Edgar Filing: A10 Networks, Inc.

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)



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

For the quarterly period ended March 31, 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: 001-36343

A10 NETWORKS, INC.

(Exact Name of Registrant as Specified in its Charter)



Delaware		20-1446869
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
3 West Plumeria Drive, San Jose, California 95134
(Address of Principal Executive Offices and Zip Code)

(408) 325-8668

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ¨ No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨	Smaller reporting company	¨
(Do not check if a smaller reporting company)		Emerging growth company	x

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

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

As of September 17, 2018, the number of outstanding shares of the registrant’s common stock, par value $0.00001 per share, was 72,707,302.

A10 NETWORKS, INC. FORM 10-Q TABLE OF CONTENTS

	Page No.
PART I. FINANCIAL INFORMATION	2
Item 1. Condensed Consolidated Financial Statements (unaudited): (*)	2
Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017	2
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2018 and 2017 (As Restated)	3
Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2018 and 2017 (As Restated)	4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017 (As Restated)	5
Notes to Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3. Quantitative and Qualitative Disclosures About Market Risk	32
Item 4. Controls and Procedures	33
PART II. OTHER INFORMATION	37
Item 1. Legal Proceedings	37
Item 1A. Risk Factors	37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	62
Item 3. Defaults Upon Senior Securities	62
Item 4. Mine Safety Disclosures	62
Item 5. Other Information	62
Item 6. Exhibits	62
Exhibit Index	63
Signatures	63

(*) The condensed consolidated financial statements for the three months ended March 31, 2017 have been restated as further

discussed in Note 2. Restatement of Previously Issued Consolidated Financial Statements of the Notes to Condensed Consolidated Financial Statements of Part I, Item 1 in this report.

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A10 NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except par value)



	March 31, 2018			December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	46,964		$	46,567
Marketable securities	83,738			84,567
Accounts receivable, net of allowances of $850 and $983, respectively	47,755			48,266
Inventory	16,189			17,577
Prepaid expenses and other current assets	14,352			6,825
Total current assets	208,998			203,802
Property and equipment, net	9,634			9,913
Goodwill	1,307			1,307
Intangible assets	4,829			5,190
Other non-current assets	7,229			4,646
Total assets	$	231,997		$	224,858
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	7,632		$	9,033
Accrued liabilities	25,491			21,835
Deferred revenue	65,735			61,858
Total current liabilities	98,858			92,726
Deferred revenue, non-current	31,895			32,779
Other non-current liabilities	884			967
Total liabilities	131,637			126,472
Commitments and contingencies (Note 6)
Stockholders' equity:
Common stock, $0.00001 par value: 500,000 shares authorized; 72,707 and 71,692 shares issued and outstanding, respectively	1			1
Additional paid-in-capital	364,953			355,533
Accumulated other comprehensive loss	(296		)	(123		)
Accumulated deficit	(264,298		)	(257,025		)
Total stockholders' equity	100,360			98,386
Total liabilities and stockholders' equity	$	231,997		$	224,858

See accompanying notes to the condensed consolidated financial statements.

A10 NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share amounts)



	Three Months Ended March 31,
	2018			2017
				(As Restated, Note 2)
Revenue:
Products	$	28,149		$	43,698
Services	21,034			20,236
Total revenue	49,183			63,934
Cost of revenue:
Products	7,109			10,502
Services	4,775			4,241
Total cost of revenue	11,884			14,743
Gross profit	37,299			49,191
Operating expenses:
Sales and marketing	26,904			26,263
Research and development	18,797			17,042
General and administrative	11,594			7,647
Total operating expenses	57,295			50,952
Loss from operations	(19,996		)	(1,761		)
Non-operating income (expense):
Interest expense	(33		)	(44		)
Interest and other income, net	566			842
Total non-operating income, net	533			798
Loss before income taxes	(19,463		)	(963		)
Provision for income taxes	207			374
Net loss	$	(19,670	)	$	(1,337	)
Net loss per share:
Basic and diluted	$	(0.27	)	$	(0.02	)
Weighted-average shares used in computing net loss per share:
Basic and diluted	72,232			68,571

See accompanying notes to the condensed consolidated financial statements.

A10 NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited, in thousands)



	Three Months Ended March 31,
	2018			2017
				(As Restated, Note 2)
Net loss	$	(19,670	)	$	(1,337	)
Other comprehensive loss, net of tax:
Unrealized loss on marketable securities	(173		)	(1		)
Comprehensive loss	$	(19,843	)	$	(1,338	)

See accompanying notes to the condensed consolidated financial statements.

A10 NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)



	Three Months Ended March 31,
	2018			2017
				(As Restated, Note 2)
Cash flows from operating activities:
Net loss	$	(19,670	)	$	(1,337	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	2,134			2,202
Stock-based compensation	8,151			4,316
Other non-cash items	389			(278		)
Changes in operating assets and liabilities:
Accounts receivable, net	94			1,759
Inventory	827			(1,623		)
Prepaid expenses and other assets	(1,687		)	(1,699		)
Accounts payable	(1,202		)	(1,624		)
Accrued liabilities	3,599			(1,647		)
Deferred revenue	6,995			490
Other	18			(14		)
Net cash (used in) provided by operating activities	(352		)	545
Cash flows from investing activities:
Proceeds from sales of marketable securities	10,709			7,620
Maturities of marketable securities	17,150			10,694
Purchases of marketable securities	(27,220		)	(18,616		)
Purchases of property and equipment	(1,133		)	(678		)
Net cash used in investing activities	(494		)	(980		)
Cash flows from financing activities:
Proceeds from issuance of common stock under employee equity incentive plans	1,269			2,065
Other	(26		)	(25		)
Net cash provided by financing activities	1,243			2,040
Net increase in cash and cash equivalents	397			1,605
Cash and cash equivalents - beginning of period	46,567			28,975
Cash and cash equivalents - end of period	$	46,964		$	30,580
Non-cash investing and financing activities:
Inventory transfers to property and equipment	$	561		$	783
Purchases of property and equipment included in accounts payable	$	87		$	458
Vesting of early exercised stock options	$	—		$	41

See accompanying notes to the condensed consolidated financial statements.

A10 Networks, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Description of Business and Summary of Significant Accounting Policies

Description of Business

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

We are a leading provider of secure application solutions and services that enable a new generation of intelligently

connected companies with the ability to continuously improve cyber protection and digital responsiveness across dynamic Information Technology (“IT”) and network infrastructures. Our product portfolio seeks to address many of the aforementioned challenges and solution requirements. The portfolio consists of six secure application solutions; Thunder Application Delivery Controllers (“ADC”), Lightning Application Delivery Controller (“Lightning ADC”), Thunder Carrier Grade Network Address Translation (“CGN”), Thunder Threat Protection System (“TPS”), Thunder SSL Insight (“SSLi”) and Thunder Convergent Firewall (“CFW”), and two intelligent management and automation tools; Harmony Controller and aGalaxy. Our solutions are available in a variety of form factors, such as optimized hardware appliances, bare metal software, virtual appliances and cloud-native software.

Basis of Presentation

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

We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). As permitted under these rules and regulations, we have condensed or omitted certain financial information and footnote disclosures we normally include in our annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The unaudited condensed consolidated balance sheet as of December 31, 2017 has been derived from the Company’s audited financial statements, which are included in its 2017 Annual Report on Form 10-K for the year ended December 31, 2017 on file with the SEC (our “Annual Report”).

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

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

Reclassifications

Certain prior year amounts have been reclassified to conform to current year presentation in the condensed consolidated balance sheets and the condensed consolidated statements of cash flows. We have separately presented the line items “Proceeds from sales of marketable securities” and “Maturities of marketable securities” as opposed to our historical consolidated presentation of “Proceeds from sales and maturities of marketable securities” in the condensed consolidated statement of cash flows for the three months ended March 31, 2017.

Use of Estimates

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

Significant Accounting Policies

The Company’s significant accounting policies are disclosed in its Annual Report on Form 10-K for the year ended December 31, 2017. Other than the accounting policies related to the adoption of Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) discussed in Note 11 in this report, there have been no material changes to the Company’s significant accounting policies during the three months ended March 31, 2018.

Concentration of Credit Risk and Significant Customers

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

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

Significant customers, including distribution channel partners and direct customers, are those which represent more than 10% of our total revenue for each period presented or our gross accounts receivable balance as of each respective balance sheet date. Revenues from our significant customers as a percentage of our total revenue are as follows:



	Three Months Ended March 31,
	2018	2017
Customer A (a distribution channel partner)	*	18%
Customer B (a distribution channel partner)	*	11%
Customer C (a direct customer)	*	12%

* represents less than 10% of total revenue

As of March 31, 2018, one customer accounted for 13% of our total gross accounts receivable, respectively. As of December 31, 2017, no customer accounted for 10% or more of our total gross accounts receivable.

Recently Adopted Accounting Guidance

In May 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This standard is effective for annual periods beginning after December 15, 2017 and interim periods within that reporting period. The amendments will be applied prospectively to an award modified on or after the adoption date. The adoption of ASU 2017-09 on January 1, 2018 did not impact our condensed consolidated financial statements or disclosures.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), as subsequently amended, which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition. This ASU requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the capitalization of incremental customer acquisition costs and amortization of these costs over the contract period or estimated customer life which resulted in the recognition of a deferred commission asset on our condensed consolidated balance sheet. We adopted ASU 2014-09 and its related amendments (collectively “ASC 606”) on January 1, 2018 using the modified retrospective method. See Note 11 in this report for disclosure on the impact of adopting this standard.

Recent Accounting Pronouncements Not Yet Effective

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This new accounting standard primarily requires lessees to recognize most leases on their balance sheets but record expenses on their income statements in a manner similar to current accounting. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and

direct financing leases. In July 2018, FASB issued ASU No. 2018-11, Topic 842 - Targeted Improvements. The update requires modified retrospective transition, with the option to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment and elect various practical expedients. This standard is effective for annual periods beginning after December 15, 2018 with early adoption permitted. We will adopt this standard effective January 1, 2019. We are currently gathering information and evaluating the impact of this guidance on our condensed consolidated financial statements and related disclosures.

In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 118. These amendments add SEC guidance to the FASB Accounting Standards Codification regarding the Tax Cuts and Jobs Act pursuant to the issuance of SAB 118. The amendments are effective upon addition to the FASB Codification. See Note 9 in this report for disclosures related to the effect of the Tax Cuts and Jobs Act and our utilization of SAB 118.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule is effective 30 days after publication in the Federal Register. The final rule was not yet published in the Federal Register as of the date of this Quarterly Report on Form 10-Q. We are evaluating the impact of this guidance on our condensed consolidated financial statements.

There are several other new accounting pronouncements issued by the FASB, which we will adopt. However, we do not believe any of those accounting pronouncements will have a material impact on our consolidated financial position, operating results or statements of cash flows.

2. Restatement of Previously Issued Consolidated Financial Statements

Restatement Background

Subsequent to the issuance of the condensed consolidated financial statements as of September 30, 2017, the Audit Committee of our Board of Directors (the “Audit Committee”) commenced an investigation (the “Investigation”) with the assistance of outside counsel relating to certain accounting and internal control matters at the Company, principally focused on certain revenue recognition matters from the fourth quarter of 2015 through the fourth quarter of 2017 inclusive. The investigation was conducted with the assistance of outside counsel and independent counsel. Counsel retained forensic accountants to assist with their work. The investigation commenced following the identification of violations of the Company's Insider Trading Policy and Code of Conduct by a mid-level employee within the finance department, and as a result it was determined that further review and procedures relating to certain accounting and internal control matters should be undertaken.

During the course of this Investigation, code of conduct breaches and accounting and financial reporting errors were identified. The matters primarily resulted in modification to the timing of the recognition of revenue in a limited number of sale transactions between the Company and its resellers and distributors. The Company determined the need to restate the condensed consolidated financial statements as of and for the three months ended March 31, 2017 and the consolidated statements as of and for the year ended December 31, 2016, including interim periods therein. The Company also adjusted the consolidated financial statements as of and for the year ended December 31, 2015 to correct identified immaterial errors.

Revenue Recognition Adjustments

During the three months ended March 31, 2017, revenue on certain sale transactions was recognized prematurely in prior year, as it was determined that there was an oversight or misuse of facts which indicated that the reseller’s or distributor’s price was not fixed or determinable, or that collectability was not reasonably assured, because the reseller’s or distributor’s payment to the Company was contingent on resale of the product or the transaction included extended payment terms beyond the Company’s customary terms.

To correct these errors, the related revenue and cost of revenue were reversed in the period in which the accounting errors took place and have been recognized in subsequent periods when all of the revenue recognition criteria were met.

Additionally, certain adjustments to accounts receivable, net of allowances, inventory, and deferred revenue, current, were made to the condensed consolidated balance sheet at the end of the period in which the accounting errors occurred.

Other Adjustments

In addition to the restatement adjustments described above, we have identified other revenue and expense classification errors that are not material, individually or in the aggregate that have been corrected in connection with the restatement.

Tax effect of restatement adjustments

The Company recorded adjustments to its deferred taxes as a result of the restatement. The overall impact of the restatement is an increase to deferred taxes with the corresponding increase to the valuation allowance with no impact to the effective tax rate or income tax expense.

Impact of the Restatement

The following table presents the condensed consolidated statement of operations as previously reported, restatement adjustments and the condensed consolidated statement of operations as restated for the three months ended March 31, 2017 (in thousands, except per share amounts):



	Three Months Ended March 31, 2017
	As Previously Reported			Revenue Recognition Adjustments		Other Adjustments			As Restated
Revenue:
Products	$	39,706		$	3,634	$	358		$	43,698
Services	20,580			14		(358		)	20,236
Total revenue	60,286			3,648		—			63,934
Cost of revenue:
Products	9,784			599		119			10,502
Services	4,360			—		(119		)	4,241
Total cost of revenue	14,144			599		—			14,743
Gross profit	$	46,142		$	3,049	$	—		$	49,191
Operating expenses:
General and administrative	$	7,161		$	486	$	—		$	7,647
Total operating expenses	$	50,466		$	486	$	—		$	50,952
Loss from operations	$	(4,324	)	$	2,563	$	—		$	(1,761	)
Loss before income taxes	$	(3,526	)	$	2,563	$	—		$	(963	)
Net loss	$	(3,900	)	$	2,563	$	—		$	(1,337	)
Net loss per share:
Basic and diluted	$	(0.06	)						$	(0.02	)
Weighted-average shares used in computing net loss per share:
Basic and diluted	68,571								68,571

The following table presents the condensed consolidated statement of cash flows as previously reported, restatement adjustments, and the condensed consolidated statement of cash flows as restated for the three months ended March 31, 2017 (in thousands):



	Three Months Ended March 31, 2017
	As Previously Reported			Revenue Recognition Adjustments			As Restated
Cash flows from operating activities:
Net loss	$	(3,900	)	$	2,563		$	(1,337	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Changes in operating assets and liabilities:
Accounts receivable, net	$	5,214		$	(3,455	)	$	1,759
Inventory	$	(2,222	)	$	599		$	(1,623	)
Deferred revenue	$	197		$	293		$	490
Net cash provided by operating activities	$	545		$	—		$	545

The only change to the condensed consolidated statement of comprehensive loss and the condensed consolidated statement of stockholders’ equity for the three months ended March 31, 2017 as a result of the restatements is due to the changes in net loss. Refer to the condensed consolidated statement of comprehensive loss as restated.

3. Marketable Securities and Fair Value Measurements

Marketable Securities

Marketable securities, classified as available-for-sale, consisted of the following (in thousands):



	March 31, 2018									December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Certificates of deposit	$	16,999	$	2	$	(8	)	$	16,993	$	17,000	$	6	$	(1	)	$	17,005
Corporate securities	41,452		—		(191		)	41,261		39,154		1		(76		)	39,079
U.S. Treasury and agency securities	5,243		—		(25		)	5,218		5,744		—		(19		)	5,725
Commercial paper	6,473		—		(4		)	6,469		9,225		1		(2		)	9,224
Asset-backed securities	13,867		—		(70		)	13,797		13,567		—		(33		)	13,534
	$	84,034	$	2	$	(298	)	$	83,738	$	84,690	$	8	$	(131	)	$	84,567

During the three months ended March 31, 2018 and 2017, we did not reclassify any amount to earnings from accumulated other comprehensive loss related to unrealized gains or losses.

The following table summarizes the cost and estimated fair value of marketable securities based on stated effective maturities as of March 31, 2018 (in thousands):



	Amortized Cost		Fair Value
Less than 1 year	$	56,501	$	56,372
Mature in 1 - 3 years	27,533		27,366
	$	84,034	$	83,738

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

Marketable securities in an unrealized loss position consisted of the following (in thousands):



	Less Than 12 Months					12 Months or More					Total
As of March 31, 2018	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Certificates of deposit	$	10,491	$	(8	)	$	—	$	—		$	10,491	$	(8	)
Corporate securities	39,761		(191		)	—		—			39,761		(191		)
U.S. Treasury and agency securities	1,736		(10		)	3,482		(15		)	5,218		(25		)
Commercial paper	6,469		(4		)	—		—			6,469		(4		)
Asset-backed securities	12,872		(67		)	925		(3		)	13,797		(70		)
	$	71,329	$	(280	)	$	4,407	$	(18	)	$	75,736	$	(298	)



	Less Than 12 Months					12 Months or More					Total
As of December 31, 2017	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Certificates of deposit	$	2,999	$	(1	)	$	—	$	—		$	2,999	$	(1	)
Corporate securities	36,079		(74		)	1,499		(2		)	37,578		(76		)
U.S. Treasury and agency securities	2,246		(2		)	3,479		(17		)	5,725		(19		)
Commercial paper	4,232		(2		)	—		—			4,232		(2		)
Asset-backed securities	11,415		(32		)	728		(1		)	12,143		(33		)
	$	56,971	$	(111	)	$	5,706	$	(20	)	$	62,677	$	(131	)

Based on evaluation of securities that have been in a continuous loss position, we did not recognize any other-than-temporary impairment charges during the three months ended March 31, 2018 and 2017.

Fair Value Measurements

The following is a summary of our cash, cash equivalents and marketable securities measured at fair value on a recurring basis (in thousands):



	March 31, 2018								December 31, 2017
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash	$	33,798	$	—	$	—	$	33,798	$	34,453	$	—	$	—	$	34,453
Cash equivalents	13,166		—		—		13,166		12,114		—		—		12,114
Certificates of deposit	—		16,993		—		16,993		—		17,005		—		17,005
Corporate securities	—		41,261		—		41,261		—		39,079		—		39,079
U.S. Treasury and agency securities	—		5,218		—		5,218		—		5,725		—		5,725
Commercial paper	—		6,469		—		6,469		—		9,224		—		9,224
Asset-backed securities	—		13,797		—		13,797		—		13,534		—		13,534
	$	46,964	$	83,738	$	—	$	130,702	$	46,567	$	84,567	$	—	$	131,134

There were no transfers between Level 1 and Level 2 fair value measurement categories during the three months ended March 31, 2018 and 2017.

4. Condensed Consolidated Financial Statement Details

Inventory



	March 31, 2018		December 31, 2017
	(in thousands)
Raw materials	$	5,869	$	6,643
Finished goods	10,320		10,934
Total inventory	$	16,189	$	17,577

Property and Equipment, Net



	Useful Life	March 31, 2018			December 31, 2017
	(in years)	(in thousands)
Equipment	1-3	$	49,245		$	47,817
Software	1-3	4,018			3,988
Furniture and fixtures	1-3	951			950
Leasehold improvements	2-8	3,824			3,824
Property and equipment, gross		58,038			56,579
Less: accumulated depreciation		(48,404		)	(46,666		)
Property and equipment, net		$	9,634		$	9,913

Depreciation expense on property and equipment was $1.7 million and $1.8 million for the three months ended March 31, 2018 and 2017, respectively.

Intangible Assets

Purchased intangible assets, net, consisted of the following (in thousands):



	March 31, 2018							December 31, 2017
	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net
Developed technology	$	5,050	$	(1,768	)	$	3,282	$	5,050	$	(1,515	)	$	3,535
Patents	2,936		(1,389		)	1,547		2,936		(1,281		)	1,655
Total	$	7,986	$	(3,157	)	$	4,829	$	7,986	$	(2,796	)	$	5,190

Amortization expense related to purchased intangible assets was $0.4 million each for the three months ended March 31, 2018 and 2017. Purchased intangible assets will be amortized over a remaining weighted average useful life of 3.4 years.

Future amortization expense for purchased intangible assets as of March 31, 2018 is as follows (in thousands):



Fiscal Year
Remainder of 2018	$	1,082
2019	1,442
2020	1,442
2021	863
	$	4,829

Accrued Liabilities



	March 31, 2018		December 31, 2017
	(in thousands)
Accrued compensation and benefits	$	14,156	$	13,828
Accrued tax liabilities	3,118		2,985
Other	8,217		5,022
Total accrued liabilities	$	25,491	$	21,835

Deferred Revenue



	March 31, 2018			December 31, 2017
	(in thousands)
Deferred revenue:
Products	$	5,714		$	6,161
Services	91,916			88,476
Total deferred revenue	97,630			94,637
Less: current portion	(65,735		)	(61,858		)
Non-current portion	$	31,895		$	32,779

5. Credit Facility

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

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

Our obligations under the 2016 Credit Facility are secured by substantially all of our assets, excluding our intellectual property. The 2016 Credit Facility contains customary affirmative and negative covenants. In addition, the 2016 Credit Facility requires us to maintain compliance with an adjusted quick ratio of not less than 1.50:1.00, as determined in accordance with the 2016 Credit Facility. As of March 31, 2018, we had no outstanding balance under the 2016 Credit Facility and were in compliance with all financial statement covenants except for the submission of our quarterly financial statements no later than 45 days after the last day of the fiscal quarter. However, SVB granted a forbearance on this requirement through August 31, 2018, and we submitted our quarterly financial statements within the forbearance period.

6. Commitments and Contingencies

Legal Proceedings

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

reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim; (b) a reasonably possible loss or range of loss cannot be estimated; or (c) such estimate is immaterial.

On March 22, 2018, the Company, our Chief Executive Officer, our Chief Financial Officer, and certain former officers, were named as defendants in a putative class action lawsuit filed in the United States District Court for the Northern District of California, captioned Shah v. A10 Networks, Inc. et al., 3:18-cv-01772-VC (the “Securities Action”). The complaint in the Securities Action alleges claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and seeks unspecified damages and other relief. On August 31, 2018, the court appointed a lead plaintiff. An operative amended complaint remains to be filed.

On May 30, 2018, certain of our current and former directors and officers were named as defendants in a putative shareholder derivative lawsuit filed in the United States District Court for the Northern District of California, captioned Moulton v. Chen et al., 3:18-cv-03223-VC (the “Derivative Action”). We were also named as a nominal defendant. The complaint in the Derivative Action alleges breaches of fiduciary duties and other related claims in connection with purported misrepresentations related to internal controls and revenues and failures to ensure that financial statements were made in accordance with generally accepted accounting principles. Plaintiff seeks unspecified damages allegedly sustained by the Company, restitution, and other relief. On July 11, 2018 the Derivative Action was stayed until a motion to dismiss in the Securities Action is granted with prejudice or denied in whole or in part. Defendants are not required to move or otherwise respond to the current complaint.

Investigations

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

Lease Commitments

We lease various operating spaces in the United States, Asia and Europe under non-cancelable operating lease arrangements that expire on various dates through April 2022. These arrangements require us to pay certain operating expenses, such as taxes, repairs and insurance, and contain renewal and escalation clauses. We recognize rent expense under these arrangements on a straight-line basis over the term of the lease.

Guarantees and Indemnifications

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

7. Equity Incentive Plans and Stock-Based Compensation

Equity Incentive Plans

2014 Equity Incentive Plan

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

8,310,566 shares may become available from such awards granted under the 2008 Plan for issuance under the 2014 Plan.

The shares authorized for the 2014 Plan increase annually by the least of (i) 8,000,000 shares, (ii) 5% of the outstanding shares of common stock on the last day of our immediately preceding fiscal year, or (iii) such other amount as determined by our Board of Directors. Accordingly, on January 1, 2018, the number of shares in the 2014 Plan increased by 3,584,623 shares, representing 5% of the prior year end’s common stock outstanding. As of March 31, 2018, we had a total of 10,633,711 shares available for future grant.

2014 Employee Stock Purchase Plan

The 2014 Employee Stock Purchase Plan (the “2014 Purchase Plan”) provides for twenty-four month offering periods with four six-month purchase periods in each offering period. Employees purchase shares in each purchase period at 85% of the market value of our common stock at the beginning of the offering period or the end of the purchase period, whichever is lower. If the market value of our common stock at the end of the purchase period is less than the market value at the beginning of the offering period, participants will be withdrawn from the then current offering period following their purchase of shares, and automatically will be enrolled in the immediately following offering period. Participants may contribute up to 15% of their eligible compensation, subject to certain limits. As of March 31, 2018, we had 3,065,182 shares available for future issuance under the 2014 Purchase Plan.

The 2014 Purchase Plan was suspended effective March 16, 2018 due to the delay of the Form 10-K filing for the fiscal year ended December 31, 2017. Accordingly, there were no stock purchases under the 2014 Purchase Plan during the three months ended March 31, 2018. The 2014 Purchase Plan may resume after we become a current filer, subject to the Board acting at that time to establish new purchase and offering periods.

Stock-Based Compensation

A summary of our stock-based compensation expense is as follows (in thousands):



	Three Months Ended March 31,
	2018		2017
Stock-based compensation by type of award:
Stock options	$	329	$	819
Stock awards	2,665		2,949
Employee stock purchase rights (1)	5,157		548
	$	8,151	$	4,316

Stock-based compensation by category of expense:
Cost of revenue	$	893	$	283
Sales and marketing	2,765		1,536
Research and development	3,382		1,664
General and administrative	1,111		833
	$	8,151	$	4,316


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

As of March 31, 2018, we had $27.5 million of unrecognized stock-based compensation expense related to unvested stock-based awards which will be recognized over a weighted-average period of 2.3 years.

We did not grant stock options and employee stock purchase rights during the three months ended March 31, 2018 and 2017.

Stock Options

The following tables summarize our stock option activities and related information:



	Number of Shares (thousands)		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (thousands)
Outstanding as of December 31, 2017	6,018		$	5.18
Exercised	(359	)	$	3.54
Canceled (1)	(87	)	$	10.74
Outstanding as of March 31, 2018	5,572		$	5.19	5.0	$	7,546
Vested and exercisable as of March 31, 2018	4,688		$	5.03	4.4	$	7,027



(1)	Includes 51,995 shares of canceled stock options from the 2008 Plan that became available for issuance under the 2014 Plan.

As of March 31, 2018, the aggregate intrinsic value represents the excess of the closing price of our common stock of $5.82 over the exercise price of the outstanding in-the-money options.

The intrinsic value of options exercised was $1.1 million and $4.7 million during the three months ended March 31, 2018 and 2017, respectively.

Stock Awards

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

In 2014 and 2015, we granted 540,000 MSUs and 40,000 MSUs, respectively, to certain executives. These MSUs will vest if the closing price of our common stock remains above certain predetermined target prices for 20 consecutive trading days within a 4-year period following the grant date, subject to continued service by the award holder. None of these MSUs were vested as of March 31, 2018.

In February 2016, we granted 547,000 PSUs with certain financial and operational targets. Actual performance, as measured at the time and prior to the restatement of the 2016 financial statements, resulted in participants achieving 80% of target. Given the PSUs did not contain explicit or implicit claw back rights, there was no change to stock-based compensation expense for the impact of the restatement. As of March 31, 2018, 178,402 shares had vested, 181,600 shares were forfeited, and the remaining shares will vest in annual tranches through February 2020 subject to continued service vesting requirements.

In October 2016, we granted 60,641 PSUs with certain financial and operational targets. To the extent they become eligible to vest upon achievement of the performance targets, these PSUs additionally are subject to service condition vesting requirements with scheduled vesting dates of March 2017 through June 2018. As of March 31, 2018, 12,128 shares had vested, 30,321 shares were forfeited, and the remaining shares were unvested and are eligible to vest based on achievement of performance targets.

The following table summarizes our stock award activities and related information:



	Number of Shares (thousands)		Weighted-Average Grant Date Fair Value		Weighted-Average Remaining Vesting Term (years)
Outstanding as of December 31, 2017	5,568		$	6.88
Granted	99		$	6.86
Released	(656	)	$	6.44
Canceled	(284	)	$	7.57
Outstanding as of March 31, 2018	4,727		$	6.90	1.4

The aggregate fair value of stock awards released as of the respective vesting dates was approximately $4.3 million and $6.2 million for the three months ended March 31, 2018 and 2017, respectively.

Stock Repurchase Program

On October 23, 2017, our board of directors authorized a share repurchase program for up to $20.0 million of our common stock over 12 months. Under the repurchase authorization, shares may be purchased from time to time, subject to general business and market conditions and other investment opportunities, through open market purchases, privately negotiated transactions or other means. The repurchase authorization may be commenced, suspended or discontinued at any time at our discretion. No shares were repurchased under this repurchase program as of March 31, 2018.

8. Net Loss Per Share

Basic net loss per share is computed using the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed using the weighted average number of common shares outstanding for the period plus potential dilutive common shares, including stock options, RSUs and employee stock purchase rights, unless the potential common shares are anti-dilutive. Since we had net losses in the three months ended March 31, 2018 and 2017, none of the potential dilutive common shares were included in the computation of diluted shares for these periods, as inclusion of such shares would have been anti-dilutive.

The following table presents common shares related to potentially dilutive shares excluded from the calculation of diluted net loss per share as their effect would have been anti-dilutive (in thousands):



	Three Months Ended March 31,
	2018	2017
Stock options, RSUs and employee stock purchase rights	10,431	13,478
Common stock subject to repurchase	—	8
	10,431	13,486

9. Income Taxes

We recorded income tax expense of $0.2 million and $0.4 million for the three months ended March 31, 2018 and 2017, respectively, which primarily consisted of foreign taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities in the financial statements and their respective tax bases using tax rates expected to be in effect during the years in which the basis differences reverse.

We believe it is more likely than not that our federal and state net deferred tax assets will not be fully realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of our deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. A valuation allowance is recorded for loss carryforwards and other deferred tax assets where it is more likely than not that such deferred tax assets will

not be realized. Accordingly, we continue to maintain a valuation allowance against all of our U.S. and certain foreign net deferred tax assets as of March 31, 2018. We will continue to maintain a full valuation allowance against our net federal, state and certain foreign deferred tax assets until there is sufficient evidence to support recoverability of our deferred tax assets.

We had $3.9 million and $3.8 million of unrecognized tax benefits as of March 31, 2018 and December 31, 2017, respectively. We do not anticipate a material change to our unrecognized tax benefits over the next twelve months. Unrecognized tax benefits may change during the next twelve months for items that arise in the ordinary course of business.

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

We are subject to taxation in the United States, various states, and several foreign jurisdictions. Because we have net operating loss and credit carryforwards, there are open statutes of limitations in which federal, state and foreign taxing authorities may examine our tax returns for all years from 2004 through the current period. We are not currently under examination by any taxing authorities.

The Tax Cuts and Jobs Act

In December 2017, the United States enacted the Tax Cuts and Jobs Act (“TCJA”), which instituted fundamental changes to the taxation of multinational corporations, including, but not limited to: (1) a reduction of the U.S. federal corporate income tax rate to 21% for tax years beginning after December 31, 2017; (2) a requirement for companies to pay a one-time transition tax on certain unremitted earnings of foreign subsidiaries; and, (3) the transition of international taxation from a worldwide tax system to a territorial system.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. For the three months ended March 31, 2018, the accounting for the TCJA remained incomplete, but there were no material changes to the provisional tax impacts assessed for the year ended December 31, 2017. The ultimate impact may materially differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the TCJA. The accounting is expected to be completed when the 2017 U.S. corporate income tax return is filed in 2018. We are not currently under examination by any taxing authorities.

10. Geographic Information

The following table depicts the disaggregation of revenue by geographic region based on the ship to location of our customers and is consistent with how we evaluate our financial performance (in thousands):



	Three Months Ended March 31,
	2018		2017
United States	$	20,678	$	34,274
Japan	13,080		13,079
Asia Pacific, excluding Japan	7,438		9,862
EMEA	6,499		5,632
Other	1,488		1,087
	$	49,183	$	63,934

The following table is a summary of our long-lived assets which include property and equipment, net based on the physical location of the assets (in thousands):



	March 31, 2018		December 31, 2017
United States	$	7,430	$	7,733
Japan	1,409		1,510
Other	795		670
Total	$	9,634	$	9,913

11. Revenue

ASC 606 Adoption Impact

On January 1, 2018, we adopted ASC 606 applying the modified retrospective method. We recognized the cumulative effect of initially applying the new guidance as an adjustment to the opening balance of accumulated deficit as of the adoption date. We applied ASC 606 to all contracts that were not completed at the date of initial application. Comparative information for prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods. In connection with the adoption of ASC 606, we also adopted ASC 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 ASC 340-40 as the “new standard.”

Adoption of the new standard resulted in changes to our accounting policies for revenue recognition, commissions and deferred commissions as discussed below. We recorded a reduction to opening accumulated deficit of $12.4 million as of January 1, 2018 due to the cumulative impact of adopting the new standard as follows:


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


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

Impact on the Condensed Consolidated Financial Statements

The following tables summarize the impact of the new standard on our condensed consolidated statement of balance sheet and condensed consolidated of operations for the period presented:

Selected Condensed Consolidated Balance Sheet Line Items



	March 31, 2018
(in thousands)	As Reported			Adjustments Increase (Decrease)			Balance Without Adopting the New Standard
Assets
Prepaid expenses and other current assets	$	14,352		$	(5,755	)	$	8,597
Other non-current assets	7,229			(2,610		)	4,619
Liabilities
Deferred revenue, current	65,735			2,657			68,392
Deferred revenue, non-current	31,895			1,686			33,581
Stockholders' Equity
Accumulated deficit	(264,298		)	(12,785		)	(277,083		)

Selected Condensed Consolidated Statement of Operations Line Items



	Three Months Ended March 31, 2018
(in thousands, except per share amounts)	As Reported			Adjustments Increase (Decrease)			Balance Without Adopting the New Standard
Revenue - products	$	28,149		$	(342	)	$	27,807
Revenue - services	21,034			—			21,034
Total revenue	49,183			(342		)	48,841
Gross profit	37,299			(342		)	36,957
Sales and marketing	26,904			39			26,943
Total operating expenses	57,295			39			57,334
Loss from operations	(19,996		)	(381		)	(20,377		)
Net loss	(19,670		)	(381		)	(20,051		)
Basic and diluted net loss per share	(0.27		)				(0.28		)

Changes in Accounting Policies

Revenue Recognition

We derive revenue from two sources: (i) products revenue, which includes hardware, perpetual software license and subscription revenue; and (ii) services revenue, which includes post contract support (“PCS”), professional services, and training. A substantial portion of our revenue is from sales of our products and services through distribution channel partners, such as resellers and distributors. Revenue is recognized, net of applicable taxes, upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to be entitled to receive in exchange for those products or services. We apply the following five-step revenue recognition model:


•	Identification of the contract, or contracts, with a customer


•	Identification of the performance obligations in the contract


•	Determination of the transaction price


•	Allocation of the transaction price to the performance obligations in the contract


•	Recognition of revenue when, or as, performance obligations are satisfied.

PCS revenue includes arrangements for software support and technical support for our products. PCS is 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. Revenue for PCS services is recognized on a straight-line basis over the service contract term, which is typically one year, but can be up to five years as there is no discernable pattern of transfer related to these promises. Billed but unearned PCS revenue is included in deferred revenue.

Professional service revenue primarily consists of the fees we earn related to installation and consulting services. We recognize revenue from professional services upon delivery or completion of performance. Professional service arrangements are typically short term in nature and are largely completed within 30 to 90 days from the start of service. Revenue is recognized for training when the training course is delivered.

Contracts with Multiple Performance Obligations

Most of our contracts with customers, other than renewals of PCS, contain multiple performance obligations with a combination of products and PCS. Products and PCS generally qualify as distinct performance obligations. Our hardware includes embedded ACOS software, which together deliver the essential functionality of our products. For contracts which contain multiple performance obligations, we allocate revenue to each distinct performance obligation based on the standalone selling price (“SSP”). Judgment is required to determine the SSP for each distinct performance obligation. We use a range of amounts to estimate SSP for products and PCS sold together in a contract to determine whether there is a discount to be allocated based on the relative SSP of the various products and PCS.

If we do not have an observable SSP, such as when we do not sell a product or service separately, then SSP is estimated using judgment and considering all reasonably available information such as market conditions and information about the size and/or purchase volume of the customer. We generally use a range of amounts to estimate SSP for individual products and services based on multiple factors including, but not limited to the sales channel (reseller, distributor or end customer), the geographies in which our products and services are sold, and the size of the end customer.

We account for multiple contracts with a single partner as one arrangement if the contractual terms and/or substance of those agreements indicate that they may be so closely related that they are, in effect, parts of a single contract.

We may occasionally accept returns to address customer satisfaction issues even though there is generally no contractual provision for such returns. We estimate returns for sales to customers based on historical returns rates applied against current-period shipments. Specific customer returns and allowances are considered when determining our sales return reserve estimate.

Our policy applies to the accounting for individual contracts. However, we have elected a practical expedient to apply the guidance to a portfolio of contracts or performance obligations with similar characteristics so long as such application would not differ materially from applying the guidance to the individual contracts (or performance obligations) within that portfolio.

Consequently, we have chosen to apply the portfolio approach when possible, which we do not believe will happen frequently. Additionally, we will evaluate a portfolio of data, when possible, in various situations, including accounting for commissions, rights of return and transactions with variable consideration.

We report revenue net of sales taxes. We include shipping charges billed to customers in revenue and the related shipping costs are included in cost of product revenue.

Contract Balances

The following table reflects contract balances with customers (in thousands):



		As of		As of Adoption
	Balance Sheet Line Reference	March 31, 2018		January 1, 2018
Accounts receivable, net	Accounts receivables, net	$	47,755	$	48,266
Deferred revenue, current	Deferred revenue	65,735		59,360
Deferred revenue, non-current	Deferred revenue, non-current	31,895		31,276

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

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

Contract assets include amounts related to our contractual right to consideration for performance obligations not yet billed and are included in prepaid and other current assets in the condensed consolidated balance sheets. Amount is immaterial as of March 31, 2018 and as of the adoption date.

Deferred revenue primarily consists of amounts that have been invoiced but not yet been recognized as revenue and consists of performance obligations pertaining to support and subscription services. During the three months ended March 31, 2018, $19.5 million of revenue recognized was included in the deferred revenues balance at the beginning of the period.

Deferred Contract Acquisition Costs

In connection with the adoption of ASC 340-40, we capitalize certain contract acquisition costs consisting of incremental sales commissions incurred to obtain customer contracts. Deferred commissions related to product revenues are recognized upon transfer of control to customers. Deferred commissions related to services revenue are recognized as the related performance obligations are met. Deferred commissions that will be recognized during the succeeding 12-month period are recorded as prepaid expenses and other current assets, and the remaining portion is recorded as other non-current assets. Amortization of deferred commissions is included in sales and marketing expense.

Deferred contract acquisition costs were $8.4 million as of March 31, 2018 and the related amortization amount for the three months ended March 31, 2018 was $1.7 million.

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

Remaining Performance Obligations

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

We expect to recognize revenue on the remaining performance obligations as follows (in thousands):



	March 31, 2018
Within 1 year	$	65,735
Next 2 to 3 years	30,062
Thereafter	1,833
Total	$	97,630


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

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

These forward-looking statements include, but are not limited to, statements concerning the following:


•	our ability to provide customers with improved benefits relating to their applications;


•	our ability to maintain an adequate rate of revenue growth;


•	our ability to successfully anticipate market needs and opportunities;


•	our business plan and our ability to effectively manage our growth;


•	loss or delay of expected purchases by our largest end-customers;


•	our ability to further penetrate our existing customer base;


•	our ability to displace existing products in established markets;


•	continued growth in markets relating to network security;


•	our ability to timely and effectively scale and adapt our existing technology;


•	our ability to innovate new products and bring them to market in a timely manner;


•	our ability to expand internationally;


•	the effects of increased competition in our market and our ability to compete effectively;


•	the effects of seasonal trends on our results of operations;


•	our expectations concerning relationships with third parties;


•	the attraction and retention of qualified employees and key personnel;


•	our ability to achieve or maintain profitability while continuing to invest in our sales, marketing and research and development teams;


•	variations in product mix or geographic locations of our sales;


•	fluctuations in currency exchange rates;


•	increased cost requirements of being a public company and future sales of substantial amounts of our common stock in the public markets;


•	the cost and potential outcomes of litigation;


•	our ability to maintain, protect, and enhance our brand and intellectual property;


•	future acquisitions of or investments in complementary companies, products, services or technologies;


•	our ability to effectively integrate operations of entities we have acquired or may acquire; and


•	actions relating to the remediation of identified material weaknesses.

These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this

Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations, except as required by law.

Overview

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

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

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

We sell our products globally to service providers and enterprises that depend on data center applications and networks to generate revenue and manage operations efficiently. Our end-customers operate in a variety of industries, including telecommunications, technology, industrial, retail, financial, gaming, education and government. Since inception, our customer base has grown rapidly. As of March 31, 2018, we had sold products to approximately 6,300 customers across 83 countries.

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

During the first quarter of 2018, 42% of our total revenue was generated from the United States, 27% from Japan and 31% from other geographical regions. During the first quarter of 2017, 54% of our total revenue was generated from the United States, 20% from Japan and 26% from other geographical regions. Our enterprise customers accounted for 58% and 57% of our total revenue during the first quarter of 2018 and 2017, respectively. Our service provider customers accounted for 42% and 43% of our total revenue during the first quarter of 2018 and 2017, respectively.

As a result of the nature of our target market and the current stage of our development, a substantial portion of our revenue comes from a limited number of large customers, including service providers, in any period. Purchases from our ten largest end-customers accounted for 36% and 45% of our total revenue during the first quarter of 2018 and 2017, respectively. Sales to these large end-customers have typically been characterized by large but irregular purchases with long sales cycles. The timing of these purchases and the delivery of the purchased products are difficult to predict. Consequently, any acceleration or delay in anticipated product purchases by or deliveries to our largest customers could materially impact our revenue and operating results in any quarterly period. This may cause our quarterly revenue and operating results to fluctuate from quarter to quarter and make them difficult to predict.

As of March 31, 2018, we had $47.0 million of cash and cash equivalents and $83.7 million of marketable securities. Cash used in operating activities was $0.4 million in the first quarter of 2018 as compared to $0.5 million cash generated by operating activities in the same period of 2017.

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

Results of Operations

A summary of our condensed consolidated statements of operations for the three months ended March 31, 2018 and 2017 is as follows (dollars in thousands):



	Three Months Ended March 31,
	2018					2017					Change
	Amount			Percent of Total Revenue		Amount			Percent of Total Revenue		Amount			Percent
Revenue:
Products	$	28,149		57.2	%	$	43,698		68.3	%	$	(15,549	)	(36	)%
Services	21,034			42.8		20,236			31.7		798			4	%
Total revenue	49,183			100.0		63,934			100.0		(14,751		)	(23	)%
Cost of revenue:
Products	7,109			14.5		10,502			16.5		(3,393		)	(32	)%
Services	4,775			9.7		4,241			6.6		534			13	%
Total cost of revenue	11,884			24.2		14,743			23.1		(2,859		)	(19	)%
Gross profit	37,299			75.8		49,191			76.9		(11,892		)	(24	)%
Operating expenses:
Sales and marketing	26,904			54.7		26,263			41.0		641			2	%
Research and development	18,797			38.2		17,042			26.7		1,755			10	%
General and administrative	11,594			23.6		7,647			12.0		3,947			52	%
Total operating expenses	57,295			116.5		50,952			79.7		6,343			12	%
Loss from operations	(19,996		)	(40.7	)	(1,761		)	(2.8	)	(18,235		)	1,035	%
Non-operating income (expense):
Interest expense	(33		)	(0.1	)	(44		)	(0.1	)	11			(25	)%
Interest and other income (expense), net	566			1.2		842			1.4		(276		)	(33	)%
Total non-operating income (expense), net	533			1.1		798			1.3		(265		)	(33	)%
Loss before income taxes	(19,463		)	(39.6	)	(963		)	(1.5	)	(18,500		)	1,921	%
Provision for income taxes	207			0.4		374			0.6		(167		)	(45	)%
Net loss	$	(19,670	)	(40.0	)%	$	(1,337	)	(2.1	)%	$	(18,333	)	1,371	%

Revenue

Our products revenue primarily consists of revenue from sales of our hardware appliances upon which our software is

installed. Such software includes our ACOS software platform plus one of our ADC, CGN, TPS, SSLi or CFW solutions.

Purchase of a hardware appliance includes a perpetual license to the included software. We recognize products revenue upon transfer of control, generally at the time of shipment, provided that all other revenue recognition criteria have been met. As a

percentage of revenue, our products revenue may vary from quarter to quarter based on, among other things, the timing of orders and delivery of products, cyclicality and seasonality, changes in currency exchange rates and the impact of significant transactions with unique terms and

conditions.

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

Our adoption of ASC 606, the new revenue recognition guidance, in January 2018 did not have a material impact on the recognition or timing of revenue. See Note 11 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for additional information.

A summary of our total revenue is as follows (dollars in thousands):



	Three Months Ended March 31,
	2018				2017				Change
	Amount		Percent of Total Revenue		Amount		Percent of Total Revenue		Amount			Percent
Revenue:
Products	$	28,149	57	%	$	43,698	68	%	$	(15,549	)	(36	)%
Services	21,034		43		20,236		32		798			4	%
Total revenue	$	49,183	100	%	$	63,934	100	%	$	(14,751	)	(23	)%
Revenue by geographic region:
United States	$	20,678	42	%	$	34,274	54	%	$	(13,596	)	(40	)%
Japan	13,080		27		13,079		20		1			—	%
Asia Pacific, excluding Japan	7,438		15		9,862		15		(2,424		)	(25	)%
EMEA	6,499		13		5,632		9		867			15	%
Other	1,488		3		1,087		2		401			37	%
Total revenue	$	49,183	100	%	$	63,934	100	%	$	(14,751	)	(23	)%

Total revenue decreased by $14.8 million, or 23%, during the first quarter of 2018 compared to the same period of 2017. This decrease was due to a $15.5 million decrease in products revenue, partially offset by a $0.8 million increase in services revenue. Revenue from service provider and enterprise customers decreased 26% and 21%, respectively, during the first quarter of 2018 compared to the same period of 2017.

Products revenue decreased $15.5 million, or 36%, during the first quarter of 2018 compared to the same period of 2017 primarily driven by the decreases from the United States and Asia Pacific regions excluding Japan.

Services revenue increased $0.8 million, or 4%, during the first quarter of 2018 compared to the same period of 2017. The increase was primarily attributable to the increase in PCS sales in connection with our increased installed customer base.

During the first quarter of 2018, $20.7 million, or 42% of total revenue, was generated from the United States, which represents a 40% decrease compared to the same period of 2017. The decrease is primarily due to lower products revenue.

During the first quarter of 2018, $13.1 million, or 27% of total revenue, was generated from Japan, which remained relatively consistent for the first quarter of 2018 compared to the same period of 2017.

During the first quarter of 2018, $7.4 million, or 15% of total revenue, was generated from Asia Pacific regions excluding Japan, which represents a 25% decrease compared to the same period of 2017. The decrease is primarily due to lower products revenue, partially offset by slightly higher services revenue from PCS sales in connection with our increased installed customer base.

During the first quarter of 2018, $6.5 million, or 13% of total revenue, was generated from EMEA, which represents a 15% increase compared to the same period of 2017. The increase is driven by both higher products revenue and higher services revenue from PCS sales in connection with our increased installed customer base.

Cost of Revenue, Gross Profit and Gross Margin

Cost of revenue

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

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

A summary of our cost of revenue is as follows (dollars in thousands):



	Three Months Ended March 31,				Change
	2018		2017		Amount			Percent
Cost of revenue:
Products	$	7,109	$	10,502	$	(3,393	)	(32	)%
Services	4,775		4,241		534			13	%
Total cost of revenue	$	11,884	$	14,743	$	(2,859	)	(19	)%

Gross Margin

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

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

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

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



	Three Months Ended March 31,
	2018				2017				Change
	Amount		Gross Margin		Amount		Gross Margin		Amount			Gross Margin
Gross profit:
Products	$	21,040	74.7	%	$	33,196	76.0	%	$	(12,156	)	(1.3	)%
Services	16,259		77.3	%	15,995		79.0	%	264			(1.7	)%
Total gross profit	$	37,299	75.8	%	$	49,191	76.9	%	$	(11,892	)	(1.1	)%

Products gross margin decreased 1.3% during the first quarter of 2018 compared to the same period of 2017 primarily due to unfavorable product and geographic mix.

Services gross margins decreased 1.7% during the first quarter of 2018 compared to the same period of 2017 primarily driven by higher costs of inventory used to provide hardware replacements to end-customers under PCS contracts.

Operating Expenses

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

A summary of our operating expenses is as follows (dollars in thousands):



	Three Months Ended March 31,				Change
	2018		2017		Amount		Percent
Operating expenses:
Sales and marketing	$	26,904	$	26,263	$	641	2	%
Research and development	18,797		17,042		1,755		10	%
General and administrative	11,594