Investing in our common stock involves a high degree of risk. Before making a decision
to invest in our common stock, you should carefully consider the risks and uncertainties described below, and in our Annual Report on Form 10-K filed with the SEC on October 14, 2015, together with all of the other information contained in this
Quarterly Report on Form 10- Q, including our consolidated financial statements and the related notes thereto. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or
that we currently believe are not material, may also become important factors that affect us. If any of the following risks occur, our business, financial condition, operating results and prospects could be materially and adversely affected. In that
event, the price of our common stock could decline, and you could lose part or all of your investment.
Risks Related to Our Business and Industry
We have a history of losses, and we expect to incur losses for the foreseeable future.
We have incurred significant net losses in each year since our inception, including net losses of $32.0 million and $37.8 million for the nine
months ended April 30, 2016 and 2015, respectively. As a result, we had an accumulated deficit of $228.2 million at April 30, 2016 and $196.2 million at July 31, 2015, and we expect to continue to incur net losses for the
foreseeable future. Because the market for our software is rapidly evolving and has not yet reached widespread adoption, it is difficult for us to predict our future operating results. We expect our operating expenses to significantly increase over
the next several years as we hire additional personnel, particularly in sales and marketing, expand and improve the effectiveness of our distribution channels, expand our operations and infrastructure, both domestically and internationally, and
continue to develop our platform. In addition, as we grow because we are a newly public company, we will incur additional significant legal, accounting and other expenses that we did not incur as a private company. If our revenue does not increase
to offset these increases in our operating expenses, we will not be profitable in future periods. While historically, our total revenue has grown, not all components of our total revenue have grown consistently. Further, in future periods, our
revenue growth could slow or our revenue could decline for a number of reasons, including slowing demand for our software, increasing competition, any failure to gain or retain channel partners, a decrease in the growth of our overall market, or our
failure, for any reason, to continue to capitalize on growth opportunities. As a result, our past financial performance should not be considered indicative of our future performance. Any failure by us to achieve or sustain profitability on a
consistent basis could cause the value of our common stock to materially decline.
The market for our platform is new and unproven and may not grow
or may decrease.
Since we were founded in 2004, we have been creating products for the developing and rapidly evolving market for
API-based software platforms, a market that is largely unproven and is subject to a number of inherent risks and uncertainties. We believe that our future success will depend in large part on the growth, if any, in the market for API-based software
platforms. The utilization of API software is still relatively new, and enterprises may not recognize the need for APIs or, if they do, they may decide that they do not need a solution that offers the range of functionalities that we offer, or they
may decide to build such capabilities in-house. In order to grow our business and extend our market position, we intend to expand the functionality of our product and bring new technologies to market to increase market acceptance and use of our
platform. It is difficult to predict customer adoption and renewal
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rates, customer demand for our solutions, the size and growth rate of the overall market that our platform addresses, the entry of competitive products and the success of existing competitive
products. Any expansion of the market our platform addresses depends upon a number of factors, including the cost, performance and perceived value associated with such solutions. If the market our platform addresses does not achieve significant
additional growth or there is a reduction in demand for our platform solutions caused by a lack of customer acceptance, technological challenges, competing technologies and products, decreases in corporate spending, weakening economic conditions, or
otherwise, it could result in reduced revenue and customer orders, early terminations, and reduced renewal rates, any of which would adversely affect our business, results of operations, financial condition and growth prospects.
We have a short operating history for our recently released solutions, including the current version of our cloud-based solution and the current version
of our predictive analytics solution, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.
We have a short operating history of selling our recently released solutions, including the current version of our cloud-based Apigee Edge
solution that we began offering at the end of 2012 and other solutions such as Apigee Insights and Apigee Sense, both of which we introduced more recently. This short selling history limits our ability to forecast our future operating results and
plan for and model future growth. We also have encountered and will continue to encounter risks and uncertainties frequently experienced by growing companies in developing industries. If our assumptions regarding these uncertainties, which we use to
plan our business, are incorrect or if we do not address these risks successfully, our business, results of operations, financial condition and growth prospects could differ materially from our expectations and our business could suffer.
Additionally, we have limited experience with respect to determining the optimal prices for our solutions. If the market for our solutions
begins to mature or as new competitors introduce new products or services that compete with our solutions, we may be unable to attract new customers based on the pricing model we have used historically. Moreover, large customers, which are the focus
of our sales efforts, may demand greater price concessions. As a result, in the future we may be required to reduce our prices, which could adversely affect our revenue, gross margin, and other results of operations, financial condition and cash
flows. Furthermore, our software sales pricing is based on the customers usage. Our on-premises license sales are based on the number of computer server cores, while our cloud-based services sales are based on API traffic. This usage-based
aspect to our pricing model may make it difficult to accurately forecast revenue because the customer controls when and to what extent it uses our platform, and our customers activities on our platform may vary from period to period based on a
variety of factors. As a result, revenue may fluctuate period to period. Therefore, historical revenue from a customer may not be indicative of our future revenue, and this usage-based aspect of our pricing model may limit our ability to forecast
revenue.
Moreover, although we have experienced strong growth historically, we may not continue to grow in the future. Any success that
we may experience in the future will depend in large part on our ability to, among other things:
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maintain and expand our customer base and the ways in which our customers use our platform;
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increase revenue from existing customers through increased or broader use of our platform within their organizations;
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improve the performance and capabilities of our software through research and development;
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successfully expand our business domestically and internationally;
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successfully compete with other companies, open source initiatives and custom development efforts that are currently in, or may in the future enter, the markets for our software;
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continue to invest in our platform to foster an ecosystem of developers and users to expand the use cases of our software;
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continue to develop Apigee Edge and other solutions on our platform such as Apigee Link and Apigee Sense;
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generate leads and convert users of the trial version of our software to paying customers;
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prevent users from circumventing the terms of their software licenses;
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continue to enhance our website infrastructure to minimize interruptions or slower than expected download times when accessing our software from our website;
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process, store and use our customers data in compliance with applicable governmental regulations and other legal obligations related to data privacy and security; and
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hire, integrate and retain qualified talent.
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If we fail to address these risks and challenges
and those described elsewhere in this Risk Factors section, our business will be adversely affected and our operating results will suffer.
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Because we currently derive substantially all of our revenue and cash flows from our Apigee Edge solution,
failure of this solution to satisfy customer demands or to achieve increased market acceptance would materially and adversely affect our business, results of operations, financial condition and growth prospects.
We derive substantially all of our revenue and cash flows from our Apigee Edge solution. As such, the market acceptance of Apigee Edge is
critical to our continued success. Demand for Apigee Edge is affected by a number of factors beyond our control, including continued market acceptance of our solutions by referenceable accounts for existing and new use cases, the timing of
development and release of new products by our competitors and customer demand for them, the timing of development and release of additional capabilities and functionality by us, technological change, and growth or contraction of the market in which
we compete. In addition, similar to the situation encountered by traditional APIs, we cannot assure you that our Apigee Edge solution and future enhancements to our platform and solutions will be able to address future advances in technology or
requirements of digital businesses. Moreover, our platform may not be able to scale and perform to meet increased requirements, including any associated with the proliferation of mobile apps and devices. We also lacked a clear migration path to
transition existing customers under prior versions of our Apigee Edge solution (versions prior to August 2012), which has limited our ability to sell add-on purchases to these existing customers. We have experienced, and may continue to
experience, decline in add-on purchases from customers using prior versions of our Apigee Edge solution. If we are unable to continue to meet customer demands or to achieve more widespread market acceptance of our software, our business, results of
operations, financial condition and growth prospects will be materially and adversely affected.
If we are not able to introduce new products
successfully and to make enhancements to existing products, our growth rates would likely decline and our business, results of operations and competitive position could suffer.
We invest substantial resources in researching and developing new products and enhancing existing products by incorporating additional
features, improving functionality and adding other improvements to meet our customers evolving demands in our highly competitive industry. In order to be competitive, our platform must address an ever-increasing array of mobile apps, networked
devices and back end databases, applications and systems, as well as keep pace with technological innovations in our industry and with our customers business requirements. For example, we are focused on enhancing the features and functionality
of our platform to enhance its adaptability for the Internet of Things (IoT), and have developed Apigee Link, our IoT product for connecting devices to the Internet. We are also focused on enhancing the features and functionality of our
platform for the healthcare industry segment, and have developed Apigee Health APIx to enable healthcare payors and providers to securely share patient data with mobile health apps and with each other. In addition, we recently introduced Apigee
Sense for enhanced, data-driven API security. We have derived very little revenue from Apigee Link and no revenue from our new healthcare solution or Apigee Sense to date, and we cannot assure you when new products or solutions under development
will be commercially released or that they will generate material revenue. Since developing our platform is complex, the timetable for the release of new products and enhancements to existing products is difficult to predict, and we may not offer
new products and updates as rapidly as our customers require or expect. The success of new products and enhancements to our platform and their market acceptance may depend upon the timing of introduction of these new products and enhancements, and
any failure in this regard may significantly impair our revenue growth.
We also have invested, and may in the future continue to invest,
in the acquisition of complementary products or services that expand the solutions that we can offer our customers and help us enter into new markets. We often make these investments without being certain that they will result in products or
enhancements that our target markets will accept or that they will expand our share of those markets. The sizes of the markets currently addressed by our products are not certain, and our ability to grow our business in the future may depend upon
our ability to introduce new solutions or enhance and improve our existing products for those markets or entry into new markets. Our growth would likely be adversely affected and we would not be able to extend our leadership position if we fail to
introduce these new solutions or enhancements, fail to manage successfully the transition to new solutions from the products they are replacing or do not invest our development efforts in appropriate products or enhancements for significant new
markets, or if these new products or enhancements do not attain market acceptance.
In addition, our introduction of new products that are
developed or acquired by us may reduce sales of existing products or cause us to lower the sales price of existing products, which may impact our results of operations. For example, we recently began offering a lower-priced version of our Apigee
Edge product, which includes a limit on call volume, fewer features and less functionality than our current version of Apigee Edge. Customers may choose to purchase this new version of Apigee Edge instead of our existing version, or we may determine
to lower the price of our existing version of Apigee Edge in order to make this version more attractive to our customers.
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Our new solutions or enhancements, such as Apigee Link, Apigee Sense and Apigee Insights, could
fail to attain market acceptance for many reasons, including:
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downtime or other lack of availability or performance of our cloudbased solution;
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defects, errors or failures in our platform;
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the inability of our platform to interoperate effectively with products from other vendors or to operate successfully when deployed within the networks of our customers;
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negative publicity about the performance or effectiveness of our new solutions or enhancements to our existing solutions;
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the timeliness of the introduction and delivery of our solutions or enhancements;
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our failure or inability to predict changes in our industry or customers requirements;
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reluctance of customers to purchase products that include cloud-based solutions or incorporate elements of open source software;
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failure of our channel partners to market, support or distribute our solutions; and
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changes in government or industry standards and criteria.
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If we do not respond to the rapidly
changing needs of our customers by timely developing and introducing new and effective solution features, upgrades and services that can respond adequately to their needs, our competitive position, business and growth prospects will be harmed.
We may not be able to compete successfully against current and future competitors.
We compete against in-house or custom IT development efforts, a variety of large software vendors and smaller specialized companies and open
source initiatives, all of which vary in the breadth and scope of the products and services offered. The principal competitive factors in our markets include domain expertise in API business practices and technologies, size of customer base and
level of user and developer adoption, established status as a strategic IT platform, brand awareness and reputation, total cost of ownership, ease of deployment and use of our solution by paying customers and developers, breadth and depth of
offering, performance, availability and support for our solution, capability for configurability, integration, security, scalability and reliability of applications, and the ability to innovate and respond to customer needs rapidly. Beyond in-house
or custom IT development efforts, our competitors include, among others, International Business Machines Corporation and Oracle Corporation, both of which can bundle competing products and services with other software offerings, or offer them at a
low price as part of a larger sale. In addition, in July 2015 Amazon Web Services (AWS) introduced a gateway functionality in a product called AWS Gateway, which products functionality is a subset of that offered by the API
Services component of our Apigee Edge solution.
Some of our actual and potential competitors have additional advantages over us, such as:
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significantly greater financial, technical, marketing, research and development or other resources;
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stronger brand and business user recognition;
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larger installed customer bases;
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larger intellectual property portfolios;
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more basic, lower-priced solutions; and
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broader global distribution and presence.
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Our industry is evolving rapidly and is becoming
increasingly competitive, and we expect further increased competition if our market continues to expand. Larger and more established companies may focus on API management and API-based software platforms and could directly compete with us. Smaller
companies are also launching new products and services that could gain market acceptance quickly. Conditions in our market could change rapidly and significantly as a result of technological advancements, open source initiatives or other factors.
In recent years, there have been significant acquisitions and consolidation by and among our competitors. Consolidation in our industry
may allow our competitors to take advantage of the greater resources of the larger organization or may increase the likelihood of our competitors offering bundled or integrated products with which we cannot effectively compete. As a result of these
acquisitions, competitors might take advantage of the greater resources of the larger organization to compete more vigorously or broadly with us. If we are unable to differentiate our products from the integrated or bundled products of our
competitors, such as by
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offering enhanced functionality or performance, we may see increased pricing pressure, decreased demand or increased sales and marketing expenses, which would adversely affect our business,
operations, financial results and growth prospects. Further, it is possible that continued industry consolidation may impact customers perceptions of the viability of smaller or even medium-sized software firms and consequently their
willingness to use software solutions from such firms. Similarly, if customers seek to concentrate their software license purchases in the product portfolios of a few large providers, we may be at a competitive disadvantage regardless of the
performance and features of our software. We believe that to remain competitive at the large enterprise level, we may need to develop and expand relationships with resellers, large system integrators and providers of complementary technologies to
provide a broad range of products and services. If we are unable to compete effectively, our business, results of operations, financial condition and growth prospects could be materially and adversely affected.
Our future quarterly results may fluctuate significantly, which could adversely affect our share price.
Our results of operations, including the levels of our revenue, cost of revenue, gross margin, operating expenses, cash
flow and deferred revenue, have fluctuated from quarter to quarter in the past and may continue to vary significantly in the future so that period-to-period comparisons of our operating results may not be meaningful. Accordingly, our
financial results in any one quarter should not be relied upon as indicative of future performance. Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control, may be difficult to
predict, and may or may not fully reflect the underlying performance of our business. Because the timing and amount of our revenue is difficult to forecast and because our operating costs and expenses are relatively fixed in the short term, if our
revenue does not meet our expectations, we are unlikely to be able to adjust our spending to levels commensurate with our revenue. As a result, the effect of revenue shortfalls on our results of operations may be more accentuated, and these and
other fluctuations in quarterly results may negatively affect the market price of our common stock. Among the factors that may cause fluctuations in our quarterly financial results are those listed below:
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our ability to attract and retain new customers;
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the addition or loss of large customers;
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our ability to successfully expand our business domestically and internationally;
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our ability to gain new channel partners and retain existing channel partners;
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fluctuations in the growth rate of the overall market that our solutions address;
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fluctuations in the mix of our revenue;
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the unpredictability of the timing of our receipt of orders for perpetual licenses, the revenue for which we typically recognize upfront;
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the amount and timing of operating expenses related to the maintenance and expansion of our business and operations, including continued investments in sales and marketing, research and development and general and
administrative resources;
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network outages or performance degradation of our cloud service;
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information security breaches;
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general economic, industry and market conditions;
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customer renewal rates;
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increases or decreases in the number of elements of our services or pricing changes upon any renewals of customer agreements;
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changes in our pricing policies or those of our competitors;
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the budgeting cycles and purchasing practices of customers;
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decisions by potential customers to purchase alternative solutions from larger, more established vendors, including from their primary software vendors;
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decisions by potential customers to develop in-house solutions as alternatives to our platform;
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insolvency or credit difficulties confronting our customers, which could adversely affect their ability to purchase or pay for our software and services;
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delays in our ability to fulfill our customers orders;
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seasonal variations in sales of our solutions;
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the cost and potential outcomes of future litigation or other disputes;
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future accounting pronouncements or changes in our accounting policies;
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our overall effective tax rate, including impacts caused by any reorganization in our corporate tax structure and any new legislation or regulatory developments;
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fluctuations in stock-based compensation expense;
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fluctuations in foreign currency exchange rates;
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the timing and success of new products and service introductions by us or our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, customers or
strategic partners;
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the timing of expenses related to the development or acquisition of technologies or businesses and potential future charges for impairment of goodwill from acquired companies; and
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other risk factors described in this Quarterly Report on Form 10-Q.
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We expect our revenue mix to vary
over time, which can affect our gross margin and operating results.
We expect our revenue mix to vary over time due to a number
of factors, including the mix of perpetual licenses, time-based licenses, subscriptions and professional services. In addition, third-party hosting infrastructure costs associated with customer adoption of our cloud-based solution can vary over
time. Our gross margins and operating results can be affected by such changes in revenue mix and costs, together with numerous other factors including:
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entry into new markets or growth in lower margin markets;
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entry into markets with different pricing and cost structures;
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increased price competition;
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changes in distribution channels; and
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how well we execute our strategy and operating plans.
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Reliance on orders, especially for perpetual
licenses, at the end of a fiscal quarter could cause our revenue to vary from period to period or to fall below expected levels for a given period.
As a result of customer buying behavior and the efforts of our sales force and channel partners to meet or exceed their sales objectives, we
have historically received and generated a substantial portion of bookings and generated a significant portion of our quarterly revenue related to perpetual licenses during the last month of each quarter. The unpredictability of the timing of
customer licensesparticularly for perpetual licenses, the revenue for which we typically recognize upfrontand subscriptions could cause our revenue to vary from period to period or to fall below expected levels for a given period, which
would adversely affect our business, financial condition, and results of operations, and result in a decline in the market price of our common stock.
Our business and growth depend on our ability to obtain subscription and maintenance renewals from existing customers. Nonrenewals and subscription
downgrades could adversely affect our future operating results.
We primarily sell our platform on a yearly subscription basis,
either deployed in the cloud or on premises. At the end of the term of these subscriptions, customers can renew their existing subscriptions, upgrade their subscriptions, downgrade their subscriptions or not renew. In recent periods, a lesser
portion of our total revenue has been derived from annual maintenance and support associated with perpetual licenses. During the year ended July 31, 2015, our subscription and time-based licenses that were eligible for renewal were renewed at a
dollar-based simple renewal rate of approximately 86%. We calculate dollar-based simple renewal rate based on the dollar value of renewed contracts divided by the dollar value of expiring contracts at any given period. However, due to limited
historical data with respect to rates of subscription renewals by our customers, particularly for our cloud-based solution, we cannot accurately predict customer dollar-based simple renewal rates. The dollar-based simple renewal rate for the year
ended July 31, 2015, is not necessarily indicative of our dollar-based simple renewal rate for any future period. Our customers renewal rates may decline or fluctuate as a result of a number of factors, including customer dissatisfaction
with our pricing or our products functionality, features or performance, competitors product offerings or in-house developed solutions, customers ability to continue their
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operations and spending levels, migration path issues for new versions of products (which we have experienced before) and other factors, a number of which are beyond our control. Our customers
have no obligation to renew their subscriptions after the expiration of the initial term, and they may elect not to renew their subscriptions or to reduce the product quantity under their subscriptions or maintenance and support contracts, thereby
reducing our future revenue. If our customers do not renew their subscriptions for our products on similar pricing terms, our revenue may decline and our business, results of operations and growth prospects could suffer. In addition, if the average
term of our contracts were to decrease, this may afford us less visibility into our future financial performance.
We recognize our subscription and
time-based revenue over the term of our customer contracts. Consequently, downturns or upturns in new sales may not be immediately reflected in our operating results and may be difficult to discern.
We recognize our revenue ratably over the term, typically one year, of customer subscriptions for our cloud-based solution and on-premises
time-based licenses. As a result, a portion of our total revenue in each quarter is derived from the recognition of deferred revenue relating to subscriptions and time-based licenses and maintenance and support contracts entered into during prior
periods. Consequently, a decline in new or renewed subscriptions or time-based licenses in any single quarter may have a small impact on our revenue for that quarter. However, such a decline will negatively affect our revenue in future quarters.
Accordingly, the effect of significant downturns in sales and market acceptance of our platform and potential changes in our rate of customer expansion or retention or in our pricing policies will not be fully reflected in our results of operations
in a single quarter but only over several quarters. In addition, a significant majority of our operating costs are expensed as incurred, while a majority of our revenue is recognized over the term of our agreements with our customers. As a result,
continued growth in the number of our customers may not result in increases in our revenue that offset increases in our operating costs and expenses. Our subscription model also makes it difficult for us to rapidly increase our revenue through
additional sales in any period, as revenue from new customers is generally recognized ratably over the applicable term of our agreements.
We may
require additional capital to support our business, and this capital might not be available on acceptable terms, if at all.
We
intend to continue to make investments to support our business and may require additional funds, in particular as we seek to grow our business, including the need to develop new features or enhance our software, improve our operating infrastructure
or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our
existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing that we may secure in the future could
involve 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 and to pursue business opportunities, including potential
acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. 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
business growth, scale our infrastructure, develop product enhancements and to respond to business challenges could be significantly impaired, and our business may be adversely affected.
To the extent that we are unable to timely recognize revenue from the provision of professional services to our customers or to rely on our partners and
others to deliver professional services for our solutions, our total revenue, gross profit and gross margins may be lower.
We
generally offer professional services associated with implementing our solutions, and we recognize revenue from professional services primarily on a time and materials basis as services are delivered. Costs associated with maintaining a professional
services department is fixed while professional services revenue is dependent on the amount of work actually billed to customers in a period, the combination of which may result in variability in our gross profit. In addition, the timing of the
recognition of professional services revenue is dependent on several factors outside our control. If a customer deploys our solutions and utilizes our services more slowly than we expect, we may not be able to recognize the related revenue as
quickly as we anticipated, and we may experience an adverse impact on our gross profit and other results of operations. We increasingly rely on our channel partners for professional services associated with implementing our solutions and we plan to
continue to expand our channel relationships that provide these professional services to supplement our own resources and, to the extent that we are unable to adequately grow these channel partner relationships, or otherwise have others perform
professional services associated with our solutions, we may have a significant portion of our revenue mix derived from our provision of such services which carry lower gross margins than our other revenue sources and may reduce our gross profit.
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The seasonality of our business can create significant variance in our quarterly bookings, license revenue
and cash flows from operations.
We operate on a July 31 fiscal year end and believe that there are significant seasonal
factors, which may cause us to experience lower levels of revenue in our first fiscal quarter ending October 31 and higher levels of revenue in our second fiscal quarter ending April 30 as compared with other quarters. We believe that this
seasonality results from a number of factors, including:
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slower enterprise buying patterns during the late summer months, both domestically and overseas, including from our telecommunications customers, as well as government customer procurement, budget and deployment cycles,
and the timing of our training for our entire sales force, each of which impacts our revenue in our first fiscal quarter; and
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larger customers with a December 31 fiscal year end choosing to spend remaining budgets shortly before their year-end, which impacts our revenue in our second fiscal quarter.
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If we are unable to attract and retain key personnel, our business and financial results could be adversely affected.
We depend on the continued contributions of our senior management and other key personnel, the loss of whom could adversely affect our
business. All of our executive officers and key employees are at-will employees, which means they may terminate their employment relationship with us at any time. We do not maintain a key-person life insurance policy on any of our officers or other
employees.
Our future success also depends in large part on our ability to identify, attract and retain highly skilled technical,
managerial, finance and other personnel, particularly in our sales and marketing, research and development, general and administrative, and professional service departments. We face intense competition for qualified individuals from numerous
software and other technology companies. In addition, competition for qualified personnel, particularly software engineers, is particularly intense in the San Francisco Bay Area, where our headquarters are located. We may incur significant costs to
attract and retain them, and we may lose new employees to our competitors or other technology companies before we realize the benefit of our investment in recruiting and training them. As we move into new geographies, we will need to attract and
recruit skilled personnel in those areas. Certain members of our senior management team have only recently joined us, and other members of our senior management team have separated from us in recent quarters. Our productivity and business may be
harmed if we do not integrate and train our employees and managers quickly and effectively or if we do not retain them. If we are unable to attract and retain suitably qualified individuals who are capable of meeting our growing technical,
operational and managerial requirements, on a timely basis or at all, our business will be adversely affected.
Volatility or lack of
appreciation in our stock price may also affect our ability to attract and retain our key employees. Many of our senior management personnel and other key employees have become, or will soon become, vested in a substantial amount of stock or stock
options. Employees may be more likely to leave us if the shares they own or the shares underlying their vested options have significantly appreciated in value relative to the original purchase prices of the shares or the exercise prices of the
options, or, conversely, if the exercise prices of the options that they hold are significantly above the market price of our common stock. If we are unable to retain our employees, or if we need to increase our compensation expenses to retain our
employees, our business, results of operations, financial condition and cash flows would be adversely affected.
If we do not effectively train and
expand our sales force, we may be unable to add new customers or increase sales to our existing customers and our business will be adversely affected.
Currently, we sell our solutions primarily through our direct sales force. Our ability to increase our sales to both new and existing
customers is in part dependent on our ability to continue to train and expand our sales force, which from July 31, 2012 to July 31, 2015, grew over 250%. There is significant competition for sales personnel with the skills and technical
knowledge that we require. Moreover, newly hired sales personnel require substantial training and typically take a significant amount of time before they achieve full productivity. Our recent hires and planned hires may not become productive as
quickly as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals in the markets where we do business or plan to do business. In addition, as we continue to grow, a large percentage of our sales force can be
expected to be new to the company and our platform. Identifying, recruiting and effectively training sufficient sales personnel to support our growth requires significant time, expenses and management and other resources. If we are unable to hire,
develop and retain sales personnel or if our new direct sales personnel are unable to achieve expected sales productivity levels in a reasonable period of time or at all, we may not be able to increase our revenue and grow our business, which would
adversely affect our results of operations.
If we fail to manage our growth effectively, our business, operating results and financial condition
would be adversely affected.
In recent periods, we have been adding personnel and other resources as we focus on growing our
business, entering new geographic markets and increasing our market share, and we expect to incur significant additional expenses in further expanding our personnel, particularly in sales and marketing and our international operations in order to
grow our business, operations and customer base, and we intend to continue to make significant additional investments in these areas. The number of our full-time employees was
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394 as of April 30, 2016. The return on these investments in terms of increases in revenue, operating margin and number of customers may be lower, or may be realized more slowly, than we
expect. If we do not achieve the benefits anticipated from our investments, or if the achievement of these benefits is delayed, our business, results of operations and financial condition would be adversely affected.
In addition, our growth has placed, and is expected to continue to place, a significant strain on our managerial, administrative, operational,
financial and other resources. To effectively manage growth, we must continue to improve our operational, financial and management controls, and our reporting systems and procedures.
If we are not able to maintain and enhance our brand and increase market awareness of our company and solutions, our business and operating results may
be adversely affected.
We believe that maintaining and enhancing the Apigee brand identity and increasing market
awareness of our company and solutions is critical to achieving widespread acceptance of our platform, to our relationships with our customers and channel partners and to our ability to attract new customers and channel partners. The successful
promotion of our brand will depend largely upon our marketing efforts, our ability to continue to offer high-quality software, our ability to be thought leaders in API-based software platforms and our ability to successfully differentiate our
platform from those of our competitors. Our thought leadership and brand promotion activities may not be successful or yield increased revenue. In addition, independent industry analysts often provide reviews of our products, as well as those of our
competitors, and perception of our product in the marketplace may be significantly influenced by these reviews. If these reviews are negative, or less positive as compared to those of our competitors products and services, our brand may be
adversely affected.
In addition, the promotion of our brand requires us to make substantial expenditures, and we anticipate that the
expenditures will increase as our market becomes more competitive, as we expand into new markets and as more sales are generated through our channel partners. To the extent that these activities yield increased revenue, this revenue may not offset
the increased expenses we incur. If we do not successfully maintain and enhance our brand, our business may not grow, we may have reduced pricing power relative to competitors with stronger brands, and we may lose customers and channel partners, all
of which would adversely affect our business, results of operations, and financial condition.
Our growth depends in part on the success of our
strategic relationships with third parties, which relationships are at an early stage of development.
In order to grow our
business, we anticipate that we will continue to depend on relationships with third parties, such as Accenture LLP and SAP AG, to resell and co-sell and provide services related to our platform. Our relationships with these partners are at an early
stage of development, we have generated very limited revenue through these relationships to date, and we cannot assure you that we will be able to maintain successful relationships with our channel partners or that these partners will be successful
in marketing and selling our platform or solutions based upon our platform. Identifying partners such as these, negotiating and supporting relationships with them and maintaining relationships requires a significant commitment of time and resources
that may not yield a significant return on our investment in these relationships. Our channel partners are not required to exclusively market or sell our solutions in our target markets and have only limited commitments to dedicate resources to
marketing and promoting our solutions. In addition, our competitors may be more effective in providing incentives to our strategic partners or prospective partners to favor their products or services over our solutions. If we are unsuccessful in
establishing or maintaining our relationships with strategic partners, or if these partners are unsuccessful in marketing or selling our solutions, or are unable or unwilling to devote sufficient resources to these activities, our ability to compete
in the marketplace or to grow our revenue could be impaired and our operating results may suffer.
Our sales cycles can be long and unpredictable,
and our sales efforts require considerable time and expense. As a result, our sales and revenue are difficult to predict and may vary substantially from period to period.
The timing of our sales and related revenue recognition is difficult to predict because of the length and unpredictability of the sales cycle
for our platform. We are often required to spend time and resources to better familiarize potential customers with the value proposition of API management and API-based software platforms generally. Customers often view the purchase of our products
as a significant and strategic decision and, as a result, frequently require considerable time to evaluate, test and qualify our products prior to making a purchase decision and placing an order. A number of factors influence the length and
variability of our sales cycles, including, for example:
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the need to educate potential customers about the uses and benefits of our platform;
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the discretionary nature of potential customers purchasing and budget cycles and decisions;
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the competitive nature of potential customers evaluation and purchasing approval processes; and
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the availability of in-house solutions, either currently or through addition internal development, to our potential and current customers.
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The amount of time that customers devote to their evaluation, contract negotiation and budgeting
processes vary significantly. The length of the sales cycle for our platform averages approximately seven months, but specific transactions can be significantly longer. During the sales cycle, we expend significant time and money on sales and
marketing and contract negotiation activities, which may not result in a sale. For all of these reasons, it is difficult to predict whether and when a sale will be completed, and when revenue from a sale will be recognized or begin to be recognized.
If our sales cycles lengthen, our revenue could be lower than expected, which would have an adverse effect on our business, results of operations and financial condition.
We rely upon Amazon Web Services to operate certain aspects of our service and any disruption of or interference with our use of Amazon Web Services
would impact our operations and our business would be adversely impacted.
AWS provides a distributed computing infrastructure
platform for business operations, or what is commonly referred to as a cloud computing service. We have designed our software and computer systems so as to utilize data processing, storage capabilities and other services provided by AWS. Currently,
the vast majority of our cloud service infrastructure is run on AWS. Given this, along with the fact that we cannot easily switch our AWS operations to another cloud provider, any disruption of or interference with our use of AWS would impact our
operations and our business would be adversely impacted.
If we fail to adequately maintain cloud-based infrastructure capacity through third
parties, our existing customers may experience service outages, and our new customers may experience delays in the deployment of our platform.
Customers of our cloud-based solution need to be able to access our platform 24 hours a day, seven days a week, without interruption or
degradation of performance. We outsource all of our data centers to third parties, including AWS. The number of API calls trafficked through our platform is increasing substantially. An API call is a request for data or services from within an
application, made through an API, to another application or system. Although we expend considerable effort to ensure that our platform performance is able to handle existing and anticipated traffic levels, we are dependent upon third parties in
order to meet these performance requirements of our customers and we may not be able to maintain the level of performance required by our customers, especially to cover peak levels or spikes in the number of API calls trafficked through our
platform. The provisioning of new cloud hosting capacity and data center infrastructure requires lead-time. If we do not accurately predict our infrastructure capacity requirements with sufficient lead-time, our customers could experience service
shortfalls.
We do not control the operation of the third-party infrastructure on which our cloud service is deployed and we are therefore
vulnerable to any information security breaches, power outages or other issues the data center may experience. We have in the past experienced, and expect that we will in the future experience, interruptions, delays and outages in service and
availability from time to time due to a variety of factors, including infrastructure changes, human or software errors, website or third-party hosting disruptions or capacity constraints due to a number of potential causes including technical
failures, natural disasters or fraud or security attacks. For example, in the fall of 2014, we were unable to process all of the API calls for one of our customers due to initial capacity constraints in connection with a spike in the number of API
calls for this customer. As a result, this customer experienced a momentary outage in service and availability, and during a period of less than two hours the performance of our platform was degraded for this customer while we provisioned
additional capacity for this customer. We assessed the impact of the outage and determined that it did not have a material impact on our business or operating results. If our security, or that of our third-party infrastructure providers, is
compromised, our platform is unavailable or our users are unable to deploy our solutions within a reasonable amount of time or at all, our business could be negatively affected. In some instances, we may not be able to identify the cause or causes
of these performance problems within an acceptable period of time. It may become increasingly difficult to maintain and improve our platform performance, especially during peak usage times and as our software becomes more complex and the number of
API calls trafficked through our platform increases. To the extent that we do not effectively address capacity constraints, upgrade third-party infrastructure as needed and continually develop our technology and network architecture to accommodate
actual and anticipated changes in technology, our business and results of operations may be adversely affected. In addition, any changes in service levels from our cloud infrastructure provider may adversely affect our ability to meet our
customers requirements.
Any of the above circumstances or events may harm our reputation, cause customers to terminate their
agreements with us, impair our ability to obtain subscription and maintenance renewals from existing customers, impair our ability to grow our customer base, subject us to financial penalties and liabilities under our service level agreements, and
otherwise harm our business, results of operations and financial condition.
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Breaches of our networks or systems, or those of our third-party cloud infrastructure providers, could
degrade our ability to conduct our business operations, delay our ability to recognize revenue, compromise the integrity of our solutions and products, result in significant data losses and the theft of our intellectual property, damage our
reputation, expose us to liability to third parties and require us to incur significant additional costs to maintain the security of our networks and data.
We increasingly depend upon our IT systems to conduct virtually all of our business operations, ranging from our internal operations and
product development activities to our marketing and sales efforts and communications with our customers and business partners. Computer programmers or other individuals or entities may attempt to penetrate our network security, or that of our
platform, including both customer deployments and our third-party cloud infrastructure, and to cause adverse effects on our business operations, including by misappropriating our proprietary information or that of our customers, employees and
business partners or to cause interruptions of our service. Because the techniques used by such individuals or entities to access, disrupt or sabotage computing devices, systems and networks change frequently and may not be recognized until launched
against a target, we may be unable to anticipate these techniques, and we may not become timely aware of such a security breach which could exacerbate any damage we experience. Any data security incidents, unauthorized access, unauthorized usage,
virus or similar breach or disruption of us or of third-party infrastructure provider could result in loss of confidential information, damage to our reputation, early termination of our contracts, litigation, regulatory investigations, fines,
penalties and other liabilities. Additionally, we depend upon our employees and contractors to appropriately handle confidential and sensitive data and to deploy our IT resources in safe and secure fashion that does not expose our network systems to
security breaches or the loss of data. Accordingly, if our cybersecurity protocols and defenses and those of our contractors, including our third-party infrastructure providers, fail to protect against unauthorized access, attacks (which may include
sophisticated cyberattacks) or the mishandling of data by our employees and contractors, our ability to conduct our business effectively could be damaged in a number of ways, including:
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sensitive data regarding our business, including intellectual property and other proprietary data, could be stolen or compromised;
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sensitive customer data running through our cloud-based solution or through on-premises customer deployments could be stolen or compromised;
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our electronic communications systems, including email and other methods, could be disrupted, and our ability to conduct our business operations could be seriously impeded until such systems can be restored;
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our ability to process customer orders, electronically deliver solutions and services and perform our contractual obligations could be degraded, and our distribution channels could be disrupted, resulting in delays in
revenue recognition;
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defects and security vulnerabilities could be introduced into our software, thereby damaging the reputation and perceived reliability and security of our solutions and potentially making the data systems of our
customers vulnerable to further data loss and cyberincidents; and
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personally identifiable data of our customers, employees and business partners could be stolen or compromised.
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If our security measures or those of our third-party infrastructure providers are breached as a result of third-party action, employee error,
malfeasance or otherwise and, as a result, someone obtains unauthorized access to or engages in unauthorized use of customer data, our reputation may be damaged, our business may suffer and we could incur significant liability. Also, the regulatory
and contractual actions, litigation, investigations, fines, penalties and liabilities relating to any such incidents can be significant in terms of the dedication of management and financial resources, reputational impact and may necessitate changes
to our business operations that may be disruptive to us. Additionally, we could incur significant costs, both in terms of monetary expense and in management and technical attention, in order to upgrade our information security systems and methods
and remediate damages. Consequently, our financial performance and results of operations could be adversely affected.
Our ability to sell our
products is highly dependent on the quality of our software, support and services offerings, and our failure to offer high-quality software, support and services could have a material and adverse effect on our business and results of operations.
Once our platform is deployed for our customers, those customers depend on our support organization and those of our channel
partners to resolve any issues relating to our platform. Customers using our cloud-based solution are similarly dependent upon our ability to resolve these platform issues. Because our software is complex, undetected errors, failures or bugs may
occur. Our platform may be installed and used in large-scale computing environments with different operating systems, system management software and equipment and networking configurations, which may cause errors or failures of our software or other
aspects of the computing environment into which it is deployed. Despite testing by us, errors, failures or bugs may not be found in enhancements to our platform until they are used by our customers. In the past, we have discovered software errors,
failures and bugs in our platform. Real or perceived errors, failures or bugs in our software could result in negative publicity, loss of or delay in market acceptance of our software, loss of competitive position, claims by customers for losses
sustained by them or, in the case of our cloud-based solution, failure to meet the stated service level commitments in our customer agreements. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend
significant additional resources in order to help correct the problem.
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High-quality software, support and services are critical for the successful marketing and sale of our products.
If we or our channel partners do not devote sufficient resources or are otherwise unsuccessful in assisting our customers in deploying our products effectively, succeed in helping our customers resolve post-deployment issues quickly, or provide
ongoing support, it could adversely affect our ability to sell our products to existing end customers and could harm our reputation with potential customers. In addition, as we expand our operations internationally, our support organization will
face additional challenges, including those associated with delivering support, training and documentation in languages other than English. Our failure or the failure of our channel partners to maintain high-quality software, support and services
could have an adverse effect on our business, results of operations and financial condition.
Incorrect implementation or use of our software could
result in customer or developer dissatisfaction and negatively affect our business, operations, financial results and growth prospects.
Our platform is designed to be operated in a self-service manner by developers and by customers who subscribe to our cloud-based
solution. In addition, our platform may be deployed in large scale, complex technology environments of our customers. Our customers, developers and channel partners require training and experience in the proper use of and the variety of benefits
that can be derived from our platform to maximize its potential. If our customers do not have sufficient or adequate resources to timely launch projects using our software, or they are unable to operate our software properly, customer perceptions of
our platform may be impaired, our reputation and brand may suffer, and customers may choose not to expand their use of our software or to discontinue its use. If our software is not implemented or used correctly or as intended, inadequate
performance or security vulnerabilities may result. Because our customers rely on our software to manage a wide range of operations, the incorrect implementation or use of our
software, our failure to train customers on how to productively use our software may result in customer dissatisfaction, negative publicity and adversely
affect our reputation and brand. Failure by us to provide these training and implementation services to our customers would result in lost opportunities for follow-on sales to these customers and adoption of our platform by new customers, and
adversely affect our business and growth prospects.
In cases where our platform has been deployed on premises within a customers
environment, if we or our customers or their developers are unable to configure or implement our software properly, or unable to do so in a timely manner, or poor advice or information is spread through our customer or developer communities,
customer perceptions of our platform may be impaired, our reputation and brand may suffer, and customers may choose not to expand their use of our software or to discontinue its use. In addition, our on-premises solution imposes server load and data
storage requirements for implementation. If our customers do not have the server load capacity or the storage capacity required, they may not be able to effectively implement and use our software and, therefore, may not choose to expand their use of
our software or to discontinue its use.
We typically provide service level commitments of up to 99.99% under our customer contracts. If we fail to
meet these contractual commitments, we could be obligated to provide credits or refunds for prepaid amounts related to unused subscription services or face contract terminations, which could adversely affect our business, results of operations and
financial condition.
Subscriptions for our cloud-based solution typically provide our customers with service level commitments on
a monthly basis. If we are unable to meet the stated service level commitments to our customers, as has happened from time to time, or suffer extended periods of unavailability of our cloud-based solution, we may be contractually obligated to
provide these customers with service credits, refunds for prepaid amounts related to unused subscription services, and could face contract terminations. As a result, our revenue, other operating results and financial condition could be adversely
affected if we suffer unscheduled downtime that exceeds the service level commitments under our agreements with our customers, and any extended service outages could adversely affect our business and reputation.
Our international sales and operations subject us to additional risks that can adversely affect our operating results and financial condition.
In fiscal 2014 and 2015, respectively, we derived approximately 33% and 38%, respectively, of our total revenue from customers
located outside the United States. In the three months ended April 30, 2016 and 2015, we derived approximately 33% and 42%, respectively, of our total revenue from sales to customers located outside the United States, and in the nine months
ended April 30, 2016 and 2015, we derived approximately 36% and 39%, respectively, of our total revenue from sales to customers located outside the United States. We are continuing to expand our international operations as part of our growth
strategy. Sales to our customers in foreign countries have typically been denominated in U.S. dollars. Fluctuations in currency exchange rates could cause our products to become relatively more expensive to end customers in a particular country,
leading to a reduction in sales in that country. We are also exposed to movements in foreign currency exchange rates since the operating expenses we incur for our operations and personnel
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outside the United States are denominated in local currencies. We have research and development personnel in India and the United Kingdom, engage contractors in various international locations,
and have testing and support personnel in the United States, India and the United Kingdom, and we may expand our offshore development efforts. In addition, we have sales and support personnel in numerous countries worldwide and expect to continue to
substantially expand our overseas headcount. Our international operations subject us to a variety of additional risks, including:
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the difficulty of managing and staffing international offices and the increased travel, infrastructure and legal compliance costs associated with numerous international locations;
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reduced demand for technology products outside the United States;
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difficulties in enforcing contracts and collecting accounts receivable, and longer payment cycles, especially in emerging markets;
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demanding data protection standards in certain jurisdictions that can interrupt or delay the transfer and processing of personal data;
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tariffs and trade barriers, import requirements, export control and trade sanctions regulations and other regulatory or contractual limitations on our ability to sell or develop our products in certain foreign markets;
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heightened exposure to political instability, war and terrorism;
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added legal compliance obligations and complexity;
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reduced protection for intellectual property rights in some countries;
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multiple conflicting tax laws and regulations;
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lack of familiarity and burdens of complying with foreign laws, accounting and legal standards, regulatory requirements, tariffs, and other barriers;
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compliance with laws and regulations applicable to domestic and international operations, including the United States Foreign Corrupt Practices Act of 1977, as amended (FCPA), the United Kingdom Bribery Act
of 2010 (Bribery Act), privacy and data protection laws and regulations, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell our software in
certain foreign markets, and the risks and costs of non-compliance;
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heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of financial statements and
irregularities in financial statements;
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difficulties in adapting to differing technology standards;
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the need to localize our products for international end customers and our lack of experience in connection with the localization of our solutions, including translation into foreign languages and adaptation for local
practices and regulatory requirements;
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increased financial accounting and reporting burdens and complexities; and
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complexities and increased costs in retaining and terminating employees in some countries.
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As
noted above, we are subject to the FCPA and the Bribery Act in certain cases. We are also subject to the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, and possibly other anti-bribery and
anti-money laundering laws and regulations in countries in which we conduct activities. Failure to comply with these laws and regulations could cause delays in revenue recognition and financial reporting misstatements, and subject us to other
serious adverse consequences discussed below. Anti-corruption and anti-bribery laws such as the FCPA and Bribery Act generally prohibit companies and their employees and third-party intermediaries from making corrupt payments to government officials
or private parties for the purpose of obtaining or keeping business, permits or other regulatory approvals, securing an advantage, or directing business to another. These laws also require companies to maintain accurate books and records and a
system of internal accounting controls. We plan to increase our international sales and business and engage with an increasing number of business partners and other third-party intermediaries to conduct our business and sell our products and
services abroad. We, our business partners, or our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities. Under the
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FCPA, the company may be held liable for the corrupt actions taken by directors, officers, employees, agents, or
other strategic or local partners or representatives. Similarly, under the Bribery Act, we may be held strictly liable for the corrupt acts of any person associated with us. As such, if we or our intermediaries fail to comply with the requirements
of the FCPA, the Bribery Act or similar legislation, we could be subject to whistleblower complaints, investigations, sanctions, settlements, prosecution, other enforcement actions, significant criminal fines, civil penalties, tax penalties,
disgorgement, and other remedial measures, suspension or debarment from contracting with certain governments or other persons, the loss of export privileges, reputational harm, adverse media coverage, civil litigation, and other collateral
consequences. In addition, responding to any allegation or action will likely result in a materially significant diversion of managements attention and resources and investigation, compliance, and defense costs and other professional fees, and
could result in a material adverse effect on our business, prospects, financial condition, or results of operations. We also face the risk of multijurisdictional liability for the same act. This is due to the fact that many countries have broad laws
and regulations in place, which overlap with the laws, and regulations of other countries.
As we continue to expand our business
globally, our success will depend, in large part, on our ability to anticipate and manage effectively these and other risks associated with our international operations. In addition, compliance with laws and regulations applicable to our
international operations increases our cost of doing business in foreign jurisdictions. We may be unable to keep current with changes in government requirements as they change from time to time. Failure to comply with these regulations could have
adverse effects on our business. Although we have implemented policies and procedures designed to ensure compliance with these laws and policies, we cannot assure you that all of our employees, contractors, channel partners and agents will comply
with the FCPA and Bribery Act.
Our reliance on Software-as-a-Service technologies from third parties may adversely affect our business and
operating results.
We rely heavily on hosted Software-as-a-Service, technologies from third parties in order to operate critical
functions of our business, including enterprise resource planning services from NetSuite and customer relationship management services from salesforce.com. If these services become unavailable due to extended outages, interruptions or because they
are no longer available on commercially reasonable terms or prices, our expenses could increase, our ability to manage our finances could be interrupted and our processes for managing sales of our software and supporting our customers could be
impaired until equivalent services, if available, are identified, obtained and implemented, all of which could adversely affect our business.
We
could incur substantial costs in protecting or defending our intellectual property rights, and any failure to protect our intellectual property could impair our business.
Our success depends, in part, on our ability to protect proprietary methods and technologies that we develop under patent and other
intellectual property laws of the United States and foreign jurisdictions so that we can prevent others from using our inventions and proprietary information. As of April 30, 2016, we have only been issued nine U.S. patents and have filed
fourteen nonprovisional U.S. patent applications. We have no foreign patents. There can be no assurance that additional patents will be issued or that any patents that have been issued or that may be issued in the future will provide significant
protection for our intellectual property. If we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology and our business might be harmed. There is no assurance that the particular forms of
intellectual property protection that we seek, including business decisions about when to file patents and when to maintain trade secrets, will be adequate to protect our business. We could be required to spend significant resources to monitor and
protect our intellectual property rights. Litigation may be necessary in the future to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of us or others or defend against
claims of infringement or invalidity. Such litigation could be costly, time-consuming and distracting to management, result in a diversion of significant resources, the narrowing or invalidation of portions of our intellectual property and have an
adverse effect on our business, results of operations and financial condition. Our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our
intellectual property rights or alleging that we infringe the counterclaimants own intellectual property. These steps may be inadequate to protect our intellectual property. Any of our patents, copyrights, trademarks or other intellectual
property rights could be challenged by others or invalidated through administrative process or litigation.
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We also rely, in part, on confidentiality agreements with our technology partners, employees,
consultants, advisors, customers and others in our efforts to protect our proprietary technology, processes and methods,. These agreements may not effectively prevent disclosure of our confidential information, and it may be possible for
unauthorized parties to copy our software or other proprietary technology or information, or to develop similar software independently without our having an adequate remedy for unauthorized use or disclosure of our confidential information. In
addition, others may independently discover our trade secrets and proprietary information, and in these cases we would not be able to assert any trade secret rights against those parties. Costly and time-consuming litigation could be necessary to
enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
In addition, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States. To the extent
we expand our international activities, our exposure to unauthorized copying, transfer and use of our solutions and proprietary technology or information may increase.
There can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors will not independently
develop similar technology. If we fail to meaningfully protect our intellectual property, our business, brand, operating results and financial condition could be materially harmed.
We could incur substantial costs as a result of any claim of infringement of another partys intellectual property rights.
In recent years, there have been significant litigation involving patents and other intellectual property rights in the software industry.
Companies providing software are increasingly bringing and becoming subject to suits alleging infringement of proprietary rights, particularly patent rights, and to the extent we gain greater market visibility, we face a higher risk of being the
subject of intellectual property infringement claims. We do not have a significant patent portfolio, which could prevent us from deterring patent infringement claims, and our competitors and others may now and in the future have significantly larger
and more mature patent portfolios than we have. The risk of patent litigation has been amplified by the increase in the number of a type of patent holder, which we refer to as a non-practicing entity, whose sole business is to assert such claims and
against whom our own intellectual property portfolio may provide little deterrent value. We could incur substantial costs in prosecuting or defending any intellectual property litigation. If we sue to enforce our rights or are sued by a third party
that claims that our solutions infringe its rights, the litigation could be expensive and could divert our management and resources.
Any
intellectual property litigation to which we might become a party, or for which we are required to provide indemnification, may require us to do one or more of the following:
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cease selling or using solutions that incorporate the intellectual property that we allegedly infringe;
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terminate customer agreements and issue refunds to customers;
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make substantial payments for legal fees, settlement payments or other costs or damages;
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obtain a license, which may not be available on reasonable terms or at all, to sell or use the relevant technology; or
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redesign the allegedly infringing solutions to avoid infringement, which could be costly, time-consuming or impossible.
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If we are required to make substantial payments or undertake any of the other actions noted above as a result of any intellectual property
infringement claims against us or any obligation to indemnify our customers for such claims, such payments or actions could harm our business.
Our
use of open source software could negatively affect our ability to sell our solutions and subject us to possible litigation.
A
portion of our technologies incorporate open source software, and we expect to continue to incorporate open source software in our solutions in the future. Few of the licenses applicable to open source software have been interpreted by courts, and
there is a risk that these licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. Moreover, we cannot assure you that we have not incorporated additional open
source software in our software in a manner that is inconsistent with the terms of the license or our current policies and procedures. If we fail to comply with these licenses, we may be subject to certain requirements, including requirements that
we offer our solutions that incorporate the open source software for no cost, that we make available source code for modifications or derivative works we create based upon, incorporating or using the open source software and that we license such
modifications or derivative works under the terms of applicable open source licenses. If an author or other third party that distributes such open source software were to allege that we had
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not complied with the conditions of one or more of these licenses, we could be required to incur significant
legal expenses defending against such allegations and could be subject to significant damages, enjoined from the sale of our solutions that contained the open source software and required to comply with onerous conditions or restrictions on these
solutions, which could disrupt the distribution and sale of these solutions. In addition, there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products. In any of
these events, we and our customers could be required to seek licenses from third parties in order to continue offering our products, and to re-engineer our products or discontinue the sale of our products in the event re-engineering cannot be
accomplished on a timely basis. We and our customers may also be subject to suits by parties claiming infringement due to the reliance by our solutions on certain open source software, and such litigation could be costly for us to defend or subject
us to an injunction. Any of the foregoing could require us to devote additional research and development resources to re-engineer our solutions, could result in customer dissatisfaction, and may adversely affect our business, results of operations
and financial condition.
We may have additional tax liabilities, which could harm our business, operating results, financial condition and
prospects.
Significant judgments and estimates are required in determining our provision for income taxes and other tax
liabilities. Our tax expense may be impacted if our intercompany transactions, which are required to be computed on an arms-length basis, are challenged and successfully disputed by the tax authorities. Also, our tax expense could be impacted
depending on the applicability of withholding and other taxes (including withholding and indirect taxes on software licenses and related intercompany transactions) under the tax laws of certain jurisdictions in which we have business operations. In
determining the adequacy of income taxes, we assess the likelihood of adverse outcomes that could result if our tax positions were challenged by the Internal Revenue Service, or IRS, and other tax authorities. We may be audited in various
jurisdictions, and such jurisdictions may assess additional taxes against us. The ultimate outcome of these audits cannot be predicted with certainty. Should the IRS or other tax authorities assess additional taxes as a result of audits, we may be
required to record charges to operations that could have a material impact on the results of operations, financial position or cash flows.
Taxing
authorities may successfully assert that we should have collected or in the future should collect sales and use, value added or similar taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect
our results of operations.
We do not collect sales and use, value added and similar taxes in all jurisdictions in which we have
sales, based on our belief that such taxes are not applicable. Sales and use, value added and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are
applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future. Such tax assessments, penalties and interest or future requirements may adversely affect our results of
operations.
Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and
other losses.
Our agreements with clients and other third parties may include indemnification provisions under which we agree to
indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement, damages caused by us to property or persons, or other liabilities relating to or arising from our products, services, or other contractual
obligations. Some of these indemnity agreements provide for uncapped liability for which we would be responsible. The term of these indemnity provisions generally survives termination or expiration of the applicable agreement. Large indemnity
payments could harm our business, operating results and financial condition. From time to time, we are requested by clients to indemnify them for breach of confidentiality with respect to personal data or other security breaches. Although we
typically do not agree to, or contractually limit our liability with respect to, such requests, the existence of such a dispute with a client may have adverse effects on our client relationships and reputation.
We may become involved in litigation that may materially adversely affect us.
From time to time, we may become involved in various legal proceedings relating to matters incidental to the ordinary course of our business,
including patent, commercial, product liability, employment, class action, whistleblower and other litigation and claims, and governmental and other regulatory investigations and proceedings. Such matters can be time-consuming, divert
managements attention and resources, cause us to incur significant expenses or liability and/or require us to change our business practices. Because of the potential risks, expenses and uncertainties of litigation, we may, from time to time,
settle disputes, even where we have meritorious claims or defenses, by agreeing to settlement agreements. Because litigation is inherently unpredictable, we cannot assure you that the results of any of these actions will not have a material adverse
effect on our business, financial condition, results of operations and prospects.
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We employ third-party licensed software for use in or with our products, and the inability to maintain
these licenses or errors in the software we license could result in increased costs, or reduced service levels, which would adversely affect our business.
Our products incorporate certain third-party software obtained under licenses from other companies. We anticipate that we will continue to
rely on such third-party software and development tools from third parties in the future. Such third-party companies may discontinue their products, go out of business, or otherwise cease to make support available for such third-party software.
Although we believe that there are commercially reasonable alternatives to the third-party software we currently license, this may not always be the case, or it may be difficult or costly to replace. In addition, integration of the software used in
our products with new third-party software may require significant work and require substantial investment of our time and resources. Also, to the extent that our products depend upon the successful operation of third-party software in conjunction
with our software, any undetected errors or defects in this third-party software could prevent the deployment or impair the functionality of our products, delay new product introductions, result in a failure of our products and injure our
reputation. Our use of additional or alternative third-party software would require us to enter into license agreements with third parties.
Future
acquisitions could disrupt our business and adversely affect our results of operations, financial condition and cash flows.
We
may choose to expand by making acquisitions that could be material to our business, results of operations, financial condition and cash flows. Our ability as an organization to successfully acquire and integrate technologies or businesses is
unproven. Acquisitions involve many risks, including the following:
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an acquisition may negatively affect our results of operations, financial condition or cash flows because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax
consequences or unfavorable accounting treatment, may expose us to claims and disputes by third parties, including intellectual property claims and disputes, or may not generate sufficient financial return to offset additional costs and expenses
related to the acquisition;
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we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, personnel or operations of any company that we acquire, particularly if key personnel of the acquired company
decide not to work for us;
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an acquisition may disrupt our ongoing business, divert resources, increase our working capital requirements and expenses, and distract our management;
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the need to implement or improve internal controls, procedures and policies appropriate for a public company at businesses that, prior to our acquisition of them, may have lacked effective controls, procedures or
policies, including but not limited to, processes required for the effective and timely reporting of the financial condition and results of operations of the acquired business, both for historical periods prior to the acquisition and on a forward
basis following the acquisition;
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an acquisition may result in a delay or reduction of customer purchases for both us and the company acquired due to customer uncertainty about continuity and effectiveness of service from either company;
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we may encounter difficulties in, or may be unable to, successfully sell any acquired products;
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an acquisition may involve the entry into geographic or business markets in which we have little or no prior experience or where competitors have stronger market positions;
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our use of cash to pay for acquisition would limit other potential uses for our cash;
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if we incur debt to fund such acquisition, such debt may subject us to material restrictions on our ability to conduct our business as well as financial maintenance covenants; and
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to the extent that we issue a significant amount of equity securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease.
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The occurrence of any of these risks could have a material adverse effect on our business, results of operations, financial condition and cash
flows.
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If our goodwill or intangible assets become impaired, we may be required to record a significant charge to
earnings.
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 April 30, 2016 and July 31, 2015, we had goodwill and intangible assets with a net book value of $17.4 million and $17.9 million,
respectively, related to our acquisition of InsightsOne Systems, Inc. (InsightsOne). 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 to our goodwill or intangible assets. Any such charges may have a material negative impact on our operating results.
If currency exchange rates fluctuate substantially in the future, the results of our operations, which are reported in U.S. dollars, could be adversely
affected.
As we continue to expand our international operations, we become more exposed to the effects of fluctuations in
currency exchange rates. Our sales contracts are denominated in U.S. dollars, and therefore substantially all of our revenues are not subject to foreign currency risk. However, a strengthening of the U.S. dollar could increase the real cost of our
software to our customers located outside of the United States, which could adversely affect our business, results of operations, financial condition and cash flows. In addition, we incur expenses for employee compensation and other operating
expenses at our non-U.S. locations in the local currency. Fluctuations in the exchange rates between the U.S. dollar and other currencies could result in the dollar equivalent of such expenses being higher. This could have a negative impact on our
reported operating results. To date, we have not engaged in any hedging strategies, and any such strategies, such as forward contracts, options and foreign exchange swaps related to transaction exposures that we may implement to mitigate this risk
may not eliminate our exposure to foreign exchange fluctuations.
Our ability to use our net operating losses to offset future taxable income may be
subject to certain limitations.
In general, under Section 382 of the Internal Revenue Code of 1986, as amended (the
Code), a corporation that undergoes an ownership change is subject to limitations on its ability to utilize its pre-change net operating losses (NOLs), to offset future taxable income. Our existing NOLs may be
subject to limitations arising from previous ownership changes, and if we undergo an ownership change, our ability to utilize NOLs could be further limited by Section 382 of the Code. Future changes in our stock ownership, some of which are
outside of our control, could result in an ownership change under Section 382 of the Code. Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations. There is also a risk that due to
regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. For these reasons, we may not be able to utilize a material
portion of the NOLs reflected on our balance sheet, even if we attain profitability.
Our international operations may give rise to potentially
adverse tax consequences.
We generally conduct our international operations through wholly-owned subsidiaries and report our
taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. Our intercompany relationships are subject to complex transfer pricing regulations administered by taxing authorities in various
jurisdictions. The relevant taxing authorities may disagree with our determinations as to the income and expenses attributable to specific jurisdictions. In addition, a taxing authority in a jurisdiction in which we have substantial business
operations could assert that withholding or other taxes in such jurisdiction could apply, including in connection with a future disposition of our shares. If such a disagreement were to occur or such assertion by a taxing authority made, we could be
required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates and reduced cash flows. We believe that our financial statements reflect adequate reserves to cover such a contingency,
but there can be no assurances in that regard. If our reserves are not sufficient to cover such contingency, our financial results could be harmed.
The enactment of legislation implementing changes in the U.S. taxation of international business activities or the adoption of other tax reform policies
could materially impact our financial position and results of operations.
Recent changes to U.S. tax laws, including limitations
on the ability of taxpayers to claim and utilize foreign tax credits and the deferral of certain tax deductions until earnings outside of the United States are repatriated to the United States, as well as changes to U.S. tax laws that may be enacted
in the future, could impact the tax treatment of our foreign earnings. Due to expansion of our international business activities, any changes in the U.S. taxation of such activities may increase our worldwide effective tax rate and adversely affect
our financial position and results of operations.
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Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events,
and to interruption by man-made problems such as power disruptions or terrorism.
Our corporate headquarters are located in the
San Francisco Bay Area, a region known for seismic activity. We also have significant facilities in India, a region known for typhoons, floods and other natural disasters. A significant natural disaster, such as an earthquake, fire or a flood,
occurring at our headquarters, at one of our other facilities or where a channel partner or supplier is located could have a material adverse effect on our business, operating results and financial condition. In addition, natural disasters and acts
of terrorism could cause disruptions in our or our customers businesses, national economies or the world economy as a whole. We also rely on IT systems to communicate among our workforce located worldwide and, in particular, our research and
development activities that are coordinated between our corporate headquarters in the San Francisco Bay Area and our operations in other states and countries. Any disruption to our internal communications, whether caused by a natural disaster or by
man-made problems, such as power disruptions or terrorism, could delay our research and development efforts. To the extent that these disruptions result in delays or cancellations of customer orders or delays in our research and development efforts
or the deployment of our solutions, our business and operating results would be materially and adversely affected.
Unfavorable conditions in our
industry or the global economy or reductions in information technology spending could limit our ability to grow our business and negatively affect our operating results.
Our operating results may vary based on the impact of changes in our industry or the global economy on us or our customers. The revenue growth
and potential profitability of our business depend on demand for business software applications and services generally and for API-based software platforms in particular. Current or future economic uncertainties or downturns could adversely affect
our business and results of operations. Negative conditions in the general economy both in the United States and abroad, including conditions resulting from changes in gross domestic product growth, financial and credit market fluctuations,
political deadlock, natural catastrophes, warfare and terrorist attacks on the United States, Europe, the Asia Pacific region or elsewhere, could cause a decrease in business investments, including corporate spending on API-based software platforms
in general and negatively affect the rate of growth of our business. Historically, during economic downturns there have been reductions in spending on information technology as well as pressure for extended billing terms and other financial
concessions. If economic conditions deteriorate, our customers and prospective customers may elect to decrease their information technology, which would limit our ability to grow our business and negatively affect our operating results.
To the extent purchases of our platform perceived by customers and potential customers to be discretionary, our revenue may be
disproportionately affected by delays or reductions in general information technology spending. Also, customers may choose to develop in-house software as an alternative to using our products. Moreover, competitors may respond to market conditions
by lowering prices and attempting to lure away our customers. In addition, the increased pace of consolidation in certain industries may result in reduced overall spending on our software.
We cannot predict the timing, strength or duration of any economic slowdown, instability or recovery, generally or within any particular
industry. If the economic conditions of the general economy or industries in which we operate do not improve, or worsen from present levels, our business, results of operations, financial condition and cash flows could be adversely affected.
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 solutions are subject to export
control and import laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations and various economic and trade sanctions regulations administered by the U.S. Treasury Departments Office of Foreign Assets
Controls. Exports of our solutions must be made in compliance with these laws and regulations. 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 solutions or changes in applicable export or
import regulations may create delays in the introduction and sale of our solutions in international markets, prevent our customers with international operations from deploying our solutions or, in some cases, prevent the export or import of our
solutions 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 solutions, or in our decreased ability to export or sell our solutions to existing or potential customers with international operations. Any decreased use of our solutions or limitation on
our ability to export or sell our solutions would likely adversely affect our business.
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Furthermore, we incorporate encryption technology into certain of our solutions. 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 solutions or could limit our customers ability
to implement our solutions in those countries. Encrypted solutions 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 solutions, when applicable, could harm our international sales and adversely affect our revenue. Compliance with applicable regulatory requirements regarding the export of
our solutions, including with respect to new releases of our solutions, may create delays in the introduction of our solutions in international markets, prevent our customers with international operations from deploying our solutions throughout
their globally-distributed systems or, in some cases, prevent the export of our solutions to some countries altogether.
Moreover, U.S.
export control laws and economic sanctions programs prohibit the shipment of certain products and services to countries, governments and persons that are subject to U.S. 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.
Our platform and our business are subject to a variety of U.S. and international laws and regulations, including those regarding privacy, data
protection and information security, and our customers may be subject to regulations related to the handling and transfer of certain types of sensitive and confidential information. Any failure of our products or solutions to comply with or enable
our customers and channel partners to comply with applicable laws and regulations would harm our business, financial condition and operating results.
We and our customers that use our solutions may be subject to privacy- and data protection-related laws and regulations that impose
obligations in connection with the collection, processing and use of personal data, financial data, health data or other similar data. Existing U.S. federal and various state and foreign privacy- and data protection-related laws and regulations are
evolving and subject to potentially differing interpretations, and various legislative and regulatory bodies may expand current or enact new laws and regulations regarding privacy- and data protection-related matters. For example, the European Union
is expected to soon formally adopt a general data protection regulation, to be effective two years after adoption, which would supersede current EU data protection legislation and impose more stringent EU data protection requirements. Such
regulation is anticipated to provide for penalties for noncompliance of up to four percent of annual global revenues. More generally, we believe additional regulation is likely in the area of data privacy, and changing laws, regulations and
standards applying to the collection, processing or use of personal or consumer information could affect our customers obligations and our facilitation of those obligations. New laws, amendments to or re-interpretations of existing laws and
regulations, rules of self-regulatory bodies, industry standards and contractual obligations may impact our business and practices, and we may be required to expend significant resources to adapt to these changes. These developments could harm our
business, financial condition and results of operations.
The U.S. federal and various state and foreign governments have adopted or
proposed limitations on, or requirements regarding, the collection, distribution, use, security and storage of personally identifiable information of individuals. The U.S. Federal Trade Commission and numerous state attorneys general are applying
federal and state consumer protection laws to impose standards on the online collection, use and dissemination of data, and to the security measures applied to such data. Similarly, many foreign countries and governmental bodies, including the
member states of the European Union, or EU, have laws and regulations concerning the collection and use of personally identifiable information obtained from their residents or by businesses operating within their jurisdiction, which are often more
restrictive than those in the United States. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure and security of personally identifiable information that identifies or may be used to identify an
individual, such as names, email addresses and, in some jurisdictions, Internet Protocol, or IP, addresses. Further, as we undertake efforts to have our platform comply with applicable laws and regulations, these and other obligations may be
modified, they may be interpreted and applied in an inconsistent manner from one jurisdiction to another, and they may conflict with one another, other regulatory requirements or our internal practices. We also may be bound by contractual
obligations relating to our collection, use and disclosure of personal, financial and other data.
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Following a European court decision in October 2015 that invalidated the U.S.-EU Safe Harbor
Framework, which framework was adopted to provide assurance that U.S. based companies were adhering to certain standards for data protection, we intend to use standard EU model contractual clauses in an effort to help our customers comply with,
relevant laws and regulations of the EU and its member states applicable to our handling of personal data. The invalidation of the U.S.-EU Safe Harbor Framework may serve as a basis for our personal data handling practices, or those of our
customers, to be challenged and may otherwise adversely impact our business. U.S. and EU authorities reached a political agreement on February 2, 2016 regarding a new potential means for legitimizing personal data transfers from the European
Economic Area, or EEA to the United States, the EU-U.S. Privacy Shield, but it is unclear whether the EU-U.S. Privacy Shield will be formally implemented and whether the EU-U.S. Privacy Shield will function as an appropriate means for us to
legitimize any of our personal data transfers from the EEA to the U.S. Responding to an investigation or enforcement action by relevant authorities of the EU and its member states could divert managements attention and resources, cause us to
incur investigation, compliance and defense costs and other professional fees, result in fines and other penalties, and adversely affect our business, results of operations, financial condition and cash flows.
We facilitate our customers compliance with a number of diverse data protection, security, privacy and other government- and
industry-specific requirements, including those that require companies to notify individuals of data security incidents involving certain types of personal data. For example, with respect to portions of our platform we maintain compliance with the
requirements set forth in the U.S. Health Insurance Portability and Accountability Act of 1996 (HIPAA), as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH), and their
respective implementing regulations, including the final omnibus rule published on January 25, 2013. Among other things, HITECH, through its implementing regulations, makes certain of HIPAAs privacy and security standards directly
applicable to business associates, defined as persons or organizations that create, receive, maintain or transmit protected health information (PHI), for or on behalf of a HIPAA-covered entity for a function or activity regulated by
HIPAA. Because certain customers that are HIPAA-covered entities receive and transmit PHI through our platform, we may be considered a business associate with respect to these customers and therefore subject to the HIPAA requirements applicable to
business associates. In addition, state laws govern the privacy and security of personal information and health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect,
thus complicating compliance efforts. Noncompliance with applicable HIPAA and related state law requirements could result in significant civil and criminal penalties, which could adversely impact our business, financial condition and cash flows as
well as our reputation.
Similarly, because a number of our clients interface with payment card systems through our platform, including
those for the processing of debit or credit cards, we maintain Payment Card Industry Data Security Standard (PCI DSS) compliance with respect to portions of our platform as part of our information security program. If we are unable to
comply with PCI DSS, whether due to changes in the PCI DSS standard or for another reason, we might incur significant liability and may suffer an adverse effect to our reputation.
With respect to all of the above, any failure or perceived failure by us or our platform to comply with U.S., EU or other foreign privacy or
security laws, policies, industry standards or legal obligations, or any security incident that results in the unauthorized access to, or acquisition, release or transfer of, personally identifiable information or other customer data may result in
governmental investigations, inquiries, enforcement actions and prosecutions, private litigation, fines and penalties or adverse publicity. Such actions and penalties could divert managements attention and resources, adversely affect our
business, results of operations, financial condition and cash flows, and cause our customers and channel partners to lose trust in our solutions, which could have an adverse effect on our reputation and business.
We expect that there will continue to be new proposed laws, regulations and industry standards concerning privacy, data protection and
information security in the United States, the European Union and other jurisdictions, and we cannot yet determine the impact such future laws, regulations and standards may have on our business. Because global laws, regulations and industry
standards concerning privacy, data protection and information security have continued to develop and evolve rapidly, it is possible that we or our platform and solutions may not be, or may not have been, compliant with each such applicable law,
regulation, and industry standard.
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Any such new laws, regulations, other legal obligations or industry standards, or any changed
interpretation of existing laws, regulations or other standards may require us to incur additional costs and restrict our business operations. If our privacy or data security measures fail to comply with current or future laws, regulations,
policies, legal obligations or industry standards, we may be subject to litigation, regulatory investigations, fines or other liabilities, as well as negative publicity and a potential loss of business. Moreover, if future laws, regulations, other
legal obligations or industry standards, or any changed interpretations of the foregoing limit our customers or partners ability to use and share personally identifiable information or our ability to store, process and share personally
identifiable information or other data, demand for our solutions could decrease, our costs could increase and our business, financial condition and operating results could be harmed.
Changes in laws and regulations related to the Internet or changes in the Internet infrastructure itself may diminish the demand for our platform, and
could have a negative impact on our business.
The future success of our business depends in part upon the continued use of the
Internet as a primary medium for commerce, communication, and business applications. Federal, state, or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the
Internet as a commercial medium. Changes in these laws or regulations could require us to modify our platform in order to comply with these changes. In addition, government agencies or private organizations have imposed and may impose
additional taxes, fees, or other charges for accessing the Internet or commerce conducted via the Internet. These laws or charges could limit the growth of Internet-related commerce or communications generally, or result in reductions in the demand
for Internet-based platforms and services such as ours. In addition, the use of the Internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of
Internet activity, security, reliability, cost, ease-of-use, accessibility, and quality of service. The performance of the Internet and its acceptance as a business tool has been adversely affected by viruses, worms, and
similar malicious programs and the Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If the use of the Internet is adversely affected by these issues, demand for our platform
could decline.
The terms of our existing loan and security agreement with Silicon Valley Bank and future indebtedness could restrict our
operations, particularly our ability to respond to changes in our business or to take specified actions.
The terms of our
existing loan and security agreement with Silicon Valley Bank, or SVB, contains, and any future indebtedness would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions on us, including
restrictions on our ability, and the ability of our subsidiaries, to take actions that may be in our best interests, including, among others, disposing of assets, entering into change of control transactions, mergers or acquisitions, incurring
additional indebtedness, granting liens on our assets and paying dividends. Our loan and security agreement requires us to satisfy specified financial covenants, including a minimum revenue covenant and a minimum liquidity ratio. Our ability to meet
those financial covenants can be affected by events beyond our control, and we may not be able to continue to meet those covenants. A breach of any of these covenants or the occurrence of other events specified in the loan and security agreement
could result in an event of default under the loan and security agreement. Upon the occurrence of an event of default, SVB could elect to declare all amounts outstanding under the loan and security agreement to be immediately due and payable and
terminate all commitments to extend further credit. If we were unable to repay those amounts, SVB could proceed against the collateral granted to them to secure such indebtedness. We have pledged substantially all of our assets, other than our
intellectual property, as collateral under the loan and security agreement. If SVB accelerates the repayment of borrowings, if any, we may not have sufficient funds to repay our existing debt.
The nature of our business requires the application of complex revenue and expense recognition rules and the current legislative and regulatory
environment affecting GAAP is uncertain. Significant changes in current principles could affect our financial statements going forward and changes in financial accounting standards or practices may cause adverse, unexpected financial reporting
fluctuations and harm our operating results.
The accounting rules and regulations that we must comply with are complex and
subject to interpretation by the Financial Accounting Standards Board, (FASB), the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. Recent actions and public comments from FASB and the SEC have
focused on the integrity of financial reporting. In
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addition, many companies accounting policies are being subject to heightened scrutiny by regulators and the
public. Further, the accounting rules and regulations are continually changing in ways that could materially impact our financial statements. For example, in May 2014, FASB issued a new accounting guidance on revenue recognition, Accounting
Standards Update No. 2014-09, Revenue from Contracts with Customers, which becomes effective for us beginning August 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method.
We have not yet selected a transition method and continue to evaluate the impact that this guidance will have on our financial condition and
results of operations. Regardless of the transition method, the application of this new guidance may result in exclusion of certain future licensing revenues in the statement of comprehensive loss after the adoption date, which, despite no change in
associated cash flows, could have a material adverse effect on our net income or loss. We cannot predict the impact of future changes to accounting principles or our accounting policies on our 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, were we to change our critical accounting estimates, including the timing of
recognition of license revenue and other revenue sources, our results of operations could be significantly impacted.
Risks Related to Ownership of Our
Common Stock
Our stock price has been and may continue to be volatile or may decline, regardless of our operating performance, resulting in
substantial losses for investors.
The trading prices of the securities of technology companies have been and may continue to be
highly volatile. Since shares of our common stock were sold in our initial public offering in April 2015 at a price of $17.00 per share, the reported high and low sales prices of our common stock have ranged from $5.14 to $20.50 through
April 30, 2016. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
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actual or anticipated fluctuations in our operating results;
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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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failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the
expectations of investors;
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ratings changes by any securities analysts who follow our company;
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announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;
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the addition or loss of large customers;
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network outages or performance issues of our cloud service;
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information security breaches of our internal systems, our cloud service or customer on-premises deployments of our platform;
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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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price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
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any major change in our board of directors or management;
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lawsuits threatened or filed against us; 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 markets, and in particular the market on which our common stock is listed, have experienced extreme price and volume
fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating
performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs,
divert resources and the attention of management from our business and adversely affect our business, results of operations, financial condition and cash flows.
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Our directors, executive officers and significant stockholders continue to have substantial
control over us and could delay or prevent a change in corporate control.
As of April 30, 2016, our directors, executive
officers and holders of more than 5% of our common stock, together with their affiliates, currently beneficially own, in the aggregate 40.4% of our outstanding common stock. As a result, these stockholders, acting together, would have the ability to
control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, would
have the ability to control the management and affairs of our company. Accordingly, this concentration of ownership might adversely affect the market price of our common stock by:
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delaying, deferring or preventing a change in control of the company;
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impeding a merger, consolidation, takeover or other business combination involving us; or
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discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of the company.
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If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share
price and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports
that securities or industry analysts publish about us or our business, our market and our competitors. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our
shares, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading
volume to decline.
Substantial future sales of shares of our common stock could cause the market price of our common stock to decline.
The market price of shares of our common stock could decline as a result of substantial sales of our common stock, particularly sales by our
directors, executive officers and significant stockholders, a large number of shares of our common stock becoming available for sale or the perception in the market that holders of a large number of shares intend to sell their shares. As of
April 30, 2016, holders of an aggregate of 19,799,026 shares of our common stock have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements
that we may file for our stockholders or ourselves. We have also registered shares of common stock that we may issue under our employee equity incentive plans. These shares will be able to be sold freely in the public market upon issuance.
We rely on judgments, assumptions and estimates, as well as data collected from our data management system, to calculate certain of our metrics, and
real or perceived inaccuracies in such metrics may harm our reputation and cause our stock price to decline.
Certain of our
metrics are calculated and estimated using data from data systems other than our financial accounting system. While these numbers are based on what we believe to be reasonable calculations and estimates for the applicable period of measurement,
there are inherent challenges in measuring these metrics because of the judgments and assumptions such measurements require our management team to make. If these judgments or assumptions are made incorrectly, the resulting calculation or estimation
of the applicable metric will likely be inaccurate. Further, the judgments and assumptions made by our management team to calculate or estimate a metric may change from time to time, as additional information is taken into account subsequent to the
initial calculation or estimate, and such changes by themselves may significantly impact such metric in future periods and may cause us to revise the calculations or estimations of such metric for historical periods.
If we discover material inaccuracies in our metrics, our reputation may be harmed. Such inaccuracies could also cause investors to lose
confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock.
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We are an emerging growth company and we cannot be certain if the reduced disclosure
requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an
emerging growth company, as defined in the Jumpstart our Business Startups Act of 2012 (JOBS Act), and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public
companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley
Act), 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 may 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.
Anti-takeover provisions in our charter
documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws, may have the effect of delaying or
preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:
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authorize our board of directors to issue, without further action by the stockholders, shares of undesignated preferred stock with terms, rights and preferences determined by our board of directors;
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require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;
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specify that special meetings of our stockholders can be called only by our board of directors, the Chairman of our board of directors, or our Chief Executive Officer;
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establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;
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establish that our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving three-year staggered terms;
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prohibit cumulative voting in the election of directors;
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provide that our directors may be removed only for cause;
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provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and
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require the approval of our board of directors or the holders of a supermajority of our outstanding shares of capital stock to amend our bylaws and certain provisions of our certificate of incorporation.
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These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by
making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of
Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any interested stockholder for a period of three years
following the date on which the stockholder became an interested stockholder.
The requirements of being a public company may strain our
resources, divert managements attention and affect our ability to attract and retain executive management and qualified board members.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the
accounting provisions of the FCPA, the listing requirements of the NASDAQ Stock Market and other applicable securities rules and regulations. Compliance with these rules and regulations has increased and will continue to increase our legal and
financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and
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resources, particularly after we are no longer an emerging growth company. The Exchange Act requires,
among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and
internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may
be required. As a result, managements attention may be diverted from other business concerns, which could adversely affect our business and operating results. Although we have already hired additional employees to comply with these
requirements, we may need to hire more employees in the future or engage outside consultants, which will increase our costs and expenses.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for
public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a
result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to
disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of managements time and
attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their
application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.
However, for as long as we remain an emerging growth company as defined in the JOBS Act, we may take advantage of certain
exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of
Section 404 of the Sarbanes-Oxley Act, 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 may take advantage of these reporting exemptions until we are no longer an emerging growth company.
We will remain an emerging growth company for up to five years, although if the market value of our common stock that is held by
non-affiliates exceeds $700 million as of any July 31 before that time, we would cease to be an emerging growth company as of the following January 31.
We also expect that these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and
we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on
our audit committee and compensation committee, and qualified executive officers.
As a public company, our business and financial
condition has become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be adversely affected, and
even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and operating results.
As a public company, we are obligated to develop and maintain proper and effective internal control over financial reporting. We may not complete
our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our
common stock.
We are required, pursuant to Section 404 of the SarbanesOxley Act, to furnish a report by management on,
among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of our initial public offering. This assessment will need to include disclosure of any material
weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our independent registered public accounting firm has issued an opinion on our internal control over financial reporting.
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We are in the costly and challenging process of compiling the system and processing documentation
necessary to perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or
more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective.
If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting
firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline, and we may
be subject to investigation or sanctions by the SEC.
We are required to disclose changes made in our internal control and procedures on a
quarterly basis. However, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year
following our first annual report required to be filed with the SEC, or the date we are no longer an emerging growth company as defined in the JOBS Act if we take advantage of the exemptions contained in the JOBS Act. At such time, our
independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts may not enable us to avoid a
material weakness in the future.
We will remain an emerging growth company for up to five years, although if the market value
of our common stock that is held by non-affiliates exceeds $700 million as of any July 31 before that time, we would cease to be an emerging growth company as of the following January 31. To comply with the requirements of
being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff.
We do not intend to pay dividends for the foreseeable future.
We have never declared or paid any cash dividends on our common stock and do not intend to pay any cash dividends in the foreseeable future.
We anticipate that we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. In
addition, our loan and security agreement with SVB restricts, and any future indebtedness may restrict, our ability to pay dividends. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as
the only way to realize any future gains on their investments.
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