Notes to Consolidated Financial Statements
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Hortonworks, Inc. (the Company) was incorporated in Delaware in 2011 and is an industry-leading innovator that creates, distributes
and supports a new class of enterprise data management software solutions built on open source technology. The Companys customers use our enterprise-scale Connected Data Platforms to build transformational data applications fueled
by actionable intelligence from data in motion, information that flows over a network, such as the internet or corporate networks, and data at rest, information that is stored in digital form in a file system, database or other storage medium.
The Companys
data-at-rest
solution, Hortonworks Data
Platform (HDP), is an enterprise-scale data management platform built entirely on open source software including Apache Hadoop. HDP combines computer servers with local storage and open source software technology to create a reliable
distributed compute and storage platform for large data sets that is secure and scalable up to petabytes of data within thousands of servers or nodes. At the core of HDP is the next generation computing and resource management framework called Yet
Another Resource Negotiator (YARN), which enables a centralized data architecture for batch, interactive and real-time workloads to be executed simultaneously on both a single cluster and data set with the comprehensive security,
governance and operational services enterprise customers require. HDP integrates with existing data center technologies to support
best-of-breed
data architectures and
enables our customers to collect, store, process and analyze increasing amounts of existing and new data types in a way that augments rather than replaces their existing data center infrastructures.
The Companys
data-in-motion
solution, Hortonworks
DataFlow (HDF), is an enterprise-scale data ingest and stream processing platform built entirely on open source software including Apache NiFi. HDF is complementary to HDP and accelerates the flow of data in motion into HDP to support
full fidelity analytics. HDF is a real-time, integrated, secure and adaptive platform capable of ingesting any type of data in motionfrom traditional data sources to new data types such as sensor and machine data, server log data, clickstream
data,
geo-location
data, social and sentiment data and other data generated by documents and other file types. HDF enables customers to collect, curate and analyze their data in motion in order to deliver
real-time business insights and actionable intelligence.
In December 2014, the Company completed its initial public offering and
concurrent private placement (collectively, the IPO) of 7,673,986 shares of common stock, including 486,486 shares in a concurrent private placement and 937,500 shares of common stock from the full exercise of the option to purchase
additional shares granted to the underwriters, at a price of $16.00 per share. The Company received net cash proceeds of $109.6 million from the sale of shares of common stock. Immediately prior to the closing of the IPO,
all shares of the Companys outstanding convertible preferred stock automatically converted into 21,949,525 shares of common stock.
In February 2016, the Company completed a
follow-on
public offering of an aggregate of 9,688,750
shares of its common stock, including 1,263,750 additional shares sold pursuant to the full exercise of the option to purchase additional shares by the underwriters, at a public offering price of $9.50 per share. Net proceeds to the Company were
approximately $87.7 million after deducting underwriting discounts and commissions and offering expenses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation and Consolidation
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) in the
United States (U.S.) and include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
72
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
Out-of-Period
Adjustment
During the year ended December 31, 2016, the Company recorded an
out-of-period
adjustment related to revenue recognition for customer contracts with acceptance clauses, resulting in an increase of total revenue by approximately $0.7 million. The adjustment was
primarily associated with the four quarterly periods ended December 31, 2015. The Company evaluated the adjustment considering both quantitative and qualitative factors and concluded the adjustment was not material to previously issued and
current period financial statements.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue, and expenses, the related disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reporting
period. The Company bases its estimates and judgments on its historical experience, knowledge of current conditions and its beliefs regarding what may occur in the future given available information. Estimates, assumptions and judgments are used
for, but are not limited to, revenue recognition, stock-based awards and warrants, accounting for income taxes, allowance for doubtful accounts, valuation and determination of other-than-temporary impairments of notes receivable and certain accrued
liabilities. Actual results may differ from these estimates.
Concentration of Risk
Credit Risk
Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of cash and
cash equivalents and investments. The Company places its cash and cash equivalents with major financial institutions, which management assesses to be of high-credit quality.
The Companys investment policies limit investments to those that are investment grade, liquid securities and restricts
placement of these investments to issuers evaluated as creditworthy.
Concentration of Revenue and Accounts Receivable
The Company generally does not require collateral or other security in support of accounts receivable. Allowances are provided
for individual accounts receivable when the Company becomes aware of a customers inability to meet its financial obligations, such as in the case of bankruptcy, deterioration in the customers operating results or change in financial
position. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted. The Company also considers broad factors in evaluating the sufficiency of its allowances for doubtful accounts,
including the length of time receivables are past due, significant
one-time
events, creditworthiness of customers and historical experience.
Significant customers are those which represent 10 percent or more of the Companys total revenue or gross accounts
receivable balance for each respective consolidated statement of operations and consolidated balance sheet period. For both the years ended December 31, 2016 and 2015, Microsoft, Inc. (Microsoft) accounted for less than
10 percent of the Companys total revenue and for the year ended December 31, 2014, Microsoft accounted for approximately 22 percent of the Companys total revenue. There were no other significant customers that represent
10 percent or more of the Companys total revenue for the periods presented.
As of both December 31, 2016
and 2015, there were no customers which represented 10 percent or more of the Companys gross accounts receivable balance.
73
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, money market funds, certificates of deposit and commercial paper with original maturities of three
months or less at the time of purchase.
Operating cash deposits held with banks may exceed the amount of insurance provided on such
deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions with reputable credit and therefore bear minimal credit risk. The Company seeks to mitigate its credit risk by spreading such risk across
multiple counterparties and monitoring the risk profiles of these counterparties.
Investments
The Company classifies its debt securities as trading,
available-for-sale
or
held-to-maturity,
depending on
managements intent at the time of purchase. Unrealized losses on
available-for-sale
securities are charged against net earnings when a decline in fair value is
determined to be other-than-temporary. The Companys management reviews several factors to determine whether a loss is other-than-temporary, such as the length and extent of the fair value decline and the financial condition and near term
prospects of the issuer. For debt securities, management also evaluates whether the Company has the intent to sell or will likely be required to sell before its anticipated recovery. Realized gains and losses are accounted for on the specific
identification method.
Available-for-sale
debt
instruments with original maturities at the date of purchase greater than approximately three months and remaining maturities of less than one year are classified as short-term investments.
Available-for-sale
debt instruments with remaining maturities beyond one year are classified as long-term investments.
Fair Value Measurement
Fair value
is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal market (or most advantageous market, in the absence of a principal market) for the asset or liability in an orderly transaction between
market participants at the measurement date. Further, entities are required to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value, and to utilize a three-level fair value hierarchy that
prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:
Level
1
Quoted prices in active markets for identical assets or liabilities.
Level
2
Observable inputs other than quoted prices included within Level 1, including quoted prices for
similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs other than quoted prices that are observable or are derived principally from, or corroborated
by, observable market data by correlation or other means.
Level
3
Unobservable inputs that are supported
by little or no market activity, are significant to the fair value of the assets or liabilities, and reflect the Companys own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on
the best information available in the circumstances.
Restricted Cash
Restricted cash includes collateral used to secure a credit card, and may not be used or transferred until the restriction is released by the
issuing bank. Restricted cash also includes amounts to secure letters of credit issued in lieu of deposits on office space.
74
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
Software Development Costs
The Company develops open source software that is generally freely available on the Apache Hadoop platform. Capitalization of software
development costs begins upon the establishment of technological feasibility and ceases when the product is available for general release. There is usually a very minimal passage of time between the achievement of technological feasibility and the
availability of the Companys software for general release. Accordingly, there are no capitalized software development costs for the years ended December 31, 2016 and 2015.
Internal Use Software
The
Companys capitalized internal use software costs were not material for the years ended December 31, 2016 and 2015.
Property and
Equipment
Property and equipment are stated at cost. Depreciation is computed using a straight-line method over the estimated
useful lives, determined to be two years for purchased software, two to three years for computer equipment, and five years for network and communication equipment and furniture and fixtures. Expenditures for repairs and maintenance are charged to
expenses as incurred. Leasehold improvements and capital leases are amortized on a straight-line basis over the term of the lease, or the useful life of the assets, whichever is shorter.
Goodwill and Long-Lived Assets
Goodwill is tested for impairment on an annual basis and between annual tests if events or circumstances indicate that an impairment loss may
have occurred. The test is based on a comparison of the reporting units book value to its estimated fair market value. The annual impairment test is performed by the Company during the fourth quarter of each fiscal year using the opening
consolidated balance sheet as of the first day of the fourth quarter, with any resulting impairment recorded in the fourth quarter of the fiscal year. During the year ended December 31, 2016, the Company determined that the fair value of its
sole reporting unit exceeded its carrying value, and as a result, no goodwill impairment was recorded in fiscal 2016.
Long-lived assets
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. In such instances, the recoverability of assets to be held and used is measured first by a comparison of
the carrying amounts of the assets or asset groups to future undiscounted net cash flows expected to be generated by the assets or asset groups. If such assets or asset groups are considered to be impaired, an impairment loss would be recognized if
the carrying amount of the assets or asset groups exceeds the fair value of the assets or asset groups. During the year ended December 31, 2016, the Company recognized an impairment charge of $2.7 million in operating expenses
due to a promissory note and related interest receivable. During the fourth quarter of 2016, the Company determined that it is probable that the promissory note receivable and related interest receivable are unrecoverable due to our estimate of the
third-party service providers illiquidity and unfavorable rate of cash use. Other than the promissory note and related interest receivable impairment, to date, the Company believes that no other impairment has occurred in fiscal 2016.
Common Stock Warrant Liability
Warrants for common stock that did not meet the requirements for equity classification because the number of shares were variable based on
future issuances of Series D preferred shares or warrants were previously classified as liabilities on the accompanying consolidated balance sheets and carried at their estimated fair value. At the end of each reporting period, any changes in fair
value were recorded as a component of other expense
75
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
until the consummation of the Companys IPO in December 2014. Upon the consummation of the IPO, the warrants were reclassified to additional
paid-in
capital within stockholders equity, as the requirements for equity classification were met.
Revenue Recognition
Apache Hadoop is a freely available open source based software platform. While it has emerged as an enabling technology for the modern data
center architecture, there are limitations related to the traditional Hadoop offering that may inhibit broad adoption by enterprises. The Companys software development efforts are thus focused on creating an enterprise-grade Hadoop platform by
working in concert with the Apache community to develop HDP and HDF.
HDP and HDF are available under an Apache open source license. Open
source software is an alternative to proprietary software and represents a different model for the development and licensing of commercial software code than that typically used for proprietary software. Because open source software code is
generally freely shared, the Company does not typically generate any direct revenue from its software development activities.
The Company
generates the predominant amount of its revenue through support (support subscription) and consulting and training services (professional services) arrangements with its enterprise customers. The Company provides telephone support, web support,
security updates, bug fixes, functionality enhancements and upgrades to the technology and new versions of the software, if and when available. The Companys professional services provide assistance in the implementation process and training
related activities.
The Company prices support subscription offerings based on the number of servers in a cluster, or nodes, core or edge
devices, data under management and/or the scope of support provided. The Companys consulting services are priced primarily on a time and materials basis, and to a lesser extent, a fixed fee basis, and training services are priced based on
attendance.
Under the Companys support subscription and professional services arrangements, revenue is recognized when
(i) persuasive evidence of an arrangement exists; (ii) the services have been delivered; (iii) the arrangement fee is fixed or determinable; and (iv) collectability is probable.
Support Subscription Revenue
In
single-element arrangements, support subscription fees are recognized on a ratable basis over the support subscription term. The Companys support subscription arrangements do not typically contain refund provisions for fees earned related to
support services performed.
Professional Services Revenue
Professional services revenue is derived from customer fees for consulting services engagements and training services. The Companys
consulting services are provided primarily on a time and materials basis and, to a lesser extent, a fixed fee basis, and training services are priced based on attendance. Revenue from professional services, when such services are sold in
single-element arrangements, is recognized as the services are performed.
Multiple-Element Arrangements
The Companys multiple-element arrangements generally include support subscription combined with professional services. The Company has
not established vendor-specific objective evidence of fair value
76
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
(VSOE) for its support subscriptions and professional services offerings, and the Company recognizes revenue on a ratable basis over the period beginning when both the support
subscription and professional services have substantially commenced, and ending at the conclusion of the support subscription or professional services period, whichever is longer. Under the Companys multiple-element arrangements, the support
subscription element generally has the longest service period and the professional services element is performed during the earlier part of the support subscription period. On occasion, the Company may sell engineering services and/or a premium
subscription agreement that provides a customer with development input and the opportunity to work more closely with its developers.
The
Companys agreements with customers often include multiple support subscription and/or professional services elements, and these elements are sometimes included in separate contracts. The Company considers an entire customer arrangement to
determine if separate contracts should be considered linked arrangements for the purposes of revenue recognition.
Revenue recognition
requires judgment, including whether a software arrangement includes multiple elements, and if so, whether VSOE exists for those elements. A portion of revenue may be recorded as unearned due to undelivered elements. Changes to the elements in a
software arrangement, the ability to identify the VSOE for those elements and the VSOE of all respective elements could materially impact the amount of earned and unearned revenue in a given period.
Revenue from Strategic Relationships and Reseller Arrangements
The Company has strategic relationships and reseller arrangements with third parties (collectively, Partners). Under these
arrangements, the Company is not the primary obligor for what is ultimately sold by the Partners to their end customers. The amount recognized as revenue from sales to end users represents the amount due to the Company from the Partners and is
generally recognized on a ratable basis over the applicable services term under support subscription revenue.
Equity Instruments Issued to
Customers
The Company has entered into warrant and share purchase agreements with certain customers. For such arrangements, the
fair value of the underlying securities is recognized as contra-revenue to the extent cumulative revenue from the customer is available to offset the fair value of the security on the measurement date. If cumulative revenue from the customer is less
than the fair value of the security, the excess is recorded as cost of sales. See additional discussion at Note 10Stockholders Equity and Note 15Related Party Transactions.
Deferred Revenue
Deferred revenue
consists of amounts billed to customers but not yet recognized in revenue.
As of December 31, 2016 and 2015, substantially all of
the Companys accounts receivable represents amounts billed to customers but not yet received or recognized as revenue and are thus recorded as deferred revenue.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts. The allowance for doubtful accounts is based
on the assessment of the collectability of accounts. The Company regularly reviews the adequacy of the allowance for doubtful accounts by considering the age of each outstanding invoice
77
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
and the collection history of each customer to determine whether a specific allowance is appropriate. When deemed uncollectable, accounts receivable are reserved via the allowance for doubtful
accounts and charged against bad debt expense or the related deferred revenue, as applicable.
Cost of Revenue
Cost of support subscription revenue consists primarily of personnel costs (including salaries, benefits and stock-based compensation expense)
for employees, including support engineers, associated with the Companys support subscription offerings mainly related to technology support and allocated shared costs. Cost of professional services revenue consists primarily of personnel
costs (including salaries, benefits and stock-based compensation expense) for employees and fees to subcontractors associated with the Companys professional service contracts, travel costs and allocated shared costs.
The Company allocates shared costs such as rent, information technology and employee benefits to all departments based on headcount. As such,
allocated shared costs are reflected in cost of revenue and each operating expense category. Additionally, during the year ended December 31, 2014, cost of support subscription and professional services revenue included expenses of
$47.4 million and $0.6 million, respectively, related to the vesting of the Yahoo! stock warrant (the 2011 Yahoo! Warrant) upon the Companys IPO. Cost of revenue for support subscription and professional services is
expensed as incurred.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of personnel costs (including salaries, commissions, benefits and stock-based compensation
expense) for the Companys sales and marketing employees. In addition, sales and marketing expense include the cost of advertising, online marketing, promotional events, corporate communications, product marketing, other brand-building
activities, plus allocated shared costs. All costs of advertising, including cooperative marketing arrangements, are expensed as incurred. Advertising expense totaled $9.1 million, $11.1 million and $7.2 million for the years ended
December 31, 2016, 2015 and 2014, respectively.
Research and Development Expenses
Research and development expenses consist primarily of personnel costs (including salaries, benefits and stock-based compensation expense) for
the Companys research and development employees, costs associated with subcontractors and equipment lease expenses, plus allocated shared costs. The Companys research and development expenses include costs for development related to the
distribution of its solutions, including security updates, fixes, functionality enhancements, upgrades to the technology and new versions of the software, quality assurance personnel, technical documentation personnel and at times, expenses related
to engineering resources for its subscription and professional services offerings.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel costs (including salaries, benefits and stock-based compensation expense)
for our executive, finance, human resources, IT, legal and other administrative employees. In addition, general and administrative expenses include fees for third-party professional services, including consulting, accounting and legal services and
other corporate expenses and allocated overhead.
78
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
Stock-Based Compensation Expense
The Company recognizes compensation costs related to employee stock options, restricted stock unit (RSU) and performance stock unit
(PSU) awards and participation in the Companys 2014 Employee Stock Purchase Plan (ESPP) based on the estimated fair value on the date of grant, net of estimated forfeitures. The Company estimates the grant date fair
value of options using the Black-Scholes option pricing model. The Company estimates the grant date fair value of RSU and PSU stock awards based upon the closing market price of the Companys common stock on the grant date. The Company
estimates fair value of each ESPP purchase at the beginning of the offering period using the Black-Scholes option pricing model. The respective grant date fair values of stock options, RSU and PSU stock awards and each ESPP purchase are recognized
on a straight-line basis over the requisite service periods, which are the vesting periods.
The Company recognizes compensation costs
related to restricted stock based on the estimated fair value of the underlying stock option using the Black-Scholes option pricing model or, in the case of restricted stock granted in connection with an acquisition, based upon the fair market value
of the underlying common shares.
The Company accounts for stock options and RSUs issued to
non-employees
based on the fair value of the awards as determined using the Black-Scholes option pricing model and the closing market price of the Companys common stock, respectively. The fair value of
stock options and RSUs granted to
non-employees
are remeasured each period as the stock options and RSUs vest, and the resulting change in value, if any, is recognized in the consolidated statements of
operations during the period the related services are performed.
Income Taxes
The Company accounts for income taxes using an asset and liability approach. Deferred income tax assets and liabilities are computed for
differences between the financial statement and income tax basis of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax asset and liability computations are based on enacted tax laws and
rates applicable to periods in which the differences are expected to affect taxable income. A valuation allowance is established, when necessary, for any portion of deferred income tax assets where it is considered more likely than not that it will
not be realized.
The tax effects of the Companys income tax positions are recognized only if determined more likely than
not to be sustained based solely on the technical merits as of the reporting date. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not
accurately anticipate actual outcomes.
Foreign Currency
The financial statements of foreign subsidiaries, for which the U.S. dollar is the functional currency and which have certain transactions
denominated in a local currency, are remeasured into U.S. dollars. The remeasurement of local currencies into U.S. dollars creates remeasurement adjustments that are included in net income. Foreign exchange net gains and losses are included in the
consolidated statements of operations within operating expenses. The net gains and losses were immaterial in 2016, 2015 and 2014.
For
subsidiaries with
non-U.S.
dollar functional currencies, the impact of changes in foreign currency exchange rates resulting from the translation of foreign currency financial statements into U.S. dollars for
financial reporting purposes is included in other comprehensive loss. Assets and liabilities are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at average rates for the
period. Foreign transaction gains and losses are recorded as they are realized and were immaterial in 2016, 2015, and 2014.
79
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
Net Loss Per Share of Common Stock
Basic net loss per share of common stock is calculated by dividing the net loss by the weighted-average number of common shares outstanding
during the period, less restricted common stock and common stock issued that is subject to repurchase, and excludes any dilutive effects of share-based awards. Diluted net loss per share of common stock is the same as basic net loss per share of
common stock, because the effects of potentially dilutive securities are anti-dilutive.
Recently Issued Accounting Pronouncements
In November 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
, which provides guidance to decrease the diversity in practice in the classification and presentation of changes in restricted cash on
the statements of cash flows. The ASU is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company does not anticipate that
ASU
2016-18
will have a material impact on its consolidated financial statements.
In August 2016,
FASB issued ASU
No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, which provides guidance to decrease the diversity in practice in how
certain cash receipts and cash payments are presented and classified in the statements of cash flows. The ASU is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal
years. Early adoption is permitted. The Company does not anticipate that ASU
2016-15
will have a material impact on its consolidated financial statements.
In March 2016, FASB issued ASU
No. 2016-09,
Compensation-Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting
, which simplifies several aspects of the accounting for employee share-based payment transactions for both public and
non-public
entities, including
the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statements of cash flows. The ASU is effective for public companies for fiscal years beginning after December 15, 2016,
including interim periods within those fiscal years. Early adoption is permitted. The Company will adopt the new standard as of January 1, 2017. As a result of adopting this standard, the Company will make an accounting policy election to
account for forfeitures as they occur. This change will be applied on a modified retrospective basis, resulting in an expected cumulative-effect adjustment decreasing retained earnings by approximately $0.6 million as of January 1, 2017.
In February 2016, FASB issued ASU
2016-02,
Leases (Topic 842),
which, for operating
leases, requires a lessee to recognize a
right-of-use
asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet.
The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. The ASU is effective for public companies for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect that the adoption of ASU
2016-02
will have on its
consolidated financial statements.
In May 2014, FASB issued ASU
No. 2014-09,
Revenue from
Contracts with Customers (Topic 606)
, which will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The ASU requires an entity to recognize the amount of revenue to which it expects to be entitled upon
transfer of promised goods or services to customers. ASU
2014-09
defines a five-step process in order to achieve this core principle, which may require the use of judgment and estimates, and also requires
expanded qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and estimates used.
80
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
In August 2015, FASB issued ASU
No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date
, which defers the effective date of ASU
2014-09
by one year allowing early adoption as of the original effective date
January 1, 2017. The deferral results in the new revenue standard being effective for the Company January 1, 2018. Additional ASUs have been issued to amend or clarify the new standard as follows:
|
|
|
ASU
No. 2016-12
Revenue from Contracts with Customers (Topic
606)
:
Narrow-Scope Improvements and Practical Expedients
was issued in May 2016. ASU
2016-12
amends the new revenue recognition standard to clarify the guidance on assessing collectability,
measuring
non-cash
consideration, presenting sales taxes and certain transition matters.
|
|
|
|
ASU
No. 2016-10
Revenue from Contracts with Customers (Topic
606): Identifying Performance Obligations and Licensing
was issued in April 2016. ASU
2016-10
addresses implementation issues identified by the FASB-International Accounting Standards Board Joint
Transition Resource Group (TRG) for Revenue Recognition concerning identifying performance obligations and accounting for licenses of intellectual property.
|
|
|
|
ASU
No. 2016-08
Revenue from Contracts with Customers (Topic
606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
was issued in March 2016. ASU
2016-08
requires an entity to determine whether the nature of its promise to provide goods or
services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal or agent designation.
|
The new standard permits adoption either by using (i) a full retrospective approach for all periods presented or (ii) a modified
retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. The Company is adopting the new standard as of January 1, 2018
using the modified retrospective approach. The Companys decision was based on a number of factors such as the significance of the impact of the new standard on the Companys financial results, system readiness, including that of software
procured from third-party providers, and the Companys ability to accumulate and analyze the information necessary to assess the cumulative effect of the new standard through January 1, 2018.
The Company is continuing to evaluate the impact of the new standard on its accounting policies, processes, and system requirements. The
Company has assigned internal resources in addition to the engagement of third-party service providers to assist in the evaluation and to provide periodic updates to management and the Audit Committee. Furthermore, the Company has made and will
continue to make investments in systems to enable timely and accurate reporting under the new standard. While the Company continues to assess all potential impacts under the new standard, there is the potential for significant impacts to the timing
and amount of support subscription and professional services revenue recognized, as well as the potential capitalization and amortization of contract acquisition costs.
Under current industry-specific software revenue recognition guidance, the Company has concluded it has not established VSOE for support
subscriptions and professional services offerings in multiple-element arrangements where support subscriptions are sold with professional services. The Company recognizes revenue on a ratable basis over the period beginning when both the support
subscription and professional services have substantially commenced, and ending at the conclusion of the support subscription or professional services period, whichever is longer. The new standard, which does not retain the concept of VSOE, requires
an evaluation of whether support subscriptions and professional services are distinct performance obligations, and therefore should be separately recognized as the respective performance obligations are satisfied based on the standalone selling
price for each performance obligation, which may not be on a ratable basis. Depending on the outcome of the Companys evaluation under the new standard, the timing of revenue recognition could change significantly for
81
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
professional services bundled in multiple-element arrangements and currently recognized ratably due to lack of VSOE for support subscriptions. In particular, professional services revenue is
likely to be recognized in an earlier period and over a shorter timeframe under the new standard compared to the Companys current accounting policy under the existing standards and guidance.
As part of its preliminary evaluation, the Company has also considered the impact of the guidance in Accounting Standards Codification
340-40
,
Other Assets and Deferred Costs; Contracts with Customers
, and the interpretations of the FASB TRG for Revenue Recognition from their November 7, 2016 meeting with respect to
the capitalization and amortization of incremental costs of obtaining a contract (
e.g.
, sales commissions). For contracts with an expected duration greater than one year, the new standard requires the capitalization of incremental costs that
the Company incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained, provided the Company expects to recover the costs. Such capitalized costs are then to be amortized on a systematic basis
that is consistent with the transfer to the customer of the services to which such costs relate, and the amortization period may extend beyond the initial contract term if renewal commissions on expected renewals are not commensurate with the
commission on the initial contract. Under the Companys current accounting policy, incremental costs incurred to obtain a contract are expensed when incurred. Thus, the application of the new standard could result in a significant change to the
Companys current policy for accounting for contract acquisition costs, which may result in the Company recognizing the expense for contract acquisition costs in a different period, and potentially over a longer period, compared to the
Companys current practice under the existing standards and guidance.
The Company is in the process of quantifying the impact of the
new standard and related guidance as well as finalizing its accounting positions on other areas where the impact is not expected to be as significant.
3. FAIR VALUE MEASUREMENTS
The following
table summarizes the investments in
available-for-sale
securities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Gross
Amortized
Costs
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
U.S. government securities
|
|
$
|
2,072
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,072
|
|
Certificates of deposit
|
|
|
960
|
|
|
|
|
|
|
|
|
|
|
|
960
|
|
Commercial paper
|
|
|
2,497
|
|
|
|
|
|
|
|
|
|
|
|
2,497
|
|
Corporate notes and bonds
|
|
|
30,347
|
|
|
|
4
|
|
|
|
(32
|
)
|
|
|
30,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in
available-for-sale securities
|
|
$
|
35,876
|
|
|
$
|
4
|
|
|
$
|
(32
|
)
|
|
$
|
35,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Gross
Amortized
Costs
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
U.S. Treasury bills
|
|
$
|
3,493
|
|
|
$
|
6
|
|
|
$
|
|
|
|
$
|
3,499
|
|
U.S. government securities
|
|
|
2,071
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
2,069
|
|
Certificates of deposit
|
|
|
4,172
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
4,171
|
|
Commercial paper
|
|
|
10,727
|
|
|
|
2
|
|
|
|
(5
|
)
|
|
|
10,724
|
|
Corporate notes and bonds
|
|
|
40,397
|
|
|
|
|
|
|
|
(62
|
)
|
|
|
40,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in
available-for-sale securities
|
|
$
|
60,860
|
|
|
$
|
8
|
|
|
$
|
(70
|
)
|
|
$
|
60,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
The contractual maturities of investments in
available-for-sale
securities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Gross
Amortized
Cost
|
|
|
Fair Value
|
|
|
Gross
Amortized
Cost
|
|
|
Fair Value
|
|
Due within one year
|
|
$
|
31,792
|
|
|
$
|
31,764
|
|
|
$
|
60,860
|
|
|
$
|
60,798
|
|
Due after one year through five years
|
|
|
4,084
|
|
|
|
4,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in
available-for-sale
securities
|
|
$
|
35,876
|
|
|
$
|
35,848
|
|
|
$
|
60,860
|
|
|
$
|
60,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the fair value of the Companys financial assets and liabilities measured
on a recurring basis by level within the fair value hierarchy (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
24,533
|
|
|
$
|
|
|
|
$
|
24,533
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
|
|
|
|
|
|
2,072
|
|
|
|
2,072
|
|
Certificates of deposit
|
|
|
|
|
|
|
960
|
|
|
|
960
|
|
Commercial paper
|
|
|
|
|
|
|
2,497
|
|
|
|
2,497
|
|
Corporate notes and bonds
|
|
|
|
|
|
|
26,235
|
|
|
|
26,235
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes and bonds
|
|
|
|
|
|
|
4,084
|
|
|
|
4,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
24,533
|
|
|
$
|
35,848
|
|
|
$
|
60,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
11,923
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
11,923
|
|
Certificates of deposit
|
|
|
|
|
|
|
245
|
|
|
|
|
|
|
|
245
|
|
Commercial paper
|
|
|
|
|
|
|
2,000
|
|
|
|
|
|
|
|
2,000
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bills
|
|
|
3,499
|
|
|
|
|
|
|
|
|
|
|
|
3,499
|
|
U.S. government securities
|
|
|
|
|
|
|
2,069
|
|
|
|
|
|
|
|
2,069
|
|
Certificates of deposit
|
|
|
|
|
|
|
3,926
|
|
|
|
|
|
|
|
3,926
|
|
Commercial paper
|
|
|
|
|
|
|
8,724
|
|
|
|
|
|
|
|
8,724
|
|
Corporate notes and bonds
|
|
|
|
|
|
|
40,335
|
|
|
|
|
|
|
|
40,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
15,422
|
|
|
$
|
57,299
|
|
|
$
|
|
|
|
$
|
72,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration (Note 4)
|
|
|
|
|
|
|
|
|
|
|
1,651
|
|
|
|
1,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,651
|
|
|
$
|
1,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
Where applicable, the Company uses quoted market prices in active markets for identical
assets to determine fair value. This pricing methodology applies to Level 1 investments, which are composed of money market funds and U.S. Treasury bills. If quoted prices in active markets for identical assets are not available, then the
Company uses quoted prices for similar assets or inputs other than quoted prices that are observable, either directly or indirectly. These investments are included in Level 2 and consist of certificates of deposit, commercial paper, U.S.
government securities and corporate notes and bonds. Commercial paper is valued using market prices, if available, adjusting for accretion of the purchase price to face value at maturity. The carrying amounts of accounts receivable, prepaid
expenses, accounts payable, accrued expenses and other current liabilities and accrued compensation and benefits approximate fair value.
The Company entered into a three-year, $2.5 million promissory note receivable with a third-party service provider in February 2015,
which bears interest at four percent per annum. The promissory note receivable is valued on a
non-recurring
basis and is classified as
held-to-maturity
within long-term investments. During the year ended December 31, 2016, the Company recognized an impairment charge of $2.7 million
in operating expenses related to a promissory note and related interest receivable. During the fourth quarter of 2016, the Company determined that it is probable that the promissory note and related interest receivable are unrecoverable due to the
Companys estimate of the third-party service providers illiquidity and unfavorable rate of cash use.
In certain cases, where
there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3 within the valuation hierarchy. Level 3 liabilities that were measured at estimated fair value on a recurring basis consisted
of the contingent consideration in connection with the Companys acquisition of SequenceIQ Hungary Kft. (SequenceIQ) which is contingent upon the achievement of certain product milestones. See Note 4Business
Combinations for additional information.
The Company estimated the acquisition date fair value of the contingent consideration
payable of $1.6 million based on various estimates including a discount rate based on the estimated timing of achievement of product milestones, the probability of achievement and other risk factors, all of which the Company believes are
appropriate and representative of market participant assumptions. Upon the achievement of product milestones in January 2016, the Company paid the fair value of the contingent consideration liability of $1.7 million. As of December 31,
2016, there is no contingent consideration liability outstanding.
A financial instruments categorization within the valuation
hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Companys assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make
judgments and consider factors specific to the asset or liability. During the years ended December 31, 2016 and 2015, the Company did not make any transfers between Level 1, Level 2, or Level 3 investments. As of
December 31, 2016, the Company did not have any Level 3 financial assets or liabilities.
Gross unrealized gains and losses were
not material as of December 31, 2016 and 2015. Realized gains and losses were not material for years ended December 31, 2016, 2015 and 2014. As of December 31, 2016 and 2015, there were no securities that were in an unrealized loss
position for more than 12 months.
4. BUSINESS COMBINATIONS
Transactions completed in 2016
The
Company did not complete any acquisitions during the year ended December 31, 2016.
84
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
Transactions completed in 2015
Onyara, Inc.
On August 31, 2015, the Company acquired Onyara, Inc. (Onyara), the creator of and key contributor
to Apache NiFi. The acquisition enables customers to automate and secure data flows and to collect, conduct and curate real-time business insights and actions derived from data in motion. As a result of the acquisition, the Company introduced
HDF powered by Apache NiFi, which simplifies and accelerates the flow of data in motion into HDP for full fidelity analytics.
The
acquisition date fair value of the purchase consideration was $26.5 million, which included the following (in thousands):
|
|
|
|
|
Common stock (921,643 shares at fair value of $23.76 per share)
|
|
$
|
21,898
|
|
Holdback of 194,259 shares of common stock for a period of 12 months for general representations
and warranties
|
|
|
4,616
|
|
|
|
|
|
|
Total
|
|
$
|
26,514
|
|
|
|
|
|
|
The total purchase consideration of $26.5 million exceeded the estimated fair value of the net tangible
and identifiable intangible assets and liabilities acquired. Prior to the acquisition, Apache NiFi was open sourced in November 2014 as part of the National Security Agency Technology Transfer Program. As a result, no technology was acquired and the
Company recorded goodwill of $26.4 million in connection with this transaction. The goodwill is attributable to the synergies expected from combining Onyaras operations with the Companys operations. The goodwill is not deductible for tax
purposes.
Under the terms of the agreement, all outstanding shares of Onyaras capital stock, options to purchase Onyara capital
stock and any other securities convertible into, exercisable for or exchangeable for shares of Onyara capital were canceled in exchange for an aggregate of approximately 1.6 million shares of the Companys common stock with a fair value of
approximately $38.5 million. Of these shares, 1.1 million shares with a fair value of approximately $26.5 million were allocated to purchase consideration. The remaining 0.5 million shares with a fair value of approximately
$12.0 million were considered post-combination remuneration which will be recorded as stock-based compensation expense over the vesting period of up to three years. The vesting of these RSUs is contingent upon continued employment. The related
acquisition costs, consisting primarily of legal expenses in the amount of $0.4 million during the year ended December 31, 2015, were expensed as incurred.
The following table summarizes the allocation of the consideration paid of approximately $26.5 million to the fair values of the assets
acquired and liabilities assumed at the acquisition date (in thousands):
|
|
|
|
|
Goodwill
|
|
$
|
26,429
|
|
Cash
|
|
|
180
|
|
Tangible liabilities acquired
|
|
|
(95
|
)
|
|
|
|
|
|
Total
|
|
$
|
26,514
|
|
|
|
|
|
|
In connection with the acquisition, the Company also issued RSUs covering 0.2 million shares of the
Companys common stock with a fair value of approximately $5.2 million, which is being recognized as stock-based compensation expense as the RSUs vest over three years. The vesting of these RSUs is contingent upon continued employment. As
such, the Company will account for such payments as post-combination remuneration, to be recognized in operating expenses in the consolidated statements of operations as the services are performed.
85
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
The results of operations of Onyara have been included in the Companys consolidated
statements of operations from the acquisition date.
SequenceIQ.
On April 23, 2015, the Company acquired
100 percent of the voting shares of SequenceIQ, an open source provider of rapid deployment tools for Hadoop, to deliver a consistent and automated solution for launching
on-demand
Hadoop clusters in the
cloud or to any environment that supports Docker containers. This acquisition complements the Companys strategy of providing enterprise customers the broadest choice of consumption options for HDP, from
on-premises
deployments to cloud architectures.
The acquisition of SequenceIQ was accounted for
as the purchase of a business. The related acquisition costs, consisting primarily of consulting and legal expenses, were not material during the year ended December 31, 2015 and were expensed as incurred.
The acquisition date fair value of the purchase consideration was $10.0 million, which included the following (in thousands):
|
|
|
|
|
Cash
|
|
$
|
3,721
|
|
Cash holdback for a period of 15 months for general representations and warranties
|
|
|
1,875
|
|
Cash payable upon
18-month
anniversary of closing
date
|
|
|
1,651
|
|
Contingent consideration (Note 3)
|
|
|
1,625
|
|
Vested RSUs (49,102 shares at fair value of $21.97 per share)
|
|
|
1,079
|
|
|
|
|
|
|
Total
|
|
$
|
9,951
|
|
|
|
|
|
|
See Note 3Fair Value Measurements for further details on the Companys fair value
methodology with respect to the contingent consideration liability.
The Company also issued to the selling shareholders RSUs covering
114,583 shares of the Companys common stock that vest over a period of up to three years. The vesting of the additional RSUs is contingent upon the continued employment of the selling shareholders that were retained as employees. As such, the
Company accounted for such payments as post-combination remuneration, to be recognized in operating expenses in the consolidated statements of operations as the services are performed.
The acquisition of SequenceIQ provided the Company with developed technology. The Company determined that the fair value of the developed
technology was approximately $4.4 million using the cost approach. The cost approach reflects the amount that would be required currently (at the acquisition date) to replace the service capacity of an asset. The assumptions underlying the fair
value calculation include: the labor required using a burdened overhead rate, the development period, a developers profit based on the operating profitability of market participants and the opportunity cost based on the estimated required
return on investment over the development period using venture capital rates of return and private capital rates of return for enterprises at a similar stage of development as SequenceIQ. A deferred tax liability related to the fair value of the
developed technology obtained in the acquisition was also recognized. The Company recognized goodwill of $5.8 million equal to the excess of the purchase consideration over the fair value of the assets acquired and the liabilities assumed
inclusive of approximately $0.4 million related to a deferred tax liability recognized in the acquisition. The goodwill is attributable to the synergies expected from combining SequenceIQs operations with the Companys operations.
The goodwill is not deductible for tax purposes.
86
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
The following table summarizes the allocation of the consideration paid of approximately
$10.0 million to the fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands):
|
|
|
|
|
Tangible assets acquired, net
|
|
$
|
191
|
|
Developed technology
|
|
|
4,395
|
|
Goodwill
|
|
|
5,785
|
|
Deferred tax liabilities, net
|
|
|
(420
|
)
|
|
|
|
|
|
Total
|
|
$
|
9,951
|
|
|
|
|
|
|
The results of operations of SequenceIQ have been included in the Companys consolidated statements of
operations from the acquisition date.
The Companys business combinations completed during the year ended December 31, 2015 did
not have a material impact on the Companys consolidated financial statements and therefore, actual and pro forma disclosures have not been presented.
Transactions completed in 2014
XA Secure.
On May 13, 2014, the Company acquired 100 percent of the voting shares of Agniv, Inc. d/b/a XA Secure
(XA Secure), a developer of data security solutions across a number of information technology platforms, for approximately $4.8 million, consisting of approximately $3.0 million in cash and the issuance of 132,508 shares of the
Companys common stock with a fair value of $13.70 per share on the acquisition date. The Company integrated the core security capabilities acquired across all Hadoop workloads. The acquisition of XA Secure was accounted for as the purchase of
a business. The related acquisition costs, consisting primarily of legal expenses in the amount of $0.2 million during the year ended December 31, 2014, were expensed. These legal expenses were presented as general and administrative
expenses on the consolidated statements of operations for the year ended December 31, 2014.
The acquisition of XA Secure provided
the Company with developed technology. The Company determined that the fair value of the developed technology was approximately $4.0 million. The fair value of the developed technology was determined using the cost approach. The cost approach
reflects the amount that would be required currently (at the acquisition date) to replace the service capacity of an asset. The assumptions underlying the fair value calculation include: the labor required using a burdened overhead rate, the
development period, a developers profit based on the operating profitability of market participants and the opportunity cost based on the estimated required return on investment over the development period using venture capital rates of return
and private capital rates of return for enterprises at a similar stage of development as XA Secure. A deferred tax liability related to the fair value of the developed technology obtained in the acquisition was also recognized. Primarily as a result
of the deferred tax liability recognized in the acquisition, the Company recognized goodwill of $2.1 million equal to the excess of the purchase consideration over the fair value of the assets acquired and the liabilities assumed. The goodwill
is attributable to the synergies expected from combining XA Secures operations with the Companys operations. The goodwill is not deductible for tax purposes.
Concurrently with the recognition of the deferred tax liability related to the developed technology acquired, the Company released a portion
of the valuation allowance on its deferred tax asset balance and recognized a $1.3 million benefit to income tax expense. The benefit for income taxes resulted from the additional source of income arising from the deferred tax liability
recognized, which offset the Companys deferred tax assets.
87
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
In connection with the acquisition of XA Secure, the Company also issued 132,506 shares of
restricted stock, issued 159,483 options to purchase the Companys common stock and agreed to pay a $3.9 million cash retention bonus payable over 18 months to certain key employee-shareholders of XA Secure. The restricted shares vest over
18 months and the options vest over 48 months. All vesting provisions for the stock and options, as well as the future cash payments, are contingent upon the continued service of the key employees. Thus, the Company accounts for such payments as
post-combination remuneration, to be recognized in operating expenses in the consolidated statements of operations as the services are performed.
The following table summarizes the allocation of the consideration paid of approximately $4.8 million to the fair values of the assets
acquired and liabilities assumed at the acquisition date (in thousands):
|
|
|
|
|
Developed technology
|
|
$
|
3,971
|
|
Deferred tax liabilities
|
|
|
(1,279
|
)
|
Goodwill
|
|
|
2,119
|
|
|
|
|
|
|
Total
|
|
$
|
4,811
|
|
|
|
|
|
|
The Companys business combination completed during the year ended December 31, 2014 did not have a
material impact on the Companys consolidated financial statements and therefore actual and pro forma disclosures have not been presented.
5.
PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Computer equipment
|
|
$
|
12,513
|
|
|
$
|
5,856
|
|
Network and communication equipment
|
|
|
3,453
|
|
|
|
2,663
|
|
Purchased software
|
|
|
667
|
|
|
|
593
|
|
Furniture and fixtures
|
|
|
4,585
|
|
|
|
3,362
|
|
Capital leases
|
|
|
476
|
|
|
|
476
|
|
Leasehold improvements
|
|
|
10,871
|
|
|
|
8,204
|
|
Assets not yet in use
|
|
|
206
|
|
|
|
553
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, gross
|
|
|
32,771
|
|
|
|
21,707
|
|
Less: accumulated depreciation
|
|
|
(13,390
|
)
|
|
|
(6,285
|
)
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
19,381
|
|
|
$
|
15,422
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2016, 2015 and 2014 was $7.2 million,
$4.5 million and $1.2 million, respectively.
88
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
6. GOODWILL
The changes in the carrying amount of goodwill for the years ended December 31, 2016 and 2015 were as follows (in thousands):
|
|
|
|
|
Net balance as of January 1, 2015
|
|
$
|
2,119
|
|
Acquisitions
|
|
|
32,214
|
|
|
|
|
|
|
Net balance as of December 31, 2015
|
|
|
34,333
|
|
Acquisitions
|
|
|
|
|
|
|
|
|
|
Net balance as of December 31, 2016
|
|
$
|
34,333
|
|
|
|
|
|
|
7. INTANGIBLE ASSETS, NET
The following table summarizes the Companys intangible assets, net (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Developed technology
|
|
$
|
4,395
|
|
|
$
|
(1,274
|
)
|
|
$
|
3,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
4,395
|
|
|
$
|
(1,274
|
)
|
|
$
|
3,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Developed technology
|
|
$
|
4,395
|
|
|
$
|
(393
|
)
|
|
$
|
4,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
4,395
|
|
|
$
|
(393
|
)
|
|
$
|
4,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys intangible assets as of December 31, 2016 and 2015 were comprised entirely of
developed technology from the Companys acquisition of SequenceIQ. The amortizable intangible assets have a useful life of five years. For the years ended December 31, 2016 and 2015, the Company recognized amortization expense for
intangible assets of $0.9 million and $0.4 million, respectively, in research and development expenses. For the year ended December 31, 2014, the Company did not recognize any amortization expense. However, as a result of the
Companys contribution to the Apache Software Foundation of developed technology acquired in the XA Secure acquisition in August 2014, the Company recognized a research and development expense of $4.0 million equal to the carrying value of
the developed technology.
Based on the current amount of intangibles subject to amortization, the estimated amortization expense for each
of the succeeding years is as follows: 2017: $0.9 million; 2018: $0.9 million; 2019: $0.9 million; and 2020: $0.5 million.
8.
COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has a number of operating lease agreements primarily involving office space and data center equipment. These leases are
non-cancelable
with original lease periods up to 15 years, which expire between 2017 and 2031. Some of these operating lease agreements have free or adjustable rent provisions. Lease expense is recognized on a
straight-line basis over the lease term. The Company subleases some excess capacity to a subtenant under a
non-cancelable
operating lease.
89
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
In August 2016, the Company entered into a
15-year
operating lease agreement for approximately 12,000 square feet of office space located in Cork, Ireland, which commenced in September 2016. As of December 31, 2016, the total future minimum lease payment related to this lease was approximately
$5.4 million.
As of December 31, 2016, future minimum lease commitments under
non-cancelable
leases are as follows (in thousands):
|
|
|
|
|
Years Ending December 31,
|
|
Leases
|
|
2017
|
|
$
|
7,237
|
|
2018
|
|
|
5,866
|
|
2019
|
|
|
2,618
|
|
2020
|
|
|
1,601
|
|
2021
|
|
|
1,019
|
|
Thereafter
|
|
|
3,653
|
|
|
|
|
|
|
Gross lease payments
|
|
|
21,994
|
|
Less:
non-cancelable
subtenant receipts
|
|
|
(1,229
|
)
|
|
|
|
|
|
Net lease payments
|
|
$
|
20,765
|
|
|
|
|
|
|
Rent expense incurred under operating leases for the years ended December 31, 2016, 2015 and 2014 was
$9.9 million, $8.0 million and $4.6 million, respectively.
Capital Leases
The Company entered into various capital lease agreements beginning in April 2014 to obtain network equipment. The original term of the capital
leases is five years and the capital lease obligations bear interest at rates of approximately four percent per annum. In December 2016, the Company entered into a capital lease agreement for equipment installed at its data center. The agreement has
a term of two years commencing in January 2017 and bears an interest rate of six percent per annum.
As of December 31, 2016 and
December 31, 2015, capital lease obligations were $0.7 million and $0.3 million, respectively. The portion of the future payments designated as principal repayment was classified as a capital lease obligation within accrued expenses
and other current liabilities on the consolidated balance sheets. The Company is obligated to make future payments under the capital leases as of December 31, 2016 of $0.4 million for 2017 and $0.3 million for 2018. Interest expense
related to the capital leases was approximately $7,000, $13,000 and $7,000 for the years ended December 31, 2016, 2015 and 2014, respectively.
Property and equipment under the capital leases was $0.5 million as of both December 31, 2016 and 2015. Accumulated amortization on
these assets was $0.2 million and $0.1 million as of December 31, 2016 and 2015, respectively.
Legal Proceedings
From time to time, the Company is party to various litigation and administrative proceedings relating to claims arising from its operations in
the normal course of business. Based on the information presently available, including discussion with legal counsel, management believes that resolution of these matters will not have a material effect on the Companys business, results of
operations, financial condition or cash flows.
90
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
On February 29, 2016, a putative class action lawsuit alleging violations of federal
securities laws was filed in the U.S. District Court for the Northern District of California, captioned
Monachelli v. Hortonworks, Inc
., Case
No. 3:16-cv-00980-SI. The
lawsuit names as defendants the Company, Robert G. Bearden, and Scott J. Davidson. Plaintiffs allege that the defendants violated Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 by allegedly making materially false and misleading statements regarding the Companys business and operations. On June 1, 2016, the court entered an order appointing a lead plaintiff and lead
counsel. On July 28, 2016, the lead plaintiff and another named plaintiff filed an amended complaint seeking to represent a class of persons who purchased or otherwise acquired Hortonworks securities between August 5, 2015 and
January 15, 2016, inclusive and sought class certification, an award of unspecified compensatory damages, an award of reasonable costs and expenses, including attorneys fees, and other further relief as the Court may deem just and proper.
On December 5, 2016, the court granted Defendants motion to dismiss the amended complaint, with leave to amend. The parties thereafter engaged in settlement negotiations and have agreed in principle to a class-wide settlement that would
not have a material effect on the Companys financial statements. A hearing to address preliminary approval of the settlement is scheduled for April 21, 2017.
9. DEBT
Revolving Credit Agreement
On November 2, 2016, the Company entered into a $30.0 million
two-year
senior secured
revolving credit agreement (the Credit Agreement) with Silicon Valley Bank (the Bank). Amounts outstanding under the Credit Agreement are payable on or before November 2, 2018 and will accrue interest per annum at a rate
equal to the Banks prime rate plus 0.50 percent. Any outstanding loans drawn under the Credit Agreement may be paid at any time prior to maturity. Pursuant to the terms of the Credit Agreement, the Company agreed to pay an annual facility
fee equal to 0.50 percent of the aggregate amount of the revolving credit facility commitments and an unused line fee of 0.35 percent per annum on the unused commitments. The Credit Agreement currently has no subsidiary guarantors.
The Credit Agreement contains customary reporting, affirmative and negative covenants, including negative covenants imposing limitations on,
among other things, the ability of the Company and its subsidiaries to incur additional indebtedness, grant liens, consummate asset sales, make certain investments and declare or make dividends or repurchase its stock. It also contains certain
financial covenants that require the Company to maintain a minimum trailing consolidated adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) and a minimum adjusted quick ratio. In addition, the Company
is required to maintain on account with the Bank not less than $10.0 million.
As of the date of this filing, the Company had no
borrowings outstanding under the Credit Agreement and was in compliance with all financial covenants.
10. STOCKHOLDERS EQUITY
Common Stock
Each share of common
stock is entitled to one vote for matters to be voted on by the stockholders of the Company. The holders of common stock are also entitled to receive dividends whenever declared by the Board of Directors from legally available funds. The Company has
not paid a dividend since its inception, and has no current plans to do so.
91
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
Common Stock Reserved for Issuance
The Company reserved shares of common stock, on an
as-if
converted basis, for future issuance as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Common stock warrants
|
|
|
3,250,000
|
|
|
|
3,250,000
|
|
Exercise and conversion of common stock warrants
|
|
|
476,368
|
|
|
|
476,368
|
|
Common stock subject to repurchase
|
|
|
30,708
|
|
|
|
55,603
|
|
Outstanding stock options
|
|
|
7,430,094
|
|
|
|
11,552,487
|
|
Unvested restricted stock, RSUs and PSUs
|
|
|
11,536,846
|
|
|
|
6,642,601
|
|
Shares available for issuance under 2014 Stock Option and Incentive Plan
|
|
|
4,234,205
|
|
|
|
2,006,015
|
|
Shares available for purchase under 2014 Employee Stock Purchase Plan
|
|
|
2,451,215
|
|
|
|
2,707,648
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
29,409,436
|
|
|
|
26,690,722
|
|
|
|
|
|
|
|
|
|
|
2011 Stock Option and Grant Plan
In June 2011, the Company adopted the Hortonworks, Inc. 2011 Stock Option and Grant Plan (the 2011 Plan). The 2011 Plan allows for
the grant of incentive stock options (ISOs),
non-statutory
stock options (NSOs), restricted common stock and RSUs to the Companys full or part-time officers, employees,
non-employee
directors and consultants. The exercise price of an option is determined by the Board of Directors when the option is granted, and may not be less than 100 percent of the fair market value of the
shares on the date of grant, provided that the exercise price of ISOs granted to a 10 percent stockholder is not less than 110 percent of the fair market value of the shares on the date of grant. ISOs granted under the 2011 Plan generally
vest 25 percent after the completion of 12 months of service and the balance in equal monthly installments over the next 36 months of service, and expire 10 years from the date of grant. ISOs granted to a 10 percent
stockholder expire five years from the date of grant. NSOs vest according to the specific option agreement, and expire 10 years from the date of grant.
In December 2014, in connection with the closing of the Companys IPO, the 2011 Plan was terminated and shares authorized for issuance
under the 2011 Plan were canceled (except for those shares reserved for issuance upon exercise of outstanding stock options). As of December 31, 2016, options to purchase 6,623,524 shares of common stock were outstanding under the 2011 Plan
pursuant to their original terms and no shares were available for future grant.
2014 Stock Option and Incentive Plan
The Hortonworks, Inc. 2014 Stock Option and Incentive Plan (the 2014 Plan) was adopted by the Companys Board of Directors in
September 2014. The 2014 Plan was approved by the Companys stockholders in November 2014 and became effective immediately prior to the closing of the Companys IPO. All remaining shares available in the 2011 Plan rolled into the 2014 Plan
following the consummation of the IPO. An amendment and restatement of the 2014 Plan (the Amended 2014 Plan) was approved by the Board of Directors in April 2016 and by the Companys stockholders in May 2016. The Amended 2014 Plan
allows the Compensation Committee to make equity-based incentive awards to the Companys full or part-time officers, employees,
non-employee
directors and consultants. The exercise price of an option is
determined by the Board of Directors when the option is granted, and may not be less than 100 percent of the fair market value of the shares on the date of grant, provided that the exercise price of ISOs granted to a 10 percent stockholder is
not less
92
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
than 110 percent of the fair market value of the shares on the date of grant. ISOs granted under the Amended 2014 Plan generally vest 25 percent after the completion of 12 months
of service and the balance in equal monthly installments over the next 36 months of service, and expire 10 years from the date of grant. ISOs granted to a 10 percent stockholder expire five years from the date of grant. NSOs vest
according to the specific option agreement, and expire 10 years from the date of grant.
The Company initially reserved 6,000,000
shares of the Companys common stock for the issuance of awards under the 2014 Plan, plus 923,732 shares of the Companys common stock that remained available for issuance under the Companys 2011 Plan as of the Companys IPO
date. The amendment and restatement of the 2014 Plan increased the number of shares reserved for issuance under the Amended 2014 Plan by 7,000,000 shares. The Amended 2014 Plan also provides that the number of shares reserved and available for
issuance under the plan will automatically increase each January 1, beginning on January 1, 2015, by five percent of the outstanding number of shares of the Companys common stock on the immediately preceding December 31 or such
lesser number of shares as determined by the Companys Compensation Committee. This number is subject to adjustment in the event of a stock split, stock dividend or other change in the Companys capitalization.
In April, June and July 2015, under the 2014 Plan, the Company granted an aggregate of 421,484 PSUs to certain executive and senior officers
(the Grantees) that vest upon (a) the achievement of specified performance targets as set by the Compensation Committee and (b) the Grantee remaining employed during the respective performance cycles over a service period of up
to three years, with such service periods commencing on July 1, 2015. The performance target value for each performance cycle is based on an average of the applicable internal and external billings amounts for the respective performance cycle.
The number of PSUs that vest for a given performance cycle is based on the Companys achievement of actual billings relative to the performance target value.
In October 2015, under the 2014 Plan, the Company granted an aggregate of 266,084 PSUs to the Grantees that vest upon (a) the achievement
of specified performance targets as set by the Compensation Committee and (b) the Grantee remaining employed for the duration of the respective
12-month
performance cycles over a service period of up to
two years, with such service periods commencing on January 1, 2016. The number of PSUs that vest for a given performance cycle is based on the Companys achievement of EBITDA growth and revenue growth relative to the linear ranking of
a
pre-selected
group of the Companys peers.
As of December 31, 2016, options to
purchase shares of stock, RSUs, PSUs and restricted stock covering an aggregate of 12,067,581 shares of common stock were outstanding under the Amended 2014 Plan.
On January 1, 2016, the shares reserved for issuance under the 2014 Plan increased by 2,326,899, resulting in 19,093,426 total shares
reserved for issuance under the Amended 2014 Plan as of December 31, 2016, of which 4,234,205 remained available for issuance.
93
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
Stock Options
A summary of information related to stock options for the year ended December 31, 2016 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
Number of
Shares
Underlying
Outstanding
Options
|
|
|
Weighted-
Average
Exercise
Price Per
Share
|
|
|
Weighted-
Average
Remaining
Contractual Life
(Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
OutstandingDecember 31, 2015
|
|
|
11,552,487
|
|
|
$
|
9.80
|
|
|
|
7.82
|
|
|
$
|
140,873
|
|
Options granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(1,646,314
|
)
|
|
|
2.33
|
|
|
|
|
|
|
|
|
|
Options canceled/forfeited
|
|
|
(2,476,079
|
)
|
|
|
14.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OutstandingDecember 31, 2016
|
|
|
7,430,094
|
|
|
$
|
9.81
|
|
|
|
6.73
|
|
|
$
|
16,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vestDecember 31, 2016
|
|
|
7,311,650
|
|
|
$
|
9.73
|
|
|
|
6.72
|
|
|
$
|
16,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ExercisableDecember 31, 2016
|
|
|
5,125,486
|
|
|
$
|
8.23
|
|
|
|
6.47
|
|
|
$
|
15,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no options granted in the year ended December 31, 2016. The weighted-average grant date fair
value of all options to purchase common stock granted in the years ended December 2015 and 2014 was $23.17 and $14.31 per share, respectively.
Aggregate intrinsic value represents the difference between the exercise price of the options to purchase common stock and the fair value of
the Companys common stock. The aggregate intrinsic value of options exercised for the years ended December 31, 2016, 2015 and 2014 was $13.2 million, $42.9 million and $10.0 million, respectively.
Cash received from option exercises for the year ended December 31, 2016 was $3.8 million.
Restricted Stock
A summary of
information related to restricted stock for the year ended December 31, 2016 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares Issued
Under the Stock
Plans
|
|
|
Number of
Shares Issued
Outside the Stock
Plans
|
|
|
Weighted-
Average
Exercise
Price Per
Share
|
|
|
Weighted-
Average
Grant
Date Fair
Value
Per Share
(*)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Unvested balanceDecember 31, 2015
|
|
|
145,968
|
|
|
|
644,014
|
|
|
$
|
0.67
|
|
|
$
|
23.76
|
|
|
$
|
4,551
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(145,968
|
)
|
|
|
(368,179
|
)
|
|
|
0.67
|
|
|
|
23.76
|
|
|
|
|
|
Canceled/forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested balanceDecember 31, 2016
|
|
|
|
|
|
|
275,835
|
|
|
$
|
|
|
|
$
|
23.76
|
|
|
$
|
513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
The weighted-average grant date fair value per share relates to 1,424,946 shares of restricted stock paid as
part of the acquisition of Onyara, of which 275,835 shares are unvested as of December 31, 2016. See Note 4Business Combinations for additional information regarding this transaction.
|
94
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
The fair value of the restricted stock that vested during the year
ended December 31, 2016 was $4.5 million. The fair value of the restricted stock that vested during the year ended December 31, 2015 was $14.4 million and $26.5 million, related to restricted stock vesting over a
requisite service period and fully vested common shares issued as part of Onyara purchase consideration, respectively. The fair value of the restricted stock that vested during the year ended December 31, 2014 was $6.1 million and
$1.8 million, related to restricted stock vesting over a requisite service period and fully vested common shares issued as part of XA Secure purchase consideration, respectively.
As of December 31, 2016, there was $19.0 million of unrecognized stock-based compensation expense related to unvested stock options
and restricted stock which is expected to be recognized over a weighted-average period of 1.53 years.
Restricted Stock Units and Performance Stock
Units
A summary of information related to RSUs and PSUs for the year ended December 31, 2016 is presented below:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares Issued
Under Stock
Plans
|
|
|
Weighted-Average
Grant Date Fair
Value Per Share
|
|
Unvested balanceDecember 31, 2015
|
|
|
5,852,619
|
|
|
$
|
23.33
|
|
Granted
|
|
|
9,635,168
|
|
|
|
9.92
|
|
Vested
|
|
|
(2,681,838
|
)
|
|
|
20.95
|
|
Canceled/forfeited
|
|
|
(1,544,938
|
)
|
|
|
16.35
|
|
|
|
|
|
|
|
|
|
|
Unvested balanceDecember 31, 2016
|
|
|
11,261,011
|
|
|
$
|
13.21
|
|
|
|
|
|
|
|
|
|
|
The fair value of the RSUs and PSUs that vested during the year ended December 31, 2016 was
$26.8 million. The fair value of the RSUs and PSUs vested during the year ended December 31, 2015 was $1.1 million and $1.1 million, related to RSUs vesting over a requisite service period and vested RSUs issued as
part of SequenceIQ purchase consideration, respectively. No RSUs or PSUs vested during the year ended December 31, 2014.
As of
December 31, 2016, there was $103.1 million of unrecognized stock-based compensation expense related to RSUs and PSUs which is expected to be recognized over a weighted-average period of 1.66 years.
Determining Fair Value for Employee Grants
The Company estimated the fair value of stock options granted using the Black-Scholes option pricing model with weighted-average assumptions as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Expected term (in years)
|
|
|
|
|
|
|
6.00
|
|
|
|
5.77
|
|
Risk-free interest rate
|
|
|
|
%
|
|
|
1.59
|
%
|
|
|
1.52
|
%
|
Expected volatility
|
|
|
|
%
|
|
|
44
|
%
|
|
|
46
|
%
|
Dividend rate
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
95
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
The fair value of each grant of stock options was determined using the Black-Scholes option
pricing model and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment to determine.
Fair Value of Common Stock
. Historically, for all periods prior to the Companys IPO, the Company estimated the fair value of
common stock. The fair value of the common stock underlying the stock-based awards was determined by the Companys Board of Directors, which considered numerous objective and subjective factors to determine the fair value of common stock at
each grant date. These factors included, but were not limited to: (i) contemporaneous valuations of common stock performed by third-party specialists; (ii) the lack of marketability of the Companys common stock;
(iii) developments in the business; (iv) the prices paid in recent transactions involving the Companys equity securities; and (v) the likelihood of achieving a liquidity event, such as an IPO or a merger or acquisition, given
prevailing market conditions.
Since the Companys IPO, the Company has used the market closing price of its common stock as reported
on the NASDAQ Global Select Market.
Expected Term.
The Company estimates the expected term for stock options using the
simplified method due to limited historical exercise activity for the Company. The simplified method calculates the expected term as the midpoint between the vesting date and the contractual expiration date of the award.
Expected Volatility.
Due to the limited trading history of its common stock, the expected volatility was derived from the average
historical stock volatilities of several unrelated public companies within the Companys industry that it considers to be comparable to its business over a period equivalent to the expected term of the stock option grants.
Risk-Free Interest Rate.
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for
the expected term of the stock-based award.
Dividend Rate.
The expected dividend yield is zero, as the Company does not
currently pay a dividend and does not expect to do so in the foreseeable future.
Forfeiture Rate.
Forfeitures are estimated
based on the Companys analysis of historical stock option forfeitures. To the extent that the forfeiture rate is different than what the Company has estimated, the compensation cost associated with unrecognized stock-based compensation expense
will be different from the Companys expectations.
Restricted Stock Purchase Agreements
The Company entered into restricted stock purchase agreements with certain founders and employees for the issuance of restricted common stock
in exchange for services. Under the terms of the restricted stock purchase agreements, the Company has the right to repurchase any unvested shares at the original issue price (ranging from $0.18 per share to $4.76 per share) in the event of
termination of service. These repurchase rights lapse over the vesting term, which varies by agreement.
The restricted stock was
purchased in exchange for promissory notes (Notes) that, prior to repayment in October 2014, accrued interest at rates ranging from 0.89 to 2.89 percent annually, with interest payable annually. The principal, along with any unpaid
accrued interest, was payable upon the earlier of certain corporate transactions including an IPO, the termination of services, or nine to ten years from the date of the Notes. The Company had recourse against the restricted stock issued along with
the Notes and recourse of up to 80 percent of the principal amount, and up to the full amount of accrued interest, against the individuals personal assets.
96
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
The Company accounted for the Notes as
non-recourse
in their entirety because the Notes are not aligned with a corresponding percentage of the underlying shares. Accordingly, the
non-recourse
notes received by the Company as consideration for the issuance of
the restricted stock were considered as stock options for accounting purposes as the substance is similar to the grant of an option because the employee generally will relinquish the stock in lieu of repaying the Note.
Non-refundable
principal payments were recorded as a credit to additional
paid-in
capital for the underlying shares that were vested as of the repayment date and as a
repurchase liability for the underlying shares that were unvested as of the repayment date.
Non-refundable
interest was recorded as interest income.
There were no shares of restricted stock outstanding subject to the Companys right of repurchase as of December 31, 2016. The
number of shares of restricted stock outstanding subject to the Companys right of repurchase as of December 31, 2015 was 286,679 which had repurchase prices ranging from $0.18 to $1.28 per share. The liability for shares subject to
repurchase as of December 31, 2015 was $0.2 million, which was included in accrued expenses and other current liabilities.
These restricted stock arrangements were accounted for similarly to stock options until the Notes were repaid. During the years ended
December 31, 2016 and 2015, there were no restricted shares repurchased. During the year ended December 31, 2014, 528,745 restricted shares were repurchased from ten stockholders. Because the restricted shares were accounted for as
options, the Notes were not recorded in the accompanying consolidated balance sheets and compensation cost was recognized over the requisite service period with an offsetting credit to additional
paid-in
capital. In October 2014, all outstanding Notes were repaid in full and the restricted stock that had vested became shares of common stock.
The fair value of the options was determined based on the Black-Scholes option pricing model using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Expected term (in years)
|
|
|
|
|
|
|
|
|
|
|
5.00
|
|
Risk-free interest rate
|
|
|
|
%
|
|
|
|
%
|
|
|
1.58
|
%
|
Expected volatility
|
|
|
|
%
|
|
|
|
%
|
|
|
40
|
%
|
Dividend rate
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
Periodic principal payments were recorded as a credit to additional
paid-in
capital for the underlying shares that were vested as of the repayment date and as a repurchase liability for the underlying shares that are unvested as of the repayment date. The shares were recorded
when they vested and when principal payments were received.
The interest amounts related to the Notes were recognized as interest income
in the accompanying consolidated statements of operations because the interest portion of the Notes was full recourse. The interest income was not material for any period presented.
Restricted Stock and Stock Options Subject to Repurchase
The 2011 Plan allowed for the granting of options that may be exercised before the options have vested. Shares issued as a result of early
exercise and shares that had not vested are deemed to be restricted stock and are subject to a vesting schedule identical to the vesting schedule of the related restricted stock and options, as well as certain other restrictions. Shares issued as a
result of early exercise that have not vested are subject to
97
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
repurchase by the Company upon termination of the purchasers employment or services, at the price paid by the purchaser, and are not deemed to be issued for accounting purposes until those
related shares vest. The amounts received in exchange for these shares have been recorded as a liability on the accompanying consolidated balance sheets and will be reclassified into common stock and additional
paid-in
capital as the shares vest. The Companys right to repurchase these shares generally lapses with respect to 1/48 of the original grant amount per month over four years.
The number of shares of restricted stock and early exercised options to purchase common stock outstanding subject to the Companys right
of repurchase as of December 31, 2016 and 2015 was 30,708 and 342,282, respectively, which had repurchase prices ranging from $8.46 to $14.22 per share and $0.18 to $14.22 per share, respectively. The liability for shares subject to repurchase
as of December 31, 2016 and 2015 was $0.4 million and $0.9 million, respectively. Of the $0.4 million liability as of December 31, 2016, $0.3 million was included in accrued expenses and other current liabilities and
$0.1 million was included in other long-term liabilities. Of the $0.9 million liability as of December 31, 2015, $0.5 million was included in accrued expenses and other current liabilities and $0.4 million was included in
other long-term liabilities.
2014 Employee Stock Purchase Plan
The Companys ESPP was adopted and approved by the Companys Board of Directors in September 2014, was adopted and approved by the
Companys stockholders in November 2014, and was amended in August 2015 to allow employees of certain of the Companys
non-U.S.
subsidiaries to participate in the ESPP. The ESPP initially reserved
and authorized the issuance of up to a total of 2,500,000 shares of common stock to participating employees. The ESPP provides that the number of shares reserved and available for issuance will automatically increase each January 1,
beginning on January 1, 2015, by the lesser of (i) 1,000,000 shares of common stock, (ii) one percent of the outstanding number of shares of the Companys common stock on the immediately preceding December 31, or
(iii) such lesser number of shares as determined by the ESPP administrator. This number is subject to adjustment in the event of a stock split, stock dividend or other change in the Companys capitalization. On January 1, 2016, the
shares reserved for issuance increased by 465,225 resulting in total shares reserved for issuance under the ESPP of 3,392,473 as of December 31, 2016, of which 2,451,215 remained available for purchase.
The following table summarizes the assumptions used in the Black-Scholes option pricing model to determine fair value of the Companys
common shares to be issued under the ESPP:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Expected term (in years)
|
|
0.5-1.0
|
|
0.5-1.0
|
|
|
|
|
Risk-free interest rate
|
|
0.25%-0.70%
|
|
0.10%-0.40%
|
|
|
|
%
|
Expected volatility
|
|
26%-52%
|
|
35%-41%
|
|
|
|
%
|
Dividend rate
|
|
%
|
|
%
|
|
|
|
%
|
Each employee who is a participant in the ESPP may purchase shares by authorizing payroll deductions of up to
15 percent of his or her base compensation during an offering period. Unless the participating employee has previously withdrawn from the offering, his or her accumulated payroll deductions will be used to purchase shares on the last business
day of the offering period at a price equal to 85 percent of the fair market value of the shares on the first business day or the last business day of the offering period, whichever is lower. Under applicable tax rules, an employee may purchase
no more than $25,000 worth of shares of common stock, valued at the start of the purchase period, under the ESPP in any calendar year. There is no minimum holding period associated with shares purchased pursuant to the ESPP.
98
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
As of December 31, 2016, there was $1.2 million of unrecognized stock-based
compensation expense related to the ESPP, which is expected to be recognized over a weighted-average period of 0.38 years.
Cash received
from the purchases of shares under the ESPP for the year ended December 31, 2016 was $5.6 million.
Determining Fair Value for
Non-Employees
Stock-based compensation expense related to stock options and RSUs granted to
non-employees
is recognized as the stock options and RSUs vest. As of December 31, 2016, the Company granted options to purchase 345,834 shares of common stock to
non-employees
with a weighted-average exercise price of $3.32 per share and RSUs covering 200,416 shares of common stock with a weighted-average grant date fair value of $9.46 per share. As of
December 31, 2016, options to purchase 59,677 shares of common stock granted to
non-employees
were outstanding with a weighted-average exercise price of $2.29 per share and RSUs covering 95,529 shares of
common stock granted to
non-employees
were outstanding with a weighted-average grant date fair value of $9.52 per share. As of December 31, 2015, the Company granted options to purchase 345,834 shares of
common stock to
non-employees
with a weighted-average exercise price of $3.32 per share and RSUs covering 7,416 shares of common stock with a weighted-average grant date fair value of $21.71 per share. As of
December 31, 2015, options to purchase 91,200 shares of common stock granted to
non-employees
were outstanding with a weighted-average exercise price of $1.69 per share and RSUs covering 7,416 shares of
common stock granted to
non-employees
were outstanding with a weighted-average grant date fair value of $21.71 per share.
The Company granted
non-employees
options to purchase and RSUs to convert to a total of 193,000, 7,416
and 202,500 shares of common stock for the years ended December 31, 2016, 2015 and 2014, respectively. Compensation expense related to these options and RSUs was $1.3 million, $0.6 million and $1.2 million for the years ended
December 31, 2016, 2015 and 2014, respectively.
The Company believes that the fair value of the stock options is more reliably
measurable than the fair value of services received. The fair value of the stock options granted is calculated at each reporting date using the Black-Scholes option pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Expected term (in years)
|
|
|
|
|
|
|
6.4
|
|
|
|
8.84
|
|
Risk-free interest rate
|
|
|
|
%
|
|
|
1.74
|
%
|
|
|
2.34
|
%
|
Expected volatility
|
|
|
|
%
|
|
|
45
|
%
|
|
|
43
|
%
|
Dividend rate
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
99
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
Stock-Based Compensation Expense
Total stock-based compensation expense, including stock-based compensation expense to
non-employees,
by
category was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Cost of revenue
|
|
$
|
5,700
|
|
|
$
|
2,702
|
|
|
$
|
580
|
|
Sales and marketing
|
|
|
25,787
|
|
|
|
11,688
|
|
|
|
1,881
|
|
Research and development
|
|
|
36,540
|
|
|
|
15,193
|
|
|
|
2,257
|
|
General and administrative
|
|
|
30,796
|
|
|
|
11,356
|
|
|
|
4,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
98,823
|
|
|
$
|
40,939
|
|
|
$
|
9,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In February 2016, one of the executives of the Company voluntarily canceled a stock option to purchase
1,185,000 shares. As a result, the Company recognized in general and administrative expense a stock-based compensation expense of $10.0 million during the year ended December 31, 2016.
Warrants
In July 2011, the
Company issued a warrant to purchase 6,500,000 shares of Series A preferred stock at an exercise price of $0.005 per share. The warrant was issued to Yahoo! Inc. (Yahoo!) in connection with the Companys Series A financing and
the transactions contemplated thereby, including commercial agreements with Yahoo! providing for support subscription offerings and certain rights to technology. The ability for Yahoo! to exercise the warrant was subject to the continuation of the
commercial agreement for a period of two years, which has been satisfied. Upon consummation of the Companys IPO in December 2014, the warrant automatically converted into a warrant to purchase 3,250,000 shares of common stock. As the warrant
was issued to a customer, upon the occurrence of the IPO, the vesting of the warrant resulted in an immediate $4.0 million reduction in revenue, which was the cumulative revenue from Yahoo!. The $48.0 million difference between the fair
value of the warrant of $52.0 million and the reduction in revenue was recognized in cost of revenue during the fourth quarter of 2014. The $52.0 million fair value of the warrant was recognized in additional
paid-in
capital. Refer to Note 15Related Party Transactions for additional information regarding related party transactions.
On June 9, 2014, the Company issued a warrant to purchase a number of shares of common stock up to one percent of the sum
of (i) 45,585,496, plus (ii) the number of shares of Series D preferred stock or shares of such stock issuable upon exercise of warrants to purchase such stock (on an as converted to common stock basis) issued or issuable upon
exercise of warrants to purchase Series D preferred stock that are sold, if any, by the Company during the period commencing on June 9, 2014 and ending immediately prior to the occurrence of a corporate event at an exercise price of
$8.46 per share. The warrant was issued to Yahoo! in exchange for the amendment of the rights held by Yahoo! under Section 2.11 of the Investors Rights Agreement to approve an acquisition of Hortonworks, which removed a competitor of
Yahoo! from the list of companies over which Yahoo! has such blocking rights. Upon the Companys IPO, the common stock warrant liability was reclassified to additional
paid-in
capital at the then current
fair value of $5.4 million. The combined value of the initial measurement and the change in the fair value of this warrant of $5.4 million is recorded as other expense in the consolidated statement of operations for the year ended
December 31, 2014. As of December 31, 2016, the warrant was exercisable into 476,368 shares of common stock.
Each warrant
expires nine years from the date of issuance. The warrants vested upon consummation of the Companys IPO in December 2014. As of December 31, 2016, neither warrant had been exercised into shares of common stock.
100
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
11. NET LOSS PER SHARE OF COMMON STOCK
Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period, less
restricted common stock and common stock issued that is subject to repurchase, and excludes any dilutive effects of share-based awards. Diluted net loss per share of common stock is computed giving effect to all potential dilutive common shares. As
the Company had net losses for the years ended December 31, 2016, 2015 and 2014, all potential common shares were determined to be anti-dilutive.
The following table sets forth the computation of basic and diluted net loss per share (in thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net loss
|
|
$
|
(251,688
|
)
|
|
$
|
(179,117
|
)
|
|
$
|
(177,365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing net loss per share of common stock
|
|
|
57,203,067
|
|
|
|
43,318,044
|
|
|
|
7,341,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(4.40
|
)
|
|
$
|
(4.13
|
)
|
|
$
|
(24.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following outstanding shares of common stock equivalents were excluded from the computation of diluted net
loss per share of common stock for the periods presented because including them would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Common stock warrants
|
|
|
3,250,000
|
|
|
|
3,250,000
|
|
|
|
3,250,000
|
|
Exercise and conversion of common stock warrants
|
|
|
476,368
|
|
|
|
476,368
|
|
|
|
476,368
|
|
Common stock subject to repurchase
|
|
|
30,708
|
|
|
|
55,603
|
|
|
|
1,604,728
|
|
Outstanding stock options
|
|
|
7,430,094
|
|
|
|
11,552,487
|
|
|
|
13,953,894
|
|
Unvested restricted stock, RSUs and PSUs
|
|
|
11,536,846
|
|
|
|
6,642,601
|
|
|
|
1,623,222
|
|
Estimated ESPP shares to be issued
|
|
|
442,992
|
|
|
|
151,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
23,167,008
|
|
|
|
22,128,527
|
|
|
|
20,908,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12. INCOME TAXES
The components of income tax expense (benefit) for the years ended December 31, 2016, 2015 and 2014 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State and local
|
|
|
67
|
|
|
|
58
|
|
|
|
18
|
|
Foreign
|
|
|
1,130
|
|
|
|
514
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current tax expense
|
|
|
1,197
|
|
|
|
572
|
|
|
|
168
|
|
Total deferred tax expense (benefit)
|
|
|
27
|
|
|
|
(140
|
)
|
|
|
(1,279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
1,224
|
|
|
$
|
432
|
|
|
$
|
(1,111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
The components of loss before income taxes by United States and foreign jurisdictions are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
United States
|
|
$
|
209,882
|
|
|
$
|
137,713
|
|
|
$
|
149,629
|
|
Foreign
|
|
|
40,582
|
|
|
|
40,972
|
|
|
|
28,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss before income tax
|
|
$
|
250,464
|
|
|
$
|
178,685
|
|
|
$
|
178,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Companys deferred tax assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
132,744
|
|
|
$
|
87,128
|
|
Research and development credit
|
|
|
8,997
|
|
|
|
3,971
|
|
Warrant expense
|
|
|
19,312
|
|
|
|
19,422
|
|
Depreciation and amortization
|
|
|
1,105
|
|
|
|
415
|
|
Accruals and reserves
|
|
|
3,005
|
|
|
|
2,125
|
|
Deferred revenue
|
|
|
9,093
|
|
|
|
5,547
|
|
Stock-based compensation expense
|
|
|
15,865
|
|
|
|
10,446
|
|
Other
|
|
|
2,037
|
|
|
|
1,244
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
192,158
|
|
|
|
130,298
|
|
Valuation allowance
|
|
|
(192,152
|
)
|
|
|
(130,178
|
)
|
Intangibles
|
|
|
(312
|
)
|
|
|
(400
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(306
|
)
|
|
$
|
(280
|
)
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation of the statutory federal income tax rate to the Companys effective tax
rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Tax at federal statutory rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State and local taxes, net of federal benefit
|
|
|
2.54
|
|
|
|
2.93
|
|
|
|
4.21
|
|
Permanent differences and other items not individually material
|
|
|
(0.08
|
)
|
|
|
(0.26
|
)
|
|
|
(0.77
|
)
|
Warrant expense
|
|
|
|
|
|
|
|
|
|
|
(1.03
|
)
|
Stock-based compensation expense
|
|
|
(8.24
|
)
|
|
|
(2.29
|
)
|
|
|
|
|
Credits
|
|
|
2.01
|
|
|
|
0.62
|
|
|
|
0.49
|
|
Foreign tax differential
|
|
|
(5.97
|
)
|
|
|
(8.01
|
)
|
|
|
(5.58
|
)
|
Change in valuation allowance
|
|
|
(24.75
|
)
|
|
|
(27.23
|
)
|
|
|
(30.70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
(0.49
|
)%
|
|
|
(0.24
|
)%
|
|
|
0.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys effective tax rate for the period ended December 31, 2016 was lower than the statutory
tax rate primarily because of the valuation allowance on its U.S. and foreign deferred tax assets and the losses of foreign subsidiaries taxed at lower rates, partially offset by state taxes and tax credits. The losses of the foreign subsidiaries
were generated primarily by the Companys cost sharing agreement with its Netherlands operations.
102
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
The benefit for income taxes for the year ended December 31, 2014 relates primarily to
the release of a valuation allowance of $1.3 million associated with nondeductible intangible assets recorded as part of the XA Secure acquisition, partially offset by state minimum income tax and income tax on the Companys earnings in
foreign jurisdictions. In connection with the acquisition of XA Secure, a deferred tax liability was established for the
book-tax
basis differences related to the acquired developed technology. The net
deferred tax liability from this acquisition creates an additional source of income to offset the Companys deferred tax assets. As such, the impact on the acquiring Companys deferred tax assets and liabilities caused by an acquisition
are recorded in the acquiring Companys consolidated financial statements outside of acquisition accounting. The income tax expense for the years ended December 31, 2016, 2015 and 2014 relates to state minimum income tax and income tax on
the Companys earnings in foreign jurisdictions.
A valuation allowance is provided when it is more likely than not that the deferred
tax assets will not be realized. The Company has established a valuation allowance to offset net deferred tax assets at December 31, 2016 due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards
(NOLs) and other deferred tax assets. The net valuation allowance increased by approximately $62.0 million during the year ended December 31, 2016. As of December 31, 2016, the Company had NOL carryforwards for federal,
state and local and foreign tax purposes of approximately $381.0 million, $320.2 million and $0.1 million, respectively. The NOL carryforwards will expire at various dates beginning in 2031 (federal), 2018 (state and local) and 2020
(foreign), unless previously utilized. The Company also has federal and state research and development tax credit carryforwards of approximately $7.8 million and $6.3 million, respectively. The federal tax credits will expire at various
dates beginning in 2031, unless previously utilized. The state tax credits do not expire and will carry forward indefinitely until utilized.
As a result of certain realization requirements of the accounting guidance for stock-based compensation expense, the table of deferred tax
assets and liabilities shown above does not include certain deferred tax assets as of December 31, 2016 and 2015 that arose directly from (or the use of which was postponed by) tax deductions related to equity compensation in excess of
compensation recognized for financial reporting. Approximately $38.4 million of federal NOLs and $24.3 million of state NOLs relate to stock-based compensation expense deductions in excess of book expense, the tax effect of which would be
to credit additional
paid-in
capital if realized.
Current laws impose substantial restrictions on
the utilization of NOLs and credit carryforwards in the event of an ownership change within a three-year period as defined by the Internal Revenue Code Section 382. If there should be an ownership change, the Companys ability
to utilize its carryforwards could be limited.
The Company has not recorded a provision for deferred U.S. tax expense that could result
from the remittance of foreign undistributed earnings since the Company intends to reinvest the earnings of these foreign subsidiaries indefinitely. The amount of unrecognized deferred tax liability related to these earnings is insignificant.
The Company recorded unrecognized tax benefits for uncertain tax positions of approximately $3.5 million and $1.6 million as of
December 31, 2016 and 2015, respectively, of which none would impact the effective tax rate, if recognized, since the benefit would be offset by an increase in the valuation allowance.
The Companys policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax
expense. During the year ended December 31, 2016, the Company recognized no interest and penalties associated with unrecognized tax benefits. There are no tax positions for which it is reasonably possible that the total amounts of unrecognized
tax benefits will significantly increase or decrease within 12 months of the reporting date.
103
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
The Company files income tax returns in the U.S. federal jurisdiction, various state and
local jurisdictions and foreign jurisdictions. The Companys tax years for fiscal year end 2011 and forward are subject to examination by the U.S. tax authorities and various state tax authorities, and the Companys tax years for fiscal
year end 2013 and forward are subject to examination by various foreign tax authorities. As of December 31, 2016, the U.S. federal income tax returns for the tax year ended April 30, 2014 and the eight months ended December 31, 2014
were under examination.
A reconciliation of the Companys unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
Balance as of December 31, 2014
|
|
$
|
997
|
|
Increases related to prior years tax positions
|
|
|
145
|
|
Increases related to current years tax positions
|
|
|
443
|
|
|
|
|
|
|
Balance as of December 31, 2015
|
|
|
1,585
|
|
Increases related to prior years tax positions
|
|
|
875
|
|
Increases related to current years tax positions
|
|
|
1,076
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
$
|
3,536
|
|
|
|
|
|
|
13. SEGMENT AND GEOGRAPHICAL INFORMATION
The Companys chief operating decision maker reviews financial information on a consolidated basis for the purposes of allocating
resources and evaluating financial performance. The Companys chief operating decision maker has direct reports responsible for various functions within the Company (
e.g.
business strategy, finance, legal, business development, products,
etc.) on a consolidated basis. There are no segment managers who are held accountable for operations or operating results. The Companys primary growth strategy is predicated upon the growth of the support subscription business, and the
Companys key business metrics reflect this strategy. Professional services are offered with the overall goal of securing and retaining support subscription customers and growing support subscription revenue. Accordingly, management has
determined that the Company operates in one reportable segment.
The Company has historically presented revenue by country, determined by
location of sales office. As the Company continues to expand its international operations, presenting revenue by customer domicile would enhance the segment disclosure as it is more representative of the Companys geographic revenue. The
following table summarizes the Companys revenue by customer domicile. Prior period amounts have been revised to conform with current presentation (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
United States
|
|
$
|
137,933
|
|
|
$
|
105,842
|
|
|
$
|
42,234
|
|
United Kingdom
|
|
|
21,025
|
|
|
|
3,815
|
|
|
|
1,865
|
|
Rest of world
|
|
|
25,503
|
|
|
|
12,287
|
|
|
|
1,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
184,461
|
|
|
$
|
121,944
|
|
|
$
|
46,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No individual country other than the United States and the United Kingdom accounted for more than
10 percent of total revenue during any of the periods presented.
The Companys long-lived assets are primarily located in the
United States and not allocated to any specific region. Therefore, geographic information is presented only for total revenue.
104
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
14. 401(K) PLAN
The Company has a qualified defined contribution plan under Section 401(k) of the Internal Revenue Code covering eligible employees. To
date, the Company has not made any matching contributions to this plan.
15. RELATED PARTY TRANSACTIONS
In June 2011, the Company entered into a
two-year
commercial agreement with Yahoo!, a principal
shareholder, that requires the Company to provide support subscription offerings and certain rights to technology, and the Company issued a preferred stock warrant to Yahoo!. The initial total contract value was $2.0 million and was being paid
in quarterly installments of $250,000. In June 2013, the commercial agreement was amended to automatically renew for an additional year on an annual basis, unless otherwise terminated by either party 60 days prior to the end of the then-current
renewal period. In December 2015, the commercial agreement was further amended to extend the current term until December 30, 2018, and thereafter, the commercial agreement will automatically renew for an additional year on an annual basis,
unless otherwise terminated by either party 60 days prior to the end of the then-current renewal period. Refer to Note 10Stockholders Equity for further discussion of the 2011 Yahoo! Warrant.
In February 2012, the Company entered into a development, distribution and marketing agreement with Teradata Corporation, which at that time
was a significant shareholder. Under this and subsequent arrangements, the Company is providing support subscription and professional services to Teradata and certain of its end users. In April 2012, the Company received a nonrefundable prepayment
of $9.5 million from Teradata as consideration for support subscription offerings and professional services expected to be performed by the Company through December 2016. In June 2015, the Company entered into an amendment to their prior
agreement with Teradata and received a second prepayment of $1.5 million in August 2015 as consideration for support subscription offerings and professional services expected to be performed by the Company through December 2017. In September
2016, the Company entered into an amendment with Teradata and received a third prepayment of $1.5 million in the same month as consideration for support subscription offerings and professional services expected to be performed by the Company
through December 2018. As of February 2, 2016, Teradata was no longer a Hortonworks shareholder and as such, was not considered to be a related party as of December 31, 2016.
In September 2013, the Company entered into a common stock purchase agreement with an affiliate of AT&T Inc. (AT&T)
covering the sale and issuance of 390,269 shares of the Companys stock for a nominal amount of consideration. The initial grant included restricted shares that were subject to repurchase rights by the Company. Fifty percent of the shares
vested on an equal and ratable basis over an
18-month
period beginning on October 1, 2013 and the remaining 50 percent of shares vested in their entirety on March 31, 2015. Concurrently, the
Company also entered into a commercial agreement with AT&T to provide specified support subscription and professional services over a three-year term with a minimum annual fee of $6.0 million. Due to the lack of VSOE, this fee is being
recognized ratably over the three-year term. The fair value of approximately $0.4 million related to the common shares where the repurchase right expired as of December 31, 2013 was recognized as contra-revenue. In January 2014, the
Company entered into an amended stock purchase agreement with an affiliate of AT&T in which the Company relinquished its repurchase rights, at which point the fair value of the remaining shares was recognized as a reduction in revenue. The
contra-revenue amount of $2.0 million was determined based on the fair value of the common stock on the date of modification of the stock purchase agreement. As of December 31, 2016, AT&T did not hold more than five percent of the
Companys outstanding common stock and therefore, the Company did not consider AT&T to be a related party.
In June 2014, the
Company issued a warrant to purchase a number of shares of common stock in exchange for the amendment of certain rights held by Yahoo! under the Investors Rights Agreement to approve certain
105
HORTONWORKS, INC.
Notes to Consolidated Financial Statements
corporate transactions involving the Company. The warrant became exercisable upon the consummation of the IPO at which point the fair value of the award was reclassified to equity. As of
December 31, 2016, the warrant is exercisable for 476,368 shares of the Companys common stock. The combined value of the initial measurement and the change in the fair value of this warrant of $5.4 million was recorded as other
expense in the consolidated statement of operations for the year ended December 31, 2014.
In July 2014, the Company entered into a
Series D preferred stock purchase agreement with Hewlett Packard Enterprise Company (Hewlett Packard Enterprise) covering the sale and issuance of 2,051,349 shares of the Companys stock for a total of $50.0 million. Under this
and subsequent arrangements, Hewlett Packard Enterprise resells the Companys support subscription services. The Company receives a net percentage of the gross dollars collected from Hewlett Packard Enterprises
end-user
customers related to such support and professional services. For this related party arrangement, the Company did not record contra-revenue for the associated equity as the Series D preferred stock was
issued at fair value. Hewlett Packard Enterprise was the former employer of the Companys director Martin Fink until October 2016. As Martin Fink was no longer associated with Hewlett Packard Enterprise as of December 31, 2016, the Company
no longer considers Hewlett Packard Enterprise to be a related party.
The following table summarizes the Companys shares/warrants
owned by entities that were related parties as of December 31, 2016, 2015 and 2014. See Note 10Stockholders Equity for information regarding the terms of the 2011 Yahoo! Warrant and information regarding the terms of the
stock warrant issued in 2014 (in thousands, except for share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Yahoo!
|
|
|
|
|
|
|
|
|
|
|
Shares/warrants owned by related party:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
3,845,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock warrants
|
|
|
3,726,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Yahoo!
|
|
|
Teradata
|
|
|
AT&T
|
|
|
Hewlett
Packard
|
|
Shares/warrants owned by related party:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
3,845,806
|
|
|
|
|
|
|
|
15,269
|
|
|
|
2,051,349
|
|
Common stock warrants
|
|
|
3,726,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014
|
|
|
|
Yahoo!
|
|
|
Teradata
|
|
|
AT&T
|
|
|
Hewlett
Packard
|
|
Shares/warrants owned by related party:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
3,845,806
|
|
|
|
2,895,742
|
|
|
|
390,269
|
|
|
|
2,051,349
|
|
Common stock warrants
|
|
|
3,726,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2016, 2015 and 2014, the Company recognized revenue from sales to
related parties net of contra-revenue of $2.6 million, $10.1 million and $2.8 million, respectively. As of December 31, 2016 and 2015, the Companys deferred revenue from related parties was $1.6 million and
$8.5 million, respectively, and accounts receivable from related parties was $1.6 million and $3.9 million, respectively. The Companys payables due to related parties were immaterial as of December 31, 2016 and 2015.
The Company does not separately record routine cost of revenue and operating expenses on a per related party contract basis.
106