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 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: 001-36343

A10 NETWORKS, INC.

(Exact Name of Registrant as Specified in its Charter)



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

(408) 325-8668

(Registrant’s Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

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



Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨	Smaller reporting company	¨
		Emerging growth company	x

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

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

As of October 25, 2018, the number of outstanding shares of the registrant’s common stock, par value $0.00001 per share, was 73,798,417.

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 September 30, 2018 and December 31, 2017	2
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017 (As Restated)	3
Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2018 and 2017 (As Restated)	4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 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	26
Item 3. Quantitative and Qualitative Disclosures About Market Risk	39
Item 4. Controls and Procedures	39
PART II. OTHER INFORMATION	43
Item 1. Legal Proceedings	43
Item 1A. Risk Factors	43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	69
Item 3. Defaults Upon Senior Securities	69
Item 4. Mine Safety Disclosures	69
Item 5. Other Information	69
Item 6. Exhibits	70
Signatures	71

(*) The condensed consolidated financial statements for the three and nine months ended September 30, 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)



	September 30, 2018			December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	36,162		$	46,567
Marketable securities	87,391			84,567
Accounts receivable, net of allowances of $1,003 and $983, respectively	51,084			48,266
Inventory	15,102			17,577
Prepaid expenses and other current assets	13,266			6,825
Total current assets	203,005			203,802
Property and equipment, net	7,994			9,913
Goodwill	1,307			1,307
Intangible assets	4,108			5,190
Other non-current assets	8,380			4,646
Total assets	$	224,794		$	224,858
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	9,630		$	9,033
Accrued liabilities	20,602			21,835
Deferred revenue	60,653			61,858
Total current liabilities	90,885			92,726
Deferred revenue, non-current	34,202			32,779
Other non-current liabilities	642			967
Total liabilities	125,729			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	369,858			355,533
Accumulated other comprehensive loss	(157		)	(123		)
Accumulated deficit	(270,637		)	(257,025		)
Total stockholders' equity	99,065			98,386
Total liabilities and stockholders' equity	$	224,794		$	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 September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
				As Restated, Note 2						As Restated, Note 2
Revenue:
Products	$	38,265		$	40,404		$	105,638		$	116,930
Services	22,237			21,601			64,760			62,982
Total revenue	60,502			62,005			170,398			179,912
Cost of revenue:
Products	8,790			9,357			24,979			28,124
Services	4,224			4,510			13,106			13,286
Total cost of revenue	13,014			13,867			38,085			41,410
Gross profit	47,488			48,138			132,313			138,502
Operating expenses:
Sales and marketing	24,539			26,930			77,231			78,754
Research and development	15,505			15,997			49,874			49,529
General and administrative	9,012			6,945			30,464			21,444
Total operating expenses	49,056			49,872			157,569			149,727
Loss from operations	(1,568		)	(1,734		)	(25,256		)	(11,225		)
Non-operating income (expense):
Interest expense	(34		)	(20		)	(99		)	(128		)
Interest and other income (expense), net	(131		)	(37		)	6			779
Total non-operating income (expense), net	(165		)	(57		)	(93		)	651
Loss before income taxes	(1,733		)	(1,791		)	(25,349		)	(10,574		)
Provision for income taxes	74			454			660			963
Net loss	$	(1,807	)	$	(2,245	)	$	(26,009	)	$	(11,537	)
Net loss per share:
Basic and diluted	$	(0.02	)	$	(0.03	)	$	(0.36	)	$	(0.17	)
Weighted-average shares used in computing net loss per share:
Basic and diluted	72,707			70,705			72,550			69,688

See accompanying notes to the condensed consolidated financial statements.

A10 NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited, in thousands)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
				As Restated, Note 2						As Restated, Note 2
Net loss	$	(1,807	)	$	(2,245	)	$	(26,009	)	$	(11,537	)
Other comprehensive loss, net of tax:
Unrealized gain (loss) on marketable securities	64			29			(34		)	28
Comprehensive loss	$	(1,743	)	$	(2,216	)	$	(26,043	)	$	(11,509	)

See accompanying notes to the condensed consolidated financial statements.

A10 NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)



	Nine Months Ended September 30,
	2018			2017
				As Restated, Note 2
Cash flows from operating activities:
Net loss	$	(26,009	)	$	(11,537	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization	6,020			6,222
Stock-based compensation	13,055			13,824
Other non-cash items	152			930
Changes in operating assets and liabilities:
Accounts receivable	(3,144		)	11,288
Inventory	1,550			(2,513		)
Prepaid expenses and other assets	(868		)	(2,785		)
Accounts payable	806			(1,243		)
Accrued and other liabilities	(1,482		)	(3,023		)
Deferred revenue	4,219			(1,245		)
Other	183			102
Net cash (used in) provided by operating activities	(5,518		)	10,020
Cash flows from investing activities:
Proceeds from sales of marketable securities	23,194			18,747
Proceeds from maturities of marketable securities	41,732			52,119
Purchases of marketable securities	(67,754		)	(69,580		)
Purchase of investment	(1,000		)	—
Purchases of property and equipment	(2,252		)	(4,223		)
Net cash used in investing activities	(6,080		)	(2,937		)
Cash flows from financing activities:
Proceeds from issuance of common stock under employee equity incentive plans	1,269			7,665
Repurchases and retirement of common stock	—			(3,071		)
Payment of contingent consideration	—			(650		)
Other	(76		)	(83		)
Net cash provided by financing activities	1,193			3,861
Net (decrease) increase in cash and cash equivalents	(10,405		)	10,944
Cash and cash equivalents - beginning of period	46,567			28,975
Cash and cash equivalents - end of period	$	36,162		$	39,919
Non-cash investing and financing activities:
Inventory transfers to property and equipment	$	925		$	2,368
Purchases of property and equipment included in accounts payable	$	78		$	65

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 our audited financial statements, which are included in our 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 “Proceeds from 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 nine months ended September 30, 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 nine months ended September 30, 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 10% or more of our total revenue for each period presented or our gross accounts receivable balance as of each respective balance sheet date. Revenues from our significant customers as a percentage of our total revenue are as follows:



	Three Months Ended September 30,		Nine Months Ended September 30,
	2018	2017	2018	2017
Customer A (a distribution channel partner)	16%	*	14%	10%
Customer B (a distribution channel partner)	*	11%	*	*
Customer C (a direct customer)	*	14%	*	10%

* represents less than 10% of total revenue

As of September 30, 2018, one customer accounted for 17% of our total gross accounts receivable. 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 evaluating the impact of this guidance on our condensed consolidated financial statements and related disclosures. We expect to apply the new transition method prescribed by ASU 2018-11 at the adoption date. We expect the most prominent impact on our condensed consolidated financial statements to be the recognition of right-of-use assets and lease liabilities for those leases classified as operating leases. We expect the standard to have a material impact on our condensed consolidated balance sheets, but an immaterial impact on our condensed consolidated statement of operations.

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 on November 5, 2018. We are evaluating the impact of this guidance on our condensed consolidated financial statements and expect to adopt this guidance in the first quarter of 2019.

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 its interim condensed consolidated financial statements for each of the first three quarters of 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 and nine months ended September 30, 2017, revenue on certain sale transactions was recognized prematurely in prior periods, 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 collectibility 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, prepaid expenses and other assets 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 tables present the condensed consolidated statement of operations as previously reported, restatement adjustments and the condensed consolidated statement of operations as restated for the three and nine months ended September 30, 2017 (in thousands, except per share amounts):



	Three Months Ended September 30, 2017
	As Previously Reported			Revenue Recognition Adjustments		Other Adjustments			As Restated
Revenue:
Products	$	39,389		$	517	$	498		$	40,404
Services	22,030			69		(498		)	21,601
Total revenue	61,419			586		—			62,005
Cost of revenue:
Products	9,119			108		130			9,357
Services	4,640			—		(130		)	4,510
Total cost of revenue	13,759			108		—			13,867
Gross profit	$	47,660		$	478	$	—		$	48,138
Operating expenses:
General and administrative	$	6,878		$	67	$	—		$	6,945
Total operating expenses	$	49,805		$	67	$	—		$	49,872
Loss from operations	$	(2,145	)	$	411	$	—		$	(1,734	)
Loss before income taxes	$	(2,202	)	$	411	$	—		$	(1,791	)
Net loss	$	(2,656	)	$	411	$	—		$	(2,245	)
Net loss per share:
Basic and diluted	$	(0.04	)						$	(0.03	)
Weighted-average shares used in computing net loss per share:
Basic and diluted	70,705								70,705



	Nine Months Ended September 30, 2017
	As Previously Reported			Revenue Recognition Adjustments		Other Adjustments			As Restated
Revenue:
Products	$	111,195		$	4,467	$	1,268		$	116,930
Services	64,199			51		(1,268		)	62,982
Total revenue	175,394			4,518		—			179,912
Cost of revenue:
Products	26,973			814		337			28,124
Services	13,623			—		(337		)	13,286
Total cost of revenue	40,596			814		—			41,410
Gross profit	$	134,798		$	3,704	$	—		$	138,502
Operating expenses:
General and administrative	$	21,028		$	416	$	—		$	21,444
Total operating expenses	$	149,311		$	416	$	—		$	149,727
Loss from operations	$	(14,513	)	$	3,288	$	—		$	(11,225	)
Loss before income taxes	$	(13,862	)	$	3,288	$	—		$	(10,574	)
Net loss	$	(14,825	)	$	3,288	$	—		$	(11,537	)
Net loss per share:
Basic and diluted	$	(0.21	)						$	(0.17	)
Weighted-average shares used in computing net loss per share:
Basic and diluted	69,688								69,688

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 nine months ended September 30, 2017 (in thousands):



	Nine Months Ended September 30, 2017
	As Previously Reported			Revenue Recognition Adjustments			As Restated
Cash flows from operating activities:
Net loss	$	(14,825	)	$	3,288		$	(11,537	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Changes in operating assets and liabilities:
Accounts receivable, net	$	16,049		$	(4,761	)	$	11,288
Inventory	$	(3,242	)	$	729		$	(2,513	)
Prepaid expenses and other assets	$	(2,870	)	$	85		$	(2,785	)
Deferred revenue	$	(1,904	)	$	659		$	(1,245	)
Net cash provided by operating activities	$	10,020		$	—		$	10,020

The only change to the condensed consolidated statement of comprehensive loss for the three and nine months ended September 30, 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):



	September 30, 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	$	14,999	$	10	$	(1	)	$	15,008	$	17,000	$	6	$	(1	)	$	17,005
Corporate securities	47,419		7		(118		)	47,308		39,154		1		(76		)	39,079
U.S. Treasury and agency securities	3,747		—		(18		)	3,729		5,744		—		(19		)	5,725
Commercial paper	5,931		—		(3		)	5,928		9,225		1		(2		)	9,224
Asset-backed securities	15,452		—		(34		)	15,418		13,567		—		(33		)	13,534
	$	87,548	$	17	$	(174	)	$	87,391	$	84,690	$	8	$	(131	)	$	84,567

During the nine months ended September 30, 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 September 30, 2018 (in thousands):



	Amortized Cost		Fair Value
Less than 1 year	$	54,749	$	54,668
Mature in 1 - 3 years	32,799		32,723
	$	87,548	$	87,391

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 September 30, 2018	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	38,550		(110		)	2,143		(8		)	40,693		(118		)
U.S. Treasury and agency securities	1,731		(16		)	1,998		(2		)	3,729		(18		)
Commercial paper	4,940		(3		)	—		—			4,940		(3		)
Asset-backed securities	8,463		(19		)	5,562		(15		)	14,025		(34		)
	$	56,683	$	(149	)	$	9,703	$	(25	)	$	66,386	$	(174	)



	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 nine months ended September 30, 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):



	September 30, 2018								December 31, 2017
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash	$	25,688	$	—	$	—	$	25,688	$	34,453	$	—	$	—	$	34,453
Cash equivalents	10,474		—		—		10,474		12,114		—		—		12,114
Certificates of deposit	—		15,008		—		15,008		—		17,005		—		17,005
Corporate securities	—		47,308		—		47,308		—		39,079		—		39,079
U.S. Treasury and agency securities	—		3,729		—		3,729		—		5,725		—		5,725
Commercial paper	—		5,928		—		5,928		—		9,224		—		9,224
Asset-backed securities	—		15,418		—		15,418		—		13,534		—		13,534
	$	36,162	$	87,391	$	—	$	123,553	$	46,567	$	84,567	$	—	$	131,134

There were no transfers between Level 1 and Level 2 fair value measurement categories during the nine months ended September 30, 2018 and 2017.

4. Condensed Consolidated Financial Statement Details

Inventory

Inventory consisted of the following (in thousands):



	September 30, 2018		December 31, 2017
Raw materials	$	6,118	$	6,643
Finished goods	8,984		10,934
Total inventory	$	15,102	$	17,577

Property and Equipment, Net

Property and equipment, net, consisted of the following (in thousands):



	Useful Life	September 30, 2018			December 31, 2017
	(in years)
Equipment	1-3	$	49,930		$	47,817
Software	1-3	4,033			3,988
Furniture and fixtures	1-3	951			950
Leasehold improvements	2-8	3,836			3,824
Construction in progress		284			—
Property and equipment, gross		59,034			56,579
Less: accumulated depreciation		(51,040		)	(46,666		)
Property and equipment, net		$	7,994		$	9,913

Depreciation expense on property and equipment was $1.5 million for each of the three months ended September 30, 2018 and 2017, and $4.9 million and $5.1 million for the nine months ended September 30, 2018 and 2017, respectively.

Intangible Assets

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



	September 30, 2018							December 31, 2017
	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net
Developed technology	$	5,050	$	(2,273	)	$	2,777	$	5,050	$	(1,515	)	$	3,535
Patents	2,936		(1,605		)	1,331		2,936		(1,281		)	1,655
Total	$	7,986	$	(3,878	)	$	4,108	$	7,986	$	(2,796	)	$	5,190

Amortization expense related to purchased intangible assets was $0.4 million for each of the three months ended September 30, 2018 and 2017, and $1.1 million for each of the nine months ended September 30, 2018 and 2017. Purchased intangible assets will be amortized over a remaining weighted average useful life of 2.9 years.

Future amortization expense for purchased intangible assets as of September 30, 2018 is as follows (in thousands):



Fiscal Year
Remainder of 2018	$	361
2019	1,442
2020	1,442
2021	863
	$	4,108

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):



	September 30, 2018		December 31, 2017
Accrued compensation and benefits	$	12,003	$	13,828
Accrued tax liabilities	3,632		2,985
Other	4,967		5,022
Total accrued liabilities	$	20,602	$	21,835

Deferred Revenue

Deferred revenue consisted of the following (in thousands):



	September 30, 2018			December 31, 2017
Deferred revenue:
Products	$	5,109		$	6,161
Services	89,746			88,476
Total deferred revenue	94,855			94,637
Less: current portion	(60,653		)	(61,858		)
Non-current portion	$	34,202		$	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 credit facility fee on the 2016 Credit Facility from 0.4% to 0.3%.

Our obligations under the 2016 Credit Facility are secured by substantially all of our assets, excluding our intellectual property. The 2016 Credit Facility contains customary affirmative and negative covenants. In addition, the 2016 Credit Facility requires us to maintain compliance with an adjusted quick ratio of not less than 1.50:1.00, as determined in accordance with the 2016 Credit Facility. As of September 30, 2018, we had no outstanding balance under the 2016 Credit Facility and were in compliance with all facility covenants.

6. Commitments and Contingencies

Legal Proceedings

Litigation

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

On March 22, 2018, the Company, our Chief Executive Officer, our Chief Financial Officer, and certain former officers, were named as defendants in a putative class action lawsuit filed in the United States District Court for the Northern District of California, captioned Shah v. A10 Networks, Inc. et al., 3:18-cv-01772-VC (the “Securities Action”). On August 31, 2018, the court appointed a lead plaintiff. On October 5, 2018, the lead plaintiff filed an amended complaint. The amended complaint names the same defendants as the initial complaint, in addition to one of the Company’s former executive vice presidents. The amended complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.

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

On October 24, 2018, the Company was sued in the Federal District Court for the Northern District of California by Firenet Technologies, LLC, which we believe is a non-practicing patent holding company. The complaint alleges infringement of certain patents purportedly owned by the plaintiff. The Company is currently evaluating the matter and intends to vigorously defend the lawsuit, but the Company is unable to reasonably estimate a possible loss or range of possible loss, if any, arising from this matter at this early stage. Accordingly, no accrued litigation expense has been recorded in the accompanying condensed consolidated financial statements.

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 September 30, 2018, we had a total of 11,580,435 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 September 30, 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 and nine months ended September 30, 2018. In October 2018, the Board approved amending our 2014 Purchase Plan in order to, among other things, reduce the maximum contribution participants can make under the plan from 15% to 10% of eligible compensation. Our 2014 Purchase Plan as amended also reflects revised offering periods, which were changed from 24 to six months in duration and that begin on or about December 1 and June 1 each year, starting in December 2018.

Stock-Based Compensation

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



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Stock-based compensation by type of award:
Stock options	$	291	$	589	$	922	$	2,199
Stock awards	2,042		2,969		6,976		9,269
Employee stock purchase rights ⁽¹⁾	—		987		5,157		2,356
	$	2,333	$	4,545	$	13,055	$	13,824

Stock-based compensation by category of expense:
Cost of revenue	$	187	$	403	$	1,277	$	1,068
Sales and marketing	619		1,696		4,085		5,120
Research and development	960		1,537		5,345		5,024
General and administrative	567		909		2,348		2,612
	$	2,333	$	4,545	$	13,055	$	13,824


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

As of September 30, 2018, we had $18.4 million of unrecognized stock-based compensation expense related to unvested stock-based awards which will be recognized over a weighted-average period of 1.9 years.

Stock Options

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



	Number of Shares (thousands)		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (thousands)
Outstanding as of December 31, 2017	6,018		$	5.18
Granted	—		$	—
Exercised	(359	)	$	3.54
Canceled ⁽¹⁾	(314	)	$	8.84
Outstanding as of September 30, 2018	5,345		$	5.07	4.3	$	8,455
Vested and exercisable as of September 30, 2018	4,795		$	4.90	3.9	$	8,201


(1)	Includes 249,491 shares of canceled stock options from the 2008 Plan that became available for issuance under the 2014 Plan.

As of September 30, 2018, the aggregate intrinsic value represents the excess of the closing price of our common stock of $6.08 over the exercise price of the outstanding in-the-money options.

The intrinsic value of options exercised was $1.1 million and $7.0 million during the nine months ended September 30, 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 September 30, 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 September 30, 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 September 30, 2018, 30,320 shares were vested and 30,321 shares were forfeited.

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)
Unvested as of December 31, 2017	5,568		$	6.88
Granted	99		$	6.86
Released	(656	)	$	6.44
Canceled	(854	)	$	7.38
Unvested as of September 30, 2018	4,157		$	6.85	1.1

The aggregate fair value of stock awards released as of the respective vesting dates was $4.3 million and $12.2 million for the nine months ended September 30, 2018 and 2017, respectively.

In October 2018, upon the resumption of timely filings with the SEC, we resumed our equity plan activities and granted approximately 3.1 million stock awards and 0.3 million stock options to our employees.

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 September 30, 2018. Our share repurchase program expired in October 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 and nine months ended September 30, 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 September 30,		Nine Months Ended September 30,
	2018	2017	2018	2017
Stock options, RSUs and employee stock purchase rights	8,546	10,071	9,395	12,587

9. Income Taxes

We recorded income tax expense of $0.1 million and $0.5 million for the three months ended September 30, 2018 and 2017, respectively, and $0.7 million and $1.0 million for the nine months ended September 30, 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 September 30, 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 $3.8 million of unrecognized tax benefits as of September 30, 2018 and December 31, 2017. 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 nine months ended September 30, 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.

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 September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
United States	$	27,003	$	28,951	$	78,124	$	92,140
Japan	14,023		16,634		38,971		38,119
Asia Pacific, excluding Japan	9,331		7,171		27,436		25,594
EMEA	8,119		6,117		20,038		18,535
Other	2,026		3,132		5,829		5,524
	$	60,502	$	62,005	$	170,398	$	179,912

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):



	September 30, 2018		December 31, 2017
United States	$	6,080	$	7,733
Japan	1,210		1,510
Other	704		670
Total	$	7,994	$	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



	September 30, 2018
(in thousands)	As Reported			Adjustments Increase (Decrease)			Balance Without Adopting the New Standard
Assets
Prepaid expenses and other current assets	$	13,266		$	(5,824	)	$	7,442
Other non-current assets	8,380			(3,000		)	5,380
Liabilities
Deferred revenue, current	60,653			3,164			63,817
Deferred revenue, non-current	34,202			2,220			36,422
Stockholders' Equity
Accumulated deficit	(270,637		)	(14,208		)	(284,845		)

Selected Condensed Consolidated Statement of Operations Line Items



	Three Months Ended September 30, 2018
(in thousands, except per share amounts)	As Reported			Adjustments Increase (Decrease)			Balance Without Adopting the New Standard
Revenue - products	$	38,265		$	(475	)	$	37,790
Revenue - services	22,237			—			22,237
Total revenue	60,502			(475		)	60,027
Gross profit	47,488			(475		)	47,013
Sales and marketing	24,539			292			24,831
Total operating expenses	49,056			292			49,348
Loss from operations	(1,568		)	(767		)	(2,335		)
Net loss	(1,807		)	(767		)	(2,574		)
Basic and diluted net loss per share	(0.02		)				(0.04		)



	Nine Months Ended September 30, 2018
(in thousands, except per share amounts)	As Reported			Adjustments Increase (Decrease)			Balance Without Adopting the New Standard
Revenue - products	$	105,638		$	(1,384	)	$	104,254
Revenue - services	64,760			—			64,760
Total revenue	170,398			(1,384		)	169,014
Gross profit	132,313			(1,384		)	130,929
Sales and marketing	77,231			420			77,651
Total operating expenses	157,569			420			157,989
Loss from operations	(25,256		)	(1,804		)	(27,060		)
Net loss	(26,009		)	(1,804		)	(27,813		)
Basic and diluted net loss per share	(0.36		)				(0.38		)

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	September 30, 2018		January 1, 2018
Accounts receivable, net	Accounts receivables, net	$	51,084	$	48,266
Deferred revenue, current	Deferred revenue	60,653		59,360
Deferred revenue, non-current	Deferred revenue, non-current	34,202		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. The amount is immaterial as of September 30, 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 and nine months ended September 30, 2018, we recognized revenue of $13.2 million and $49.9 million, respectively, related to deferred revenues 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 $8.8 million as of September 30, 2018, and the related amortization amount was $1.1 million for the three months ended September 30, 2018 and $4.1 million for the nine months ended September 30, 2018.

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):



	September 30, 2018
Within 1 year	$	60,653
Next 2 to 3 years	28,350
Thereafter	5,852
Total	$	94,855


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;


•	our ability to timely file financial, periodic and current reports required by the Exchange Act;


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


•	our ability to further penetrate our existing customer base;


•	our ability to displace existing products in established markets;


•	continued growth in markets relating to network security;


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


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


•	our ability to expand internationally;


•	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.

Our investor relations Web site is located at https://investors.a10networks.com. We intend to use our investor relations Web site as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Accordingly, investors should monitor this portion of our Web site, in addition to following press releases, SEC filings and public conference calls and webcasts. We also make available, free of charge, on our investor relations Web site under “SEC Filings,” our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports as soon as reasonably practicable after electronically filing or furnishing those reports to the SEC.

Overview

We are a leading provider of secure application solutions and services that enable a new generation of intelligently connected companies with the ability to continuously improve cyber protection and digital responsiveness across dynamic Information Technology (“IT”) and network infrastructures. Our portfolio of software and hardware solutions combines industry-leading performance and scale with advanced intelligent automation, machine learning, data driven analytics, and threat intelligence to ensure security and availability of customer applications across their multi-cloud 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 September 30, 2018, we had sold products to approximately 6,700 customers across 84 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 nine months of 2018, 46% of our total revenue was generated from the United States, 23% from Japan and 31% from other geographical regions. During the first nine months of 2017, 51% of our total revenue was generated from the United States, 21% from Japan and 28% from other geographical regions. Our enterprise customers accounted for 60% and 54% of our total revenue during the first nine months of 2018 and 2017, respectively. Our service provider customers accounted for 40% and 46% of our total revenue during the first nine months 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 37% and 39% of our total revenue for the first nine months 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 September 30, 2018, we had $36.2 million of cash and cash equivalents and $87.4 million of marketable securities. Cash used in operating activities was $5.5 million in the first nine months of 2018 compared to $10.0 million cash generated by operating activities in the same period of last year.

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

Results of Operations

A summary of our condensed consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017 are as follows (dollars in thousands):



	Three Months Ended September 30,
	2018				2017				Increase (Decrease)
	Amount		Percent of Total Revenue		Amount		Percent of Total Revenue		Amount			Percent
Revenue:
Products	$	38,265	63.2	%	$	40,404	65.2	%	$	(2,139	)	(5	)%
Services	22,237		36.8		21,601		34.8		636			3	%
Total revenue	60,502		100.0		62,005		100.0		(1,503		)	(2	)%
Cost of revenue:
Products	8,790