UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2018

☐	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 001-35338

Imperva, Inc.

(Exact name of the Registrant as Specified in its Charter)

Delaware

03-0460133

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

3400 Bridge Parkway

Redwood Shores, California 94065

(Address of Principal Executive Offices, including Zip Code)

(650) 345-9000

(Registrant’s Telephone Number, including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 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 ☒ 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 ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one):

Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

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. ☐

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

Shares of Imperva, Inc. common stock, $0.0001 par value per share, outstanding as of October 31, 2018: 35,197,514 shares.

IMPERVA, INC.

FORM 10-Q

Quarterly Period Ended September 30, 2018

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017	3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017	4
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2018 and 2017	5
	Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2018 and 2017	6
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49
Item 4.	Controls and Procedures	49

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70
Item 3.	Defaults Upon Senior Securities	70
Item 4.	Mine Safety Disclosures	70
Item 5.	Other Information	70
Item 6.	Exhibits	71
Signatures		72

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

IMPERVA, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

	September 30, 2018			December 31, 2017
	Unaudited			Audited
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	155,932		$	192,538
Short-term investments		148,487			166,993
Restricted cash		30			52
Accounts receivable, net of allowance of $1,139 and $936 as of September 30, 2018 and December 31, 2017, respectively		68,261			75,535
Deferred costs, current		6,647			-
Inventory		189			617
Prepaid expenses and other current assets		9,191			14,894
Total current assets		388,737			450,629
Property and equipment, net		22,600			25,407
Goodwill		149,445			36,389
Intangible assets, net		14,376			3,184
Severance pay fund		5,799			6,554
Restricted cash		2,603			2,284
Deferred tax assets		995			2,022
Other assets including non-current deferred costs		21,388			1,593
TOTAL ASSETS	$	605,943		$	528,062
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	5,372		$	5,869
Income taxes		8,916		$	319
Accrued compensation and benefits		23,422			22,913
Accrued and other current liabilities		15,327			11,098
Deferred revenue, current		137,814			126,174
Total current liabilities		190,851			166,373
Long-term accrued severance pay		6,564			7,238
Other non-current liabilities		12,887			6,253
Deferred revenue		54,022			33,081
TOTAL LIABILITIES		264,324			212,945
Commitments and contingencies (See note 7)
STOCKHOLDERS' EQUITY:
Common stock, $0.0001 par value - 145,000,000 shares authorized, 35,151,159 and 34,233,888 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively		3			3
Additional paid-in capital		612,249			572,106
Accumulated deficit		(268,846	)		(256,537	)
Accumulated other comprehensive loss		(1,787	)		(455	)
TOTAL STOCKHOLDERS' EQUITY		341,619			315,117
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	605,943		$	528,062

See Notes to Condensed Consolidated Financial Statements.

IMPERVA, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

	Three months ended September 30,					Nine months ended September 30,
	2018		2017			2018			2017
Net revenue:
Products and license	$	23,241	$	26,627		$	62,971		$	66,217
Services		68,392		57,265			197,706			164,418
Total net revenue		91,633		83,892			260,677			230,635
Cost of revenue:
Products and license		1,985		1,883			5,623			5,638
Services		16,997		14,684			49,634			41,455
Total cost of revenue		18,982		16,567			55,257			47,093
Gross profit		72,651		67,325			205,420			183,542
Operating expenses:
Research and development		18,618		15,515			56,219			47,493
Sales and marketing		39,051		38,245			119,098			111,757
General and administrative		13,872		13,645			41,789			39,556
Restructuring charges		-		-			2,551			667
Amortization of intangible assets		644		133			908			582
Total operating expenses		72,185		67,538			220,565			200,055
Income (loss) from operations		466		(213	)		(15,145	)		(16,513	)
Gain on sale of business		-		-			-			35,871
Other income, net		1,034		567			2,983			633
Income (loss) before provision for income taxes		1,500		354			(12,162	)		19,991
Income tax expense		442		724			19,620			768
Net income (loss)	$	1,058	$	(370	)	$	(31,782	)	$	19,223
Earnings per share:
Basic	$	0.03	$	(0.01	)	$	(0.91	)	$	0.57
Diluted	$	0.03	$	(0.01	)	$	(0.91	)	$	0.56
Shares used in computing earnings per share:
Basic		35,066		33,907			34,782			33,590
Diluted		35,745		33,907			34,782			34,118

See Notes to Condensed Consolidated Financial Statements

IMPERVA, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

	Three months ended September 30,					Nine months ended September 30,
	2018		2017			2018			2017
Net income (loss)	$	1,058	$	(370	)	$	(31,782	)	$	19,223
Other comprehensive income (loss), net of tax:
Net change in net unrealized gain (loss) on investments		284		55			55			105
Net change in unrealized gain (loss) on hedging instruments		891		(987	)		(1,387	)		1,161
Total other comprehensive (loss) income, net of tax		1,175		(932	)		(1,332	)		1,266
Comprehensive income (loss)	$	2,233	$	(1,302	)	$	(33,114	)	$	20,489

See Notes to Condensed Consolidated Financial Statements.

IMPERVA, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands, except share data)

(Unaudited)

	Common Stock				Additional Paid-in			Accumulated			Accumulated Other Comprehensive			Total Shareholders'
	Shares		Amount		Capital			Deficit			Income (Loss)			Equity
For the nine months ended September 30, 2018
Balance as at January 1, 2018		34,233,888	$	3	$	572,106		$	(256,537	)	$	(455	)	$	315,117
Cumulative effect of a change in accounting principle		-		-		-			19,473			-			19,473
Issuance of common stock under employee equity plans, net of repurchases		917,271		-		10,799			-			-			10,799
Stock-based compensation		-		-		37,931			-			-			37,931
Shares withheld for tax withholding on vesting of restricted stock units		-		-		(9,151	)		-			-			(9,151	)
Assumed equity awards in acquisitions						564									564
Component of other comprehensive income (loss), net of tax
Change in unrealized gain on investments		-		-		-			-			55			55
Change in unrealized loss on hedging instruments		-		-		-			-			(1,387	)		(1,387	)
Net loss		-		-		-			(31,782	)					(31,782	)
Comprehensive loss															(33,114	)
Balance as at September 30, 2018		35,151,159	$	3	$	612,249		$	(268,846	)	$	(1,787	)	$	341,619

	Common Stock				Additional Paid-in			Accumulated			Accumulated Other Comprehensive			Total Shareholders'
	Shares		Amount		Capital			Deficit			Income (Loss)			Equity
For the nine months ended September 30, 2017
Balance as at January 1, 2017		33,088,990		3		510,257			(276,819	)		(1,478	)		231,963
Cumulative effect of a change in accounting principle						2,601			(2,587	)		-			14
Issuance of common stock under employee equity plans, net of repurchases		924,350		-		17,915			-			-			17,915
Stock-based compensation		-		-		36,588			-			-			36,588
Shares withheld for tax withholding on vesting of restricted stock units		-		-		(8,217	)		-			-			(8,217	)
Components of other comprehensive income, net of tax
Change in unrealized gain on investments		-		-		-			-			105			105
Change in unrealized gain on hedging instruments		-		-		-			-			1,161			1,161
Net income		-		-		-			19,223			-			19,223
Comprehensive income															20,489
Balance as at September 30, 2017		34,013,340	$	3	$	559,144		$	(260,183	)	$	(212	)	$	298,752

See Notes to Condensed Consolidated Financial Statements.

IMPERVA, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine months ended September 30
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(31,782	)	$	19,223
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		8,709			7,780
Amortization of deferred costs		3,864			-
Stock-based compensation		37,931			36,588
Amortization of acquired intangibles		908			582
Loss on disposals		-			48
Amortization of premiums/accretion of discounts on short-term investments		163			56
Gain on sale of business		-			(35,871	)
Facilities exit costs		559			-
Other adjustments		668			(1,090	)
Changes in operating assets and liabilities:
Accounts receivable, net		8,741			2,767
Inventory		355			61
Deferred costs		(14,541	)		-
Prepaid expenses and other assets		558			(794	)
Accounts payable		(653	)		(628	)
Income tax payable		8,597			707
Accrued compensation and benefits		509			3,981
Accrued and other liabilities		9,033			4,229
Severance pay (net)		81			256
Deferred revenue		33,848			13,253
Deferred tax assets		1,027			(1,682	)
Net cash provided by operating activities		68,575			49,466
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales/maturities of short-term investments		71,736			66,463
Purchase of short-term investments		(53,339	)		(91,878	)
Proceeds from sale of business		-			35,015
Receipt of cash in escrow from sale of business		5,000			-
Net purchases of property and equipment		(5,724	)		(9,835	)
Acquisitions, net of cash acquired		(123,507	)		-
Net cash used in investing activities		(105,834	)		(235	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of repurchases		10,799			14,790
Shares withheld for tax withholding on vesting of restricted stock units		(9,151	)		(8,217	)
Net cash provided by financing activities		1,648			6,573
Effect of exchange rate changes on cash, cash equivalents, and restricted cash		(698	)		1,090
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		(36,309	)		56,894
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - Beginning of period		194,874			109,295
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - End of period	$	158,565		$	166,189
NONCASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired but not yet paid	$	1,691		$	3,120

See Notes to Condensed Consolidated Financial Statements.

IMPERVA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation and Summary of Significant Accounting Policies

Business

Imperva, Inc. (together with its subsidiaries, the “Company”) was incorporated in April 2002 in Delaware. The Company is headquartered in Redwood Shores, California and has subsidiaries located throughout the world including Israel, Asia and Europe. The Company is engaged in the development, marketing, sales, service and support of cyber-security solutions that protect business-critical data and applications whether in the cloud or on-premises.

On October 10, 2018, the Company announced it entered into a definitive agreement (the “Merger Agreement”) to be acquired by leading private equity technology investment firm Thoma Bravo, LLC (the “Transaction”). See Note 15 for more information.

Basis of Presentation

The Company has prepared the accompanying Condensed Consolidated Financial Statements in accordance with Article 10 of Regulation S-X and pursuant to the rules and regulations for Form 10-Q of the Securities and Exchange Commission (the “SEC”). Pursuant to those rules and regulations, the Company has condensed or omitted certain information and footnote disclosures it normally includes in its annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). In management’s opinion, the Company has made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present its condensed consolidated financial position, results of operations, and cash flows. The Company’s 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 condensed consolidated financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the SEC on February 23, 2018 (the “Annual Report”).

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Concentration of Revenue and Accounts Receivable

Significant customers are those which represent 10% or more of the Company’s total revenue or gross accounts receivable balance at each respective balance sheet date. The Company primarily sells products and services through channel partners, including distributors and resellers, which sell to end-user customers. For the three months ended September 30, 2018, there was one channel partner that represented more than 10% of the Company’s total revenue. For the nine months ended September 30, 2018, no channel partner represented more than 10% of the Company’s total revenue. For the three and nine months ended September 30, 2017, there was one significant channel partner that represented more than 10% of the Company’s total revenue. As of September 30, 2018, one channel partner represented 16% of the Company’s total accounts receivable balance. As of December 31, 2017, one channel partner represented 18% of the Company’s total accounts receivable balance.

Significant Accounting Policies

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-09, Revenue from Contracts with Customers (Accounting Standards Codification or ASC 606). ASC 606 supersedes the revenue recognition requirements in Revenue Recognition (ASC 605), and requires the recognition of revenue as promised goods or services are transferred to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services. ASC 606 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer. Collectively, we refer to ASC 606 and Subtopic 340-40 as the “new standard”.

The Company adopted the new standard as of January 1, 2018, utilizing the modified retrospective method for all contracts not completed as of the date of adoption. For contracts that were modified before the effective date, the Company reflected the aggregate effect of all modifications when identifying performance obligations and allocating transaction price in accordance with practical expedient ASC 606-10-65-1-(f)-4, which did not have a material effect on the adjustment to accumulated deficit. As a result, the Company recognized the cumulative effect of initially applying the new standard as an adjustment to the opening balance of equity on January 1, 2018. The comparative information has not been adjusted and continues to be reported under ASC 605. The details of the

new policy with significant changes and quantitative impact of the changes are described in below under “Revenue from Contracts with Customers.”

In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation—Scope of Modification Accounting.” This guidance was issued in an effort to reduce diversity in practice as it relates to applying modification accounting for changes to the terms and conditions of share-based payment awards. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company has adopted this guidance in the first quarter of 2018. The Company noted the application of this ASU did not have any material impact on the condensed consolidated financial statements in the current period and is not expected to have material impacts in future periods as well.

The Company adopted ASU 2016-18, “Restricted Cash,” and ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” on January 1, 2018 using the modified retrospective method as of the date of adoption. ASU 2016-18 requires an entity to reconcile and explain the period over period change in total cash, cash equivalents and restricted cash within its condensed consolidated statement of cash flows and ASU 2016-15 provides guidance clarifying how certain cash receipts and cash payments should be classified. The Company adopted this accounting standard update retrospectively and, accordingly, certain line items in the condensed consolidated statement of cash flows have been reclassified to conform to the current presentation. The following table summarizes the change in cash flows as reported and as previously reported prior to the adoption of these standards (in thousands):

	Nine months ended
	September 30, 2018			September 30, 2017
	As Reported			As Reported			As Previously Reported
Change in restricted cash							$	(302	)
Net cash used in investing activities		(105,834	)	$	(235	)		(537	)
Net increase (decrease)		(36,309	)		56,894			56,592
Balance at beginning of period*		194,874			109,295			107,343
Balance at end of period*		158,565			166,189			163,935

* Amounts in As Reported column include cash, cash equivalents and restricted cash as required. Amounts in the As Previously Reported column reflect only cash and cash equivalents.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The new standard clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and should be applied prospectively with early adoption permitted under certain scenarios. The adoption of ASU No. 2017-01 did not have a material impact on the accompanying condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

In February 2018 the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, that gives entities the option to reclassify to retained earnings tax effects related to items that have been stranded in accumulated other comprehensive income as a result of the Tax Cuts and Jobs Act (the Act). An entity that elects to reclassify these amounts must reclassify stranded tax effects related to the Act’s change in U.S. federal tax rate for all items accounted for in other comprehensive income. These entities can also elect to reclassify other stranded effects that relate to the Act but do not directly relate to the change in the federal rate. Entities can choose whether to apply the amendments retrospectively to each period in which the effect of the Act is recognized or to apply the amendments in the period of adoption. The standard is effective for the Company on January 1, 2019, with early adoption permitted. The Company is evaluating the impact of adopting this new accounting guidance on its condensed consolidated financial statements.

In August 2017, FASB issued ASU 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. Under the new guidance, more hedging strategies will be eligible for hedge accounting and the application of hedge accounting is simplified. The new guidance amends presentation and disclosure requirements, and how effectiveness is assessed. The standard is effective for the Company on January 1, 2019, with early adoption permitted. The Company is evaluating the impact of adopting this new accounting guidance on its condensed consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350), which simplifies the measurement of goodwill impairment by removing the second step of the goodwill impairment test, which requires the determination of the fair value of individual assets and liabilities of a reporting unit. Under this guidance, goodwill impairment is to be measured as the amount by which a reporting unit’s carrying value exceeds its fair value with the loss recognized not to exceed the total amount of goodwill allocated to the reporting unit. The guidance is effective beginning January 1, 2020 on a prospective basis, with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The standard is to be

applied on a prospective basis. The Company does not anticipate a material impact to the condensed consolidated financial statements once implemented.

In June 2016, the FASB Issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new standard requires financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The standard will be effective for the Company beginning January 1, 2020, with early application permitted. The Company is evaluating the impact of adopting this new accounting guidance on its condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02 regarding ASC 842 Leases. The amendments in this guidance require balance sheet recognition of lease assets and lease liabilities by lessees for leases classified as operating leases, with an optional policy election to not recognize lease assets and lease liabilities for leases with a term of 12 months or less. The amendments also require new disclosures, including qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The standard will be effective for the Company beginning January 1, 2019. The amendments require a modified retrospective approach with optional practical expedients. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. ASU 2018-11 provides entities another option for transition, allowing entities to not apply the new standard in the comparative periods they present in their financial statements in the year of adoption. While the Company continues to evaluate the effect of the standard on its ongoing financial reporting, the Company currently believes that the adoption of the ASU may materially affect its Balance Sheet.

Change in Accounting Estimate

In Q3 2018, the Company reviewed the estimated useful lives of its certain property and equipment. This review indicated that the actual lives of certain equipment were longer than the estimated useful lives used for depreciation purposes in the Company’s financial statements. As a result, effective in August 2018, the Company changed its estimates of the useful lives of the relevant equipment to better reflect the estimated periods during which these assets will remain in service. The estimated useful lives of the relevant equipment were increased from 3 years to 5 years. The effect of this change in accounting estimate was to reduce depreciation expense by $0.7 million, increase net income by $0.7 million, and increase basic and diluted earnings per share by $0.02 for the three months ended September 30, 2018. The Company also evaluated the impact of the change in future depreciation and estimated that this change in accounting estimate will result in decreases of depreciation expenses of $1.7 million and $2.6 million for the years ended December 31, 2018 and 2019, respectively.

Revenue from Contracts with Customers

The reported results for three and nine month period ended September 30, 2018 reflect the application of the new revenue standard while the reported results for three and nine months period ended September 30, 2017 were prepared under the guidance of ASC 605, which is also referred to herein as “legacy GAAP” or the “previous guidance”. The adoption of the new revenue standard represents a change in accounting principle with the intent to align revenue recognition with the delivery of products and services and provide financial statement readers with enhanced disclosures. In accordance with the new revenue standard, revenue is recognized when a customer obtains control of promised products and services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these products and services. To achieve this core principle, the Company applies the following five steps:

Identify the contract with a customer

A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the products and services to be transferred and identifies the payment terms related to these products and services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for products and services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.

Identify the performance obligations in the contract

Performance obligations promised in a contract are identified based on the products and services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the products and services either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the products and services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised products and services, the Company must apply judgment to determine whether promised products and services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised products and services are accounted for as a combined performance obligation.

Determine the transaction price

The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring products and services to the customer. None of the Company's contracts contained a significant financing component. Determining the transaction price requires significant judgment, which is discussed by revenue category in further detail below.

Allocate the transaction price to performance obligations in the contract

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past standalone transactions, the Company estimates the standalone selling price taking into account available information such as past transactions, market conditions and internally approved pricing guidelines related to the performance obligations.

Recognize revenue when or as the Company satisfies a performance obligation

The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring promised products and services to a customer.

Revenue Recognition

The Company derives revenue from two sources: (i) products and license revenue, which includes hardware and on-premise software license revenue and (ii) services revenue, which includes subscription arrangements, maintenance and support, professional services and training. Licenses for on-premises software are either perpetual or term licenses and provide the customer with a right to use the software. Substantially all of the Company’s products and license sales have been sold in combination with maintenance and support services.

At contract inception, the Company assesses the products and services promised in its contracts with customers and identifies a performance obligation for each promise to transfer to the customer a product or service (or bundle of products or services) that is distinct – i.e., if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The Company recognizes revenue when or as it satisfies a performance obligation by transferring control of a product or service to a customer.

In rare situations, the Company may agree to accept a lower consideration than the contractual price. The Company accounts for such situations as variable consideration and estimate future price reductions based on the Company’s historical experience. The impact of such price reductions on the Company’s revenue for the three and nine month period ended September 30, 2018 was not significant.

Once the Company has determined the transaction price, the total transaction price is allocated to each performance obligation in a manner depicting the amount of consideration to which the Company expects to be entitled in exchange for transferring the good(s) or service(s) to the customer (the “allocation objective”). If the allocation objective is met at contractual prices, no further allocations are made. Otherwise, the Company allocates the transaction price to each performance obligation identified in the contract on a relative standalone selling price basis.

In order to determine the standalone selling price of its promised goods or services, the Company conducts a regular analysis to determine whether its goods or services have an observable standalone selling price. In determining observable standalone selling price, the Company requires that a substantial majority of the standalone selling prices for a good or service fall within a reasonably narrow pricing range. If the Company does not have a directly observable standalone selling price for a particular goods or service, then the Company estimates a standalone selling price by reviewing external and internal market factors including, but not limited to, pricing practices including historical discounting, major service groups, and the geographies in which the Company offers its products and services. The determination of standalone selling price is made through consultation with and approval by the Company’s management. Selling prices are analyzed on a quarterly basis to identify if the Company has experienced significant changes in its selling prices.

The upfront payment pattern relative to the delivery of subscription, maintenance and services and associated revenue recognition generates significant deferred revenue. The Company refers to contract liabilities as “deferred revenue” on the condensed consolidated financial statements and related disclosures.

The revenue and revenue recognition policies for the different types of revenue are described below:

Products and License Revenue

Products and license revenue consists of hardware and on-premise software license sales. Hardware revenue is recognized at a point in time upon delivery.

The Company’s on-premise software licenses sold without hardware generally have significant stand-alone functionality to the customer upon delivery and are considered functional intellectual property (“IP”). Revenue allocated to on-premise software licenses is typically recognized at a point in time upon delivery of the license.

Services Revenue

Services revenue consists of subscription arrangements, maintenance and support, professional services, and training. Subscription services are offered under renewable, fee-based contracts, which provide access to the Incapsula service and certain functionality within SecureSphere platform. Payments for subscription services are typically due monthly/quarterly/annually in advance. Subscription services are viewed as a stand-ready performance obligation that is satisfied over time and typically have a term of one to three years. Unearned subscription revenue is included in deferred revenue.

Maintenance and support arrangements are offered under renewable, fee-based contracts, which include technical support, hardware repair and replacement parts, bug fixes, patches and unspecified upgrades on a when-and-if-available basis. Payments for maintenance and support are typically due annually in advance. Maintenance and support services are viewed as a stand-ready performance obligation that is satisfied over time and typically have a term of one to three years. Unearned maintenance and support revenue is included in deferred revenue.

Professional services revenue consists of fees related to implementation and consulting services. The Company’s professional services typically are considered distinct from the related software or subscription services as the promise to transfer the software or subscription can be fulfilled independently from the promise to deliver the implementation and consulting services (i.e., customer receives standalone functionality from the license or subscription and the customer obtains the intended benefit of the license or subscription without the professional services). Professional services revenue is typically recognized over time as the services are rendered, using an efforts-expended (labor hours) input method. Professional service arrangements are typically short term in nature and are largely completed within 90 days from the start of service.

Training services revenue consists of fees related to training customers and partners on the use of its products. Training services are distinct performance obligations recognized upon delivery of the training.

Taxes collected from customers and remitted to governmental authorities are not included in revenue. Shipping and handling costs associated with outbound freight are accounted for as a fulfillment cost and are included in cost of revenues.

Deferred Costs

The Company capitalizes contract origination costs that are incremental and recoverable costs of obtaining a contract with a customer. These costs are deferred and amortized over a benefit period of 5 years. The Company determined the period of benefit by taking into consideration of customer contracts, the Company’s technology and other factors. The Company applies the practical expedient to expense costs as incurred if the expected benefit period was 1 year or less. This applies to sales commissions for renewal of annual contracts which would be deferred and then amortized over the related contractual renewal period. Amortization expense is included in sales and marketing expenses in the accompanying condensed consolidated statements of operations.

Allocating the Transaction Price to Performance Obligations

For certain arrangements with multiple deliverables, the Company previously allocated the arrangement fee to the non-software element based upon the relative selling price of such element and, if software and software-related elements (e.g., maintenance and support for the software element) were also included in the arrangement, the Company allocated the arrangement fee to each of those software and software-related elements as a group. After such allocations were made, the amount of the arrangement fee allocated to the software and software-related elements was accounted for using the residual method. Under the new standard, the total transaction price is allocated to each performance obligation on a relative standalone selling price basis, irrespective of whether the performance obligations would have been previously categorized as software or non-software elements.

Deferred Revenue and Contingent Revenue

The Company previously limited the amount of revenue recognized for delivered elements to the amount that was not contingent on the future delivery of products or services, or subject to the Company’s future performance obligation. Under the new standard, there is no requirement to limit the allocated transaction price to non-contingent amounts.

There have been no other material changes to the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Adoption Date Impact

The following tables summarize the impacts of adopting the new standard on the Company’s condensed consolidated financial statements as of adoption on January 1, 2018. Select condensed consolidated balance sheet line items that reflect the adoption of the new standard are as follows (in thousands):

	As reported on December 31, 2017			Impact of adoption			As adjusted on January 1, 2018
ASSETS
Deferred costs, current		-		$	3,755		$	3,755
Other assets including non-current deferred costs		1,593			12,156			13,749

LIABILITIES
Deferred revenue, current		126,174			(4,159	)		122,015
Deferred revenue		33,081			597			33,678

STOCKHOLDERS' EQUITY
Accumulated deficit	$	(256,537	)	$	19,473		$	(237,064	)

The deferred cost balance as of January 1, 2018 represents the incremental cost to obtain contracts which were not complete as of the adoption date, that were expensed pursuant to the previous accounting policy, but require capitalization under the new standard.

The deferred revenue balance decreased as of January 1, 2018 primarily due to impacts from application of revised standalone selling price methodologies, and due to certain hybrid pricing models, more specifically our FlexProtect hybrid licensing program, which was delivered prior to January 1, 2018. Under the previous guidance the entire transaction fee was recognized ratably, however, the new standard requires upfront recognition of a portion of the transaction price allocated to the functional license delivered at the inception of the arrangement.

Current Period Impact

The following tables summarize the impacts of adopting the new standard on the Company’s condensed consolidated financial statements for the nine months ended September 30, 2018. Select consolidated balance sheet line items that reflect the adoption of the new standard are as follows (in thousands):

	As of September 30, 2018
	As reported			Adjustments			Balances without adoption of Topic 606
ASSETS
Deferred cost, current	$	6,647		$	(6,647	)		-
Other assets including non-current deferred costs		21,388			(19,941	)		1,447

LIABILITIES AND STOCKHOLDERS' EQUITY
Deferred revenue, current		137,814			13,781			151,595
Deferred revenue		54,022			(1,372	)		52,650

STOCKHOLDERS' EQUITY
Accumulated deficit	$	(268,846	)	$	(38,997	)	$	(307,843	)

Select Condensed Consolidated Statement of operations line items for the three and nine months ended September 30, 2018 that reflect the adoption of the new standard are as follows (in thousands):

	Three months ended September 30, 2018								Nine months ended September 30, 2018
	As reported		Adjustments			Balances without adoption of Topic 606			As reported			Adjustments			Balances without adoption of Topic 606
Net revenue:
Products and license	$	23,241	$	(3,377	)	$	19,864		$	62,971		$	(6,387	)	$	56,584
Services:
Subscriptions		38,519		(378	)		38,141			109,957			(352	)		109,605
Maintenance and Support		25,220		(967	)		24,253			75,393			(2,365	)		73,028
Professional services and training		4,653		71			4,724			12,356			257			12,613
Total services		68,392		(1,274	)		67,118			197,706			(2,460	)		195,246
Total net revenue		91,633		(4,651	)		86,982			260,677			(8,847	)		251,830
Operating expenses:
Sales and marketing		39,051		2,882			41,933			119,098			10,677			129,775
Income (loss) from operations		466		(7,533	)		(7,067	)		(15,145	)		(19,524	)		(34,669	)
Net income (loss)		1,058		(7,533	)		(6,475	)		(31,782	)		(19,524	)		(51,306	)
Net loss per share of common stock stockholders, basic and diluted	$	0.03				$	(0.18	)	$	(0.91	)				$	(1.48	)

Select Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2018 that reflect the adoption of the new standard are as follows (in thousands):

	Nine months ended September 30, 2018
Statement of Cash Flows	As reported			Adjustments			Balance without adoption of Topic 606
Net loss	$	(31,782	)	$	(19,524	)	$	(51,306	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Amortization of deferred costs		3,864			(3,864	)		-
Changes in operating assets and liabilities:
Deferred costs		(14,541	)		14,541			-
Deferred revenue		33,848			8,847			42,695
Net cash provided by operating activities	$	68,575					$	68,575

Disaggregation of Revenue

The Company’s revenue was comprised of the following major product and service lines (in thousands):

	Three months ended September 30				Nine months ended September 30
	2018		2017		2018		2017
Major product/service lines
Products and licenses	$	23,241	$	26,627	$	62,971	$	66,217
Services:
Subscriptions		38,519		30,956		109,957		86,305
Maintenance and support		25,220		23,133		75,393		67,709
Professional services and training		4,653		3,176		12,356		10,404
		68,392		57,265		197,706		164,418
Total revenue	$	91,633	$	83,892	$	260,677	$	230,635

The Company’s revenue by geographic region is based on the customer’s location and presented under footnote 11.

The following table presents the Company’s revenue by timing of revenue recognition (in thousands):

	Three months ended September 30				Nine months ended September 30
	2018		2017		2018		2017
Timing of revenue recognition
Products and services transferred at a point in time	$	23,241	$	26,627	$	62,971	$	66,217
Products and services transferred over time		68,392		57,265		197,706		164,418
Total revenue	$	91,633	$	83,892	$	260,677	$	230,635

Deferred Revenue

The following table provides information about deferred revenues from contracts with customers (in thousands).

	As of September 30, 2018
Deferred revenue (current)	$	137,814
Deferred revenue		54,022
Total deferred revenue	$	191,836

The deferred revenue balance includes customer deposits of $3.2 million, primarily related to cancellable services and subscriptions which were billed in advance.

Standard payment terms to customers range from 30 to 90 days; however, payment terms and conditions in the Company’s customer contracts may vary. In some cases, customers prepay for products and services in advance of our delivery of the related products or services; in other cases, payment is due as services are performed or in arrears following the delivery of the related products or services. Unbilled revenues primarily relate to the Company’s rights to consideration for work completed but not billed at the reporting date and typically relate to professional services. The unbilled revenues are transferred to receivables when the rights become unconditional. Deferred revenue relates to the advance consideration received from customers, which precedes our performance to satisfy the associated performance obligation(s). The Company’s deferred revenue primarily result from customer payments received upfront for subscription, maintenance and support on software licenses and certain fixed fee professional services because these performance obligations are satisfied over time.

$50.8 million and $110.0 million of services revenue was recognized during the three and nine months ended September 30, 2018 respectively, that was included in the deferred revenue balances at the beginning of the period.

Transaction Price Allocated to the Remaining Performance Obligations

The following table includes estimated revenue expected to be recognized over time related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 30, 2018 (in thousands).

Remainder

of 2018

2019

2020

2021

Thereafter

Performance obligations transferred over time

53,896

94,348

30,387

11,458

1,747

Total net revenue

53,896

94,348

30,387

11,458

1,747

Amortization of Deferred Costs

Deferred costs primarily consist of capitalized incremental contract origination costs and were $26.6 million and $15.9 million as of September 30, 2018 and January 1, 2018 respectively. Amortization costs of $1.6 million and $3.9 million were recorded for the three and nine months ended September 30, 2018, respectively, and there were no impairments of deferred costs during either period.

2. Cash, Cash Equivalents, Restricted Cash and Short-Term Investments

The following table provides a summary of cash, cash equivalents, and restricted cash reported within the Condensed Consolidated Balance Sheets that reconciles to the corresponding amount in the Condensed Consolidated Statements of Cash Flows (in thousands):

	As of September 30, 2018		As of December 31, 2017		As of September 30, 2017		As of December 31, 2016
Cash and cash equivalents	$	155,932	$	192,538	$	163,935	$	107,343
Restricted cash included in Current assets		30		52		51		68
Restricted cash included in Non-current assets		2,603		2,284		2,203		1,884
Total cash, cash equivalents, and restricted cash shown in the Statements of Cash Flows	$	158,565	$	194,874	$	166,189	$	109,295

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of cash on hand, highly liquid investments in commercial paper, money market funds, corporate debt obligations and various deposit accounts. Restricted cash represents bank deposits to secure bank guarantees provided to its lessors for its operating lease arrangements.

The Company considers all high-quality investments purchased with original maturities at the date of purchase greater than three months to be short-term investments. Investments are available to be used for current operations and are, therefore, classified as current assets even though maturities may extend beyond one year. Cash equivalents and short-term investments are classified as available-for-sale and are, therefore, recorded at fair value on the condensed consolidated balance sheets, with any unrealized gains and losses reported in accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders’ equity in its condensed consolidated balance sheets, until realized. The Company uses the specific-identification method to compute gains and losses on the investments. The amortized cost of securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included as a component of other income, net in the condensed consolidated statements of operations.

Cash, cash equivalents and short-term investments consist of the following (in thousands):

	As of September 30, 2018
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Cash and cash equivalents:
Cash	$	101,873		-		-	$	101,873
Money market funds		54,059		-		-		54,059
U.S. government and U.S. government agencies		-		-		-		-
Total	$	155,932	$	-	$	-	$	155,932
Short-term investments:
Commercial paper		-		-		-		-
Corporate debt obligations		106,651		2		395		106,258
U.S. government and U.S. government agencies		42,147		-		158		41,989
Certificate of deposits		240		-		-		240
Total	$	149,038	$	2	$	553	$	148,487

	As of December 31, 2017
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Cash and cash equivalents:
Cash	$	92,030		-		-	$	92,030
Money market funds		84,144		-		-		84,144
U.S. government and U.S. government agencies		16,367		-		3		16,364
Total	$	192,541		-	$	3	$	192,538
Short-term investments:
Commercial paper	$	699		-		-	$	699
Corporate debt obligations		123,320		-

IMPERVA INC 10-Q