Company Quick10K Filing
Quick10K
A10 Networks
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$6.40 76 $484
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
8-K 2019-07-26 Enter Agreement, Earnings, Officers, Exhibits
8-K 2019-04-25 Earnings, Exhibits
8-K 2019-02-07 Earnings, Exhibits
8-K 2019-01-08 Amend Bylaw, Exhibits
8-K 2018-11-07 Amend Bylaw, Shareholder Vote, Exhibits
8-K 2018-10-30 Earnings, Exhibits
8-K 2018-08-31
8-K 2018-08-30 Earnings, Exhibits
8-K 2018-07-02 Amendment, Exhibits
8-K 2018-04-03 Exhibits
8-K 2018-03-14 Enter Agreement, Officers, Exhibits
8-K 2018-02-26 Amend Bylaw, Other Events
8-K 2018-01-30 Other Events, Exhibits
8-K 2018-01-16 Earnings, Exhibits
LRCX Lam Research 29,780
KIM Kimco Realty 7,600
DNOW NOW 1,530
EVH Evolent Health 1,180
MLAB Mesa Laboratories 986
WTRE Watford Holdings 564
OPRX Optimizerx 160
CIZN Citizens Holding 103
CBMB CBM Bancorp 56
NOVC Novation Companies 0
ATEN 2019-06-30
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Default Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 a6302019exhibit311.htm
EX-31.2 a6302019exhibit312.htm
EX-32.1 a6302019exhibit321.htm
EX-32.2 a6302019exhibit322.htm

A10 Networks Earnings 2019-06-30

ATEN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a630201910-q.htm 10-Q Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number: 001-36343
 
A10 NETWORKS, INC.
(Exact Name of Registrant as Specified in its Charter)
 
 
Delaware
 
20-1446869
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
3 West Plumeria Drive, San Jose, California 95134
(Address of Principal Executive Offices and Zip Code)
(408) 325-8668
(Registrant’s Telephone Number, Including Area Code)
 
 

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, $0.00001 par value
 
ATEN
 
New York Stock Exchange


Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
x
Non-accelerated filer
¨
Smaller reporting company
¨

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



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

As of July 26, 2019, the number of outstanding shares of the registrant’s common stock, par value $0.00001 per share, was 76,555,094.
 



A10 NETWORKS, INC.
FORM 10-Q

TABLE OF CONTENTS
 
Page No.
 


1


PART I. FINANCIAL INFORMATION
 
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

A10 NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except par value)

 
June 30,
2019
 
December 31,
2018
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
36,818

 
$
40,621

Marketable securities
82,478

 
87,754

Accounts receivable, net of allowances of $58 and $319, respectively
45,251

 
53,972

Inventory
22,522

 
17,930

Prepaid expenses and other current assets
14,746

 
14,662

Total current assets
201,815

 
214,939

Property and equipment, net
7,408

 
7,262

Goodwill
1,307

 
1,307

Intangible assets
3,026

 
3,748

Other non-current assets
13,256

 
8,620

Total assets
$
226,812

 
$
235,876

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
7,749

 
$
8,202

Accrued liabilities
20,209

 
25,291

Deferred revenue
60,571

 
63,874

Total current liabilities
88,529

 
97,367

Deferred revenue, non-current
37,220

 
34,092

Other non-current liabilities
2,737

 
534

Total liabilities
128,486

 
131,993

Commitments and contingencies (Note 2 and Note 6)

 

Stockholders' equity:
Common stock, $0.00001 par value: 500,000 shares authorized; 76,082 and 74,301 shares issued and outstanding, respectively
1

 
1

Additional paid-in-capital
388,356

 
376,272

Accumulated other comprehensive income (loss)
258

 
(144
)
Accumulated deficit
(290,289
)
 
(272,246
)
Total stockholders' equity
98,326

 
103,883

Total liabilities and stockholders' equity
$
226,812

 
$
235,876

 
 
 
 

See accompanying notes to the condensed consolidated financial statements.


2


A10 NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2018
 
2019
 
2018
Revenue:
 

 
 

 
 

 
 

Products
$
26,785

 
$
39,224

 
$
55,015

 
$
67,373

Services
22,404

 
21,489

 
44,464

 
42,523

Total revenue
49,189

 
60,713

 
99,479

 
109,896

Cost of revenue:
 
 
 
 
 
 
 
Products
6,891

 
9,080

 
14,407

 
16,189

Services
4,380

 
4,107

 
9,114

 
8,882

Total cost of revenue
11,271

 
13,187

 
23,521

 
25,071

Gross profit
37,918

 
47,526

 
75,958

 
84,825

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
23,626

 
25,788

 
48,109

 
52,692

Research and development
14,617

 
15,572

 
30,783

 
34,369

General and administrative
6,099

 
9,858

 
14,457

 
21,452

Total operating expenses
44,342

 
51,218

 
93,349

 
108,513

Loss from operations
(6,424
)
 
(3,692
)
 
(17,391
)
 
(23,688
)
Non-operating income (expense):
 
 
 
 
 
 
 
Interest expense
(37
)
 
(32
)
 
(192
)
 
(65
)
Interest and other income (expense), net
776

 
(429
)
 
143

 
137

Total non-operating income (expense), net
739

 
(461
)
 
(49
)
 
72

Loss before income taxes
(5,685
)
 
(4,153
)
 
(17,440
)
 
(23,616
)
Provision for income taxes
86

 
379

 
603

 
586

Net loss
$
(5,771
)
 
$
(4,532
)
 
$
(18,043
)
 
$
(24,202
)
Net loss per share:
 
 
 
 
 
 
 
Basic and diluted
$
(0.08
)
 
$
(0.06
)
 
$
(0.24
)
 
$
(0.33
)
Weighted-average shares used in computing net loss per share:
 
 
 
 
 
 
 
Basic and diluted
75,712

 
72,707

 
75,263

 
72,471

 
 
 
 
 
 
 
 



 See accompanying notes to the condensed consolidated financial statements.



3


A10 NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited, in thousands)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(5,771
)
 
$
(4,532
)
 
$
(18,043
)
 
$
(24,202
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gain (loss) on marketable securities
162

 
75

 
402

 
(98
)
Comprehensive loss
$
(5,609
)
 
$
(4,457
)
 
$
(17,641
)
 
$
(24,300
)

See accompanying notes to the condensed consolidated financial statements.


4


A10 NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited, in thousands)


 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
 
2019
 
2018
 
2019
 
2018
Shares of common stock issued and outstanding
 
 
 
 
 
 
 
 
Beginning balance
75,183

 
72,707

 
74,301

 
71,692

 
Common stock issued under employee equity incentive plans
899

 

 
1,781

 
1,015

 
 
    Ending balance
76,082

 
72,707

 
76,082

 
72,707

 
 
 
 
 
 
 
 
 
 
Stockholders' equity
 
 
 
 
 
 
 
 
Common stock:
 
 
 
 
 
 
 
 
 
Beginning balance
$
1

 
$
1

 
$
1

 
$
1

 
 
Common stock issued under employee equity incentive plans

 

 

 

 
 
    Ending balance
1

 
1

 
1

 
1

 
 
 
 
 
 
 
 
 
 
 
Additional paid-in capital:
 
 
 
 
 
 
 
 
 
Beginning balance
381,195

 
364,953

 
376,272

 
355,533

 
 
Common stock issued under employee equity incentive plans
2,233

 

 
3,260

 
1,269

 
 
Stock-based compensation
4,928

 
2,572

 
8,824

 
10,723

 
 
    Ending balance
388,356

 
367,525

 
388,356

 
367,525

 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Beginning balance
96

 
(296
)
 
(144
)
 
(123
)
 
 
Unrealized gain (loss) on marketable securities, net of tax
162

 
75

 
402

 
(98
)
 
 
    Ending balance
258

 
(221
)
 
258

 
(221
)
 
 
 
 
 
 
 
 
 
 
 
Accumulated deficit:
 
 
 
 
 
 
 
 
 
Beginning balance
(284,518
)
 
(264,298
)
 
(272,246
)
 
(257,025
)
 
 
Cumulative effect adjustment from adoption of ASU 2014-09

 

 

 
12,397

 
 
Net loss
(5,771
)
 
(4,532
)
 
(18,043
)
 
(24,202
)
 
 
    Ending balance
(290,289
)
 
(268,830
)
 
(290,289
)
 
(268,830
)
 
 
 
 
 
 
 
 
 
 
Total stockholders' equity
$
98,326

 
$
98,475

 
$
98,326

 
$
98,475


See accompanying notes to the condensed consolidated financial statements.


5


A10 NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)

 
Six Months Ended June 30,
 
2019
 
2018
 
 
 
 
Cash flows from operating activities:
 

 
 

Net loss
$
(18,043
)
 
$
(24,202
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation and amortization
4,982

 
4,103

Stock-based compensation
8,824

 
10,723

Other non-cash items
(310
)
 
(234
)
Changes in operating assets and liabilities:
 

 
 

Accounts receivable
8,802

 
(1,941
)
Inventory
(5,045
)
 
1,993

Prepaid expenses and other assets
63

 
(705
)
Accounts payable
(434
)
 
(3,035
)
Accrued and other liabilities
(9,372
)
 
3,163

Deferred revenue
(175
)
 
7,447

Other
123

 
118

Net cash used in operating activities
(10,585
)
 
(2,570
)
Cash flows from investing activities:
 

 
 

Proceeds from sales of marketable securities
16,134

 
13,877

Proceeds from maturities of marketable securities
19,250

 
30,655

Purchases of marketable securities
(29,557
)
 
(46,890
)
Purchase of investment

 
(1,000
)
Purchases of property and equipment
(2,303
)
 
(1,289
)
Net cash provided by (used in) investing activities
3,524

 
(4,647
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of common stock under employee equity incentive plans
3,260

 
1,269

Other
(2
)
 
(52
)
Net cash provided by financing activities
3,258

 
1,217

Net decrease in cash and cash equivalents
(3,803
)
 
(6,000
)
Cash and cash equivalents - beginning of period
40,621

 
46,567

Cash and cash equivalents - end of period
$
36,818

 
$
40,567

Non-cash investing and financing activities:
 

 
 

Inventory transfers to property and equipment
$
453

 
$
619

Purchases of property and equipment included in accounts payable
$
19

 
$
38


See accompanying notes to the condensed consolidated financial statements.

6


A10 Networks, Inc.

Notes to Condensed Consolidated Financial Statements
(unaudited)



1. Description of Business and Summary of Significant Accounting Policies
Description of Business

A10 Networks, Inc. (together with our subsidiaries, the “Company”, “we”, “our” or “us”) was incorporated in California in 2004 and reincorporated in Delaware in March 2014. We are headquartered in San Jose, California and have wholly-owned subsidiaries throughout the world including Asia and Europe.

We are a leading provider of secure application solutions and services that enable a new generation of intelligently connected companies with the ability to continuously improve cyber protection and digital responsiveness across dynamic Information Technology (“IT”) and network infrastructures. Our product portfolio consists of six secure application solutions: Thunder Application Delivery Controller (“ADC”), Lightning Application Delivery Controller (“Lightning ADC”), Thunder Carrier Grade Networking (“CGN”), Thunder Threat Protection System (“TPS”), Thunder SSL Insight (“SSLi”) and Thunder Convergent Firewall (“CFW”); and two intelligent management and automation tools: Harmony Controller and aGalaxy TPS. Our solutions are available in a variety of form factors, such as optimized hardware appliances, bare metal software, containerized software, virtual appliances and cloud-native software.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include those of A10 Networks, Inc. and its subsidiaries after elimination of all intercompany accounts and transactions.

We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). As permitted under these rules and regulations, we have condensed or omitted certain financial information and footnote disclosures we normally include in our annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The unaudited condensed consolidated balance sheet as of December 31, 2018 has been derived from our audited financial statements, which are included in our 2018 Annual Report on Form 10-K, as amended by Form 10-K/A, for the year ended December 31, 2018 on file with the SEC (the “2018 Annual Report”).

These financial statements have been prepared on the same basis as our annual financial statements and, in management’s opinion, reflect all adjustments consisting only of normal recurring adjustments that are necessary for a fair presentation of our financial information. Our interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. 

These financial statements and accompanying notes should be read in conjunction with the financial statements and accompanying notes thereto in the 2018 Annual Report.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Those estimates and assumptions affect revenue recognition and deferred revenue, the allowance for doubtful accounts, the sales return reserve, the valuation of inventory, the fair value of marketable securities, the incremental borrowing rate used in determining operating lease liabilities, contingencies and litigation, accrued liabilities, deferred commissions and the determination of fair value of stock-based compensation. These estimates are based on information available as of the date of the condensed consolidated financial statements; therefore, actual results could differ from management’s estimates.

Significant Accounting Policies

The Company’s significant accounting policies are disclosed in the 2018 Annual Report. Other than the accounting policies related to the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) discussed below, there have been no material changes to the Company’s significant accounting policies during the six months ended June 30, 2019.

Leases


7


In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under prior generally accepted accounting principles. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet.

The adoption of ASU 2016-02 on January 1, 2019 resulted in the recognition of right-of-use assets of approximately $6.0 million and lease liabilities for operating leases of approximately $6.8 million on the Company’s condensed consolidated balance sheets, with no material impact to its condensed consolidated statements of operations. See Note 2 for further information regarding the impact of the adoption of ASU 2016-02 on the Company's financial statements.

The Company determines if an arrangement is a lease at inception. For leases where the Company is the lessee, right-of-use (“ROU”) assets represent the Company’s right to use the underlying asset for the term of the lease and are included within other non-current assets on the condensed consolidated balance sheets, and the lease liabilities represent an obligation to make lease payments arising from the lease and are recorded within accrued liabilities and other non-current liabilities on the condensed consolidated balance sheets. Lease liabilities are recognized at the lease commencement date based on the present value of the future lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at the commencement date of the underlying lease arrangement to determine the present value of lease payments. The ROU asset is determined based on the lease liability initially established and reduced for any prepaid lease payments and any lease incentives received. The lease term to calculate the ROU asset and related lease liability includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise the option. The Company’s lease agreements generally do not contain any material variable lease payments, residual value guarantees or restrictive covenants.

The Company elected the package of practical expedients permitted under the transition guidance, which allowed for the carry-forward of the Company’s historical lease classification and assessment on whether a contract is or contains a lease. The Company elected to not apply the new standard’s recognition requirements to leases with an initial term of 12 months or less and instead elected to recognize lease payments in the condensed consolidated statements of operations on a straight-line basis over the lease term. The Company did not elect to apply the hindsight practical expedient when determining lease term and assessing impairment of right-of-use assets.

Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense while expense for financing leases is recognized as depreciation expense and interest expense using the accelerated interest method of recognition. The Company accounts for lease components and non-lease components as a single lease component. 

Concentration of Credit Risk and Significant Customers

Financial instruments that potentially subject us to concentrations of credit risk consist of cash, cash equivalents, marketable securities and accounts receivable. Our cash, cash equivalents and marketable securities are held and invested in high-credit quality financial instruments by recognized financial institutions and are subject to minimum credit risk.

Our accounts receivable are unsecured and represent amounts due to us based on contractual obligations of our customers. We mitigate credit risk in respect to accounts receivable by performing periodic credit evaluations based on a number of factors, including past transaction experience, evaluation of credit history and review of the invoicing terms of the contract. We generally do not require our customers to provide collateral to support accounts receivable.

Significant customers, including distribution channel partners and direct customers, are those which represent 10% or more of our total revenue for each period presented or our gross accounts receivable balance as of each respective balance sheet date. Revenues from our significant customers as a percentage of our total revenue are as follows:
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
Customers
 
2019
 
2018
 
2019
 
2018
Customer A (a distribution channel partner)
 
14%
 
*
 
14%
 
*
Customer B (a distribution channel partner)
 
*
 
20%
 
*
 
14%
Customer C (a distribution channel partner)
 
12%
 
*
 
*
 
*
 

8


* represents less than 10% of total revenue

As of June 30, 2019, three customers accounted for 16%, 14% and 10%, respectively, of our total gross accounts receivable. As of December 31, 2018, two customers accounted for 16% and 12%, respectively, of our total gross accounts receivable.

Recent Accounting Pronouncements Not Yet Effective

There have been no new accounting pronouncements issued by the FASB during the six months ended June 30, 2019, as compared to the recent accounting pronouncements described in Note 1 of the Company’s 2018 Annual Report, that the Company believes are of significance or potential significance to the Company.  

2. Leases

We lease various operating spaces in the United States, Asia and Europe under non-cancellable operating lease arrangements that expire on various dates through July 2027. These arrangements require us to pay certain operating expenses, such as taxes, repairs and insurance, and contain renewal and escalation clauses.

The table below presents the Company’s right-of-use assets and lease liabilities as of June 30, 2019 (in thousands):
 
 
June 30, 2019
Operating leases
 
Right-of-use assets:
 
 
Other non-current assets
$
4,812

Total right-of-use assets
$
4,812

 
 
 
Lease liabilities:
 
 
Accrued liabilities
$
3,081

 
Other non-current liabilities
2,350

Total operating lease liabilities
$
5,431


The aggregate future lease payments for operating leases as of June 30, 2019 were as follows (in thousands):

Remainder of 2019
$
1,917

2020
2,051

2021
1,293

2022
337

Total lease payments
5,598

Less: imputed interest
(167
)
Present value of lease liabilities
$
5,431


The components of lease costs were as follows (in thousands):
 
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
 
 
 
 
Operating lease costs
$
852

 
$
1,745

Short-term lease costs
138

 
275

Total lease costs
$
990

 
$
2,020

 
 
 
 
 

Average lease terms and discount rates for the Company’s operating leases were as follows (in thousands):

9


 
June 30, 2019
 
 
Weighted-average remaining term (years)
2.07

Weighted-average discount rate
3.31
%

Supplemental cash flow information for the Company’s operating leases (in thousands):
 
 
Six Months Ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
$
1,982

 
 
 
Right-of-use assets obtained in exchange for new lease liabilities
$
467


New Corporate Office Lease

On May 2, 2019 (the “Effective Date”), the Company entered into a sublease agreement (the “Sublease”) with Marvell Semiconductor, Inc. (“Sublandlord”) for corporate office space located at 2300 Orchard Parkway, San Jose, California, 95131 (the “Premises”). The Company intends to use the premises as a corporate office space and for research and development purposes. The term of the Sublease is seven years and eight months from the earlier of (i) December 1, 2019 or (ii) the date the Company commences business operations at the Premises. The Sublease provides for monthly base rent of approximately $262,000 per month for the first year with annual increases thereafter. The total base rent through the end of the term of the Sublease is approximately $26.4 million. In addition to base rent, the Company will also be responsible for operating and other expenses.

The Company anticipates gaining access and the right of use of the lease facility in the fourth quarter of 2019 and will account for the sublease arrangement under ASC 842.

Lease Commitments as of December 31, 2018

As previously disclosed in the Company’s 2018 Annual Report and under the previous lease accounting standard, ASC 840, Leases, the aggregate future minimum lease payments for operating leases as of December 31, 2018 were as follows (in thousands):
2019
$
3,907

2020
1,921

2021
1,194

2022
313

Total
$
7,335



10


3. Marketable Securities and Fair Value Measurements

Marketable Securities

Marketable securities, classified as available-for-sale, consisted of the following (in thousands):
 
 
June 30, 2019
 
December 31, 2018
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Certificates of deposit
 
$
10,998

 
$
27

 
$

 
$
11,025

 
$
11,000

 
$
7

 
$
(3
)
 
$
11,004

Corporate securities
 
50,033

 
189

 
(9
)
 
50,213

 
46,442

 
11

 
(116
)
 
46,337

U.S. Treasury and agency securities
 
1,749

 

 
(2
)
 
1,747

 
1,748

 

 
(12
)
 
1,736

Commercial paper
 
4,955

 
8

 

 
4,963

 
12,327

 
1

 
(5
)
 
12,323

Asset-backed securities
 
14,485

 
46

 
(1
)
 
14,530

 
16,381

 
5

 
(32
)
 
16,354

Total
 
$
82,220

 
$
270

 
$
(12
)
 
$
82,478

 
$
87,898

 
$
24

 
$
(168
)
 
$
87,754

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

During the six months ended June 30, 2019 and 2018, we did not reclassify any amount to earnings from accumulated other comprehensive loss related to unrealized gains or losses.

The following table summarizes the cost and estimated fair value of marketable securities based on stated effective maturities as of June 30, 2019 (in thousands):
 
Amortized Cost
 
Fair Value
Less than 1 year
$
42,570

 
$
42,632

Mature in 1 - 3 years
39,650

 
39,846

Total
$
82,220

 
$
82,478

 
 
 
 

All available-for-sale securities have been classified as current because they are available for use in current operations.

Marketable securities in an unrealized loss position consisted of the following (in thousands):
 
Less Than 12 Months
 
12 Months or More
 
Total
June 30, 2019
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
Corporate securities
$
1,499

 
$
(1
)
 
$
5,642

 
$
(8
)
 
$
7,141

 
$
(9
)
U.S. Treasury and agency securities

 

 
1,747

 
(2
)
 
1,747

 
(2
)
Asset-backed securities

 

 
1,503

 
(1
)
 
1,503

 
(1
)
Total
$
1,499

 
$
(1
)
 
$
8,892

 
$
(11
)
 
$
10,391

 
$
(12
)
 
 
 
 
 
 
 
 
 
 
 
 


11


 
Less Than 12 Months
 
12 Months or More
 
Total
December 31, 2018
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
Certificates of deposit
$
2,997

 
$
(3
)
 
$

 
$

 
$
2,997

 
$
(3
)
Corporate securities
29,435

 
(68
)
 
7,601

 
(48
)
 
37,036

 
(116
)
U.S. Treasury and agency securities
992

 
(7
)
 
744

 
(5
)
 
1,736

 
(12
)
Commercial paper
9,888

 
(5
)
 

 

 
9,888

 
(5
)
Asset-backed securities
8,499

 
(15
)
 
4,758

 
(17
)
 
13,257

 
(32
)
Total
$
51,811

 
$
(98
)
 
$
13,103

 
$
(70
)
 
$
64,914

 
$
(168
)
 
 
 
 
 
 
 
 
 
 
 
 

Based on evaluation of securities that have been in a continuous loss position, we did not recognize any other-than-temporary impairment charges during the six months ended June 30, 2019 and 2018.

Fair Value Measurements

The following is a summary of our cash, cash equivalents and marketable securities measured at fair value on a recurring basis (in thousands):
 
 
June 30, 2019
 
December 31, 2018
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash
 
$
28,565

 
$

 
$

 
$
28,565

 
$
39,113

 
$

 
$

 
$
39,113

Cash equivalents
 
8,253

 

 

 
8,253

 
1,508

 

 

 
1,508

Certificates of deposit
 

 
11,025

 

 
11,025

 

 
11,004

 

 
11,004

Corporate securities
 

 
50,213

 

 
50,213

 

 
46,337

 

 
46,337

U.S. Treasury and agency securities
 

 
1,747

 

 
1,747

 

 
1,736

 

 
1,736

Commercial paper
 

 
4,963

 

 
4,963

 

 
12,323

 

 
12,323

Asset-backed securities
 

 
14,530

 

 
14,530

 

 
16,354

 

 
16,354

Total
 
$
36,818

 
$
82,478

 
$

 
$
119,296

 
$
40,621

 
$
87,754

 
$

 
$
128,375

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

There were no transfers between Level 1 and Level 2 fair value measurement categories during the six months ended June 30, 2019 and 2018.

4. Condensed Consolidated Financial Statement Details

Inventory

Inventory consisted of the following (in thousands):

 
June 30,
2019
 
December 31,
2018
 
 
Raw materials
$
8,465

 
$
7,979

Finished goods
14,057

 
9,951

Total inventory
$
22,522

 
$
17,930


Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):
 
June 30, 2019
 
December 31, 2018
 
 
 
 
Prepaid expenses
$
7,953

 
$
6,679

Deferred contract acquisition costs
5,272

 
6,564

Other
1,521

 
1,419

Total prepaid and other current assets
$
14,746

 
$
14,662


Property and Equipment, Net

Property and equipment, net, consisted of the following (in thousands):
 
Useful Life
 
June 30,
2019
 
December 31,
2018
 
(in years)
 
 
 
 
Equipment
1 - 3
 
$
49,636

 
$
49,804

Software
1 - 3
 
4,352

 
4,088

Furniture and fixtures
1 - 3
 
967

 
967

Leasehold improvements
2 - 8
 
3,834

 
3,832

Construction in progress
 
 
787

 
160

Property and equipment, gross
 
 
59,576

 
58,851

Less: accumulated depreciation
 
 
(52,168
)
 
(51,589
)
Property and equipment, net
 
 
$
7,408

 
$
7,262


Depreciation expense on property and equipment was $1.4 million and $1.7 million for the three months ended June 30, 2019 and 2018, respectively, and $2.6 million and $3.4 million for the six months ended June 30, 2019 and 2018, respectively.

Intangible Assets

Purchased intangible assets, net, consisted of the following (in thousands):
 
June 30, 2019
 
December 31, 2018
 
Cost
 
Accumulated Amortization
 
Net
 
Cost
 
Accumulated Amortization
 
Net
 
 
 
 
 
 
 
 
 
 
 
 
Developed technology
$
5,050

 
$
(3,030
)
 
$
2,020

 
$
5,050

 
$
(2,525
)
 
$
2,525

Patents
2,936

 
(1,930
)
 
$
1,006

 
2,936

 
(1,713
)
 
1,223

Total intangible assets
$
7,986

 
$
(4,960
)
 
$
3,026

 
$
7,986

 
$
(4,238
)
 
$
3,748

 
 
 
 
 
 
 
 
 
 
 
 
Amortization expense related to purchased intangible assets was $0.4 million and $0.3 million for the three months ended June 30, 2019 and 2018, respectively, and $0.7 million for each of the six months ended June 30, 2019 and 2018. Purchased intangible assets will be amortized over a remaining weighted average useful life of 2.1 years.

Future amortization expense for purchased intangible assets as of June 30, 2019 is as follows (in thousands):
Fiscal Year
 
 
Remainder of 2019
 
$
721

2020
 
1,442

2021
 
863

Total
 
$
3,026



12


Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):
 
June 30,
2019
 
December 31,
2018
 
 
 
 
Accrued compensation and benefits
$
8,872

 
$
15,283

Accrued tax liabilities
3,712

 
4,455

Lease liability
3,081

 

Other
4,544

 
5,553

Total accrued liabilities
$
20,209

 
$
25,291


Deferred Revenue

Deferred revenue consisted of the following (in thousands):
 
June 30,
2019
 
December 31,
2018
 
 
 
 
Deferred revenue:
 
 
 
Products
$
5,799

 
$
5,216

Services
91,992

 
92,750

Total deferred revenue
97,791

 
97,966

Less: current portion
(60,571
)
 
(63,874
)
Non-current portion
$
37,220

 
$
34,092




5. Credit Facility

In November 2016, we entered into a loan and security agreement (the “2016 Credit Facility”) with Silicon Valley Bank (“SVB”) as the lender. The 2016 Credit Facility provides a three-year, $25.0 million revolving credit facility, which includes a maximum of $25.0 million letter of credit subfacility. When the balance of our cash, cash equivalents and marketable securities minus outstanding revolving loans and letters of credit equals or exceeds $50.0 million, loans may be advanced under the 2016 Credit Facility up to the full $25.0 million. When our net cash falls below $50.0 million, loans may be advanced under the 2016 Credit Facility based on a borrowing base equal to a specified percentage of the value of our eligible accounts receivable. The loans bear interest, at our option, at (i) the prime rate reported in The Wall Street Journal, minus 0.50% or (ii) a LIBOR rate determined in accordance with the 2016 Credit Facility, plus 2.50%. We are required to pay customary closing fees, commitment fees and letter of credit fees for a facility of this size and type.

In September 2018, we entered into an amendment with SVB to reduce the unused revolving credit facility fee on the 2016 Credit Facility from 0.4% to 0.3%.

Our obligations under the 2016 Credit Facility are secured by substantially all of our assets, excluding our intellectual property. The 2016 Credit Facility contains customary affirmative and negative covenants. In addition, the 2016 Credit Facility requires us to maintain compliance with an adjusted quick ratio of not less than 1.50:1.00, as determined in accordance with the 2016 Credit Facility. As of June 30, 2019, we had no outstanding balance under the 2016 Credit Facility and were in compliance with all facility covenants.


13


6. Commitments and Contingencies

Legal Proceedings

Litigation
  
From time to time, we may be party or subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. Some of these proceedings involve claims that are subject to substantial uncertainties and unascertainable damages. We make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Unless otherwise specifically disclosed in this note, we have determined that no provision for liability nor disclosure is required related to any claim against us because: (a) there is not a reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim; (b) a reasonably possible loss or range of loss cannot be estimated; or (c) such estimate is immaterial.

On March 22, 2018, the Company, our Chief Executive Officer, our Chief Financial Officer, and certain former officers, were named as defendants in a putative class action lawsuit filed in the United States District Court for the Northern District of California, captioned Shah v. A10 Networks, Inc. et al., 3:18-cv-01772-VC (the “Securities Action”). On August 31, 2018, the court appointed a lead plaintiff. On October 5, 2018, the lead plaintiff filed an amended complaint. The amended complaint names the same defendants as the initial complaint, in addition to one of the Company’s former executive vice presidents. The amended complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The amended complaint named the same defendants as the initial complaint, in addition to one of the Company’s former executive vice presidents. The Company and individual defendants filed motions to dismiss the amended complaint. On February 21, 2019, the court granted the motions to dismiss with leave to amend within 21 days. The lead plaintiff did not file an amended complaint by the Court-ordered deadline. Instead, on March 21, 2019, the lead plaintiff filed a notice of appeal in the United States Court of Appeals for the Ninth Circuit. On April 5, 2019, the clerk of court suspended briefing on the appeal and ordered that, by April 26, 2019, appellants shall either move for voluntary dismissal or show cause why the appeal should not be dismissed for lack of jurisdiction. On April 25, 2019, appellants moved to voluntarily dismiss the appeal without prejudice, and that motion was granted on May 1, 2019. The district court entered final judgment dismissing lead plaintiff’s claims on May 8, 2019. The lead plaintiff subsequently filed a notice of appeal on June 6, 2019.

On May 30, 2018, certain of our current and former directors and officers were named as defendants in a putative shareholder derivative lawsuit filed in the United States District Court for the Northern District of California, captioned Moulton v. Chen et al., 3:18-cv-03223-VC (the “Derivative Action”). We were also named as a nominal defendant. The complaint in the Derivative Action alleges breaches of fiduciary duties and other related claims in connection with purported misrepresentations related to internal controls and revenues and failures to ensure that financial statements were made in accordance with generally accepted accounting principles. Plaintiff seeks unspecified damages allegedly sustained by the Company, restitution, and other relief. On July 11, 2018 the Derivative Action was stayed until a motion to dismiss in the Securities Action is granted with prejudice or denied in whole or in part. Following dismissal of the Securities Action, Plaintiff voluntarily dismissed his claims on June 7, 2019.

Investigations

The U.S. Securities and Exchange Commission (“SEC”) is conducting a private investigation into possible violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), and 13(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 13a-14, 13a-15, and 13b2-1 thereunder.  The Company is cooperating with the SEC regarding this investigation. The Company is unable to predict the duration, scope or outcome of the investigation, but an adverse outcome is reasonably possible. In such an event, the Company could be required to pay fines and sanctions and/or implement additional remedial measures.  However, the Company is not able to estimate the likelihood or a reasonable range of possible loss.

Lease Commitments

We lease various operating spaces in the United States, Asia and Europe under non-cancelable operating lease arrangements that expire on various dates through July 2027. These arrangements require us to pay certain operating expenses, such as taxes, repairs and insurance, and contain renewal and escalation clauses.


14


Guarantees and Indemnifications

In the normal course of business, we provide indemnifications to customers against claims of intellectual property infringement made by third parties arising from the use of our products. Other guarantees or indemnification arrangements include guarantees of product and service performance, and standby letters of credit for lease facilities and corporate credit cards. We have not recorded a liability related to these indemnification and guarantee provisions and our guarantees and indemnification arrangements have not had any significant impact on our consolidated financial statements to date.


7. Equity Incentive Plans and Stock-Based Compensation

Equity Incentive Plans

2014 Equity Incentive Plan

The 2014 Equity Incentive Plan (the “2014 Plan”) provides for the granting of stock options, restricted stock awards, restricted stock units (“RSUs”), performance-based RSUs (“PSUs”), stock appreciation rights, performance units and performance shares to our employees, consultants and members of our board of directors. In June 2015, our board of directors adopted and our stockholders approved an amendment and restatement of the 2014 Plan, which increased the number of shares available for issuance under the 2014 Plan by the number of shares granted under the 2008 Stock Plan (the “2008 Plan”) that were or may in the future be canceled or otherwise forfeited or repurchased after March 20, 2014.

The shares authorized for the 2014 Plan increase annually by the least of (i) 8,000,000 shares, (ii) 5% of the outstanding shares of common stock on the last day of our immediately preceding fiscal year, or (iii) such other amount as determined by our Board of Directors. Accordingly, effective January 1, 2019, the number of shares in the 2014 Plan increased by 3,715,060 shares, representing 5% of the prior year end’s common stock outstanding. As of June 30, 2019, we had 11,983,811 shares available for future grant under the 2014 Plan.

To date, we have granted stock options, RSUs and PSUs under the 2014 Plan. Stock options expire no more than 10 years from the grant date and generally vest over four years. In the case of an incentive stock option granted to an employee who, at the time of grant, owns stock representing more than 10% of the total combined voting power of all classes of stock, the per share exercise price will be no less than 110% of the fair market value per share on the date of grant, and the incentive stock option will expire no later than five years from the date of grant. For incentive stock options granted to any other employees and nonstatutory stock options granted to employees, consultants, or members of our board of directors, the per share exercise price will be no less than 100% of the fair market value per share on the date of grant. RSUs and PSUs generally vest over one to four years.

2014 Employee Stock Purchase Plan

The 2014 Employee Stock Purchase Plan (the “2014 Purchase Plan”) was suspended effective March 16, 2018 due to the delay of the Form 10-K filing for the year ended December 31, 2017. In October 2018, the Board approved amending the 2014 Purchase Plan (the “Amended 2014 Purchase Plan”) in order to, among other things, reduce the maximum contribution participants can make under the plan from 15% to 10% of eligible compensation. The Amended 2014 Purchase Plan also reflects revised offering periods, which were changed from 24 months to six months in duration and that begin on or about December 1 and June 1 each year, starting in December 2018. The Amended 2014 Purchase Plan permits eligible employees to purchase shares of our common stock through payroll deductions with up to 10% of their gross eligible earnings subject to certain Internal Revenue Code limitations. The purchase price of the shares is 85% of the lower of the fair market value of our common stock on the first day of a six-month offering period or the relevant purchase date. In addition, no participant may purchase more than 1,500 shares of common stock in each purchase period.

Employees purchased 322,903 shares at an average price of $5.18 during the six months ended June 30, 2019. The intrinsic value of shares purchased during the six months ended June 30, 2019 was $0.3 million. The intrinsic value is calculated as the difference between the market value on the date of purchase and the purchase price of the shares. As of June 30, 2019, the Company had 2,742,279 shares available for future issuance under the Amended 2014 Purchase Plan.

15



Stock-Based Compensation

A summary of our stock-based compensation expense is as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Stock-based compensation by type of award:
 
 
 
 
 
 
 
Stock options
$
157

 
$
302

 
$
341

 
$
631

Stock awards
4,522

 
2,270

 
7,996

 
4,935

Employee stock purchase rights (1)
249

 

 
487

 
5,157

 
$
4,928

 
$
2,572

 
$
8,824

 
$
10,723

 
 
 
 
 
 
 
 
Stock-based compensation by category of expense:
 
 
 
 
 
 
 
Cost of revenue
$
458

 
$
197

 
$
782

 
$
1,090

Sales and marketing
1,860

 
701

 
3,181

 
3,466

Research and development
1,593

 
1,003

 
2,924

 
4,385

General and administrative
1,017

 
671

 
1,937

 
1,782

 
$
4,928

 
$
2,572

 
$
8,824

 
$
10,723

 
 
 
 
 
 
 
 
 
(1)
Amount for the six months ended June 30, 2018 includes $4.1 million of accelerated stock-based compensation expense. In March 2018, as a result of a suspension of the 2014 Purchase Plan due to our non-timely filing status, all unrecognized stock-based compensation expense related to the 2014 Purchase Plan was accelerated and recognized within the condensed consolidated statement of operations.

As of June 30, 2019, the Company had $30.8 million of unrecognized stock-based compensation expense related to unvested stock-based awards which will be recognized over a weighted-average period of 2.5 years.

Stock Options

The following tables summarize our stock option activities and related information:
 
Number of Shares
(thousands)
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Term
(years)
 
Aggregate Intrinsic Value
(thousands)
Outstanding as of December 31, 2018
4,674

 
$
5.19

 
 
 
 
Granted

 
$

 
 
 
 

Exercised
(496
)
 
$
3.20

 
 
 
 
Canceled
(93
)
 
$
9.03

 
 
 
 

Outstanding as of June 30, 2019
4,085

 
$
5.34

 
4.86
 
$
7,802

Vested and exercisable as of June 30, 2019
3,688

 
$
5.22

 
4.47
 
$
7,517

 
 
 
 
 
 
 
 

As of June 30, 2019, the aggregate intrinsic value represents the excess of the closing price of our common stock of $6.82 over the exercise price of the outstanding in-the-money options.

The intrinsic value of options exercised was $1.8 million and $1.1 million during the six months ended June 30, 2019 and 2018, respectively.


16


Stock Awards

We have granted RSUs to our employees, consultants and members of our board of directors, and PSUs and market performance-based restricted stock units (“MSUs”) to certain executives.

In February 2016, we granted 547,000 PSUs with certain financial and operational targets. Actual performance, as measured at the time and prior to the restatement of the 2016 financial statements, resulted in participants achieving 80% of target. Given the PSUs did not contain explicit or implicit claw back rights, there was no change to stock-based compensation expense for the impact of the previously disclosed restatement of the 2016 consolidated financial statements. As of June 30, 2019, 253,203 shares had vested, 200,297 shares were forfeited, and the remaining shares 93,500 will vest (as to 80%) in February 2020 subject to continued service vesting requirements.
 
In October 2018, we granted 464,888 PSUs with certain financial targets. These PSUs will become eligible to vest at 75% on the second month following achievement of certain performance targets by December 31, 2020, with the remaining 25% of the PSUs to vest on the first anniversary of the initial vesting date, subject to service condition vesting requirements. None of these PSUs were vested as of June 30, 2019.

In April 2019, we granted 346,453 PSUs with certain financial targets. These PSUs will become eligible to vest at 75% on the second month following achievement of certain performance targets by December 31, 2021, with the remaining 25% of the PSUs to vest on the first anniversary of the initial vesting date, subject to service condition vesting requirements. None of these PSUs were vested as of June 30, 2019.

The following table summarizes our stock award activities and related information:
 
Number of Shares
(thousands)
 
Weighted-Average Grant Date Fair Value
 
Weighted-Average Remaining Vesting Term
(years)
Nonvested as of December 31, 2018
5,974

 
$
6.51

 
 
Granted
1,245

 
$
6.78

 
 
Released
(962
)
 
$
6.73

 
 
Canceled
(580
)
 
$
6.41

 
 
Nonvested as of June 30, 2019
5,677

 
$
6.54

 
1.61
 
 
 
 
 
 

The aggregate fair value of stock awards released as of the respective vesting dates was $6.4 million and $4.3 million for the six months ended June 30, 2019 and 2018, respectively.


8. Net Loss Per Share

Basic net loss per share is computed using the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed using the weighted average number of common shares outstanding for the period plus potential dilutive common shares, including stock options, RSUs and employee stock purchase rights, unless the potential common shares are anti-dilutive. Since we had net losses in the three and six months ended June 30, 2019 and 2018, none of the potential dilutive common shares were included in the computation of diluted shares for these periods, as inclusion of such shares would have been anti-dilutive.


17


The following table presents common shares related to potentially dilutive shares excluded from the calculation of diluted net loss per share as their effect would have been anti-dilutive (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Stock options, restricted stock units and employee stock purchase rights
9,600

 
9,209

 
9,797

 
9,826




18


9. Income Taxes

We recorded income tax expense of $0.1 million and $0.4 million for the three months ended June 30, 2019 and 2018, respectively, and $0.6 million for each of the six months ended June 30, 2019 and 2018, which primarily consisted of foreign taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities in the financial statements and their respective tax bases using tax rates expected to be in effect during the years in which the basis differences reverse.

We believe it is more likely than not that our federal and state net deferred tax assets will not be fully realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of our deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. A valuation allowance is recorded for loss carryforwards and other deferred tax assets where it is more likely than not that such deferred tax assets will not be realized. Accordingly, we continue to maintain a valuation allowance against all of our U.S. and certain foreign net deferred tax assets as of June 30, 2019. We will continue to maintain a full valuation allowance against our net federal, state and certain foreign deferred tax assets until there is sufficient evidence to support recoverability of our deferred tax assets.

We had $4.0 million of unrecognized tax benefits as of June 30, 2019 and December 31, 2018. We do not anticipate a material change to our unrecognized tax benefits over the next twelve months. Unrecognized tax benefits may change during the next twelve months for items that arise in the ordinary course of business.

Accrued interest and penalties related to unrecognized tax benefits are recognized as part of our income tax provision in our condensed consolidated statements of operations.

We are subject to taxation in the United States, various states, and several foreign jurisdictions. Because we have net operating loss and credit carryforwards, there are open statutes of limitations in which federal, state and foreign taxing authorities may examine our tax returns for all years from 2005 through the current period. We are not currently under examination by any taxing authorities.

10. Geographic Information

The following table depicts the disaggregation of revenue by geographic region based on the ship to location of our customers and is consistent with how we evaluate our financial performance (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
   United States
$
15,278

 
$
30,443

 
$
33,378

 
$
51,121

   Japan
14,894

 
11,868

 
28,046

 
24,948

   Asia Pacific, excluding Japan
9,213

 
10,667

 
17,989

 
18,105

   EMEA
6,570

 
5,420

 
13,799

 
11,919

   Other
3,234

 
2,315

 
6,267

 
3,803

   Total revenue
$
49,189

 
$
60,713

 
$
99,479

 
$
109,896


The following table is a summary of our long-lived assets which include property and equipment, net and operating lease ROU assets based on the physical location of the assets (in thousands):
 
June 30,
2019
 
December 31,
2018
United States
$
6,843

 
$
5,525

Japan
3,195

 
1,108

Other
2,182

 
629

Total
$
12,220

 
$
7,262

 
 
 
 



19


11. Revenue

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), as subsequently amended, which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition. This ASU requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the capitalization of incremental customer acquisition costs and amortization of these costs over the contract period or estimated customer life which resulted in the recognition of a deferred commission asset on our consolidated balance sheet.

The Company adopted ASU 2014-09 and its related amendments (collectively “ASC 606”) on January 1, 2018 using the modified retrospective method. The adoption of the new standard resulted in changes to the Company’s accounting policies for revenue recognition, commissions and deferred commissions. As a result of the adoption, the Company recorded a reduction to opening accumulated deficit of $12.4 million as of January 1, 2018 due to the cumulative impact of adopting the new standard as follows:

A decrease in total deferred revenue of $4.0 million primarily due to the removal of the current limitation on contingent revenue that would have accelerated revenue recognition for certain of our historical revenue contracts; and

Recognition of a deferred commissions asset of $8.4 million due to the requirement under the new standard to recognize incremental customer acquisition costs in our condensed consolidated statement of operations as the related performance obligations are met as compared to the previous recognition to expense as incurred.

For additional information and disclosure of the impact of adopting the new standard, see Note 2 to the Company’s Consolidated Financial Statements included in Part II, Item 8 of the 2018 Annual Report.

Contract Balances
The following table reflects contract balances with customers (in thousands):
 
June 30, 2019
 
December 31, 2018
Accounts receivable, net
$
45,251

 
$
53,972

Deferred revenue, current
60,571

 
63,874

Deferred revenue, non-current
37,220

 
34,092


We receive payments from customers based upon billing cycles. Invoice payment terms are usually ranging from 30 to 90 days.

Accounts receivable are recorded when the right to consideration becomes unconditional.

Contract assets include amounts related to our contractual right to consideration for performance obligations not yet billed and are included in prepaid and other current assets in the condensed consolidated balance sheets. The amount is immaterial as of June 30, 2019.

Deferred revenue primarily consists of amounts that have been invoiced but not yet been recognized as revenue and consists of performance obligations pertaining to support and subscription services. During the three months ended June 30, 2019 and 2018, we recognized revenue of $21.0 million and $17.2 million, respectively, and during the six months ended June 30, 2019 and 2018, we recognized revenue of $38.7 million and $36.7 million, respectively, related to deferred revenues at the beginning of the respective periods.

Deferred Contract Acquisition Costs
In connection with the adoption of ASC 340-40, we capitalize certain contract acquisition costs consisting of incremental sales commissions incurred to obtain customer contracts. Deferred commissions related to product revenues are recognized upon transfer of control to customers. Deferred commissions related to services revenue are recognized as the related performance obligations are met. Deferred commissions that will be recognized during the succeeding 12-month period

20


are recorded as prepaid expenses and other current assets, and the remaining portion is recorded as other non-current assets. Amortization of deferred commissions is included in sales and marketing expense.
Deferred contract acquisition costs were $8.5 million as of June 30, 2019, and the related amortization amount was $1.9 million and $1.3 million for the three months ended June 30, 2019 and 2018, respectively, and $3.9 million and $3.0 million for the six months ended June 30, 2019 and 2018, respectively.

We had no impairment loss in relation to the costs capitalized and no asset impairment charges related to contract assets.

Remaining Performance Obligations
Remaining performance obligations represent contracted revenues that are non-cancellable and have not yet been recognized due to unsatisfied or partially satisfied performance obligations, which include deferred revenues and amounts that will be invoiced and recognized as revenues in future periods.

We expect to recognize revenue on the remaining performance obligations as follows (in thousands):
 
 
June 30, 2019
 
 
 
Within 1 year
$
60,571

Next 2 to 3 years
29,678

Thereafter
7,542

 
Total
$
97,791

 
 
 



21


12. Subsequent Events

On July 26, 2019, the Company entered into a letter agreement with VIEX Capital Advisors, LLC (“VIEX”), certain entities affiliated with VIEX, and Eric Singer. Pursuant to the letter agreement, among other things, a) the Company increased the size of the Company’s board of directors (the “Board”) to six directors and appointed Mr. Singer to serve as a director, effective July 26, 2019; b) Mr. Singer was appointed to the Board’s Compensation, Nominating and Corporate Governance and Strategy Committees; c) VIEX and certain of its affiliated entities agreed to customary “standstill” provisions that will expire at 11:59 p.m., Pacific time, on the day that is 15 business days prior to the deadline for the submission of stockholder nominations of directors and business proposals for the Company’s 2020 Annual Meeting of Stockholders (the “Restricted Period”); and d) after August 25, 2019, and prior to the expiration of the Restricted Period, VIEX has the right to recommend one independent director for appointment to the Board, and the Board must take appropriate action to appoint that person.

On July 30, 2019, the Company announced the planned retirement of Lee Chen, the Company’s President and Chief Executive Officer. The Board has formed a search committee and retained an executive search firm for the purpose of recruiting and exploring potential chief executive officer candidates. Upon the appointment of a successor, Mr. Chen will resign as president and chief executive officer.


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations (“MD&A”) should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this document. In addition to historical information, the MD&A contains forward-looking statements. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan” “expect,” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements.

These forward-looking statements include, but are not limited to, statements concerning the following:
our ability to provide customers with improved benefits relating to their applications;
our ability to maintain an adequate rate of revenue growth and other factors contributing to such growth;
our ability to successfully anticipate market needs and opportunities;
our business plan and our ability to effectively manage our growth;
our ability to timely file financial, periodic and current reports required by the Exchange Act;
loss or delay of expected purchases by our largest end-customers;
our ability to further penetrate our existing customer base;
our ability to displace existing products in established markets;
continued growth in markets relating to network security;
our ability to timely and effectively scale and adapt our existing technology;
our ability to innovate new products and bring them to market in a timely manner;
our ability to expand internationally and any related impact on profitability;
the effects of increased competition in our market and our ability to compete effectively;
the effects of seasonal trends on our results of operations;
our expectations concerning relationships with third parties;
the attraction, retention and growth of qualified employees and key personnel;
our ability to achieve or maintain profitability while continuing to invest in our sales, marketing and research and development teams;
our expectations regarding our future expenses;
our exploration of strategic alternatives;
variations in product mix or geographic locations of our sales;
fluctuations in currency exchange rates;
tariffs affecting us;

22


increased cost requirements of being a public company and future sales of substantial amounts of our common stock in the public markets;
the cost and potential outcomes of litigation;
our ability to maintain, protect, and enhance our brand and intellectual property;
future acquisitions of or investments in complementary companies, products, services or technologies;
our ability to effectively integrate operations of entities we have acquired or may acquire; and
actions relating to the remediation of identified material weaknesses.

These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations, except as required by law.

Our investor relations website is located at https://investors.a10networks.com. We use our investor relations website, our company blog (https://www.a10networks.com/blog) and our corporate Twitter account (https://twitter.com/A10Networks) to post important information for investors, including news releases, analyst presentations, and supplemental financial information, and as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Accordingly, investors should monitor our investor relations website, our company blog and our corporate Twitter account, in addition to following press releases, SEC filings and public conference calls and webcasts. We also make available, free of charge, on our investor relations website under “SEC Filings,” our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports as soon as reasonably practicable after electronically filing or furnishing those reports to the SEC.

Overview

We are a leading provider of secure application solutions and services that enable a new generation of intelligently connected companies with the ability to continuously improve cyber protection and digital responsiveness across dynamic Information Technology (“IT”) and network infrastructures. Our portfolio of software and hardware solutions combines industry-leading performance and scale with advanced intelligent automation, machine learning, data driven analytics, and threat intelligence to ensure security and availability of customer applications across their multi-cloud and mobile infrastructure networks, including on-premise, private and public clouds. As the cyber threat landscape intensifies and network architectures evolve, we are committed to providing customers with greater connected intelligence to improve the security, visibility, automation, availability, flexibility, management and performance of their applications. Our customers include leading cloud providers, web-scale businesses, service providers, government organizations and enterprises.

Our product portfolio seeks to address many of the aforementioned challenges and solution requirements. The portfolio consists of six secure application solutions: Thunder Application Delivery Controller (“ADC”), Lightning Application Delivery Controller (“Lightning ADC”), Thunder Carrier Grade Networking (“CGN”), Thunder Threat Protection System (“TPS”), Thunder SSL Insight (“SSLi”) and Thunder Convergent Firewall (“CFW”); and two intelligent management and automation tools: Harmony Controller and aGalaxy TPS. Our products are offered in a variety of form factors and payment models, including physical appliances and perpetual and subscription-based software licenses, as well as pay-as-you-go licensing models and FlexPool, a flexible consumption-based software model.


23


We derive revenue from sales of products and related support services. Products revenue is generated primarily by sales of hardware appliances with perpetual licenses to our embedded software solutions. We also derive revenue from licenses to, or subscription services for, software-only versions of our solutions. We generate services revenue primarily from sales of maintenance and support contracts. Our customers predominantly purchase maintenance and support in conjunction with purchases of our products. In addition, we also derive revenue from the sale of professional services.

We sell our products globally to service providers, enterprises and web giants that depend on data center applications and networks to generate revenue and manage operations efficiently. Our end-customers operate in a variety of industries, including telecommunications, technology, industrial, retail, financial, gaming, education and government. Since inception, our customer base has grown rapidly. As of June 30, 2019, we had sold products to approximately 6,500 end customers across 116 countries.

We sell substantially all of our solutions through our high-touch sales organization as well as distribution channel partners, including distributors, value-added resellers and system integrators, and fulfill nearly all orders globally through such partners. We believe this sales approach allows us to obtain the benefits of channel distribution, such as expanding our market coverage, while still maintaining face-to-face relationships with our end-customers. We outsource the manufacturing of our hardware products to original design manufacturers. We perform quality assurance and testing at our San Jose, Taiwan and Japan distribution centers, as well as at our manufacturers’ locations.

During the first half of 201934% of our total revenue was generated from the United States, 28% from Japan and 38% from other geographical regions. During the first half of 201847% of our total revenue was generated from the United States, 23% from Japan and 30% from other geographical regions. Our enterprise customers accounted for 45% and 40% of our total revenue during the first half of 2019 and 2018, respectively. Our service provider customers accounted for 43% and 42% of our total revenue during the first half of 2019 and 2018, respectively. Our web giant customers accounted for 12% and 18% of our total revenue during the first half of 2019 and 2018, respectively.

As a result of the nature of our target market and the current stage of our development, a substantial portion of our revenue comes from a limited number of large customers, including service providers and web giants, in any period. Purchases from our ten largest end-customers accounted for 33% and 38% of our total revenue for the first half of 2019 and 2018, respectively. Sales to these large end-customers have typically been characterized by large but irregular purchases with long sales cycles. The timing of these purchases and the delivery of the purchased products are difficult to predict. Consequently, any acceleration or delay in anticipated product purchases by or deliveries to our largest customers could materially impact our revenue and operating results in any quarterly period. This may cause our quarterly revenue and operating results to fluctuate from quarter to quarter and make them difficult to predict.

As of June 30, 2019, we had $36.8 million of cash and cash equivalents and $82.5 million of marketable securities. Cash used in operating activities was $10.6 million in the first half of 2019 compared to $2.6 million cash used in operating activities in the same period of last year.

We intend to continue to invest for long-term growth. We have invested and expect to continue to invest in our product development efforts to deliver new products and additional features in our current products to address customer needs. In addition, we may expand our global sales and marketing organizations, expand our distribution channel partner programs and increase awareness of our solutions on a global basis. Our investments in growth in these areas may affect our short-term profitability.

Recent Developments

As previously disclosed, on July 26, 2019, we entered into a letter agreement with VIEX Capital Advisors, LLC (“VIEX”), certain entities affiliated with VIEX, and Eric Singer. Pursuant to the letter agreement, we increased the size of the board of directors (the “Board”) to six directors and appointed Mr. Singer to serve as a director, effective July 26, 2019. Mr. Singer was also appointed to the Board’s Compensation, Nominating and Corporate Governance and Strategy Committees. VIEX and certain of its affiliated entities have agreed to customary “standstill” provisions that will expire at 11:59 p.m., Pacific time, on the day that is 15 business days prior to the deadline for the submission of stockholder nominations of directors and business proposals for our 2020 Annual Meeting of Stockholders.

On July 30, 2019, we announced the planned retirement of Lee Chen, our president and chief executive officer. The Board has formed a search committee and retained an executive search firm for the purpose of recruiting and exploring

24


potential chief executive officer candidates. Upon the appointment of a successor, Mr. Chen will resign as president and chief executive officer.

On July 30, 2019, we also announced the formation of a Strategy Committee of the Board consisting of Mr. Singer and existing directors Peter Chung and Tor Braham. The Strategy Committee is tasked and empowered with overseeing and executing specific activities directed to increasing shareholder value. In furtherance of these activities, we have retained Bank of America Merrill Lynch to advise us and the Board on strategic matters, including a near term exploration of a potential sale or change of control transaction. No assurance can be given that such a transaction will be consummated in the near term or at all.



25


Results of Operations

A summary of our condensed consolidated statements of operations for the three and six months ended June 30, 2019 and 2018 is as follows (dollars in thousands):

 
Three Months Ended June 30,
 
 
 
 
 
2019
 
2018
 
Increase (Decrease)
 
Amount
 
Percent of Total Revenue
 
Amount
 
Percent of Total Revenue
 
Amount
 
Percent
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Products
$
26,785

 
54.5
 %
 
$
39,224

 
64.6
 %
 
$
(12,439
)
 
(31.7
)%
Services
22,404

 
45.5

 
21,489

 
35.4

 
915

 
4.3

Total revenue
49,189

 
100.0

 
60,713

 
100.0

 
(11,524
)
 
(19.0
)
Cost of revenue:
 
 
 
 
 
 
 
 
 
 
 
Products
6,891

 
14.0

 
9,080

 
14.9

 
(2,189
)
 
(24.1
)
Services
4,380

 
8.9

 
4,107

 
6.8

 
273

 
6.6

Total cost of revenue
11,271

 
22.9

 
13,187

 
21.7

 
(1,916
)
 
(14.5
)
Gross profit
37,918

 
77.1

 
47,526

 
78.3

 
(9,608
)
 
(20.2
)
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
23,626

 
48.0

 
25,788

 
42.6

 
(2,162
)
 
(8.4
)
Research and development
14,617

 
29.7

 
15,572

 
25.6

 
(955
)
 
(6.1
)
General and administrative
6,099

 
12.4

 
9,858

 
16.2

 
(3,759
)
 
(38.1
)
Total operating expenses
44,342

 
90.1

 
51,218

 
84.4

 
(6,876
)
 
(13.4
)
Loss from operations
(6,424
)
 
(13.1
)
 
(3,692
)
 
(6.1
)
 
(2,732
)
 
74.0

Non-operating income (expense):
 
 
 
 
 
 
 
 
 
 
 
Interest expense
(37
)
 
(0.1
)
 
(32
)
 
(0.1
)
 
(5
)
 
15.6

Interest and other income (expense), net
776

 
1.6

 
(429
)
 
(0.6
)
 
1,205

 
280.9

Total non-operating income (expense), net
739

 
1.5

 
(461
)
 
(0.7
)
 
1,200

 
260.3

Loss before income taxes
(5,685
)
 
(11.6
)
 
(4,153
)
 
(6.8
)
 
(1,532
)
 
36.9

Provision for income taxes
86

 
0.2

 
379

 
0.7

 
(293
)
 
(77.3
)
Net loss
$
(5,771
)
 
(11.7
)%
 
$
(4,532
)
 
(7.5
)%
 
$
(1,239
)
 
27.3
 %