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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q


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

For the quarterly period ended June 30, 2019


	☐ 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: 001-38478

CARBON BLACK, INC.

(Exact Name of Registrant as Specified in its Charter)


Delaware		55-0810166
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1100 Winter Street
Waltham, MA		02451
(Address of principal executive offices)		(Zip Code)

(617) 393-7400

(Registrant’s telephone number, including area code)

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	CBLK	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, 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.

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 ☒

There were 73,549,186 shares of the registrant’s common stock with a par value of $0.001 per share, outstanding as of July 31, 2019.

Table of Contents

CARBON BLACK, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED

JUNE 30, 2019

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements:
	Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018 (Unaudited)	3
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited)	4
	Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited)	5
	Consolidated Statements of Redeemable Convertible and Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited)	6
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018 (Unaudited)	7
	Condensed Notes to the Consolidated Financial Statements (Unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	39

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings		40
Item 1A.	Risk Factors		40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		64
Item 3.	Defaults upon Senior Securities		64
Item 4.	Mine Safety Disclosures		64
Item 5.	Other Information		64
Item 6.	Exhibits		65
Signatures			66

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CARBON BLACK, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


	June 30,		December 31,
(In thousands, except share and per share amounts)	2019		2018
Assets:
Current assets:
Cash and cash equivalents	$	58,855	$	67,868
Short-term investments		89,256		92,770
Accounts receivable, net of allowances of $180 and $300, as of June 30, 2019 and December 31, 2018, respectively		52,318		62,555
Prepaid expenses and other current assets		9,302		8,751
Deferred commissions		14,293		13,078
Total current assets		224,024		245,022
Deferred commissions, net of current portion		26,165		25,076
Property and equipment, net		12,963		14,370
Operating lease right-of-use assets		13,852		—
Intangible assets, net		1,936		2,529
Goodwill		119,656		119,656
Deferred tax asset		483		483
Other-long term assets		558		601
Total assets	$	399,637	$	407,737
Liabilities:
Current liabilities:
Accounts payable	$	4,967	$	4,663
Accrued expenses		15,927		20,669
Deferred revenue		149,294		152,522
Deferred rent		—		1,216
Operating lease short-term liability		5,316		—
Total current liabilities		175,504		179,070
Deferred revenue, net of current portion		35,787		40,371
Deferred rent, net of current portion		—		2,651
Operating lease long-term liability		12,039		—
Deferred tax liability		49		49
Other long-term liabilities		24		42
Total liabilities		223,403		222,183
Commitments and contingencies (Note 10)
Stockholders' equity:
Common stock, $0.001 par value per share, 500,000,000 shares authorized:
73,392,066 and 69,738,599 shares issued, and 73,336,662 and 69,683,195 shares outstanding,as of June 30, 2019 and December 31, 2018, respectively		73		70
Treasury stock, at cost, 55,404 shares as of June 30, 2019 and December 31, 2018, respectively		(6)		(6)
Additional paid-in capital		747,928		723,051
Accumulated other comprehensive income (loss)		57		(49)
Accumulated deficit		(571,818)		(537,512)
Total stockholders' equity		176,234		185,554
Total liabilities and stockholders' equity	$	399,637	$	407,737

See accompanying condensed notes to the consolidated financial statements.

Table of Contents

CARBON BLACK, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands, except share and per share amounts)	2019		2018		2019		2018
Revenue:
Subscription, license and support	$	58,631	$	47,891	$	114,925	$	93,282
Services		2,226		3,101		4,488		6,144
Total revenue		60,857		50,992		119,413		99,426
Cost of revenue:
Subscription, license and support		11,291		8,051		21,793		15,263
Services		1,879		3,053		4,402		6,056
Total cost of revenue		13,170		11,104		26,195		21,319
Gross profit		47,687		39,888		93,218		78,107
Operating expenses:
Sales and marketing		35,571		35,161		74,981		65,839
Research and development		19,250		16,084		37,627		31,006
General and administrative		8,108		7,850		16,196		18,276
Total operating expenses		62,929		59,095		128,804		115,121
Loss from operations		(15,242)		(19,207)		(35,586)		(37,014)
Other income (expense), net:
Interest income		841		439		1,700		507
Interest expense		(38)		(28)		(69)		(51)
Change in fair value of warrant liability		—		(5,957)		—		(8,838)
Other income (expense), net		(109)		(494)		(214)		(374)
Total other income (expense), net		694		(6,040)		1,417		(8,756)
Loss before income taxes		(14,548)		(25,247)		(34,169)		(45,770)
Provision for income taxes		71		34		137		105
Net loss		(14,619)		(25,281)		(34,306)		(45,875)
Accretion of preferred stock to redemption value		—		(159,453)		—		(199,492)
Net loss attributable to common stockholders	$	(14,619)	$	(184,734)	$	(34,306)	$	(245,367)


Net loss per share attributable to common stockholders—basic and diluted	$	(0.20)	$	(4.13)	$	(0.48)	$	(8.73)
Weighted-average common shares outstanding—basic and diluted		72,375,825		44,759,435		71,430,435		28,104,372

See accompanying condensed notes to the consolidated financial statements.

Table of Contents

CARBON BLACK, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)


	Three Months Ended June 30,
(In thousands)	2019		2018
Net loss	$	(14,619)	$	(25,281)
Other comprehensive income (loss), net of related taxes:
Net unrealized gains (losses) on available-for-sale securities, net of related taxes of zero		57		-
Other comprehensive income (loss)		57		-
Total comprehensive loss	$	(14,562)	$	(25,281)


	Six Months Ended June 30,
(In thousands)	2019		2018
Net loss	$	(34,306)	$	(45,875)
Other comprehensive income (loss), net of related taxes:
Net unrealized gains (losses) on available-for-sale securities, net of related taxes of zero		106		-
Other comprehensive income (loss)		106		-
Total comprehensive loss	$	(34,200)	$	(45,875)

See accompanying condensed notes to the consolidated financial statements.

Table of Contents

CARBON BLACK, INC.

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE AND CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(UNAUDITED)


	Redeemable														Accumulated
	Convertible			Convertible									Additional		Other				Total
	Preferred Stock			Preferred Stock			Common Stock			Treasury Stock			Paid-in		Comprehensive		Accumulated		Stockholders'
(In thousands, except share amounts)	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount		Capital		Income (Loss)		Deficit		Equity (Deficit)
Balance at December 31, 2017	88,741,194	$	333,204	3,851,806	$	1,510	11,139,690	$	11	53,676	$	(6)	$	13,429	$	—	$	(273,513)	$	(260,079)
Net loss	—		—	—		—	—		—	—		—		—		—		(20,594)		(20,594)
Exercise of Series A stock options	—		—	185,063		89	—		—	—		—		—		—		—		—
Exercise of common stock options	—		—	—		—	274,840		—	—		—		976		—		—		976
Stock-based compensation expense	—		—	—		—	—		—	—		—		2,389		—		—		2,389
Accretion of redeemable convertible preferred stock to redemption value	—		40,039	—		—	—		—	—		—		(16,794)		—		(23,245)		(40,039)
Repurchase of common stock	—		—	—		—	(1,728)		—	1,728		—		—		—		—		—
Balance at March 31, 2018	88,741,194	$	373,243	4,036,869	$	1,599	11,412,802	$	11	55,404	$	(6)	$	—	$	—	$	(317,352)	$	(317,347)
Net loss	—		—	—		—	—		—	—		—		—		—		(25,281)		(25,281)
Exercise of Series A stock options	—		—	175,322		122	—		—	—		—		—		—		—		—
Exercise of common stock options	—		—	—		—	349,179		1	—		—		1,543		—		—		1,544
Stock-based compensation expense	—		—	—		—	—		—	—		—		3,487		—		—		3,487
Accretion of redeemable convertible preferred stock to redemption value	—		159,453	—		—	—		—	—		—		(756)		—		(158,697)		(159,453)
Conversion of redeemable convertible preferred stock upon initial public offering	(88,741,194)		(532,696)	—		—	44,370,560		44	—		—		532,652		—		—		532,696
Conversion of convertible preferred stock upon initial public offering	—		—	(4,212,191)		(1,721)	1,709,063		2	—		—		1,719		—		—		1,721
Issuance of common stock upon initial public offering, net of underwriting discounts and commissions and offering costs incurred of $4,858	—		—	—		—	9,200,000		9	—		—		157,697		—		—		157,706
Issuance of common stock upon exercise of common stock warrants	—		—	—		—	712,063		1	—		—		11,603		—		—		11,604
Balance at June 30, 2018	—	$	—	—	$	—	67,753,667	$	68	55,404	$	(6)	$	707,945	$	—	$	(501,330)	$	206,677
Balance at December 31, 2018	—	$	—	—	$	—	69,683,195	$	70	55,404	$	(6)	$	723,051	$	(49)	$	(537,512)	$	185,554
Net loss	—		—	—		—	—		—	—		—		—		—		(19,687)		(19,687)
Exercise of common stock options	—		—	—		—	1,535,993		1	—		—		6,225		—		—		6,226
Vesting of restricted stock units, net of shares withheld for employee taxes	—		—	—		—	122,372		—	—		—		(351)		—		—		(351)
Stock-based compensation expense	—		—	—		—	—		—	—		—		4,204		—		—		4,204
Unrealized gain (loss) on available-for-sale securities	—		—	—		—	—		—	—		—		—		49		—		49
Balance at March 31, 2019	—	$	—	—	$	—	71,341,560	$	71	55,404	$	(6)	$	733,129	$	—	$	(557,199)	$	175,995
Net loss	—		—	—		—	—		—	—		—		—		—		(14,619)		(14,619)
Exercise of common stock options	—		—	—		—	1,857,948		2	—		—		8,870		—		—		8,872
Vesting of restricted stock units, net of shares withheld for employee taxes	—		—	—		—	19,951		—	—		—		(112)		—		—		(112)
Stock-based compensation expense	—		—	—		—	—		—	—		—		4,709		—		—		4,709
Issuance of common stock under employee stock purchase plan	—		—	—		—	117,203		—	—		—		1,332		—		—		1,332
Unrealized gain (loss) on available-for-sale securities	—		—	—		—	—		—	—		—		—		57		—		57
Balance at June 30, 2019	—	$	—	—	$	—	73,336,662	$	73	55,404	$	(6)	$	747,928	$	57	$	(571,818)	$	176,234

See accompanying condensed notes to the consolidated financial statements.

Table of Contents

CARBON BLACK, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Six Months Ended June 30,
(In thousands)	2019		2018
Cash flows from operating activities:
Net loss	$	(34,306)	$	(45,875)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense		4,163		3,875
Stock-based compensation expense		8,913		5,876
Provisions for doubtful accounts		(57)		118
Non-cash interest expense		40		22
Change in fair value of warrant liability		—		8,838
Deferred income taxes		—		4
Other non-cash income		(734)		—
Changes in operating assets and liabilities:
Accounts receivable		10,294		17,100
Prepaid expenses and other assets		(1,002)		(2,293)
Deferred commissions		(2,304)		(1,962)
Accounts payable		252		1,787
Accrued expenses		(4,761)		(2,773)
Deferred revenue		(7,812)		572
Deferred rent		—		23
Operating leases right-of-use assets		2,168		—
Operating leases liability		(2,532)		—
Other long-term liabilities		(18)		(1)
Net cash used in operating activities		(27,696)		(14,689)
Cash flows from investing activities:
Purchases of short-term investments		(79,671)		—
Maturities of short-term investments		84,025		—
Purchases of property and equipment		(1,143)		(4,197)
Capitalization of internal-use software costs		(969)		(991)
Net cash provided by (used in) investing activities		2,242		(5,188)
Cash flows from financing activities:
Proceeds from exercise of stock options		15,600		2,731
Payments of deferred financing costs		(47)		(47)
Taxes paid related to net share settlement of equity awards		(463)		—
Proceeds from employee stock purchase plan		1,351		—
Proceeds from initial public offering, net of offering costs		—		159,617
Net cash provided by financing activities		16,441		162,301
Net (decrease) increase in cash and cash equivalents		(9,013)		142,424
Cash and cash equivalents at beginning of period		67,868		36,073
Cash and cash equivalents at end of period	$	58,855	$	178,497

Supplemental disclosure of non-cash investing and financing activities:
Conversion of redeemable convertible preferred stock upon initial public offering	$	—	$	532,696
Conversion of convertible preferred stock upon initial public offering	$	—	$	1,721
Issuance of common stock upon exercise of common stock warrants	$	—	$	11,604
Deferred IPO costs paid in prior periods	$	—	$	1,911
Accretion of preferred stock to redemption value	$	—	$	199,492
Additions to property and equipment included in accounts payable at period end	$	295	$	249

See accompanying condensed notes to the consolidated financial statements.

CARBON BLACK

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

TABLE OF CONTENTS



Note 1	Overview and Basis of Presentation	9
Note 2	New Accounting Pronouncements	11
Note 3	Cash Equivalents and Short-Term Investments	12
Note 4	Fair Value of Financial Instruments	13
Note 5	Property and Equipment, Net	14
Note 6	Goodwill and Intangible Assets	15
Note 7	Leases	15
Note 8	Stockholders’ Equity	17
Note 9	Equity Award Plans	17
Note 10	Commitments and Contingencies	19
Note 11	Income Taxes	20
Note 12	Revenue	20
Note 13	Net Loss per Share	22

CARBON BLACK

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1. OVERVIEW AND BASIS OF PRESENTATION

Overview

Carbon Black, Inc. (the “Company,” ”we,” “us,” or “our”) is a leader in cloud endpoint protection. The Company’s solutions enable customers to predict, prevent, detect, respond to and remediate cyber attacks before they cause a damaging incident or data breach. The Company was incorporated under the laws of the State of Delaware in December 2002 as Bit 9, Inc. and in April 2005 changed its name to Bit9, Inc. In January 2016, the Company amended its certificate of incorporation to change its name to Carbon Black, Inc.

The company is headquartered in Waltham, Massachusetts. The Company has wholly-owned subsidiaries in the United States, the United Kingdom, Singapore, Australia, Canada, Malaysia, Japan and Germany.

Reverse Stock Split

On April 20, 2018, the Company effected a 1-for-2 reverse stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios of Company’s Series B, Series C, Series D, Series E, Series E-1 and Series F preferred stock. Accordingly, all share and per share amounts for all periods presented in the accompanying consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratios.

Initial Public Offering

On May 8, 2018, the Company closed its initial public offering (“IPO”), in which it issued and sold 9,200,000 shares of common stock inclusive of the underwriters’ option to purchase additional shares that was exercised in full. The price to the public was $19.00 per share. The Company received aggregate proceeds of $162.6 million from the IPO, net of underwriters’ discounts and commissions, and before deducting offering costs of approximately $4.9 million. Upon the closing of the IPO, all shares of the Company’s outstanding redeemable convertible and convertible preferred stock automatically converted into 46,079,623 shares of common stock. Additionally, an outstanding warrant which became exercisable upon the closing of the IPO was exercised to purchase 485,985 shares of common stock.

CARBON BLACK

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Basis of Presentation

The accompanying consolidated financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States (“GAAP”), as well as pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), regarding interim financial reporting. Accordingly, certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the financial information included in our Annual Report on Form 10-K for 2018 filed with the SEC on March 8, 2019 (“2018 Form 10-K”).

The consolidated financial statements include our results of operations and those of our wholly-owned subsidiaries and reflect all adjustments which are, in the opinion of management, necessary for a fair statement of results for the interim periods presented. All intercompany transactions and balances have been eliminated in consolidation.

Certain previously reported amounts presented in this Quarterly Report on Form 10-Q (“Form 10-Q”) may be reclassified to conform to current-period presentation. Events occurring subsequent to the date of our consolidated balance sheet were evaluated for potential recognition or disclosure in our consolidated financial statements through the date we filed this Form 10-Q with the SEC.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that may materially affect the reported amounts of assets, liabilities, equity, revenue and expenses. As a result of unanticipated events or circumstances, actual results could differ from those estimates, and such differences may be material to the consolidated financial statements. For additional information about our use of estimates refer to “Critical Accounting Policies” included under management’s discussion and analysis in our 2018 Form 10-K.

Significant Accounting Policies

Effective January 1, 2019, the Company adopted the requirements of Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASC 842”) on a modified retrospective transition approach as discussed in detail in Note 2. All amounts and disclosures set forth in this Form 10-Q have been updated to comply with ASC 842.

The Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) permits an “emerging growth company” such as the Company, to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. The Company has irrevocably elected to “opt out” of this provision and, as a result, the Company will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies. For a complete discussion of our significant accounting policies refer to Note 2 to the consolidated financial statements in our 2018 Form 10-K.

CARBON BLACK

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS

Recently issued accounting pronouncements:


Standard	Description	Date of Adoption	Effects on the financial statements or other significant matters
ASU 2018-15, Intangibles-Goodwill and Other (Topic 350): Internal-Use Software	The standard was issued in order to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement (“CCA”) that is considered a service contract. Under this guidance, implementation costs for a CCA should be evaluated for capitalization using the same approach as implementation costs associated with internal-use software. Generally costs incurred to configure/customize the hosted software are capitalizable, however, data conversion and training costs are expensed as incurred consistent with internal-use software guidance. The amortization period is over the non-cancelable term and any reasonable certain renewals are expensed to the same line item in which fees paid to the vendor are recognized (i.e., not included in amortization expense).	January 1, 2020, early adoption permitted	We are currently assessing the impact of the standard on our consolidated financial statements.
ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments	The standard requires immediate recognition of expected credit losses for financial assets carried at amortized cost, including trade and other receivables, loans and commitments, held-to-maturity debt securities and other financial assets, held at the reporting date to be measured based on historical experience, current conditions and reasonable supportable forecasts. Credit losses on available-for-sale securities will be recorded as an allowance versus a write-down of the amortized cost basis of the security and will allow for a reversal of impairment loss when the credit of the issuer improves.	January 1, 2020, early adoption permitted	We are currently assessing the impact of the standard on our consolidated financial statements.
ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment	The standard simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The ASU requires an entity to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying value exceeds the fair value of the reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss.	January 1, 2020, early adoption permitted	We are currently evaluating the impacts of early adoption and will apply this standard prospectively, as applicable.
ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement	The standard eliminates, amends and adds disclosure requirements for fair value measurements. Eliminated disclosures include: amount of and reasons for transfers between levels 1 and 2, policy on timing of transfers, valuation processes for level 3. Removal of the requirement to disclose future changes in FV inputs. Relevant amended disclosures include no longer requiring full level 3 rollforward but rather disclosure of transfers in/out and purchases/ issuances. New disclosures include changes in OCI on level 3 assets/ liabilities and disclosure of range and weighted average of significant unobservable inputs for level 3.	January 1, 2020, early adoption permitted	We are in the process of evaluating the changes required by the new provisions. We expect this to be minimal as we do not have any level 3 inputs.

CARBON BLACK

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Recently adopted accounting pronouncements:

Leases

In February 2016, the FASB issued ASC No. 2016-02, Leases (Topic 842) (“ASC 842”), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. We adopted ASC 842 effective January 1, 2019 and elected the modified retrospective approach, whereby periods prior to 2019 were not adjusted for the new standard.

We elected the hindsight practical expedient to determine the lease term for existing leases, and we did not elect to apply the recognition requirements in the leases standard to leases that at commencement date have a lease term of 12 months or less.

We have elected the available package of practical expedients permitted under the transition guidance within the new standard which does not require us to reassess the prior conclusions about lease identification, lease classification and initial direct costs. The adoption of ASC 842 resulted in the recognition of operating right-of-use assets of approximately $16.0 million and operating lease liabilities of approximately $19.9 million. Included within our operating lease assets are the previously recorded net deferred rent balances which were reclassified into our operating lease assets upon the adoption of ASC 842. The standard did not have a material effect on our consolidated statement of operations, consolidated statement of comprehensive loss or consolidated statement of cash flows. Expanded disclosures about the nature and terms of our lease agreements are included in Note 7 in this Form 10-Q.

Stock Compensation

We adopted ASU No. 2018-07, Compensation – Stock Compensation (Topic 718) (“ASC 718”), effective January 1, 2019. The standard provides expanded guidance for stock-based compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. The overall effect from the adoption of ASC 718 had an immaterial impact to our consolidated financial statements.

NOTE 3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company’s cash equivalents consist of highly liquid investments in money market funds.

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

The following tables present the amortized cost, fair value and associated unrealized gains and losses of cash equivalents and short-term investments as of the periods presented:


	June 30, 2019
(In thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Cash equivalents:
Money market funds	$	46,859	$	—	$	—	$	46,859
Total cash equivalents	$	46,859	$	—	$	—	$	46,859

Short-term investments:
Commercial paper	$	38,640	$	—	$	—	$	38,640
Corporate bonds		28,024		30		(3)		28,051
Asset-backed securities		22,535		30		—		22,565
Total short-term investments	$	89,199	$	60	$	(3)	$	89,256

CARBON BLACK

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


	December 31, 2018
(In thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Cash equivalents:
Money market funds	$	52,047	$	—	$	—	$	52,047
Total cash equivalents	$	52,047	$	—	$	—	$	52,047

Short-term investments:
Commercial paper	$	42,706	$	—	$	—	$	42,706
U.S. treasury securities		21,486		—		(9)		21,477
Corporate bonds		13,790		—		(23)		13,767
Asset-backed securities		14,837		—		(17)		14,820
Total short-term investments	$	92,819	$	—	$	(49)	$	92,770

The following table summarizes the contractual maturities of our short-term investments as of the period presented:


	June 30, 2019
(In thousands)	Amortized Cost		Fair Value
Due within one year	$	89,199	$	89,256
Due after one year		—		—
Total short-term investments	$	89,199	$	89,256

4. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company categorizes assets and liabilities recorded or disclosed at fair value on our condensed consolidated balance sheets based upon the level of judgment associated with inputs used to measure their fair value. The categories are as follows:

• Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

• Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly.

• Level 3—Inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. The inputs require significant management judgment or estimation.

The following tables present information about the Company's financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:

June 30, 2019

(In thousands)

Level 1

Level 2

Level 3

Total

Cash equivalents:

Money market funds

46,859

—

46,859

Total cash equivalents

46,859

—

46,859

Short-term investments:

Commercial paper

—

38,640

—

38,640

Corporate bonds

—

28,051

—

28,051

Asset-backed securities

—

22,565

—

22,565

Total short-term investments

—

89,256

—

89,256

CARBON BLACK

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


	December 31, 2018
(In thousands)	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	52,047	$	—	$	—	$	52,047
Total cash equivalents	$	52,047	$	—	$	—	$	52,047

Short-term investments:
Commercial paper	$	—	$	42,706	$	—	$	42,706
U.S. treasury securities		21,477		—		—		21,477
Corporate bonds		—		13,767		—		13,767
Asset-backed securities		—		14,820		—		14,820
Total short-term investments	$	21,477	$	71,293	$	—	$	92,770

Changes in the fair values of the Company's preferred stock warrant liabilities and common stock warrant liability for the periods presented were as follows:


(In thousands)	Series D Preferred Stock Warrant Liability		Common Stock Warrant Liability		Total
Fair value at December 31, 2017	$	992	$	1,774	$	2,766
Change in fair value		1,378		7,460		8,838
Exercise of common stock warrant		—		(9,234)		(9,234)
Conversion to common stock warrant		(2,370)		—		(2,370)
Fair value at December 31, 2018	$	—	$	—	$	—

⁽¹⁾ Upon the closing of our IPO in May 2018, we no longer had any outstanding warrant liabilities.

Upon the closing of the IPO, the warrants for the purchase of Series D preferred stock became warrants to purchase common stock. The Company valued the Series D preferred stock liability as of the IPO closing date using the Black-Scholes option pricing-model and recorded a change in the fair value of the preferred stock warrants through that date. The Series D preferred stock warrant liability was then reclassified to additional paid-in capital. Additionally, the warrants for the purchase of common stock were exercised to purchase 485,985 shares of common stock upon the closing of the IPO. The Company valued the common stock warrant liability as of the IPO date using the $19 per share offering price and recorded a change in the fair value of the common stock warrants through that date. The common stock warrant liability was then reclassified to common stock and additional paid-in capital.

5. PROPERTY AND EQUIPMENT, NET


	June 30,		December 31,
(In thousands)	2019		2018
Computer equipment	$	16,249	$	15,519
Leasehold improvements		7,086		6,921
Internal-use software		5,267		4,298
Computer software		3,910		3,850
Furniture and fixtures		3,818		3,773
Office equipment		23		20
Total property and equipment		36,353		34,381
Less: Accumulated depreciation and amortization		(23,390)		(20,011)
Total property and equipment, net	$	12,963	$	14,370

Depreciation and amortization expense related to property and equipment, including internal-use software, was approximately $1.8 million and $3.6 million for the three and six months ended June 30, 2019, respectively, compared to $1.6 million and $3.1 million for the same periods in 2018, respectively. During the three and six months ended June 30, 2019, we disposed of fully depreciated assets with an original cost of $43 thousand and $192 thousand, respectively. During the three and six months ended June 30, 2018, we had no disposals of fully depreciated assets.

CARBON BLACK

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

During the three and six months ended June 30, 2019, the Company capitalized $809 thousand and $969 thousand, respectively, of costs related to the development of internal-use software and recorded amortization expense of capitalized internal-use software of $318 thousand and $622 thousand, respectively.

During the three and six months ended June 30, 2018, the Company capitalized $698 thousand and $991 thousand, respectively, of costs related to the development of internal-use software and recorded amortization expense of capitalized internal-use software of $133 thousand and $290 thousand, respectively.

6. GOODWILL AND INTANGIBLE ASSETS

Goodwill was $119,656 thousand as of both June 30, 2019 and December 31, 2018.

The following table represents the gross carrying amount, accumulated amortization and net carrying amount of other intangible assets by type, as of the dates indicated:


	June 30, 2019						December 31, 2018
	Gross		Accumulated		Carrying		Gross		Accumulated		Carrying
(In thousands)	Amount		Amortization		Value		Amount		Amortization		Value
Intangible assets:
License agreement	$	150	$	(135)	$	15	$	150	$	(128)	$	22
Developed technology		7,301		(5,380)		1,921		7,301		(4,804)		2,497
Trade name		440		(440)		—		440		(430)		10
Customer relationships		2,950		(2,950)		—		2,950		(2,950)		—
Total intangible assets	$	10,841	$	(8,905)	$	1,936	$	10,841	$	(8,312)	$	2,529

Amortization expense related to intangible assets was $268 thousand and $593 thousand for both the three and six months ended June 30, 2019, respectively, compared to $391 thousand and $782 thousand for the same periods in 2018.

7. LEASES

We lease various office space and data centers under non-cancellable operating leases. Our leases have remaining lease terms ranging from 1 year to 5 years, some of which include extension options of up to 5 years and termination options within 3 years. The exercise of these lease extension and termination options are at our sole discretion.

Right-of-use (“ROU”) assets represent the Company’s right to use leased assets over the term of the lease. Lease liabilities represent the Company’s contractual obligation to make lease payments over the lease term. We determine if an arrangement is a lease at inception. Right-of-use assets and lease liabilities are initially measured at the lease commencement date based on the present value of the lease payments over the lease term, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, our incremental borrowing rate. We determine our incremental borrowing rate based on the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. Our lease right-of-use assets also include any unamortized initial direct costs plus any prepayments less any unamortized lease incentives received.

Leases with an initial term of 12 months or less are classified as short-term leases and are not recorded on the balance sheet. Lease expenses relating to our short-term leases are recognized on a straight-line basis over the lease term. For lease agreements we entered into or reassessed after the adoption of Topic 842, we combine lease and non-lease components as a single lease component. Non-lease components primarily consist of payments for maintenance and utilities.

Our lease agreements do not contain any material residual value guarantees, material restrictive covenants or variable lease payments based on an index or rate. We currently sublease one of our office spaces to a third party.

CARBON BLACK

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table presents the components of lease expense and supplemental information for the three and six months ended June 30, 2019.


(In thousands)	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Lease expense:
Operating lease expense	$	1,349	$	2,686
Short-term lease expense		29		56
Sublease income		(52)		(104)
Variable lease expense		67		67
Total lease expense	$	1,393	$	2,705



(In thousands)	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Other information:
Cash paid for amounts included in the measurement of lease liabilities	$	1,562	$	3,022


Weighted-average:	June 30, 2019
Remaining lease term - operating leases		3.2 years
Discount rate - operating leases		5.5%

Future minimum payments under non-cancellable leases as of June 30, 2019 were the following:


(In thousands)	June 30, 2019
2019 (remaining six months)	$	3,173
2020		5,942
2021		5,717
2022		2,723
2023		1,303
Thereafter		244
Total lease payments		19,102
Less: Imputed interest		(1,747)
Present value of lease payments	$	17,355

As previously disclosed in our 2018 Form 10-K and under the previous lease accounting standard, ASC 840, Leases, the following table summarizes the future minimum lease payments due under operating leases as of December 31, 2018. In determining the future minimum lease payments, the Company included lease payments due for an optional renewal period under an existing lease.


(In thousands)	December 31, 2018
2019	$	5,492
2020		5,343
2021		5,118
2022		2,343
2023		1,070
Thereafter		986
Total lease payments	$	20,352

CARBON BLACK

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

8. STOCKHOLDERS’ EQUITY

Preferred Stock

Upon the completion of our IPO, all outstanding shares of redeemable convertible and convertible preferred stock, totaling 46.1 million shares, were automatically converted into shares of common stock. The carrying amount of the redeemable convertible and convertible preferred stock was approximately $532.7 million and $1.7 million, respectively, and was reclassified to stockholders’ equity (deficit). Also upon the completion of our IPO, all outstanding warrants to purchase shares of redeemable convertible preferred stock became warrants exercisable for 130,965 shares of common stock, which were subsequently exercised at a price of $2.9891 per share. For additional information regarding the impact of our IPO on our preferred stockholders’ equity, refer to Notes 11 and 13 to the consolidated financial statements, in our 2018 Form 10-K.

On the date of our IPO, we filed a restated certificate of incorporation, which authorized the issuance of 25.0 million shares of preferred stock with a par value of $0.001 per share, with rights and preferences designated from time to time by the board of directors. As of June 30, 2019, no shares of preferred stock were issued or outstanding.

Common Stock

Upon the completion of our IPO, a common stock warrant with an issuance date of July 1, 2012 became exercisable and was net exercised at an exercise price of $0.002 per share to purchase 485,985 shares of common stock. Subsequent to the completion of our IPO, a common stock warrant with an issuance date of July 31, 2014, was net exercised at an exercise price of $3.02 per share to purchase 95,113 shares of common stock. For additional information regarding the impact of our IPO on our common stockholders’ equity, refer to Notes 12 and 13 to the consolidated financial statements in our 2018 Form 10-K.

On the date of our IPO, we filed a restated certificate of incorporation, which authorized the issuance of 500.0 million shares of common stock with a par value of $0.001 per share, with rights and preferences designated from time to time by the board of directors. As of June 30, 2019, 73.4 million shares were issued and 73.3 million shares were outstanding.

Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are entitled to receive dividends, as may be declared by the board of directors, if any, subject to the preferential dividend rights of the preferred stockholders. No dividends have been declared through June 30, 2019.

Accumulated Other Comprehensive Income (Loss)

The following table presents changes in accumulated other comprehensive income (loss) by component for the periods indicated:


(In thousands)	Net Unrealized Gains (Losses) on Available-for-Sale Securities
Balance as of December 31, 2018	$	(49)
Other comprehensive income (loss) before reclassifications		106
Amounts reclassified into (out of) earnings		-
Other comprehensive income (loss)		106
Balance as of June 30, 2019	$	57

9. EQUITY AWARD PLANS

2018 Stock Option and Incentive Plan

We have only issued new incentive equity awards under our 2018 Stock Option and Incentive Plan (the “2018 Plan”) since our IPO in May 2018. Our 2018 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock units, restricted stock awards, unrestricted stock awards and dividend equivalent rights.

The shares of common stock underlying any awards that are forfeited, canceled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, reacquired by the Company prior to vesting, satisfied without any issuance of stock, expire or are otherwise terminated by the Company under the 2018 Plan will be added back to the shares of common stock available for issuance under the 2018 Plan.

As of June 30, 2019 and December 31, 2018, there were approximately 6.8 million and 5.8 million shares, respectively, available for grant under the 2018 Plan.

CARBON BLACK

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Options to Purchase Common Stock

The following table summarizes our common stock option activity for the six months ended June 30, 2019:


				Weighted-
		Weighted-		Average Remaining	Aggregate
	Number of	Average		Contractual Term	Intrinsic
(Dollars in thousands, except per share amounts)	Shares	Exercise Price		(in years)	Value
Outstanding at December 31, 2018	16,217,066	$	6.26	6.56	$	126,901
Granted	1,110,344		13.35
Exercised	(3,393,941)		4.44
Forfeited	(680,460)		11.20
Outstanding at June 30, 2019	13,253,009	$	7.06	6.60	$	132,959
Vested and expected to vest at June 30, 2019	12,706,651	$	6.85	6.51	$	129,912
Options exercisable at June 30, 2019	8,545,480	$	4.94	5.53	$	101,932

As of June 30, 2019, the total unrecognized compensation expense related to outstanding common stock options was approximately $28.7 million and will be recognized over an estimated weighted-average amortization period of approximately 2.44 years.

The assumptions we used to determine the fair value of the common stock options granted to employees and directors were as follows:


	Six Months Ended June 30,
	2019		2018
Risk-free interest rate	2.20-2.53	%	2.74-2.98	%
Expected term (in years)	6.25		6.25
Expected volatility	42.09-42.63	%	43.62-43.85	%
Expected dividend yield	—		—

Restricted Stock Units

The following table summarizes our unvested restricted stock unit (“RSU”) activity for the six months ended June 30, 2019:


		Weighted‑		Weighted‑
		Average		Average Remaining	Aggregate
	Number of	Grant Date Fair		Contractual Term	Intrinsic
(Dollars in thousands, except share per share amounts)	Shares	Value Per Share		(in years)	Value
Unvested at December 31, 2018	1,116,675	$	14.31	1.56	$	14,986
Granted	2,168,597		13.69
Vested⁽¹⁾	(176,209)		8.47
Forfeited	(133,955)		14.48
Unvested at June 30, 2019	2,975,108	$	14.20	1.82	$	49,744
RSUs vested and expected to vest at June 30, 2019	2,490,416	$	14.24	1.71	$	41,640
RSUs vested at June 30, 2019	—	$	—	—	$	—

⁽¹⁾ The number of RSUs vested includes shares of common stock that we withheld on behalf of the employees to satisfy the minimum statutory tax withholding requirements.

As of June 30, 2019, the total unrecognized compensation expense related to unvested RSUs was approximately $39.8 million and will be recognized over an estimated weighted-average amortization period of approximately 3.47 years.

CARBON BLACK

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Stock-Based Compensation

The following table summarizes the total stock-based compensation expense recognized in our consolidated statements of operations for the periods indicated:


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2019		2018		2019		2018
Cost of subscription, license and support revenue	$	165	$	137	$	332	$	273
Cost of services revenue		51		73		115		130
Sales and marketing expense		2,193		1,228		4,031		2,164
Research and development expense		1,256		894		2,300		1,458
General and administrative expense		1,044		1,155		2,135		1,851
	$	4,709	$	3,487	$	8,913	$	5,876

Employee Stock Purchase Plan

In April 2018, the Board of Directors adopted, and stockholders approved, the 2018 Employee Stock Purchase Plan (the “2018 ESPP”). A total of approximately 1.7 million shares of the Company’s common stock have been authorized for issuance under the 2018 ESPP. Subject to any plan limitations, the 2018 ESPP allows eligible employees to contribute through payroll deductions, up to 10% of their base compensation during the offering period, for the purchase of the Company’s common stock at a discounted price per share.

Unless the participating employee has previously withdrawn from the offering, their accumulated payroll deductions will be used to purchase shares of common stock on the last business day of the offering period at a price equal to 85% of the fair market value of the common stock on the first business day or the last business day of the offering period, whichever is lower. ESPP employee payroll contributions are included within accrued expenses in the consolidated balance sheet and are reclassified to stockholders’ equity on the purchase date.

Our first ESPP offering period commenced on January 1, 2019 and concluded on June 30, 2019. On June 30, 2019, employees purchased approximately 117,200 shares of common stock under our employee stock purchase plan at an average price of $11.36 per share, resulting in total cash proceeds of approximately $1.3 million. Our next ESPP offering period will commence on July 1, 2019 and is expected to end December 31, 2019.

10. COMMITMENTS AND CONTINGENCIES

For additional information about our commitments and contingencies, refer to Note 15 to the consolidated financial statements in our 2018 Form 10-K.

Hosting Services Agreement

In September 2017, the Company entered a non-cancelable contractual agreement related to the hosting of its data processing, storage and other computing services. The agreement, as amended, expires in November 2020. As of June 30, 2019, our off-balance sheet commitment remaining under the hosting agreement totaled approximately $16.0 million.

Indemnifications

Under the indemnification provisions of the Company's standard sales-related contracts, the Company agreed to defend end-customers against third-party claims asserting infringement of certain intellectual property rights by the Company’s solutions, which may include patents, copyrights, trademarks, or trade secrets and to pay judgments entered on such claims. The Company's exposure under these indemnification provisions is generally limited by certain defined remedies and exclusions under the agreement. However, certain agreements include indemnification provisions that could potentially expose the Company to losses in excess of the amount received under the agreement.

In addition, the Company indemnifies its officers, directors and certain key employees while they are serving in good faith in their capacities. Through June 30, 2019, there have been no claims under any indemnification provisions.

We do not believe that the outcome of any claims under indemnification arrangements will have a material effect on our financial position, results of operations or cash flows, and we have not accrued any liabilities related to such obligations in our consolidated financial statements as of June 30, 2019 or December 31, 2018.

CARBON BLACK

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Litigation

On March 21, 2018, Finjan, Inc. (“Finjan”) filed a complaint in the U.S. District Court for the Northern District of California alleging that certain of the Company's products and services infringe at least four U.S. patents purportedly owned by Finjan, seeking, among other things, a judgment holding that the Company has infringed four asserted patents, a preliminary and permanent injunction preventing alleged continued infringement of one of the asserted patents, past damages not less than a reasonable royalty, enhanced damages for alleged willful infringement, costs and reasonable attorneys' fees, and pre- and post-judgment interest. While the Company did not believe the complaint had merit, on April 6, 2018, the Company entered into a settlement agreement with Finjan, resolving all claims made pursuant to the complaint, which was dismissed later in April 2018. During the year ended December 31, 2018, we recognized and paid $3.9 million in settlement charges relating to this matter.

From time to time the Company may become involved in legal proceedings or be subject to claims arising in the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not have a material adverse effect on its business, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact because of defense and settlement costs, diversion of management resources and other factors.

11. INCOME TAXES

During the three and six months ended June 30, 2019, we recorded an income tax provision of $71 thousand and $137 thousand, respectively, primarily due to foreign income taxes, compared to $34 thousand and $105 thousand for the same periods in 2018, respectively.

12. REVENUE

We generate revenue through relationships with channel partners and through our direct sales force, consisting of three primary sources:

(i)

Sale of subscription (i.e., term-based) and perpetual licenses for our CB Protection and CB Response software products along with access to and the right to use the threat intelligence capabilities of the CB Predictive Security Cloud, as well as maintenance services and customer support, collectively referred to as support;

(ii)

Cloud-based software-as-a-service, or SaaS, subscriptions for access to our CB Predictive Security Cloud software products and CB Response Cloud; and

(iii)

Professional services and training, collectively referred to as services.

For information about our revenue recognition methodology, refer to Note 2 to our consolidated financial statements in our 2018 Form 10-K.

Contract Costs

As of June 30, 2019 and December 31, 2018, the Company recorded approximately $40.5 million and $38.1 million, respectively, of deferred commission costs in the consolidated balance sheet. Commission costs capitalized as deferred commissions during the six months ended June 30, 2019 and 2018 totaled $10.5 million and $8.1 million, respectively. Amortization of deferred commissions during the six months ended June 30, 2019 and 2018 totaled $8.1 million and $6.1 million, respectively, and is included in sales and marketing expense in the consolidated statements of operations. The Company periodically reviews these deferred costs to determine whether events or changes in circumstances have occurred that could impact the period of benefit of these deferred sales commissions. The Company does not incur any material costs to fulfill customer contracts.

Deferred Revenue

Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract. Such amounts are recognized as revenue over the contractual period. During the three and six months ended June 30, 2019, we recognized revenue of $55.3 million and $98.2 million, respectively, which was included in the deferred revenue balance as of March 31, 2019 and December 31, 2018, respectively.

We receive payments from customers based upon contractual billing schedules; accounts receivable are recorded when the right to consideration becomes unconditional. We generally bill our customers in advance, and payment terms on invoiced amounts are typically 30 to 90 days. Contract costs include amounts related to our contractual right to consideration for completed and partially completed performance obligations that may not have been invoiced; such amounts have been insignificant to date.

CARBON BLACK

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Major products and services


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2019		2018		2019		2018
Subscription and support revenue	$	34,187	$	32,648	$	67,928	$	64,743
Cloud-based subscription revenue		22,944		13,668		43,977		25,360
Perpetual license revenue		1,500		1,575		3,020		3,179
Services revenue		2,226		3,101		4,488		6,144
Total revenue	$	60,857	$	50,992	$	119,413	$	99,426

Geographic revenue

The following table presents our revenue disaggregated by geographic region based upon the location of the customer for the periods indicated:


	Three Months Ended June 30,
	2019				2018
(In thousands)	Amount		% Revenue		Amount		% Revenue
United States	$	49,109	81	%	$	42,228	83	%
Europe, Middle East and Africa		6,355	10			4,474	9
All other		5,393	9			4,290	8
Total revenue	$	60,857	100	%	$	50,992	100	%


	Six Months Ended June 30,
	2019				2018
(In thousands)	Amount		% Revenue		Amount		% Revenue
United States	$	96,718	81	%	$	82,721	83	%
Europe, Middle East and Africa		12,367	10			8,549	9
All other		10,328	9			8,156	8
Total revenue	$	119,413	100	%	$	99,426	100	%

Transaction price allocated to remaining performance obligations

Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and backlog. The Company defines backlog as contractually committed orders for subscriptions and support services for which the associated revenue has not been recognized and the customer has not been invoiced. As of June 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $185.1 million in deferred revenue and $47.3 million in backlog.

The following table presents the remaining performance obligations we expect to recognize over the periods indicated (in percentages):


			Less than				More than
	Total		1 year		1-2 Years		2 years
Deferred revenue	100	%	81	%	13	%	6	%
Backlog	100		33		45		22

Concentration Risk

As of June 30, 2019, two channel partners accounted for approximately 27.9% and 20.4%, respectively, of outstanding accounts receivable, compared to approximately 22.7% and 20.4%, respectively, as of December 31, 2018. For the three months ended June 30, 2019, the same two channel partners represented approximately 23.0% and 16.9%, respectively, of total revenue, compared to 20.7% and 19.1%, respectively, for the same period in 2018. For the six months ended June 30, 2019, the same two channel partners represented approximately 22.2% and 17.2%, respectively, of total revenue, compared to 21.9% and 17.7%, respectively, for the same period in 2018.

During both the three and six months ended June 30, 2019, revenue from customers located outside of the United States in the aggregate accounted for approximately 19%of our total revenue, compared to 17% for the same periods in 2018. Substantially all of our long-lived tangible assets (consisting of property and equipment) were held within the United States as of June 30, 2019 and December 31, 2018.

CARBON BLACK

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

13. NET LOSS PER SHARE

Basic net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per share attributable to common stockholders is computed by dividing net loss attributable to common stockholders by diluted weighted-average shares outstanding, including potentially dilutive securities, unless anti-dilutive.

As the company was in a loss for all periods presented, basic net loss per share is the same as dilutive net loss per share as the inclusion of all potential common shares outstanding would have been anti-dilutive. The following table presents the calculation for basic and diluted net loss per share attributable to common stockholders for the dates indicated:


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands, except share and per share amounts)	2019		2018		2019		2018
Numerator:
Net loss	$	(14,619)	$	(25,281)	$	(34,306)	$	(45,875)
Accretion of preferred stock to redemption value		—		(159,453)		—		(199,492)
Net loss attributable to common stockholders	$	(14,619)	$	(184,734)	$	(34,306)	$	(245,367)
Denominator:
Weighted-average number of common shares outstanding—basic and diluted		72,375,825		44,759,435		71,430,435		28,104,372
Net loss per share attributable to common stockholders—basic and diluted	$	(0.20)	$	(4.13)	$	(0.48)	$	(8.73)

The following table presents the potentially dilutive securities that were excluded from the computation of net loss per share for the periods presented because their inclusion would have an anti-dilutive effect:


	As of June 30,
	2019	2018
Options to purchase common stock	13,253,009	18,452,393
Unvested restricted stock units	2,975,108	412,521
Total potential common shares	16,228,117	18,864,914

CARBON BLACK

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

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

FORWARD-LOOKING STATEMENTS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Form 10-Q and our consolidated financial statements and related notes included in our 2018 Form 10-K. In addition to historical consolidated financial information, the following discussion and analysis and information set forth elsewhere in this Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this Form 10-Q regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “predict,” “project,” “will,” “would,” or the negative of these words or other similar terms or expressions are intended to identify forward-looking statements although not all forward-looking statements contain these identifying words.

These forward-looking statements are not statements of historical facts and represent only our current expectations regarding such matters. These statements inherently involve a wide range of known and unknown uncertainties. Our actual actions and results could differ materially from what is expressed or implied by these statements. Specific factors that could cause such a difference include, but are not limited to, those set forth under Item 1A. “Risk Factors” and other important factors disclosed previously in our other filings with the SEC. Given these factors, as well as other variables that may affect our operating results, you should not rely on forward-looking statements, assume that past financial performance will be a reliable indicator of future performance, or use historical trends to anticipate results or trends in future periods. The forward-looking statements made in this Form 10-Q relate only to events as of the date on which they are made and we expressly disclaim any obligation or intention to provide updates to the forward-looking statements and the estimates and assumptions associated with them, except as required by law.

BUSINESS OVERVIEW

Carbon Black is a leader in cloud-native endpoint protection. As an innovator in the Endpoint Protection Platform (“EPP”) market, our technology enables customers to address the complete endpoint protection lifecycle and stay ahead of advanced cyber attacks.

Our big data and security analytics platform, the CB Predictive Security Cloud (“PSC”), consolidates endpoint security and IT operations into an extensible cloud platform that prevents advanced threats, provides actionable insight and enables businesses of all sizes to simplify operations. By analyzing billions of security events per day across the globe, Carbon Black has key insights into attackers’ behavior patterns, enabling customers to detect, respond to and prevent emerging attacks.

We believe the depth, breadth and real-time nature of our unfiltered endpoint data, combined with the analytic power of our Predictive Security Cloud platform, provides customers with world-class security efficacy and operational efficiency.

Organizations globally are re-platforming their IT operations by investing in cloud computing and workforce mobility, which has resulted in enterprise environments that are more open, interconnected, and vulnerable to cyber attacks. Today, an increasingly mobile workforce and the explosion of enterprise data and applications in the cloud have expanded the attack surface beyond the traditional network perimeter. In response, attackers have adapted their methods and tools to directly target the endpoint. In short, the endpoint is the new perimeter.

Endpoints are the primary focus of attacks because they store valuable data that attackers seek to steal; perform critical operations that attackers seek to disrupt; and are the interface where attackers can target humans through email, social engineering and other tactics. Endpoints are the physical and virtual locations where sensitive data resides and include desktops, laptops, servers, virtual machines, cloud workloads (services running on cloud servers), containers, fixed-function devices such as ATMs, point of sale systems, and control and data systems for power plants and other industrial assets.

Our approach to solving these endpoint security challenges focuses on leveraging our big data and our security analytics platform in the cloud (the PSC) to better detect and prevent the behaviors and specific techniques used by attackers. Based on our experience and investment in solutions designed to address the full endpoint security lifecycle, we have developed a highly differentiated technology approach with four main pillars: (1) unfiltered data collection, (2) proprietary data shaping technology, (3) streaming analytics, and (4) extensible open architecture.

A substantial majority of our customers purchase our solutions under a subscription license. Our subscription licenses include: access to and the right to use the threat intelligence capabilities of the CB Predictive Security Cloud; ongoing support, which provides our customers

CARBON BLACK

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

with telephone and web-based support, bug fixes and repairs; and software updates on a when-and-if-available basis. Additionally, a substantial amount of those customers who purchase licenses on a perpetual basis also purchase an agreement for access to and the right to use the threat intelligence capabilities of the CB Predictive Security Cloud. Subscription (i.e. term-based) revenue is recognized on a ratable basis over the contract term beginning on the date the software is delivered to the customer. Revenue for cloud-based subscriptions is recognized on a ratable basis over the term of the subscription beginning on the date the customer is given access to the platform. Maintenance services and customer support revenue related to subscription licenses is recognized ratably over the term of the maintenance and support arrangement as this performance obligation is satisfied. Revenue from the infrequent sales of perpetual software licenses is recognized ratably over the customer’s estimated economic life, which we have estimated to be five years, beginning on the date the software is delivered to the customer. Maintenance services and customer support revenue related to perpetual licenses is recognized ratably over the term of the maintenance and support arrangement as this performance obligation is satisfied. Revenue from perpetual licenses represented less than 5% of our $58.6 million and $114.9 million of subscription, license and support revenue for the three and six months ended June 30, 2019, respectively. Due to our revenue recognition model, all of our subscription, license and support revenue is recognized on a ratable basis, providing us with strong visibility into future revenue.

We primarily sell our products through a channel partner go-to-market model, which significantly extends our global market reach and ability to rapidly scale our sales efforts. Our inside sales and field sales representatives work alongside an extensive network of value-added resellers, or VARs, distributors, managed security service providers, or MSSPs, and incident response, or IR, firms. Our MSSP and IR firm channel partners both use and recommend our products to their clients. We have established significant relationships with leading channel partners, including Optiv Security, Inc., a leading VAR and MSSP; CDW Corporation, one of the world’s largest software VARs; Arrow Electronics, Inc., a major global distributor; SecureWorks, Inc., a leading MSSP; and Kroll, a leading IR firm. For the three and six months ended June 30, 2019, approximately 96% and 94%, respectively, of our new and add-on business was closed in collaboration with a channel partner.

Our customers include many of the world’s largest, security-focused enterprises and government agencies that are among the most heavily targeted by cyber adversaries, as well as mid-sized organizations. As of June 30, 2019, we serve 5,680 customers globally across multiple industries, including approximately one-third of the Fortune 100.

We have experienced revenue growth, with revenue increasing to $60.9 million and $119.4 million for the three and six months ended June 30, 2019, respectively, up from $51.0 million and $99.4 million in the same periods in 2018, respectively, representing a 19% and 20% annual growth rate, respectively. Recurring revenue, a non-GAAP financial measure, represented 94% of our total revenue for both the three and six months ended June 30, 2019, respectively. Annual recurring revenue, or ARR, was $237.6 million and $195.5 million as of June 30, 2019 and 2018, respectively. We define ARR as the annualized value of all active subscription contracts as of the end of the period. ARR excludes revenue from perpetual licenses and services. The portion of ARR related to our cloud-based subscription contracts was $101.4 million and $61.1 million as of June 30, 2019 and 2018, respectively. The percentage of our total recurring revenue generated by sales of our cloud-based solutions was 40% and 39% for the three and six months ended June 30, 2019, respectively. We incurred net losses of $14.6 million and $34.3 million for the three and six months ended June 30, 2019, respectively, compared to $25.3 million and $45.9 million in the same periods in 2018, respectively, as we continued to invest for growth to address the large market opportunity for our platform.

CARBON BLACK

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

OVERVIEW OF FINANCIAL RESULTS

Results of Operations

Percentage of Revenue

Three Months Ended June 30,

(In thousands, except percentages)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Small reporting company

Emerging growth company

Carbon Black, Inc. 10-Q