Edgar Filing: A10 Networks, Inc.

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)



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

For the quarterly period ended June 30, 2016



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

For the transition period from to

Commission file number: 001-36343

A10 NETWORKS, INC.

(Exact Name of Registrant as Specified in its Charter)



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

(408) 325-8668

(Registrant’s Telephone Number, Including Area Code)

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

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

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



Large accelerated filer	¨		Accelerated filer	x

Non-accelerated filer	¨	(Do not check if a smaller reporting company)	Smaller reporting company	¨

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

As of July 29, 2016 the number of outstanding shares of the registrant’s common stock, par value $0.00001 per share, was 65,772,934.

A10 Networks, Inc. Quarterly Report on Form 10-Q For the Three and Six Months Ended June 30, 2016 TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION	2
Item 1. Condensed Consolidated Financial Statements (unaudited):	2
Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015	2
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016 and 2015	3
Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2016 and 2015
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015	5
Notes to Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3. Quantitative and Qualitative Disclosures About Market Risk	34
Item 4. Controls and Procedures	35
PART II. OTHER INFORMATION	36
Item 1. Legal Proceedings	36
Item 1A. Risk Factors	36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 3. Defaults Upon Senior Securities	60
Item 4. Mine Safety Disclosures	60
Item 5. Other Information	60
Item 6. Exhibits	60
Signatures	61
Exhibit Index	62

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A10 NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except par value)



	June 30, 2016			December 31, 2015
ASSETS
Current Assets:
Cash and cash equivalents	$	28,632		$	98,117
Marketable securities	85,069			—
Accounts receivable, net of allowances of $4,614 and $4,067 as of June 30, 2016 and December 31, 2015	39,348			57,778
Inventory	14,333			18,291
Prepaid expenses and other current assets	5,427			5,064
Total current assets	172,809			179,250
Property and equipment, net	8,917			8,903
Goodwill and Intangible Assets	7,086			867
Other non-current assets	3,681			3,531
Total Assets	$	192,493		$	192,551
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	7,782		$	10,508
Accrued liabilities	28,830			27,757
Deferred revenue, current	51,384			49,572
Total current liabilities	87,996			87,837
Deferred revenue, non-current	24,379			23,232
Other non-current liabilities	1,162			1,414
Total Liabilities	113,537			112,483
Commitments and contingencies (Note 5)
Stockholders' Equity:
Common stock, par value $0.00001 — 500,000 shares authorized as of June 30, 2016 and December 31, 2015; 65,585 and 64,172 shares issued and outstanding as of June 30, 2016 and December 31, 2015	1			1
Additional paid-in capital	315,156			301,886
Accumulated other comprehensive income	88			—
Accumulated deficit	(236,289		)	(221,819		)
Total Stockholders' Equity	78,956			80,068
Total Liabilities And Stockholders' Equity	$	192,493		$	192,551

See accompanying notes to the condensed consolidated financial statements.

A10 NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share amounts)



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Revenue:
Products	$	38,797		$	33,331		$	75,171		$	63,847
Services	18,333			14,205			35,763			27,706
Total revenue	57,130			47,536			110,934			91,553
Cost of revenue:
Products	9,804			7,909			18,502			14,972
Services	4,405			3,692			8,934			7,415
Total cost of revenue	14,209			11,601			27,436			22,387
Gross profit	42,921			35,935			83,498			69,166
Operating expenses:
Sales and marketing	26,773			24,962			53,541			49,484
Research and development	14,486			13,671			29,263			27,980
General and administrative	7,230			5,703			13,891			13,230
Litigation and settlement expense	202			1,025			1,993			1,470
Total operating expenses	48,691			45,361			98,688			92,164
Loss from operations	(5,770		)	(9,426		)	(15,190		)	(22,998		)
Other income (expense), net:
Interest expense	(126		)	(104		)	(252		)	(231		)
Interest income and other income (expense), net	1,020			(216		)	1,235			(189		)
Total other income (expense), net	894			(320		)	983			(420		)
Loss before provision for income taxes	(4,876		)	(9,746		)	(14,207		)	(23,418		)
Provision for income taxes	59			231			263			293
Net loss	$	(4,935	)	$	(9,977	)	$	(14,470	)	$	(23,711	)
Net loss per share:
Basic and diluted	$	(0.08	)	$	(0.16	)	$	(0.22	)	$	(0.38	)
Weighted-average shares used in computing net loss per share:
Basic and diluted	64,861			61,945			64,584			61,690

See accompanying notes to the condensed consolidated financial statements.

A10 NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited, in thousands)



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Net loss	$	(4,935	)	$	(9,977	)	$	(14,470	)	$	(23,711	)
Other comprehensive income, net of tax:
Unrealized gain on marketable securities	32			—			88			—
Comprehensive loss	$	(4,903	)	$	(9,977	)	$	(14,382	)	$	(23,711	)

See accompanying notes to the condensed consolidated financial statements.

A10 NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)



	Six Months Ended June 30,
	2016			2015
Cash flows from operating activities:
Net loss	$	(14,470	)	$	(23,711	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	3,717			4,673
Stock-based compensation	8,481			8,638
Other non-cash items	1,051			273
Changes in operating assets and liabilities:
Accounts receivable, net	17,535			7,723
Inventory	2,846			1,861
Prepaid expenses and other assets	(479		)	44
Accounts payable	(2,668		)	(3,048		)
Accrued liabilities	348			(1,619		)
Deferred revenue	2,960			8,559
Other	(65		)	84
Net cash provided by operating activities	19,256			3,477
Cash flows from investing activities:
Purchases of marketable securities	(92,682		)	—
Proceeds from sales and maturities of marketable securities	7,609			—
Payment for acquisition	(4,380		)	—
Purchases of property and equipment	(2,588		)	(1,811		)
Net cash used in investing activities	(92,041		)	(1,811		)
Cash flows from financing activities:
Proceeds from issuance of common stock under employee equity incentive plans, net of repurchases	3,350			2,626
Other	(50		)	—
Net cash provided by financing activities	3,300			2,626
Net increase (decrease) in cash and cash equivalents	(69,485		)	4,292
Cash and cash equivalents—beginning of period	98,117			91,905
Cash and cash equivalents—end of period	$	28,632		$	96,197
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Common stock issued under asset purchase agreement	$	1,313		$	—
Inventory transfers to property and equipment	$	1,112		$	1,187
Purchases of property and equipment included in accounts payable and accrued liabilities	$	428		$	486

See accompanying notes to the condensed consolidated financial statements.

A10 Networks, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Description of Business and Summary of Significant Accounting Policies

Description of Business

A10 Networks, Inc. (together with our subsidiaries, the “Company”, “we”, “our” or “us”) was incorporated in

California in 2004 and reincorporated in Delaware in March 2014. We are headquartered in San Jose, California and have wholly-owned subsidiaries throughout the world including Asia and Europe. Our solutions enable enterprises, service providers, Web giants and government organizations to accelerate, secure and optimize the performance of their data center applications and secure their users, applications and infrastructure from internet, web and network threats at scale. We offer four software based advanced application networking and network security solutions to address end-customer needs, including Application Delivery Controllers ("ADC") to optimize web and back-office application performance, Carrier Grade Network Address Translation ("CGN") to provide network address, protocol translation services for service provider networks, Threat Protection System ("TPS") for network-wide multi-vector DDoS security protection and Convergent Firewall ("CFW") for protecting data centers and mobile infrastructure, improving web security, and encrypting site-to-site communications. Our solutions are cloud-ready and available, in a variety of form factors such as optimized hardware appliances, in the cloud as software, and as virtual appliances.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of A10 Networks, Inc., and our wholly owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and following the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain notes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These financial statements have been prepared on the same basis as our annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments that are necessary for a fair presentation of our financial information. The results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016 or for any other interim period or for any other future year. The balance sheet as of December 31, 2015 has been derived from audited financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2015, which are included in the Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on March 1, 2016.

Use of Estimates

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

Summary of Significant Accounting Policies

Marketable securities

We classify our investments in debt and equity securities as available-for-sale and record these investments at fair value. Investments with an original maturity of three months or less at the date of purchase are considered cash equivalents, while all other investments are classified as current assets based on their availability for use in current operations. Unrealized gains or losses are reported in accumulated other comprehensive income, net of taxes, in stockholders’ equity. Realized gains and losses are determined based on the specific identification method, and are reflected in our Condensed Consolidated Statements of Operations. Realized gains or losses and charges for other-than-temporary declines in value, if any, on marketable securities are reported in interest income and other income (expense), net as incurred.

We regularly review our investment portfolio to identify and evaluate investments that have indicators of possible impairment. Investments are considered impaired when a decline in fair value is judged to be other-than-temporary. If the cost of an individual investment exceeds its fair value, we evaluate, among other factors, general market conditions, the duration and extent to which the fair value is less than cost, and our intent and ability to hold the investment. Once a decline in fair value is determined to be other-than-temporary, we will record an impairment charge and establish a new cost basis in the investment.

Goodwill

Goodwill is measured as the excess of consideration transferred and the net of the acquisition date fair value of assets acquired and liabilities assumed in a business acquisition. Goodwill is not amortized for accounting purposes. We review goodwill for possible impairment annually in the fourth quarter or whenever events or changes in circumstances indicate its carrying amount may not be recoverable. For annual goodwill impairment test in all periods to date, we operate under one reporting unit and the fair value of our reporting unit has been determined by our enterprise value.

When assessing goodwill for impairment, we first perform a qualitative assessment to determine whether further impairment testing is necessary. If, as a result of its qualitative assessment, it is more-likely-than-not (i.e. greater than 50% chance) that the fair value of our reporting unit is less than its carrying amount, the quantitative impairment test will be required. Otherwise, no further testing will be required.

Examples of events and circumstances that might indicate that a reporting unit’s fair value is less than the carrying amount include macro-economic conditions such as (i) a significant adverse change in customer demand or a severe deterioration in the entity’s operating environment and market conditions; (ii) entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or (iii) other events such as an expectation that a reporting unit will be sold or there will be a sustained decrease in the stock price on either an absolute basis or relative to peers.

If it is determined, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of our reporting unit is less than its carrying amount, we perform a two-step impairment test on goodwill. The first step requires the identification of the reporting units and comparison of the fair value of a reporting unit with our carrying amount, including goodwill. If the fair value of the reporting unit is less than our carrying value, an indication of goodwill impairment exists for the reporting unit, and the second step of the impairment test is performed to compute the amount of the impairment. Under the second step, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value of that goodwill.

Intangible Assets

Intangible assets consist primarily of developed technology, patent and acquired customer relationships resulting from acquisitions. Intangible assets are recorded at fair value and are amortized on a straight-line basis over their estimated useful lives, which range from five to ten years.

Impairment of Long-Lived Assets

We periodically evaluate whether changes have occurred that would render our long-lived assets not recoverable. If such circumstances arise, we use an estimate of the undiscounted value of expected future operating cash flows to determine whether the long-lived assets are impaired. If the aggregate undiscounted cash flows are less than the carrying amount of the assets, the resulting impairment charge to be recorded is calculated based on the excess of the carrying amount of the assets over the fair value of such assets, with the fair value generally determined based on an estimate of discounted future cash flows.

There have been no other changes to the significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on March 1, 2016, that have had a material impact on our condensed consolidated financial statements and related notes.

Concentration of Credit Risk and Significant Customers

Financial instruments that potentially subject us to concentrations of credit risk consist of cash, cash equivalents, marketable securities and accounts receivable. Our cash, cash equivalents and marketable securities are invested in high-credit quality financial instruments maintained with banks and financial institutions. Management believes that the financial institutions that hold our cash, cash equivalents and marketable securities are financially sound and, accordingly, are subject to minimal credit risk. In some instances, deposits held with banks and financial institutions may be in excess of insured limits provided on such deposits.

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

Significant customers, including distribution channel partners and direct customers, are those which represent more than 10% of our total revenue for each period presented or our gross accounts receivable balance as of each respective balance sheet date. Revenue from our significant customers as a percentage of our total revenue for the three and six months ended June 30, 2016 and 2015 are as follows:



	Three Months Ended June 30,		Six Months Ended June 30,
Customers	2016	2015	2016	2015
Customer A (a distribution channel partner)	11%	*	11%	*
Customer B (a direct customer)	10%	14%	*	*

* represents less than 10% of total revenue

As of June 30, 2016, one distribution channel partner (Customer A) accounted for 13% of our total gross accounts receivable. As of December 31, 2015, no customer accounted for 10% or more of our total gross accounts receivable.

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2016-02, Leases (Topic 842). This new accounting standard primarily requires lessees to recognize most leases on their balance sheets but record expenses on their income statements in a manner similar to current accounting. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The guidance is effective for annual periods beginning after December 15, 2018 with early adoption permitted. We are currently evaluating the impact of this guidance on our financial statements and the timing of adoption.

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The new guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid in capital pools. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2016 with early adoption permitted. We are currently evaluating the impact of this guidance on our financial statements and the timing of adoption.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides new guidance on the recognition of revenue and states that an entity should recognize revenue to depict the transfer of promised

goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. The original effective date of this accounting standard was annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date of the new accounting standard. This updated standard is effective for us on January 1, 2018.

In March and April 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) and ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. These accounting updates provide supplemental adoption guidance and clarification to ASC No. 2014-09 Revenue from Contracts with Customers. ASU No. 2016-08 and ASU No. 2016-10 must be adopted concurrently with the adoption of ASU 2014-09. We are currently evaluating the impact of the adoption of ASU No. 2014-09, ASU No. 2016-08 and ASU No. 2016-10 on our financial statements and method of adoption.

There have been no other recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2016, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on March 1, 2016, that are of significance or potential significance to us.

2. Marketable Securities and Fair Value Measurements

Marketable Securities

As of June 30, 2016, the estimated fair value of our marketable securities, classified as available for sale, are as follows (in thousands):



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Certificates of deposit	$	9,000	$	2	$	(1	)	$	9,001
Corporate securities	35,870		103		(7		)	35,966
Commercial paper	23,392		9		—			23,401
Asset-backed securities	16,671		30		—			16,701
	$	84,933	$	144	$	(8	)	$	85,069

For the three and six months ended June 30, 2016, realized gains were immaterial. During the three and six months ended June 30, 2016, we did not reclassify any amount to earnings from accumulated other comprehensive income related to unrealized gains or losses. We did not have any marketable securities as of December 31, 2015.

The following table summarizes the contractual maturities of our marketable securities as of June 30, 2016 (in thousands):



	Amortized Cost		Fair Value
Due in one year or less	$	46,847	$	46,875
Due between one year to three years	38,086		38,194
Total available for sale marketable securities	$	84,933	$	85,069

All available-for-sale securities have been classified as current, based on management's ability to use the funds in current operations.

Marketable securities in an unrealized loss position as of June 30, 2016 consisted of the following (in thousands):



	Fair Value		Unrealized Losses
Certificates of deposit	$	3,499	$	(1	)
Corporate securities	4,179		(7		)
	$	7,678	$	(8	)

As of June 30, 2016, no marketable securities were in a continuous unrealized loss position for more than twelve months. We do not intend to sell any of these investments, and it is not more likely than not, that we would be required to sell these investments before recovery of their amortized cost basis, which may be at maturity. As a result, there is no other-than-temporary impairment for these marketable securities as of June 30, 2016.

Fair Value Measurements

Our financial instruments consist of cash, cash equivalents, marketable securities, accounts receivable, accounts payable and accrued liabilities. Our cash equivalents, which include money market funds, are measured and recorded at fair value on a recurring basis. Marketable Securities are comprised of Certificates of Deposit, Corporate Securities, Commercial Paper and Asset-backed securities and we measure the fair value at the measurement date using the three-tier fair value hierarchy as described below. Accounts receivable, accounts payable and accrued liabilities are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment.

Assets and liabilities recorded at fair value on a recurring basis in the Condensed Consolidated Balance Sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

Level I—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Our Level I assets consist of highly liquid money market funds that are included in cash and cash equivalents.

Level II—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities;

Our Level II assets consist of Certificates of Deposit, Corporate Securities, Commercial Paper and Asset-backed securities.

Level III—Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

We did not have any Level III assets or liabilities as of June 30, 2016 and December 31, 2015.

The following table sets forth the fair value of our cash, cash equivalents and marketable securities on a recurring basis, by level, within the fair value hierarchy (in thousands):



	June 30, 2016						December 31, 2015
	Cash and Cash Equivalents		Marketable Securities		Total		Cash and Cash Equivalents		Marketable Securities		Total
Cash	$	27,302			$	27,302	$	27,036			$	27,036
Level I
Money market funds	$	1,330	$	—	$	1,330	$	71,081	$	—	$	71,081
	1,330		—		1,330		71,081		—		71,081
Level II
Certificates of deposit	—		9,001		9,001		—		—		—
Corporate securities	—		35,966		35,966		—		—		—
Commercial paper	—		23,401		23,401		—		—		—
Asset-backed securities	—		16,701		16,701		—		—		—
	—		85,069		85,069		—		—		—
Total	$	28,632	$	85,069	$	113,701	$	98,117	$	—	$	98,117

3. Balance Sheets and Statements of Operations Components

Inventory

Components of inventory as of June 30, 2016 and December 31, 2015 are shown below (in thousands):



	June 30, 2016		December 31, 2015
Raw materials	$	6,340	$	9,418
Finished goods	7,993		8,873
Total inventory	$	14,333	$	18,291

Property and Equipment, net

Components of property and equipment, net as of June 30, 2016 and December 31, 2015 are shown below (in thousands):



	June 30, 2016			December 31, 2015
Equipment	$	39,128		$	35,836
Software	3,801			3,548
Furniture and fixtures	857			864
Leasehold improvements	2,536			2,492
Construction in progress	9			83
Property and equipment, gross	46,331			42,823
Less: accumulated depreciation and amortization	(37,414		)	(33,920		)
Total property and equipment, net	$	8,917		$	8,903

Depreciation and amortization on our property and equipment for the three months ended June 30, 2016 and 2015 was $1.8 million and $2.2 million. Depreciation and amortization on our property and equipment for the six months ended June 30, 2016 and 2015 was $3.7 million and $4.7 million.

Goodwill and Intangible Assets

Activity related to goodwill for the six months ended June 30, 2016 and 2015 is as follows (in thousands):



	June 30, 2016		December 31, 2015
Balance at beginning of period	$	72	$	72
Acquisitions	1,235		—
Total goodwill	$	1,307	$	72

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



	June 30, 2016							December 31, 2015
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Value		Gross Carrying Amount		Accumulated Amortization			Net Carrying Value
Developed technology	$	5,050	$	—		$	5,050	$	—	$	—		$	—
Customer relationships	1,746		(1,746		)	—		1,746		(1,746		)	—
Patent	1,436		(707		)	$	729	1,436		(641		)	795
Total	$	8,232	$	(2,453	)	$	5,779	$	3,182	$	(2,387	)	$	795

Total future amortization expense for purchased intangible assets that have finite lives, based on our existing intangible assets and their current estimated useful lives as of June 30, 2016, is as follows (in thousands):



Fiscal Years Ending December 31,
Remainder of 2016	$	571
2017	1,143
2018	1,143
2019	1,143
2020	1,143
Thereafter	636
Total	$	5,779

Accrued Liabilities

Accrued liabilities as of June 30, 2016 and December 31, 2015 consists of the following (in thousands):



	June 30, 2016		December 31, 2015
Accrued compensation and benefits	$	19,808	$	18,134
Accrued tax liabilities	2,062		4,520
Other	6,960		5,103
Total accrued liabilities	$	28,830	$	27,757

Deferred Revenue

Deferred revenue as of June 30, 2016 and December 31, 2015 consists of the following (in thousands):



	June 30, 2016			December 31, 2015
Deferred revenue:
Products	$	2,699		$	3,233
Services	73,064			69,571
Total deferred revenue	75,763			72,804
Less: current portion	(51,384		)	(49,572		)
Non-current portion	$	24,379		$	23,232

4. Credit Facility

In September 2013, we entered into a credit agreement with Royal Bank of Canada, JPMorgan Chase Bank, N.A. and Bank of America, N.A. as lenders. The credit agreement provides a three-year, $35.0 million, revolving credit facility, which includes a maximum $10.0 million letter of credit facility. We are required to pay quarterly facility fees of 0.45% per annum on the average daily unused portion of the revolving credit facility. We had no outstanding borrowings under this credit facility as of June 30, 2016 and December 31, 2015. The revolving credit facility expires on September 30, 2016.

At our option, the revolving credit facility bears interest at a rate per annum based on either (i) an alternate base rate plus a margin ranging from 1.75% to 2.50% depending on our total leverage ratio, or (ii) the London interbank offered rate, or LIBOR, based on one, two, three or six month interest periods plus a margin ranging from 2.75% to 3.50% depending on our total leverage ratio. The alternate base rate is equal to the greatest of (i) the Royal Bank of Canada’s prime rate, (ii) the federal funds rate plus a margin equal to 0.50% and (iii) the Eurodollar rate for a one month interest period plus a margin equal to 1.00%.

Our obligations under the credit agreement are secured by a security interest on substantially all of our assets, including our intellectual property. The credit agreement contains customary financial and non-financial covenants, which are described in Note 4, Credit Facility of the Notes to Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on March 1, 2016. We were in compliance with all financial and nonfinancial covenants under the revolving credit facility as of June 30, 2016.

5. Commitments and Contingencies

Legal Proceedings

From time to time, we may be party or subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business, including proceedings and claims that relate to intellectual property matters. Some of these proceedings involve claims that are subject to substantial uncertainties and unascertainable damages. Accordingly, except as disclosed, we have not established reserves or ranges of possible loss related to these proceedings, as at this time in the proceedings, if any, the matters do not relate to a probable loss and/or amounts cannot be reasonably estimated.

On January 29, 2015, the Company, the members of our Board of Directors, our Chief Financial Officer, and the underwriters of our March 21, 2014 initial public offering ("IPO") were named as defendants in a putative class action lawsuit alleging violations of the federal Securities Act of 1933 filed in the Superior Court of the State of California, County of Santa Clara, captioned City of Warren Police and Fire Retirement System v. A10 Networks, Inc., et al., 1-15-CV-276207. Several substantially identical lawsuits were subsequently filed in the same court, bringing the same claims against the same defendants, captioned Arkansas Teacher Retirement System v. A10 Networks, Inc., et al., 1-15-CV-278575 (filed March 25, 2015) and Kaveny v. A10 Networks, Inc., et al., 1-15-CV-279006 (filed April 6, 2015). On May 29, 2015, the aforementioned putative class actions were consolidated under the caption In re A10 Networks, Inc. Shareholder Litigation, 1-15-CV-276207.

On April 6, 2016, all parties entered into a memorandum of understanding reflecting an agreement in principle to settle all claims against all defendants asserted in the action and providing that we will make a payment of $0.8 million, net of

the expected proceeds of insurance policies. The parties subsequently executed a stipulation of settlement, dated June 30, 2016, and filed a motion with the Court seeking preliminary approval of the settlement, which is scheduled to be heard on September 9, 2016. The settlement releases all claims asserted against all defendants and includes the dismissal of all claims against all defendants without any liability or wrongdoing attributed to them. The settlement remains subject to stockholder notice, court approval and other customary conditions.

On June 24, 2015, our directors and certain of our officers were named as defendants in a putative derivative lawsuit filed in the Superior Court of the State of California, County of Santa Clara, captioned Hornung v. Chen, et al., 1-15-CV-282286 (the “Derivative Action”). We were also named as a nominal defendant. The complaint seeks to allege breaches of fiduciary duties and other related claims, arising out of allegations that our officers and directors caused us to infringe patents and intellectual property, improperly approved the settlement of prior litigation, failed to adopt and implement effective internal controls, and caused us to issue false and misleading statements in connection with our IPO. Plaintiff seeks unspecified compensatory damages and other equitable relief. On May 24, 2016, all parties entered into a memorandum of understanding reflecting an agreement in principle to settle all claims against all defendants asserted in the action, which provides that we implement certain corporate governance measures following final settlement approval. The settlement releases all claims asserted against all defendants and includes the dismissal of all claims against all defendants without any liability or wrongdoing attributed to them. The settlement remains subject to execution of a formal settlement agreement, court approval and other customary conditions.

Lease Obligations and Other Commitments

We lease various operating spaces in the United States, Asia, and Europe under non-cancelable operating lease arrangements that expire on various dates through February 2020. These arrangements require us to pay certain operating expenses, such as taxes, repairs, and insurance and contain renewal and escalation clauses. We recognize rent expense under these arrangements on a straight-line basis over the term of the lease.

We have entered into agreements with some of our customers and channel partners that contain indemnification provisions in the event of claims alleging that our products infringe the intellectual property rights of a third party. Other guarantees or indemnification arrangements include guarantees of product and service performance and standby letters of credit for lease facilities and corporate credit cards. We have not recorded a liability related to these indemnification and guarantee provisions and our guarantees and indemnification arrangements have not had any significant impact on our consolidated financial statements to date.

6. Appcito Acquisition

On June 23, 2016, we entered into an asset purchase agreement with Appcito, Inc. (“Appcito”), a privately held company engaged in providing a unified set of services for applications deployed on cloud infrastructure with facilities located in Santa Clara, California and Bangalore, India. Under the terms of the purchase agreement, we acquired substantially all of the assets of Appcito. This acquisition enhances our position as a comprehensive secure application services leader, and it represents a strategic step in our vision to help our customers become more secure and agile as they bridge traditional and cloud application environments.

The total purchase consideration was $6.5 million. The fair value of the total purchase consideration was $6.3 million, which consisted of $5.0 million in cash consideration, less a holdback of $0.7 million to cover any indemnification claims within the next twelve months, and 227,404 unregistered shares of our common stock with an aggregated fair value of $1.3 million. We allocated the total purchase consideration to the net assets acquired, including identifiable intangible assets, based on their respective fair values at the acquisition date.

The following table summarizes the allocation of the purchase price to the fair value of the assets acquired (in thousands):



Assets Acquired:
Developed technology	$	5,050
Goodwill	1,235
Other tangible assets	58
Total assets acquired	$	6,343

Developed technology is amortized on a straight-line basis over the estimated useful life of five years. Goodwill of $1.2 million was recognized as part of this acquisition is attributable primarily to the expected synergies and other benefits from this acquisition including adding to our existing momentum around providing secure application service solutions that meet several key demands like application analytics, visibility, and centralized control. The acquisition is expected to introduce secure application service offerings that span traditional data centers, private clouds, public clouds, and hybrid clouds.

We incurred approximately $0.2 million in legal, accounting and other professional fees related to this acquisition, all of which were expensed during the three months ended June 30, 2016.

We do not consider the acquisition of Appcito to be material to our results of operations or financial position, and therefore, we are not presenting pro-forma financial information of combined operations.

This acquisition was taxable for income tax purposes, and the acquired assets have been recorded at fair value for both book and income tax purposes. Therefore, no deferred taxes have been recorded. The goodwill of $1.2 million and the $0.2 million of acquisition costs are capitalized and amortized over 15 years for income tax purposes.

7. Equity Award Plans

Equity Incentive Plans

2014 Equity Incentive Plan

Our 2014 Equity Incentive Plan (the "2014 Plan") was adopted by our Board of Directors and approved by our stockholders in March 2014. The 2014 Plan provides for the granting of stock options, restricted stock awards, restricted stock units, stock appreciation rights, performance units and performance shares to our employees, directors and consultants. In addition, effective as of June 10, 2015, our Board of Directors adopted, and our stockholders approved, an amendment and restatement of our 2014 Plan, which increased the number of shares available for issuance under the 2014 Plan by the number of shares available from the 2008 Plan that were canceled or otherwise forfeited or repurchased by us after March 20, 2014. A maximum of 8,310,566 shares may become available from the 2008 Plan for issuance under the 2014 Plan.

As of December 31, 2015, we had 3,364,304 shares available for future grant. Annually, the shares authorized for the Plan will increase by the least of (i) 8,000,000 shares, (ii) 5% of the outstanding shares of common stock on the last day of our immediately preceding fiscal year, or (iii) such other amount as determined by our Board of Directors. On January 1, 2016, the number of shares in the 2014 Plan was increased by 4,851,535 shares, which consisted of 3,211,211 shares, representing 5% of the prior year end’s common stock outstanding and 1,640,324 shares for awards under our 2008 Plan that have been canceled, forfeited or repurchased by us between March 21, 2014 and December 31, 2015.

During the six months ended June 30, 2016, we granted 672,000 stock options and 3,604,561 stock awards under the 2014 Plan to our employees, directors and consultants. As of June 30, 2016, we had 4,553,483 shares available for future grant, excluding shares eligible to be added from the 2008 Plan as a result of awards that have been canceled, forfeited or repurchased by us after December 31, 2015.

As of June 30, 2016, 189,016 shares of our common stock were eligible to be added to the 2014 Plan share reserve which represents awards under our 2008 Plan that have been canceled, forfeited or repurchased by us during the six months ended June 30, 2016.

2014 Employee Stock Purchase Plan

The 2014 Employee Stock Purchase Plan (the "2014 Purchase Plan") was adopted by our Board of Directors and approved by our stockholders in March 2014.

As of December 31, 2015, we had 542,030 shares available for future purchase. Under the provisions of the 2014 Purchase Plan, on the first day of each fiscal year, starting with January 1, 2015, the number of shares in the reserve will increase by the lesser of (i) 3,500,000 shares, (ii) 1% of the outstanding shares of our common stock on the last day of the immediately preceding fiscal year, or (iii) such other amount as determined by our Board of Directors or other committee administering the 2014 Purchase Plan. On January 1, 2016, the common shares reserved for future purchase was increased by 642,242 shares in accordance with the provisions of the 2014 Purchase Plan. In June 2016, our Board of Directors adopted, and our stockholders approved an amendment to our 2014 Purchase Plan which removed the automatic annual share increase and increased the number of shares available for issuance under the 2014 Purchase Plan by 4,000,000 shares.

The participants of the Purchase Plan purchased 552,554 shares during the first six months of 2016, and as of June 30, 2016, we had 631,718 shares available for future purchase, excluding the 4,000,000 shares added to the 2014 Purchase Plan in June 2016.

Stock-based Compensation

Stock-based compensation is based on the estimated fair value of awards, net of estimated forfeitures, and recognized over the requisite service period. The following is a summary of stock-based compensation for stock-based awards granted under the 2014 Plan, the 2008 Plan, and employee stock purchases under the 2014 Purchase Plan recognized during the three and six months ended June 30, 2016 and 2015 (in thousands):



	Three Months Ended June 30,					Six Months Ended June 30,
	2016			2015		2016			2015
Stock-based compensation by type of award:
Stock options	$	1,081		$	1,503	$	2,181		$	2,979
Stock awards	3,423			2,130		6,383			4,065
Employee stock purchase plan (1)	(635		)	372		(83		)	1,594
Total stock-based compensation	$	3,869		$	4,005	$	8,481		$	8,638

Stock-based compensation by category of expense:
Cost of revenue	$	224		$	342	$	589		$	813
Sales and marketing	1,732			1,873		3,817			3,939
Research and development	1,090			1,273		2,521			2,858
General and administrative	823			517		1,554			1,028
	$	3,869		$	4,005	$	8,481		$	8,638

__________________________________________

(1) Our 2014 Purchase Plan generally provides twenty-four month offering periods which consist of four six-month purchase periods. We record periodic stock-based compensation expense based on estimated contributions determined at the beginning of each offering period and record purchase adjustments for the difference between the estimated and actual contributions at the end of each purchase period. For the purchase period ended on May 20, 2016, the actual contributions were significantly lower than the estimated contributions due to lower stock price which caused more employees to reach the maximum purchase contribution limit and therefore resulted in negative stock-based compensation expense for the three and six months ended June 30, 2016.

As of June 30, 2016, we had $33.1 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to stock options, unvested stock awards and 2014 Purchase Plan purchases. This unamortized stock-based compensation expense will be recognized over a weighted-average period of 2.6 years.

Determination of Fair Value

We use the Black-Scholes option pricing model to determine the grant date fair value of stock options and stock purchases and generally recognize stock-based compensation expense on a straight-line basis over the requisite service period.

The determination of the fair value on the date of grant is affected by the estimated underlying common stock price, as well as assumptions regarding a number of complex and subjective variables. These variables include expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rates, and expected dividends.

The fair value of the stock options and employee stock purchases were determined using the Black-Scholes option pricing model and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment to determine.

• Expected Term. We estimate the expected life of options based on an analysis of our historical experience of employee exercise and post-vesting termination behavior considered in relation to the contractual life of the option. The expected term for the 2014 Purchase Plan is based on the term of the purchase period.

• Risk-Free Interest Rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected terms of stock options and shares to be issued under the 2014 Purchase Plan.

• Expected Volatility. Due to the limited trading history of our own common stock, we determined the share price volatility factor based on a combination of the historical volatility of our own common stock and the historical volatility of our peer group.

• Dividend Rate. The expected dividend was assumed to be zero as we have never paid dividends and have no current plans to do so.

The grant date fair value of RSUs that have time or performance based vesting conditions contingent upon meeting financial and operational targets are equal to the closing market price of our common stock on the grant date.

We estimate the grant date fair value of RSUs that have market based vesting conditions using the Monte Carlo simulation method.

Stock Option Activity

The following table summarizes our stock option activity and related information as of and for the six months ended June 30, 2016 (in thousands, except for years and per share amounts):



	Number of Shares Underlying Outstanding Options		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding as of December 31, 2015	9,291		$	4.78	7.0
Granted	672		$	5.52
Exercised	(327	)	$	3.69
Canceled (1)	(418	)	$	6.07
Outstanding as of June 30, 2016	9,218		$	4.81	6.6	$	19,370
Vested and expected to vest as of June 30, 2016	9,023		$	4.80	6.6	$	19,048
Vested and exercisable as of June 30, 2016	6,091		$	4.40	5.8	$	15,181

__________________________________________

(1) Common shares granted under the 2008 Plan and canceled after March 20, 2014, are reallocated to the 2014 Plan’s share reserve as they become available for issuance under the 2014 Plan. During the six months ended June 30, 2016, 189,016 shares related to canceled stock options were eligible to be reallocated to the 2014 Plan share reserve.

As of June 30, 2016, the aggregate intrinsic value represents the excess of the closing price of our common stock of $6.47 over the exercise price of the outstanding in-the-money options.

The following table provides information pertaining to our stock options for the six months ended June 30, 2016 and 2015 (in thousands, except weighted-average fair values):



	Six Months Ended June 30,
	2016		2015
Total fair value of options granted	$	1,603	$	869
Weighted-average fair value of options granted	$	2.38	$	2.13
Intrinsic value of options exercised	$	832	$	1,066

The estimated grant-date fair value of our stock options issued to employees was calculated using the Black-Scholes option-pricing model, based on the following assumptions:



	Three Months Ended June 30,		Six Months Ended June 30,
	2016	2015	2016	2015
Expected term (in years)	n/a	4.8	4.9	4.8
Risk-free interest rate	n/a	1.71%	1.42%	1.60%
Expected volatility	n/a	50%	49%	50%
Dividend rate	n/a	—%	—%	—%

Stock Award Activity

We have granted time-based stock awards ("RSUs") to our employees, directors and consultants and performance-based stock awards ("PSUs") and market performance-based stock awards ("MSUs") to certain company executives.

A summary of stock award activities, including RSUs, PSUs and MSUs during the six months ended June 30, 2016, is as follows (in thousands, except years and per share amounts):



	Time-Based		Performance-Based		Market Performance-Based	Total
Outstanding as of December 31, 2015	2,872		—		580	3,452
Granted	3,058		547		—	3,605
Released	(283	)	—		—	(283	)
Canceled	(397	)	(29	)	—	(426	)
Outstanding as of June 30, 2016	5,250		518		580	6,348

During the six months ended June 30, 2016, we granted 547,000 PSUs with performance-based conditions contingent upon meeting certain financial and operational targets. These PSUs are also subject to service condition vesting requirements with 25% of the eligible PSUs scheduled to vest on each of the first, second, third and fourth year anniversary of the PSU grant date, subject to continued service by the award holder.

We granted MSUs covering 540,000 shares and 40,000 shares of our common stock to certain company executives during 2014 and 2015, all of which were outstanding as of June 30, 2016. These MSUs will vest if the closing price of our common stock remains above certain predetermined target prices for 20 consecutive trading days within a 4-year period following the award’s grant date, subject to continued service by the award holder.

The aggregate intrinsic value is the amount that would have been received by the unit holders had all RSUs been vested and released on June 30, 2016. This amount will fluctuate based on the fair market value of our stock. As of June 30, 2016, the aggregated intrinsic value for RSUs, MSUs and PSUs was $41.1 million with a weighted-average remaining service period of 2.8 years.

Employee Stock Purchase Plan

The fair value of the option component of the 2014 Purchase Plan awards was estimated at the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions:



	Three and Six Months Ended June 30,
	2016	2015
Expected term (in years)	1.3	1.2
Risk-free interest rate	0.65%	0.32%
Expected volatility	42.6%	39.6%
Dividend rate	—%	—%

8. Net Loss Per Share

The following table sets forth the computation of our basic and diluted net loss per share (in thousands, except per share data):



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Basic and diluted net loss per share
Numerator:
Net loss	$	(4,935	)	$	(9,977	)	$	(14,470	)	$	(23,711	)
Denominator:
Weighted-average shares outstanding - basic	64,861			61,945			64,584			61,690
Effect of dilutive potential common shares from stock options, stock awards and employee stock purchase plan	—			—			—			—
Weighted-average shares outstanding - diluted	64,861			61,945			64,584			61,690
Net loss per share:
Basic and diluted	$	(0.08	)	$	(0.16	)	$	(0.22	)	$	(0.38	)

The following weighted-average outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because including them would have been antidilutive (in thousands):



	Three Months Ended June 30,		Six Months Ended June 30,
	2016	2015	2016	2015
Stock options, stock awards and employee stock purchase plan	13,567	11,058	11,736	11,063
Common stock subject to repurchase	28	90	28	90
	13,595	11,148	11,764	11,153

9. Income Taxes

We recorded income tax expense of $0.1 million and $0.2 million for the three months ended June 30, 2016 and 2015, which primarily consisted of foreign taxes. We recorded income tax expense of $0.3 million for each of the six months ended June 30, 2016 and 2015, which primarily consisted of foreign taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities in the financial statements and their respective tax bases using tax rates expected to be in effect during the years in which the basis differences reverse.

We believe it is more likely than not that our federal and state net deferred tax assets will not be fully realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of a deferred tax asset will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. A valuation allowance is recorded for loss carryforwards and other deferred tax assets where it is more likely than not that such deferred tax assets will not be realized. Accordingly, we continue to maintain a valuation allowance against all of our U.S. and certain foreign net deferred tax assets as of June 30, 2016. We will continue to maintain a full valuation allowance against our net federal, state and certain foreign deferred tax assets until there is sufficient evidence to support recoverability of our deferred tax assets.

We had $2.9 million and $2.6 million of unrecognized tax benefits as of June 30, 2016 and December 31, 2015. We do not anticipate a material change to our unrecognized tax benefits over the next twelve months. Unrecognized tax benefits may change during the next twelve months for items that arise in the ordinary course of business.

Accrued interest and penalties related to unrecognized tax benefits are recognized as part of our income tax provision in the Condensed Consolidated Statements of Operations. All tax years remain open and are subject to future examinations by federal, state and foreign tax authorities. We are not under examination in any jurisdiction.

10. Segment Information

Our chief operating decision maker is our Chief Executive Officer who reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenue by geographic region for purposes of allocating resources and evaluating financial performance. Accordingly, we have a single reportable segment and operating segment structure.

The following table represents revenue by geographic areas based on customers' location, as determined by their ship to addresses (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
United States	$	31,345	$	27,448	$	60,945	$	50,306
Japan	10,954		6,618		21,838		15,458
Asia Pacific, excluding Japan	7,746		5,545		14,477		10,131
EMEA	5,860		6,831		10,927		13,055
Other	1,225		1,094		2,747		2,603
Total revenue	$	57,130	$	47,536	$	110,934	$	91,553

No other geographic regions comprised 10% or greater of our revenue for the three and six months ended June 30, 2016 and 2015.

Geographical information relating to our long-lived assets which include property and equipment, net and intangible assets, net as of June 30, 2016 and December 31, 2015 was as follows (in thousands):



	June 30, 2016		December 31, 2015
United States	$	14,070	$	8,062
Other	1,933		1,708
Total property and equipment, net and intangible assets, net	$	16,003	$	9,770

11. Related-Party Transactions

An affiliate of one of our significant stockholders is also acting as a reseller of our products. On May 27, 2015, the significant stockholder reduced its ownership of our common stock, and ceased to be a related party. During the three and six

months ended June 30, 2015, we recognized $1.6 million and $3.0 million of revenue from this reseller while it was a related party.


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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan” “expect,” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements.

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


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


•	our ability to successfully anticipate market needs and opportunities;


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


•	costs associated with defending intellectual property infringement and other claims;


•	our ability to attract and retain end-customers;


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


•	our ability to further penetrate our existing customer base;


•	our ability to displace existing products in established markets;


•	our ability to expand our leadership position in next-generation application delivery and server load balancing solutions;


•	continued growth in markets relating to network security;


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


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


•	our ability to expand internationally;


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


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


•	our expectations concerning relationships with third parties;


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


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


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


•	fluctuations in currency exchange rates;


•	increased cost requirements of being a public company and future sales of substantial amounts of our

common stock in the public markets;


•	the cost and potential outcomes of existing and future litigation;


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


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

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

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking

statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations, except as required by law.

Overview

We are a leading provider of application networking and network security technologies. Our solutions enable enterprises, service providers, Web giants and government organizations to accelerate, secure and optimize the performance of their data center applications and secure their users, applications and infrastructure from internet, web and network threats at scale. Our products are built on our Advanced Core Operating System ("ACOS") platform of advanced network technologies, which is designed to enable our products to deliver substantially greater performance and security relative to prior generation application networking products. Our software based ACOS architecture also provides the flexibility that enables us to expand our business to offer additional products to solve a growing array of networking and security challenges arising from increased Internet cloud and mobile computing.

We currently offer four software based advanced application networking and network security solutions to address end-customer needs, including Application Delivery Controllers ("ADC") to optimize web and back-office application performance, Carrier Grade Network Address Translation ("CGN") to provide network address and protocol translation services for service provider networks, Threat Protection System ("TPS") for network-wide multi-vector DDoS security protection, and Convergent Firewall ("CFW") for protecting data centers and mobile infrastructure, improving web security, and encrypting site-to-site communications. Our solutions are cloud-ready and available in a variety of form factors as optimized hardware appliances, in the cloud as software, and as virtual appliances.

We derive revenue from sales of products and related support services. Products revenue is generated primarily by sales of hardware appliances with perpetual licenses to our embedded software solutions. We also derive revenue from licenses

to, or subscription services for, software-only versions of our solutions. We generate services revenue primarily from sales of maintenance and support contracts. Our end-customers predominantly purchase maintenance and support in conjunction with purchases of our products. In addition, we also derive revenues from the sale of professional services.

We sell our products globally to service providers and enterprises that depend on data center applications and networks to generate revenue and manage operations efficiently. Our end-customers operate in a variety of industries, including telecommunications, technology, industrial, retail, financial, education and government. Since inception, our customer base has grown rapidly. As of June 30, 2016, we had sold products to approximately 5,000 customers across 79 countries.

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

During the first half of 2016, 55% of our total revenue was generated from the United States, 20% from Japan, and 25% from other geographical regions. During the first half of 2015, 55% of our total revenue was generated from the United States, 17% from Japan, and 28% from other geographical regions. Our enterprise customers accounted for 58% and 57% of our total revenue during the first half of 2016 and 2015. Our service provider customers accounted for 42% and 43% of our total revenue during the first half of 2016 and 2015.

As a result of the nature of our target market and the current stage of our development, a substantial portion of our revenue comes from a limited number of large end-customers, including service providers, in any period. Purchases from our ten largest end-customers accounted for approximately 35% of our total revenue in each of the six-month periods ended June 30, 2016 and 2015. Sales to these large end-customers have typically been characterized by large but irregular purchases with long sales cycles. The timing of these purchases and the delivery of the purchased products are difficult to predict. As a consequence, any acceleration or delay in anticipated product purchases, by or deliveries to, our largest end customers could materially impact our revenue and operating results in any quarterly period. This may cause our quarterly revenue and operating results to fluctuate from quarter to quarter and make them difficult to predict.

As of June 30, 2016, we had $28.6 million of cash and cash equivalents and $85.1 million of marketable securities. Cash provided by operating activities was $19.3 million in the first half of 2016 compared to $3.5 million of cash provided by operating activities in the same period of 2015.

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

Results of Operations

The following table provides a summary of our Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015 as derived from our condensed consolidated financial statements included in Part I. Financial Information in this Quarterly Report on Form 10-Q (in thousands, except for percentages).



	Three Months Ended June 30,
	2016					2015					Increase (Decrease)
	Amount			Percent of Total Revenue		Amount			Percent of Total Revenue		Amount			Percent
Revenue:
Products	$	38,797		67.9	%	$	33,331		70.1		$	5,466		16	%
Services	18,333			32.1		14,205			29.9		4,128			29
Total revenue	57,130			100.0		47,536			100	%	9,594			20
Cost of revenue:
Products	9,804			17.2		7,909			16.6		1,895			24
Services	4,405			7.7		3,692			7.8		713			19
Total cost of revenue	14,209			24.9		11,601			24.4		2,608			22
Gross profit	42,921			75.1		35,935			75.6		6,986			19
Operating expenses:
Sales and marketing	26,773			46.9		24,962			52.5		1,811			7
Research and development	14,486			25.4		13,671			28.8		815			6
General and administrative	7,230			12.7		5,703			12.0		1,527			27
Litigation and settlement expense	202			0.4		1,025			2.2		(823		)	(80	)
Total operating expenses	48,691			85.2		45,361			95.4		3,330			7
Loss from operations	(5,770		)	(10.1	)	(9,426		)	(19.8	)	3,656			(39	)
Other income (expense), net:
Interest expense	(126		)	(0.2	)	(104		)	(0.2	)	(22		)	21
Interest income and other income (expense), net	1,020			1.8		(216		)	(0.5	)	1,236			(572	)
Total other income (expense), net	894			1.6		(320		)	(0.7	)	1,214			(379	)
Loss before provision for income taxes	(4,876		)	(8.5	)	(9,746		)	(20.5	)	4,870			(50	)
Provision for income taxes	59			0.1		231			0.5	%	(172		)	(74	)
Net loss	$	(4,935	)	(8.6	)%	$	(9,977	)	(21.0	)%	$	5,042		(51	)%



	Six Months Ended June 30,
	2016					2015					Increase (Decrease)
	Amount			Percent of Total Revenue		Amount			Percent of Total Revenue		Amount			Percent
Revenue:
Products	$	75,171		67.8	%	$	63,847		69.7	%	$	11,324		18%
Services	35,763			32.2		27,706			30.3		8,057			29
Total revenue	110,934			100.0		91,553			100.0		19,381			21
Cost of revenue:
Products	18,502			16.7		14,972			16.4		3,530			24
Services	8,934			8.1		7,415			8.1		1,519			20
Total cost of revenue	27,436			24.7		22,387			24.5		5,049			23
Gross profit	83,498			75.3		69,166			75.5		14,332			21
Operating expenses:
Sales and marketing	53,541			48.3		49,484			54.0		4,057			8
Research and development	29,263			26.4		27,980			30.6		1,283			5
General and administrative	13,891			12.5		13,230			14.5		661			5
Litigation and settlement expense	1,993			1.8		1,470			1.6		523			36
Total operating expenses	98,688			89.0		92,164			100.7		6,524			7
Loss from operations	(15,190		)	(13.7	)	(22,998		)	(25.1	)	7,808			(34)
Other income (expense), net:
Interest expense	(252		)	(0.2	)	(231		)	(0.3	)	(21		)	9
Interest income and other income (expense), net	1,235			1.1		(189		)	(0.2	)	1,424			(753)
Total other income (expense), net	983			0.9		(420		)	(0.5	)	1,403			(334)
Loss before provision for income taxes	(14,207		)	(12.8	)	(23,418		)	(25.6	)	9,211			(39)
Provision for income taxes	263			0.2		293			0.3		(30		)	(10)
Net loss	$	(14,470	)	(13.0	)%	$	(23,711	)	(25.9	)%	$	9,241		(39)%

Revenue

Our products revenue primarily consists of revenue from sales of our hardware appliances upon which our software is installed. Such software includes our ACOS software platform plus one of our ADC, CGN, TPS or CFW solutions. Purchase of a hardware appliance includes a perpetual license to the included software. We recognize products revenue at the time of shipment, provided that all other revenue recognition criteria have been met. As a percentage of revenue, our products revenue may vary from quarter to quarter based on, among other things, the timing of orders and delivery of products, cyclicality and seasonality, changes in currency exchange rates and the impact of significant transactions with unique terms and conditions.

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

A summary of our total revenue for the three and six months ended June 30, 2016 and 2015 is as follows (in thousands, except for percentages):



	Three Months Ended June 30,				Increase (Decrease)
	2016		2015		Amount			Percent
Revenue:
Products	$	38,797	$	33,331	$	5,466		16%
Services	18,333		14,205		4,128			29
Total revenue	$	57,130	$	47,536	$	9,594		20%
Revenue by geographic location:
United States	$	31,345	$	27,448	$	3,897		14%
Japan	10,954		6,618		4,336			66
Asia Pacific, excluding Japan	7,746		5,545		2,201			40
EMEA	5,860		6,831		(971		)	(14)
Other	1,225		1,094		131			12
Total revenue	$	57,130	$	47,536	$	9,594		20%



	Six Months Ended June 30,				Increase (Decrease)
	2016		2015		Amount			Percent
Revenue:
Products	$	75,171	$	63,847	$	11,324		18%
Services	35,763		27,706		8,057			29
Total revenue	$	110,934	$	91,553	$	19,381		21%
Revenue by geographic location:
United States	$	60,945	$	50,306	$	10,639		21%
Japan	21,838		15,458		6,380			41
Asia Pacific, excluding Japan	14,477		10,131		4,346			43
EMEA	10,927		13,055		(2,128		)	(16)
Other	2,747		2,603		144			6
Total revenue	$	110,934	$	91,553	$	19,381		21%

Total revenue increased by $9.6 million, or 20%, in the second quarter of 2016 compared to the second quarter of 2015. This increase was comprised of a $5.5 million increase in products revenue and a $4.1 million increase in services revenue. Revenue from enterprise and service provider customers increased 16% and 26%, respectively, in the second quarter of 2016 compared to the second quarter of 2015.

Total revenue increased by $19.4 million, or 21%, in the first half of 2016 compared to the first half of 2015. This increase was comprised of an $11.3 million increase in products revenue and an $8.1 million increase in services revenue. Revenue from enterprise and service provider customers increased 22% and 20%, respectively, in the first half of 2016 compared to the first half of 2015.

Products revenue increased by $5.5 million, or 16%, and $11.3 million, or 18%, in the second quarter and the first half of 2016 compared to the same periods in 2015. These increases were primarily attributable to revenue increases from the United States, Japan and Asia Pacific, excluding Japan partially offset by lower products revenue from EMEA.

Services revenue increased by $4.1 million, or 29%, and $8.1 million, or 29% ,in the second quarter and the first half of 2016 compared to the same periods in 2015. These increases were primarily attributable to the increase in PCS sales in connection with our increasing installed customer base as well as increases in our professional services revenue. Over 95% of our end-customers purchase one of our maintenance service products when purchasing our hardware products. During the first half of 2016, services revenue recognized from our installed base with contracts existing prior to 2016 grew by 29% as compared to the first half of 2015 services revenue from our installed base with contracts existing prior to 2015.

During the second quarter of 2016, $31.3 million, or 55%, of total revenue was generated from the United States, which represents a 14% increase compared to the second quarter of 2015. During the first half of 2016, $60.9 million, or 55%, of total revenue was generated from the United States, which represents a 21% growth compared to the first half of 2015. These increases were primarily attributable to an overall increase in products revenue as well as higher PCS sales in connection with our increased installed customer base.

During the second quarter of 2016, $11.0 million, or 19%, of total revenue was generated from Japan, which represents a 66% increase compared to the second quarter of 2015, primarily due to higher products revenue from enterprise customers and to a less extent an increase in PCS sales in connection with the increased customer base. During the first half of 2016, $21.8 million, or 19%, of total revenue was generated from Japan, which represents a 41% increase compared to the first half of 2015. This increase was primarily due to an overall increase in products revenue as well as higher PCS sales in connection with our increased installed customer base. In addition, total revenue from Japan during the second quarter and the first half of 2016 was increased by $0.9 million and $1.3 million, respectively, due to favorable currency exchange rates between the Japanese yen against the U.S. dollar compared to the same periods in 2015.

Total revenues from Asia Pacific regions, excluding Japan, increased by $2.2 million, or 40% and $4.3 million, or 43% in the second quarter and the first half of 2016 compared to the same periods in 2015. These increases were primarily due to significant increase in products revenue resulting from our efforts to continue expanding our presence in these regions as well as higher PCS sales in connection with our increased installed customer base.

Total revenue from EMEA decreased by $1.0 million, or 14%, and $2.1 million or 16%, in the second quarter and the first half of 2016 compared to the same periods in 2015. These decreases were primarily attributable to decreases in products revenue resulting from reduced sales and weakness in the EMEA market overall partially offset by an increase in services revenue.

Cost of Revenue, Gross Profit and Gross Margin

Cost of revenue

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

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

A summary of our cost of revenue for the three and six months ended June 30, 2016 and 2015 is as follows (in thousands, except for percentages):



	Three Months Ended June 30,				Increase (Decrease)
	2016		2015		Amount		Percent
Cost of revenue:
Products	$	9,804	$	7,909	$	1,895	24%
Services	4,405		3,692		713		19
Total cost of revenue	$	14,209	$	11,601	$	2,608	22%



	Six Months Ended June 30,				Increase (Decrease)
	2016		2015		Amount		Percent
Cost of revenue:
Products	$	18,502	$	14,972	$	3,530	24%
Services	8,934		7,415		1,519		20
Total cost of revenue	$	27,436	$	22,387	$	5,049	23%

Gross Margin

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

Our sales are generally denominated in U.S. dollars, however, in Japan they are denominated in Japanese yen. Changes in the exchange rates between the U.S. dollar and Japanese yen will therefore affect our revenue and gross margin. Any of the factors noted above can generate either a positive or negative impact on gross margin as compared to another period.

A summary of gross profit and gross margin for the three and six months ended June 30, 2016 and 2015 is as follows (in thousands, except for gross margins and percentages):

Three Months Ended June 30,

2016

2015

Increase (Decrease)

Amount

Gross Margin

Amount

Gross Margin

Amount

Gross Margin

Gross profit:

Products

28,993

74.7%