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 ~~June~~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 ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ 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 ☐ ~~(Do not check if a smaller reporting company)~~ 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 ~~July~~October 31, 2018: 3435,~~993~~197,~~967~~514 shares.

IMPERVA, INC.

FORM 10-Q

Quarterly Period Ended ~~June~~September 30, 2018

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017	3
	Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017	3
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017	4
	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 six months ended June 30, 2018 and 2017	5
	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 six months ended June 30, 2018 and 2017	6
	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 six months ended June 30, 2018 and 2017	7
	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	3234
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4749
Item 4.	Controls and Procedures	4749
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	4850
Item 1A.	Risk Factors	4950
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6870
Item 3.	Defaults Upon Senior Securities	6870
Item 4.	Mine Safety Disclosures	6870
Item 5.	Other Information	6870
Item 6.	Exhibits	6971
Signatures		7072

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

IMPERVA, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

	June 30, 2018			December 31, 2017
	September 30, 2018			December 31, 2017
	Unaudited			Audited
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	~~209~~155,~~194~~932		$	192,538
Short-term investments		~~185~~148,~~278~~487			166,993
Restricted cash		30			52
Accounts receivable, net of allowance of $1,160 and $936 as of June 30, 2018 and December 31, 2017, respectively		70,307			75,535
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		56,~~765~~647			-
Inventory		~~196~~189			617
Prepaid expenses and other current assets		129,~~975~~191			14,894
Total current assets		~~483~~388,~~745~~737			450,629
Property and equipment, net		22,~~740~~600			25,407
Goodwill		36149,~~389~~445			36,389
Intangible assets, net		214,~~920~~376			3,184
Severance pay fund		5,~~950~~799			6,554
Restricted cash		2,~~334~~603			2,284
Deferred tax assets		~~1,017~~995			2,022
Other assets including non-current deferred costs		1921,~~393~~388			1,593
TOTAL ASSETS	$	~~574~~605,~~488~~943		$	528,062
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	5,~~139~~372		$	5,869
Income taxes		108,~~015~~916		$	319
Accrued compensation and benefits		2223,~~668~~422			22,913
Accrued and other current liabilities		1315,~~970~~327			11,098
Deferred revenue, current		~~128~~137,~~519~~814			126,174
Total current liabilities		~~180~~190,~~311~~851			166,373
Long-term accrued severance pay		76,~~346~~564			7,238
Other non-current liabilities		12,~~264~~887			6,253
Deferred revenue		4654,~~132~~022			33,081
TOTAL LIABILITIES		~~246~~264,~~053~~324			212,945
Commitments and contingencies (See note 6)
Commitments and contingencies (See note 7)
STOCKHOLDERS' EQUITY:
Common stock, $0.0001 par value - 145,000,000 shares authorized, 34,956,475 and 34,233,888 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively		3			3
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		~~601~~612,~~298~~249			572,106
Accumulated deficit		(~~269~~268,~~904~~846	)		(256,537	)
Accumulated other comprehensive loss		(21,~~962~~787	)		(455	)
TOTAL STOCKHOLDERS' EQUITY		~~328~~341,~~435~~619			315,117
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	~~574~~605,~~488~~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 June 30,						Six months ended June 30,
	Three months ended September 30,						Nine months ended September 30,
	2018			2017			2018			2017
Net revenue:
Products and license	$	1923,~~218~~241		$	2026,~~012~~627		$	3962,~~730~~971		$	3966,~~590~~217
Services		6568,~~582~~392			5457,~~423~~265			~~129~~197,~~314~~706			~~107~~164,~~153~~418
Total net revenue		8491,~~800~~633			7483,~~435~~892			~~169~~260,~~044~~677			~~146~~230,~~743~~635
Cost of revenue:
Products and license		1,~~364~~985			1,~~823~~883			35,~~638~~623			35,~~755~~638
Services		16,~~070~~997			1314,~~751~~684			3249,~~637~~634			2641,~~771~~455
Total cost of revenue		1718,~~434~~982			1516,~~574~~567			3655,~~275~~257			3047,~~526~~093
Gross profit		6772,~~366~~651			5867,~~861~~325			~~132~~205,~~769~~420			~~116~~183,~~217~~542
Operating expenses:
Research and development		18,~~445~~618			1415,~~528~~515			3756,~~601~~219			3147,~~978~~493
Sales and marketing		4039,~~516~~051			3638,~~388~~245			80119,~~047~~098			73111,~~512~~757
General and administrative		1213,~~646~~872			1213,~~375~~645			2741,~~917~~789			2539,~~911~~556
Restructuring charges		-			-			2,551			667
Amortization of intangible assets		~~132~~644			~~132~~133			~~264~~908			~~449~~582
Total operating expenses		7172,~~739~~185			6367,~~423~~538			~~148~~220,~~380~~565			~~132~~200,~~517~~055
Loss from operations		(4,373	)		(4,562	)		(15,611	)		(16,300	)
Income (loss) from operations		466			(213	)		(15,145	)		(16,513	)
Gain on sale of business		-			-			-			35,871
Other income, net		~~972~~1,034			~~158~~567			12,~~949~~983			66633
(Loss) income before provision for income taxes		(3,401	)		(4,404	)		(13,662	)		19,637
Income (loss) before provision for income taxes		1,500			354			(12,162	)		19,991
Income tax expense (benefit)		19,658			(914	)		19,178			44
Income tax expense		442			724			19,620			768
Net (loss) income	$	(23,059	)	$	(3,490	)	$	(32,840	)	$	19,593
Net income (loss)	$	1,058		$	(370	)	$	(31,782	)	$	19,223
Earnings per share:
Basic	$	(0.6603	)	$	(0.1001	)	$	(0.9591	)	$	0.5957
Diluted	$	(0.6603	)	$	(0.1001	)	$	(0.9591	)	$	0.5856
Shares used in computing earnings per share:
Basic		3435,~~833~~066			33,~~640~~907			34,~~638~~782			33,~~425~~590
Diluted		3435,~~833~~745			33,~~640~~907			34,~~638~~782			3334,~~984~~118

See Notes to Condensed Consolidated Financial Statements

IMPERVA, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss) ~~Income~~

(In thousands)

(Unaudited)

	Three months ended June 30,						Six months ended June 30,
	Three months ended September 30,						Nine months ended September 30,
	2018			2017			2018			2017
Net (loss) income	$	(23,059	)	$	(3,490	)	$	(32,840	)	$	19,593
Net income (loss)	$	1,058		$	(370	)	$	(31,782	)	$	19,223
Other comprehensive (loss) income, net of tax:
Other comprehensive income (loss), net of tax:
Net change in net unrealized (loss) gain on investments		167			22			(229	)		50
Net change in net unrealized gain (loss) on investments		284			55			55			105
Net change in unrealized (loss) gain on hedging instruments		(1,867	)		419			(2,278	)		2,148
Net change in unrealized gain (loss) on hedging instruments		891			(987	)		(1,387	)		1,161
Total other comprehensive (loss) income, net of tax		(1,~~700~~175	)		~~441~~(932	)		(21,~~507~~332	)		21,~~198~~266
Comprehensive (loss) income	$	(24,759	)	$	(3,049	)	$	(35,347	)	$	21,791
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 six months ended June 30, 2018
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		~~722~~917,~~587~~271		-		910,~~995~~799			-			-			910,~~995~~799
Stock-based compensation		-		-		2537,~~950~~931			-			-			2537,~~950~~931
Shares withheld for tax withholding on vesting of restricted stock units		-		-		(69,~~753~~151	)		-			-			(69,~~753~~151	)
Assumed equity awards in acquisitions						564									564
Component of other comprehensive income (loss), net of tax
Change in unrealized loss on investments		-		-		-			-			(229	)		(229	)
Change in unrealized gain on investments		-		-		-			-			55			55
Change in unrealized loss on hedging instruments		-		-		-			-			(21,~~278~~387	)		(21,~~278~~387	)
Net loss		-		-		-			(3231,~~840~~782	)					(3231,~~840~~782	)
Comprehensive loss		-		-		-			-			-			(3533,~~347~~114	)
Balance as at June 30, 2018		34,956,475	$	3	$	601,298		$	(269,904	)	$	(2,962	)	$	328,435
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 six months ended June 30, 2017
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		~~724~~924,~~907~~350		-		1417,~~851~~915			-			-			1417,~~851~~915
Stock-based compensation		-		-		2536,~~117~~588			-			-			2536,~~117~~588
Shares withheld for tax withholding on vesting of restricted stock units		-		-		(68,~~621~~217	)		-			-			(68,~~621~~217	)
Components of other comprehensive income (loss), net of tax
Components of other comprehensive income, net of tax
Change in unrealized gain (loss) on investments		-		-		-			-			50			50
Change in unrealized gain on investments		-		-		-			-			105			105
Change in unrealized gain (loss) on hedging instruments		-		-		-			-			2,148			2,148
Change in unrealized gain on hedging instruments		-		-		-			-			1,161			1,161
Net income		-		-		-			19,~~593~~223			-			19,~~593~~223
Comprehensive income															2120,~~791~~489
Balance as at June 30, 2017		33,813,897	$	3	$	546,205		$	(259,813	)	$	720		$	287,115
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)

	Six months ended June 30
	Nine months ended September 30
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(32,840	)	$	19,593
Net income (loss)	$	(31,782	)	$	19,223
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		68,~~196~~709			47,~~943~~780
Amortization of deferred costs		23,~~311~~864			-
Stock-based compensation		2537,~~950~~931			2536,~~117~~588
Amortization of acquired intangibles		~~264~~908			~~449~~582
Amortization of premiums/accretion of discounts on short-term investments		130			(104	)
Loss on disposals		-			48
Amortization of premiums/accretion of discounts on short-term investments		163			56
Gain on sale of business		-			(35,871	)
Other adjustments		769			(1,255	)
Facilities exit costs		559			-
Other adjustments		668			(1,090	)
Changes in operating assets and liabilities:
Accounts receivable, net		58,~~228~~741			32,~~238~~767
Inventory		~~351~~355			~~192~~61
Deferred costs		(1014,~~106~~541	)		-
Prepaid expenses and other assets		~~1,487~~558			(~~864~~794	)
Accounts payable		(~~695~~653	)		(~~1,901~~628	)
Income tax payable		98,~~696~~597			~~1,148~~707
Accrued compensation and benefits		~~(245~~509	)		3,~~626~~981
Accrued and other liabilities		79,~~157~~033			14,~~842~~229
Severance pay (net)		~~712~~81			~~246~~256
Deferred revenue		1833,~~958~~848			513,~~132~~253
Deferred tax assets		1,~~005~~027			(1,~~593~~682	)
Net cash provided by operating activities		3668,~~328~~575			2349,~~938~~466
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales/maturities of short-term investments		3271,~~609~~736			5066,~~923~~463
Purchase of short-term investments		(5153,~~253~~339	)		(6991,~~451~~878	)
Proceeds from sale of business		-			35,015
Net purchases of property and equipment		(3,443	)		(6,546	)
Receipt of cash in escrow from sale of business		5,000			-
Net cash (used in) provided by investing activities		(22,087	)		9,941
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		910,~~995~~799			1114,~~725~~790
Shares withheld for tax withholding on vesting of restricted stock units		(69,~~753~~151	)		(68,~~621~~217	)
Net cash provided by financing activities		31,~~242~~648			56,~~104~~573
Effect of exchange rate changes on cash, cash equivalents, and restricted cash		(~~799~~698	)		1,~~255~~090
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		16,684			40,238
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	$	~~211~~158,~~558~~565		$	~~149~~166,~~533~~189
NONCASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired but not yet paid	$	1,~~609~~691		$	23,~~520~~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 ~~and six~~ months ended ~~June~~September 30, 2018, there was noone ~~significant~~channel ~~customer~~partner ~~which~~that represented more than 10% orof 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 ~~six~~nine months ended ~~June~~September 30, 2017, there was one ~~customer~~significant channel partner that represented 12more than 10% of the Company’s total revenue. As of ~~June~~September 30, 2018, ~~there~~one ~~are~~channel ~~two~~partner ~~customers who each~~ represented 1216% ~~and 10%~~ of the Company’s total accounts receivable balance. As of December 31, 2017, one ~~customer~~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 a separate note below.~~

Innew ~~May~~policy ~~2017,~~with ~~the~~significant 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~~quantitative ofimpact 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 Q1’18. The Company noted the application of ~~this ASU did not have any material impact on~~ the ~~condensed~~changes ~~consolidated~~are ~~financial~~described ~~statements~~ in ~~the~~below ~~current~~under ~~period~~“Revenue ~~and~~from isContracts ~~not~~with ~~expected to have material impacts in future periods as well~~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):

	Six months ended
	Nine months ended
	June 30, 2018			June 30, 2017
	September 30, 2018			September 30, 2017
	As Reported			As Reported			As Previously Reported
Change in restricted cash							$	(~~154~~302	)
Net cash provided by (used in) investing activities		(22,087	)	$	9,941			9,787
Net cash used in investing activities		(105,834	)	$	(235	)		(537	)
Net increase		16,684			40,238			40,084
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*		~~211~~158,~~558~~565			~~149~~166,~~533~~189			~~147~~163,~~427~~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 ~~impact of this accounting standard update will be fact dependent. 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 ~~six~~nine ~~months~~month period ended ~~June~~September 30, 2018 reflect the application of the new revenue standard while the reported results for three and ~~six~~nine months period ended ~~June~~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 ~~our~~the Company’s historical experience. The impact of such price reductions on ~~our~~the Company’s revenue for the three and ~~six~~nine month period ended ~~June~~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 ~~good~~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 ~~revenues~~revenue and revenue recognition policies for the different types of ~~revenues~~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.

~~Service~~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 ~~our~~of customer contracts, ~~our~~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~~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 ~~for 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 ~~six~~nine months ended ~~June~~September 30, 2018. Select consolidated balance sheet line items that reflect the adoption of the new standard are as follows (in thousands):

June 30, 2018

As of September 30, 2018

As reported

Adjustments

Balances without adoption of Topic 606

ASSETS

Deferred cost, current

56,~~765~~647

(56,~~765~~647

)

Other assets including non-current deferred costs

1921,~~393~~388

(1719,941

)

1,~~452~~447

LIABILITIES AND STOCKHOLDERS' EQUITY

Deferred revenue, current

~~128~~137,~~519~~814

513,~~769~~781

~~134~~151,~~288~~595

Deferred revenue

4654,~~132~~022

(1,~~989~~372

)

4852,~~121~~650

STOCKHOLDERS' EQUITY

Accumulated deficit

(~~269~~268,~~904~~846

)

(3138,~~464~~997

)

(~~301~~307,~~368~~843

)

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

	Three months ended June 30, 2018									Six months ended June 30, 2018
	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	$	1923,~~218~~241		$	(23,~~776~~377	)	$	1619,~~442~~864		$	3962,~~730~~971		$	(36,~~010~~387	)	$	3656,~~720~~584
Services:
Subscriptions		3638,~~484~~519			(60378	)		3638,~~424~~141			71109,~~438~~957			26(352	)		71109,~~464~~605
Maintenance and Support		2425,~~948~~220			(~~440~~967	)		24,~~508~~253			5075,~~173~~393			(12,~~398~~365	)		4873,~~775~~028
Professional services and training		4,~~150~~653			~~124~~71			4,~~274~~724			712,~~703~~356			~~186~~257			712,~~889~~613
Total services		6568,~~582~~392			(~~376~~1,274	)		6567,~~206~~118			~~129~~197,~~314~~706			(12,~~186~~460	)		~~128~~195,~~128~~246
Total net revenue		8491,~~800~~633			(34,~~152~~651	)		8186,~~648~~982			~~169~~260,~~044~~677			(48,~~196~~847	)		~~164~~251,~~848~~830
Operating expenses:
Sales and marketing		4039,~~516~~051			52,~~211~~882			4541,~~727~~933			80119,~~047~~098			710,~~795~~677			87129,~~842~~775
Loss from operations		(4,373	)		(8,363	)		(12,736	)		(15,611	)		(11,991	)		(27,602	)
Income (loss) from operations		466			(7,533	)		(7,067	)		(15,145	)		(19,524	)		(34,669	)
Net loss		(23,059	)		(8,363	)		(31,422	)		(32,840	)		(11,991	)		(44,831	)
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	$	(0.6603	)	$	~~(0.24~~	)	$	(0.9018	)	$	(0.9591	)	$	~~(0.35~~	)	$	(1.2948	)

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

	Six months ended June 30, 2018
	Nine months ended September 30, 2018
Statement of Cash Flows	As reported			Adjustments			Balance without adoption of Topic 606
Net loss	$	(3231,~~840~~782	)	$	(1119,~~991~~524	)	$	(4451,~~831~~306	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Amortization of deferred costs		23,~~311~~864			(23,~~311~~864	)		-
Changes in operating assets and liabilities:
Deferred costs		(1014,~~106~~541	)		1014,~~106~~541			-
Deferred revenue		1833,~~958~~848			48,~~196~~847			2342,~~154~~695
Net cash provided by operating activities	$	3668,~~328~~575					$	3668,~~328~~575

Disaggregation of Revenue

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

	Three months ended June 30					Six months ended June 30
	Three months ended September 30				Nine months ended September 30
	2018		2017		2018	~~2018~~		2017	~~2017~~
Major product/service lines
Products and licenses	$	1923,~~218~~241	$	2026,~~012~~627	$	$62,971	~~39,730~~	$	$66,217	~~39,590~~
Services:
Subscriptions		3638,~~484~~519		2830,~~097~~956		109,957	~~71,438~~		86,305	~~55,349~~
Maintenance and support		2425,~~948~~220		2223,~~596~~133		75,393	~~50,173~~		67,709	~~44,576~~
Professional services and training		4,~~150~~653		3,~~730~~176		12,356	~~7,703~~		10,404	~~7,228~~
		65,582		54,423			129,314			107,153
		68,392		57,265		197,706			164,418
Total revenue	$	8491,~~800~~633	$	7483,~~435~~892	$	$260,677	~~169,044~~	$	$230,635	~~146,743~~

The ~~company~~Company’s revenue by geographic region is based on the customer’s location and presented under footnote 1011.

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

Three months ended June 30

Six months ended June 30

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

1923,~~218~~241

2026,~~012~~627

3962,~~730~~971

3966,~~590~~217

Products and services transferred over time

6568,~~582~~392

5457,~~423~~265

~~129~~197,~~314~~706

~~107~~164,~~153~~418

Total revenue

8491,~~800~~633

7483,~~435~~892

~~169~~260,~~044~~677

~~146~~230,~~743~~635

Deferred Revenue

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

	As of June 30, 2018
	As of September 30, 2018
Deferred revenue (current)	$	~~128~~137,~~519~~814
Deferred revenue		4654,~~132~~022
Total Deferred Revenue	$	174,651
Total deferred revenue	$	191,836

The deferred revenue balance includes customer deposits of $23.62 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 ~~our~~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.

$3650.18 million and $82110.50 million of services revenue was recognized during the three and ~~six~~nine months ended ~~June~~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 ~~June~~September 30, 2018 (in thousands).

	Remainder of 2018		2019		2020		2021		Thereafter
Performance obligations transferred over time	$	8853,~~060~~896	$	5794,~~418~~348	$	2130,~~854~~387	$	611,~~011~~458	$	1,~~308~~747
Total net revenue	$	8853,~~060~~896	$	5794,~~418~~348	$	2130,~~854~~387	$	611,~~011~~458	$	1,~~308~~747

Amortization of Deferred Costs

Deferred costs primarily consist of capitalized incremental contract origination costs and were $~~23,706~~26.6 million and $15~~,911~~.9 million as of ~~June~~September 30, 2018 and January 1, 2018 respectively. ~~For~~Amortization costs of $1.6 million and $3.9 million were recorded for the three and ~~six~~nine months ended ~~June~~September 30, 2018, ~~amortization costs of $1,270 and $2,311 were recorded~~ 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 June 30, 2018		As of December 31, 2017		As of June 30, 2017		As of December 31, 2016
	As of September 30, 2018		As of December 31, 2017		As of September 30, 2017		As of December 31, 2016
Cash and cash equivalents	$	~~209~~155,~~194~~932	$	192,538	$	~~147~~163,~~427~~935	$	107,343
Restricted cash included in Current assets		30		52		5251		68
Restricted cash included in Non-current assets		2,~~334~~603		2,284		2,~~054~~203		1,884
Total cash, cash equivalents, and restricted cash shown in the Statements of Cash Flows	$	~~211~~158,~~558~~565	$	194,874	$	~~149~~166,~~533~~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 ~~(expense)~~, net in the condensed consolidated statements of operations.

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

	As of June 30, 2018
	As of September 30, 2018
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Cash and cash equivalents:
Cash	$	64101,~~042~~873		-		-	$	64101,~~042~~873
Money market funds		~~145~~54,~~152~~059		-		-		~~145~~54,~~152~~059
U.S. government and U.S. government agencies		-		-		-		-
Total	$	~~209~~155,~~194~~932	$	-	$	-	$	~~209~~155,~~194~~932
Short-term investments:
Commercial paper		~~1,492~~-		1-		2-		~~1,491~~-
Corporate debt obligations		~~124~~106,~~370~~651		-2		~~669~~395		~~123~~106,~~701~~258
U.S. government and U.S. government agencies		6042,~~012~~147		7-		~~172~~158		5941,~~847~~989
Certificate of deposits		240		-		1-		~~239~~240
Total	$	~~186~~149,~~114~~038	$	82	$	~~844~~553	$	~~185~~148,~~278~~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		-		488		122,832
U.S. government and U.S. government agencies		43,097		-		114		42,983
Certificate of deposits		480		-		1		479
Total	$	167,596		-	$	603	$	166,993

The following table summarizes the cost and estimated fair value of short-term investments based on stated effective maturities as of ~~June~~September 30, 2018 (in thousands):

	As of June 30, 2018
	As of September 30, 2018
			Estimated
	Amortized		Fair
	Cost		Value
Short-term investments:
Due within one year	$	~~130~~112,~~463~~157	$	~~129~~111,~~982~~731
Due within two years		5536,~~651~~881		5536,~~296~~756
Total	$	~~186~~149,~~114~~038	$	~~185~~148,~~278~~487

The gross unrealized loss related to these securities was due primarily to changes in interest rates. The Company reviews its short-term investments on a regular basis to evaluate whether or not any security has experienced an other-than-temporary decline in fair value. The Company considers factors such as the length of time and extent to which the market value has been less than the cost, the financial condition and near-term prospects of the issuer and its intent to sell, or whether it is more likely than not the Company will be required to sell, the investment before recovery of the investment’s amortized cost basis. If the Company believes that an other-than-temporary decline exists in one of these securities, the Company will write down these investments to fair value. For debt securities, the portion of the write-down related to credit loss would be recorded to other income ~~(expense)~~, net, in the Company’s condensed consolidated statements of operations. Any portion not related to credit loss would be recorded to accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders’ equity in the Company’s condensed consolidated balance sheets. During the three and ~~six~~nine months ended ~~June~~September 30, 2018 and 2017, the Company did not consider any of its investments to be other-than-temporarily impaired.

The following tables show the short-term investments in an unrealized loss position and the related gross unrealized losses and fair value and length of time that the short-term investments have been in a continuous unrealized loss position (in thousands):

As of June 30, 2018

As of September 30, 2018

Less than 12 Months

12 Months or Greater

Total

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

Commercial paper

~~1,044~~-

Corporate debt obligations

5341,~~163~~832

~~331~~191

7056,~~538~~755

~~338~~204

~~123~~98,~~701~~587

~~669~~395

U.S. government and U.S. government agencies

4641,~~283~~388

~~165~~158

~~7,593~~-

5341,~~876~~388

~~172~~158

Certificate of deposits

~~239~~240

~~100~~83,~~490~~220

~~498~~349

7856,~~370~~995

~~346~~204

~~178~~140,~~860~~215

~~844~~553

	As of December 31, 2017
	Less than 12 Months				12 Months or Greater				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Commercial paper	$	699	$	-	$	-	$	-	$	699	$	-
Corporate debt obligations		77,715		377		45,117		111		122,832		488
U.S. government and U.S. government agencies		29,093		76		11,461		38		40,554		114
Certificate of deposits		-		-		479		1		479		1
	$	107,507	$	453	$	57,057	$	150	$	164,564	$	603

3. Fair Value of Financial Instruments

The Company evaluates assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level to classify them for each reporting period. There have been no transfers between fair value measurement levels during the three and ~~six~~nine months ended ~~June~~September 30, 2018.

The Company’s cash equivalents and short-term investment instruments are classified within Level I or Level II of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include mutual funds and money market securities, and are generally classified within Level I of the fair value hierarchy. The types of instruments valued based on quoted prices in less active markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability include U.S. agency securities, investment-grade corporate bonds, bank deposits, and commercial paper. Such instruments are generally classified within Level II of the fair value hierarchy.

The Company executes its foreign currency contracts primarily in the retail market in an over-the-counter environment with a relatively high level of price transparency. The market participants usually are large multi-national and regional banks. The Company’s foreign currency contracts valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level II of the fair value hierarchy.

The following table sets forth the Company’s assets and liabilities that were measured at fair value as of ~~June~~September 30, 2018 and December 31, 2017, by level within the fair value hierarchy (in thousands):

As of June 30, 2018

As of September 30, 2018

Level I

Level II

Level III

Fair Value

Financial Assets:

Cash equivalents:

Money market funds

~~145~~54,~~152~~059

Short-term investments:

Commercial paper

~~1,491~~-

Corporate debt obligations

~~123~~106,~~701~~258

U.S. government and U.S. government agencies

5941,~~847~~989

Certificate of deposits

~~239~~240

Total financial assets

~~145~~54,~~152~~059

~~185~~148,~~278~~487

~~330~~202,~~430~~546

Financial Liability:

Accrued and other current liabilities - Forward foreign exchange contracts

~~1,412~~585

	As of December 31, 2017
	Level I		Level II		Level III		Fair Value
Financial Assets:
Cash equivalents:
Money market funds	$	84,144	$	-	$	-	$	84,144
U.S. government and U.S. government agencies				16,364				16,364
Short-term investments:
Commercial paper		-		699		-		699
Corporate debt obligations		-		122,832		-		122,832
US government and US government agencies		-		42,983		-		42,983
Certificate of deposits		-		479		-		479
Prepaid expenses and other current assets - Forward foreign exchange contracts		-		551		-		551
Total financial assets	$	84,144	$	183,908	$	-	$	268,052

In addition to the amounts disclosed in the above table, the fair value of the Company’s Israeli severance pay assets, totaling $5.98 million and $6.6 million as of ~~June~~September 30, 2018 and December 31, 2017, respectively comprised of Level II assets.

4. Derivative Instruments

The Company’s primary objective for holding derivative instruments is to reduce its exposure to foreign currency rate changes. The Company reduces its exposure by entering into forward foreign exchange contracts with respect to operating expenses that are forecast to be incurred in currencies other than U.S. dollars. Substantially all of the Company’s revenue and capital purchasing activities and a majority of its operating expenditures are transacted in U.S. dollars. However, certain operating expenditures are incurred in or exposed to other currencies, primarily the Israeli shekel, the British pound and the Euro.

The Company has established forecasted transaction currency risk management programs to protect against fluctuations in fair value and the volatility of future cash flows caused by changes in exchange rates. The Company’s currency risk management program includes forward foreign exchange contracts designated as cash flow hedges. These forward foreign exchange contracts generally mature within 12 months. The Company does not enter into derivative financial instruments for trading purposes.

Derivative instruments measured at fair value and their classification on the condensed consolidated balance sheets are presented in the following tables (in thousands):

	As of June 30, 2018					As of December 31, 2017
	As of September 30, 2018					As of December 31, 2017
	Notional Amount		Fair Value			Notional Amount		Fair Value
Foreign exchange forward contract derivatives in cash flow hedging relationships - included in (accrued and other current liabilities)	$	3012,~~070~~059	$	(~~1,412~~585	)	$	-	$	-
Foreign exchange forward contract derivatives in cash flow hedging relationships - included in prepaid expenses and other current assets	$	-	$	-		$	66,560	$	551

Gains (losses) on derivative instruments and their classification on the condensed consolidated statement of operations are presented in the following table (in thousands):

	For the three months ended June 30						For the six months ended June 30
	2018			2017			2018			2017
Foreign Exchange Forward Contract Derivatives in cash flow hedging relationships:
Gains recognized in OCI (a)	$	0		$	1,445		$	356		$	4,332
Losses recognized in OCI (a)	$	(2,202	)		(17	)	$	(2,714	)		(17	)
Gains recognized from accumulated OCI into net income (b)	$	60		$	782		$	317		$	988
Losses recognized from accumulated OCI into net income (b)	$	(395	)	$	(5	)	$	(395	)	$	(10	)

Gains (losses) on derivative instruments and their classification on the condensed consolidated statement of operations are presented in the following table (in thousands):

	For the three months ended September 30						For the nine months ended September 30
	2018			2017			2018			2017
Foreign exchange forward contract derivatives in cash flow hedging relationships:
Gains recognized in OCI (a)	$	114		$	90		$	470		$	4,422
Losses recognized in OCI (a)		(48	)		(513	)		(2,762	)		(530	)
Gains recognized from accumulated OCI into net income (b)	$	-		$	1,115		$	317		$	2,103
Losses recognized from accumulated OCI into net income (b)	$	(825	)	$	-		$	(1,222	)	$	(10	)

(a)	Net change in the fair value of the effective portion classified in other comprehensive income (loss) (“OCI”).

(b) Effective portion of cash flow hedges reclassified from accumulated other comprehensive income (loss) into earnings, of which $70155 and $~~265~~670 were recognized within cost of sales and operating expenses, respectively, for the three months ended ~~June~~September 30, 2018; $14144 of ~~gains~~losses and $92761 of losses, were recognized within cost of sales and operating expenses, respectively, for the ~~six~~nine months ended ~~June~~September 30, 2018; $54199 and $~~723~~916 were recognized within cost of sales and operating expenses, respectively, for the three months ended ~~June~~September 30, 2017 and $68267 and $~~910~~1,826 were recognized within cost of sales and operating expenses, respectively, for the ~~six~~nine months ended ~~June~~September 30, 2017. All amounts are reflected within the respective condensed consolidated statement of operations.

5. ~~Goodwill~~Business ~~and Acquired Intangible Assets~~Combinations

On August 9, 2018, the Company completed the acquisition of Prevoty, Inc (“Prevoty”), a private software security company based in Los Angeles, California that provides Runtime Application Self-Protection, or security tools that function within actual software applications. Imperva’s condensed consolidated statements of operations include the operating results of the Prevoty business from the date of acquisition.

The Company has accounted for this acquisition as a business combination. The Company incurred approximately $1.3 million in transaction costs related to the acquisition of which $1.1 million was incurred during three months ended on September 30, 2018. These expenses were recorded in general and administrative expense in the accompanying condensed consolidated statement of operations for the three- and nine-month periods ended September 30, 2018.

The acquisition date fair value of the consideration transferred for Prevoty was approximately $132.8 million, including the following (in thousands):

Cash consideration	$	132,152
Fair value of equity awards		564
Assumed liability		100
Total purchase consideration	$	132,816

The purchase consideration reflects the payment of cash consideration of $132.2 million, including cash transferred to selling shareholders and repayment of Prevoty’s historical related-party note payable which was accelerated on the closing of the transaction. The purchase consideration is subject to a new working capital adjustment to be finalized by the parties.

In connection with the acquisition, certain Prevoty stock options that were outstanding, unexercised and unvested were assumed and converted into options to purchase Imperva common stock. Separately, certain Prevoty stock options were cancelled and Imperva granted these individuals restricted stock units under the Company’s Amended and Restated 2015 Equity Inducement Plan. The amounts included in consideration transferred are amounts attributable to services rendered prior to the closing date.

Additionally, per the terms of the merger agreement, certain Prevoty employees agreed to the imposition of vesting restrictions on a portion of the shares of Prevoty stock held by them prior to the merger. As a result of these restrictions, the Company withheld approximately $17.1 million of the cash proceeds otherwise payable in respect of the revested shares, and is required to pay such withheld amounts to such employees over a time-based vesting schedule, subject to continuing employment. Such amounts are excluded from the purchase consideration above and will be recognized as compensation expense post-acquisition over the vesting period of 3 years.

The following table summarizes the preliminary fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):

Cash	$	8,500
Accounts receivable		1,467
Other current and noncurrent assets		435
Intangible assets		12,100
Deferred revenue, current		(1,377	)
Other current liabilities		(447	)
Deferred revenue, noncurrent		(918	)
Net identifiable assets		19,760
Goodwill		113,056
Total purchase consideration	$	132,816

Prior to the acquisition, Prevoty had a net deferred tax asset position and Prevoty continues to be in a net deferred tax asset position, after adjustments for deferred tax liability of $5.4 million related to purchase accounting adjustments. The net deferred tax asset is subject to a full valuation allowance. Imperva’s U.S. net deferred tax asset was also subject to a full valuation allowance. Therefore, the combined U.S. deferred tax asset position remained unchanged as a result of the acquisition.

The allocation of the purchase price is preliminary, subject to potential future measurement period adjustments, including adjustments relating to certain assumed tax liabilities and net working capital adjustment.

Goodwill

The excess of the consideration for Prevoty over the fair values assigned to the assets acquired and liabilities assumed represents the goodwill resulting from the acquisition. Goodwill is primarily attributable to expected post-acquisition synergies from integrating Prevoty’s technology into Imperva’s cyber security solutions. Goodwill recorded in connection with the acquisition is not deductible for income tax purposes. The goodwill attributable to the acquisition was recorded as a non-current asset and is not amortized, but is subject to an annual review for impairment.

Identifiable Intangible Assets

The Company determined that Prevoty’s separately identifiable intangible assets were developed technology, customer contracts and related relationships, trade names and other. The Company amortizes the acquired intangibles over their estimated useful lives as set forth in the table below.

	Useful life (years)		Fair value
Acquired technology		4.0	$	9,500
Customer relationships		2.0		1,800
Trade name and other		3.0		800
Total acquired intangibles			$	12,100

Since the Acquisition, we continue to operate in a single operating segment.

The amounts of revenue and pretax loss of Prevoty included in the Company’s condensed consolidated statement of operations from the acquisition date in August 2018 were not material to the Company’s results of operations.

Pro Forma Consolidated Results of Operations

The following unaudited pro forma results of operations present the combined results of operations of the Company and Prevoty as if the acquisition had been completed at the beginning of fiscal 2017. The historical consolidated financial statements have been adjusted in the pro forma combined financial statements to give effect to pro forma events that are directly attributable to the business combination and factually supportable.

The pro forma information includes adjustments to the amortization expense from acquired intangible assets and the stock-based compensation expense for unvested stock options assumed and restricted stock units granted. In addition, the pro forma consolidated results of operations for the three and nine months ended on September 30, 2018 have been adjusted to include impact of Prevoty’s adoption of the new revenue standard as Prevoty, as a private company, had not adopted the new revenue standard prior to the acquisition. The pro forma results for the comparative period include a non-recurring adjustment for transaction costs incurred in connection with the acquisition.

The pro forma data are for informational purposes only and are not necessarily indicative of the consolidated results of operations of the combined business had the acquisition actually occurred at the beginning of fiscal 2017 or of the results of future operations of the combined business. Consequently, actual results may differ from the unaudited pro forma information presented below (in thousands).

	For the three months ended September 30						For the nine months ended September 30
	2018			2017			2018			2017
Pro forma revenues	$	91,891		$	84,746		$	265,429		$	232,959
Pro forma net income (loss)	$	(121	)	$	(4,513	)	$	(39,144	)	$	5,954

6. Goodwill and Acquired Intangible Assets

Goodwill represents the excess of the purchase price in a business combination over the fair value of net assets acquired. Goodwill amounts are not amortized, but rather tested for impairment at least annually.

The Company did not have any goodwill impairments during three and ~~six~~nine months ended ~~June~~September 30, 2018 and 2017.

The changes in the carrying amount of goodwill for the period ended ~~June~~September 30, 2018 were as follows (in thousands):

Balance as of January 1	$	36,389
Changes during the six month period		-
Changes during the nine month period		113,056
Balance as of June 30	$	36,389
Balance as of September 30	$	149,445

The Company amortizes intangible assets, which consist of purchased technologies that have estimated useful lives ranging from 72 to 10 years, using the straight-line method when the consumption pattern of the asset cannot be reliably determined. The Company reviews such assets for impairment whenever an impairment indicator exists and continually monitors events and changes in circumstances that could indicate carrying amounts of the intangible assets may not be recoverable. When such events or changes in circumstances occur, the Company assesses recoverability by determining whether the carrying value of such assets exceed the estimates of future undiscounted future cash flows expected to be generated by such assets. Should impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the asset’s estimated fair value. There was no impairment of intangible assets recorded for the three and ~~six~~nine months ended ~~June~~September 30, 2018 and 2017.

Acquired intangible assets subject to amortization are presented as follows (in thousands):

	As of June 30, 2018
	As of September 30, 2018
	Weighted Average Remaining Useful life (years)		Gross Carrying Amount		Accumulated Amortization			Net Book Value
Acquired technology		54.51	$	313,~~753~~253	$	(1,~~427~~874	)	$	211,~~326~~379
Customer relationships		53.54		~~480~~2,280		(~~106~~253	)		~~374~~2,027
Trade name and other		52.54		~~280~~1,080		(60110	)		~~220~~970
Total acquired intangibles		53.59	$	416,~~513~~613	$	(12,~~593~~237	)	$	214,~~920~~376
	As of December 31, 2017
	Weighted Average Remaining Useful life (years)		Gross Carrying Amount		Accumulated Amortization			Net Book Value
Acquired technology		6.0	$	3,753	$	(1,216	)	$	2,537
Customer relationships		6.0		480		(71	)		409
Trade name and other		6.0		280		(42	)		238
Total acquired intangibles		6.0	$	4,513	$	(1,329	)	$	3,184

20As of September 30, 2018, the amortization expense in future periods is expected to be as follows (in thousands):

As of June 30, 2018, the amortization expense in future periods is expected to be as follows (in thousands):

	Acquired
Fiscal Year	Technology
2018 (remaining 3 months)		1,018
2019		4,071
2020		3,716
2021		3,065
2022		1,967
Thereafter		539
Total expected amortization expense	$	14,376

	Acquired
Fiscal Year	Technology
2018 (remaining 6 months)		265
2019		529
2020		529
2021		529
Thereafter		1,068
Total expected amortization expense	$	2,920

7. Commitments and Contingencies

6. Commitments and Contingencies

(a) Operating Leases

The Company rents its facilities under operating leases with lease periods expiring through 2023. Future minimum payments under these facility operating leases and minimum rentals to be received under non-cancellable subleases as of ~~June~~September 30, 2018 are as follows (in thousands):

	Operating Leases		Estimated Sublease Income
Period Ending June 30:
2018 (remaining 3 months)		1,858		215
2018 (remaining 6 months)		3,912		312
2019		8,017		264
2019		5,013		-
2020		5,159		269
2020		4,754		-
2021		863		87
2021		611		-
2022		465		87
Thereafter		~~480~~109		-
Total	$	1416,~~770~~471	$	~~312~~922

Rent expense for the Company’s operating leases is recognized on a straight-line basis over the lease term. Rent expense for the ~~six~~nine months ended ~~June~~September 30, 2018 and 2017 was $3.5.3 million and $34.29 million, respectively.

In connection with leases of office space, the Company may receive tenant improvement allowances from lessors for certain improvements the Company makes to the leased properties. The Company records the tenant improvement allowances as a leasehold improvement within property and equipment, net, and as deferred rent within other liabilities on the condensed consolidated balance sheets. The deferred rent liability is amortized to rent expense over the term of the lease on a straight-line basis. The leasehold improvements are amortized to expense over the period from when the improvements were placed into service until the end of their useful life, which is the end of the lease term. For the three and six months ending June 30, 2018 and 2017, the Company did not receive any tenant improvement allowances. 23

In connection with leases of office space, the Company may receive tenant improvement allowances from lessors for certain improvements the Company makes to the leased properties. The Company records the tenant improvement allowances as a leasehold improvement within property and equipment, net, and as deferred rent within other liabilities on the condensed consolidated balance sheets. The deferred rent liability is amortized to rent expense over the term of the lease on a straight-line basis. The leasehold improvements are amortized to expense over the period from when the improvements were placed into service until the end of their useful life, which is the end of the lease term. For the three and nine months ending September 30, 2018 and 2017, the Company did not receive any tenant improvement allowances.

In addition, certain of the Company’s operating lease agreements for office space also include rent holidays and scheduled rent escalations during the initial lease term. The Company has recorded the rent holidays as a deferred rent within other liabilities on the condensed consolidated balance sheets. The Company recognizes the deferred rent liability and scheduled rent increase on a straight-line basis into rent expense over the lease term commencing on the date the Company takes possession of the lease space.

As of ~~June~~September 30, 2018 and December 31, 2017 the Company had $2.5 million and $2.3 million, respectively, in restricted deposits to secure bank guarantees provided to its lessors.

In September 2018, the Company exited and subleased a portion of its facilities located in Redwood Shores, California and recorded a facility exit cost of $0.6 million in connection with the exit. The facility exit cost is recorded in “General and administrative” expenses.

(b) Cancelable Lease Agreements

The Company leases motor vehicles under cancelable operating lease agreements. The Company has an option to cancel the lease agreements, which may result in penalties in a maximum amount of $0.1 million as of ~~June~~September 30, 2018. Motor vehicle lease expenses for the ~~six~~nine months ended ~~June~~September 30, 2018 and 2017 were $23.56 million and $13.54 million, respectively.

As of ~~June~~September 30, 2018 and December 31, 2017, the Company had purchase commitments of $32.42 million and $2.6 million, respectively, to purchase inventory, trial units, and research and development equipment from its vendors. The purchase commitments result from the Company’s contractual obligation to order or build inventory in advance of anticipated sales. According to the Company’s agreements with its vendors, the Company is committed to purchase inventory within six months from the date the inventory arrived at the vendor’s warehouse.

(d) Litigation

From time to time, the Company may be subject to other legal proceedings and claims in the ordinary course of business.

On August 25, 2017, a purported class action lawsuit was filed against the Company and others, alleging that current, former and prospective employees are entitled to monetary damages for violations of the notice provisions of the Fair Credit Reporting Act (FCRA) and similar California laws governing background checks. The lawsuit was filed in the Superior Court for San Mateo County and on September 29, 2017, the Company removed the action to the U.S. District Court for the Northern District of California. On November 6, 2017, the Company filed a motion to dismiss the action. On April 9, 2018, the court ~~granted~~dismissed the ~~motion,~~complaint ~~dismissing~~in ~~several~~its ~~claims~~entirety, with ~~prejudice~~leave ~~and giving plaintiff thirty days~~ to ~~file~~amend anas ~~amended complaint with regards~~ to ~~the~~some ~~remaining claims~~counts. The plaintiff filed an amended complaint on May 10, 2018 ~~with~~asserting ~~only~~a ~~one~~ claim under the ~~Fair~~FCRA ~~Credit Reporting Act~~ and no claims under ~~the~~ similar California laws.

On August 25, 2017, the same plaintiff filed a second purported class action lawsuit against ~~the~~us ~~Company~~ and others in the Superior Court for San Mateo County, alleging, among other claims, violation of California wage and hour, laws regarding overtime, meal ~~break~~ and rest ~~break rules and regulations~~breaks, ~~failure~~business ~~to provide for proper~~ expense ~~reimbursements~~reimbursement, ~~failure to maintain~~ accurate and complete payroll records, ~~failure to pay commissions~~ and ~~unfair business practices~~commissions, and seeking unspecified monetary damages, injunctive relief and attorneys’ fees. ~~The~~We ~~Company~~ filed an answer to the complaint on September 29, 2017. On November 3, 2017, the plaintiff amended his complaint to assert an additional representative Private Attorney General Act (PAGA) claim against usthe Company. On December 6, 2017, ~~the~~we ~~Company~~ filed an answer to the amended complaint.

In June 2018, through formal mediation, the parties reached an agreement ~~in principle~~ to settle both ~~actions~~class action lawsuits. The ~~Company~~parties ~~recorded~~agreed anto ~~accrual~~settle ~~of $2.4~~the ~~million included~~two ~~under~~class ~~other~~action ~~current~~lawsuits ~~and accrued liabilities~~ for ~~the~~an ~~six~~aggregate ~~months~~amount ~~period~~of $2.4 ~~ended~~million. ~~June~~The ~~30,~~respective ~~2018~~courts tohave ~~cover~~preliminarily approved the ~~settlement of both~~ class ~~action lawsuits~~settlements. ~~Both~~Notice ~~settlements~~of ~~remain~~the ~~subject~~settlements tohas ~~the~~been ~~approval~~sent ofto the respective ~~courts~~settlement inclasses. ~~which~~The ~~the~~settlement ~~actions~~amount ~~were~~of ~~brought,~~$2.4 ~~among~~million ~~other~~has ~~conditions,~~been ~~and~~recorded ~~will~~in ~~not~~accrued beand ~~funded~~other ~~until~~current ~~the courts issue final approvals of the settlements~~liabilities.

In addition, the Company has received, and may in the future continue to receive, claims from third parties asserting, among other things, infringement of their intellectual property rights. Future litigation may be necessary to defend the Company, its channel partners and its customers by determining the scope, enforceability and validity of third-party proprietary rights or to establish its proprietary rights.

Except for the above settlement, in the opinion of management, liabilities associated with other claims from third parties, while possible, are not probable at this time, and therefore the Company has not recorded any accrual for them as of ~~June~~September 30, 2018 and December 31, 2017. Further, any possible range of loss cannot be reasonably estimated at this time. The ultimate outcome of any litigation is uncertain and, regardless of outcome, litigation can have an adverse impact on the Company because of defense costs, potential negative publicity, diversion of management resources and other factors. Accordingly, there can be no assurance that existing or future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on the Company’s business, condensed consolidated financial position, results of operations or cash flows.

(e) Indemnification

Under the indemnification provisions of its standard sales contracts, the Company agrees to defend its end customers and certain channel partners against third-party claims asserting infringement of certain intellectual property rights, which may include patents, copyrights, trademarks, or trade secrets, and to pay judgments and settlements entered on such claims. The Company’s exposure under these indemnification provisions is generally limited to the total amount paid under the agreement. However, some agreements include indemnification provisions that could potentially expose the Company to losses in excess of the amount received under the agreement. To date, there have been no claims under such indemnification provisions. Accordingly, the Company has not recorded a liability on its condensed consolidated balance sheets for these indemnification provisions.

In addition to the foregoing, the Company maintains director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify its directors and officers.

(f) Indemnification

We are also under audit by taxing authorities with regards to income tax matters. We have reserved for potential adjustments to our provision for income taxes that may result from examinations by, or any negotiated agreements with, these tax authorities. Although we believe our tax estimates are reasonable, the final determination of audits could be materially different from our historical income tax provisions and accruals. The results of an audit could have a material effect on our financial position, results of operations, or cash flows in the period for which that determination is made.

78. Stockholders’ Equity and Employee Stock Plans

(a) Preferred Stock

Our board of directors is authorized, subject to any limitations prescribed by law, without stockholder approval, to issue from time to time up to an aggregate of 5,000,000 shares of preferred stock, in one or more series, each series to have such rights and preferences, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences as the Company’s board of directors determines. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that may be issued in the future. The Company currently has no shares of preferred stock outstanding and the Company has no present plans to issue any shares of preferred stock.

(b) 2003 Stock Plan

During 2003, the Board of Directors adopted the 2003 Stock Plan (the “2003 Plan”), which allowed for the grant of both incentive stock options and non-qualified stock options and the direct award or sale of shares of the Company’s common stock (including restricted common stock) to officers, employees, directors, consultants and other key persons. In connection with the Company’s initial public offering, which was completed in November 2011, the Board of Directors determined not to grant any further awards under the 2003 Plan upon completion of the public offering. The 2011 Stock Option and Incentive Plan (the “2011 Plan”) replaced the 2003 Plan in November 2011. Under the 2003 Plan, incentive stock options could have been granted to employees with exercise prices of no less than the fair value of the common stock on the grant date, and non-qualified options could have been granted to employees, directors, or consultants at exercise prices of no less than 85% of the fair value of the common stock on the grant date, as determined by the Board of Directors. If, at the time the Company granted an option, the optionee directly or by attribution owned stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, the option price had to have been at least 110% of the fair value. Options granted under the 2003 Plan generally expire no later than ten years from the date of grant and, in general, vest four years from the date of grant.

In September 2011, the Board of Directors adopted the 2011 Plan which was subsequently approved by the Company’s stockholders. The 2011 Plan replaced the 2003 Plan and the Company no longer grants awards under the 2003 Plan. The Company initially reserved a total of 1,000,000 shares of common stock for issuance under the 2011 Plan. In addition, 955,568 reserved but unissued shares under the 2003 Stock Plan were added to the number of shares reserved for issuance under the 2011 Plan. The 2011 Plan also provided that the number of shares reserved and available for issuance under the plan would automatically increase each January 1, beginning in 2012 and ending in 2015, by 4% of the outstanding number of shares of common stock on the immediately preceding December 31. The last automatic increase occurred on January 1, 2015. In May 2016 and April 2017, the Company’s stockholders approved an increase to the share reserve under the 2011 Plan by 1,300,000 shares and 850,000 shares respectively.

The 2011 Plan permits the granting of incentive stock options, non-qualified stock options, restricted stock units (“RSUs”), stock appreciation rights, restricted shares of common stock and performance share awards. The exercise price of stock options may not be less than 100% of the fair market value of the common stock on the date of grant.

Options granted pursuant to the 2011 Plan generally expire no later than ten years from the date of grant. The Company also grants RSUs. RSUs granted to new hires and merit grants to existing employees generally vest over a four-year period with 25% vesting at the end of one year and the remainder vesting quarterly thereafter. Additionally, from time to time, the Company grants performance-based RSUs (“PRSUs”). The Company granted PRSUs to its executives to align with the Company’s pay-for-performance philosophy. The PRSUs provide for a target number of shares that generally vest over three years which includes a one-year performance period and two years of service-based vesting. The PRSUs vest contingent upon the Company’s achievement of ~~annual~~financial ~~revenue and annual operating margin~~ targets for fiscal 2018 relative to the Company’s annual operating plan. The amount of PRSUs earned may vary from zero to 200% of the target award amount depending on the achievement percentage, and provided the award recipient remains employed through each applicable vesting date.

23In 2017, the Company awarded PRSUs subject to Company’s achievement of an annual contract value for subscription bookings target and total operating expenses for 2017 of 110% or less of the annual operating plan. The PRSUs vest over an eight quarter period from the vesting commencement date through November 2019. Accordingly, the Company recognized an expense of $0.03 million and $0.5 million, respectively for the three and nine months ended September 30, 2018. The Company recorded an expense of $0.4 million and $1.8 million respectively, for the three and nine months ended September 30, 2017.

In ~~2017~~2018, the Company awarded ~~performance-based~~PRSUs ~~restricted~~to ~~stock~~certain ~~units~~employees subject to the Company’s achievement of annual ~~contract~~revenue ~~value~~growth ~~for~~compared ~~subscription~~to ~~bookings~~fiscal ~~target~~year ~~and~~ended ~~achieving~~December ~~cost~~31, ~~efficiencies~~2017 ~~for~~and ~~total~~annual operating ~~expenses~~margin ~~for~~targets. ~~2017~~Vesting ~~being~~of ~~110%~~the orPRSUs ~~less~~is ofexpected ~~the~~to ~~internal~~occur ~~operating~~evenly ~~plan~~ over an eight quarter period from the vesting commencement date through November 2020. ~~The~~Vesting of the PRSU ~~vest~~for ~~quarterly~~one employee is expected to occur evenly over ~~eight~~a six quarter period from ~~grant~~vesting commencement date through ~~November~~May ~~2019~~2020 and for another employee is expected to occur evenly over a seven quarter period from the vesting commencement date. ~~Accordingly~~In August 2018, the ~~Company~~Compensation ~~recognized~~Committee anof ~~expense~~the Board of ~~$0.1~~Directors ~~million~~approved ~~and~~an $0amendment to the performance metrics governing the PRSUs.5 ~~million~~The original performance metrics of revenue growth compared to fiscal year ended December 31, ~~respectively~~2017 and annual operating margin targets were amended to total billings for the ~~three~~year ended December 31, 2018 compared to fiscal year ended December 31, 2017 and ~~six~~total operating expense targets. The incremental compensation expense recognized for the three months ended ~~June~~September 30, 2018 was not material. ~~The~~Total ~~Company~~expenses ~~recorded~~recognized anfor ~~expense~~2018 ofPRSUs were $0.98 million and $13.41 million, respectively, for the three and ~~six~~nine months ended ~~June~~September 30, ~~2017~~2018.

In 2018, the Company awarded performance-based restricted stock units to certain executives’ contingent on annual revenue growth compared to fiscal ended December 31, 2017 and annual operating margin targets. Vesting of such PRSU for all executives except for one is expected to occur evenly over eight quarter period from grant date through November 2020. For one executive vesting of such PRSU awarded is expected to occur evenly over six quarter period from grant date through May 2020. Accordingly, the Company recognized an expense of $1.5 million and $2.5 million, respectively for the three and six months ended June 30, 2018.

(d) 2011 Employee Stock Purchase Plan

In September 2011, the Board of Directors adopted the 2011 Employee Stock Purchase Plan (the “ESPP”) which was subsequently approved by the Company’s stockholders. The ESPP took effect on November 8, 2011, the effective date of the registration statement for the Company’s initial public offering. The ESPP permits eligible employees to acquire shares of the Company’s common stock by accumulating funds through periodic payroll deductions of up to 15% of base salary. Each offering period may run for no more than 24 months and consist of no more than five purchase periods. The purchase price for shares of the Company’s common stock purchased under the ESPP will be 85% of the lesser of the fair market value of the Company’s common stock on the first day of the offering period or the last trading day of the applicable purchase period within that offering period.

The Company initially reserved a total of 500,000 shares of common stock for future issuance under the ESPP. The number of shares reserved for issuance under the ESPP increases automatically on January 1 of each of the first eight years commencing in 2012 by the number of shares equal to 1% of the Company’s total outstanding shares as of the immediately preceding December 31. The Board of Directors or compensation committee may reduce the amount of the increase in any particular year. No more than 20,000,000 shares of common stock may be issued under the ESPP and no other shares may be added to the ESPP without the approval of the Company’s stockholders. On January 1, 2018, the share reserved under the 2011 Employee Stock Purchase Plan were automatically increased by 342,338 shares.

(e) Inducement Stock Option Plan and Agreement and Inducement Restricted Stock Unit Plan and Agreement

In August 2014 and August 2015, the Compensation Committee of the Board of Directors adopted Inducement Stock Option Plans and Agreements (the “Inducement Option Plans”) and Inducement Restricted Stock Unit Plans and Agreements (the “Inducement RSU Plans”), in each case created as employment inducement awards. In accordance with the terms of the Inducement Option Plans, the Company issued options to purchase an aggregate of 290,000 shares of the Company’s common stock at an exercise price equal to the fair market value of a share of the Company’s common stock on the dates of grant of the options. The options, ~~which~~had ~~have~~ a ten-year term, ~~vest~~and vested at the rate of 25% of the shares on each of the first anniversary of the vesting commencement date with an additional 6.25% of the shares subject to the option vesting each quarter thereafter so long as the participant has not been terminated. In accordance with the terms of the Inducement RSU Plans, the Company issued RSUs representing an aggregate of 290,000 shares of the Company’s common stock. The RSUs, ~~which~~vested ~~expire following settlement, vest~~ at the rate of 25% of the shares on each of the first anniversary of the vesting commencement date with an additional 6.25% of the shares subject to the RSU vesting each quarter thereafter so long as the participant has not been terminated. The recipients of the options and RSUs terminated employment in 2018. As a result, the unvested options and RSUs have ceased vesting and have been cancelled.

(f) 2015 Equity Inducement Plan

In October 2015, the Board of Directors adopted the 2015 Equity Inducement Plan, a non-stockholder approved plan that was subsequently amended and restated to increase the amount of shares available for grant thereunder (the “2015 Plan”),. aThe ~~non-stockholder~~2015 ~~approved~~ plan ~~that~~ provides for the granting of stock options and RSUs as employment inducement awards and in connection with acquisitions, subject to compliance with applicable securities laws and stock exchange requirements for such plans. Under the terms of the 2015 Plan, the exercise price of stock options may not be less than 100% of the fair market value of common stock on the date of grant and generally expire no later than ten years from the date of grant.

The Company initially reserved 100,000 shares of common stock for issuance under the 2015 Plan and subsequently increased the number of shares available for grant up to ~~550~~650,000 shares. During the year ended December 31, 2017, the Company granted 101,200 RSUs under the 2015 Plan and during the ~~three~~nine ~~and six~~ months ended ~~June~~September 30, 2018, the Company granted an additional ~~221~~305,~~400~~808 RSUs under the 2015 Plan.

Option Activity

The following table summarizes option activity under the Plans and related information:

	Options Outstanding					Weighted- Average Remaining
	Number of Shares			Weighted Average Exercise Price		Contractual Term (in years)		Aggregate Intrinsic Value (in thousands) (1)
Balances - January 1, 2018		997,674		$	41.87		5.72	$	5,689
Exercised		(205,563	)	$	31.88
Granted		-			-
Cancelled or forfeited		(154,028	)	$	52.14
Assumed in acquisition		141,279		$	3.60
Balances - June 30, 2018		638,083		$	42.62		5.36	$	6,284
Exercised		(227,037	)	$	32.40
Vested and expected to vest - June 30, 2018		638,083		$	42.62		5.18	$	6,284
Cancelled or forfeited		(175,017	)	$	52.65
Exercisable - June 30, 2018		573,632		$	41.58		5.18	$	6,068
Balances - September 30, 2018		736,899		$	34.89		5.32	$	11,397
Vested and expected to vest - September 30, 2018		736,899		$	34.89		4.29	$	11,397
Exercisable - September 30, 2018		563,107		$	41.46		4.29	$	5,407

(1) The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing stock price of $4846.2545 of the Company’s common stock on ~~June~~September 30, 2018.

The aggregate intrinsic value of options exercised under the Plans was $3.14 million for the ~~six~~nine months ended ~~June~~September 30, 2018. The aggregate intrinsic value is calculated as the difference between the fair market value of the Company’s common stock on the date of the exercise and the exercise price of each option multiplied by the number of options exercised.

RSU Activity

The following table summarizes RSU activity under the Plans and related information:

	Number of Restricted Stock Units Outstanding			Weighted- Average Grant Date Fair Value
Unvested - January 1, 2018		2,353,315		$	47.42
Granted		~~983~~1,~~345~~304,106		$	4445.3013
Granted, performance RSUs		~~438~~478,980		$	44.4860
Released		(~~417~~787,~~779~~640	)	$	4246.4468
Cancelled or forfeited		(~~646~~809,~~181~~446	)	$	43.9098
Unvested - June 30, 2018		2,711,680		$	47.70
Unvested - September 30, 2018		2,539,315		$	47.04

As of ~~June~~September 30, 2018, total compensation cost related to unvested stock-based awards granted to employees under the Plans, but not yet recognized, was $8996.68 million. As of ~~June~~September 30, 2018, this cost will be amortized to expense over a weighted-average remaining period of 2.8177 years. Future stock-based award grants will increase the amount of compensation expense to be recorded in these periods.

There was no capitalized stock-based compensation expense during the three and ~~six~~nine months ended ~~June~~September 30, 2018 and 2017.

(g) Stock Compensation Expense

The Company recognized stock-based compensation expense under the 2003 Plan, 2011 Plan, the ESPP, Inducement Option and RSU Plans, the Incapsula 2010 Share Incentive Plan and the 2015 Plan, and Prevoty 2013 Stock Incentive Plan in the condensed consolidated statements of operations as follows (in thousands):

For the three months ended June 30

For the six months ended June 30

For the three months ended September 30

For the nine months ended September 30

2018

2017

2018

2017

Cost of revenue

12,~~396~~072

1,~~403~~343

24,~~715~~789

24,~~672~~015

Research and development

2,~~501~~354

2,~~560~~584

47,~~946~~299

79,~~328~~912

Sales and marketing

3,~~731~~989

3,~~700~~850

711,~~046~~034

711,~~166~~016

General and administrative

3,~~686~~566

3,~~844~~694

1114,~~243~~809

710,~~276~~970

Restructuring charges

675

Total stock-based compensation expense

11,~~314~~981

11,~~507~~471

2537,~~950~~931

2536,~~117~~588

The Company did not issue stock option grants for the three months ended ~~June~~September 30, 2018 and 2017 and ~~six~~nine months ended ~~June~~September 30, 2018 and 2017. In connection with the acquisition of Prevoty, certain Prevoty stock options that were outstanding, unexercised and unvested were assumed and converted into options to purchase the Company’s common stock in the three months ended September 30, 2018. See note 5 for more information. The fair value of assumed Prevoty options and ESPP grants for the three and ~~six~~nine months ended ~~June~~September 30, 2018 and 2017 was estimated using the following weighted average assumptions:

	For the three months ended June 30							For the six months ended June 30
		For the three months ended September 30							For the nine months ended September 30
	~~2018~~	2018			~~2017~~	2017		~~2018~~	2018			~~2017~~	2017
ESPP grants:
Options assumed in acquisition:
Dividend rate		0	%0	%		0	%-		0	%0	%		0	%-
Risk-free interest rate		~~2.1~~	%2.6	%		~~1.1~~	%-		~~2.1~~	%2.6	%		~~1.1~~	%-
Expected term (in years)		~~0.50~~	1.61			~~0.50~~	-		~~0.50~~	1.61			~~0.50~~	-
Expected Volatility		37	%34	%		52	%-		37	%34	%		52	%-
ESPP grants:
Dividend rate			-				-			0	%			0	%
Risk-free interest rate			-				-			2.1	%			1.1	%
Expected term (in years)			-				-			0.50				0.50
Expected Volatility			-				-			37	%			52	%

The fair value of the RSUs is determined using the closing price of the Company’s common stock on the date of the grant. Compensation is generally recognized on a straight-line basis over the requisite service period of each grant, except for awards with performance or market conditions for which the accelerated recognition method is used.

269. Accumulated Other Comprehensive Income (Loss)

8. Accumulated Other Comprehensive Income (Loss)

The changes in the balances of accumulated other comprehensive income (loss) by component are as follows (in thousands):

	For the three months ended June 30, 2018									For the three months ended June 30, 2017
	For the three months ended September 30, 2018									For the three months ended September 30, 2017
	Unrealized gain (loss) on cash flow hedges			Unrealized gain (loss) on investments			Total			Unrealized gain (loss) on cash flow hedges			Unrealized gain (loss) on investments			Total
Balance at April 1	$	(251	)		(1,011	)	$	(1,262	)	$	664		$	(385	)	$	279
Balance at July 1	$	(2,118	)		(844	)	$	(2,962	)	$	1,083		$	(363	)	$	720
Other comprehensive income (loss) before reclassifications		~~(2,202~~66	)		~~167~~284			~~(2,035~~350	)		~~1,196~~128			2255			~~1,218~~183
Amounts reclassified to net income (loss)		~~335~~825						~~335~~825			(~~777~~1,115	)		-			(~~777~~1,115	)
Change in other comprehensive income (loss)		~~(1,867~~891	)		~~167~~284			(1,~~700~~175	)		~~419~~(987	)		2255			~~441~~(932	)
Balance at June 30		(2,118	)		(844	)	$	(2,962	)	$	1,083		$	(363	)	$	720
Balance at September 30		(1,227	)		(560	)	$	(1,787	)	$	96		$	(308	)	$	(212	)
	For the six months ended June 30, 2018									For the six months ended June 30, 2017
	For the nine months ended September 30, 2018									For the nine months ended September 30, 2017
	Unrealized gain (loss) on cash flow hedges			Unrealized gain (loss) on investments			Total			Unrealized gain (loss) on cash flow hedges			Unrealized gain (loss) on investments			Total
Balance at January 1	$	160		$	(615	)	$	(455	)	$	(1,065	)	$	(413	)	$	(1,478	)
Other comprehensive income (loss) before reclassifications		(2,~~356~~290	)		~~(229~~55	)		(2,~~585~~235	)		3,~~126~~254			50105			3,~~176~~359
Amounts reclassified to net income (loss)		78903			-			78903			(~~978~~2,093	)		-			(~~978~~2,093	)
Change in other comprehensive income (loss)		(21,~~278~~387	)		~~(229~~55	)		(21,~~507~~332	)		21,~~148~~161			50105			21,~~198~~266
Balance at June 30	$	(2,118	)	$	(844	)	$	(2,962	)	$	1,083		$	(363	)	$	720
Balance at September 30	$	(1,227	)	$	(560	)	$	(1,787	)	$	96		$	(308	)	$	(212	)

2729

The following is a summary of reclassifications out of accumulated other comprehensive income (loss) for the three and ~~six~~nine months ended ~~June~~September 30, 2018 and 2017 (in thousands):

	For the three months ended June 30, 2018								For the three months ended June 30, 2017
	For the three months ended September 30, 2018								For the three months ended September 30, 2017
	Pre-Tax Amount			Tax (Expense) Benefit		After-Tax Amount			Pre-Tax Amount			Tax (Expense) Benefit			After-Tax Amount
Unrealized gains (losses) on cash flow hedges:
Current period unrealized gain (loss)	$	~~(2,202~~66	)	$	-	$	~~(2,202~~66	)	$	~~1,428~~(423	)		~~(232~~551	)	$	~~1,196~~128
Reclassification adjustments 1	$	~~335~~825		$	-	$	~~335~~825			(~~777~~1,115	)		-			(~~777~~1,115	)
Unrealized gains (losses) on cash flow hedges, net		~~(1,867~~891	)		-		~~(1,867~~891	)		~~651~~(1,538	)		~~(232~~551	)		~~419~~(987	)
Unrealized gains (losses) on investments:
Current period unrealized gain (loss)	$	~~167~~284			-		~~167~~284		$	3485			(1230	)		2255
Unrealized gains (losses) on investments:		~~167~~284			-		~~167~~284			3485			(1230	)		2255
Other comprehensive income (loss)	$	(1,~~700~~175	)	$	-	$	(1,~~700~~175	)	$	~~685~~(1,453	)	$	~~(244~~521	)	$	~~441~~(932	)
	For the six months ended June 30, 2018								For the six months ended June 30, 2017
	For the nine months ended September 30, 2018								For the nine months ended September 30, 2017
	Pre-Tax Amount			Tax (Expense) Benefit		After-Tax Amount			Pre-Tax Amount			Tax (Expense) Benefit			After-Tax Amount
Unrealized gains (losses) on cash flow hedges:
Current period unrealized gain (loss)	$	(2,~~356~~290	)		-	$	(2,~~356~~290	)	$	43,~~315~~892			(~~1,189~~638	)	$	3,~~126~~254
Reclassification adjustments 1		78903			-		78903			(~~978~~2,093	)		-			(~~978~~2,093	)
Unrealized gains (losses) on cash flow hedges, net		(21,~~278~~387	)		-		(21,~~278~~387	)		31,~~337~~799			(~~1,189~~638	)		21,~~148~~161
Unrealized gains (losses) on investments:
Current period unrealized gain (loss)	$	~~(229~~55	)		-	$	~~(229~~55	)	$	78163			(2858	)		50105
Unrealized gains (losses) on investments:		~~(229~~55	)		-		~~(229~~55	)		78163			(2858	)		50105
Other comprehensive income (loss)	$	(21,~~507~~332	)	$	-	$	(21,~~507~~332	)	$	31,~~415~~962		$	(~~1,217~~696	)	$	21,~~198~~266

Refer to note 4 for the affected line items in the condensed consolidated statement of operations.

910. Income Taxes

The Company is subject to income tax in the United States as well as other tax jurisdictions in which it conducts business. For the three months and nine months ended ~~June~~September 30, 2018 ~~and 2017~~, the Company recorded an income tax expense of $190.74 million and $19.6 million, respectively. For the three months and nine months ended September 30, 2017, the Company recorded an income tax ~~benefit~~expense of $0.9 7 million ~~respectively~~and $0.8 million, respectively.

The income tax expense for the ~~three~~nine months ended ~~June~~September 30, 2018 includes $1819.83 million of additional reserve for unrecognized tax benefits related to its Israeli operations.

The Company is currently under audit by the Israeli Tax Authority. The audit includes the review of various matters, including employee equity based compensation and transfer pricing. On April 22, 2018, the Israeli Supreme Court published a decision, confirming the Tel-Aviv District Court ruling in Kontera Technologies Ltd. vs. Tel Aviv Field Office 3, that expenses for employee equity based compensation should be included in the cost base of an Israeli research and development (R&D) subsidiary implementing a cost-plus arrangement and denied the corresponding tax deduction to the Israeli subsidiary in accordance with the specific provisions 30

28The Company is currently under audit by the Israeli Tax Authority. The audit includes the review of various matters, including employee equity based compensation and transfer pricing. On April 22, 2018, the Israeli Supreme Court published a decision, confirming the Tel-Aviv District Court ruling in Kontera Technologies Ltd. vs. Tel Aviv Field Office 3, that expenses for employee equity based compensation should be included in the cost base of an Israeli research and development (R&D) subsidiary implementing a cost-plus arrangement and denied the corresponding tax deduction to the Israeli subsidiary in accordance with the specific provisions of section 102 of the Israeli Income Tax Ordinance. The Company’s policy is to review and update tax reserves as facts and circumstances change. The additional tax reserve includes approximately $17.2 million of tax and $2.1 million of interest.

of section 102 of the Israeli Income Tax Ordinance. The Company’s policy is to review and update tax reserves as facts and circumstances change. The additional tax reserve includes approximately $17.2 million of tax and $1.6 million of interest.

The remaining income tax expense includes tax expense based on our projected effective tax rate for 2018, net of share-based award tax benefit recognized during the quarter.

The income tax benefit for the three months ended June 30, 2017 was primarily attributable to share-based award tax benefit and intraperiod tax benefit allocation to the income statement related to unrealized gains reported in other comprehensive income, offset in part by foreign and state income taxes11. ~~Factors~~Segment that impact the income tax provision include, but are not limited to, stock-based compensation expense, permanent tax adjustments, foreign operations and a valuation allowance against the Company’s domestic deferred tax assets.Information

10. Segment Information

The Company operates its business in one operating segment, which is the development, marketing, sales, service and support of cyber-security solutions that protect business-critical data and applications whether in cloud or on-premises. Operating segments are defined as components of an enterprise that engage in business activities for which separate financial information is available and evaluated by the chief operating decision maker in deciding how to allocate resources and assessing performance. The chief operating decision maker is the Company’s Chief Executive Officer.

The Company’s net revenue by geographic region, based on the customer’s location, is summarized as follows (in thousands):

Three months ended June 30

Six months ended June 30

Three months ended September 30

Nine months ended September 30

2018

2017

2018

2017

Primary geographical markets

Americas

United States

3945,~~527~~217

3642,~~701~~560

75121,~~931~~148

74116,~~346~~906

Other

78,~~800~~411

86,~~296~~705

1725,~~278~~689

1522,~~473~~178

Americas sub-total

4753,~~327~~628

4449,~~997~~265

93146,~~209~~837

89139,~~819~~084

EMEA

1917,~~017~~611

1415,~~842~~836

3653,~~141~~752

2844,~~622~~458

APAC

1820,~~456~~394

1418,~~596~~791

3960,~~694~~088

2847,~~302~~093

Total revenue

8491,~~800~~633

7483,~~435~~892

~~169~~260,~~044~~677

~~146~~230,~~743~~635

The following table presents long-lived assets by location (in thousands):

	As of June 30,		As of December 31,
	As of September 30,		As of December 31,
	2018		2017
United States	$	2032,~~773~~547	$	23,697
Israel		4,~~672~~238		4,640
Rest of world		~~215~~191		254
Total long-lived assets	$	2536,~~660~~976	$	28,591

1112. Restructuring Charges

In January 2018, the Company implemented a restructuring plan to improve customer experiences, fuel product innovation and increase operational effectiveness. There iswere no restructuring charges during the three months ended ~~June~~September 30, 2018. The restructuring charge during the ~~six~~nine months ended ~~June~~September 30, 2018 was $2.6 million ~~of which substantially all were paid out by June 30, 2018~~. The restructuring activity was ~~substantially~~ completed by the end of the first quarter of 2018 and the Company does not expect material costs associated with the activity in future periods. All restructuring charges are reported in Restructuring and other, net in the Condensed Consolidated Statements of Operations.

2931

The Company’s restructuring activity is summarized as follows (in thousands):

	Balance as of December 31, 2017		Additions		Adjustments			Cash payments			Balance as of ~~June~~September 30, 2018
Severance and termination-related costs	$	-	$	2,451	$	-		$	(2,~~438~~451	)	$	13-
Legal and other exit costs		-		100		-			(100	)		-
Total	$	-	$	2,551	$	-		$	(2,~~538~~551	)	$	13-
	Balance as of December 31, 2016		Additions		Adjustments*			Cash payments			Balance as of ~~June~~September 30, 2017
Severance and termination-related costs	$	1,132	$	667	$	(797	)	$	(1,002	)	$	-
Legal and other exit costs		-		-		-			-			-
Total	$	1,132	$	667	$	(797	)	$	(1,002	)	$	-

* includes amounts representing non-cash stock-based compensation

1213. Net Income (Loss) per Share

Basic and diluted net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. The computation of net income (loss) per share for each period, including the number of weighted-average shares outstanding, is shown on the face of the condensed consolidated statements of operations. Diluted earnings per share is calculated using our weighted-average outstanding common shares including the dilutive effect of stock awards as determined under the treasury stock method. In periods when the Company recognizes a net loss, the Company excludes the impact of outstanding stock awards from the diluted loss per share calculation as their inclusion would have an antidilutive effect.

The table below shows the reconciliation of the basic and diluted shares for the three and ~~six~~nine months ended ~~June~~September 30, 2018 (in thousands):

For the three months ended June 30,

For the six months ended June 30,

For the three months ended September 30,

For the nine months ended September 30,

2018

2017

2018

2017

Weighted average number of shares outstanding:

Basic

3435,~~833~~066

33,~~640~~907

34,~~638~~782

33,~~425~~590

Dilutive effects of:

Employee stock options, RSU’s and share based payment awards issued to employees

-679

~~559~~528

Diluted

3435,~~833~~745

33,~~640~~907

34,~~638~~782

3334,~~984~~118

The following outstanding shares of common stock and potential common shares were excluded from the computation of diluted net income (loss) per share of common stock for the three and ~~six~~nine months ended ~~June~~September 30, 2018 and 2017 because the impact of them would have been antidilutive:

	For the three and six months ended June 30,
	For the three months ended September 30,				For the nine months ended September 30,
	2018		2017		2018		2017
Stock options to purchase common stock		~~638~~247,~~083~~780		1,~~179~~058,~~087~~871		736,899		655,411
Restricted stock units for common stock		~~2,711,680~~-		2,~~417~~538,~~349~~438		2,539,315		857,047
Employee share purchase plan		~~100,726~~-		~~85,413~~-		101,019		-

1314. Disposition of Business

On February 23, 2017, the Company completed the sale of the assets of its Skyfence cloud access security broker business (“Skyfence”) to Forcepoint LLC and its Israeli subsidiary for consideration of approximately $40 million in cash. Of the total consideration, approximately $5.0 million was remitted directly to escrow to secure the Company’s indemnification obligations. ~~This~~In ~~escrowed~~the third quarter of 2018, the full escrow amount iswas ~~recorded~~released into ~~prepaid~~the ~~expenses~~Company. ~~and~~As ~~other~~a ~~current~~result ~~assets~~of onthe ~~our~~sale, ~~condensed~~the ~~consolidated~~Company ~~balance~~recognized ~~sheet~~a asgain of ~~June~~$35.9 ~~30,~~million during the first quarter of 2017 included in gain on sale of Skyfence in our condensed consolidated statement of operations.

3032

2018, As a result of the sale, the Company recognized a gain of $35.9 million during the first quarter of 2017 included in gain on sale of Skyfence in our condensed consolidated statement of operations.

The following table presents the carrying amounts of Skyfence immediately preceding the disposition on February 23, 2017:

	(dollars in thousands)
Assets
Prepaid and other current assets	$	46
Property and equipment, net		219
Goodwill		1,058
Acquired intangible assets, net		4,496
Total assets	$	5,819
Liabilities
Accounts payable	$	104
Accrued and other current liabilities		117
Deferred revenue		1,454
Total liabilities	$	1,675

The Company evaluated the disposition of Skyfence and determined it did not meet the criteria for classification as a discontinued operation and determined that the disposition is not expected to have a material impact to our quarterly consolidated operating loss and net income. However, the Company determined that the disposition does represent an individually significant component of our business. The following table presents certain amounts related to Skyfence in our consolidated results of operations through its disposal on February 23, 2017:

	For the three months ended June 30,				For the six months ended June 30,
	For the three months ended September 30,				For the nine months ended September 30,
	2018		2017		2018		2017
	(dollars in thousands)				(dollars in thousands)
Operating loss	$	-	$	-	$	-	$	(3,567	)
Loss before taxes		-		-		-		(3,648	)
Net loss		-		-		-		(3,659	)

1415. Subsequent Event

On ~~July~~October 2510, 2018, the Company, ~~through~~Imperial ~~its~~Purchaser, ~~wholly~~LLC, ~~owned~~a ~~subsidiary~~Delaware ~~Pahlmeyer~~limited ~~Acquisition~~liability company (“Newco”), and Imperial Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Newco (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) ~~with~~to ~~Prevoty,~~be ~~Inc~~acquired ~~(‘Prevoty’)~~by ~~and~~private ~~Fortis~~equity ~~Advisors~~technology ~~LLC~~investment firm Thoma Bravo, asLLC (the ~~security~~“Transaction”). ~~holders’~~Upon ~~Agent~~the inclose anof ~~all~~the ~~cash~~Transaction, ~~transaction~~Imperva ofwill ~~$140~~operate ~~million~~as ~~subject~~a toprivately-held ~~potential~~company. ~~working~~Newco ~~capital~~ and ~~other~~Merger ~~adjustments.~~Sub ~~Prevoty,~~were ~~Inc~~formed isby aan ~~DevOps~~affiliate ~~security~~of ~~company~~private ~~that~~equity ~~provides~~investment ~~Runtime~~firm ~~Application~~Thoma ~~Self-Protection~~Bravo. ~~The~~Capitalized ~~merger~~terms isused ~~subject~~in tothis ~~regulatory~~Note ~~approvals~~not ~~and~~otherwise ~~customary~~defined ~~closing~~have ~~conditions,~~the ismeanings ~~expected~~set toforth ~~be completed~~ in the ~~third~~Merger ~~quarter of 2018~~Agreement.

AsUnder athe ~~part~~terms of the ~~merger~~Merger ~~agreement~~Agreement, ~~outstanding~~the ~~unvested~~Company’s ~~shares~~stockholders ofwill ~~Prevoty~~receive ~~stock~~$55.75 ~~are~~per ~~expected~~share toin becash ~~exchanged~~in ~~for~~a antransaction ~~aggregate~~valued ofat approximately $02.61 ~~million and subject to continued vesting~~billion. InThe ~~addition,~~Transaction ~~the~~is ~~Company~~currently ~~will~~expected ~~assume unvested options~~ to ~~purchase~~close ~~Prevoty~~late ~~capital~~in ~~stock~~the ~~held~~fourth byquarter ~~persons~~of ~~that~~2018 ~~join~~or ~~Imperva~~early asin ~~service~~the ~~providers~~first onquarter ~~closing~~ of ~~the merger. On closing~~2019, ~~Imperva~~subject ~~expects~~ to ~~grant~~approval ~~restricted~~by ~~stock units under~~ the Company’s ~~Amended~~stockholders and ~~Restated~~regulatory ~~2015~~authorities ~~Equity~~and ~~Inducement~~the ~~Plan~~satisfaction toof ~~Prevoty~~customary ~~employees valued at approximately $4.6 million based on average~~ closing ~~price of $56.35 per share. Additionally~~conditions, onas ~~closing,~~described ~~an amount equal to $21 million~~ in ~~cash~~that ~~shall~~Current beReport ~~deposited~~on ~~into~~Form an8-K ~~escrow~~filed ~~fund~~with ~~for a period of 18 months (subject to specified exceptions) as security for~~ the ~~indemnification~~SEC ~~obligations~~on ofOctober ~~the~~10, ~~Prevoty security holders~~2018.

31The Merger Agreement provides for a 45-day “go-shop” period, during which the Company’s Board and advisors may actively solicit alternative acquisition proposals and enter into negotiations with other parties. During this period, the Company will have the right to terminate the Merger Agreement to enter into a superior proposal subject to the terms and conditions of the Merger Agreement. There can be no assurance this 45-day “go-shop” period will result in a superior proposal. The Company does not intend to disclose developments about the “go-shop” process unless and until its Board has made a decision with respect to any potential superior proposal.

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 should be read in conjunction with the (1) condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and (2) the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2017 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on February 23, 2018. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors,” set forth in Part II, Item 1A of this Form 10-Q and in our other SEC filings, including our Annual Report on Form 10-K for the year ended December 31, 2017. You should review the risk factors for a more complete understanding of the risks associated with an investment in our securities. We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Pending Merger

On October 10, 2018, we announced we had entered into a definitive agreement to be acquired by private equity technology investment firm Thoma Bravo, LLC in an all-cash transaction valued at approximately $2.1 billion. If the Merger is completed, our stockholders will be entitled to receive $55.75 in cash for each share of Imperva common stock they hold as of the effective time of the Merger. The Merger is expected to close in the fourth quarter of 2018 or early in the first quarter of 2019, subject to approval by our stockholders and regulatory authorities, and the satisfaction of other customary closing conditions.

See Note 15, Agreement and Plan of Merger, in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, for further details.

Overview

We were incorporated as a Delaware corporation in 2002 with the vision of protecting high-value applications and data assets within the enterprise. Since that time we have been investing in our cyber security solutions to meet the rapidly evolving demands of customers. We shipped our initial web application security and data security products in 2002. In 2006, we expanded our database security product to include compliance features. In 2010, we launched our file security offering. In addition, in 2010, we launched our cloud-based initiatives with ThreatRadar and, in 2011, we introduced our cloud-based offering for mid-market enterprises and small and medium-sized businesses (“SMB”) that we provided through Incapsula, Inc., which was majority owned by Imperva, Inc. until March 2014 when we acquired the remaining portion of Incapsula that we did not already own in order to more fully integrate its operations with ours. In January 2014, we acquired certain assets and liabilities of Tomium Software, LLC to accelerate our mainframe data security solutions. In February 2014, we acquired Skyfence Networks Ltd. to further our Software as a Service (“SaaS”) delivery models for internally facing corporate applications. In December 2016, we acquired certain assets and liabilities of Camouflage Software, Inc., to further our data masking, security and compliance solutions in the cloud and on-premises. In February 2017, we sold the assets of Skyfence to Forcepoint LLC.

In March 2017, we introduced our FlexProtect hybrid licensing program to give customers access to our on-premises and cloud offerings (hybrid solutions) for data and applications under a single license. At initial introduction, FlexProtect for Applications was available only as a subscription, and FlexProtect for Databases was available only as a perpetual license. In February 2018, we introduced a subscription offering for FlexProtect for Databases. Designed to give customers the flexibility to use Imperva products, regardless of where data and applications are initially deployed or migrated, Imperva FlexProtect directly supports dynamic hybrid cloud deployments and provides protection to manage this transition. During the second quarter of 2017, we released CounterBreach version 2.0 and announced enhancements to the Incapsula Content Delivery Network. During the second quarter of 2018, we introduced Imperva Attack Analytics. Imperva Attack Analytics is a cloud-based service that applies machine learning to correlate and distill thousands of security events into a few readable security narratives. Attack Analytics is included within FlexProtect for Applications, and available as a separate subscription for SecureSphere WAF and Incapsula.

In January 2018, we announced organizational changes designed to allow us to focus on customers and product innovation and to drive operational efficiencies. The reorganization ~~enables~~enabled us to reallocate resources and focus employees on transformation and growth initiatives.

Our research and development efforts are focused primarily on improving and enhancing our existing cyber-security solutions and services, as well as developing new products and services (including cloud-based services) and conducting advanced security research. We conduct most of our research and development activities in Israel, and we believe this provides us with access to some of the best engineering talent in the security industry. As of June 30, 2018, we had 322 employees dedicated to research and development, including our advanced security research group, the Imperva Defense Center (“IDC”). Our research and development expense was $37.6 million for the six months ended June 30, 2018 as compared to $32.0 million for the same period in 2017.34

WeIn ~~derive~~August ~~our~~2018, ~~revenue~~we ~~from~~completed ~~sales~~the ~~and~~acquisition ~~licenses~~ of ~~our~~Prevoty. ~~products~~The ~~and~~combination ~~sales~~ of ~~our~~Imperva ~~services. Products~~ and ~~license~~Prevoty ~~revenue~~will isexpand ~~generated~~customers’ ~~primarily~~security ~~from~~capabilities ~~sales~~and oftheir ~~on-premise~~visibility ~~software~~into ~~licenses~~how ~~installed~~applications onare ~~hardware~~accessed, ~~appliances~~what orhappens ~~virtual~~within ~~appliances~~the ~~for~~applications, ~~our~~and ~~SecureSphere~~how ~~product~~applications ~~line. Services revenue consists of subscription services, maintenance~~ and ~~support,~~users ~~professional~~interact ~~services~~with ~~and training~~data. AWith ~~majority~~this ofexpanded ~~our~~view ~~revenue~~across istheir ~~derived~~business ~~from~~assets, customers inwill ~~the~~have ~~Americas~~deeper ~~region.~~insights Into ~~the~~help ~~six~~them ~~months~~understand ~~ended~~and ~~June~~mitigate ~~30,~~security ~~2018, 55~~risk.1%

32Our research and development efforts are focused primarily on improving and enhancing our existing cyber-security solutions and services, as well as developing new products and services (including cloud-based services) and conducting advanced security research. We conduct most of our research and development activities in Israel, and we believe this provides us with access to some of the best engineering talent in the security industry. As of September 30, 2018, we had 345 employees dedicated to research and development, including our advanced security research group, the Imperva Defense Center (“IDC”). Our research and development expense was $56.2 million for the nine months ended September 30, 2018 as compared to $47.5 million for the same period in 2017.

We derive our revenue from sales and licenses of our products and sales of our services. Products and license revenue is generated primarily from sales of on-premise software licenses installed on hardware appliances or virtual appliances for our SecureSphere product line. Services revenue consists of subscription services, maintenance and support, professional services and training. A majority of our revenue is derived from customers in the Americas region. In the nine months ended September 30, 2018, 56.3% of our total revenue was generated from the Americas, 2120.46% from Europe, Middle East and Africa (“EMEA”) and 23.51% from Asia Pacific (“APAC”).

We market and sell our products through a hybrid sales model, which combines a direct touch sales organization and an overlay channel sales team that actively assist our extensive network of channel partners throughout the sales process. We also provide our channel partners with marketing assistance, technical training and support. We primarily sell our products and services through our channel partners, including distributors and resellers, which sell to end-user customers, who we refer to in this Quarterly Report on Form 10-Q as our customers. In 2017, over 500 channel partners worldwide sold our products, which included approximately 200 direct resellers and distributors and over 300 indirect resellers. In 2017, our channel partners originated over 5057% of our sales and fulfilled almost 8684% of our sales. We work with many of the world’s leading security value-added resellers, and our partners include some of the largest hosting companies for cloud-based deployments.

As of ~~June~~September 30, 2018, we had 6,~~267~~430 customers in more than 100 countries. In addition, our solutions are used to protect thousands of organizations through cloud-based deployments with our Software-as-a-Service (“SaaS”) customers and our managed security service provider (“MSSP”) and hosting partners.

Our net revenue has increased in each of the last three years, growing from $234.3 million in 2015 to $321.7 million in 2017. We incurred net loss of $3231.8 million in the ~~six~~nine months ended ~~June~~September 30, 2018, and earned net income of $19.62 million in the ~~six~~nine months ended ~~June~~September 30, 2017. As of ~~June~~September 30, 2018, we had an accumulated deficit of $~~269~~268.98 million.

Opportunities, Challenges and Risks

We believe that the growth of our business and our future success are dependent upon many factors, including our ability to maintain our technology leadership, improve our sales and marketing, address the needs of smaller enterprises and compete effectively in the marketplace for cyber-security solutions. While each of these areas presents significant opportunities for us, they also pose important challenges and risks that we must successfully address in order to sustain the growth of our business and improve our results of operations.

Maintain Technology Leadership. As a result of the rise in sophisticated attacks by hackers and malicious insiders, the difficulty in complying with regulations governing business data and the growing complexity of, and open access to, data centers, we believe that enterprises are struggling to provide visibility and control over high-value business applications and data assets that they need to protect. In addition, organizations are increasingly taking advantage of cloud-based services and virtualization technologies, and these new technologies and architectures are increasing the complexity of, and accessibility to, the data center. We believe these challenges are driving the need for a new protection layer positioned closely around the applications and data assets in the data center. We expect that as enterprises recognize the growing risk to high-value business data and the need to comply with increasing regulatory compliance mandates, their spending will increase on solutions designed to control and protect such data. We believe that traditional security and compliance products do not address the evolving needs of enterprises or do not do so adequately, and that this presents us with a large market opportunity. To capitalize on this opportunity, we have introduced and expect that in the future we will need to continue to introduce innovations to our broad business security solutions, including solutions to address cyber-security opportunities that arise as enterprises pursue cloud computing initiatives. We cannot assure you that our products will achieve widespread market acceptance or that we will properly anticipate future customer needs. Moreover, if our products do not satisfy evolving customer requirements, we will not capture the increase in spending that we expect will result from enterprises seeking to secure data across various systems in the data center.

Invest in Our Go To Market Strategy. We are investing in our go to market strategy to improve how we serve our customers and leverage strategic partners in targeted vertical and global markets. We have historically aligned our go-to-market efforts around our products and intend to transition to focus more on our customers. For example, as part of the reorganization we created a Customer Success function led by our Chief Customer Officer to improve the customer experience. In addition, we made substantive changes to our partner program, including an increased focus on our most strategic partners and changes in incentives to align with our mutual outcomes and will also have an increased focus on cloud platforms.35

Invest in Our Go To Market Strategy. We are investing in our go to market strategy to improve how we serve our customers and leverage strategic partners in targeted vertical and global markets. We have historically aligned our go-to-market efforts around our products and intend to transition to focus more on our customers. For example, as part of the reorganization we created a Customer Success function to improve the customer experience. In addition, we made substantive changes to our partner program, including an increased focus on our most strategic partners and changes in incentives to align with our mutual outcomes and will also have an increased focus on cloud platforms.

Address Needs of Smaller Enterprises. As market awareness of the benefits of a comprehensive cyber-security solution increases, we believe there is a significant opportunity to provide cyber-security solutions to smaller enterprises as they confront increasing security threats and compliance mandates. To capitalize on this opportunity, we intend to increase our business with mid-market enterprises and SMBs by expanding our cloud-based service offerings and our distribution channel. We have made, and may in the future continue to make, significant investments in our cloud-based security products to address the business security needs of mid-market enterprises and SMBs. If our cloud-based security products, which are relatively new, fail to gain broad acceptance with mid-market enterprises and SMBs, our revenue growth, results of operations and competitive position in our industry could suffer.

Compete Effectively. We operate in an intensely competitive market that has witnessed significant consolidation with large companies acquiring many of our competitors. We track our success rate in competitive sales opportunities against certain competitors, some of which generate higher revenues and have greater market capitalizations than we do, and many of which are more established or have greater name recognition within our industry. Based upon our internal tracking of the results of such competitive sales opportunities, we believe that we have historically competed favorably against our larger competitors, and that we have a proven track record of successfully competing against such larger competitors. Nonetheless, some of our larger competitors have numerous advantages, including, but not limited to, greater financial resources, broader product offerings and more established relationships with channel partners and customers. If we are unable to compete effectively for a share of the business security market, our business, results of operations and financial condition could be materially and adversely affected.

To date, we have incurred, and continue to incur, losses from operations. However, we believe that our existing cash, cash equivalents and short-term investments will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Further, we expect that, if we successfully execute our business plan and strategy, our loss from operations will decline, and that we will reach profitability. Should we need additional cash in the future, we may enter into lines of credit or raise funds through the sale of equity securities.

Key Metrics of Our Business

We monitor the key financial metrics discussed below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies.

Beginning in the second quarter of 2018 ~~and going forward~~, we ~~plan~~have toreported ~~regularly~~billings ~~report Billings~~ in our Quarterly Reports ~~in Form 10Q or~~ on ~~our Annual Reports on~~ Form ~~10K~~10-Q.

Net Revenue. We measure our net revenue to assess the acceptance of our products from our customers, our growth in the markets we serve and to help us establish our strategic and operating plans for future periods. We discuss the components of our net revenue in “—Financial Overview—Net Revenue” below.

Gross Margin. We monitor our gross margin to assess the impact on our current and forecasted financial results from any changes to the pricing and mix of products we are selling to our customers.

Deferred Revenue. Our deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenue. The majority of our deferred revenue balance consists of the unamortized portion of services revenue from subscription, maintenance and support. We monitor our deferred revenue balance because it represents a significant portion of revenue to be recognized in future periods. We also assess the increase in our deferred revenue balance plus revenue we recognized in a particular period as a measure of our sales activity for that period. While the change in our deferred revenue and revenue recognized in a given period comprise the majority of our sales activity during that period, they do not constitute the entire sales activity during the period. Our total sales activity also includes sales of products and services for which we have not yet met the criteria to recognize revenue or add such amounts to our deferred revenue balance. Revenue and deferred revenue from these transactions is recognized or recorded in future periods when we have met the required criteria. We discuss for the periods presented deferred revenue further below under “—Results of Operations.”

Loss from Operations. We track our loss from operations to assess how effectively we are planning and monitoring our operations as well as controlling our operational costs, which are primarily driven by headcount.

Cash, Cash Equivalents and Short-term Investments. We evaluate the level of our cash, cash equivalents and short-term investments to ensure we have sufficient liquidity to fund our operations, including the development of future products and product enhancements and the expansion into new sales channels and territories.

Net Cash Flow Provided By Operations. We monitor cash flow from operations as a measure of our overall business performance. Our cash flow from operations is driven primarily by sales of our products and licenses, subscription services and from up-front payments from customers under maintenance and support contracts. Our primary uses of cash in operating activities are for personnel-related expenditures, costs of acquiring the hardware used for our appliances, marketing and promotional expenses and costs related to our facilities. Monitoring cash flow from operations enables us to analyze our financial performance without the non-cash effects of certain items such as depreciation and amortization and stock-based compensation expenses, thereby allowing us to better understand and manage the cash needs of our business.

Number of Customers. We believe our customer count is a key indicator of our market penetration, the productivity of our sales organization and the value that our products bring to our customer base. We also believe our existing customers represent significant future revenue opportunities for us.

34Billings (Non-GAAP). We define billings as revenue recognized in accordance with GAAP plus the change in deferred revenue from the beginning to the end of the period, net of acquired deferred revenue, and adjustment to the deferred revenue balance due to adoption of the new revenue recognition standard. We consider billings to be a useful metric to manage the business given the company’s hybrid-SaaS revenue model, and believe billings provides investors with an important indicator of the health of the business as sales of subscription and support services and related renewals grow. Total billings were $294.5 million for nine months ended September 30, 2018, an increase of 21.5% compared to $242.4 million in the same period last year.

~~Billings~~For ~~(Non-GAAP). We consider billings to be a useful metric used by management to manage~~ the ~~company’s~~periods ~~business~~presented ~~given the company’s hybrid-SaaS~~ revenue ~~model~~, ~~and~~we ~~believe~~discuss ~~billings~~gross ~~provides~~margin, ~~investors~~the ~~with~~components ~~an important indicator~~ of ~~the~~loss ~~health~~from operations and ~~visibility~~number of ~~the~~customers ~~company’s~~further ~~business~~below ~~because~~under it“—Results ~~includes~~of ~~subscription and support revenue~~Operations”, ~~which~~as ~~is recognized over the contractual service period~~applicable, and ~~product~~we ~~and~~discuss ~~license~~our ~~revenue,~~cash ~~which~~and iscash ~~recognized~~equivalents atunder ~~point~~“—Liquidity in time, provided that all other revenue recognition criteria have been met. We define billings as revenue recognized in accordance with GAAP plus the change in deferred revenue from the beginning to the end of the period and ~~adjustment~~Capital ~~to the deferred revenue balance due to adoption of the new revenue recognition standard~~Resources. ~~Total billings were $188.0 million for June 30, 2018, an increase of 25.0% compared to $150.4 million in the same period last year.~~ ”

WeThe ~~discuss~~following ~~for~~represents ~~the periods presented revenue, gross margin, the components of loss from operations and number of customers further below under “—Results of Operations”, as applicable, and we discuss~~ our ~~cash~~key ~~and~~financial ~~cash equivalents under “—Liquidity~~ and ~~Capital~~operation ~~Resources.”~~metrics:

We also believe that deferred revenue and net cash flow provided by operations are key financial metrics for our business. The components of deferred revenue and net cash flow provided by operations, as well as our rationale for monitoring these metrics, are discussed immediately below this table:

	Three months ended or As of September 30,						Nine months ended or As of September 30,
	2018			2017			2018			2017
	(in thousands, except number of customers and percentages)
Net revenue	$	91,633		$	83,892		$	260,677		$	230,635
Gross margin		79.3	%		80.3	%		78.8	%		79.6	%
Loss from operations	$	466		$	(213	)	$	(15,145	)	$	(16,513	)
Total deferred revenue	$	191,836		$	142,271		$	191,836		$	142,271
Cash, cash equivalents and short-term investments	$	304,419		$	343,204		$	304,419		$	343,204
Net cash provided by operations	$	32,247		$	25,528		$	68,575		$	49,466
Number of customers		6,430			5,760			6,430			5,760
Billings	$	106,523		$	92,013		$	294,525		$	242,435

	Three months ended or As of June 30,						Six months ended or As of June 30,
	2018			2017			2018			2017
	(in thousands, except number of customers and percentages)
Net revenue	$	84,800		$	74,435		$	169,044		$	146,743
Gross margin		79.4	%		79.1	%		78.5	%		79.2	%
Loss from operations	$	(4,373	)	$	(4,562	)	$	(15,611	)	$	(16,300	)
Total deferred revenue	$	174,651		$	134,150		$	174,651		$	134,150
Cash, cash equivalents and short-term investments	$	394,472		$	319,887		$	394,472		$	319,887
Net cash provided by operations	$	13,826		$	5,442		$	36,328		$	23,938
Number of customers		6,267			5,591			6,267			5,591
Billings	$	103,058		$	83,436		$	188,002		$	150,422

Financial Overview

Net Revenue

We derive our revenue from sales and licenses of our products and sales of our services.

Our net revenue is comprised of the following:

• Products and License Revenue—Products and license revenue is generated primarily from sales of ~~perpetual~~On-Premises software licenses installed on hardware appliances or virtual appliances for our SecureSphere product line. Our SecureSphere product line consists of database security, file security and web application security. Our other product lines include CounterBreach, ~~ThreatRadar~~Autonomous Application Protection and Camouflage. We offer multiple hardware appliance versions that accompany our SecureSphere software, each with different throughput capacities. ~~Perpetual~~Software ~~software~~ license revenue is generated from sales of our appliances, licenses for additional users and add-on software modules. Our FlexProtect hybrid licensing program contributes partially to products and license revenue. We also generate a small amount of hardware revenue from sales of spares or replacement appliances, demonstration units and accessories.

• Services Revenue— Services revenue consists of subscription, maintenance and support and professional services and training. Subscription revenue is generated from sales of our cloud-based services such as Incapsula, Attack Analytics and ThreatRadar services as well as our FlexProtect subscription offerings. Incapsula services provide distributed denial of service protection (“DDoS”) and load balancing and failover. ThreatRadar services provide reputation and crowdsourced security intelligence services. Maintenance and support revenue is generated from support services that are bundled with appliances and add-on software modules. There are five levels of maintenance and support—Standard, Enhanced, Premium, Select and Select+ —and these are usually offered through agreements for one to three-year terms. Maintenance and support includes major and minor when-and-if available software updates; customer care, which includes our designated support engineer and Imperva resident engineer programs; content updates from our advanced security research group, the IDC, and hardware replacement. Professional services revenue consists of fees we earn related to implementation and37

35• Services Revenue— Services revenue consists of subscription, maintenance and support and professional services and training. Subscription revenue is generated from sales of our cloud-based services such as Incapsula, Attack Analytics and ThreatRadar services as well as our FlexProtect subscription offerings. Incapsula services provide distributed denial of service protection (“DDoS”) and load balancing and failover. ThreatRadar services provide reputation and crowdsourced security intelligence services. Maintenance and support revenue is generated from support services that are bundled with appliances and add-on software modules. There are five levels of maintenance and support—Standard, Enhanced, Premium, Select and Select+ —and these are usually offered through agreements for one to three-year terms. Maintenance and support includes major and minor when-and-if available software updates; customer care, which includes our designated support engineer and Imperva resident engineer programs; content updates from our advanced security research group, the IDC, and hardware replacement. Professional services revenue consists of fees we earn related to implementation and consulting services we provide our customers. Training revenue consists of fees we earn related to training customers and partners on the use of our products. We expect subscription revenue will increase as sales of our cloud-based services and sales of FlexProtect subscriptions, continue to increase. We also expect that the services revenue from maintenance and support contracts will continue to grow along with the increase in the size of our installed base, partially offset by expected migration of our installed base to FlexProtect Subscriptions.

~~consulting~~A ~~services~~majority weof ~~provide~~ our ~~customers.~~products ~~Training~~and ~~revenue~~services ~~consists~~are ofsold ~~fees we earn related~~ to ~~training~~ customers ~~and~~in ~~partners on~~ the ~~use~~Americas, ofprimarily ~~our~~in ~~products.~~the WeUnited ~~expect~~States, ~~subscription~~however, ~~revenue~~a ~~will~~significant ~~increase~~portion ~~as sales~~ of our ~~cloud-based~~revenue ~~services~~is ~~and~~generated ~~sales~~from ofinternational ~~FlexProtect subscriptions, continue to increase~~sales. WeSee ~~also~~note ~~expect~~11 ~~that~~of ~~the~~“Notes ~~services revenue from maintenance and support contracts will continue~~ to ~~grow~~Condensed ~~along~~Consolidated ~~with~~Financial ~~the~~Statements” ~~increase~~for ina ~~the~~discussion ~~size~~ of our ~~installed~~financial ~~base,~~information ~~partially offset~~ by ~~expected~~geographic ~~migration of our installed base to FlexProtect Subscriptions~~region.

A majority of our products and services are sold to customers in the Americas, primarily in the United States, however, a significant portion of our revenue is generated from international sales. See note 10 of “Notes to Condensed Consolidated Financial Statements” for a discussion of our financial information by geographic region.

Cost of Revenue

Our total cost of revenue is comprised of the following:

•

Cost of Products and License Revenue—Cost of products and license revenue is comprised primarily of third-party hardware costs and royalty fees. Our cost of products and license revenue also includes personnel costs related to our operations team, shipping costs and write-offs for excess and obsolete inventory.

•

Cost of Services Revenue—Cost of services revenue is primarily comprised of personnel costs of our technical support team, our professional consulting services and training teams, our Security Operations Center team, facilities costs, data communication costs, subscription fees and depreciation. We expect that our cost of services revenue will increase in absolute dollars as we increase our headcount and grow our subscription-based business.

Operating Expenses

Our operating expenses consist of research and development, sales and marketing, general and administrative expenses, restructuring charges and amortization of acquired intangible assets. Personnel costs are the most significant component of our operating expenses and consist of wages, benefits, bonuses, stock-based compensation, and with regard to sales and marketing expense, sales commissions. Personnel costs also include stock-based compensation. We expect personnel costs to continue to increase in absolute dollars as we hire additional employees to continue to grow our business.

Research and Development

Our research and development is focused on maintaining and improving our existing products and on new product development. A majority of our research and development expenses are comprised of personnel costs and, to a lesser extent, facility costs, hardware prototype costs, laboratory expenses and depreciation. We expense research and development costs as incurred. We expect our research and development expenses to increase in absolute dollars as we continue to enhance our existing products and develop new products and services that address the emerging market for business security and regulatory compliance.

Sales and Marketing

Sales and marketing expense is the largest component of our operating expenses and consists primarily of personnel costs, including commissions and travel expenses. Sales and marketing expenses also include costs related to marketing and promotional activities, third-party referral fees, facilities costs and depreciation. We expect our sales and marketing expenses to increase in absolute dollars as we expand our sales and marketing efforts worldwide.

General and Administrative

General and administrative expense consists primarily of personnel costs, including stock-based compensation, as well as professional fees, facilities costs and depreciation. General and administrative personnel costs include our executive, finance, order entry, human resources, information technology and legal functions. Our professional fees consist primarily of accounting, external legal, information technology and other consulting costs. We expect our general and administrative expenses to increase in absolute dollars as we hire new employees to continue to grow our business.

Restructuring Charges

In November 2016, we implemented a restructuring plan designed to reduce operating expense through reductions in sales, marketing, and general and administrative headcount and spending generally. We completed the restructuring activities during the first quarter of 2017 and did not incur significant costs related to the plan in subsequent periods. The expenses incurred primarily consisted of employee severance charges and other termination-related costs. In January 2018, we implemented a separate restructuring plan designed to improve customer experiences, fuel product innovation and increase operational effectiveness. We had substantially completed the restructuring activities by the end of the first quarter of 2018 and do not expect material costs associated with the activity in future periods. The expenses incurred primarily consisted of employee severance charges and other termination-related costs.

designed to improve customer experiences, fuel product innovation and increase operational effectiveness. We had substantially completed the restructuring activities by the end of the first quarter of 2018 and do not expect material costs associated with the activity in future periods. The expenses incurred primarily consisted of employee severance charges and other termination-related costs.

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets consists of amortization of intangible assets from the acquisitions of Skyfence and Tomium that occurred in the first quarter of 2014, ~~and~~ Camouflage in the fourth quarter of 2016 and Prevoty in the third quarter of 2018. On February 23, 2017, we completed the sale of Skyfence.

Other Income ~~(Expense)~~, net

Other income (expense), net is comprised of the following items:

•

Interest Income—Interest income consists of interest earned on our cash, cash equivalents and short-term investments. We expect interest income will vary each reporting period depending on our average investment balances during the period and market interest rates.

•

Interest Expense—Interest expense consists of interest accrued or paid on debt obligations.

•

Foreign Currency Forward Contract Gains (Losses)—Foreign currency forward contract gains and losses pertain to the ineffective portion of derivative instruments designated as hedges that we have entered into primarily to manage our exposure to the variability in expected future expenses resulting from changes in foreign currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes.

•

Foreign Currency Exchange Gains (Losses)—Foreign currency exchange gains and losses relate to transactions denominated in currencies other than the U.S. Dollar.

Provision for Income Taxes

The Company is subject to income tax in the United States as well as other tax jurisdictions in which it conducts business. For the three months and nine months ended ~~June~~September 30, 2018 ~~and 2017~~, the Company recorded an income tax expense of $0.4 million and $19.76 million, respectively. For the three months and nine months ended September 30, 2017, the Company recorded an income tax ~~benefit~~expense of $0.97 million and $0.8 million, respectively.

The income tax expense for the ~~three~~nine months ended ~~June~~September 30, 2018, includes $1819.83 million of additional reserve for unrecognized tax benefits related to its Israeli operations. The Company is currently under audit by the Israeli Tax Authority. The audit includes the review of various matters, including employee equity based compensation and transfer pricing. On April 22, 2018, the Israeli Supreme Court published a decision, confirming the Tel-Aviv District Court ruling in Kontera Technologies Ltd. vs. Tel Aviv Field Office 3, that expenses for employee equity based compensation should be included in the cost base of an Israeli research and development (R&D) subsidiary implementing a cost-plus arrangement and denied the corresponding tax deduction to the Israeli subsidiary in accordance with the specific provisions of section 102 of the Israeli Income Tax Ordinance. The Company’s policy is to review and update tax reserves as facts and circumstances change. The additional tax reserve includes approximately $17.2 million of tax and $2.1 million of interest.

The Company is currently under audit by the Israeli Tax Authority. The audit includes the review of various matters, including employee equity based compensation and transfer pricing. On April 22, 2018, the Israeli Supreme Court published a decision, confirming the Tel-Aviv District Court ruling in Kontera Technologies Ltd. vs. Tel Aviv Field Office 3, that expenses for employee equity based compensation should be included in the cost base of an Israeli R&D subsidiary implementing a cost-plus arrangement and denied the corresponding tax deduction to the Israeli subsidiary in accordance with the specific provisions of section 102 of the Israeli Income Tax Ordinance. The Company’s policy is to review and update tax reserves as facts and circumstances change. The additional tax reserve includes approximately $17.2 million of tax and $1.6 million of interest.

The remaining income tax expense includes tax expense based on our projected effective tax rate for 2018, net of share-based award tax benefit recognized during the quarter.

The income tax benefit for the three months ended June 30, 2017 was primarily attributable to share-based award tax benefit and intraperiod tax benefit allocation to the income statement related to unrealized gains reported in other comprehensive income, offset in part by foreign and state income taxes. Factors that impact the income tax provision include, but are not limited to, stock-based compensation expense, permanent tax adjustments, foreign operations and a valuation allowance against the Company’s domestic deferred tax assets.

Results of Operations

The following table is a summary of our condensed consolidated statements of operations in dollars and as a percentage of our total revenue. We have derived the data for the three and six months ended June 30, 2018 and 2017 from our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

	For the three months ended June 30,												For the six months ended June 30,
	2018						2017						2018						2017
	Amount			% of Net Revenue			Amount			% of Net Revenue			Amount			% of Net Revenue			Amount			% of Net Revenue
	(dollars in thousands)												(dollars in thousands)
Statement of Operations Data:
Net revenue:
Products and license	$	19,218			22.7		$	20,012			26.9		$	39,730			23.5		$	39,590			26.9
Services:
Subscriptions		36,484			43.0			28,097			37.7			71,438			42.3			55,349			37.8
Maintenance and support		24,948			29.4			22,596			30.4			50,173			29.7			44,576			30.4
Professional services and training		4,150			4.9			3,730			5.0			7,703			4.5			7,228			4.9
Total services		65,582			77.3			54,423			73.1			129,314			76.6			107,153			73.1
Total net revenue		84,800			100.0			74,435			100.0			169,044			100.0			146,743			100.0
Cost of revenue:
Products and license		1,364			1.6			1,823			2.4			3,638			2.2			3,755			2.6
Services		16,070			19.0			13,751			18.5			32,637			19.3			26,771			18.2
Total cost of revenue		17,434			20.6			15,574			20.9			36,275			21.6			30,526			20.8
Gross profit		67,366			79.4			58,861			79.1			132,769			78.5			116,217			79.2
Operating expenses:
Research and development		18,445			21.8			14,528			19.5			37,601			22.2			31,978			21.8
Sales and marketing		40,516			47.8			36,388			48.9			80,047			47.4			73,512			50.1
General and administrative		12,646			14.9			12,375			16.6			27,917			16.5			25,911			17.7
Restructuring charges		-			0.0			-			-			2,551			1.5			667			0.5
Amortization of purchased intangibles		132			0.2			132			0.2			264			0.2			449			0.3
Total operating expenses		71,739			84.7			63,423			85.2			148,380			87.8			132,517			90.4
Loss from operations		(4,373	)		(5.3	)		(4,562	)		(6.1	)		(15,611	)		(9.3	)		(16,300	)		(11.2	)
Gain on sale of business		-			0.0			-			-			-			0.0			35,871			24.4
Other income (expense), net		972			1.1			158			0.2			1,949			1.2			66			-
Income (loss) before provision for income taxes		(3,401	)		(4.2	)		(4,404	)		(5.9	)		(13,662	)		(8.1	)		19,637			13.2
Provision for income taxes		19,658			23.2			(914	)		(1.2	)		19,178			11.3			44			-
Net income (loss)	$	(23,059	)		(27.4	)	$	(3,490	)		(4.7	)	$	(32,840	)		(19.4	)	$	19,593			13.2

Comparison of the Three Months Ended June 30, 2018 and 2017

	For the three months ended June 30,
	2018		2017		2018			2017			Change
	Amount		Amount		%			%			Amount			%
	(dollars in thousands)				(percentage of revenues)
Net revenue:
Products and license	$	19,218	$	20,012		22.7	%		26.9	%	$	(794	)		-4.0	%
Services:
Subscriptions		36,484		28,097		43.0	%		37.7	%		8,387			29.9	%
Maintenance and Support		24,948		22,596		29.4	%		30.4	%		2,352			10.4	%
Professional Services and Training		4,150		3,730		4.9	%		5.0	%		420			11.3	%
Total Services		65,582		54,423		77.3	%		73.1	%		11,159			20.5	%
Total net revenue	$	84,800	$	74,435		100.0	%		100.0	%	$	10,365			13.9	%
Revenue by geographic region:
United States	$	39,527	$	36,701		46.6	%		49.3	%	$	2,826			7.7	%
Other		7,800		8,296		9.2	%		11.1	%		(496	)		-6.0	%
Americas sub-total		47,327		44,997		55.8	%		60.5	%		2,330			5.2	%
EMEA		19,017		14,842		22.4	%		19.9	%		4,175			28.1	%
APAC		18,456		14,596		21.8	%		19.6	%		3,860			26.4	%
Total net revenue	$	84,800	$	74,435		100.0	%		100.0	%	$	10,365			13.9	%

Three Months Ended June 30, 2018 Compared with Three Months Ended June 30, 2017

Our total net revenue increased by $10.4 million during the three months ended June 30, 2018 primarily due to increased demand for subscription service offerings. Products and license revenue decreased by $0.8 million during the three months ended June 30, 2018 as customers continue to adopt our subscription-based offering. Services revenue increased by $11.2 million primarily due to an increase in subscription revenue resulting from our cloud-based security services, in addition to an increase in maintenance and support revenue from our larger installed base in all regions. Our professional services and training revenue increased by $0.4 million, primarily due to timing of projects.

We had 201 orders exceeding $100,000 during the three months ended June 30, 2018, compared to approximately 171 orders during the three months ended June 30, 2017. Also, as customers migrate to our new Flexprotect hybrid licensing program, we continue to see a portion of product revenue shift to the subscription revenue line. This growth is represented by increased revenues in United States, EMEA and APAC, partially offset by decreased revenues in the Other region mainly due to lower product revenues.

~~Comparison~~Results of ~~the Six Months Ended June 30, 2018 and 2017~~Operations

	For the six months ended June 30,
	2018		2017		2018			2017			Change
	Amount		Amount		%			%			Amount		%
	(dollars in thousands)				(percentage of revenues)
Net revenue:
Products and license	$	39,730	$	39,590		23.5	%		26.9	%	$	140		0.4	%
Services:
Subscriptions		71,438		55,349		42.3	%		37.8	%		16,089		29.1	%
Maintenance and Support		50,173		44,576		29.7	%		30.4	%		5,597		12.6	%
Professional Services and Training		7,703		7,228		4.6	%		4.9	%		475		6.6	%
Total Services		129,314		107,153		76.5	%		73.1	%		22,161		20.7	%
Total net revenue	$	169,044	$	146,743		100.0	%		100.0	%	$	22,301		15.2	%
Revenue by geographic region:
United States	$	75,931	$	74,346		44.9	%		50.7	%	$	1,585		2.1	%
Other		17,278		15,473		10.2	%		10.5	%		1,805		11.7	%
Americas sub-total		93,209		89,819		55.1	%		61.2	%		3,390		3.8	%
EMEA		36,141		28,622		21.4	%		19.5	%		7,519		26.3	%
APAC		39,694		28,302		23.5	%		19.3	%		11,392		40.3	%
Total net revenue	$	169,044	$	146,743		100.0	%		100.0	%	$	22,301		15.2	%

The following table is a summary of our condensed consolidated statements of operations in dollars and as a percentage of our total revenue. We have derived the data for the three and nine months ended September 30, 2018 and 2017 from our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Six Months Ended June 30, 2018 Compared with Six Months Ended June 30, 2017

	For the three months ended September 30,										For the nine months ended September 30,
	2018				2017						2018						2017
	Amount		% of Net Revenue		Amount			% of Net Revenue			Amount			% of Net Revenue			Amount			% of Net Revenue
	(dollars in thousands)										(dollars in thousands)
Statement of Operations Data:
Net revenue:
Products and license	$	23,241		25.4	$	26,627			31.7		$	62,971			24.2		$	66,217			28.7
Services:
Subscriptions		38,519		42.0		30,956			36.9			109,957			42.2			86,305			37.4
Maintenance and support		25,220		27.5		23,133			27.6			75,393			28.9			67,709			29.4
Professional services and training		4,653		5.1		3,176			3.8			12,356			4.7			10,404			4.5
Total services		68,392		74.6		57,265			68.3			197,706			75.8			164,418			71.3
Total net revenue		91,633		100.0		83,892			100.0			260,677			100.0			230,635			100.0
Cost of revenue:
Products and license		1,985		2.2		1,883			2.2			5,623			2.2			5,638			2.4
Services		16,997		18.5		14,684			17.5			49,634			19.0			41,455			18.0
Total cost of revenue		18,982		20.7		16,567			19.7			55,257			21.2			47,093			20.4
Gross profit		72,651		79.3		67,325			80.3			205,420			78.8			183,542			79.6
Operating expenses:
Research and development		18,618		20.4		15,515			18.5			56,219			21.6			47,493			20.6
Sales and marketing		39,051		42.6		38,245			45.6			119,098			45.7			111,757			48.5
General and administrative		13,872		15.1		13,645			16.3			41,789			16.0			39,556			17.2
Restructuring charges		-		-		-			-			2,551			1.0			667			0.3
Amortization of purchased intangibles		644		0.7		133			0.2			908			0.3			582			0.3
Total operating expenses		72,185		78.8		67,538			80.6			220,565			84.6			200,055			86.9
Income (loss) from operations		466		0.5		(213	)		(0.3	)		(15,145	)		(5.8	)		(16,513	)		(7.3	)
Gain on sale of business		-		-		-			-			-			-			35,871			15.6
Other income, net		1,034		1.1		567			0.7			2,983			1.1			633			0.3
Income (loss) before provision for income taxes		1,500		1.6		354			0.4			(12,162	)		(4.7	)		19,991			8.6
Provision for income taxes		442		0.5		724			0.9			19,620			7.5			768			0.3
Net income (loss)	$	1,058		1.1	$	(370	)		(0.5	)	$	(31,782	)		(12.2	)	$	19,223			8.3

Our total net revenue increased by $22.3 million during the six months ended June 30, 2018 due to increased demand primarily for our service offerings, especially in the subscription service line due to strong cloud-based security services. Products and license revenue increased marginally by $0.1 million during the six months ended June 30 2018. Services revenue increased significantly by $22.2 million as a result of increase in cloud-based subscription security services, in additional to an overall increase in maintenance and support revenue from larger installed base in all regions. Our professional services and training revenue increased by $0.5 million, primarily due to timing of projects.

As customers migrate to our new Flexprotect hybrid licensing program and other subscription based service offerings, we continue to see a portion of product revenue shift to the subscription revenue line. We had 384 orders exceeding $100,000 during the six months ended June 30, 2018, compared to 329 orders during the six months ended June 30, 2017. This growth is represented across all regions mainly due to increasing demand for our service offerings, an increase in our international sales personnel and improved sales execution. Geographically, our growth was most significantly noted in APAC by 40.3% followed by EMEA by 26.3%, and the Americas by 3.8%.

Gross Profit

	For the three months ended June 30,								For the six months ended June 30,
	2018			2017					2018			2017
	Amount			Amount			% Change		Amount			Amount			% Change
	(dollars in thousands)								(dollars in thousands)
Products and license gross profit	$	17,854		$	18,189				$	36,092		$	35,835
Gross Margin %		92.9	%		90.9	%		2.0		90.8	%		90.5	%		0.3
Services gross profit		49,512			40,672					96,677			80,382
Gross Margin %		75.5	%		74.7	%		0.8		74.8	%		75.0	%		(0.2	)
Total gross profit	$	67,366		$	58,861				$	132,769		$	116,217
		79.4	%		79.1	%		0.3		78.5	%		79.2	%		(0.7	)

~~Three~~Comparison ~~Months~~of ~~Ended~~the ~~June 30, 2018 Compared with~~ Three Months Ended ~~June~~September 30, 2018 and 2017

Our overall gross margin increased by 0.3%, to 79.4% during the three months ended June 30, 2018. Products and license gross margin increased due to higher sales of Licenses for Virtual Appliances which generally have a higher gross margins.

	For the three months ended September 30,
	2018		2017		2018			2017			Change
	Amount		Amount		%			%			Amount			%
	(dollars in thousands)				(percentage of revenues)
Net revenue:
Products and license	$	23,241	$	26,627		25.4	%		31.7	%	$	(3,386	)		-12.7	%
Services:
Subscriptions		38,519		30,956		42.0	%		36.9	%		7,563			24.4	%
Maintenance and Support		25,220		23,133		27.5	%		27.6	%		2,087			9.0	%
Professional Services and Training		4,653		3,176		5.1	%		3.8	%		1,477			46.5	%
Total Services		68,392		57,265		74.6	%		68.3	%		11,127			19.4	%
Total net revenue	$	91,633	$	83,892		100.0	%		100.0	%	$	7,741			9.2	%

Revenue by geographic region:
United States	$	45,217	$	42,560		49.3	%		50.7	%	$	2,657			6.2	%
Other		8,411		6,705		9.2	%		8.0	%		1,706			25.4	%
Americas sub-total		53,628		49,265		58.5	%		58.7	%		4,363			8.9	%

EMEA		17,611		15,836		19.2	%		18.9	%		1,775			11.2	%
APAC		20,394		18,791		22.3	%		22.4	%		1,603			8.5	%
Total net revenue	$	91,633	$	83,892		100.0

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