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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended December 31, 2021


☐	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: 001-37637

MIMECAST LIMITED

(Exact Name of Registrant as Specified in its Charter)


Bailiwick of Jersey	Not applicable
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1 Finsbury Avenue London EC2M 2PF United Kingdom	EC2M 2PF
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (781) 996-5340

Securities registered pursuant to Section 12(b) of the Act:


(Title of each class)	(Trading Symbol)	(Name of each exchange on which registered)
Ordinary Shares, par value $0.012 per share	MIME	The Nasdaq Global Select Market

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 ☐

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

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


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

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

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

As of January 27, 2022, the registrant had 66,922,342 shares of ordinary shares, $0.012 par value per share, outstanding.

SUMMARY of the Material and Other Risks Associated with Our Business

Business and Operational Risks

•

On December 7, 2021, we entered into a Transaction Agreement providing for our acquisition by an entity affiliated with Permira Advisers LLC in an all-cash transaction valued at approximately $5.8 billion (the "Transaction"). The Transaction, the pendency of the Transaction or our failure to complete the Transaction could have a material adverse effect on our business, results of operations, financial condition and share price.

•

Data security and integrity are critically important to our business, and breaches of our information and technology networks and unauthorized access to a customer’s data, including our recent security incident, could harm our business and operating results.

•

The global COVID-19 pandemic has had, and will likely continue to have, certain negative impacts on our business, financial results and operations.

•

If we are unable to attract new customers, sell additional services, features and products to our existing customers, and retain customers, our business and results of operations will be affected adversely.

•

The markets in which we participate are highly competitive, and our failure to compete successfully would make it difficult for us to add and retain customers and would reduce or impede the growth of our business.

•

If we are unable to effectively increase sales of our services to large enterprises, our business, financial position and results of operations may suffer.

•

Our business and results of operations may be negatively impacted by the United Kingdom’s withdrawal from the European Union.

•

If we fail to maintain successful relationships with our channel partners, our business, financial position and results of operations may suffer.

•

Any serious disruptions in our services may cause us to lose revenue and market acceptance and may affect the service level commitments under our subscription agreements, which could obligate us to provide refunds.

•

We have acquired, and may acquire in the future, other businesses, products or technologies, which could require significant management attention, disrupt our business, dilute shareholder value and adversely affect our results of operations.

•

If we are not able to provide successful updates, enhancements and features to our technology to, among other things, keep up with emerging cyber threats and customer needs, our business could be adversely affected.

•

We are subject to a number of risks associated with global sales and operations, including without limitation the recent societal unrest in South Africa.

•

Our research and development efforts may not produce new services or enhancements to existing services.

•

We employ third-party licensed software for use in or with our services, and the inability to maintain these licenses or errors or vulnerabilities in the software we license could result in increased costs, reduced service levels or security risks, which would adversely affect our business.

•

Interruptions or performance problems associated with our information and technology infrastructure could impair the delivery of our services and harm our business.

Legal and Regulatory Risks

•

Our failure to comply with evolving data privacy, data protection and cloud computing regulations, cross-border data transfer restrictions and other domestic or foreign laws and regulations may result in substantial liability and may limit the use and adoption of, or require modifications to, our products and services, all of which could reduce our revenue, harm our operating results and adversely affect our business.

•

We are subject to governmental export controls and funds dealings restrictions that could impair our ability to compete in certain international markets and subject us to liability if we are not in full compliance with applicable laws.

•

We may become involved in litigation that may materially adversely affect us.

Human Capital Risks

•

We are dependent on the continued services and performance of our key employees, including our co-founder.

•

If we are unable to hire, retain and motivate qualified personnel, our business may be adversely impacted.

Risks Related to Intellectual Property

•

Third parties have sued us for alleged infringement of their proprietary rights.

•

Failure to protect our intellectual property rights could impair our ability to protect our technology and our brand.

•

Our employees may disclose our trade secrets and other proprietary information.

•

Our employees or contractors may wrongfully use or disclose alleged trade secrets or confidential information of their former employers or other parties.

•

The use of open source software in our offerings may expose us to additional risks, including security risks, and harm our intellectual property.

Financial Risks

•

Because we recognize revenue from subscriptions for our services over the term of the agreement, downturns or upturns in new business may not be immediately reflected in our operating results and may be difficult to discern.

•

Fluctuations in currency exchange rates could adversely affect our business.

•

Financial covenants and other restrictions under our credit facility create default risks and reduce our flexibility.

•

We must maintain the adequacy of internal controls over financial reporting.

Tax Risks

•

We are a multinational organization faced with increasingly complex tax issues in many jurisdictions, including issues related to our tax residence, allocations of our taxable income among our subsidiaries, and limitations on our use of net operating losses or tax credit carryforwards.

Risks Related to Owning Our Ordinary Shares and Our Organization in Jersey, Channel Islands

•

Our share price has been and may continue to be volatile based on many factors, many of which are not within our control.

•

If securities or industry analysts cease to publish research or publish inaccurate or unfavorable research about our business, our share price and trading volume could decline.

•

We do not expect to pay dividends and investors should not buy our ordinary shares expecting to receive dividends.

•

The rights afforded to our shareholders are governed by Jersey law. Not all rights available to shareholders under English law or U.S. law will be available to shareholders, potentially including the ability to enforce civil liabilities against us.

The summary described above should be read together with the text of the full risk factors below and in the other information set forth in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and the related notes, as well as in other documents that we file with the Securities and Exchange Commission. If any such risks and uncertainties actually occur, our business, prospects, financial condition and results of operations could be materially and adversely affected. The risks summarized above or described in full below are not the only risks that we face. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial may also materially adversely affect our business, prospects, financial condition and results of operations. For more information on these risk factors, see Part II, Item 1A, “Risk Factors”, included in this Quarterly Report on Form 10-Q.

Table of Contents


		Page
PART I.	FINANCIAL INFORMATION	1
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of December 31, 2021 and March 31, 2021	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2021 and 2020	2
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended December 31, 2021 and 2020	3
	Condensed Consolidated Statements of Shareholders’ Equity for the Three and Nine Months Ended December 31, 2021 and 2020	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2021 and 2020	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	39
PART II.	OTHER INFORMATION	40
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 6.	Exhibits	63
Signatures		67

iii

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

MIMECAST LIMITED

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

(unaudited)


	As of December 31,			As of March 31,
	2021			2021
Assets
Current assets
Cash and cash equivalents	$	416,173		$	292,949
Accounts receivable, net		120,071			114,280
Deferred contract costs, net		18,667			16,165
Prepaid expenses and other current assets		20,729			20,031
Total current assets		575,640			443,425

Property and equipment, net		91,066			92,891
Operating lease right-of-use assets		113,810			128,063
Intangible assets, net		40,944			43,193
Goodwill		180,600			173,952
Deferred contract costs, net of current portion		53,577			50,086
Other assets		3,248			3,097
Total assets	$	1,058,885		$	934,707

Liabilities and shareholders' equity
Current liabilities
Accounts payable	$	7,088		$	10,487
Accrued expenses and other current liabilities		64,067			54,676
Deferred revenue		253,345			237,749
Current portion of finance lease obligations		429			323
Current portion of operating lease liabilities		29,703			33,447
Current portion of long-term debt		9,738			9,090
Total current liabilities		364,370			345,772

Deferred revenue, net of current portion		10,624			12,936
Operating lease liabilities		98,969			112,316
Long-term debt		69,867			94,671
Other non-current liabilities		7,171			8,143
Total liabilities		551,001			573,838

Commitments and contingencies (Note 13)

Shareholders' equity
Ordinary shares, $0.012 par value, 300,000,000 shares authorized; 66,907,431 and 64,562,222 shares issued and outstanding as of December 31, 2021 and March 31, 2021, respectively		803			775
Additional paid-in capital		508,400			408,249
Accumulated deficit		(12,442	)		(53,915	)
Accumulated other comprehensive income		11,123			5,760
Total shareholders' equity		507,884			360,869
Total liabilities and shareholders' equity	$	1,058,885		$	934,707

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

MIMECAST LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)


	Three months ended December 31,						Nine months ended December 31,
	2021			2020			2021			2020
Revenue	$	151,599		$	129,636		$	441,381		$	367,505
Cost of revenue		34,408			31,572			101,433			89,783
Gross profit		117,191			98,064			339,948			277,722
Operating expenses
Research and development		26,305			25,408			83,025			70,497
Sales and marketing		49,738			45,187			146,775			133,224
General and administrative		24,199			16,649			60,373			50,400
Total operating expenses		100,242			87,244			290,173			254,121
Income from operations		16,949			10,820			49,775			23,601
Other income (expense)
Interest income		82			261			351			612
Interest expense		(465	)		(578	)		(1,535	)		(2,251	)
Foreign exchange (expense) income and other, net		(1,043	)		1,441			(2,234	)		4,365
Total other income (expense), net		(1,426	)		1,124			(3,418	)		2,726
Income before income taxes		15,523			11,944			46,357			26,327
Provision for income taxes		1,705			1,155			4,884			2,350
Net income	$	13,818		$	10,789		$	41,473		$	23,977

Net income per ordinary share
Basic	$	0.21		$	0.17		$	0.63		$	0.38
Diluted	$	0.20		$	0.16		$	0.60		$	0.37
Weighted-average number of ordinary shares outstanding
Basic		66,575			63,987			65,921			63,509
Diluted		70,133			66,023			68,767			65,419

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

MIMECAST LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)


	Three months ended December 31,				Nine months ended December 31,
	2021		2020		2021		2020
Net income	$	13,818	$	10,789	$	41,473	$	23,977
Other comprehensive income:
Change in foreign currency translation adjustment		3,006		15,775		5,363		21,766
Total other comprehensive income		3,006		15,775		5,363		21,766
Comprehensive income	$	16,824	$	26,564	$	46,836	$	45,743

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

MIMECAST LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands)

(unaudited)


	Three months ended December 31, 2021
												Accumulated
	Ordinary Shares					Additional						Other		Total
	Number of					Paid-in			Accumulated			Comprehensive		Shareholders'
	Shares			Amount		Capital			Deficit			Income		Equity
Balance as of September 30, 2021		66,326		$	796	$	476,805		$	(26,260	)	$	8,117	$	459,458
Net income		—			—		—			13,818			—		13,818
Foreign currency translation adjustment		—			—		—			—			3,006		3,006
Issuance of ordinary shares upon exercise of share options		456			6		15,983			—			—		15,989
Share-based compensation		—			—		14,618			—			—		14,618
ESPP purchases		67			—		3,051			—			—		3,051
Tax withholding on ESPP purchases and vesting of RSUs		(28	)		—		(2,056	)		—			—		(2,056	)
Vesting of RSUs		86			1		(1	)		—			—		—
Balance as of December 31, 2021		66,907		$	803	$	508,400		$	(12,442	)	$	11,123	$	507,884


	Nine months ended December 31, 2021
													Accumulated
	Ordinary Shares						Additional						Other		Total
	Number of						Paid-in			Accumulated			Comprehensive		Shareholders'
	Shares			Amount			Capital			Deficit			Income		Equity
Balance as of March 31, 2021		64,562		$	775		$	408,249		$	(53,915	)	$	5,760	$	360,869
Net income		—			—			—			41,473			—		41,473
Foreign currency translation adjustment		—			—			—			—			5,363		5,363
Issuance of ordinary shares upon exercise of share options		1,750			21			56,686			—			—		56,707
Share-based compensation		—			—			47,334			—			—		47,334
ESPP purchases		142			1			6,424			—			—		6,425
Tax withholding on ESPP purchases and vesting of RSUs		(220	)		(2	)		(10,285	)		—			—		(10,287	)
Vesting of RSUs		673			8			(8	)		—			—		—
Balance as of December 31, 2021		66,907		$	803		$	508,400		$	(12,442	)	$	11,123	$	507,884


	Three months ended December 31, 2020
												Accumulated
	Ordinary Shares					Additional						Other			Total
	Number of					Paid-in			Accumulated			Comprehensive			Shareholders'
	Shares			Amount		Capital			Deficit			Income (Loss)			Equity
Balance as of September 30, 2020		63,843		$	766	$	368,813		$	(70,472	)	$	(4,856	)	$	294,251
Net income		—			—		—			10,789			—			10,789
Foreign currency translation adjustment		—			—		—			—			15,775			15,775
Issuance of ordinary shares upon exercise of share options		378			5		8,812			—			—			8,817
Share-based compensation		—			—		13,833			—			—			13,833
ESPP purchases		91			1		3,320			—			—			3,321
Tax withholding on ESPP purchases and vesting of RSUs		(17	)		—		(867	)		—			—			(867	)
Vesting of RSUs		52			—		—			—			—			—
Balance as of December 31, 2020		64,347		$	772	$	393,911		$	(59,683	)	$	10,919		$	345,919


	Nine months ended December 31, 2020
													Accumulated
	Ordinary Shares						Additional						Other			Total
	Number of						Paid-in			Accumulated			Comprehensive			Shareholders'
	Shares			Amount			Capital			Deficit			Income (Loss)			Equity
Balance as of March 31, 2020		62,792		$	754		$	325,808		$	(83,660	)	$	(10,847	)	$	232,055
Net income		—			—			—			23,977			—			23,977
Foreign currency translation adjustment		—			—			—			—			21,766			21,766
Issuance of ordinary shares upon exercise of share options		1,160			14			24,683			—			—			24,697
Share-based compensation		—			—			41,183			—			—			41,183
ESPP purchases		178			2			6,414			—			—			6,416
Tax withholding on ESPP purchases and vesting of RSUs		(109	)		(1	)		(4,174	)		—			—			(4,175	)
Vesting of RSUs		326			3			(3	)		—			—			—
Balance as of December 31, 2020		64,347		$	772		$	393,911		$	(59,683	)	$	10,919		$	345,919

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

MIMECAST LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Nine months ended December 31
	2021			2020
Operating activities
Net income	$	41,473		$	23,977
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		29,838			28,297
Share-based compensation expense		47,365			41,064
Amortization of deferred contract costs		13,106			9,471
Amortization of debt issuance costs		331			344
Amortization of operating lease right-of-use assets		24,926			22,328
Deferred income tax expense (benefit)		602			(190	)
Other non-cash items		(3	)		—
Unrealized currency losses (gains) on foreign denominated transactions		1,233			(4,540	)
Changes in assets and liabilities:
Accounts receivable		(7,180	)		6,224
Prepaid expenses and other current assets		(946	)		(1,700	)
Deferred contract costs		(20,043	)		(19,521	)
Other assets		1,163			250
Accounts payable		799			(3,630	)
Deferred revenue		16,442			2,537
Operating lease liabilities		(27,495	)		(25,024	)
Accrued expenses and other liabilities		8,549			15,439
Net cash provided by operating activities		130,160			95,326
Investing activities
Purchases of property, equipment and capitalized software		(29,401	)		(30,931	)
Purchase of strategic investments		(1,500	)		—
Payments for acquisitions, net of cash acquired		—			(17,044	)
Net cash used in investing activities		(30,901	)		(47,975	)
Financing activities
Proceeds from issuance of ordinary shares		63,097			31,113
Withholding taxes related to net share settlement of ESPP purchases and vesting of RSUs		(10,287	)		(4,175	)
Payments on debt including revolving credit facilities		(24,375	)		(5,000	)
Payments on finance lease obligations		(610	)		(789	)
Proceeds from long-term debt including revolving credit facilities		—			17,500
Net cash provided by financing activities		27,825			38,649
Effect of foreign exchange rates on cash		(3,860	)		10,939
Net increase in cash and cash equivalents		123,224			96,939

Cash and cash equivalents at beginning of period		292,949			173,958
Cash and cash equivalents at end of period	$	416,173		$	270,897

Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	1,222		$	2,163
Cash paid during the period for income taxes	$	1,878		$	1,228

Supplemental disclosure of non-cash investing and financing activities
Unpaid purchases of property, equipment and capitalized software	$	4,441		$	11,739
Operating lease right-of-use assets exchanged for lease obligations	$	12,289		$	30,216
Amounts due from seller for acquisitions	$	—		$	74
Proceeds receivable from issuance of ordinary shares	$	35		$	—
Property and equipment acquired under finance lease	$	716		$	—

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

MIMECAST LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data, unless otherwise noted)

(unaudited)

1. Summary of Business and Significant Accounting Policies

Description of Business

Mimecast Limited (Mimecast or the Company) is a public limited company organized under the laws of the Bailiwick of Jersey on July 28, 2015 and is headquartered in London, England.

The principal activity of the Company is the provision of cloud security and risk management services for email and corporate information. The Company’s Email Security 3.0 and Cyber Resilience Extension offerings are designed to protect customers from today’s rapidly changing security environment. The Email Security 3.0 strategy addresses threats in three distinct zones: at the email perimeter (Zone 1); inside the network and the organization (Zone 2); and beyond the perimeter (Zone 3). The Company’s Cyber Resilience Extensions expand resilience to other critical elements of an organization’s digital infrastructure. The Company’s primary offerings include: email security; email continuity and sync & recover; email archiving; awareness training; web security; DMARC analyzer; CyberGraph; brand exploit protection; and threat intelligence and our API ecosystem. Mimecast operates principally in Europe, North America, Africa and Australia.

The Company is subject to a number of risks and uncertainties common to companies in similar industries and stages of development including, but not limited to, rapid technological changes, competition from substitute products and services from larger companies, customer concentration, security risks, management of international activities, protection of proprietary rights, patent litigation, and dependence on key individuals.

Pending Transaction

On December 7, 2021, the Company entered into a Transaction Agreement (Transaction Agreement) with Magnesium Bidco Limited, a private limited company incorporated in England & Wales (Buyer). Buyer is an affiliate of Permira Advisors LLC. The Transaction Agreement provides for the implementation of a Bailiwick of Jersey scheme of arrangement (Scheme of Arrangement) pursuant to which Buyer will acquire all of the Company’s shares (subject to certain exceptions) then outstanding as of the time that an act of the Royal Court of Jersey sanctioning the Scheme of Arrangement has been delivered to the Registrar of Companies in Jersey for registration (the “Effective Time”) and Company shareholders will be entitled, in accordance with the terms of the Scheme of Arrangement, to receive an amount in cash, without interest, equal to $80.00 per Company ordinary share that is outstanding immediately prior to the Effective Time.

The completion of the transactions contemplated by the Transaction Agreement (Transaction) is subject to certain closing conditions, including approval by Company shareholders, receipt of regulatory approvals and such other conditions to completion as set forth in the Transaction Agreement. The Transaction is expected to close in the first half of 2022, subject to these closing conditions. Upon completion of the Transaction, the Company will become a privately held company and the ordinary shares of the Company will no longer be listed on any public market.

Two special meetings of Company shareholders, the first to approve the Scheme of Arrangement for purposes of satisfying the requirements of the Companies (Jersey) Law 1991, as amended (the “Companies Law”), and the second to authorize the directors of the Company’s board of directors to take all actions as they consider necessary or appropriate for carrying the Scheme of Arrangement into effect and to amend the Company’s articles of association, are expected to be held in March 2022.

Basis of Presentation

The accompanying interim condensed consolidated financial statements are unaudited. These financial statements and notes should be read in conjunction with the audited consolidated financial statements for the year ended March 31, 2021 and related notes, together with management’s discussion and analysis of financial condition and results of operations, contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on May 27, 2021.

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) for interim financial information, pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the financial information and footnotes required by GAAP for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements and notes have been prepared on the same basis as the audited consolidated financial statements for the year ended March 31, 2021 contained in the Company’s Annual Report on Form 10-K and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position as of December 31, 2021, and for the three and nine months ended December 31, 2021 and 2020. These interim periods are not necessarily indicative of the results to be expected for any other interim period or the full year.

The Company reclassified certain amounts within its condensed consolidated statement of cash flows to conform to current period presentation. The reclassifications include $0.7 million from other assets and $0.5 million from accrued expenses and other liabilities to deferred income tax expense (benefit) for the nine months ended December 31, 2020. These reclassifications had no impact on the Company’s previously reported results of operations or balance sheets.

Principles of Consolidation

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

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of income and expenses during the reporting period.

Significant estimates relied upon in preparing these condensed consolidated financial statements include revenue recognition, variable consideration, valuation at fair value of assets acquired or sold, including intangible assets, goodwill, tangible assets, and liabilities assumed, amortization periods, expected future cash flows used to evaluate the recoverability of long-lived assets, contingent liabilities, determination of incremental borrowing rates, restructuring liabilities, expensing and capitalization of research and development costs for internal-use software, the determination of the fair value of share-based awards issued, the average period of benefit associated with costs capitalized to obtain revenue contracts and the recoverability of the Company’s net deferred tax assets and related valuation allowance.

Due to the global COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. The Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of December 31, 2021. Although the Company regularly assesses these estimates, actual results could differ materially from these estimates. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from management’s estimates if these results differ from historical experience, or other assumptions do not turn out to be substantially accurate, even if such assumptions are reasonable when made. Changes in estimates are recorded in the period in which they become known.

Comprehensive Income

Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions, other events, and circumstances from non-owner sources. Comprehensive income consists of net income and other comprehensive income, which includes certain changes in equity that are excluded from net income. As of December 31, 2021 and March 31, 2021, accumulated other comprehensive income is presented separately on the condensed consolidated balance sheets and consists of cumulative foreign currency translation adjustments.

Accounting Policies

The accompanying condensed consolidated financial statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes to the condensed consolidated financial statements. As of December 31, 2021, the Company’s significant accounting policies and estimates, which are detailed in the Company’s Annual Report on Form 10-K, have not changed.

2. Revenue and Deferred Revenue

Revenue recognized during the three and nine months ended December 31, 2021 from amounts included in deferred revenue at the beginning of the respective periods was approximately $105.0 million and $212.7 million, respectively. Revenue recognized during the three and nine months ended December 31, 2020 from amounts included in deferred revenue at the beginning of the respective periods was approximately $87.0 million and $177.0 million, respectively. Revenue recognized during the three and nine months ended December 31, 2021 and 2020 from performance obligations satisfied or partially satisfied in previous periods was not material.

Contracted revenue as of December 31, 2021 and March 31, 2021 that has not yet been recognized (contracted and not recognized) was $145.3 million and $117.5 million, respectively, which includes deferred revenue and non-cancellable amounts that will be invoiced and recognized as revenue in future periods and excludes contracts with an original expected length of one year or less. The Company expects 53% of contracted and not recognized revenue to be recognized over the next year, 46% in years two and three, with the remaining balance recognized thereafter.

3. Concentration of Credit Risk and Off-Balance Sheet Risk

The Company has no off-balance sheet risk, such as foreign exchange contracts, option contracts, or other foreign hedging arrangements. Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents, investments and accounts receivable. The Company maintains its cash, cash equivalents and investments with major financial institutions of high-credit quality. Although the Company deposits its cash with multiple financial institutions, its deposits, at times, may exceed federally insured limits.

Credit risk with respect to accounts receivable is dispersed due to the Company’s large number of customers. The Company’s accounts receivable are derived from revenue earned from customers primarily located in the United States, the United Kingdom, and South Africa. The Company generally does not require its customers to provide collateral or other security to support accounts receivable. The Company maintains an allowance for its doubtful accounts receivable due to estimated credit losses. The Company estimates credit losses at the reporting date resulting from the inability of its customers to make required payments, including its historical experience of actual losses and the aging of such receivables. These receivables have been pooled by shared risk characteristics. Based on known information the Company may also establish specific allowances for customers in an adverse financial condition or adjust its expectations of changes in conditions that may impact the collectability of outstanding receivables. Credit losses historically have not been significant and the Company generally has not experienced any material losses related to receivables from individual customers, or groups of customers. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by management to be probable in the Company’s accounts receivable. The Company will continue to actively monitor the impact of the global COVID-19 pandemic on expected credit losses. As of December 31, 2021 and March 31, 2021, no individual customer represented more than 10% of the Company’s accounts receivable. During the three and nine months ended December 31, 2021 and 2020, no individual customer represented more than 10% of the Company’s revenue.

The Company generally diversifies its investment portfolio by investing in multiple types of investment-grade securities and attempts to mitigate the risk of loss by using a third-party investment manager. As of December 31, 2021, the Company's only investments consisted of convertible debt investments in privately held companies. As of March 31, 2021, the Company did not hold any investments.

4. Cash, Cash Equivalents and Investments

The Company considers all highly liquid instruments purchased with an original maturity date of 90 days or less from the date of purchase to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks, amounts held in interest-bearing money market funds and investments with maturities of 90 days or less from the date of purchase. Cash equivalents are carried at cost, which approximates their fair market value. Investments not classified as cash equivalents are presented as either short-term or long-term investments based on both their stated maturities as well as the time period the Company intends to hold such securities. The Company determines the appropriate classification of investments at the time of purchase and reevaluates such designation at each balance sheet date. The Company adjusts the cost of investments for amortization of premiums and accretion of discounts to maturity. The Company includes such amortization and accretion in interest income in the condensed consolidated statements of operations. As of December 31, 2021 and March 31, 2021, cash and cash equivalents of $416.2 million and $292.9 million, respectively, were carried at amortized cost, which approximates their market value.

Strategic investments consist of convertible debt investments in privately held companies. The Company has classified these convertible debt investments as of December 31, 2021, as available-for-sale pursuant to Accounting Standard Codification (ASC) 320, Investments - Debt Securities. Due to the conversion option and other embedded features, the Company has elected to record the convertible debt investments in their entirety at fair value with any changes in fair value recognized in "Foreign exchange (expense) income and other, net" on the condensed consolidated statements of operations. As of December 31, 2021, the Company holds convertible debt investments that are due within two years with an amortized cost and a fair value of $1.5 million. These investments are included within other assets on the condensed consolidated balance sheets. During the three months ended December 31, 2021, the Company recognized immaterial unrealized gains related to changes in the fair value of the convertible debt investments. As of March 31, 2021, the Company did not hold any strategic investments.

5. Fair Value of Financial Instruments

The Company’s financial instruments include cash, cash equivalents, investments, accounts receivable, accounts payable, accrued expenses and borrowings under the Company’s long-term debt arrangements. The carrying amount of the Company’s long-term debt arrangements approximates its fair values due to the interest rates the Company believes it could obtain for arrangements with similar terms. The Company's convertible debt investments are classified as available-for-sale and reported at fair value in accordance with the market approach primarily utilizing unobservable inputs. The carrying amount of the remainder of the Company’s financial instruments approximated their fair values as of December 31, 2021 and March 31, 2021, due to the short-term nature of those instruments.

The Company has evaluated the estimated fair value of financial instruments using available market information. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts.

Fair values determined using “Level 1 inputs” utilize unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined using “Level 2 inputs” utilize quoted prices that are directly or indirectly observable. Fair values determined using “Level 3 inputs” utilize unobservable inputs for determining fair values of assets or liabilities that reflect an entity's own assumptions in pricing assets or liabilities. As of December 31, 2021, the only assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) are the Company's convertible debt investments. As of March 31, 2021, the Company did not have any assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).

The Company measures eligible assets and liabilities at fair value, with changes in value recognized in earnings. Fair value treatment may be elected either upon initial recognition of an eligible asset or liability or, for an existing asset or liability, if an event triggers a new basis of accounting. The Company elected the fair value option for the convertible debt investments transacted during the three months ended December 31, 2021. Other than the convertible debt investments, the Company did not elect to remeasure any of its existing financial assets or liabilities and did not elect the fair value option for any financial assets and liabilities transacted in the three and nine months ended December 31, 2021 and the year ended March 31, 2021.

The following table summarizes financial assets measured and recorded at fair value on a recurring basis in the accompanying condensed consolidated balance sheets as of December 31, 2021 and March 31, 2021, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:


	December 31, 2021
	Quoted Prices in Active Markets for Identical Assets (Level 1 Inputs)		Significant Other Observable Inputs (Level 2 Inputs)		Significant Unobservable Inputs (Level 3 Inputs)		Total
Assets:
Money market funds	$	12,519	$	—	$	—	$	12,519
Convertible debt investments		—		—		1,515		1,515
Total assets	$	12,519	$	—	$	1,515	$	14,034


	March 31, 2021
	Quoted Prices in Active Markets for Identical Assets (Level 1 Inputs)		Significant Other Observable Inputs (Level 2 Inputs)		Significant Unobservable Inputs (Level 3 Inputs)		Total
Assets:
Money market funds	$	15,366	$	—	$	—	$	15,366

6. Leases

The Company has operating leases for data centers and facilities and finance leases for certain equipment. The leases have remaining lease terms of less than one year to 7 years, some of which include options to extend the leases for up to 10 years. The Company recognizes lease expense for operating leases on a straight-line basis over the lease term. Variable costs, which are based on actual usage, are not included in the measurement of right-of-use assets (ROUA) and lease liabilities but are expensed when the event determining the amount of variable consideration to be paid occurs. Amortization expense of the ROUA for finance leases is recognized on a straight-line basis over the lease term and interest expense for finance leases is recognized based on the effective interest method using an incremental borrowing rate.

The components of lease expense were as follows:


	Three months ended December 31,				Nine months ended December 31,
	2021		2020		2021		2020
Short-term lease cost	$	9	$	40	$	51	$	128
Variable lease cost		1,353		1,536		4,403		5,094
Operating lease cost		9,681		9,390		29,079		26,712
Finance lease cost:
Amortization of lease assets		70		250		372		750
Interest on lease liabilities		1		9		5		37
Total finance lease cost	$	71	$	259	$	377	$	787

Supplemental cash flow information related to leases was as follows:


	Three months ended December 31,				Nine months ended December 31,
	2021		2020		2021		2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases	$	10,335	$	11,514	$	32,125	$	29,638
Operating cash outflows from finance leases	$	2	$	5	$	5	$	37
Financing cash outflows from finance leases	$	263	$	178	$	610	$	789

Weighted-average remaining lease term and discount rate:


	As of December 31,			As of March 31,
	2021			2021
Weighted-average remaining lease term (in years)
Operating leases		5.35			5.76
Finance leases		0.66			0.35
Weighted-average discount rate
Operating leases		4.42	%		4.58	%
Finance leases		0.86	%		4.83	%

Maturities of lease liabilities as of December 31, 2021 were as follows:


Year Ending March 31,	Operating Leases			Finance Leases
Remainder of 2022	$	9,014		$	123
2023		33,796			307
2024		25,576			—
2025		23,657			—
2026		19,237			—
Thereafter		33,229			—
Total lease payments		144,509			430
Less: imputed interest		(15,837	)		(1	)
Total lease liabilities	$	128,672		$	429

As of December 31, 2021, the Company had no additional operating or finance leases that have not yet commenced.

7. Internal-use Software Costs

Software Development Costs

Costs incurred to develop software applications used in the Company’s SaaS platform consist of certain direct costs of materials and services incurred in developing or obtaining internal-use computer software, and payroll and payroll-related costs for employees who are directly associated with, and who devote time to, the project. These costs generally consist of internal labor during configuration, coding, and testing activities. Research and development costs incurred during the preliminary project stage or costs incurred for data conversion activities, training, maintenance and general and administrative or overhead costs are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the application is substantially complete and ready for its intended use. Qualified costs incurred during the operating stage of the Company’s software applications relating to upgrades and enhancements are capitalized to the extent it is probable that they will result in added functionality, while costs incurred for maintenance of, and minor upgrades and enhancements to, internal-use software are expensed as incurred. During the three and nine months ended December 31, 2021 and 2020, the Company believes the substantial majority of its development efforts were either in the preliminary project stage of development or in the operation stage (post-implementation), and accordingly, no costs have been capitalized during these periods. These costs are included in the accompanying condensed consolidated statements of operations as research and development expense.

Implementation Costs on Cloud-computing Arrangements

As of December 31, 2021 and March 31, 2021, the net carrying value of capitalized implementation costs related to hosting arrangements that were incurred during the application development stage were $2.1 million and $2.9 million, respectively. These capitalized implementation costs will be amortized over the expected term of the arrangement and are amortized in the same line item in the condensed consolidated statements of operations as the expense for fees for the associated hosting arrangement.

8. Net Income Per Ordinary Share

The Company calculates basic and diluted net income per ordinary share by dividing net income by the weighted-average number of ordinary shares outstanding during the period.

The following table presents the calculation of basic and diluted net income per share for the periods presented (in thousands, except per share data):


	Three months ended December 31,				Nine months ended December 31,
	2021		2020		2021		2020
Numerator:
Net income	$	13,818	$	10,789	$	41,473	$	23,977
Denominator:
Weighted-average number of ordinary shares used in computing net income per share applicable to ordinary shareholders – basic		66,575		63,987		65,921		63,509
Dilutive effect of share equivalents resulting from share options, RSUs and ESPP shares		3,558		2,036		2,846		1,910
Weighted-average number of ordinary shares used in computing net income per share – diluted		70,133		66,023		68,767		65,419
Net income per share applicable to ordinary shareholders:
Basic	$	0.21	$	0.17	$	0.63	$	0.38
Diluted	$	0.20	$	0.16	$	0.60	$	0.37

The following potentially dilutive ordinary share equivalents have been excluded from the calculation of diluted weighted-average shares outstanding as their effect would have been anti-dilutive for the periods presented (in thousands):


	Three months ended December 31,				Nine months ended December 31,
	2021		2020		2021		2020
Share options outstanding		—		2,373		346		3,276
Unvested RSUs		67		101		426		402
ESPP shares		—		82		—		166

9. Share-Based Compensation

For the three and nine months ended December 31, 2021 and 2020, all grants of share-based awards have been made under the Mimecast Limited 2015 Share Option and Incentive Plan (the 2015 Plan) and the 2015 Employee Share Purchase Plan (the ESPP). Additionally, the Company has two pre-IPO share-based compensation plans including the Mimecast Limited 2010 EMI Share Option Scheme (the 2010 Plan), and the Mimecast Limited Approved Share Option Plan (the Approved Plan) (the 2010 Plan and the Approved Plan, collectively, the Historical Plans). Subsequent to November 19, 2015, the IPO date, no further grants under the Historical Plans were permitted.

The 2015 Plan allows the compensation committee of the board of directors to make equity-based incentive awards to the Company’s officers, employees, non-employee directors and consultants. Initially a total of 5.5 million ordinary shares were reserved for the issuance of awards under the 2015 Plan. This number is subject to adjustment in the event of a share split, share dividend or other change in our capitalization. The 2015 Plan provides that the number of shares reserved and available for issuance under the plan will automatically increase each January 1st by 5% of the outstanding number of ordinary shares on the immediately preceding December 31 or such lesser number of shares as determined by the board of directors.

Under the 2015 Plan, the share option price may not be less than the fair market value of the ordinary shares on the date of grant and the term of each share option may not exceed 10 years from the date of grant. Share options typically vest over 4 years, but vesting provisions can vary based on the discretion of the board of directors. The Company settles share option exercises and RSU releases under the 2015 Plan through newly issued shares. The Company’s ordinary shares underlying any awards that are forfeited, canceled, withheld upon exercise of an option, or settlement of an award to cover the exercise price or tax withholding, or otherwise terminated other than by exercise will be added back to the shares available for issuance under the 2015 Plan.

Initially, a total of 1.1 million shares of the Company's ordinary shares were reserved for future issuance under the ESPP. This number is subject to change in the event of a share split, share dividend or other change in capitalization. The ESPP may be terminated or amended by the board of directors at any time.

The ESPP permits eligible employees to purchase shares by authorizing payroll deductions from 1% to 10% of his or her eligible compensation during each six-month offering period, which starts on the first business day in January and July each year. Unless an employee has previously withdrawn from the offering, his or her accumulated payroll deductions will be used to purchase shares on the last day of the offering period at a price equal to 85% of the fair market value of the shares on the first business day or last business day of the offering period, whichever is lower.

Share Options

The fair value of each share option issued under the 2015 Plan was estimated using the Black-Scholes option-pricing model that used the following weighted-average assumptions:


		Nine months ended December 31,
		2021

Mimecast Ltd 10-Q