An investment in our Class A common stock involves a high degree of risk. You should
carefully consider the risks and uncertainties described below, together with all the other information in this Quarterly Report on Form
10-Q,
including Managements Discussion and Analysis of
Financial Condition and Results of Operations and the consolidated financial statements and the related notes. If any of the following risks actually occurs, our business, reputation, financial condition, results of operations, revenue, and
future prospects could be seriously harmed. Unless otherwise indicated, references to our business being seriously harmed in these risk factors will include harm to our business, reputation, financial condition, results of operations, revenue, and
future prospects.
44
Risks relating to our business and industry
We have experienced significant revenue growth and we may fail to sustain that growth rate or may not grow in the future.
We were founded in 1985 and launched our first commercial software in 1990. Our growth has primarily been attributed to the increasing reliance of
manufacturers on our simulation and optimization software to support development of their products and designs. Revenue from our software segment has historically constituted a significant portion of our total revenue. Our revenue growth could
decline over time as a result of a number of factors, including increasing competition from smaller entities and
well-established,
larger organizations, limited ability to, or our decision not to, increase
pricing, contraction of our overall market or our failure to capitalize on growth opportunities. Other factors include managing our global organization, revenues generated outside the United States that are subject to adverse currency fluctuations
and uncertain international geopolitical landscapes. In connection with operating as a public company, we will also incur additional legal, accounting and other expenses that we did not incur as a private company. Accordingly, we may not achieve
similar growth rates in future periods, and you should not rely on our historical revenue growth as an indication of our future revenue or revenue growth.
If we cannot maintain our company culture of innovation, teamwork, and communication our business may be harmed.
We believe that a critical component to our success has been our company culture, which is based on our core values of innovation, envisioning the future,
communicating honestly and broadly, seeking technology and business firsts, and embracing diversity. We have invested substantial time and resources in building a company embodying this culture. As we develop the infrastructure of a public company
and continue to grow, we may find it difficult to maintain these valuable aspects of our corporate culture. Any failure to preserve our culture could negatively impact our future success, including our ability to attract and retain personnel,
encourage innovation and teamwork, and effectively focus on and pursue our corporate objectives.
If our existing customers or users do not increase
their usage of our software, or we do not add new customers, the growth of our business may be harmed.
Our software includes a multitude of broad
and deep design, simulation, optimization, and analysis applications and functionalities.
Our future success depends, in part, on our ability to increase
the:
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number of customers and users accessing our software;
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usage of our software to address expanding design, engineering, computing and analytical needs; and/or
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number of our applications and functionalities accessed by users and customers through our licensing model.
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In addition, through our Altair Partner Alliance, or APA, our customers have access to additional software offered by independent third parties, without the
need to enter into additional license agreements.
If we fail to increase the number of customers or users and/or application usage among existing users
of our software and the software of our APA partners, our ability to license additional software will be adversely affected, which would harm our operating results and financial condition.
Our ability to acquire new customers is difficult to predict because our software sales cycle can be long.
Our ability to increase revenue and maintain or increase profitability depends, in part, on widespread acceptance of our software by
mid-
to-
large-size
organizations worldwide. We face long, costly, and unpredictable sales cycles. As a result of the variability and
length of the sales cycle, we have only a limited ability to forecast the timing of sales. A delay in or failure to complete sales could harm our business and financial results, and could cause our financial results to vary significantly from period
to period. Our sales cycle varies widely, reflecting differences in potential customers decision making processes, procurement requirements and budget cycles, and is subject to significant risks over which we have little or no
control, including:
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longstanding use of competing products and hesitancy to change;
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customers budgetary constraints and priorities;
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timing of customers budget cycles;
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need by some customers for lengthy evaluations;
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hesitation to adopt new processes and technologies;
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length and timing of customers approval processes; and
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development of software by our competitors perceived to be equivalent or superior to our software.
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To the
extent any of the foregoing occur, our average sales cycle may increase and we may have difficulty acquiring new customers.
Reduced spending on
product design and development activities by our customers may negatively affect our revenues.
Our revenues are largely dependent on our
customers overall product design and development activities, particularly demand from
mid-
to-
large-size
organizations
worldwide and their supplier base. The licensing of our software is discretionary. Our customers may reduce their research and development budgets, which could cause them to reduce, defer, or forego licensing of our software. To the extent licensing
of our software is perceived by existing and potential customers to be extraneous to their needs, our revenue may be negatively affected by our customers delays or reductions in product development research and development spending. Customers
may delay or cancel software licensing or seek to lower their costs. Deterioration in the demand for product design and development software for any reason would harm our business, operating results, and financial condition in the future.
Our business largely depends on annual renewals of our software licenses.
We typically license our software to our customers on an annual basis. In order for us to maintain or improve our operating results, it is important that our
customers renew and/or increase the amount of software licensed on an annual basis. Customer renewal rates may be affected by a number of factors, including:
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our pricing or license term and those of our competitors;
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our reputation for performance and reliability;
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new product releases by us or our competitors;
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customer satisfaction with our software or support;
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consolidation within our customer base;
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availability of comparable software from our competitors;
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effects of global or industry specific economic conditions;
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our customers ability to continue their operations and spending levels; and
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other factors, a number of which are beyond our control.
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If our customers fail to renew their licenses or
renew on terms that are less beneficial to us, our renewal rates may decline or fluctuate, which may harm our business.
We believe our future
success will depend, in part, on the growth in demand for our software by customers other than simulation engineering specialists and in additional industry verticals.
Historically, our customers have been simulation engineering specialists. To enable concept engineering, driven by simulation, we make our physics solvers
more accessible to designers by wrapping them in powerful simple interfaces. We believe our future success will depend, in part, on growth in demand for our software by these designers, which could be negatively impacted by the lack of:
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continued and/or growing reliance on software to optimize and accelerate the design process;
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adoption of simulation technology by designers other than simulation engineering specialists;
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continued proliferation of mobility, large data sets, cloud computing and IoT; our ability to predict demands of designers other than simulation engineering specialists and achieve market acceptance of our products
within these additional areas and customer bases or in additional industry verticals; or
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our ability to respond to changes in the competitive landscape, including whether our competitors establish more widely adopted products for designers other than simulation engineering specialists.
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If some or all of this software does not achieve widespread adoption, our revenues and profits may be adversely affected.
46
We face significant competition, which may adversely affect our ability to add new customers, retain
existing customers, and grow our business.
The market for CAE software is highly fragmented but has been undergoing significant consolidation.
Our primary competitors include Dassault Systèmes, Siemens, Ansys and MSC Software. Dassault and Siemens are large public companies, with significant financial resources, which have historically focused on CAD and product data management.
More recently, these two companies have been investing in simulation software through acquisitions. Ansys and MSC are focused on CAE. In addition to these competitors, we compete with many smaller companies offering CAE software applications.
A significant number of companies have developed or are developing software and services that currently, or in the future may, compete with some or all of our
software and services. We may also face competition from participants in adjacent markets, including
two-dimensional,
or 2D, and 3D, CAD, and broader PLM competitors, that may enter our markets by leveraging
related technologies and partnering with or acquiring other companies.
The principal competitive factors in our industry include:
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breadth, depth and integration of software;
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domain expertise of sales and technical support personnel;
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consistent global support;
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performance and reliability; and
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Many of our current and potential competitors have longer-term and more extensive relationships with
our existing and potential customers that provide them with an advantage in competing for business with those customers. They may be able to devote greater resources to the development and improvement of their offerings than we can. These
competitors could incorporate additional functionality into their competing products from their wider product offerings or leverage their commercial relationships in a manner that uses product bundling or closed technology platforms to discourage
enterprises from purchasing our applications.
Many existing and potential competitors enjoy competitive advantages over us, such as:
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larger sales and marketing budgets and resources;
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access to larger customer bases, which often provide incumbency advantages;
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broader global distribution and presence;
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greater resources to make acquisitions;
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the ability to bundle competitive offerings with other software and services;
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greater brand recognition;
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lower labor and development costs;
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greater levels of aggregate investment in research and development;
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larger and more mature intellectual property portfolios; and
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greater financial, technical, management and other resources.
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These competitive pressures in our markets or
our failure to compete effectively may result in fewer customers, price reductions, licensing of fewer units, increased sales and marketing expenses, reduced revenue and gross profits and loss of market share. Any failure to address these factors
could harm our business.
Because we derive a substantial portion of our revenues from customers in the automotive industry, we are susceptible to
factors affecting this industry.
The automotive industry accounted for approximately 50% of our total revenue for the year ended
December 31, 2016. An adverse occurrence, including industry slowdown, recession, political instability, costly or constraining regulations, excessive inflation, prolonged disruptions in one or more of our customers production schedules
or labor disturbances, that results in significant decline in the volume of sales in this industry, or in an overall downturn in the business and operations of our customers in this industry, could adversely affect our business.
The automotive industry is highly cyclical in nature and sensitive to changes in general economic conditions, consumer preferences and interest rates. Any
weakness in demand in this industry, the insolvency of a manufacturer
47
or suppliers, or constriction of credit markets may cause our automotive customers to reduce their amount of software licensed or services requested or request discounts or extended payment
terms, any of which may cause fluctuations or a decrease in our revenues and timing of cash flows.
Our quarterly results may fluctuate
significantly and may not fully reflect the underlying performance of our business.
Our quarterly results of operations and our key metrics,
including billings, Adjusted EBITDA and Free Cash Flow may vary significantly in the future.
Period-to-period
comparisons of our operating results may not be meaningful.
The results of any one quarter should not be relied upon as an indication of future performance. Our quarterly financial results and key metrics may fluctuate as a result of a variety of factors including:
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our ability to retain and/or increase sales to existing customers at various times;
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our ability to attract new customers;
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the addition or loss of large customers, including through their acquisitions or industry consolidations;
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the timing of recognition of revenues;
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the amount and timing of billings;
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the amount and timing of operating expenses and capital expenditures;
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significant security breaches, technical difficulties or unforeseen interruptions to the functionality of our software;
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the number of new employees added;
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the amount and timing of billing for professional services engagements;
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the timing and success of new products, features, enhancements or functionalities introduced by us or our competitors;
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changes in our pricing policies or those of our competitors;
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changes in the competitive dynamics of our industry, including consolidation among competitors;
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the timing of expenses related to the development or acquisition of technology;
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any future charges for impairment of goodwill from acquired companies;
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extraordinary expenses such as litigation or other dispute-related settlement payments;
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the impact of new accounting pronouncements; and
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general economic conditions.
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Billings have historically been highest in the first and fourth quarters of any
calendar year and may vary in future quarters. This seasonality or the occurrence of any of the factors above may cause our results of operations to vary and our financial statements may not fully reflect the underlying performance of our business.
In addition, we may choose to grow our business for the long-term rather than to optimize for profitability or cash flows for a particular shorter-term
period. If our quarterly results of operations fall below the expectations of investors or securities analysts the price of our Class A common stock could decline and we could face lawsuits, including securities class action suits.
Seasonal variations in the purchasing patterns of our customers may lead to fluctuations in the timing of our cash flows.
We have experienced and expect to continue to experience seasonal variations in the timing of customers purchases of our software and services. Many
customers make purchase decisions based on their fiscal year budgets, which often coincide with the calendar year. These seasonal trends materially affect the timing of our cash flows, as license fees become due at the time the license term
commences based upon agreed payment terms that customers may not adhere to. As a result, new and renewal licenses have been concentrated in the first and fourth quarter of the year, and our cash flows from operations have been highest late in the
first quarter and early in the second quarter of the succeeding fiscal year.
In connection with the preparation of our consolidated financial
statements in recent years, we and our independent registered public accounting firm identified material weaknesses in our internal control over financial reporting. If we are not able to remediate the material weaknesses and otherwise maintain an
effective system of internal control over financial reporting, the reliability of our financial reporting, investor confidence in us and the value of our common stock could be adversely affected.
48
As a public company, we are required to maintain internal control over financial reporting and to report any
material weaknesses in such internal controls. Section 404 of SOX, or Section 404, requires that we evaluate and determine the effectiveness of our internal controls over financial reporting and, beginning with our second annual report
following this offering, provide a management report on internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of annual or interim financial statements will not be prevented or detected and corrected on a timely basis.
In
connection with the audits of fiscal years 2015 and 2016 financial statements, we and our independent registered public accounting firm identified two material weaknesses in our internal controls over financial reporting. The first material weakness
pertained to controls over accounting for income taxes. Specifically, that: (i) certain misstatements were either not identified by management or were not identified timely by management; (ii) the preparation of the consolidation provision
and various technical accounting analysis were not prepared or reviewed timely; and (iii) additional technical resources were necessary to enable timely and sufficient review controls over accounting for income taxes. We have taken steps to
remediate this by hiring additional technical resources and increasing management review and oversight over the income tax process.
Also in connection
with our audits of the fiscal year 2015 and 2016 consolidated financial statements, we and our independent registered public accounting firm identified a second material weakness related to the lack of timely preparation and review of our
consolidated financial statements and related disclosures consistent with the requirements for a publicly traded company. Specifically, that our internal controls over the financial statement close process were not designed to be precise enough to
detect a material error in the financial statements in a timely manner. We have taken steps to remediate this material weakness, by hiring additional personnel and increasing management review and oversight over the financial statement close
process.
If our steps are insufficient to successfully remediate the material weaknesses and otherwise establish and maintain an effective system of
internal control over financial reporting, the reliability of our financial reporting, investor confidence in us and the value of our common stock could be materially and adversely affected. The process of designing and implementing internal control
over financial reporting required to comply with Section 404 will be time consuming, costly and complicated. Our independent registered public accounting firm was not engaged to audit the effectiveness of our internal control over financial
reporting. We may discover other control deficiencies in the future, and we cannot assure you that we will not have a material weakness in future periods.
Effective internal control over financial reporting is necessary for us to provide reliable and timely financial reports and, together with adequate
disclosure controls and procedures, are designed to reasonably detect and prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting
obligations. For as long as we are an emerging growth company under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness
of our internal control over financial reporting pursuant to Section 404. We could be an emerging growth company for up to five years. An independent assessment of the effectiveness of our internal control over financial reporting
could detect problems that our managements assessment might not. Undetected material weaknesses in our internal control over financial reporting could lead to financial statement restatements and require us to incur the expense of remediation.
Fluctuations in foreign currency exchange rates could result in declines in our reported revenue and operating results.
As a result of our international activities, we have revenue, expenses, cash, accounts receivable and payment obligations denominated in foreign currencies
including Euros, British Pounds Sterling, Indian Rupees, Japanese Yen, and Chinese Yuan. Foreign currency risk arises primarily from the net difference between
non-United
States dollar receipts from
customers and
non-United
States dollar operating expenses. The value of foreign currencies against the United States dollar can fluctuate significantly, and those fluctuations may occur quickly. We cannot
predict the impact of future foreign currency fluctuations.
Further strengthening of the United States dollar could cause our software to become
relatively more expensive to some of our customers leading to decreased sales and a reduction in billings and revenue not denominated in United States dollars. A reduction in revenue or an increase in operating expenses due to fluctuations in
foreign currency exchange rates could have an adverse effect on our financial condition and operating results. Such foreign currency exchange rate fluctuations may make it more difficult to detect underlying trends in our business and operating
results.
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We do not currently, and do not have plans to, engage in currency hedging activities to limit the risk of
exchange rate fluctuations. In the future, we may use derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities
may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place, and the cost of those hedging techniques may have a significant negative
impact on our operating results. The use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments. If we are not able to successfully manage or hedge against the risks associated with
currency fluctuations, our financial condition and operating results could be adversely affected.
If we fail to attract new or retain existing
third party independent software vendors to participate in the APA, we may not be able to grow the APA program.
The APA program allows our
customers to use third party software that may be unrelated to our software, without the need to enter into additional license agreements. The APA program results in increased revenues through revenue sharing, and encourages users to stay within the
Altair software ecosystem. If third party software providers are unwilling to join the APA on appropriate terms, including agreeing with our revenue share allocations, or if we are unable to retain our current APA participants, we may not be able to
grow the APA program.
Licensing of our solidThinking software is dependent on performance of our distributors and resellers.
We have historically licensed our software primarily through our direct sales force. Our solidThinking offerings are primarily licensed through a recently
expanded network of distributors and resellers. If these distributors and resellers become unstable, financially insolvent, or otherwise do not perform as we expect, our revenue growth derived from solidThinking could be negatively impacted.
If we fail to adapt to technology changes our software may become less marketable, less competitive, or obsolete.
Our success depends in part on our ability to:
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anticipate customer needs;
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foresee changes in technology, including to cloud-enabled hardware, software, networking, browser and database technologies;
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differentiate our software;
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maintain operability of our software with changing technology standards; and
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develop or acquire additional or complementary technologies.
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We may not be able to develop or market new or
enhanced software in a timely manner, which could result in our software becoming less marketable, less competitive, or obsolete.
We believe our
long-term value as a company will be greater if we focus on growth, which may negatively impact our profitability in the near term.
Part of our
business strategy is to focus on our long-term growth. As a result, our profitability may be lower in the near term than it would be if our strategy was to maximize short-term profitability. Expanding our research and development efforts, sales and
marketing efforts, infrastructure and other such investments may not ultimately grow our business or cause higher long-term profitability. If we are ultimately unable to achieve greater profitability at the level anticipated by analysts and our
stockholders, our Class A common stock price may decline.
Our research and development may not generate revenue or yield expected benefits.
A key element of our strategy is to invest significantly in research and development to create new software and enhance our existing software to
address additional applications and serve new markets. Research and development projects can be technically challenging and expensive, and there may be delays between the time we incur expenses and the time we are able to generate revenue, if any.
Anticipated customer demand for any software we may develop could decrease after the development cycle has commenced, and we could be unable to avoid costs associated with the development of any such software. If we expend a significant amount of
resources on research and development and our efforts do not lead to the timely introduction or improvement of software that is competitive in our current or future markets, it could harm our business.
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Our continued innovation may not generate revenue or yield expected benefits.
As a business focused on innovation, we expect to continue developing new software and products both internally and through acquisitions. These offerings may
focus either on our existing markets or other markets in which we see opportunities. We may not receive revenue from these investments sufficient to either grow our business or cover the related development or acquisition costs.
If we lose our senior executives, we may be unable to achieve our business objectives.
We currently depend on the continued services and performance of James Scapa, our chief executive officer, and other senior executives. Many members of this
executive team have served the Company for more than 15 years, with Mr. Scapa having served since our founding in 1985. Loss of Mr. Scapas services or those of other senior executives could delay or prevent the achievement of our
business objectives.
If we are unable to attract and retain key personnel, we may be unable to achieve our business objectives.
Our business is dependent on our ability to attract and retain highly skilled software engineers, salespeople, and support teams. There is significant
industry competition for these individuals. We have many employees whose equity awards in our company are fully vested and may increase their personal wealth after giving effect to our offering, which could affect their decision to remain with the
Company. Failure to attract or retain key personnel could delay or prevent the achievement of our business objectives.
Defects or errors in our
software could result in loss of revenue or harm to our reputation.
Our software is complex and, despite extensive testing and quality control,
may contain undetected or perceived bugs, defects, errors, or failures. From time to time we have found defects or errors in our software and we may discover additional defects in the future. We may not find defects or errors in new or enhanced
software before release and these defects or errors may not be discovered by us or our customers until after they have used the software. We have in the past issued, and may in the future need to issue, corrective releases or updates of our software
to remedy bugs, defects and errors or failures. The occurrence of any real or perceived bugs, defects, errors, or failures could result in:
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lost or delayed market acceptance of our software;
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delays in payment to us by customers;
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injury to our reputation;
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diversion of our resources;
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loss of competitive position;
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claims by customers for losses sustained by them;
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breach of contract claims or related liabilities;
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increased customer support expenses or financial concessions; and
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increased insurance costs.
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Any of these problems could have a material adverse effect on our business,
financial position, results of operations and cash flows.
Acquisitions may dilute our stockholders, disrupt our core business, divert our
resources, or require significant management attention.
Most of our software has been developed internally with acquisitions used to augment our
capabilities. We may not effectively identify, evaluate, integrate, or use acquired technology or personnel from future acquisitions, or accurately forecast the financial impact of an acquisition, including accounting charges.
After the completion of an acquisition, it is possible that our valuation of such acquisition for purchase price allocation purposes may change compared to
initial expectations and result in unanticipated write-offs or charges, impairment of our goodwill, or a material change to the fair value of the assets and liabilities associated with a particular acquisition.
We may pay cash, incur debt, or issue equity securities to fund an acquisition. The payment of cash will decrease available cash. The incurrence of debt would
likely increase our fixed obligations and could subject us to restrictive covenants or obligations. The issuance of equity securities would likely be dilutive to our stockholders. We may also incur unanticipated liabilities as a result of acquiring
companies. Future acquisition activity may disrupt our core business, divert our resources, or require significant management attention.
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Failure to protect and enforce our proprietary technology and intellectual property rights could
substantially harm our business.
The success of our business depends, in part, on our ability to protect and enforce our proprietary technology
and intellectual property rights, including our trade secrets, patents, trademarks, copyrights, and other intellectual property. We attempt to protect our intellectual property under trade secret, patent, trademark, and copyright laws. Despite our
efforts, we may not be able to protect our proprietary technology and intellectual property rights, if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. It may be possible for unauthorized
third parties to copy our technology and use information that we regard as proprietary to create products and services that compete with ours. Provisions in our licenses protect against unauthorized use, copying, transfer and disclosure of our
technology, but such provisions may be difficult to enforce or are unenforceable under the laws of certain jurisdictions and countries. The laws of some countries do not protect proprietary rights to the same extent as the laws of the
United States. Our international activities expose us to unauthorized copying and use of our technology and proprietary information.
We primarily
rely on our unpatented proprietary technology and trade secrets. Despite our efforts to protect our proprietary technology and trade secrets, unauthorized parties may attempt to misappropriate, reverse engineer or otherwise obtain and use them. The
contractual provisions that we enter into with employees, consultants, partners, vendors and customers may not be sufficient to prevent unauthorized use or disclosure of our proprietary technology or trade secrets and may not provide an adequate
remedy in the event of unauthorized use or disclosure of our proprietary technology or trade secrets.
Policing unauthorized use of our technologies,
software and intellectual property is difficult, expensive and time-consuming, particularly in countries where the laws may not be as protective of intellectual property rights as those in the United States and where mechanisms for enforcement of
intellectual property rights may be weak. We may be unable to detect or determine the extent of any unauthorized use or infringement of our software, technologies or intellectual property rights.
From time to time, we may need to engage in litigation or other administrative proceedings to protect our intellectual property rights or to defend against
allegations by third parties that we have infringed or misappropriated their intellectual property rights, including in connection with requests for indemnification by our customers who may face such claims. We have been approached and may be
approached in the future by certain of our customers to indemnify them against third party intellectual property claims. Litigation and/or any requests for indemnification by our customers could result in substantial costs and diversion of resources
and could negatively affect our business and revenue. If we are unable to protect and enforce our intellectual property rights, our business may be harmed.
Intellectual property disputes could result in significant costs and harm our business.
Intellectual property disputes may occur in the markets in which we compete. Many of our competitors are large companies with significant intellectual
property portfolios, which they may use to assert claims of infringement, misappropriation or other violations of intellectual property rights against us, or our customers. Any allegation of infringement, misappropriation or other violation of
intellectual property rights by a third party, even those without merit, could cause us to incur substantial costs defending against the claim, could distract our management from our business, and could cause uncertainty among our customers or
prospective customers, all of which could have an adverse effect on our business or revenue. We are currently engaged in ongoing litigation with MSC, a competitor of ours, who brought suit against us in 2007 alleging misappropriation of trade
secrets, breach of confidentiality and other employment-related claims. A jury returned a verdict against us in April 2014. After a successful challenge by us in November 2014, this verdict was partially vacated except for damages for $425,000
related to certain employment matters and the court ordered a new trial on damages for the trade secrets claims. No trial date is scheduled. On August 21, 2017, the court granted Altairs motion to strike the testimony of MSCs
damage expert. On October 11, 2017, the court mooted the remaining
pre-trial
motions and allowed us to file a motion for summary judgment on the issue of whether MSC can prove damages. We cannot be
certain of the outcome of this matter. We agreed to indemnify our employees named in the MSC litigation.
Our agreements may include provisions that
require us to indemnify others for losses suffered or incurred as a result of our infringement of a third partys intellectual property rights infringement, including certain of our employees and customers.
An adverse outcome of a dispute or an indemnity claim may require us to:
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pay substantial damages;
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cease licensing our software or portions of it;
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develop
non-infringing
technologies;
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acquire or license
non-infringing
technologies; and
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make substantial indemnification payments.
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Any of the foregoing or other damages could harm our business,
decrease our revenue, increase our expenses or negatively impact our cash flow.
Security breaches, computer malware, computer hacking attacks and
other security incidents could harm our business, reputation, brand and operating results.
Security incidents have become more prevalent across
industries and may occur on our systems. Security incidents may be caused by, or result in but are not limited to, security breaches, computer malware or malicious software, computer hacking, unauthorized access to confidential information, denial
of service attacks, security system control failures in our own systems or from vendors we use, email phishing, software vulnerabilities, social engineering, sabotage and
drive-by
downloads. Such security
incidents, whether intentional or otherwise, may result from actions of hackers, criminals, nation states, vendors, employees or customers.
We may
experience disruptions, data loss, outages and other performance problems on our systems due to service attacks, unauthorized access or other security related incidents. Any security breach or loss of system control caused by hacking, which involves
efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions or loss, modification or corruption of data, software, hardware or other computer equipment and the inadvertent transmission of computer malware
could harm our business.
In addition, our software stores and transmits customers confidential business information in our facilities and on our
equipment, networks and corporate systems. Security incidents could expose us to litigation, remediation costs, increased costs for security measures, loss of revenue, damage to our reputation and potential liability. Our customer data and corporate
systems and security measures may be compromised due to the actions of outside parties, employee error, malfeasance, capacity constraints, a combination of these or otherwise and, as a result, an unauthorized party may obtain access to our data or
our customers data. Outside parties may attempt to fraudulently induce our employees to disclose sensitive information in order to gain access to our customers data or our information. We must continuously examine and modify our security
controls and business policies to address new threats, the use of new devices and technologies, and these efforts may be costly or distracting.
Because
the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently or may be designed to remain dormant until a predetermined event and often are not recognized until launched against a target, we
may be unable to anticipate these techniques or implement sufficient control measures to defend against these techniques. Though it is difficult to determine what harm may directly result from any specific incident or breach, any failure to maintain
confidentiality, availability, integrity, performance and reliability of our systems and infrastructure may harm our reputation and our ability to retain existing customers and attract new customers. If an actual or perceived security incident
occurs, the market perception of the effectiveness of our security controls could be harmed, our brand and reputation could be damaged, we could lose customers, and we could suffer financial exposure due to such events or in connection with
remediation efforts, investigation costs, regulatory fines and changed security control, system architecture and system protection measures.
Adverse global conditions, including economic uncertainty, may negatively impact our financial results.
Global conditions, including the effects of the outcome of the United Kingdoms referendum on membership in the European Union or any negative financial
impacts affecting United States corporations operating on a global basis as a result of tax reform or changes to existing trade agreements or tax conventions, could adversely impact our business in a number of ways, including longer sales cycles,
lower prices for our software license fees, reduced licensing renewals or foreign currency fluctuations.
During challenging economic times our customers
may be unable or unwilling to make timely payments to us, which could cause us to incur increased bad debt expenses. Our customers may unilaterally extend the payment terms of our invoices, adversely affecting our short-term or long-term cash flows.
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International operations expose us to risks inherent in international activities.
Operating in international markets requires significant resources and management attention and subjects us to regulatory, economic and political risks that are
different from those in the United States. We face risks in doing business internationally that could adversely affect our business, including:
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the need to localize and adapt our software for specific countries, including translation into foreign languages and associated expenses;
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import and export restrictions and changes in trade regulation, including uncertainty regarding renegotiation of international trade agreements and partnerships;
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sales and customer service challenges associated with operating in different countries;
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enhanced difficulties of integrating any foreign acquisitions;
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difficulties in staffing and managing foreign operations and working with foreign partners;
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different pricing environments, longer sales cycles, longer accounts receivable payment cycles, and collections issues;
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compliance challenges related to the complexity of multiple, conflicting and changing governmental laws and regulations, including the Foreign Corrupt Practices Act of 1977, or the FCPA, employment, ownership, tax,
privacy and data protection laws and regulations;
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limitations on enforcement of intellectual property rights;
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more restrictive or otherwise unfavorable government regulations;
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increased financial accounting and reporting burdens and complexities;
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restrictions on the transfer of funds;
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withholding and other tax obligations on remittance and other payments made by our subsidiaries; and
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unstable regional, economic and political conditions.
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Our inability to manage any of these risks
successfully, or to comply with these laws and regulations, could reduce our sales and harm our business.
We may lose customers if our software
does not work seamlessly with our customers existing software.
Our customers may use our software, which in many instances has been designed
to seamlessly interface with software from some of our competitors, together with their own software and software they license from third parties. If our software ceases to work seamlessly with our customers existing software applications, we
may lose customers.
Our customers use our software and services to design and develop their products, which when built and used may expose us to
claims.
Many of our customers use our software and services, together with software and services from other third parties and their own
resources, to assist in the design and development of products intended to be used in a commercial setting. To the extent our customers design or develop a product that results in potential liability, including product liability, we may be included
in resulting litigation. We may be subject to litigation defense costs or be subject to potential judgments or settlement costs for which we may not be fully covered by insurance, which would result in an increase of our expenses.
We also license our software on Altair branded computer hardware, which we acquire from an original equipment manufacturer, which we refer to as an OEM,
exposing us to potential liability for the hardware, such as product liability. To the extent this liability is greater than the warranty and liability protection from our OEM, we may incur additional expenses, which may be significant.
If we fail to educate and train our users regarding the use and benefits of our software, we may not generate additional revenue.
Our software is complex and highly technical. We continually educate and train our existing and potential users regarding the depth, breadth, and benefits of
our software including through classroom and online training. If these users do not receive education and training regarding the use and benefits of our software, or the education and training is ineffective, they may not increase their usage of our
software. We incur costs of training directly related to this activity prior to generating additional revenue, if any.
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If we are unable to match engineers to open positions in our CES business or are otherwise unable to grow
our CES business, our revenue could be adversely affected.
We operate our client engineering services business by hiring engineers for placement
at a customer site for specific customer-directed assignments and pay them only for the duration of the placement. The success of this business is dependent upon our ability to recruit and retain highly skilled, qualified engineers to meet the
requirements of our customers and to maintain ongoing relationships with these customers. Our CES business constituted approximately 15% of our total revenues for each of the years ended December 31, 2015 and 2016. Some of our customers operate
their engineering personnel needs through managed service providers, or MSPs. A significant percentage of the engineers we place, either directly or through MSPs, are with U.S.-based customers and are citizens of countries other than the United
States. In the event these engineers are unable to enter into the United States legally, we may be unable to match engineers with the appropriate skill sets matched to open customer positions. If we are unable to attract highly skilled, qualified
engineers because of competitive factors or immigration laws, or otherwise fail to match engineers to open customer positions, our revenue may be adversely affected.
Our sales to United States government agencies and their suppliers may be subject to reporting and compliance requirements.
Our customers include agencies of the United States government and their suppliers of products and services. These customers may procure our software and
services through United States government mandated procurement regulations. Because of United States government reporting and compliance requirements we may incur unexpected costs. United States government agencies and their suppliers may have
statutory, contractual or other legal rights to terminate contracts for convenience or due to a default, and any such termination may adversely affect our future operating results.
Our sales to
non-United
States government agencies and their suppliers may be subject to reporting and
compliance requirements.
Our customers include agencies of various
non-United
States governments and
their suppliers of products and services. These customers procure our software and services through various governments mandated procurement regulations. Because of governmental reporting and compliance requirements we may incur unexpected
costs. Government agencies and their suppliers may have statutory, contractual or other legal rights to terminate contracts for convenience or due to a default, and any such termination may adversely affect our future operating results.
We may require additional capital to support our business, which may not be available on acceptable terms.
We expect to continue to make investments in our business, which may require additional funds. We may raise these funds through either equity or debt
financings. Issuances of equity or convertible debt securities may significantly dilute stockholders and any new equity securities could have rights, preferences and privileges superior to those holders of our Class A common stock. Future debt
financings could contain restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital, manage our business and pursue business
opportunities, including potential acquisitions.
We may not be able to obtain additional financing on terms favorable to us. If we are unable to obtain
adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our growth, develop new software or add capabilities and enhancements to our existing software and respond to business challenges
could be significantly impaired, and our business may be adversely affected.
Our loan agreements contain operating and financial covenants that may
restrict our business and financing activities.
Our Credit Agreement is unconditionally guaranteed by us and all existing and subsequently
acquired controlled domestic subsidiaries. It is also collateralized by a first priority, perfected security interest in, and mortgages on, substantially all of our tangible assets. The Credit Agreement contains operating financial restrictions and
covenants, including liens, limitations on indebtedness, fundamental changes, limitations on guarantees, limitations on sales of assets and sales of receivables, dividends, distributions and other restricted payments, transactions with affiliates,
prepayment of indebtedness and limitations on loans and investments in each case subject to certain exceptions. The Credit Agreement also requires us to maintain a minimum level of liquidity, which shall not be less than $20,000,000 at the end of
each fiscal quarter. We entered into a new revolving credit facility in October 2017, or our New Credit Facility, which becomes effective on satisfaction of certain conditions including the closing of our offering on similar terms as described above
and subject to similar operating financial restrictions and covenants. We expect to repay borrowings under our Credit Agreement and pay the fees and expenses related to entering into the new
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revolving credit facility with the proceeds of this offering. The restrictions and covenants in the Credit Agreement, as well as those contained in any future debt financing agreements that we
may enter into, including our New Credit Facility, may restrict our ability to finance our operations and engage in, expand or otherwise pursue our business activities and strategies. Our ability to comply with these covenants and restrictions may
be affected by events beyond our control, and breaches of these covenants and restrictions could result in a default under the loan agreement and any future financing agreements that we may enter into.
We operate internationally and must comply with employment and related laws in various countries, which may, in turn, result in unexpected expenses.
We are subject to a variety of domestic and foreign employment laws, including those related to safety, discrimination, whistle-blowing,
employment of illegal aliens, classification of employees, wages, statutory benefits, and severance payments. Such laws are subject to change as a result of judicial decisions or otherwise, and there can be no assurance that we will not be found to
have violated any such laws in the future. Such violations could lead to the assessment of significant fines against us by federal, state or foreign regulatory authorities or to the award of damages claims, including severance payments, against us
in judicial or administrative proceedings by employees or former employees, any of which would reduce our net income or increase our net loss.
Changes in government trade, immigration or currency policies may harm our business.
We operate our business globally in multiple countries that have policies and regulations relating to trade, immigration and currency, which may change.
Governments may change their trade policies by withdrawing from negotiations on new trade policies, renegotiating existing trade agreements, imposing tariffs or imposing other trade restrictions or barriers. Any such changes may result in:
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changes in currency exchange rates;
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changes in political or economic conditions;
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import or export licensing requirements or other restrictions on technology imports and exports;
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laws and business practices favoring local companies;
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changes in diplomatic and trade relationships;
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modification of existing or implementation of new tariffs;
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imposition or increase of trade barriers; or
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establishment of new trade or currency restrictions.
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Any of these changes, changes in immigration policies,
government intervention in currency valuation or other government policy changes may adversely impact our ability to sell software and services, which could, in turn, harm our revenues and our business. We are headquartered in the United States and
may be particularly impacted by changes affecting the United States.
Our use of open source technology could impose limitations on our ability to
commercialize our software.
We use open source software in some of our software and expect to continue to use open source software in the future.
Although we monitor our use of open source software to avoid subjecting our software to conditions we do not intend, we may face allegations from others alleging ownership of, or seeking to enforce the terms of, an open source license, including by
demanding release of the open source software, derivative works, or our proprietary source code that was developed using such software. These allegations could also result in litigation. The terms of many open source licenses have not been
interpreted by United States courts. There is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our software. In such an event, we may be required to
seek licenses from third parties to continue commercially offering our software, to make our proprietary code generally available in source code form, to
re-engineer
our software or to discontinue the sale of
our software if
re-engineering
could not be accomplished on a timely basis, any of which could adversely affect our business and revenue.
The use of open source software subjects us to a number of other risks and challenges. Open source software is subject to further development or modification
by anyone. Others may develop such software to be competitive with or no longer useful by us. It is also possible for competitors to develop their own solutions using open source software, potentially reducing the demand for our software. If we are
unable to successfully address these challenges, our business and operating results may be adversely affected and our development costs may increase.
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We currently open source certain of our software and may open source other software in the future, which
could have an adverse effect on our revenues and expenses.
We offer a portion of our Altair PBS workload management software in an open source
version to generate additional usage and broaden user-community development and enhancement of the software. We offer related software and services on a paid basis. We believe increased usage of open source software leads to increased purchases of
these related paid offerings. We may offer additional software on an open source basis in the future. There is no assurance that the incremental revenues from related paid offerings will outweigh the lost revenues and incurred expenses attributable
to the open sourced software.
Our revenue mix may vary over time, which could harm our gross margin and operating results.
Our revenue mix may vary over time due to a number of factors, including the mix of term-based licenses and perpetual licenses. Due to the differing revenue
recognition policies applicable to our term-based licenses, perpetual licenses and professional services, shifts in the mix between subscription and perpetual licenses from quarter to quarter, or increases or decreases in revenue derived from our
professional engineering services, which have lower gross margins than our software services, could produce substantial variation in revenues recognized even if our billings remain consistent. Our gross margins and operating results could be harmed
by changes in revenue mix and costs, together with other factors, including: entry into new markets or growth in lower margin markets; entry into markets with different pricing and cost structures; pricing discounts; and increased price competition.
Any one of these factors or the cumulative effects of certain of these factors may result in significant fluctuations in our gross margin and operating results. This variability and unpredictability could result in our failure to meet internal
expectations or those of securities analysts or investors for a particular period. If we fail to meet or exceed such expectations for these or any other reasons, the market price of our common stock could decline.
The estimates of market opportunity and forecasts of market growth included in our periodic reports or other public disclosures may prove to be
inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.
Market opportunity estimates and growth forecasts included in our periodic reports or other public disclosures, including those we have generated ourselves,
are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. Even if the market in which we compete meets the size estimates and growth forecasted in our periodic reports or other public
disclosures, our business could fail to grow for a variety of reasons, which would adversely affect our results of operations.
We are subject to
governmental export and import controls that could impair our ability to compete in international markets due to licensing requirements and subject us to liability if we are not in compliance with applicable laws.
Our software, services and hardware are subject to export control and import laws and regulations. As a company headquartered in the United States we are
subject to regulations, including the International Traffic in Arms Regulations, or ITAR, and Export Administration Regulations, or EAR, United States Customs regulations and various economic and trade sanctions regulations administered by the
United States Treasury Departments Office of Foreign Assets Controls presenting further risk of unexpected reporting and compliance costs. Compliance with these regulations may also prevent and restrict us from deriving revenue from potential
customers in certain geographic locations for certain of our technologies.
If we fail to comply with these laws and regulations, we and certain of our
employees could be subject to substantial civil or criminal penalties, including the possible loss of export or import privileges, fines which may be imposed on us and responsible employees or managers and, in extreme cases, the incarceration of
responsible employees or managers. Obtaining the necessary authorizations, including any required license, for a particular sale may be time-consuming, is not guaranteed and may result in the delay or loss of sales opportunities. In addition,
changes in our software or changes in applicable export or import regulations may create delays in the introduction and sale of our software in international markets, prevent our customers with international operations from deploying our software
or, in some cases, prevent the export or import of our software to certain countries, governments or persons altogether. Any change in export or import regulations, shift in the enforcement or scope of existing regulations, or change in the
countries, governments, persons or technologies targeted by such regulations, could also result in decreased use of our software, or in our decreased ability to export or license our software to existing or potential customers with international
operations. Any decreased use of our software or limitation on our ability to export or license our software will likely adversely affect our business.
We incorporate encryption technology into portions of our software. Various countries regulate the import of certain encryption technology, including through
import permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our software or could limit our customers ability to implement our software in those
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countries. Encrypted software and the underlying technology may also be subject to export control restrictions. Governmental regulation of encryption technology and regulation of imports or
exports of encryption products, or our failure to obtain required import or export approval for our software, when applicable, could harm our international sales and adversely affect our revenue. Compliance with applicable regulatory requirements
regarding the export of our software, including with respect to new releases of our software, may create delays in the introduction of our software in international markets, prevent our customers with international operations from deploying our
software throughout their globally-distributed systems or, in some cases, prevent the export of our software to some countries altogether.
United States
export control laws and economic sanction programs prohibit the shipment of certain software and services to countries, governments and persons that are subject to United States economic embargoes and trade sanctions. Any violations of such economic
embargoes and trade sanction regulations could have negative consequences, including government investigations, penalties and reputational harm.
Any
change in export or import regulations, economic sanctions or related legislation, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could result
in decreased use of our software by, or in our decreased ability to export or license our software to, existing or potential customers with international operations. Any decreased use of our software or limitation on our ability to export or license
our software could adversely affect our business.
Our business is subject to a wide range of laws and regulations, and our failure to comply with
those laws and regulations could harm our business.
Our business is subject to regulation by various federal, state, local and foreign
governmental agencies, including agencies responsible for monitoring and enforcing employment and labor laws, workplace safety, environmental laws, privacy and data protection laws, anti-bribery laws, import and export controls, federal securities
laws and tax laws and regulations. In certain foreign jurisdictions, these regulatory requirements may be more stringent than those in the United States. These laws and regulations are subject to change over time and thus we must continue to monitor
and dedicate resources to ensure continued compliance.
Non-compliance
with applicable regulations or requirements could subject us to investigations, sanctions, mandatory product recalls, enforcement actions,
disgorgement of profits, fines, damages, civil and criminal penalties or injunctions. If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, operating results, and financial
condition could be materially adversely affected. In addition, responding to any action will likely result in a significant diversion of managements attention and resources and an increase in professional fees. Enforcement actions and
sanctions could harm our business, operating results and financial condition.
If we or any of our employees violate the United States Foreign
Corrupt Practices Act, the U.K. Bribery Act or similar anti-bribery laws we could be adversely affected.
The United States Foreign Corrupt
Practices Act, or FCPA, the U.K. Bribery Act and similar anti-bribery laws generally prohibit companies and their intermediaries from authorizing, offering or providing, directly or indirectly, improper payments or benefits for the purpose of
obtaining or retaining business to government officials, political parties and private-sector recipients. United States based companies are required to maintain records that accurately and fairly represent their transactions and have an adequate
system of internal accounting controls. We operate in areas of the world that potentially experience corruption by government officials to some degree and, in certain circumstances, compliance with anti-bribery laws may conflict with local customs
and practices. We cannot assure that our employees, resellers or distributors will not engage in prohibited conduct. If we are found to be in violation of the FCPA, the U.K. Bribery Act or other anti-bribery laws we could suffer criminal or civil
penalties or other sanctions.
Business interruptions could adversely affect our business.
Our operations and our customers are vulnerable to interruptions by fire, flood, earthquake, power loss, telecommunications failure, terrorist attacks, wars
and other events beyond our control. A catastrophic event that results in the destruction of any of our critical business or information technology systems could severely affect our ability to conduct normal business operations, including system
interruptions, reputational harm, delays in our software development, breaches of data security and loss of critical data.
We rely on our network and
third party infrastructure and applications, internal technology systems, and our websites for our development, marketing, operational support, hosted services and sales activities. If these systems were to fail or be negatively impacted as a result
of a natural disaster or other event, our ability to deliver software and training to our customers could be impaired.
Our business interruption
insurance may not be sufficient to compensate us fully for losses or damages that may occur as a result of these events, if at all.
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Our reported financial results may be adversely affected by changes in accounting principles generally
accepted in the United States.
GAAP are subject to interpretation by the Financial Accounting Standards Board, or FASB, the United States
Securities and Exchange Commission, or the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial
results for periods prior and subsequent to such change. We will need to comply with the FASB issued Accounting Standards Update
No. 2014-09,
Revenue from Contracts with Customers. This standard outlines
a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most existing revenue recognition guidance under GAAP. The core principle of the guidance is that an entity should
recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. We expect the timing of revenue
recognition to be accelerated because we anticipate that license revenue will be recognized at a point in time, rather than over time, which is our current practice. Generally, the license revenue component of an arrangement represents a significant
portion of the overall fair value of a software arrangement. While we continue to assess the potential impacts, under the new standards there is the potential for significant impacts on the consolidated financial statements.
The application of this new guidance may result in a change in the timing and pattern of revenue recognition including the retrospective recognition of
revenue in historical periods that may negatively affect our future revenue trend, which, despite no change in associated cash flows, could have a material adverse effect on our net income (loss). The adoption of new standards may potentially
require enhancements or changes in our systems and will require significant time and cost on behalf of our financial management.
As an emerging
growth company the JOBS Act allows us an extended transition period for complying with new and revised accounting standards that have different effective dates for public and private companies until the earlier of the date (i) we are no
longer an emerging growth company, or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. We have elected to use this extended transition period under the JOBS Act, including with respect to
ASU
2014-09.
As a result, we will not be required to apply ASU
2014-09
until January 1, 2019.
We cannot predict the impact of all of the future changes to accounting principles or our accounting policies on our consolidated financial statements going
forward, which could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of the change. In addition, if we were to change our critical accounting estimates,
including those related to the recognition of license revenue and other revenue sources, our operating results could be significantly affected.
If
our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings, which could harm our business.
Under GAAP, we review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable.
Goodwill is required to be tested for impairment at least annually. As of September 30, 2017, and December 31, 2016 respectively, we have $68.9 million and $36.6 million of goodwill and $15.4 million
and $11.2 million of other intangible assetsnet. An adverse change in market conditions, particularly if such change has the effect of changing one of our critical assumptions or estimates, could result in a change to the estimation
of fair value that could result in an impairment charge.
We have significant deferred tax assets in the United States, which we may not use in
future taxable periods.
As of September 30, 2017, and December 31, 2016 we had net deferred tax assets, or DTAs, of $68.0 million
and $61.5 million, respectively, primarily related to tax credits, share-based compensation, deferred revenue, and capitalized research and development expenses. We are entitled to a United States federal tax deduction when
non-qualified
stock options, or NSOs, are exercised. In connection with this offering, we expect a significant number of our NSOs will be exercised, creating substantial additional tax deductions for us. These
deductions are expected to result in future net operating losses for United States tax purposes which are expected to result in our needing to establish a valuation allowance for the majority of our DTAs. Our ability to utilize any net operating
losses or tax credits could be limited under provisions of the Internal Revenue Code of 1986, or the Code, if we undergo an ownership change in connection with or after this offering, provided, that for this purpose an ownership change is generally
defined as a greater than
50-percentage-point
cumulative change, by value, in the equity ownership of certain stockholders over a rolling three-year period. We did not experience an ownership change in
connection with our initial public offering. We may also be unable to realize our tax credit carryforwards as they begin to expire in 2018.
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If our global tax methodology is challenged our tax expense may increase.
As a global business headquartered in the United States, we are required to pay tax in a number of different countries, exposing us to transfer pricing and
other adjustments. Transfer pricing refers to the methodology of allocating revenue and expenses for tax purposes to particular countries. Taxing authorities may challenge our transfer pricing methodology, which if successful could increase our
professional expenses and result in
one-time
tax charges, a higher worldwide effective tax rate, reduced cash flows, and lower overall profitability of our operations.
Our tax expense could be impacted depending on the applicability of withholding and other taxes including taxes on software licenses and related intercompany
transactions under the tax laws of jurisdictions in which we have business operations. Our future income taxes may fluctuate if our earnings are either lower in countries that have low statutory tax rates or higher in countries that have high
statutory tax rates. We are subject to review and audit by the United States and other taxing authorities. Any review or audit could increase our professional expenses and, if determined adversely, could result in unexpected costs.
Sales and use, value-added and similar tax laws and rates vary by jurisdiction. Any of these jurisdictions may assert that such taxes are applicable, which
could result in tax assessments, penalties and interest.
In addition to our software, we manufacture, distribute and sell products, which may
expose us to product liability claims, product recalls, and warranty claims that could be expensive and harm our business.
We manufacture,
distribute and sell products through two wholly owned subsidiaries, Altair Product Design, Inc., which we refer to as APD, and Ilumisys, Inc. doing business as toggled and which we refer to in this quarterly report as toggled. Generally, APD
supports our customers with engineering and design services, which may include the fabrication of equipment and prototypes that are sold to businesses but not sold to consumers. From time to time, certain customers may contract directly with us for
services similar to those provided by APD. toggled designs, sources through contract manufacturers, and assembles in our own facilities LED lighting and related products for sale to consumers and businesses.
To the extent these products do not perform as expected, cause injury or death or are otherwise unsuitable for usage, we may be held liable for claims,
including product liability and other claims. A product liability claim, any product recalls or an excessive warranty claim, whether arising from defects in design or manufacture or otherwise could negatively affect our APD or toggled sales or
require a change in the design or manufacturing process of these products, any of which may harm our reputation and business.
Failure to protect
and enforce toggleds proprietary technology and intellectual property rights could substantially harm toggleds lighting business.
Part of the success of toggleds lighting business depends on our ability to protect and enforce toggleds proprietary rights, including its
patents, trademarks, copyrights, trade secrets and other intellectual property rights. As of December 31, 2016, toggled had 109 issued patents in the United States and more than 20 pending patent applications. We attempt to protect
toggleds intellectual property under patent, trademark, copyright, and trade secret laws. However, the steps we take to protect its intellectual property may be inadequate. We will not be able to protect toggleds intellectual property if
we are unable to enforce its rights or if we do not detect unauthorized use of its intellectual property. It may be possible for unauthorized third parties to copy toggleds technology and use information that it regards as proprietary to
create products that compete with toggleds products. Some license provisions protecting against unauthorized use, copying, transfer and disclosure of toggleds technology may be unenforceable under the laws of certain jurisdictions and
foreign countries. Further, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States.
The process
of obtaining patent protection is uncertain, expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. In addition, issuance of a patent does not
guarantee that we have an absolute right to practice our patented technology, or that we have the right to exclude others from practicing our patented technology. As a result, we may not be able to obtain adequate patent protection or to enforce our
issued patents effectively.
From time to time, toggled enforces its patents and other intellectual property rights including through initiating
litigation. Any such litigation could result in substantial costs and diversion of resources and could negatively affect toggleds business, operating results, financial condition and cash flows. If toggled is unable to protect toggleds
intellectual property rights, its business, operating results and financial condition will be harmed.
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Assertions by third parties of infringement or other violations by toggled of their intellectual property
rights, or other lawsuits brought against toggled, could result in significant costs and substantially harm toggleds business.
Patent and
other intellectual property disputes are common in the markets in which toggled competes. Some of toggleds competitors, own large numbers of patents, copyrights, trademarks and trade secrets, which they may use to assert claims of
infringement, misappropriation or other violations of intellectual property rights against toggled or its customers. As the number of patents and competitors in this market increases, allegations of infringement, misappropriation and other
violations of intellectual property rights may increase. Any allegation of infringement, misappropriation or other violation of intellectual property rights by a third party, even those without merit, could cause toggled to incur substantial costs
and resources defending against the claim, which could have an adverse effect on toggleds business.
Some of our businesses may collect
personal information and are subject to privacy laws.
Companies that collect personal information are required to comply with the privacy laws
adopted by United States and various state and foreign governments, including member states of the European Union. These privacy laws regulate the collection, use, storage, disclosure and security of data, such as names, email addresses and, in some
jurisdictions, Internet Protocol addresses, that may be used to identify or locate an individual, including a customer or an employee.
Our Company
includes the WEYV business, a consumer music and content service, which in the course of providing its service directly to consumers, collects and stores consumer information. Currently we expect to operate WEYV only within the United States and are
only subject to the United States privacy laws. To the extent we expand our WEYV offering beyond the United States we will need to comply with the privacy laws of every country in which we operate. Some of our other products may collect personal
data and would also be subject to these privacy laws.
These laws and regulations may require us to implement privacy and security policies, permit
end-customers
to access, correct and delete personal information stored or maintained by us, inform individuals of security breaches that affect their personal information, and, in some cases, obtain
individuals consent to use personally identifiable information for certain purposes. Governments could require that any personally identifiable information collected in a country not be disseminated outside of that country. We also may find it
necessary or desirable to join industry or other self-regulatory bodies or other information security, or data protection, related organizations that require compliance with their rules pertaining to information security and data protection. We may
agree to be bound by additional contractual obligations relating to our collection, use and disclosure of personal, financial and other data. Our failure to comply with these privacy laws or any actual or suspected security incident may result in
governmental actions, fines and
non-monetary
penalties, which may harm our business.
The privacy laws in the
member states of the European Union are in a state of flux and may evolve or change in the near to
mid-term.
To the extent any European Union member state or other country in which we operate, modifies or
changes its interpretation of an existing privacy law or enacts any new privacy law, we may incur unexpected costs.
Risks related to ownership of our
Class A common stock
An active public trading market for our Class A common stock may not be sustained.
Prior to our initial public offering in the fourth quarter of 2017, there had been no public market or active private market for trading shares of our
Class A common stock. Our Class A common stock is listed on the Nasdaq Global Select Market under the symbol ALTR. However, we cannot assure you that an active trading market will be sustained. The lack of an active
market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the price of shares of Class A common stock. An inactive market may
impair our ability to raise capital by selling shares and our ability to use our capital stock to acquire other companies or technologies. We cannot predict the prices at which our Class A common stock will trade.
Our Class A common stock has only recently become publicly traded, and the market price of our Class A common stock may be volatile.
The market price of our Class A common stock may fluctuate substantially depending on a number of factors, many of which are beyond our
control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our Class A common stock, since you might not be able to sell your
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shares at or above the price you paid in this offering. Factors that could cause fluctuations in the market price of our Class A common stock include the following:
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price and volume fluctuations in the overall stock market from time to time, including as a result of trends in the economy as a whole;
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volatility in the market prices and trading volumes of technology stocks;
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changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;
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the expiration of market
stand-off
or contractual
lock-up
agreements and sales of shares of our Class A common stock by us or our
stockholders;
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the volume of shares of our Class A common stock available for public sale;
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failure of financial analysts to maintain coverage of us, changes in financial estimates by any analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
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the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
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announcements by us or our competitors of new software or new or terminated significant contracts, commercial relationships or capital commitments;
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public analyst or investor reaction to our press releases, other public announcements and filings with the SEC;
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rumors and market speculation involving us or other companies in our industry;
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actual or anticipated changes or fluctuations in our operating results;
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actual or anticipated developments in our business, our customers businesses, or our competitors businesses or the competitive landscape generally;
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litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;
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developments or disputes concerning our intellectual property or our solutions, or third party proprietary rights;
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announced or completed acquisitions of businesses or technologies by us or our competitors;
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new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
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changes in accounting standards, policies, guidelines, interpretations or principles;
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any major changes in our management or our board of directors;
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general economic conditions and slow or negative growth of our markets; and
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other events or factors, including those resulting from war, incidents of terrorism or responses to these events.
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In addition, the stock market in general, and the market for technology companies in particular, have experienced extreme price and volume fluctuations that
have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may affect the market price of our Class A common stock, regardless of our actual operating performance. In the
past, following periods of volatility in the overall market and the market prices of a particular companys securities, securities class action litigation has often been instituted against that company. We may become the target of this type of
litigation in the future. Securities litigation, if instituted against us, could result in substantial costs and divert our managements attention and resources from our business.
We do not intend to pay dividends in the foreseeable future. As a result, your ability to achieve a return on your investment will depend on
appreciation in the price of our Class A common stock.
We have never declared or paid any cash dividends on our Class A common stock.
We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our Class A common stock in the foreseeable future. Any determination to pay
dividends in the future will be at the discretion of our board of directors. Consequently, your only opportunity to achieve a return on your investment in our company will be if the market price of our Class A common stock appreciates and you
sell your shares at a profit. There is no guarantee that the price of our Class A common stock that will prevail in the market after this offering will ever exceed the price that you pay.
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Our management team has limited experience managing a public company.
Most members of our management team have limited experience managing a publicly-traded company, interacting with public company investors, and complying with
laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company subject to significant regulatory oversight and reporting obligations under the federal securities laws and
the continuous scrutiny of securities analysts and investors. These new obligations and constituents will require significant attention from our senior management and could divert their attention away from the
day-to-day
management of our business, which could adversely affect our business, financial condition, and operating results.
We will incur increased costs and devote additional management time as a result of operating as a public company.
As a public company, we will incur legal, accounting and other expenses that we did not incur as a private company. We will be subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and will be required to comply with the applicable requirements of the Sarbanes-Oxley Act of 2002, or SOX, and the Dodd-Frank Wall Street Reform and Consumer
Protection Act, or Dodd-Frank, as well as rules and regulations subsequently implemented by the SEC and the Nasdaq Global Select Market, including the establishment and maintenance of effective disclosure and financial controls and changes in
corporate governance practices. We expect that compliance with these requirements will increase our legal and financial compliance costs and will make some activities more time consuming and costly. In addition, we expect that our management and
other personnel will need to divert attention from operational and other business matters to devote additional time to these public company requirements. In particular, we expect to incur additional expenses and devote additional management effort
toward ensuring compliance with the requirements of Section 404 of SOX, which will increase when we are no longer an emerging growth company, as defined by the JOBS Act. We may need to hire additional accounting and financial staff with
appropriate experience and technical accounting knowledge to support internal auditing. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.
If we fail to maintain effective internal controls, we may not be able to report financial results accurately or on a timely basis, or to detect fraud,
which could have a material adverse effect on our business or share price.
Effective internal controls are necessary for us to provide reasonable
assurance with respect to our financial reports and to effectively prevent financial fraud. Pursuant to SOX, we will be required to periodically evaluate the effectiveness of the design and operation of our internal controls. Internal controls over
financial reporting may not prevent or detect misstatements because of inherent limitations, including the possibility of human error or collusion, the circumvention or overriding of controls, or fraud. If we fail to maintain an effective system of
internal controls, our business and operating results could be harmed, and we could fail to meet our reporting obligations, which could have a material adverse effect on our business and our share price.
As a public company, we are required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls.
Section 404 of SOX requires annual management assessments of the effectiveness of our internal controls over financial reporting beginning with our Annual Report for the year ending December 31, 2018. We are in the process of designing,
implementing, and testing the internal control over financial reporting required to comply with this obligation, which process is time consuming, costly, and complicated. We have identified material weaknesses in our internal controls over financial
reporting for the fiscal years ended December 31, 2015 and 2016. If we identify material weaknesses in our internal control over financial reporting in the future or if we are unable to successfully remediate the identified material weaknesses
or, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, investors may lose confidence in the accuracy and completeness of our financial
reports and the market price of our Class A common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could
require additional financial and management resources.
We are an emerging growth company and we cannot be certain if (i) the reduced
disclosure requirements or (ii) extended transition periods for complying with new or revised accounting standards applicable to emerging growth companies will make our common stock less attractive to investors.
We qualify as an emerging growth company. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time
as those standards apply to private companies. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to
private companies. We have elected to use
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this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we
(i) are no longer an emerging growth company, or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply
with new or revised accounting pronouncements as of public company effective dates.
For as long as we continue to be an emerging growth company, we
intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports
and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our
common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
We will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of our common stock that is held
by
non-affiliates
exceeds $700.0 million as of June 30, (ii) the end of the fiscal year in which we have total annual gross revenues of $1.07 billion or more during such fiscal year,
(iii) the date on which we issue more than $1.0 billion in
non-convertible
debt in a three-year period or (iv) December 31, 2022.
We cannot predict the impact our capital structure may have on our stock price.
In July 2017, S&P Dow Jones, a provider of widely followed stock indices, announced that companies with multiple share classes, such as ours, will not be
eligible for inclusion in certain of their indices. As a result, our Class A common stock will likely not be eligible for these stock indices. Additionally, FTSE Russell, another provider of widely followed stock indices, recently stated that
it plans to require new constituents of its indices to have at least five percent of their voting rights in the hands of public stockholders. Many investment funds are precluded from investing in companies that are not included in such indices, and
these funds would be unable to purchase our Class A common stock. We cannot assure you that other stock indices will not take a similar approach to S&P Dow Jones or FTSE Russell in the future. Exclusion from indices could make our
Class A common stock less attractive to investors and, as a result, the market price of our Class A common stock could be adversely affected.
If financial or industry analysts do not publish research or reports about our business or if they issue inaccurate or unfavorable commentary or
downgrade our Class A common stock, our stock price and trading volume could decline.
The trading market for our Class A common stock
will be influenced by the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts or the content and opinions included in their reports. As a new public company, we may be slow to
attract research coverage, and the analysts who publish information about our Class A common stock will have had relatively little experience with our company, which could affect their ability to accurately forecast our results and make it more
likely that we fail to meet their estimates. In the event we obtain industry or financial analyst coverage, if any of the analysts who cover us issue an inaccurate or unfavorable opinion regarding our stock price, our stock price would likely
decline. In addition, the stock prices of many companies in the technology industry have declined significantly after those companies have failed to meet, or often times exceeded, the financial guidance publicly announced by the companies or the
expectations of analysts. If our financial results fail to meet, or significantly exceed, our announced guidance or the expectations of analysts or public investors, analysts could downgrade our Class A common stock or publish unfavorable
research about us. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
Future sales of substantial amounts of our Class A common stock may cause our stock price to decline.
Future sales of a substantial number of shares of our Class A common stock, particularly sales by our directors, executive officers and significant
stockholders could adversely affect the market price of our Class A common stock and may make it more difficult to sell Class A common stock at a time and price that you deem appropriate. As of November 27, 2017, we had an aggregate
of 26,394,996 shares of Class A common stock and 36,507,676 shares of Class B common stock outstanding.
All of the shares of
Class A common stock sold in our initial public offering are freely tradable without restrictions or further registration under the Securities Act of 1933, as amended, or the Securities Act, except for any shares held by our affiliates as
defined in Rule 144 under the Securities Act.
A substantial majority our outstanding shares of common stock outstanding prior to our initial public
offering are currently restricted from resale as a result of market standoff and
lock-up
agreements.
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These shares will become available to be sold in the second quarter of 2018. Shares held by directors, executive
officers and other affiliates will be subject to volume limitations under Rule 144 under the Securities Act and various vesting agreements. In addition, the underwriters may, in their sole discretion, release all or some portion of the shares
subject to market standoff or
lock-up
agreements prior to the expiration of the
lock-up
period. Sales of a substantial number of such shares upon expiration of the
market standoff and
lock-up
agreements, or the perception that such sales may occur, or early release of these agreements, could cause our market price to fall or make it more difficult for you to sell your
Class A common stock at a time and price that you deem appropriate.
We registered the offer and sale of an aggregate of
approximately 15,948,252 shares of Class A common stock that have been issued or reserved for future issuance under our equity compensation plans on a Form
S-8
registration statement. Once we
register the offer and sale of these shares, they can be freely sold in the public market upon issuance, subject to the market standoff or
lock-up
agreements or unless they are held by affiliates,
as that term is defined in Rule 144 of the Securities Act. If the holders of these shares choose to sell a large number of shares, they could adversely affect the market price for our Class A common stock.
We may also issue shares of our Class A common stock or securities convertible into shares of our Class A common stock from time to time in
connection with a financing, acquisition, investment or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the trading price of our Class A common stock to decline.
The dual class structure of our common stock has the effect of concentrating voting control with certain stockholders who hold shares of our
Class B common stock, including our founders, certain of our directors and executive officers and affiliates, who hold in the aggregate approximately 95% of the voting power of our capital stock. This will limit or preclude your ability to
influence corporate matters, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder
approval.
Our Class B common stock was granted ten votes per share, and our Class A common stock has one vote per share. Our
Class B stockholders, including our founders, certain of our directors and executive officers, and affiliates, hold, in the aggregate approximately 95% of the voting power of our capital stock. The
ten-to-one
voting ratio between our Class B and Class A common stock, results in the holders of our Class B common stock collectively controlling a majority of the combined voting power of our
common stock and therefore being able to control all matters submitted to our stockholders for approval until 2029, or upon the occurrence of a triggering event at which time all shares of our Class B common stock will automatically convert
into shares of our Class A common stock, or on an earlier date, as set forth in our Delaware certificate of incorporation.
This concentrated control
will limit or preclude your ability to influence corporate matters for the foreseeable future, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our
assets, or other major corporate transaction requiring stockholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that you may feel are in your best interest as one of our
stockholders.
Future transfers by holders of our Class B common stock will generally result in those shares converting to Class A common stock,
subject to the specific exceptions set forth in our Delaware certificate of incorporation, such as certain transfers effected for estate planning purposes and between or among our founders. The conversion of Class B common stock to Class A
common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long-term.
Certain provisions in our charter documents and Delaware law could prevent an acquisition of our company, limit attempts by our stockholders to replace
or remove members of our board of directors or current management and may adversely affect the market price of our Class A common stock.
Our
Delaware certificate of incorporation and bylaws contain provisions that could delay or prevent a change in control of our company that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a
premium for their shares. These provisions may also prevent or delay attempts by stockholders to replace or remove our current management or members of our board of directors. These provisions include:
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providing for a dual class common stock structure for 15 years following the completion of this offering;
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providing for a classified board of directors with staggered three-year terms, which could delay the ability of stockholders to change the membership of a majority of our board of directors;
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authorizing our board of directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval;
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the requirement that a special meeting of stockholders may be called only by the chairman of our board of directors, our chief executive officer, our president, or a majority vote of our board of directors, which could
delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;
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requiring the affirmative vote of holders of at least
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2
/
3
% of the voting power of all of the then outstanding shares of the voting
stock, voting together as a single class, to adopt, amend, or repeal provisions of (i) our certificate of incorporation relating to the issuance of preferred stock without stockholder approval, voting rights of our Class A common stock and
our Class B common stock, and management of our business, and (ii) our bylaws relating to the ability of stockholders to call a special meeting and amending our bylaws in their entirety, which may inhibit the ability of an acquirer to
effect such amendments to facilitate an unsolicited takeover attempt;
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the ability of our board of directors, by majority vote, to amend our bylaws, which may allow our board of directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer
to amend our bylaws to facilitate an unsolicited takeover attempt; and
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requiring advance notice procedures with which stockholders must comply to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders meeting, which may discourage or
deter a potential acquirer from conducting a solicitation of proxies to elect the acquirers own slate of directors or otherwise attempting to obtain control of us.
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In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law. These provisions may prohibit large
stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time.
These and other provisions in our certificate of incorporation, our bylaws and under Delaware law could discourage potential takeover attempts, reduce the
price that investors might be willing to pay for shares of our Class A common stock in the future and result in the market price being lower than it would be without these provisions.