing this letter in the space provided below and returning it to me, along with your completed and signed Employee, Proprietary Information, and Invention Assignment Agreement.

 

Should you have any questions regarding this offer or any other issue, please contact your recruiter or me at 512.346.2000.

 

Juliette, we look forward to welcoming you onto the SailPoint team. We are committed to building a great company. With your help, I am confident we will succeed.

 

 

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Sincerely,

 

Mark McClain CEO & Founder

 

 

AGREED AND ACCEPTED:

 

 

 

/s/ Juliette Rizkallah

 

Juliette Rizkallah

 

 

 

07/02/2015

 

Date

 

4

 

Exhibit 10.16

November 19, 2018

 

Andrew Kahl

4222 Alta Vista Lane

Dallas, Texas 75229

Dear Andrew:

I am excited about the prospect of you joining SailPoint Technologies, Inc. (“SailPoint”).  Your skills and abilities will be a great addition to the team and I look forward to working with you.  This letter confirms the details of SailPoint’s offer of employment, subject to the approval of the Board of Directors, as the Chief Customer Officer with a proposed start date of January 7, 2019.

 

1.

Compensation.  Your annual base salary will be $300,000; paid semi-monthly (on the 15th and last day of each month) consistent with our standard payroll procedures, and reduced by payroll deductions and all required withholdings.

You will also be eligible for a bonus of 40% of your annual salary based on achievement of corporate goals as set forth by the SailPoint Board of Directors Compensation Committee.

 

2.

Equity Awards.  Subject to approval by SailPoint’s Board of Directors, you will be granted

 

(i)

an award of restricted stock units (“RSUs”) with a value of $725,000, determined based on the 30 trading day average closing price of SailPoint Common Stock on the date the Board approves the grant of the RSUs.  The RSUs represent the right to receive shares of SailPoint Common Stock and will vest and be settled in four annual 25% installments beginning February 20, 2020.

 

(ii)

(ii) an option to purchase a number of shares of SailPoint Common Stock determined by dividing $725,000 by 30 trading day average closing price of SailPoint Common Stock on the date the Board approves the award, multiplied by two.  Your stock option will have an exercise price equal to the closing price of SailPoint Common Stock on the date the Board approves the award.  The stock options will vest 25% on the first anniversary of the date of grant and then 1/48th on each monthly anniversary of the date of grant thereafter.  

All vesting of RSUs and options is contingent upon your continued employment with SailPoint.  The RSUs and options are subject to the terms and conditions of the SailPoint’s 2017 Long Term Incentive Plan and the award agreements evidencing such awards.

 

3.

Sign On Bonus.  You will also receive a one-time bonus for $40,000 to be paid within thirty (30) days following your start date. Should you resign or be terminated for cause within twelve (12) months of your start date, the company reserves the right to seek repayment of a pro-rata portion of your bonus.  Your signature below authorizes SailPoint to deduct reimbursement of this starting bonus from any monies owed to you upon your termination.

 

4.

Moving Expense Reimbursement. SailPoint agrees to reimburse you for up to $25,000 of your actual, documented "qualified" (per IRS rules) moving expenses ("Moving Expense Reimbursement").

 

 

Assuming that you have permanently relocated to Austin by June 1, 2019, you will be reimbursed for any such expenses reasonably incurred by you and submitted with reasonable documentation to SailPoint on or before August 31, 2019.  Should you resign or be terminated for cause within twelve (12) months of your relocation date, you will be required to reimburse SailPoint 100% of the Moving Expense Reimbursement paid to you. Your signature below authorizes SailPoint to deduct reimbursement of the moving expenses from any monies owed to you upon your termination.  

 

5.

Executive Severance.  So long as you are currently serving in the capacity of the Chief Customer Officer (or other similarly senior executive position), you will be eligible for participation in the Executive Severance plan, subject to the approval of both the Chief Executive Officer and the Compensation Committee under the terms and conditions of the plan.

 

6.

Benefits.  You will be eligible to participate in a comprehensive package of employee benefits, which includes medical, dental, vision, group life insurance and a 401(k) plan.  Details of these and other benefit options will be provided to you at the New Hire Orientation session, scheduled for your first day.

 

7.

Work Authorization.  In compliance with Federal Immigration law, this offer of employment is contingent upon your ability to provide proof of eligibility and right to work in the United States.  This documentation must be provided within 3 business days of the effective date of your employment.

 

8.

Background Check. As a condition of accepting this offer of employment, you may be required to submit to a background screening. Unsatisfactory results from, refusal to cooperate with, or any attempt to affect the results of this check may result in termination of employment.

 

9.

Employment, Proprietary Information, and Invention Assignment Agreement.  As a condition of accepting this offer of employment, you will be required to complete, sign and return SailPoint Employment, Proprietary Information, and Invention Assignment Agreement.

 

10.

General.  This offer letter, the Employment, Confidential Information and Invention Assignment Agreement, when signed by you, set forth the terms of your employment with SailPoint.  This agreement can only be amended in writing, signed by you and an officer of SailPoint.  

Your employment with SailPoint is at will and may be terminated by you or by SailPoint at any time and for any reason, with or without cause.  No statement on this letter, any SailPoint booklet, brochure, guideline, manual, policy or plan should be construed as creating an employment contract for any specific duration.  

If these terms are agreeable, please indicate your acceptance by signing this letter in the space provided below and returning it to me, along with your completed and signed Employee, Proprietary Information, and Invention Assignment Agreement.

Should you have any questions regarding this offer or any other issue, please contact your recruiter or me at 512.346.2000.  

Andrew, we look forward to welcoming you onto the SailPoint team.  We are committed to continuing to build a great company.  With your help, I am confident we will succeed.

 

 

 

Sincerely,

 

Mark McClain

CEO & Founder

 

 

AGREED AND ACCEPTED:

 

 

 

/s/ Andrew Kahl

 

Andrew Kahl

 

 

 

November 24, 2018

 

Date

 

 

 

Exhibit 10.29

NOTICE OF GRANT OF RESTRICTED SHARE UNITS

Pursuant to the terms and conditions of the SailPoint Technologies Holdings, Inc. 2015 Stock Incentive Plan, attached as Appendix A (the “Plan”), and the associated Restricted Share Unit Agreement, attached as Appendix B (the “Agreement”), you are hereby granted an award to receive the number of Restricted Share Units (“RSUs”) set forth below, whereby each RSU represents the right to receive one Share, plus rights to certain dividend equivalents described in Section 3 of the Agreement, under the terms and conditions set forth below, in the Agreement, and in the Plan.  Capitalized terms used but not defined herein shall have the meanings set forth in the Plan or the Agreement.  

 

Grantee:

 

 

 

 

 

Date of Grant:

 

 

Such date being subject to Section 9.4 of the Plan and Section 29(b) of the Agreement.

 

Number of RSUs:

 

 

 

Intended Type of Award:

(X check one):

 

 

 

 

 

 

 

 

Restricted Share Unit (U.S.)

 

 

 

 

 

 

 

 

 

Restricted Share Unit designated as 102 Capital Gains Track Award (with Trustee) (Israel)

 

 

 

 

 

 

 

 

 

Restricted Share Unit designated as 102 Ordinary Income Track Award (with Trustee) (Israel)

 

 

 

 

 

 

 

 

 

Restricted Share Unit designated as 102 Non-Trustee Award (Israel)

 

The above being subject to Section 7 of the Agreement, Section 18.4 of the Plan and applicable law.

 

Vesting Schedule:

The RSUs granted pursuant to the Agreement will become vested and be nonforfeitable as of the following schedule: [●]; provided, that, you remain in the employ of the Company or its Subsidiaries continuously from the Date of Grant through such vesting dates.  

 

By your electronic acceptance of this Notice of Grant of Restricted Share Unit, you and the Company hereby acknowledge receipt of the RSUs issued on the Date of Grant indicated above, which have been issued under the terms and conditions of the Plan and the Agreement.  

 

 

By accepting the RSUs you acknowledge and agree that (a) you are not relying on any written or oral statement or representation by the Company, its affiliates, or any of their respective employees, directors, officers, attorneys or agents (collectively, the “Company Parties”) regarding the tax effects associated with this Notice of Grant of Restricted Share Units and the Agreement and your receipt, holding and vesting of the RSUs, (b) in accepting the RSUs you are relying on your own judgment and the judgment of the professionals of your choice with whom you have consulted, and (c) a copy of the Agreement and the Plan has been made available to you.  By accepting the RSUs you hereby release, acquit and forever discharge the Company Parties from all actions, causes of actions, suits, debts, obligations, liabilities, claims, damages, losses, costs and expenses of any nature whatsoever, known or unknown, on account of, arising out of, or in any way related to your employment, your compensation or the tax effects associated with this Notice of Grant of Restricted Share Unit and the Agreement and your receipt, holding and the vesting of the RSUs.

You further acknowledge receipt of a copy of the Plan and the Agreement and agree to all of the terms and conditions of the Plan and the Agreement, which are incorporated herein by reference.  

Note: Failure to acknowledge acceptance of this Notice of Grant of Restricted Share Units at the time presented to you will render this issuance invalid.  

 

SAILPOINT TECHNOLOGIES HOLDINGS, INC.,

a Delaware Corporation

 

 

By:

 

Name:

 

Title:

 

 

Attachments:

Non-U.S. Exhibit for Employees Located in Israel

Appendix A – SailPoint Technologies Holdings, Inc. 2015 Stock Incentive Plan

Appendix B – Restricted Share Unit Agreement

2

 

NON-U.S. EXHIBIT FOR EMPLOYEES LOCATED IN ISRAEL

Notwithstanding anything to the contrary herein, the grant of RSUs (the “Award”) shall be subject to the Country-Specific Terms provided below.  The Country-Specific Terms constitute part of this Agreement and are incorporated herein by reference.  Capitalized terms used but not defined in this Exhibit are defined in the Plan or the Agreement and have the meanings set forth therein.  

1.

No Entitlement or Claims for Compensation.  In connection with the acceptance of the grant of the Award under this Agreement, you acknowledge the following:

(a)the Plan is established voluntarily by the Company, the grant of the Award under the Plan is made at the discretion of the Committee and the Plan may be modified, amended, suspended or terminated by the Company at any time;

(b)the grant of the Award under the Plan is voluntary and occasional and does not create any contractual or other right to receive future grants of equity awards, or benefits in lieu of them, even if equity awards have been granted repeatedly in the past;

(c)all decisions with respect to future grants of awards, if any, will be at the sole discretion of the Committee;

(d)you are voluntarily participating in the Plan and acknowledge you have received a copy of the Plan;

(e)the Award and any amounts payable or property transferred under the Award are extraordinary items that do not constitute compensation of any kind for services of any kind rendered to the Company and which are outside the scope of your employment contract, if any;

(f)the Award and any amounts payable under the Award are not to be considered part of your normal or expected compensation or salary for any purpose, including, but not limited to, calculating any severance, resignation, termination, payment in lieu of notice, redundancy, end of service payments, bonuses, long-service awards, pension or retirement or welfare benefits or similar payments;

(g)the Award and any amounts payable under the Award are not intended to replace any pension rights or compensation;

(h)the grant of the Award and your participation in the Plan will not be interpreted to form an employment contract or relationship with the Company;

(i)the future value of the underlying Shares is unknown and cannot be predicted with certainty;

(j)you understand that the Company is not responsible for any foreign exchange fluctuation between the United States Dollar and your local currency that may affect the value of the Award or the Shares;

3

 

(k)in consideration of the grant of the Award, you shall have no rights, claim or entitlement to compensation or damages from the forfeiture of the Award or payments under the Award or diminution in the value of the Award as a result of your cessation of employment for any reason whatsoever (whether or not in breach of contract or local labor law) or notice to terminate employment having been given by either you or the Company, and you irrevocably release the Company from any such rights, entitlement or claim that may arise.  If, notwithstanding the foregoing, any such right or claim is found by a court of competent jurisdiction to have arisen, then, by accepting this Notice of Grant, you shall be deemed to have irrevocably waived your entitlement to pursue such rights or claim;

(l)your termination will result in loss of any unvested rights; and

(m)it is your express wish that this Agreement, as well as any other documents relating to this Agreement, have been and shall be drawn up in the English language only.

2.

Settlement.  Notwithstanding any discretion in the Plan or anything to the contrary in this Agreement, the grant of the Award does not provide you any right to receive a cash payment, and the Award may be settled only in Shares.

3.

Tax Issues.  Under Section 102 of the Israeli Income Tax Ordinance, preferential tax rates may apply to certain types of trustee capital gains plans.  The Plan is currently approved to provide preferential tax treatment under Section 102.

4

 

Appendix A

 

SailPoint Technologies Holdings, Inc. 2015 Stock Incentive Plan

 

 

Appendix B

 

Restricted Share Unit Agreement

 

 

Exhibit 10.30

SAILPOINT TECHNOLOGIES HOLDINGS, INC.

2015 STOCK INCENTIVE PLAN

RESTRICTED SHARE UNIT AGREEMENT

This Agreement is made and entered into as of the Date of Grant set forth in the Notice of Grant of Restricted Share Units (“Notice of Grant”) by and between SailPoint Technologies Holdings, Inc., a Delaware corporation (the “Company”), and you;

WHEREAS, the Company, as part of your compensation as an employee and in order to induce you to materially contribute to the success of the Company, agrees to grant you this restricted share unit award;

WHEREAS, the Company adopted the Plan (as defined in the Notice of Grant) under which the Company is authorized to grant restricted share units to certain employees, directors and other service providers of the Company;

WHEREAS, a copy of the Plan has been furnished to you and shall be deemed a part of this Restricted Share Unit Agreement (“Agreement”) as if fully set forth herein and the terms capitalized but not defined herein shall have the meanings set forth in the Plan; and

WHEREAS, you desire to accept the restricted share unit award made pursuant to this Agreement.

NOW, THEREFORE, in consideration of and mutual covenants set forth herein and for other valuable consideration hereinafter set forth, the parties agree as follows:

1.

The Grant.  Subject to the conditions set forth below, the Company hereby grants you effective as of the Date of Grant set forth in the Notice of Grant, as a matter of separate inducement but not in lieu of any cash or other compensation for your services for the Company, an award (the “Award”) consisting of the aggregate number of Shares set forth in the Notice of Grant in accordance with the terms and conditions set forth herein and in the Plan, plus the additional rights to receive possible dividend equivalents, in accordance with the terms and conditions set forth herein.  

2.

No Shareholder Rights.  The Restricted Share Units (“RSUs”) granted pursuant to this Agreement do not and shall not entitle you, or with respect to 102 Awards, the Trustee) to any rights of a holder of Shares prior to the date shares of Stock are issued to you (or the Trustee for 102 Awards) in settlement of the Award.  

3.

Dividend Equivalents.  In the event that the Company declares and pays a dividend in respect of its outstanding Shares on or after the Date of Grant and, on the record date for such dividend, you hold RSUs granted pursuant to this Agreement that have not been settled, the Company shall pay to you an amount in cash equal to the cash dividends you would have received if you were the holder of record as of such record date, of the number of Shares related to the portion of your RSUs that have not been settled as of such record date, such payment (“Dividend Equivalents”) to be made on or promptly following the date that the Company pays such dividend (however, in no event shall the Dividend Equivalents be paid later than 30 days following the date on which the Company pays such dividend to its shareholders generally).  

1

 

4.

Restrictions; Forfeiture.  The RSUs are restricted in that they may not be sold, transferred or otherwise alienated or hypothecated until Shares are issued pursuant to Section 6 following the removal or expiration of the restrictions as contemplated in Section 5 of this Agreement and as described in the Notice of Grant.  In the event you cease to be an employee of the Company or its Affiliates for any reason prior to the applicable date(s) and time(s) set forth in the Notice of Grant, the RSUs that are not Vested on the date of such cessation of employment or service shall be immediately forfeited. With respect to the Award, the Company may, in its sole discretion, determine that if you are on leave of absence for any reason you will be considered to still be in the employ of the Company or its Affiliates, provided that rights to the RSUs during a leave of absence will be limited to the extent to which those rights were Vested when the leave of absence began.

5.

Expiration of Restrictions and Risk of Forfeiture.  The restrictions on the RSUs granted pursuant to this Agreement will expire and the RSUs will become nonforfeitable as set forth in the Notice of Grant, provided that you remain an employee of the Company or its Affiliates until the applicable dates and times set forth therein.  RSUs that have become vested and non-forfeitable as provided in this Agreement are referred to herein as “Vested.”  

6.

Issuance of Stock.  Shares shall be issued to you in settlement of your RSUs to the extent your Award is Vested within 30 days following the date or event that caused the Award to become Vested.  At the time of settlement, the Company shall cause to be issued Shares registered in your name in payment of the Award. The Company shall evidence the Stock to be issued in payment of the RSUs in the manner it deems appropriate.  The value of any fractional RSU shall be rounded down at the time Shares are issued to you.  No fractional Shares, nor the cash value of any fractional Shares, will be issuable or payable to you pursuant to this Agreement.  The value of Shares shall not bear any interest owing to the passage of time.  Neither this Section 6 nor any action taken pursuant to or in accordance with this Section 6 shall be construed to create a trust or a funded or secured obligation of any kind.  

7.

Payment of Taxes.  The Company, or with respect to 102 Awards, the Trustee, may require you to pay to the Company (or the Company’s Affiliate if you are an employee of an Affiliate of the Company or the Trustee for 102 Awards), an amount the Company deems necessary to satisfy its (or its Affiliate’s or the Trustee’s) current or future obligation to withhold federal, state or local income or other taxes that you incur as a result of the Award.  With respect to any tax withholding and to the extent permissible pursuant to Rule 16b-3 under the Exchange Act, you may (a) direct the Company to withhold from the Shares to be issued to you under this Agreement the number of Shares necessary or appropriate to satisfy the Company’s obligation to withhold taxes, which determination will be based on the Shares’ Fair Market Value at the time such determination is made; (b) deliver to the Company Shares sufficient to satisfy the Company’s tax withholding obligations, based on the Shares’ Fair Market Value at the time such determination is made; or (c) deliver cash to the Company sufficient to satisfy its tax withholding obligations.  If you desire to elect to use the stock withholding option described in subparagraph (a), you must make the election at the time and in the manner the Company prescribes.  The Company, in its discretion, may deny your request to satisfy its tax withholding obligations using a method described under subparagraph (a) or (b).  In the event the Company determines that the aggregate Fair Market Value of the Shares withheld as payment of any tax withholding obligation is insufficient to discharge that tax withholding obligation, then you must pay to the Company, in cash, the amount of that deficiency immediately upon the Company’s request.

2

 

 

8.

Compliance with Securities Law.  Notwithstanding any provision of this Agreement to the contrary, the issuance of Shares will be subject to compliance with all applicable requirements of federal, state, or foreign law with respect to such securities and with the requirements of any stock exchange or market system upon which the Shares may then be listed.  No Shares will be issued hereunder if such issuance would constitute a violation of any applicable federal, state, or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Shares may then be listed.  In addition, Shares will not be issued hereunder unless (a) a registration statement under the Securities Act, is at the time of issuance in effect with respect to the shares issued or (b) in the opinion of legal counsel to the Company, the shares issued may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act.  The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s legal counsel to be necessary to the lawful issuance and sale of any shares subject to the Award will relieve the Company of any liability in respect of the failure to issue such shares as to which such requisite authority has not been obtained.  As a condition to any issuance hereunder, the Company may require you to satisfy any qualifications that may be necessary or appropriate to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect to such compliance as may be requested by the Company.  From time to time, the Board and appropriate officers of the Company are authorized to take the actions necessary and appropriate to file required documents with governmental authorities, stock exchanges, and other appropriate Persons to make Shares available for issuance.

9.

Legends.  The Company may at any time place legends referencing any restrictions imposed on the shares pursuant to Sections 4 and 8 of this Agreement on all certificates representing Shares issued with respect to this Award.

10.

Right of the Company and Affiliates to Terminate Services.  Nothing in this Agreement confers upon you the right to continue in the employ of or performing services for the Company or any Affiliate, or interfere in any way with the rights of the Company or any Affiliate to terminate your employment or service relationship at any time.

11.

Furnish Information.  You agree to furnish to the Company all information requested by the Company to enable it to comply with any reporting or other requirements imposed upon the Company by or under any applicable statute or regulation.

12.

Remedies.  The parties to this Agreement shall be entitled to recover from each other reasonable attorneys’ fees incurred in connection with the successful enforcement of the terms and provisions of this Agreement whether by an action to enforce specific performance or for damages for its breach or otherwise.

13.

No Liability for Good Faith Determinations.  The Company and the members of the Board shall not be liable for any act, omission or determination taken or made in good faith with respect to this Agreement or the RSUs granted hereunder.

3

 

 

14.

Execution of Receipts and Releases.  Any payment of cash or any issuance or transfer of RSUs or other property to you, or to your legal representative, heir, legatee or distributee, in accordance with the provisions hereof, will, to the extent thereof, be in full satisfaction of all claims of such Persons hereunder. In addition, the Company may require you or your legal representative, heir, legatee or distributee, as a condition precedent to such payment or issuance, to execute a general release of all claims in favor of the Company, any Affiliate and the employees, officers, stockholders or board members of the foregoing in such form as the Company may determine; provided, however, that any review period under such release will not modify the date of settlement with respect to your Award.

15.

No Guarantee of Interests.  The Board and the Company do not guarantee the Stock of the Company from loss or depreciation.

16.

Company Records.  Records of the Company or its Affiliates regarding your period of service, termination of service and the reason(s) therefor, and other matters shall be conclusive for all purposes hereunder, unless determined by the Company to be incorrect.

17.

Notice.  All notices required or permitted under this Agreement must be in writing and personally delivered or sent by mail and shall be deemed to be delivered on the date on which it is actually received by the person to whom it is properly addressed or if earlier the date it is sent via certified United States mail.

18.

Waiver of Notice.  Any person entitled to notice hereunder may waive such notice in writing.

19.

Information Confidential.  As partial consideration for the granting of the Award hereunder, you hereby agree to keep confidential all information and knowledge, except that which has been disclosed in any public filings required by law, that you have relating to the terms and conditions of this Agreement; provided, however, that such information may be disclosed as required by law and may be given in confidence to your spouse and tax and financial advisors.  In the event any breach of this promise comes to the attention of the Company, it shall take into consideration that breach in determining whether to recommend the grant of any future similar award to you, as a factor weighing against the advisability of granting any such future award to you.  Nothing in this Agreement will prevent you from: (a) making a good faith report of possible violations of applicable law to any governmental agency or entity or (b) making disclosures that are protected under the whistleblower provisions of applicable law. For the avoidance of doubt, nothing herein shall prevent you from making a disclosure that: (i) is made (A) in confidence to a federal, state or local government official, either directly or indirectly, or to an attorney; and (B) solely for the purpose of reporting or investigating a suspected violation of law; or (ii) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. Further, an individual who files a lawsuit for retaliation by an employer of reporting a suspected violation of law may make disclosures without violating this Section 19 to the attorney of the individual and use such information in the court proceeding.

4

 

 

20.

Successors.  This Agreement shall be binding upon you, your legal representatives, heirs, legatees and distributees, and upon the Company, its successors and assigns.

21.

Severability.  If any provision of this Agreement is held to be illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions hereof, but such provision shall be fully severable and this Agreement shall be construed and enforced as if the illegal or invalid provision had never been included herein.

22.

Company Action.  Any action required of the Company shall be by resolution of the Board or by a person or entity authorized to act by resolution of the Board.

23.

Headings.  The titles and headings of Sections are included for convenience of reference only and are not to be considered in construction of the provisions hereof.

24.

Governing Law.  All questions arising with respect to the provisions of this Agreement shall be determined by application of the laws of Delaware, without giving any effect to any conflict of law provisions thereof, except to the extent Delaware state law is preempted by federal law.  The obligation of the Company to sell and deliver Shares hereunder is subject to applicable laws and to the approval of any governmental authority required in connection with the authorization, issuance, sale, or delivery of such Shares.

25.

Amendment.  This Agreement may be amended the Board or by the Committee at any time (a) if the Board or the Committee determines, in its sole discretion, that amendment is necessary or advisable in light of any addition to or change in any federal or state, tax or securities law or other law or regulation, which change occurs after the Date of Grant and by its terms applies to the Award; or (b) other than in the circumstances described in clause (a) or provided in the Plan, with your consent.  

26.

Consent to Delaware Jurisdiction and Venue.  You hereby consent and agree that the courts located in Delaware shall have exclusive jurisdiction and proper venue with respect to any dispute between you and the Company arising in connection with the Award or this Agreement.  In any dispute with the Company, you will not raise, and you hereby expressly waive, any objection or defense to any such jurisdiction as an inconvenient forum.  

27.

The Plan.  This Agreement is subject to all the terms, conditions, limitations and restrictions contained in the Plan.

28.

Nonqualified Deferred Compensation Rules.  This Agreement is not intended to constitute a deferral of compensation within the meaning of Section 409A of the Code and shall be construed and interpreted in accordance with such intent.  Payment under this Agreement shall be made in a manner that will be exempt from or, notwithstanding the preceding sentence, comply with Section 409A of the Code, including regulations or other guidance issued with respect thereto, except as otherwise determined by the Committee.  The applicable provisions of Section 409A of the Code are hereby incorporated by reference and shall control over any contrary provisions herein that conflict therewith.

5

 

 

29.

Section 102 Awards.  

(a)Eligibility for Awards.  Subject to Applicable Law, 102 Awards may only be granted to an “employee” within the meaning of Section 102(a) of the Ordinance (which as of the date hereof means (i) individuals employed by an Israeli company being the Company or any of its Affiliates, and (ii) individuals who are serving and are engaged personally (and not through an entity) as “office holders” by such an Israeli company), but may not be granted to a Controlling Stockholder (“Eligible 102 Grantees”). Eligible 102 Grantees may receive only 102 Awards, which may either be granted to a Trustee or granted under Section 102 of the Ordinance without a Trustee.

(b)102 Award Grant Date.  

 

i.

Each 102 Award will be deemed granted on the date determined by the Committee, subject to Section 29(b)(ii), provided that (i) the Grantee has accepted all documents required by the Company or pursuant to Applicable Law, and (ii) with respect to 102 Trustee Awards, the Company has provided all applicable documents to the Trustee in accordance with the guidelines published by the ITA, and if this Agreement is not accepted and delivered by the Grantee within 90 days from the date determined by the Committee (subject to Section 29(b)(i)), then such 102 Trustee Award shall be deemed granted on such later date as this Agreement is accepted and delivered and on which the Company has provided all applicable documents to the Trustee in accordance with the guidelines published by the ITA. In the case of any contradiction, this provision and the date of grant determined pursuant hereto shall supersede and be deemed to amend any date of grant indicated in the Notice of Grant of Restricted Share Units or in any corporate resolution or any agreement.

 

ii.

Unless otherwise permitted by the Ordinance, any grants of 102 Trustee Awards that are made on or after the date of the adoption of this Plan or an amendment to this Plan, as the case may be, that may become effective only at the expiration of thirty (30) days after the filing of this Plan or any amendment thereof (as the case may be) with the ITA in accordance with the Ordinance shall be conditional upon the expiration of such 30-day period, such condition shall be read and is incorporated by reference into any corporate resolutions approving such grants and into this Agreement and any agreement evidencing such grants (whether or not explicitly referring to such condition), and the date of grant shall be at the expiration of such 30-day period, whether or not the date of grant indicated therein corresponds with this Section. In the case of any contradiction, this provision and the date of grant determined pursuant hereto shall supersede and be deemed to amend any date of grant indicated in the Notice of Grant of Restricted Share Units or in any corporate resolution or any agreement.

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(c)102 Trustee Awards.  To the extent and with respect to 102 Trustee Awards, the Grantee acknowledges, undertakes and confirms that: (i) the Grantee fully understands that Section 102 Ordinance and the rules and regulations enacted thereunder apply to the RSUs, and (ii) the Grantee understands the provisions of Section 102 of the Ordinance, the tax track chosen thereunder and the implications thereof. If applicable, the terms of such RSUs shall also be subject to the terms of the Trust Agreement made between the Company and the Trustee for the benefit of the Grantee, and the Grantee shall sign all documents requested by the Company or the Trustee, in accordance with and under the trust agreement. A copy of the trust agreement is available for the Grantee’s review, during normal working hours, at the Company’s offices.

(d)Grantee Undertaking. Without derogating from the generality of the foregoing, to the extent and with respect to any RSUs that are 102 Capital Gain Track Awards, and as required by Section 102 of the Ordinance and the Rules, the Grantee acknowledges, undertakes and confirms in writing the following (which shall be apply and relate to all Awards granted to the Grantee, whether under this Plan or other plans maintained by the Company, and whether prior to or after the date hereof, if any):

 

i.

The Grantee shall comply with all terms and conditions set forth in Section 102 of the Ordinance with regard to the “Capital Gain Track” and the applicable rules and regulations promulgated thereunder, as amended from time to time;

 

ii.

The Grantee is familiar with, and understands the provisions of, Section 102 of the Ordinance in general, and the tax arrangement under the “Capital Gain Track” in particular, and its tax consequences; the Grantee agrees that the Shares will be held by a trustee appointed pursuant to Section 102 of the Ordinance for at least the duration of the Holding Period, as defined in Section 102 under the “Capital Gain Track”. The Grantee understands that any release of such Shares from trust, or any sale of the Share prior to the termination of the Holding Period, will result in taxation at marginal tax rates, in addition to deductions of appropriate social security, health tax contributions or other compulsory payments; and

 

iii.

The Grantee agrees to the trust agreement signed between the Company, his employing company and the trustee appointed pursuant to Section 102 of the Ordinance and shall accept all documents requested by the Company or the Trustee, in accordance with and under the trust agreement.  

[Remainder of page intentionally left blank]

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Exhibit 10.37

 

SAILPOINT TECHNOLOGIES HOLDINGS, INC.

SEVERANCE PAY PLAN

AND

SUMMARY PLAN DESCRIPTION

 

 

 

 

 

 

 

 

 

 

Effective November 6, 2018

 

 

 

SAILPOINT TECHNOLOGIES HOLDINGS, INC.

SEVERANCE PAY PLAN

AND

SUMMARY PLAN DESCRIPTION

 

This plan document describes the severance benefits provided under the Sailpoint Technologies Holdings, Inc. Severance Pay Plan.  This plan document also serves as a summary plan description.

Article I
DEFINITIONS

1.1“Annual Base Salary” means the annual base salary of a Participant in effect immediately prior the Participant’s Termination of Employment (or, to the extent applicable, the annual base salary in effect prior to any change in annual base salary that would constitute Good Reason).

1.2“Board” means the Board of Directors of the Company.

1.3“Cause” means “cause” as defined in the Participant’s Employment Agreement, or in the absence of such an agreement or such a definition, “Cause” will mean a vote of the Board for the CEO and the Committee for all other Participants that the Participant should be dismissed as a result of (a) the Participant’s conviction of a felony; (b) the Participant’s engaging in any other act of fraud, intentional misrepresentation, moral turpitude, misappropriation or embezzlement, illegality or unlawful harassment which, as determined by the Board in good faith and in light of all available facts, would: (1) materially adversely affect the business or the reputation of the Company with its current or prospective customers, suppliers, lenders and/or other third parties with whom the Company does or might do business; or (2) expose the Company to a risk of material civil or criminal legal damages, liabilities or penalties; (c) the Participant’s repeated willful failure to follow the reasonable directives of the Board in connection with the business affairs of the Company; or (d) any material breach by the Participant of any material agreement with the Company or any of its subsidiaries or material violation of the Company’s policies; or (e) the Participant’s willful and deliberate non-performance of duty in connection with the business affairs of the Company, provided, however, in the event of termination based on (c), (d) or (e), the Participant will have a period of thirty (30) days after written notice to the Participant from the Company to cure the circumstance, if curable.

1.4“CEO” means the Chief Executive Officer of the Company.

1.5“CEO Base Amount” means, unless a Participation Agreement provides otherwise, an amount equal to the CEO’s Annual Base Salary.

1.6“Change in Control” has the meaning set forth in the Sailpoint Technologies Holdings, Inc. 2017 Long Term Incentive Plan.

1.7“COBRA” means the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended.

 

 

1.8“COBRA Continuation Benefit” means continued participation in the Company’s group health plan pursuant to COBRA at active employee rates and pursuant to the coverage election in effect for the Participant immediately prior to the Participant’s Termination of Employment.

1.9“Code” means the Internal Revenue Code of 1986, as amended.

1.10“Committee” means the Compensation Committee of the Board.

1.11“Company” means Sailpoint Technologies Holdings, Inc.

1.12“Disability” means a disability resulting in the payment of long term disability benefits under the Company’s long term disability plan.

1.13“Effective Date” means November 6, 2018.

1.14“Employment Agreement” means the employment agreement, if any, between the Participant and the Company.

1.15“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

1.16“Executive” means a member of the Senior Leadership Team designated by the Plan Administrator as a Participant.

1.17“Executive Base Amount” means, unless a Participation Agreement provides otherwise, an amount equal to the Executive’s Annual Base Salary.

1.18“Good Reason” means “good reason” as defined in the Participant’s Employment Agreement, or in the absence of such an agreement or such a definition, “Good Reason” means that the Participant resigns from employment with the Company after complying with the Good Reason Process because, without the Participant’s prior written consent, the Company: (a) reduces the Participant’s base salary in any material respect, except for across-the-board salary reductions not to exceed 10% based on the Company’s financial performance similarly affecting all or substantially all senior management employees of the Company; (b) fails to pay any material incentive compensation to which the Participant is actually entitled under a written agreement with the Company; (c) makes a material reduction in the Participant’s job responsibilities so as to constitute a de facto demotion (other than a mere change in title or reporting relationship effected in connection with the integration of the operations of the Company into the operations of an acquirer in connection with a Change in Control); or (d) relocates the Participant’s principal place of work to a location more than 25 miles from the location at the Effective Date, without the Participant’s prior written approval.

1.19“Good Reason Process” means that (a) the Participant reasonably determines in good faith that a Good Reason condition has occurred; (b) the Participant notifies the Company in writing of the first occurrence of the Good Reason condition within 90 days of the first occurrence of such condition; (c) the Participant cooperates in good faith with the Company’s efforts, for a period not less than 30 days following such notice to remedy the condition; (d) notwithstanding

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such efforts, the Good Reason condition continues to exist; and (e) the Participant terminates the Participant’s employment within 60 days after the end of the cure period contemplated by clause (c) above. If the Company cures the Good Reason condition during such cure period, Good Reason shall be deemed not to have occurred.

1.20“Participation Agreement” means the notice delivered to a Participant informing the Participants of the terms and conditions of the Participant’s participation in the Plan.

1.21“Participant” means an Employee who receives a Participation Agreement and is selected for participation in the Plan pursuant to Article II.

1.22“Plan” means the Sailpoint Technologies Holdings, Inc. Severance Pay Plan.

1.23“Plan Administrator” means the Company or the individual or individuals designated by the Company to administer the Plan.  As of the date of adoption of the Plan, the Committee has been designated as the Plan Administrator.

1.24“Protection Period” means the period beginning three months prior to a Change in Control and ending on the one year anniversary following a Change in Control.

1.25“Senior Leadership Team” means those key employees identified by the Committee as eligible to participate in the Plan from time to time.

1.26“Termination of Employment” means a separation from service within the meaning of Treasury Regulation § 1.409A-1(h).

Article II
ELIGIBILITY AND PARTICIPATION

2.1Participation.  The CEO and any Executive who receive a Participation Agreement will be eligible to participate in the Plan effective as of the date of such Participation Agreement.  The terms and conditions of the severance benefit potentially payable to a Participant will be subject to the Participation Agreement delivered to the Participant and to the Plan.  In the event of an explicit discrepancy between a Participation Agreement and the Plan, the Participation Agreement will control.

Article III
SEVERANCE BENEFITS

3.1Severance Benefits.

(a)Payment of Severance Benefit.  A Participation Agreement will specify the amount and timing of a severance benefit to the extent such terms vary from those of the Plan.

(b)Termination Prior To or Following the Protection Period.

(i)CEO Benefit.  Subject to Section 3.3 and unless otherwise provided pursuant to a Participation Agreement, in the event the CEO incurs a Termination of Employment

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with the Company prior to or following the Protection Period that is (A) by the Company without Cause or (B) a Termination of Employment by the CEO with Good Reason, the CEO will be entitled to receive, (x) in a single lump sum payment on the 60th day following the CEO’s Termination of Employment, an amount equal to the CEO Base Amount, and (y) to the extent the CEO properly elects COBRA, the COBRA Continuation Benefit for a period of 12 months following the CEO’s Termination of Employment.

(ii)Executive Severance Benefit.  Subject to Section 3.3 and unless otherwise provided pursuant to a Participation Agreement, in the event the Executive incurs a Termination of Employment with the Company prior to or following the Protection Period that is by the Company without Cause, the Executive will be entitled to receive, (A) in a single lump sum payment on the 60th day following the Executive’s Termination of Employment, an amount equal to 50% of the Executive Base Amount, and (B) to the extent a Participant properly elects COBRA, the COBRA Continuation Benefit for a period of six months following the Participant’s Termination of Employment.

(c)Termination Within the Protection Period.

(i)CEO Benefit.  Subject to Section 3.3 and unless otherwise provided pursuant to a Participation Agreement, in the event the CEO incurs a Termination of Employment with the Company within the Protection Period that is (A) by the Company without Cause or (B) a Termination of Employment by the CEO with Good Reason, the CEO will be entitled to receive, (x) in a single lump sum payment on the 60th day following the CEO’s Termination of Employment, an amount equal to 150% of the CEO Base Amount, (y) to the extent the CEO properly elects COBRA, the COBRA Continuation Benefit for a period of 18 months following the CEO’s Termination of Employment, and (z) accelerated vesting of all outstanding equity compensation awards held by the CEO immediately prior to such Termination of Employment (with performance-based equity awards vesting at the greater of actual performance as of such Termination of Employment or the target performance goal established with respect to such awards).

(ii)Executive Severance Benefit.  Subject to Section 3.3 and unless otherwise provided pursuant to a Participation Agreement, in the event the Executive incurs a Termination of Employment with the Company within the Protection Period that is by the Company without Cause, the Executive will be entitled to receive, (A) in a single lump sum payment on the 60th day following the Executive’s Termination of Employment, an amount equal to the Executive Base Amount, (B) to the extent a Participant properly elects COBRA, the COBRA Continuation Benefit for a period of 12 months following the Participant’s Termination of Employment, and (C) accelerated vesting of all outstanding equity compensation awards held by the Participant immediately prior to such Termination of Employment (with performance-based equity awards vesting at the greater of actual performance as of such Termination of Employment or the target performance goal established with respect to such awards).

3.2Severance Benefits Discretionary.  Severance benefits available under the Plan are wholly discretionary.  Prior to the receipt of a Participation Agreement, a Participant will have no legally binding right to any benefits under the Plan.

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3.3Release and Other Agreements.  Notwithstanding any other provision in the Plan to the contrary, as consideration for receiving severance benefits under the Plan, each Participant who is otherwise entitled to receive such benefits must execute a release, and such other documents and agreements as reasonably required by the Plan Administrator, in the form and pursuant to the procedures reasonably established by the Plan Administrator.  If a Participant fails to properly execute such release and other documents or agreements within 55 days of the Participant’s Termination of Employment (which release will be delivered to the Participant no later than seven days following such Termination of Employment), the Participant shall not be entitled to severance benefits under the Plan.

3.4Voluntary Termination.  An Employee who voluntarily terminates employment with the Company (other than a voluntary termination for Good Reason under circumstances that would entitle the Participant to severance benefits pursuant to Section 3.3) shall receive no severance benefits under the Plan.

3.5Termination for Cause, Death or Disability.  In the event the employment of a Participant is terminated by the Company for Cause or due to the death or Disability of the Participant no severance benefits will be payable pursuant to the Plan.

3.6Sections 280G and 4999 of the Code.  Notwithstanding any other provision in this Plan the contrary, in the event that a Participant becomes entitled to any payments or benefits under this Plan and any portion of those payments or benefits, when added to any other amount theretofore or thereafter payable to the Participant, whether or not under any other plan, arrangement or agreement with the Company (the “Aggregate Benefits”), would be subject to the tax (the “Excise Tax”) imposed by Section 4999 of the Code, then the payments and/or benefits under this Plan shall be reduced (first by reducing the cash payments under this Plan, then by reducing any fringe or other benefits required to be provided under this Plan, then by reducing the payments under any other plan, arrangement or agreement and finally by reducing the number of shares of any equity award subject to accelerated vesting under this Plan or any other plan, arrangement or agreement) to an amount that is one dollar ($1.00) less than the amount of the Aggregate Benefits which could be made to the Participant before any portion of the Aggregate Benefits was subject to the Excise Tax.  Determinations pursuant to this Section 3.6 will be made by the Company in its discretion.

Article IV
GENERAL PROVISIONS

4.1Funding and Cost of Plan.  The severance benefits provided herein shall be unfunded and shall be provided from the Company’s general assets.  The cost of providing severance benefits under the Plan shall be borne by the Company.

4.2Named Fiduciary.  The Plan Administrator shall be the named fiduciary for purposes of ERISA.

4.3Administration.  The Plan Administrator shall be responsible for the management and control of the operation and the administration of the Plan, including without limitation, interpretation of the Plan, decisions pertaining to eligibility to participate in the Plan, computation

5

 

 

of severance benefits, granting or denial of severance benefit claims, and review of claims denials.  The Plan Administrator has absolute discretion in the exercise of its powers and responsibilities.  To the extent the Company delegates its responsibilities and powers as Plan Administrator, the Company shall, without limiting any rights that the delegate may have under the Company’s charter or bylaws, applicable law or otherwise, indemnify and hold harmless each such delegate (and any other individual acting on such delegate’s behalf) against any and all expenses and liabilities arising out of such person’s administrative functions or fiduciary responsibilities, excepting only expenses and liabilities arising out of the delegate’s own gross negligence or willful misconduct; expenses against which such delegate shall be indemnified hereunder include without limitation the amounts of any settlement, judgment, attorneys’ fees, costs of court, and any other related charges reasonably incurred in connection with a claim, proceeding, settlement, or other action under the Plan.

4.4Plan Year.  The Plan shall be administered on a calendar year basis.  Accordingly, the Plan year shall be the twelve-consecutive-month period commencing January 1 of each year.

4.5Amendment and Termination.  The Plan may be amended or terminated by the Plan Administrator at any time; provided, however, that no amendment may materially reduce the benefits payable to any Participant without the consent of such Participant  

4.6Successors.  Any successor to the Company shall assume the Company’s obligations under the Plan.  The failure of any successor to assume the Plan or any termination or amendment of the Plan that does not comply with the provisions of Section 4.5 shall be deemed to be a Termination of Employment by the Company without Cause for any affected Participant.  

4.7Claims Procedure and Review.  Claims for severance benefits under the Plan shall be made to the Plan Administrator.  If a claim for severance benefits is wholly or partially denied, the Plan Administrator shall, within a reasonable period of time but no later than 90 days after receipt of the claim (or 180 days after receipt of the claim if special circumstances require an extension of time for processing the claim), notify the claimant of the denial.  Such notice shall (a) be in writing,  (b) be written in a manner calculated to be understood by the claimant, (c) contain the specific reason or reasons for denial of the claim, (d) refer specifically to the pertinent Plan provisions upon which the denial is based, (e) describe any additional material or information necessary for the claimant to perfect the claim (and explain why such material or information is necessary), and (f) describe the Plan’s claim review procedures and time limits applicable to such procedures, including a statement of the claimant’s right to bring a civil action under section 502(a) of the ERISA, following an adverse benefit determination on review. Within 60 days of the receipt by the claimant of this notice, the claimant may file a written appeal with the Plan Administrator.  In connection with the appeal, the claimant may review Plan documents and may submit written issues and comments.  The Plan Administrator shall deliver to the claimant a written decision on the appeal promptly, but not later than 60 days after the receipt of the claimant’s appeal (or 120 days after receipt of the claimant’s appeal if there are special circumstances which require an extension of time for processing).  Such decision shall (i) be in writing, (ii) be written in a manner calculated to be understood by the claimant, (iii) include specific reasons for the decision, (iv) refer specifically to the Plan provisions upon which the decision is based, (v) state that the claimant is entitled to receive, on request and free of charge, reasonable access to and copies of all documents, records, and other information relevant to the claimant’s claim for benefits, and (vi) a statement of

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the Participant’s right to bring an action under section 502(a) of ERISA.  If special circumstances require an extension, up to 180 or 120 days, whichever applies, the Plan Administrator shall send written notice of the extension.  This notice shall indicate the special circumstances requiring the extension and state when the Plan Administrator expects to render the decision.

4.8Not Contract of Employment.  The adoption and maintenance of the Plan shall not be deemed to be a contract of employment between the Company and any person, to be consideration for the employment of any person, or to have any impact whatsoever on the at-will employment relationship between the Company and the Participants.  Nothing in the Plan shall be deemed to give any person the right to be retained in the employ of the Company or to restrict the right of the Company to discharge any person at any time.  Nothing in the Plan shall be deemed to give the Company the right to require any person to remain in the employ of the Company or to restrict any person’s right to terminate employment at any time.

4.9Governing Law.  This Plan shall be interpreted under the laws of the State of Texas except to the extent preempted by federal law.

4.10Gender; Number.  Wherever appropriate herein, the masculine, neuter, and feminine genders shall be deemed to include each other, and the plural shall be deemed to include the singular and vice versa.

4.11Overpayment.  If, due to mistake or any other reason, a person receives severance benefits under this Plan in excess of what the Plan provides, that person shall repay the overpayment to the Company in a lump sum within 30 days of notice of the amount of overpayment.  If that person fails to so repay the overpayment, then without limiting any other remedies available to the Company, the Company may deduct the amount of the overpayment from any other amounts which become payable to that person under the Plan or otherwise.

4.12Headings.  The headings of the Articles and Sections are included solely for convenience.  If the headings and the text of the Plan conflict, the text shall control.  All references to Articles and Sections are to the Plan unless otherwise indicated.

4.13Severability.  If any provision of the Plan is held to be illegal or invalid for any reason, that holding shall not affect the remaining provisions of the Plan.  Instead, the Plan shall be construed and enforced as if such illegal or invalid provision had not been contained herein.

4.14Mitigation.  A Participant will not be required to mitigate the amount of any severance benefit payable hereunder.

4.15Withholding.  The Company may withhold from any amounts payable under the Plan any federal, state or local taxes as the Company is required to withhold pursuant to any law or government regulation or ruling.  To the extent any withholding is required with respect to the COBRA Continuation Benefit such amounts may be withheld from any cash severance benefits payable to the Participant pursuant to the Plan.

4.16Benefits are Not Insured.  The Plan is a severance plan.  The Pension Benefits Guaranty Corporation under Title IV of ERISA does not insure benefits under this Plan.

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4.17Section 409A.  Severance benefits payable pursuant to the Plan are intended to constitute a “short term deferral” for purposes of Section 409A of the Code and the guidance promulgated thereunder.  Any payments to be made under this Agreement upon a termination of a Participant’s employment shall only be made if such termination of employment constitutes a “separation from service” under Section 409A. Notwithstanding any provision in this Plan to the contrary, if any payment or benefit provided for herein would be subject to additional taxes and interest under Section 409A of the Code if the Participant’s receipt of such payment or benefit is not delayed until the earlier of (i) the date of Participant’s death or (ii) the date that is six months after the Participant’s Termination of Employment (such date, the “Section 409A Payment Date”), then such payment or benefit shall not be provided to Participant (or Participant’s estate, if applicable) until the Section 409A Payment Date.  Notwithstanding the foregoing, the Company makes no representations that the payments and benefits provided under this Plan are exempt from, or compliant with, Section 409A of the Code and in no event shall the Company be liable for all or any portion of any taxes, penalties, interest or other expenses that may be incurred by Participant on account of non-compliance with Section 409A of the Code.

4.18ERISA Rights.  

As a participant in the Plan, Participants are entitled to certain rights and protections under ERISA, which provides that all Plan participants shall be entitled to:

(a)Examine without charge, at the Plan Administrator’s office and at other specified locations such as worksites, all Plan documents, and copies of all documents filed by the Plan with the U.S. Department of Labor, such as detailed annual reports.

(b)Obtain copies of all Plan documents and other Plan information upon written request to the Plan Administrator.  The Plan Administrator may make a reasonable charge for the copies.

(c)To the extent applicable, receive a summary of the Plan’s annual financial report.  The Plan Administrator is required by law to furnish each participant with a copy of this summary annual report.

In addition to creating rights for Plan Participants, ERISA imposes obligations upon the people who are responsible for the operation of employee benefit plans.  The people who operate the Plan, called “fiduciaries” of the Plan, have a duty to do so prudently and in the interest of Participants and beneficiaries.  No one, including the Company, may fire a Participant or otherwise discriminate against a Participant in any way to prevent the Participant from obtaining benefits or exercising his or her rights under ERISA.

If a claim for a severance benefit is denied in whole or in part, a Participant has the right to know why this was done, to obtain copies of documents relating to the decision without charge, and to appeal any denial, all within certain time schedules.

Under ERISA, there are steps a Participant can take to enforce the above rights.  For instance, if a Participant requests materials from the Plan Administrator and does not receive them within 30 days, the Participant may file suit in a federal court.  In such a case, the court may require the Plan Administrator to provide the materials and pay the Participant up to $110 a day until the Participant receives the materials, unless the materials were not sent because of reasons beyond

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the control of the Plan Administrator.  If a Participant’s claim for severance benefits is denied or ignored, in whole or in part, the Participant may file suit in a state or federal court.  If a Participant is discriminated against for asserting his or her rights, the Participant may seek assistance from the U.S. Department of Labor, or file suit in a federal court.  The court will decide who should pay court costs and legal fees.  If the Participant is successful, the court may order the person sued by the Participant to pay the costs and fees.  If the Participant loses, the court may order the Participant to pay the costs and fees (for example, if it finds that the Participant’s claim is frivolous).

If a Participant has any questions about this Plan, the Participant should contact the Plan Administrator.  If a Participant has any questions about this statement or about his or her rights under ERISA, or if a Participant needs assistance in obtaining documents from the Plan Administrator, he or she should contact the nearest office of the Employee Benefits Security Administration, U.S. Department of Labor, listed in the telephone directory or the Division of Technical Assistance and Inquiries, Employee Benefits Security Administration, U.S. Department of Labor, 200 Constitution Avenue N.W., Washington D.C.  20210.  A Participant may also obtain certain publications about his or her rights and responsibilities under ERISA by calling the publications hotline of the Employee Benefits Security Administration.

4.19Additional Information.  

Plan Name:

Sailpoint Technologies Holdings, Inc. Severance Pay Plan

Plan Year:

January 1 through December 31

Type of Plan:

Welfare Plan—Severance Plan

Plan No.:

506

Plan Sponsor:

Sailpoint Technologies Holdings, Inc.11305 Four Points Drive, Building 2, Suite 100Austin, Texas 78726EIN:  47-1628077

Plan Administrator:

Sailpoint Technologies Holdings, Inc.11305 Four Points Drive, Building 2, Suite 100Austin, Texas 78726

 

Telephone Number:  (512) 346-2000

 

The Plan is administered by the Company.

Funding Medium:

Plan severance benefits are paid from general assets of the Company.

Agent for Service

of Legal Process:

The Plan Administrator.  Process may be served
at the address specified above.

 

 

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IN WITNESS WHEREOF, the Company. has executed this Sailpoint Technologies Holdings, Inc. Severance Pay Plan, effective as of November 6, 2018.

SAILPOINT TECHNOLOGIES HOLDINGS, INC.

 

By:

/s/ Cam McMartin

 

Cam McMartin

 

Chief Financial Officer

 

 

 

Exhibit 21.1

 

SUBSIDIARIES OF SAILPOINT TECHNOLOGIES HOLDINGS, INC.

 

1.

SailPoint Technologies Intermediate Holdings, LLC (Delaware)

 

2.

SailPoint Technologies, Inc. (Delaware)

 

3.

SailPoint Holdings, Inc. (Delaware)

 

4.

SailPoint International, Inc. (Delaware)

 

5.

SailPoint Technologies UK Ltd (United Kingdom)

 

6.

SailPoint Technologies India Private Limited (India)

 

7.

SailPoint Technologies Netherlands B.V. (Netherlands)

 

8.

SailPoint Technologies Pte. Ltd. (Singapore)

 

9.

SailPoint Technologies Israel Ltd. (Israel)

 

10.

SailPoint Technologies GmbH (Germany)

 

11.

SailPoint Technologies SARL (Switzerland)

 

12.

Whitebox Security Ltd (Israel)

 

13.

SailPoint Technologies Japan G.K (Japan)

 

14.

SailPoint Technologies Canada Inc. (Canada)

 

 

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We have issued our reports dated March 18, 2019, with respect to the consolidated financial statements and internal control over financial reporting included in the Annual Report of SailPoint Technologies Holdings, Inc. on Form 10-K for the year ended December 31, 2018.  We consent to the incorporation by reference of said reports in the Registration Statement of SailPoint Technologies Holdings, Inc. on Form S-8 (File No. 333-221679).

 

/s/GRANT THORNTON LLP

 

Denver, Colorado

March 18, 2019

 

 

Exhibit 31.1

CERTIFICATION PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Mark McClain, certify that:

1.

I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2018 of SailPoint Technologies Holdings, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 18, 2019

 

By:

/s/ Mark McClain

 

Mark McClain

 

Chief Executive Officer

 

(Principal Executive Officer)

 

 

 

Exhibit 31.2

CERTIFICATION PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Cam McMartin, certify that:

1.

I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2018 of SailPoint Technologies Holdings, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 18, 2019

 

By:

/s/ Cam McMartin

 

Cam McMartin

 

Chief Financial Officer

 

(Principal Financial Officer)

 

 

 

Exhibit 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K for the year ended December 31, 2018 of SailPoint Technologies Holdings, Inc. (the “Company”), as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark McClain, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 18, 2019

 

By:

 

/s/ Mark McClain

 

 

Mark McClain

 

 

Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

Exhibit 32.2

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K for the year ended December 31, 2018 of SailPoint Technologies Holdings, Inc. (the “Company”), as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Cam McMartin, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 18, 2019

 

By:

 

/s/ Cam McMartin

 

 

Cam McMartin

 

 

Chief Financial Officer

 

 

(Principal Financial Officer)