Company Quick10K Filing
Quick10K
A10 Networks
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$6.40 76 $484
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 2019-04-25 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
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BJ BJ's 3,730
HOME Homeland Energy Solutions 1,490
UEIC Universal Electronics 607
NEXT Nextdecade 585
CLXT Calyxt 523
TTS Tile Shop Holdings 239
ALCO Alico 201
YOGA Yogaworks 15
AHL Aspen Insurance Holdings 0
ATEN 2019-03-31
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-10.1 exhibit1012300orchardsub.htm
EX-31.1 a3312019exhibit311.htm
EX-31.2 a3312019exhibit312.htm
EX-32.1 a3312019exhibit321.htm
EX-32.2 a3312019exhibit322.htm

A10 Networks Earnings 2019-03-31

ATEN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a331201910-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 March 31, 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)
 
 

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
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



As of April 30, 2019, the number of outstanding shares of the registrant’s common stock, par value $0.00001 per share, was 75,634,696.
 



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)

 
March 31,
2019
 
December 31,
2018
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
33,967

 
$
40,621

Marketable securities
88,784

 
87,754

Accounts receivable, net of allowances of $219 and $319, respectively
44,802

 
53,972

Inventory
20,952

 
17,930

Prepaid expenses and other current assets
17,113

 
14,662

Total current assets
205,618

 
214,939

Property and equipment, net
7,676

 
7,262

Goodwill
1,307

 
1,307

Intangible assets
3,387

 
3,748

Other non-current assets
13,989

 
8,620

Total assets
$
231,977

 
$
235,876

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
8,136

 
$
8,202

Accrued liabilities
25,436

 
25,291

Deferred revenue
62,528

 
63,874

Total current liabilities
96,100

 
97,367

Deferred revenue, non-current
36,041

 
34,092

Other non-current liabilities
3,062

 
534

Total liabilities
135,203

 
131,993

Commitments and contingencies (Note 2 and Note 6)

 

Stockholders' equity:
Common stock, $0.00001 par value: 500,000 shares authorized; 75,183 and 74,301 shares issued and outstanding, respectively
1

 
1

Additional paid-in-capital
381,195

 
376,272

Accumulated other comprehensive income (loss)
96

 
(144
)
Accumulated deficit
(284,518
)
 
(272,246
)
Total stockholders' equity
96,774

 
103,883

Total liabilities and stockholders' equity
$
231,977

 
$
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 
 March 31,
 
2019
 
2018
 
 
 

Revenue:
 

 
 

Products
$
28,230

 
$
28,149

Services
22,060

 
21,034

Total revenue
50,290

 
49,183

Cost of revenue:
 

 
 

Products
7,516

 
7,109

Services
4,734

 
4,775

Total cost of revenue
12,250

 
11,884

Gross profit
38,040

 
37,299

Operating expenses:
 

 
 

Sales and marketing
24,483

 
26,904

Research and development
16,166

 
18,797

General and administrative
8,358

 
11,594

Total operating expenses
49,007

 
57,295

Loss from operations
(10,967
)
 
(19,996
)
Non-operating income (expense):
 

 
 

Interest expense
(155
)
 
(33
)
Interest and other income (expense), net
(633
)
 
566

Total non-operating income (expense), net
(788
)
 
533

Loss before income taxes
(11,755
)
 
(19,463
)
Provision for income taxes
517

 
207

Net loss
$
(12,272
)
 
$
(19,670
)
Net loss per share:
 

 
 

Basic and diluted
$
(0.16
)
 
$
(0.27
)
Weighted-average shares used in computing net loss per share:
 

 
 

Basic and diluted
74,809

 
72,232

 
 
 
 


 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 March 31,
 
2019
 
2018
Net loss
$
(12,272
)
 
$
(19,670
)
Other comprehensive income (loss), net of tax
 
 
 
Unrealized gain (loss) on marketable securities
240

 
(173
)
Comprehensive loss
$
(12,032
)
 
$
(19,843
)
 
 
 
 

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 March 31,
 
 
 
2019
 
2018
Shares of common stock issued and outstanding
 
 
 
 
Beginning balance
74,301

 
71,692

 
Common stock issued under employee equity incentive plans
882

 
1,015

 
 
Ending balance
75,183

 
72,707

 
 
 
 
 
 
Stockholders' equity
 
 
 
 
Common stock:
 
 
 
 
 
Beginning balance
$
1

 
$
1

 
 
Common stock issued under employee equity incentive plans

 

 
 
Ending balance
1

 
1

 
 
 
 
 
 
 
Additional paid-in capital:
 
 
 
 
 
Beginning balance
376,272

 
355,533

 
 
Common stock issued under employee equity incentive plans
1,027

 
1,269

 
 
Stock-based compensation
3,896

 
8,151

 
 
Ending balance
381,195

 
364,953

 
 
 
 
 
 
 
Accumulated other comprehensive income (loss):
 
 
 
 
 
Beginning balance
(144
)
 
(123
)
 
 
Unrealized gain (loss) on marketable securities, net of tax
240

 
(173
)
 
 
Ending balance
96

 
(296
)
 
 
 
 
 
 
 
Accumulated deficit:
 
 
 
 
 
Beginning balance
(272,246
)
 
(257,025
)
 
 
Cumulative effect adjustment from adoption of ASU 2014-09

 
12,397

 
 
Net loss
(12,272
)
 
(19,670
)
 
 
Ending balance
(284,518
)
 
(264,298
)
 
 
 
 
 
 
Total stockholders' equity
$
96,774

 
$
100,360

 
 
 
 
 
 


See accompanying notes to the condensed consolidated financial statements.


5


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

 
Three Months Ended March 31,
 
2019
 
2018
 
 
 

Cash flows from operating activities:
 

 
 

Net loss
$
(12,272
)
 
$
(19,670
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation and amortization
2,447

 
2,134

Stock-based compensation
3,896

 
8,151

Other non-cash items
(246
)
 
389

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
9,285

 
94

Inventory
(3,325
)
 
827

Prepaid expenses and other assets
(2,409
)
 
(1,687
)
Accounts payable
(492
)
 
(1,202
)
Accrued and other liabilities
(3,616
)
 
3,599

Deferred revenue
603

 
6,995

Other
71

 
18

Net cash used in operating activities
(6,058
)
 
(352
)
Cash flows from investing activities:
 

 
 

Proceeds from sales of marketable securities
8,674

 
10,709

Proceeds from maturities of marketable securities
4,500

 
17,150

Purchases of marketable securities
(13,859
)
 
(27,220
)
Purchases of property and equipment
(936
)
 
(1,133
)
Net cash used in investing activities
(1,621
)
 
(494
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of common stock under employee equity incentive plans
1,027

 
1,269

Other
(2
)
 
(26
)
Net cash provided by financing activities
1,025

 
1,243

Net (decrease) increase in cash and cash equivalents
(6,654
)
 
397

Cash and cash equivalents - beginning of period
40,621

 
46,567

Cash and cash equivalents - end of period
$
33,967

 
$
46,964

Non-cash investing and financing activities:
 

 
 

Inventory transfers to property and equipment
$
303

 
$
561

Purchases of property and equipment included in accounts payable
$
485

 
$
87


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 for the year ended December 31, 2018 on file with the SEC (our “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 our 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, 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 its Annual Report on Form 10-K for the year ended December 31, 2018. 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 three months ended March 31, 2019.

Leases


7


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 March 31,
 
2019
 
2018
Customer A (a distribution channel partner)
13%
 
*
 
* represents less than 10% of total revenue

As of March 31, 2019, two customers accounted for 26% 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.

Recently Adopted Accounting Guidance

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.

8



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.

Recent Accounting Pronouncements Not Yet Effective

There have been no new accounting pronouncements issued by the FASB during the three months ended March 31, 2019, as compared to the recent accounting pronouncements described in Note 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, 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 April 2022. 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 March 31, 2019:
 
 
March 31, 2019
Operating leases
 
Right-of-use assets:
 
 
Other non-current assets
$
5,450

Total right-of-use assets
$
5,450

 
 
 
Lease liabilities:
 
 
Accrued liabilities
$
3,506

 
Other non-current liabilities
2,609

Total operating lease liabilities
$
6,115


The aggregate future lease payments for operating leases as of March 31, 2019 were as follows:

Remainder of 2019
$
2,866

2020
1,960

2021
1,197

2022
312

Total lease payments
6,335

Less: imputed interest
(220
)
Present value of lease liabilities
$
6,115


The components of operating lease costs were as follows:

 
 
Three Months Ended March 31, 2019
 
 
Operating lease costs
$
893

Short-term lease costs
137

Total lease costs
$
1,030

 
 
 


9


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

 
March 31, 2019
 
 
Weighted-average remaining term (years)
2.17

Weighted-average discount rate
3.41
%

Supplemental cash flow information for the Company’s operating leases:
 
 
Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
$
989

 
 
 
Right-of-use assets obtained in exchange for new lease liabilities
$
264


3. Marketable Securities and Fair Value Measurements

Marketable Securities

Marketable securities, classified as available-for-sale, consisted of the following (in thousands):
 
 
March 31, 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
 
$
11,998

 
$
24

 
$

 
$
12,022

 
$
11,000

 
$
7

 
$
(3
)
 
$
11,004

Corporate securities
 
48,217

 
89

 
(33
)
 
48,273

 
46,442

 
11

 
(116
)
 
46,337

U.S. Treasury and agency securities
 
1,748

 

 
(6
)
 
1,742

 
1,748

 

 
(12
)
 
1,736

Commercial paper
 
11,410

 
8

 

 
11,418

 
12,327

 
1

 
(5
)
 
12,323

Asset-backed securities
 
15,315

 
22

 
(8
)
 
15,329

 
16,381

 
5

 
(32
)
 
16,354

Total
 
$
88,688

 
$
143

 
$
(47
)
 
$
88,784

 
$
87,898

 
$
24

 
$
(168
)
 
$
87,754

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

During the three months ended March 31, 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 March 31, 2019 (in thousands):
 
Amortized Cost
 
Fair Value
Less than 1 year
$
57,747

 
$
57,746

Mature in 1 - 3 years
30,941

 
31,038

Total
$
88,688

 
$
88,784

 
 
 
 

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


10


Marketable securities in an unrealized loss position consisted of the following (in thousands):
 
Less Than 12 Months
 
12 Months or More
 
Total
March 31, 2019
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
Corporate securities
$
4,247

 
$
(1
)
 
$
10,365

 
$
(32
)
 
$
14,612

 
$
(33
)
U.S. Treasury and agency securities

 

 
1,742

 
(6
)
 
1,742

 
(6
)
Asset-backed securities
996

 

 
3,616

 
(8
)
 
4,612

 
(8
)
Total
$
5,243

 
$
(1
)
 
$
15,723

 
$
(46
)
 
$
20,966

 
$
(47
)
 
 
 
 
 
 
 
 
 
 
 
 

 
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 three months ended March 31, 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):
 
 
March 31, 2019
 
December 31, 2018
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash
 
$
32,615

 
$

 
$

 
$
32,615

 
$
39,113

 
$

 
$

 
$
39,113

Cash equivalents
 
1,352

 

 

 
1,352

 
1,508

 

 

 
1,508

Certificates of deposit
 

 
12,022

 

 
12,022

 

 
11,004

 

 
11,004

Corporate securities
 

 
48,273

 

 
48,273

 

 
46,337

 

 
46,337

U.S. Treasury and agency securities
 

 
1,742

 

 
1,742

 

 
1,736

 

 
1,736

Commercial paper
 

 
11,418

 

 
11,418

 

 
12,323

 

 
12,323

Asset-backed securities
 

 
15,329

 

 
15,329

 

 
16,354

 

 
16,354

Total
 
$
33,967

 
$
88,784

 
$

 
$
122,751

 
$
40,621

 
$
87,754

 
$

 
$
128,375

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

There were no transfers between Level 1 and Level 2 fair value measurement categories during the three months ended March 31, 2019 and 2018.
4. Condensed Consolidated Financial Statement Details

Inventory

Inventory consisted of the following (in thousands):

11


 
March 31,
2019
 
December 31,
2018
Raw materials
$
8,502

 
$
7,979

Finished goods
12,450

 
9,951

Total inventory
$
20,952

 
$
17,930

 
 
 
 

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):
 
March 31,
2019
 
December 31,
2018
Prepaid expenses
$
6,675

 
$
6,679

Deferred contract acquisition costs
5,711

 
6,564

Other
4,727

 
1,419

       Total prepaid and other current assets
$
17,113

 
$
14,662

 
 
 
 

Property and Equipment, Net

Property and equipment, net, consisted of the following (in thousands):
 
Useful Life
 
March 31,
2019
 
December 31,
2018
 
(in years)
 

Equipment
1-3
 
$
49,230

 
$
49,804

Software
1-3
 
4,108

 
4,088

Furniture and fixtures
1-3
 
967

 
967

Leasehold improvements
2-8
 
3,834

 
3,832

Construction in progress
 
 
692

 
160

Property and equipment, gross
 
 
58,831

 
58,851

Less: accumulated depreciation
 
 
(51,155
)
 
(51,589
)
Property and equipment, net
 
 
$
7,676

 
$
7,262

 
 
 
 
 
 

Depreciation expense on property and equipment was $1.2 million and $1.7 million for the three months ended March 31, 2019 and 2018, respectively.

Intangible Assets

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

 
$
(2,778
)
 
$
2,272

 
$
5,050

 
$
(2,525
)
 
$
2,525

Patents
2,936

 
(1,821
)
 
1,115

 
2,936

 
(1,713
)
 
1,223

Total
$
7,986

 
$
(4,599
)
 
$
3,387

 
$
7,986

 
$
(4,238
)
 
$
3,748

 
 
 
 
 
 
 
 
 
 
 
 

Amortization expense related to purchased intangible assets was $0.4 million for each of the three months ended March 31, 2019 and 2018. Purchased intangible assets will be amortized over a remaining weighted average useful life of 2.4 years.

Future amortization expense for purchased intangible assets as of March 31, 2019 is as follows (in thousands):

12


Fiscal Year
 
 
Remainder of 2019
 
$
1,082

2020
 
1,442

2021
 
863

 
 
$
3,387

 
 
 

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):
 
March 31,
2019
 
December 31,
2018
Accrued compensation and benefits
$
11,605

 
$
15,283

Accrued tax liabilities
5,555

 
4,455

Other
8,276

 
5,553

Total accrued liabilities
$
25,436

 
$
25,291

 
 
 
 

Deferred Revenue

Deferred revenue consisted of the following (in thousands):
 
March 31,
2019
 
December 31,
2018
Deferred revenue:
 
 
 
Products
$
5,529

 
$
5,216

Services
93,040

 
92,750

Total deferred revenue
98,569

 
97,966

Less: current portion
(62,528
)
 
(63,874
)
Non-current portion
$
36,041

 
$
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 March 31, 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. Prior to moving to voluntarily dismiss the appeal, the lead plaintiff requested entry of final judgment in the district court. On April 30, 2019, the district court ordered a response to that request by May 14, 2019, with a reply by lead plaintiff due by May 21, 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. Defendants are not required to move or otherwise respond to the current complaint.

On October 24, 2018, the Company was sued in the Federal District Court for the Northern District of California by FireNet Technologies, LLC, which we believe is a non-practicing patent holding company. The complaint alleged infringement of certain patents purportedly owned by the plaintiff. In January 2019, we entered into a settlement agreement whereby we obtained a fully-paid up license, and the case was dismissed with prejudice on February 4, 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.


14


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 April 2022. These arrangements require us to pay certain operating expenses, such as taxes, repairs and insurance, and contain renewal and escalation clauses.

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 March 31, 2019, we had 12,613,705 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. As of March 31, 2019, the Company had 3,065,182 shares available for future issuance under the Amended 2014 Purchase Plan.


15


During the three months ended March 31, 2019, there was no stock purchased by employees under the Amended 2014 Purchase Plan.

Stock-Based Compensation

A summary of our stock-based compensation expense is as follows (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Stock-based compensation by type of award:
 
 
 
Stock options
$
184

 
$
329

Stock awards
3,474

 
2,665

Employee stock purchase rights (1)
238

 
5,157

 
$
3,896

 
$
8,151

 
 
 
 
Stock-based compensation by category of expense:
 
 
 
Cost of revenue
$
324

 
$
893

Sales and marketing
1,321

 
2,765

Research and development
1,331

 
3,382

General and administrative
920

 
1,111

 
$
3,896

 
$
8,151

 
 
 
 
 
(1)
Amount for the three months ended March 31, 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 March 31, 2019, the Company had $28.7 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
(305
)
 
$
3.36

 
 
 
 
Canceled
(47
)
 
$
8.10

 
 
 
 

Outstanding as of March 31, 2019
4,322

 
$
5.28

 
4.9
 
$
9,498

Vested and exercisable as of March 31, 2019
3,855

 
$
5.14

 
4.4
 
$
9,061

 
 
 
 
 
 
 
 

As of March 31, 2019, the aggregate intrinsic value represents the excess of the closing price of our common stock of $7.09 over the exercise price of the outstanding in-the-money options.

The intrinsic value of options exercised was $1.1 million during each of the three months ended March 31, 2019 and 2018.


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 2014 and 2015, we granted 540,000 MSUs and 40,000 MSUs, respectively, to certain executives. These MSUs will vest if the closing price of our common stock remains above certain predetermined target prices for 20 consecutive trading days within a 4-year period following the grant date, subject to continued service by the award holder. As of March 31, 2019, none of these MSUs were vested and all of the MSUs granted in 2014 were expired.

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 March 31, 2019, 253,203 shares had vested, 200,297 shares were forfeited, and the remaining shares will vest (as to 80%) in February 2020 subject to continued service vesting requirements.
 
In October 2016, we granted 60,641 PSUs with certain financial and operational targets. To the extent they become eligible to vest upon achievement of the performance targets, these PSUs additionally are subject to service condition vesting requirements with scheduled vesting dates of March 2017 through June 2018. As of March 31, 2019, 30,320 shares were vested and 30,321 shares were forfeited.

In October 2018, we granted 464,888 PSUs with certain financial targets. These PSUs will become eligible to vest at 75% upon the achievement of the performance targets by December 31, 2020, and are subject to service condition vesting requirements. The remaining 25% of these PSUs will become eligible to vest on the first anniversary of the initial vesting date. None of these PSUs were vested as of March 31, 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
248

 
$
6.87

 
 
Released
(577
)
 
$
6.30

 
 
Canceled
(259
)
 
$
6.72

 
 
Nonvested as of March 31, 2019
5,386

 
$
6.54

 
1.5
 
 
 
 
 
 

The aggregate fair value of stock awards released as of the respective vesting dates was $3.8 million and $4.3 million for the three months ended March 31, 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 months ended March 31, 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 March 31,
 
2019
 
2018
Stock options, restricted stock units and employee stock purchase rights
9,997

 
10,431


9. Income Taxes

We recorded income tax expense of $0.5 million and $0.2 million for the three months ended March 31, 2019 and 2018, respectively, 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 March 31, 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 $4.2 million of unrecognized tax benefits as of March 31, 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 March 31,
 
2019
 
2018
United States
$
18,100

 
$
20,678

Japan
13,152

 
13,080

Asia Pacific, excluding Japan
8,776

 
7,438

EMEA
7,229

 
6,499

Other
3,033

 
1,488

 
$
50,290

 
$
49,183

 
 
 
 


18


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):
 
March 31,
2019
 
December 31,
2018
United States
$
7,652

 
$
5,525

Japan
3,488

 
1,108

Other
1,986

 
629

Total
$
13,126

 
$
7,262

 
 
 
 


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 our Annual Report on Form 10-K for the year ended December 31, 2018.

Contract Balances
The following table reflects contract balances with customers (in thousands):
 
March 31, 2019
 
December 31, 2018
Accounts receivable, net
$
44,802

 
$
53,972

Deferred revenue, current
62,528

 
63,874

Deferred revenue, non-current
36,041

 
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 March 31, 2019.


19


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 March 31, 2019 and 2018, we recognized revenue of $23.7 million and $19.5 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 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 $9.0 million as of March 31, 2019, and the related amortization amount was $2.0 million and $1.7 million for the three months ended March 31, 2019 and March 31, 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):
 
 
March 31, 2019
Within 1 year
 
$
62,528

Next 2 to 3 years
 
29,469

Thereafter
 
6,572

Total
 
$
98,569

 
 
 


20


12. Subsequent Event
Lease of 2300 Orchard Parkway

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 Sublease is conditioned upon receipt of consent to the Sublease from the landlord of the Premises, Han’s Holdings 2300 Orchard (the “Landlord”).

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 is evaluating the accounting for the new sublease arrangement under ASC 842.


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;
variations in product mix or geographic locations of our sales;
fluctuations in currency exchange rates;
tariffs affecting us;
increased cost requirements of being a public company and future sales of substantial amounts of our common stock in the public markets;

21


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 Web site is located at https://investors.a10networks.com. We intend to use our investor relations Web site as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Accordingly, investors should monitor this portion of our Web site, 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 Web site 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.

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.

22



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 March 31, 2019, we had sold products to approximately 6,300 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 three months of 201936% of our total revenue was generated from the United States, 26% from Japan and 38% from other geographical regions. During the first three months of 201842% of our total revenue was generated from the United States, 27% from Japan and 31% from other geographical regions. Our enterprise customers accounted for 46% and 44% of our total revenue during the first three months of 2019 and 2018, respectively. Our service provider customers accounted for 47% and 42% of our total revenue during the first three months of 2019 and 2018, respectively. Our web giant customers accounted for 7% and 14% of our total revenue during the first three months 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 36% of our total revenue for the first three months 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 March 31, 2019, we had $34.0 million of cash and cash equivalents and $88.8 million of marketable securities. Cash used in operating activities was $6.1 million in the first three months of 2019 compared to $0.4 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.



23


Results of Operations

A summary of our condensed consolidated statements of operations for the three months ended March 31, 2019 and 2018 is as follows (dollars in thousands):

 
Three Months Ended March 31,
 
 
 
 
 
2019
 
2018
 
Increase (Decrease)
 
Amount
 
Percent of Total Revenue
 
Amount
 
Percent of Total Revenue
 
Amount
 
Percent
Revenue:
 

 
 
 
 

 
 
 
 
 
 
Products
$
28,230

 
56.1
 %
 
$
28,149

 
57.2
 %
 
$
81

 
0.3
 %
Services
22,060

 
43.9

 
21,034

 
42.8

 
1,026

 
4.9

Total revenue
50,290

 
100.0

 
49,183

 
100.0

 
1,107

 
2.3

Cost of revenue:
 

 
 
 
 

 
 
 
 
 
 
Products
7,516

 
15.0

 
7,109

 
14.5

 
407

 
5.7

Services
4,734

 
9.4

 
4,775

 
9.7

 
(41
)
 
(0.9
)
Total cost of revenue
12,250

 
24.4

 
11,884

 
24.2

 
366

 
3.1

Gross profit
38,040

 
75.6

 
37,299

 
75.8

 
741

 
2.0

Operating expenses:
 

 
 
 
 

 
 
 
 
 
 
Sales and marketing
24,483

 
48.7

 
26,904

 
54.7

 
(2,421
)
 
(9.0
)
Research and development
16,166

 
32.1

 
18,797

 
38.2

 
(2,631
)
 
(14.0
)
General and administrative
8,358

 
16.6

 
11,594

 
23.6

 
(3,236
)
 
(27.9
)
Total operating expenses
49,007

 
97.4

 
57,295

 
116.5

 
(8,288
)
 
(14.5
)
Loss from operations
(10,967
)
 
(21.8
)
 
(19,996
)
 
(40.7
)
 
9,029

 
45.2

Non-operating income (expense):
 

 
 
 
 

 
 
 
 
 
 
Interest expense
(155
)
 
(0.3
)
 
(33
)
 
(0.1
)
 
(122
)
 
(369.7
)
Interest and other income (expense), net
(633
)
 
(1.3
)
 
566

 
1.2

 
(1,199
)
 
(211.8
)
Total non-operating income (expense), net
(788
)
 
(1.6
)
 
533

 
1.1

 
(1,321
)
 
(247.8
)
Loss before income taxes
(11,755
)
 
(23.4
)
 
(19,463
)
 
(39.6
)
 
7,708

 
39.6

Provision for income taxes
517

 
1.0

 
207

 
0.4

 
310

 
149.8

Net loss
$
(12,272
)
 
(24.4
)%
 
$
(19,670
)
 
(40.0
)%
 
$
7,398

 
37.6
 %
 
 
 
 
 
 
 
 
 
 
 
 
.


Revenue

Our products revenue primarily consists of revenue from sales of our hardware appliances upon which our software is installed. Such software includes our ACOS software platform plus one or more of our ADC, CGN, TPS, SSLi or CFW solutions. Purchase of a hardware appliance includes a perpetual license to the included software. We recognize products revenue upon transfer of control, generally at the time of shipment, provided that all other revenue recognition criteria have been met. As a percentage of revenue, our products revenue may vary from quarter to quarter based on, among other things, the timing of orders and delivery of products, cyclicality and seasonality, changes in currency exchange rates and the impact of significant transactions with unique terms and conditions.

We generate services revenue from sales of post contract support (“PCS”), which is bundled with sales of products and professional services. We offer tiered PCS services under renewable, fee-based PCS contracts, primarily including technical support, hardware repair and replacement parts, and software upgrades on a when-and-if-available basis. We recognize services revenue ratably over the term of the PCS contract, which is typically one year, but can be up to five years.


24




A summary of our total revenue is as follows (dollars in thousands):
 
Three Months Ended March 31,
 
 
 
2019
 
2018
 
Increase (Decrease)
 
Amount
 
Percent of Total Revenue
 
Amount
 
Percent of Total Revenue
 
Amount
 
Percent
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Products
$
28,230

 
56
%
 
$
28,149

 
57
%
 
$
81

 
 %
Services
22,060

 
44

 
21,034

 
43

 
1,026

 
5
 %
Total revenue
$
50,290

 
100
%
 
$
49,183

 
100
%
 
$
1,107

 
2
 %
Revenue by geographic region:
 

 
 
 
 

 
 
 
 

 
 
   United States
$
18,100

 
36
%
 
$
20,678

 
42
%
 
$
(2,578
)
 
(12
)%
   Japan
13,152

 
26

 
13,080

 
27

 
72

 
1
 %
   Asia Pacific, excluding Japan
8,776

 
18

 
7,438

 
15

 
1,338

 
18
 %
   EMEA
7,229

 
14

 
6,499

 
13

 
730

 
11
 %
   Other
3,033

 
6

 
1,488

 
3

 
1,545

 
104
 %
   Total revenue
$
50,290

 
100
%
 
$
49,183

 
100
%
 
$
1,107

 
2
 %
 
 
 
 
 
 
 
 
 
 
 
 

Total revenue increased by $1.1 million, or 2%, during the first quarter of 2019 compared to the same period of 2018. This increase was due primarily to a $1.0 million increase in services revenue, which was primarily driven by higher demand from our service provider and enterprise customers. Product revenues were higher in Latin America and Japan, partially offset by lower revenues in United States during the first quarter of 2019 compared to the same period of 2018.

Products revenue increased $0.1 million, or less than 1%, during the first quarter of 2019 compared to the same period of 2018 primarily driven by growth in EMEA, Asia Pacific and Latin America regions, partially offset by lower demand from our web giant customers in the United States.

Services revenue increased $1.0 million, or 5%, during the first quarter of 2019 compared to the same period of 2018. The increase was primarily attributable to the increase in PCS sales in connection with our increased installed customer base.

During the first quarter of 2019$18.1 million, or 36% of total revenue, was generated from the United States, which represents a 12% decrease compared to the same period of 2018. The decrease in the first quarter of 2019 was primarily due to lower products revenue driven by lower demand from our web giant customers in the United States.

During the first quarter of 2019$13.2 million, or 26% of total revenue, was generated from Japan, which remained relatively unchanged compared to the same period of 2018.

During the first quarter of 2019$8.8 million, or 18% of total revenue, was generated from Asia Pacific regions excluding Japan, which represents an 18% increase compared to the same period of 2018. The increase in the first quarter of 2019 was driven primarily by higher products revenue and higher services revenue from service provider and enterprise customers.

During the first quarter of 2019$7.2 million, or 14% of total revenue, was generated from EMEA, which represents an 11% increase compared to the same period of 2018. The increase in the first quarter of 2019 was driven primarily by higher products revenue and higher services revenue from service provider and enterprise customers.

During the first quarter of 2019$3.0 million, or 6% of total revenue, was generated from Latin American regions, which represents a 104% increase compared to the same period of 2018. The increase in the first quarter of 2019 was driven by higher products revenue and higher services revenue from service provider and enterprise customers.



25


Cost of Revenue, Gross Profit and Gross Margin

Cost of revenue

Cost of products revenue is primarily comprised of cost of third-party manufacturing services and cost of inventory for the hardware component of our products. Cost of products revenue also includes warehouse personnel costs, shipping costs, inventory write-downs, certain allocated facilities and information technology infrastructure costs, and expenses associated with logistics and quality control.

Cost of services revenue is primarily comprised of personnel costs for our technical support, training and professional service teams. Cost of services revenue also includes the costs of inventory used to provide hardware replacements to end- customers under PCS contracts and certain allocated facilities and information technology infrastructure costs.

A summary of our cost of revenue is as follows (dollars in thousands):
 
Three Months Ended March 31,
 
Increase (Decrease)
 
2019
 
2018
 
Amount
 
Percent
Cost of revenue:
 
 
 
 
 
 
 
Products
$
7,516

 
$
7,109

 
$
407

 
6
 %
Services
4,734

 
4,775

 
(41
)
 
(1
)%
Total cost of revenue
$
12,250

 
$
11,884

 
$
366

 
3
 %
 
 
 
 
 
 
 
 

Gross Margin

Gross margin may vary and be unpredictable from period to period due to a variety of factors. These may include the mix of revenue from each of our regions, the mix of our products sold within a period, discounts provided to customers, inventory write-downs and foreign currency exchange rates.

Our sales are generally denominated in U.S. dollars; however, in Japan, our sales are denominated in Japanese yen.

Any of the factors noted above can generate either a favorable or unfavorable impact on gross margin.

A summary of our gross profit and gross margin is as follows (dollars in thousands):

 
Three Months Ended March 31,
 
 
 
2019
 
2018
 
Increase (Decrease)
 
Amount
 
Gross Margin
 
Amount
 
Gross Margin
 
Amount
 
Gross Margin
Gross profit:
 

 
 

 
 

 
 

 
 

 
 

Products
$
20,714

 
73.4
%
 
$
21,040

 
74.7
%
 
$
(326
)
 
(1.3
)%
Services
17,326

 
78.5
%
 
16,259

 
77.3
%
 
1,067

 
1.2
 %
Total gross profit
$
38,040

 
75.6
%
 
$
37,299

 
75.8
%
 
$
741

 
(0.2
)%
 
 
 
 
 
 
 
 
 
 
 
 

Products gross margin decreased 1.3% points during the first quarter of 2019 compared to the same period of 2018, primarily driven by pricing incentives on select strategic opportunities.

Services gross margin increased 1.2% points during the first quarter of 2019 compared to the same period of 2018 primarily driven by higher services revenue while costs related to support and professional services remained relatively constant.


26


Operating Expenses

Our operating expenses consist of sales and marketing, research and development, general and administrative and litigation and settlement expenses. The largest component of our operating expenses is personnel costs which consist of wages, benefits, bonuses, and, with respect to sales and marketing expenses, sales commissions. Personnel costs also include stock-based compensation.

A summary of our operating expenses is as follows (dollars in thousands):
 
Three Months Ended March 31,
 
Increase (Decrease)
 
2019
 
2018
 
Amount
 
Percent
Operating expenses:
 

 
 

 
 

 
 

Sales and marketing
$
24,483

 
$
26,904

 
$
(2,421
)
 
(9
)%
Research and development
16,166

 
18,797

 
(2,631
)
 
(14
)%
General and administrative
8,358

 
11,594

 
(3,236
)
 
(28
)%
Total operating expenses
$
49,007

 
$
57,295