Carbonite Inc Annual Report 2017

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2017OR¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission file number: 001-35264 CARBONITE, INC.(Exact name of Registrant as specified in its charter) Delaware 33-1111329(State or other jurisdiction ofincorporation) (I.R.S. EmployerIdentification No.) Two Avenue de LafayetteBoston, Massachusetts 02111(Address of principal executive offices) (Zip Code)(617) 587-1100(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:Title of each class Name of exchange on which registeredCommon Stock, par value $0.01 per share The NASDAQ Stock Market LLCSecurities registered pursuant to Section 12(g) of the Act:None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No xIndicate 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 preceding12 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 postedpursuant 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨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. (Check one)Large accelerated filer ¨ Accelerated filer xNon-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨Emerging growth company ¨ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting 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 xAs of June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting stock held by non-affiliates of theregistrant was $545,981,436.As of February 28, 2018, there were 28,519,304 shares of the registrant’s common stock, par value $0.01 per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive proxy statement for its 2018 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K. Table of ContentsCARBONITE, INC.Table of Contents PagePART I. 1 Forward Looking Statements1Item 1.Business1Item 1A.Risk Factors6Item 1B.Unresolved Staff Comments24Item 2.Properties24Item 3.Legal Proceedings24Item 4.Mine Safety Disclosures24PART II. 25Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities25Item 6.Selected Financial Data27Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations30Item 7A.Quantitative and Qualitative Disclosures about Market Risk43Item 8.Financial Statements and Supplementary Data44Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure81Item 9A.Controls and Procedures81Item 9B.Other Information82PART III 84Item 10.Directors, Executive Officers and Corporate Governance84Item 11.Executive Compensation84Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters84Item 13.Certain Relationships and Related Transactions and Director Independence84Item 14.Principal Accountant Fees and Services84PART IV 85Item 15.Exhibits and Financial Statement Schedules85Item 16.Form 10-K Summary85SIGNATURES86Table of ContentsPART ISPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTSThis Annual Report on Form 10-K (this "Annual Report"), including the sections entitled “Business,” “Risk Factors,” and “Management’s Discussionand Analysis of Financial Condition and Results of Operations,” includes forward-looking statements. The words “believe,” “may,” “will,” “estimate,”“continue,” “anticipate,” “intend,” “expect,” “predict,” “potential,” and similar expressions, as well as the negatives thereof, as they relate to us, our business,our management, and our industry, are intended to identify forward-looking statements. In light of risks and uncertainties discussed in this Annual Report,the forward-looking events and circumstances discussed in this Annual Report may not occur and actual results could differ materially from those anticipatedor implied in the forward-looking statements. We have based these forward-looking statements on our current expectations and projections about futureevents and financial trends affecting the financial condition of our business. Forward-looking statements should not be read as a guarantee of futureperformance or results, and will not necessarily be accurate indications of the times at or by which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time withrespect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in orsuggested by the forward-looking statements. These risks include, but are not limited to, those set forth under Item 1A of this Annual Report.Forward-looking statements speak only as of the date of this Annual Report. We may not actually achieve the plans, intentions, or expectations disclosedin our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differmaterially from the plans, intentions, and expectations disclosed in the forward-looking statements we make. In addition, our forward-looking statements donot reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments that we may make.You should read this Annual Report completely and with the understanding that our actual future results may be materially different from what weexpect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise,except as required by law. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates withrespect to those or other forward-looking statements.ITEM 1.BUSINESSOverviewCarbonite, Inc. (together with its subsidiaries, "Carbonite", the "Company", "our", "we", or "us") provides backup, disaster recovery, high availability andworkload migration technology (the "Carbonite Data Protection Platform"). The Carbonite Data Protection Platform supports businesses in locations aroundthe world with secure and scalable global cloud infrastructure. We continue to invest in strategic acquisitions and integrate these acquisitions into ourportfolio of data protection solutions, in order to expand our addressable market and increase our strategic importance to customers.We were incorporated on February 10, 2005 as a Delaware corporation and our principal executive offices are located at Two Avenue de Lafayette,Boston, Massachusetts, 02111. We founded Carbonite on one simple idea: all computers need to be backed up, and in our always-connected and highlymobile world, cloud backup is the ideal approach.On January 31, 2017, we completed the acquisition of all the outstanding capital stock of DoubleTake Software, Inc. for a purchase price of $65.9million. In addition, on August 14, 2017, we entered into an asset purchase agreement with Datacastle Corporation for a purchase price of $9.6 millionpursuant to which we acquired all the assets associated with Datacastle's cloud data backup, caching and analytics software and services for data protectionpurposes. As discussed below, we recently entered into an agreement to acquire all of the issued and outstanding capital stock of Mozy, Inc., a cloud backupservice for businesses and consumers, and certain related business assets owned by EMC Corporation or its affiliates, for a purchase price of $145.8 million.We believe these acquisitions strengthen our overall leadership position in the data protection market and strengthen our technology portfolio.We derive the majority of our revenue from subscription fees and our consistently strong retention rates and scalable infrastructure help to support ourgrowth. The remainder of our revenue is derived from software arrangements, which often contain multiple revenue elements, such as software licenses,hardware, professional services and post-contract customer support. For the year ended December 31, 2017, 2016 and 2015, we generated revenue of $239.5million, $207.0 million, and $136.6 million, respectively. We continue to invest in customer acquisition because the market for our solutions is highly1Table of Contentscompetitive and, as a result, our bookings have grown from $116.0 million in 2013 to $245.9 million in 2017. For a reconciliation of bookings to revenue forthe last five years, see “Selected Consolidated Financial and Other Data.”Industry TrendsTrends on several fronts are fueling growth opportunities for Carbonite.The first trend is the continued evolution of the data protection industry, along with the explosion in the creation of new data, which has drivencustomers to seek flexible and powerful cloud-based solutions that deliver high value. To protect new types of data and modernize their IT environments,businesses are shifting to the cloud. Analyst firm Gartner predicts that by 2020, the number of enterprises using the cloud as a backup target will double, upfrom 10% at the beginning of 2017.1 Carbonite’s efficient cloud infrastructure fuels a variety of data protection models - from backup, to high availability tomigration - in the right deployment models - from cloud, to onsite, to hybrid - to meet the needs of our customers.The second trend is threats to data. The number of cyberattacks known as “Ransomware” has grown rapidly in recent years. The FBI defines ransomwareas a type of malware installed on a computer or server that encrypts the files, making them inaccessible until a specified ransom is paid.2 The FBI reported that ransomware “skyrocketed” last year, costing businesses $1 billion during 2016.3 According to Cybersecurity Ventures, globalransomware damage costs are expected to exceed $5 billion by the end of 2017, up from $325 million in 2015.4 In order to avoid bad press and reputationaldamage, many ransomware incidents are not reported. According to new research from Bitdefender, ransomware payments in 2017 will hit a record $2billion.5 In September 2016, the FBI issued a public service announcement stressing the importance of regular data backups and verification of the integrity ofthose backups as a defense to ransomware, stating that “backups are critical in ransomware incidents,” and “backups may be the best way to recover yourcritical data.”3 Additionally, Research and Markets expects the ransomware protection market to grow from $8.16 billion in 2016 to $17.36 billion by 2021.6We expect this trend to drive adoption of backup solutions as businesses and individuals look for solutions to protect their data to avoid falling prey tocriminals.Finally, the industry analyst firm Gartner estimates the DRaaS market is expected to reach $3.7 billion by 2021.7 According to Gartner, mid-marketdrivers for DRaaS include improved affordability and functionality.We believe data growth and data threats will continue to drive the need for data protection and that our solutions position us well to capitalize on thisgrowth opportunity.___________________________1Gartner: Magic Quadrant for Data Center Backup and Recovery Solutions, 20172Federal Bureau of Investigation Public Service Announcement I-091516-PSA, Ransomware Victims Urged to Report Infections to Federal Law Enforcement(https://www.ic3.gov/media/2016/160915.aspx)3Cyber-extortion losses skyrocket, says FBI (http://money.cnn.com/2016/04/15/technology/ransomware-cyber-security)4Cybersecurity Ventures, Ransomware Damage Report 2017 (https://cybersecurityventures.com/ransomware-damage-report-2017-5-billion)5Cyberscoop, Ransomware is now a $2 billion-per-year criminal industry (https://www.cyberscoop.com/ransomware-2-billion-bitdefender-gpu-encryption)6Research and Markets, Ransomware Protection Market by Solution (https://www.researchandmarkets.com/research/h5zh33/ransomware)7Gartner: Magic Quadrant for Disaster Recovery as a Service, 2017Our SolutionsWe believe that customers purchase our data protection solutions because they provide powerful features packaged in a cost-effective, simple and securemanner. We make it easy for customers to recover their files, applications or complete systems, and we provide high quality customer support.We believe that our solutions provide the following benefits to our customers:Power: Enterprise-grade data protection and recovery capabilities. Simplicity: Intuitive user interfaces that make our solutions easy to use and maintain.2Table of ContentsSecurity: Proven, modern technology that provides peace of mind that our customers' data is safe. We encrypt all customer files before they aretransmitted to our data centers, guarding against unauthorized access to stored files and ensuring a high level of data security. In addition, we employ state-of-the-art data center security measures intended to prevent intrusions.Value: We provide comprehensive solutions at an affordable, predictable price, enabling customers to meet their data protection needs from a singlevendor.Our Key Competitive StrengthsWe believe that our key competitive strengths include the following:Proprietary backup architecture: Our entire infrastructure is designed and optimized for protecting high volumes of data in low-latency environments.We believe that our average storage costs per subscriber are lower than those realized by typical general purpose data center storage systems, providing uswith lower cost of service and greater return on investment.Heterogeneous environment support: Our solutions have been architected to use proprietary “agents” that run on a variety of operating platforms,including Windows and Linux (on-premise and in the cloud), and VMware, Oracle, IBM AIX and HP-UX on-premise, to ensure that businesses can securelybackup and restore all their important data.Brand awareness: We believe that we have among the highest brand awareness in the cloud backup market. We promote our brand through our multi-channel marketing program, which includes a broad presence in radio, online display advertising, print advertising, paid and natural search, and an affiliateand reseller network.Distribution: Our sales network is designed to sell large volumes of our solutions to customers. To penetrate the extensive and diverse population ofbusinesses, we have invested in recruiting and onboarding a network of sales channel partners including distributors, value-added resellers, managed serviceproviders (“MSPs”) and global systems integrators. We believe the breadth and diversity of our channel partner relationships, coupled with our internal directsales capabilities provide a competitive advantage when reaching businesses.Significant intellectual property portfolio: We have a significant intellectual property portfolio relating to our solutions, including over 67 issuedpatents and pending applications worldwide. CARBONITE is a registered trademark in the U.S. and in over 40 other countries, including countries in theEuropean Union.Encryption and data security: We use sophisticated encryption technology to ensure the privacy of our customers’ stored files. For solutions that utilizeour cloud environments, we encrypt files using a secure key before the files leave the customers' computer and transmit the encrypted files over the internet tosecure data centers. Customers’ files then remain encrypted on our servers to guard against unauthorized access. We employ outside security analysis firms,including anti-hacking specialists, to review and test our defenses and internal procedures.Comprehensive customer support: We believe that our customer support is more comprehensive than that offered by our primary competitors in thecloud backup market and aids in our customer retention. Telephone, live chat, and email customer support are included in our subscription fee.Our OfferingsOur Carbonite Data Protection Platform includes the following solutions:Carbonite Safe: For individuals or businesses, we offer annual and multi-year cloud backup plans. All plans offer discounts for multi-year subscriptions.Carbonite Endpoint Protection: Carbonite Endpoint Protection protects the data that resides on an organization's computers, laptops, tablets andsmartphones. Our endpoint protection is engineered with central management and control features that simplify deployment.Carbonite Server Backup solutions, with three different deployment models:Carbonite Hybrid Backup: Carbonite Hybrid Backup, powered by EVault, protects a customer's data footprint both on-premise and in the cloud andenables rapid recovery while version history stored in the cloud safeguards against disaster. Carbonite Hybrid Backup supports more than 200 operatingsystems, platforms and applications, including new and legacy systems on both physical and virtual machines. This solution protects up to 24 terabytes(TB) with our hardware-as-a-service solution and multiple petabytes with a purchased appliance.3Table of ContentsCarbonite Cloud Backup: Carbonite Cloud Backup, powered by EVault, automatically backs up data to the cloud and keeps physical and virtualsystems protected with point-in-time restore and offers support for more than 200 operating systems, platforms and applications.Carbonite Onsite Backup: Carbonite Onsite Backup, powered by EVault, is a highly flexible data protection solution that backs up and replicates datasecurely across a customer's own private network. Carbonite Onsite Backup supports more than 200 operating systems, platforms and applications,including new and legacy systems on both physical and virtual machines. With Carbonite Onsite Backup, a customer can protect their entireorganization and manage it from a central dashboard.Carbonite High Availability and Disaster Recovery solutions:Carbonite Availability: Carbonite Availability keeps critical business systems available on Windows and Linux servers. Our continuous replicationtechnology maintains an up-to-date copy of your operating environment without taxing the primary system or network bandwidth. With support forphysical, virtual or cloud source and target environments, the Carbonite Availability solution, powered by DoubleTake, is a comprehensive IT resiliencesolution for organizations with mixed IT environments.Carbonite Recover: Carbonite's disaster recovery-as-a-service solution securely replicates critical systems from a customer's primary environment to thecloud. Carbonite Recover ensures that an up-to-date secondary copy is available for failover at any moment, minimizing downtime as well as costs.Carbonite Data Migration solutions: Carbonite Migrate: Carbonite Migrate quickly and easily migrates physical, virtual and cloud workloads to and from any environment with minimalrisk and near-zero downtime. Using efficient real-time, byte-level replication technology, Carbonite Migrate, powered by DoubleTake, creates a replicaof the data, application, database or entire server being migrated and keeps it in sync with production systems until a cutover is initiated. The migrateddata can be validated without disrupting business operations.Carbonite Email Archiving solutions:Carbonite Email Archiving: Our MailStore offerings are designed to meet the specific email archiving needs of customers in terms of performance,stability, functionality and simplicity. Our three solutions include MailStore Server, MailStore Service Provider Edition and MailStore Home.Our Proprietary TechnologyAt the core of our offerings is proprietary technology that allows us to offer highly scalable data protection solutions to our end customers, and as aplatform for managed service providers to offer to their customers as a white-labeled offering. This technology is installed on protected systems, running inthe customers' environment, and includes server software, web-based monitoring, control, and account management tools. We believe that simple,centralized, web-based control of our solutions improves the user experience both for end-users and for our partners.We invest heavily in the development of our technologies. In 2017, 2016 and 2015, we spent $46.2 million, $33.3 million, and $28.1 million,respectively, on research and development. Our proprietary technologies are fundamental to our value proposition as they enable us to deliver solutions thatare scalable, reliable and cost effective.Marketing and SalesOur marketing and sales efforts are focused on three primary goals: acquiring customers at a low cost, retaining existing customers, and building brandawareness. Our advertising reinforces our brand by emphasizing ease of use, affordability, security and reliability. We use radio advertising, online displayadvertising, print advertising, paid search, direct marketing, and affiliate and reseller marketing. Our public relations efforts include engaging the traditionalpress, new media, industry influencers and social networks. Our sales model is designed to sell large volumes of our solutions to businesses globally, bothdirectly and through our indirect network of channel partners which includes distributors, value-added resellers, managed service providers and globalsystems integrators.Marketing. Our customers come from two primary sources: businesses who buy our solutions directly from our website, our inside sales team, or from ournetwork of partners, and consumers who sign up for solutions on our website in response to our direct marketing campaigns. We support our sales networkwith a marketing approach that leverages our established brand to drive market awareness and demand generation among the broad population of businessesand consumers. Our marketing4Table of Contentsefforts are designed to attract prospective customers and enroll them as paying customers, either through immediate sale, free trials or communication of thebenefits of our solutions and development of ongoing relationships.Channel distribution. To further penetrate the extensive and diverse population of businesses, we have and will continue to invest in our network ofsales channel partners. Our network of sales channel partners includes distributors, value-added resellers, managed service providers and global systemsintegrators and is designed to sell large volumes of our relatively low-priced solutions to customers.Retention. Our retention efforts are focused on establishing and maintaining long-term relationships with our customers by delivering a compellingcustomer experience and superior value, communicating regularly with customers through email, on-site messaging, and other media, and creating positiveinteractions with our customer support team. We monitor developing trends in subscription durations, renewals, and customer satisfaction to maximize ourcustomer retention. We offer incentives to customers to purchase multi-year subscriptions, which we believe helps to increase our retention.Intellectual PropertyWe believe the strength of our brand and the functionality of our software help differentiate us from our competitors. Our success therefore depends onour ability to protect our technologies and intellectual property, which allows us to move and store vast amounts of customer data. To protect our intellectualproperty, we rely on a combination of trademark, patent, copyright, and trade secret laws, as well as confidentiality procedures and contractual restrictions.Carbonite, the Carbonite Logo, MAILSTORE, DOUBLETAKE and EVAULT, as well as other marks, are registered trademarks of Carbonite, Inc. in numerouscountries throughout the world. The Carbonite trademark is subject to registrations covering over 40 countries. Carbonite also has additional registrationsand/or pending applications for additional marks in the U.S. and/or other countries, including but not limited to “Carbonite The Better Backup Plan”, “Backit up. Get it back”, “Because Your Life is On Your Computer” Logo, "Carbonite" and the Green Dot Logo, Carbonite Lock Logo, the Z logo and Chinesecharacter representations for Carbonite. In addition, we have 67 issued patents and pending applications worldwide that cover both our technicalinfrastructure and our key usability and design concepts.CompetitionOur market is rapidly evolving due to technological advances that are driving changes in the way businesses operate. Over the past few years,competition has intensified, and we expect this to continue with market consolidation, the introduction of new technologies, and introduction of new marketentrants. We compete against many companies across the data protection, disaster recovery, high availability and storage industries, ranging from those whoprovide a wide array of IT services, to those who provide only a specific business continuity product, to distributors and resellers. We expect many of ouractual and potential competitors and solutions to change as we expand further into the business market and as the markets we compete in continue to evolve.We believe key factors to successfully compete in any of our markets include ease of installation and use, value, cloud storage, data security, reliability,and brand reputation. We believe that Carbonite competes favorably with respect to each of the key factors by providing powerful, yet simple solutions. Ourofferings are easy-to-use, affordable, secure, include a variety of storage capacity options, and enable anytime, anywhere access to files.EmployeesAs of December 31, 2017, we had 941 full-time and 26 part-time employees. Of our full-time employees, 323 were in operations and support, 239 were insales and marketing, 213 were in research and development, and 166 were in general and administrative functions. None of our employees are covered bycollective bargaining agreements.Subsequent EventsOn February 12, 2018, we entered into a definitive and binding Master Acquisition Agreement ("Agreement") with EMC Corporation (“EMC”), Mozy,Inc. ("Mozy") and Dell Technologies, Inc. pursuant to which we will acquire all of the issued and outstanding capital stock of Mozy, a provider of online,data and computer backup software, and certain related business assets owned by EMC or its affiliates, for a purchase price of $145.8 million in cash, subjectto potential adjustments for working capital. The Agreement contains customary representations, warranties, covenants and indemnities, including acovenant requiring us to use our reasonable best efforts to obtain debt financing for the transaction in accordance with the terms of a commitment letter for a$120.0 million revolving credit facility. Consummation of the transaction is also subject to various conditions, including receipt of governmental approvalsand other customary closing conditions. The Agreement contains termination rights, including a right for either party to terminate the Agreement if theclosing shall not have occurred on or before July 1, 2018, subject to certain conditions. We expect the acquisition to close during the first quarter of 2018.5Table of ContentsAvailable InformationWe file reports with the Securities and Exchange Commission (SEC), including annual reports on Form 10-K, quarterly reports on Form 10-Q, currentreports on Form 8-K, and other filings required by the SEC. We make available on our website (www.carbonite.com) our annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material iselectronically filed with or furnished to the SEC. These materials are available free of charge on or through our website via the Investor Relations page atwww.carbonite.com. References to our website address in this report are intended to be inactive textual references only, and none of the informationcontained on our website is part of this Annual Report or incorporated in this Annual Report by reference.ITEM 1A.RISK FACTORSThe following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding other statements inthis Annual Report. The following information should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and the consolidated financial statements and related notes in Part II, Item 8, “Financial Statements andSupplementary Data” of this Annual Report.Our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but notlimited to those described below, any one or more of which could, directly or indirectly, cause our actual financial condition and operating results to varymaterially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially andadversely affect our business, financial condition, operating results and stock price.Because of the following factors, as well as other factors affecting our financial condition and operating results, past financial performance should notbe considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in futureperiods.Risks Related to Our BusinessWe have experienced periods of losses and negative cash flow since our inception, and we may not be able to achieve or sustain profitability or positivecash flow in the future.We experienced net losses of $21.6 million for 2015, $4.1 million for 2016 and $4.0 million for 2017, and we have an accumulated deficit ofapproximately $169.3 million as of December 31, 2017. While we have experienced revenue growth over these same periods, we may not be able to achieveprofitability in the future and, if we are able to achieve profitability, sustain such profitability on a consistent basis. In an effort to increase and service ourcustomer base, we expect to continue making significant expenditures to develop and expand our business, including for customer acquisition, advertising,technology infrastructure, storage capacity, product development, and international expansion. We also expect that our results may fluctuate due to a varietyof factors described elsewhere in this Annual Report, including the timing and amount of our advertising expenditures, the timing and amount ofexpenditures related to the development of technologies and solutions, and to defend intellectual property infringement and other claims. We may also incurincreased losses and negative cash flow in the future for a variety of reasons, and we may encounter unforeseen expenses, difficulties, complications, delays,and other unknown events.The market for cloud solutions is competitive, and if we do not compete effectively, our operating results could be harmed.We compete with cloud backup providers and providers of traditional hardware-based backup systems. Many of our competitors benefit fromcompetitive advantages over us, such as greater name recognition, longer operating histories, more varied services, and larger marketing budgets, as well asgreater financial, technical, and other resources. In addition, many of our competitors have established marketing relationships and major distributionagreements with computer manufacturers, internet service providers, and resellers, giving them access to larger customer bases. Some of our competitors maymake acquisitions or enter into strategic relationships to offer a more comprehensive service than we do. These combinations may make it more difficult forus to compete effectively. We expect these trends to continue as competitors attempt to strengthen or maintain their market positions.Demand for our cloud and hybrid backup solutions is sensitive to price. Many factors, including our customer acquisition, advertising and technologycosts, and our current and future competitors’ pricing and marketing strategies, can significantly6Table of Contentsaffect our pricing strategies. Certain of our competitors offer, or may in the future offer, lower-priced or free solutions that compete with our solutions. Therecan be no assurance that we will not be forced to engage in price-cutting initiatives, or to increase our advertising and other expenses to attract and retaincustomers in response to competitive pressures, either of which could have a material adverse effect on our revenue and operating results.We may not be able to respond to rapid technological changes with new solutions in a timely and cost effective manner or at all, which could have amaterial adverse effect on our operating results.The market in which we compete is characterized by rapid technological change and frequent new solution and service introductions. Our ability toattract new customers and increase revenue from existing customers will depend in large part on our ability to enhance and improve our existing solutions,introduce new features and solutions, and sell into new markets. We are in the process of addressing the challenges of dynamic and accelerating markettrends, such as the changing PC market, the adoption of mobile devices, the increase in the use of virtualized environments and architectural shifts in theprovision of security and storage solutions, all of which has made it more difficult for us to compete effectively and requires us to improve our solutions andservice offerings. Customers may require features and capabilities that our current solutions do not have. Our failure to develop solutions that satisfycustomer preferences in a timely and cost-effective manner may harm our ability to renew our subscriptions with existing customers and to create or increasedemand for our solutions, and may adversely impact our operating results.Additionally, the process of developing new technology is complex and uncertain, and if we fail to accurately predict customers’ changing needs andemerging technological trends or if we fail to achieve the benefits expected from our investments, our business could be harmed. We believe that we mustcontinue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position and we must commitsignificant resources to developing new solutions before knowing whether our investments will result in solutions the market will accept. Our new solutionsor solution enhancements could fail to attain sufficient market acceptance for many reasons, including:•delays in releasing our new solutions or enhancements to the market;•failure to accurately predict market demand or customer demands;•inability to protect against new types of attacks or techniques used by hackers;•defects, errors or failures in their design or performance;•negative publicity about their performance or effectiveness;•introduction or anticipated introduction of competing solutions by our competitors;•poor business conditions for our customers, causing them to delay IT purchases;•the perceived value of our solutions or enhancements relative to their cost;•easing of regulatory requirements around security or storage; and•reluctance of customers to purchase solutions incorporating open source software.The introduction of new services by competitors or the development of entirely new technologies to replace existing offerings could make our solutionsobsolete or adversely affect our business and operating results. In addition, any new markets or countries into which we attempt to sell our solutions may notbe receptive. We may experience difficulties with software development, design, or marketing that could delay or prevent our development, introduction, orimplementation of new solutions and enhancements. We have in the past experienced delays in the planned release dates of new features and upgrades, andhave discovered defects in new solutions after their introduction. There can be no assurance that new solutions or upgrades will be released according toschedule, or that when released they will not contain defects. Either of these situations could result in adverse publicity, loss of revenue, delay in marketacceptance, or claims by customers brought against us, all of which could have a material adverse effect on our reputation, business, operating results, andfinancial condition. Moreover, the development of new technologies requires substantial investment and we have no assurance that such investments willachieve their expected benefits on a timely manner or at all, either of which could also have a material adverse effect on our results of operations.A decline in demand for our solutions or for cloud solutions in general could cause our revenue to decline.We derive, and expect to continue to derive, substantially all of our revenue from the sale of data protection solutions including our backup and restore,DRaaS and email archiving offerings. Our introduction of "hybrid" solutions (cloud and on-7Table of Contentspremise) provides a broader offering for customers who may not want cloud only solutions, but the market for cloud solutions remains dynamic and subject torapidly changing customer demands and trends in preferences. Some of the potential factors that could affect interest in and demand for cloud solutionsinclude:•awareness of our brand and the cloud and hybrid backup solutions category generally;•the appeal and reliability of our solutions;•the price, performance, features, and availability of competing solutions and services;•public concern regarding privacy and data security;•our ability to maintain high levels of customer satisfaction; and•the rate of growth in cloud solutions generally.In addition, substantially all of our revenue is currently derived from customers in the U.S. Consequently, a decrease of interest in and demand for cloudbackup solutions in the U.S. could have a disproportionately greater impact on us than if our geographic mix of revenue was less concentrated.If we are unable to attract new customers to our solutions on a cost-effective basis, our revenue and operating results would be adversely affected.We generate the majority of our revenue from the sale of subscriptions to our solutions. In order to grow, we must continue to attract a large number ofcustomers, many of whom may have not previously used cloud backup solutions. We use and periodically adjust a diverse mix of advertising and marketingprograms to promote our solutions. Significant increases in the pricing of one or more of our advertising channels would increase our advertising costs orcause us to choose less expensive and perhaps less effective channels. As we add to or change the mix of our advertising and marketing strategies, we mayexpand into channels with significantly higher costs than our current programs, which could adversely affect our operating results. We may incur advertisingand marketing expenses significantly in advance of the time we anticipate recognizing any revenue generated by such expenses, and we may only at a laterdate, or never, experience an increase in revenue or brand awareness as a result of such expenditures. Additionally, because we recognize revenue fromcustomers over the terms of their subscriptions, a large portion of our revenue for each quarter reflects deferred revenue from subscriptions entered into duringprevious quarters, and downturns or upturns in subscription sales or renewals may not be reflected in our operating results until later periods. We have madein the past, and may make in the future, significant investments to test new advertising, and there can be no assurance that any such investments will lead tothe cost-effective acquisition of additional customers. If we are unable to maintain effective advertising programs, our ability to attract new customers couldbe adversely affected, our advertising and marketing expenses could increase substantially, and our operating results may suffer.A portion of our potential customers locate our website through search engines, such as Google, Bing, and Yahoo!. Our ability to maintain the number ofvisitors directed to our website is not entirely within our control. If search engine companies modify their search algorithms in a manner that reduces theprominence of our listing, or if our competitors’ search engine optimization efforts are more successful than ours, fewer potential customers may click throughto our website. In addition, the cost of purchased listings has increased in the past and may increase in the future. A decrease in website traffic or an increasein search costs could adversely affect our customer acquisition efforts and our operating results.A significant portion of our customers first try our solutions through free trials. We seek to convert these free trial users to paying customers of oursolutions. If our rate of conversion suffers for any reason, our revenue may decline and our business may suffer.We expect to continue to acquire or invest in other companies, which may divert our management’s attention, result in additional dilution to ourstockholders, and consume resources that are necessary to sustain our business.We recently entered into a binding agreement to acquire the outstanding capital stock of Mozy, Inc. and we completed the acquisitions of DatacastleCorporation and Double-Take Software, Inc. in 2017 and the acquisition of EVault, Inc. in 2016. We expect to continue to acquire complementary solutions,services, technologies, or businesses in the future. We may also enter into relationships with other businesses to expand our portfolio of solutions or ourability to provide our solutions in foreign jurisdictions, which could involve preferred or exclusive licenses, additional channels of distribution, discountpricing, or investments in other companies. Negotiating these transactions can be time-consuming, difficult and expensive, and our ability to complete thesetransactions may often be subject to conditions or approvals that are beyond our control. Consequently, these transactions, even if undertaken andannounced, may not close.8Table of ContentsAcquisitions may also disrupt our business, divert our resources, and require significant management attention that would otherwise be available for thedevelopment of our business. Moreover, the anticipated benefits of any acquisition, investment, or business relationship may not be realized or we may beexposed to unknown liabilities, including litigation against the companies that we may acquire. In connection with any such transaction, we may:•issue additional equity securities that would dilute our stockholders;•use cash that we may need in the future to operate our business;•incur debt on terms unfavorable to us, that we are unable to repay, or that may place burdensome restrictions on our operations;•incur large charges or substantial liabilities; or•become subject to adverse tax consequences or substantial depreciation, deferred compensation, or other acquisition-related accounting charges.Any of these risks could harm our business and operating results.Integration of an acquired company’s operations may present challenges.The integration of an acquired company requires, among other things, coordination of administrative, sales and marketing, accounting and financefunctions, and expansion of information and management systems. Integration may prove to be difficult due to the necessity of coordinating geographicallyseparate organizations and integrating personnel with disparate business backgrounds and accustomed to different corporate cultures. We may not be able toretain key employees of an acquired company. Additionally, the process of integrating a new solution or service may require a disproportionate amount oftime and attention of our management and financial and other resources. Any difficulties or problems encountered in the integration of a new solution orservice could have a material adverse effect on our business.We intend to continue to acquire businesses which we believe will help achieve our business objectives. As a result, our operating costs will likelycontinue to grow. The integration of an acquired company may cost more than we anticipate, and it is possible that we will incur significant additionalunforeseen costs in connection with such integration, which may negatively impact our earnings.In addition, we may only be able to conduct limited due diligence on an acquired company’s operations. Following an acquisition, we may be subject toliabilities arising from an acquired company’s past or present operations, including liabilities related to data security, encryption and privacy of customerdata, and these liabilities may be greater than the warranty and indemnity limitations that we negotiate. Any liability that is greater than these warranty andindemnity limitations could have a negative impact on our financial condition.Even if successfully integrated, there can be no assurance that our operating performance after an acquisition will be successful or will fulfillmanagement’s objectives.We may be unsuccessful in managing or expanding our operations, which could adversely affect our business and operating results.We have office locations throughout the United States and in various international locations, including the UK, Germany, the Netherlands, Canada andSwitzerland. If we are unable to effectively manage a large and geographically dispersed group of employees or to anticipate our future growth and personnelneeds, our business may be adversely affected. As we expand our business, we add complexity to our organization and must expand and adapt ouroperational infrastructure and effectively coordinate throughout our organization. As a result, we have incurred and expect to continue to incur additionalexpense related to our continued growth. Failure to manage any future growth effectively could result in increased costs, negatively impact our customers’satisfaction with our solutions, and harm our operating results.Our ability to provide services to our customers depends on our customers’ continued high-speed access to the internet and the continued reliability of theinternet infrastructure.Our business depends on our customers’ continued high-speed access to the internet, as well as the continued maintenance and development of theinternet infrastructure. The future delivery of our solutions will depend on third-party internet service providers to expand high-speed internet access, tomaintain a reliable network with the necessary speed, data capacity and security, and to develop complementary solutions and services, including high-speedmodems, for providing reliable and timely internet access and services. All of these factors are out of our control. To the extent that the internet continues toexperience an9Table of Contentsincreased number of users, frequency of use, or bandwidth requirements, the internet may become congested and be unable to support the demands placed onit, and its performance or reliability may decline. Any internet outages or delays could adversely affect our ability to provide services to our customers.Currently, internet access is provided by telecommunications companies and internet access service providers that have significant and increasingmarket power in the broadband and internet access marketplace. On December 14, 2017, the Federal Communications Commission classified broadbandinternet access service as an unregulated information service and repealed the specific rules against blocking, throttling or “paid prioritization” of content orservices. In the absence of government regulation, these providers could take measures that affect their customers’ ability to use our products and services,such attempting to charge their customers more for using our products and services. To the extent that internet service providers implement usage-basedpricing, including meaningful bandwidth caps, or otherwise try to monetize access to their networks, we could incur greater operating expenses and customeracquisition and retention could be negatively impacted. Furthermore, to the extent network operators were to create tiers of internet access service and eithercharge us for or prohibit our services from being available to our customers through these tiers, our business could be negatively impacted. Some of theseproviders also offer products and services that directly compete with our own offerings, which could potentially give them a competitive advantage.If we are unable to retain our existing customers, our business, financial condition and operating results would be adversely affected.If our efforts to satisfy our existing customers are not successful, we may not be able to retain them, and as a result, our revenue and ability to grow wouldbe adversely affected. We may not be able to accurately predict future trends in customer renewals. Customers choose not to renew their subscriptions formany reasons, including if customer service issues are not satisfactorily resolved, a desire to reduce discretionary spending, or a perception that they do notuse the service sufficiently, that the solution is a poor value, or that competitive services provide a better value or experience. If our retention rate decreases,we may need to increase the rate at which we add new customers in order to maintain and grow our revenue, which may require us to incur significantlyhigher advertising and marketing expenses than we currently anticipate, or our revenue may decline. A significant decrease in our retention rate wouldtherefore have an adverse effect on our business, financial condition, and operating results.Our relationships with our partners and distributors may be terminated or may not continue to be beneficial in generating new customers, which couldadversely affect our ability to increase our customer base.We maintain a network of active partners and distributors, which refer customers to us through links on their websites or outbound promotion to theircustomers. The number of customers that we are able to add through these relationships is dependent on the marketing efforts of our partners and distributors,over which we have little control. If we are unable to maintain our relationships, or renew contracts on favorable terms, with existing partners and distributorsor establish new contractual relationships with potential partners and distributors, we may experience delays and increased costs in adding customers, whichcould have a material adverse effect on us.If we are unable to expand our base of small and medium business customers, our future growth and operating results could be adversely affected.We have committed and continue to commit substantial resources to the expansion and increased marketing of our small and medium business solutions.If we are unable to market and sell our solutions to small and medium businesses with competitive pricing and in a cost-effective manner, our ability to growour revenue and achieve profitability may be harmed. We believe that it is more difficult and expensive to attract and retain small and medium businesscustomers than individual consumers, because small and medium businesses:•may require more expensive, targeted sales campaigns;•may have different or much more complex needs than those of individual consumers, such as archiving, version control, enhanced securityrequirements, and other forms of encryption and authentication, which our solutions may not adequately address; and•may cease operations due to the sale or failure of their business.In addition, small and medium businesses frequently have limited budgets and are more likely to be significantly affected by economic downturns thanlarger, more established companies. As a result, they may choose to spend funds on items other than our solutions, particularly during difficult economictimes. If we are unsuccessful in meeting the needs of potential small and medium business customers, it could adversely affect our future growth andoperating results.10Table of ContentsIf we are unable to sustain market recognition of and loyalty to our brand, or if our reputation were to be harmed, we could lose customers or fail toincrease the number of our customers, which could harm our business, financial condition and operating results.Given our small and medium business and individual consumer market focus, maintaining and enhancing the Carbonite brand is critical to our success.We believe that the importance of brand recognition and loyalty will increase in light of increasing competition in our markets. We plan to continueinvesting substantial resources to promote our brand, both domestically and internationally, but there is no guarantee that our brand development strategieswill enhance the recognition of our brand. Some of our existing and potential competitors have well-established brands with greater recognition than wehave. If our efforts to promote and maintain our brand are not successful, our operating results and our ability to attract and retain customers may be adverselyaffected. In addition, even if our brand recognition and loyalty increases, this may not result in increased use of our solutions or higher revenue.Our solutions, as well as those of our competitors, are regularly reviewed in computer and business publications. Negative reviews, or reviews in whichour competitors’ solutions and services are rated more highly than our solutions, could negatively affect our brand and reputation. From time-to-time, ourcustomers express dissatisfaction with our solutions, including, among other things, dissatisfaction with our customer support, our billing policies, and theway our solutions operate. If we do not handle customer complaints effectively, our brand and reputation may suffer, we may lose our customers’ confidence,and they may choose not to renew their subscriptions. In addition, many of our customers participate in online blogs about computers and internet services,including our solutions, and our success depends in part on our ability to generate positive customer feedback through such online channels whereconsumers seek and share information. If actions that we take or changes that we make to our solutions upset these customers, their blogging couldnegatively affect our brand and reputation. Complaints or negative publicity about our solutions or billing practices could adversely impact our ability toattract and retain customers and our business, financial condition, and operating results.The termination of our relationship with any major credit card company would have a severe, negative impact on our ability to collect revenue fromcustomers. Increases in credit card processing fees would increase our operating expenses and adversely affect our operating results.The majority of our customers purchase our solutions online with credit cards, and our business depends upon our ability to offer credit card paymentoptions. The termination of our ability to process payments on any major credit card would significantly impair our ability to operate our business andsignificantly increase our administrative costs related to customer payment processing. If we fail to maintain our compliance with the applicable dataprotection and documentation standards adopted by the major credit card issuers, these issuers could terminate their agreements with us, and we could loseour ability to offer our customers a credit card payment option. If these issuers increase their credit card processing fees because we experience excessivechargebacks or refunds or for other reasons, it could adversely affect our business and operating results.Any significant disruption in service on our websites, in our computer systems, or caused by our third party storage and system providers could damage ourreputation and result in a loss of customers, which would harm our business, financial condition, and operating results.Our brand, reputation, and ability to attract, retain and serve our customers are dependent upon the reliable performance of our websites, networkinfrastructure and payment systems, and our customers’ ability to readily access their stored files. We have experienced interruptions in these systems in thepast, including server failures that temporarily slowed down our websites’ performance and our customers’ ability to access their stored files, or made ourwebsites and infrastructure inaccessible, and we may experience interruptions in the future.In addition, while we operate and maintain elements of our websites and network infrastructure, some elements of this complex system are operated bythird parties that we do not control and that would require significant time to replace. We expect this dependence on third parties to increase. In particular, weutilize Amazon Web Services and Google Cloud Storage to provide computing and storage capacity pursuant to agreements that continue until terminatedupon written notice by either party. All of these third-party systems are located in data center facilities operated by third parties. Our data center leases expireat various times in 2018 and 2023 with rights of extension. If we are unable to renew these agreements on commercially reasonable terms, we may be requiredto transfer that portion of our computing and storage capacity to new data center facilities, and we may incur significant costs and possible serviceinterruption in connection with doing so. We also rely upon third party colocation providers to host our main servers. If these providers are unable to handle current or higher volumes of use,experience any interruption in operations or cease operations for any reason or if we are unable to agree on satisfactory terms for continued hostingrelationships, we would be forced to enter into a relationship with other service providers or assume hosting responsibilities ourselves. If we are forced toswitch data center facilities, we may not be11Table of Contentssuccessful in finding an alternative service provider on acceptable terms or in hosting the computer servers ourselves. We may also be limited in our remediesagainst these providers in the event of a failure of service.Interruptions in our own systems, the third-party systems and facilities on which we rely, or the use of our data center facilities, whether due to systemfailures, computer viruses, physical or electronic break-ins, damage or interruption from human error, power losses, natural disasters or terrorist attacks,hardware failures, systems failures, telecommunications failures or other factors, could affect the security or availability of our websites and infrastructure,prevent us from being able to continuously back up our customers’ data or our customers from accessing their stored data, and may damage our customers’stored files. Any financial difficulties, such as bankruptcy, faced by our third-party data center operators, our third-party colocation providers or any of theservice providers with whom we or they contract may have negative effects on our business, the nature and extent of which are difficult to predict. Moreover,if our third-party data center providers or our third-party colocation providers are unable to keep up with our growing needs for capacity, this could have anadverse effect on our business. Interruptions in our services might reduce our revenue, cause us to issue credits or refunds to customers, subject us to potentialliability, or harm our renewal rates.In addition, prolonged delays or unforeseen difficulties in connection with adding storage capacity or upgrading our network architecture when requiredmay cause our service quality to suffer. Problems with the reliability or security of our systems could harm our reputation. Damage to our reputation and thecost of remedying these problems could negatively affect our business, financial condition, and operating results.Our proprietary systems provide redundancy at the disk level, and geospatially for vault based storage, to protect copies of stored customer files. We relyon the fact that our customers maintain the primary instance of their files. We only offer higher redundancy backup sites for our vault based solutions. Assuch, a total failure of our systems, or the failure of any of our systems, could result in the loss of or a temporary inability to back up our customers’ data andresult in our customers being unable to access their stored files. If one of our data centers fails at the same time that our customers’ computers fail, we wouldbe unable to provide stored copies of their data. If this were to occur, our reputation could be compromised and we could be subject to liability to thecustomers that were affected.If the security of our customers’ confidential information stored in our systems is breached or their stored files are otherwise subjected to unauthorizedaccess, our reputation and business may be harmed, and we may be exposed to liability.Our customers rely on our solutions to store digital copies of their files, including financial records, business information, photos, and other personallymeaningful content. We also store credit card information and other personal information about our customers. An actual or perceived breach of our networksecurity and systems or other events that cause the loss or public disclosure of, or access by third parties to, our customers’ stored files could have seriousnegative consequences for our business, including possible fines, penalties and damages, reduced demand for our solutions, an unwillingness of customers toprovide us with their credit card or payment information, an unwillingness of our customers to use our solutions, harm to our reputation and brand, loss of ourability to accept and process customer credit card orders, and time-consuming and expensive litigation. If this occurs, our business and operating resultscould be adversely affected. Third parties may be able to circumvent our security by deploying viruses, worms, and other malicious software programs thatare designed to attack or attempt to infiltrate our systems and networks and we may not immediately discover these attacks or attempted infiltrations. Further,outside parties may attempt to fraudulently induce our employees, consultants, or affiliates to disclose sensitive information in order to gain access to ourinformation or our customers’ information. The techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems changefrequently, often are not recognized until launched against a target, and may originate from less regulated or remote areas around the world. As a result, wemay be unable to proactively address these techniques or to implement adequate preventative or reactionary measures. In addition, employee or consultanterror, malfeasance, or other errors in the storage, use, or transmission of personal information could result in a breach of customer or employee privacy. Wemaintain insurance coverage to mitigate the potential financial impact of these risks; however, our insurance may not cover all such events or may beinsufficient to compensate us for the potentially significant losses, including the potential damage to the future growth of our business, that may result fromthe breach of customer or employee privacy.Many states have enacted laws requiring companies to notify consumers of data security breaches involving their personal data. These mandatorydisclosures regarding a security breach often lead to widespread negative publicity, which may cause our customers to lose confidence in the effectiveness ofour data security measures. Any security breach, whether successful or not, would harm our reputation and could cause the loss of customers. Similarly, if awell-publicized breach of data security at any other cloud backup service provider or other major consumer website were to occur, there could be a generalpublic loss of confidence in the use of the internet for cloud backup services or commercial transactions generally. Any of these events could have materialadverse effects on our business, financial condition, and operating results.12Table of ContentsSecurity vulnerabilities, data protection breaches and cyber-attacks could disrupt our data protection platform and solutions, and any such disruptioncould increase our expenses, damage our reputation, harm our business and adversely affect our stock price. We rely on third-party providers for a number of critical aspects of our cloud services and consequently we do not maintain direct control over the securityor stability of the associated systems. Furthermore, the firmware, software and/or open source software that our data protection solutions utilize may besusceptible to hacking or misuse. If malicious actors compromise our solutions or if customer confidential information is hacked or otherwise accessedwithout authorization, our business will be harmed. In the event of the discovery of a significant security vulnerability, we would incur additionalsubstantial expenses and our business would be harmed. If we or our third-party providers are unable to successfully prevent breaches of security relating toour solutions or customer private information, it could result in litigation and potential liability for us, damage our brand and reputation, or otherwise harmour business and our stock price.We are subject to governmental regulation and other legal obligations related to privacy, and our actual or perceived failure to comply with suchobligations could harm our business.We receive, store, and process personal information and other customer data. Personal privacy has become a significant issue in the United States and inmany other countries where we offer our solutions. The regulatory framework for privacy issues worldwide is currently complex and evolving, and it is likelyto remain uncertain for the foreseeable future. There are numerous federal, state, local, and foreign laws regarding privacy and the storing, sharing, use,processing, disclosure and protection of personal information and other customer data, the scope of which are changing, subject to differing interpretations,and may be inconsistent among countries or conflict with other rules. We generally seek to comply with industry standards and are subject to the terms of ourprivacy policies and privacy-related obligations to third parties. We strive to comply with all applicable laws, policies, legal obligations, and industry codesof conduct relating to privacy and data protection to the extent possible. However, it is possible that these obligations may be interpreted and applied in amanner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Any failure or perceived failure by us tocomply with our privacy policies, our privacy-related obligations to customers or other third parties, our privacy-related legal obligations, or any compromiseof security that results in the unauthorized release or transfer of personally identifiable information or other customer data, may result in governmentalenforcement actions, litigation, or public statements against us by consumer advocacy groups or others and could cause our customers to lose trust in us,which could have an adverse effect on our reputation and business. Our customers may also accidentally disclose their passwords or store them on a mobiledevice that is lost or stolen, creating the perception that our systems are not secure against third-party access. Additionally, if third parties that we work with,such as vendors or developers, violate applicable laws or our policies, such violations may also put our customers’ information at risk and could in turn havean adverse effect on our business. Any significant change to applicable laws, regulations, or industry practices regarding the use or disclosure of ourcustomers’ data, or regarding the manner in which the express or implied consent of customers for the use and disclosure of such data is obtained, couldrequire us to modify our solutions and features, possibly in a material manner, and may limit our ability to develop new services and features that make use ofthe data that our customers voluntarily share with us.Our solutions are used by customers in the health care industry and we must comply with numerous federal and state laws related to patient privacy inconnection with providing our solutions to these customers.Our solutions are used by customers in the health care industry and we must comply with numerous federal and state laws related to patient privacy inconnection with providing our solutions to these customers. In particular, the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and theHealth Information Technology for Economic and Clinical Health Act, or HITECH, include privacy standards that protect individual privacy by limiting theuses and disclosures of individually identifiable health information and implementing data security standards. Because our solutions may backupindividually identifiable health information for our customers, our customers are mandated by HIPAA to enter into written agreements with us known asbusiness associate agreements that require us to safeguard individually identifiable health information. Business associate agreements typically include:•a description of our permitted uses of individually identifiable health information;•a covenant not to disclose that information except as permitted under the agreement and to make our subcontractors, if any, subject to the samerestrictions;•assurances that appropriate administrative, physical, and technical safeguards are in place to prevent misuse of that information;•an obligation to report to our customers any use or disclosure of that information other than as provided for in the agreement;13Table of Contents•a prohibition against our use or disclosure of that information if a similar use or disclosure by our customers would violate the HIPAA standards;•the ability of our customers to terminate their subscription to our solution if we breach a material term of the business associate agreement and areunable to cure the breach;•the requirement to return or destroy all individually identifiable health information at the end of the customer’s subscription; and•access by the Department of Health and Human Services to our internal practices, books, and records to validate that we are safeguardingindividually identifiable health information.We may not be able to adequately address the business risks created by HIPAA or HITECH implementation or comply with our obligations under ourbusiness associate agreements. Furthermore, we are unable to predict what changes to HIPAA, HITECH or other laws or regulations might be made in thefuture or how those changes could affect our business or the costs of compliance. Failure by us to comply with any of the federal and state standards regardingpatient privacy may subject us to penalties, including civil monetary penalties and, in some circumstances, criminal penalties, which could have an adverseeffect on our business, financial condition, and operating results.Our solutions operate in a wide variety of environments, systems, applications and configurations, which could result in errors or solution failures.Because we offer solutions that solve a complex business need, undetected errors, failures, or bugs may occur, especially when solutions are firstintroduced or when new versions are released. Our solutions are often installed and used in large-scale computing environments with different operatingsystems, system management software, and equipment and networking configurations, which may cause errors or failures in our solutions or may exposeundetected errors, failures, or bugs in our solutions. Our customers’ computing environments are often characterized by a wide variety of standard and non-standard configurations that make pre-release testing for programming or compatibility errors very difficult and time-consuming. In addition, despite testingby us and others, errors, failures, or bugs may not be found in new solutions or releases until after distribution. In the past, we have discovered software errors,failures, and bugs in certain of our solution offerings after their introduction and, in some cases, have experienced delayed or lost revenues as a result of theseerrors.Errors, failures, or bugs in solutions released by us could result in negative publicity, damage to our brand, returns, loss of or delay in market acceptanceof our solutions, loss of competitive position, or claims by customers or others. Many of our end-user customers use our solutions in applications that arecritical to their businesses and may have a greater sensitivity to defects in our solutions than to defects in other, less critical, software solutions. In addition, ifan actual or perceived breach of information integrity or availability occurs in one of our end-user customer’s systems, regardless of whether the breach isattributable to our solutions, the market perception of the effectiveness of our solutions could be harmed. Alleviating any of these problems could requiresignificant expenditures of our capital and other resources and could cause interruptions, delays, or cessation of our solution licensing, which could cause usto lose existing or potential customers and could adversely affect our operating results.If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired, whichcould harm our operating results, our ability to operate our business, and our investors views of us.Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statementson a timely basis is a costly and time-consuming effort that needs to be evaluated frequently. As part of our process of documenting and testing our internalcontrol over financial reporting, we may identify areas for further attention and improvement. In addition, acquisitions of businesses and assets requiresubstantial work related to the integration into our internal controls. Implementing any appropriate changes to our internal controls, or work required tointegrate newly acquired businesses or assets into our internal controls, may distract our officers and employees, entail substantial costs to modify ourexisting processes, and take significant time to complete. These changes may not, however, be effective in maintaining the adequacy of our internal controls,and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operatingcosts and harm our business. In addition, investors' perceptions that our internal controls are inadequate or that we are unable to produce accurate financialstatements on a timely basis may harm our stock price and make it more difficult for us to effectively market and sell our solutions to new and existingcustomers.14Table of ContentsIf our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operatingresults could fall below expectations of securities analysts and investors, resulting in a decline in our stock price.The preparation of financial statements in conformity with generally accepted accounting principles in the U.S. ("GAAP") requires management to makeestimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates onhistorical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Significant assumptions and estimatesused in preparing our consolidated financial statements include those related to revenue recognition, stock-based compensation, valuation of inventory andaccounting for income taxes. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in ourassumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in our stockprice.Growth may place significant demands on our management and our infrastructure.We continue to experience substantial growth in our business. This growth has placed and may continue to place significant demands on ourmanagement and our operational and financial infrastructure. As our operations grow in size, scope, and complexity, we will need to improve and upgradeour systems and infrastructure to attract, service and retain an increasing number of customers. The expansion of our systems and infrastructure will require usto commit substantial financial, operational, and technical resources in advance of an increase in the volume of business, with no assurance that the volumeof business will increase. Any such additional capital investments will increase our cost base. Continued growth could also strain our ability to maintainreliable service levels for our customers, develop and improve our operational, financial, and management controls, enhance our reporting systems andprocedures, and recruit, train, and retain highly skilled personnel. If we fail to achieve the necessary level of efficiency in our organization as we grow, ourbusiness, financial condition, and operating results could be harmed.The loss of one or more of our key personnel, or our failure to attract, integrate, and retain other highly qualified personnel, could harm our business andgrowth prospects.We depend on the continued service and performance of our key personnel. We do not have long-term employment agreements with any of our officersor key employees. In addition, many of our key technologies and systems are custom-made for our business by our personnel. The loss of key personnel,including key members of our management team, as well as certain of our key marketing, sales, products development, or technology personnel, coulddisrupt our operations and have an adverse effect on our ability to grow our business. In addition, several of our key personnel have only recently beenemployed by us, and we are still in the process of integrating these personnel into our operations. Our failure to successfully integrate these key employeesinto our business could adversely affect our business.To execute our growth plan, we must attract and retain highly qualified personnel. Competition for these employees is intense, and we may not besuccessful in attracting and retaining qualified personnel. We have from time to time in the past experienced, and we expect to continue to experience,difficulty in hiring and retaining highly skilled employees with appropriate qualifications. New hires require significant training and, in most cases, takesignificant time before they achieve full productivity. Our recent hires and planned hires may not become as productive as we expect, and we may be unableto hire or retain sufficient numbers of qualified individuals. Many of the companies with which we compete for experienced personnel have greater resourcesthan we have. In addition, in making employment decisions, particularly in the internet and high-technology industries, job candidates often consider thevalue of the equity that they are to receive in connection with their employment. In addition, employees may be more likely to voluntarily exit the Companyif the shares underlying their vested and unvested options, as well as unvested restricted stock units, have significantly depreciated in value resulting in theoptions they are holding being significantly above the market price of our common stock and the value of the restricted stock units decreasing. If we fail toattract new personnel, or fail to retain and motivate our current personnel, our business and growth prospects could be severely harmed.Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity andteamwork fostered by our culture, and our business may be harmed.We believe that our corporate culture has been a key contributor to our success. If we do not continue to develop our corporate culture as we grow andevolve, including maintaining our culture of transparency with our employees, it could harm our ability to foster the innovation, creativity, and teamworkthat we believe that we need to support our growth. As our organization grows and we are required to implement more complex organizational structures, wemay find it increasingly difficult to maintain the beneficial aspects of our corporate culture, which could negatively impact our future success. In15Table of Contentsaddition, the availability of a public market for our securities could create disparities of wealth among our employees, which could adversely impact relationsamong employees and our corporate culture in general.Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect ouroperating results and financial condition.We are subject to income taxes in the United States and various foreign jurisdictions, and our domestic and international tax liabilities will be subject tothe allocation of expenses in differing jurisdictions. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors,including:•changes in the valuation of our deferred tax assets and liabilities;•expected timing and amount of the release of tax valuation allowances;•expiration of, or detrimental changes in, research and development tax credit laws;•tax effects of stock-based compensation;•costs related to intercompany restructurings;•changes in tax laws, regulations, accounting principles or interpretations thereof; or•future earnings being lower than anticipated in countries where we have lower statutory tax rates and higher than anticipated earnings in countrieswhere we have higher statutory tax rates.In addition, we may be subject to audits of our income and sales taxes by the Internal Revenue Service and other foreign and state tax authorities.Outcomes from these audits could have an adverse effect on our operating results and financial condition.Our ability to use net operating losses to offset future taxable income may be subject to certain limitations.As of December 31, 2017, we had federal, state, and foreign net operating loss carryforwards, or NOLs, of $107.9 million, $72.7 million, and $6.1 million,respectively, available to offset future taxable income, which expire in various years through 2037 if not utilized. A lack of future taxable income wouldadversely affect our ability to utilize these NOLs before they expire. Under the provisions of the Internal Revenue Code of 1986, as amended, or the InternalRevenue Code, substantial changes in our ownership may limit the amount of pre-change NOLs that can be utilized annually in the future to offset taxableincome. Section 382 of the Internal Revenue Code, or Section 382, imposes limitations on a company’s ability to use NOLs if a company experiences a more-than-50-percent ownership change over a three-year testing period. Based upon our analysis as of December 31, 2017, there was no ownership changeexperienced during 2017. If changes in our ownership occur in the future, our ability to use NOLs may be further limited. For these reasons, we may not beable to utilize a material portion of the NOLs, even if we achieve profitability. If we are limited in our ability to use our NOLs in future years in which wehave taxable income, we will pay more taxes than if we were able to fully utilize our NOLs. This could adversely affect our operating results and the marketprice of our common stock.Changes in U.S. tax laws could have a material adverse effect on our business, cash flow, results of operations or financial conditions.The Tax Cuts and Jobs Act, which has been passed by the U.S. Congress and signed by the President, contains many significant changes to the U.S.federal income tax laws, the consequences of which have not yet been determined. Changes in corporate tax rates, the realizability of the net deferred taxassets relating to our U.S. operations, the taxation of foreign earnings, and the deductibility of expenses contained in the Tax Cuts and Jobs Act or other taxreform legislation could have a material impact on the value of our deferred tax assets, could result in significant one-time charges in the current or futuretaxable years, and could increase our future U.S. tax expense. Furthermore, changes to the taxation of undistributed foreign earnings could change our futureintentions regarding reinvestment of such earnings. The foregoing items could have a material adverse effect on our business, cash flow, results of operationsor financial conditions.We face many risks associated with our plans to expand internationally, which could harm our business, financial condition, and operating results.We anticipate that our efforts to expand internationally will entail the marketing and advertising of our services and brand and the development oflocalized websites. We do not have substantial experience in selling our solutions in international markets or in conforming to the local cultures, standards,or policies necessary to successfully compete in those markets, and we must invest significant resources in order to do so. We may not succeed in these effortsor achieve our customer acquisition16Table of Contentsor other goals. For some international markets, customer preferences and buying behaviors may be different, and we may use business or pricing models thatare different from our traditional subscription model to provide cloud backup and related services to customers. Our revenue from new foreign markets maynot exceed the costs of establishing, marketing, and maintaining our international solutions, and therefore may not be profitable on a sustained basis, if at all.In addition, conducting international operations subjects us to new risks that we have not generally faced in the U.S. These risks include:•localization of our solutions, including translation into foreign languages and adaptation for local practices and regulatory requirements;•lack of experience in other geographic markets;•strong local competitors;•cost and burden of complying with, lack of familiarity with, and unexpected changes in foreign legal and regulatory requirements, includingconsumer and data privacy laws;•difficulties in managing and staffing international operations;•potentially adverse tax consequences, including the complexities of transfer pricing, foreign value added or other tax systems, double taxation andrestrictions, and/or taxes on the repatriation of earnings;•dependence on third parties, including channel partners with whom we do not have extensive experience;•compliance with the Foreign Corrupt Practices Act, economic sanction laws and regulations, export controls, and other U.S. laws and regulationsregarding international business operations;•increased financial accounting and reporting burdens and complexities;•political, social, and economic instability abroad, terrorist attacks, and security concerns in general; and•reduced or varied protection for intellectual property rights in some countries.Operating in international markets also requires significant management attention and financial resources. The investment and additional resourcesrequired to establish operations and manage growth in other countries may not produce desired levels of revenue or profitability.Our software contains encryption technologies, certain types of which are subject to U.S. and foreign export control regulations and, in some foreigncountries, restrictions on importation and/or use. Any failure on our part to comply with encryption or other applicable export control requirements couldresult in financial penalties or other sanctions under the U.S. export regulations, including restrictions on future export activities, which could harm ourbusiness and operating results. Regulatory restrictions could impair our access to technologies that we seek for improving our solutions and may also limit orreduce the demand for our solutions outside of the U.S.We are subject to the effects of fluctuations in foreign exchange rates, which could affect our operating results.Our foreign operations are reported in the relevant local currency and are then translated into U.S. dollars at the applicable currency exchange rate forinclusion in our consolidated U.S. dollar financial statements. Also, although a large portion of our agreements are denominated in U.S. dollars, we may beexposed to fluctuations in foreign exchange rates with respect to customer agreements with certain of our international customers. Exchange rates betweenthese currencies and U.S. dollars in recent years have fluctuated significantly and may do so in the future. In addition to currency translation risk, we incurcurrency transaction risk we enter into a transaction using a different currency than the relevant local currency. Given the volatility of exchange rates, we maybe unable to manage our currency transaction risks effectively. Currency fluctuations could have a material adverse effect on our future international salesand, consequently, on our financial condition and results of operations.Risks Related to Intellectual PropertyAssertions by a third party that our solutions infringe its intellectual property, whether or not correct, could subject us to costly and time-consuminglitigation or expensive licenses.There is frequent litigation in the software and technology industries based on allegations of infringement or other violations of intellectual propertyrights. Any such claims or litigation may be time-consuming and costly, divert management17Table of Contentsresources, require us to change our services, require us to credit or refund subscription fees, or have other adverse effects on our business. Many companies aredevoting significant resources to obtaining patents that could affect many aspects of our business. Third parties may claim that our technologies or solutionsinfringe or otherwise violate their patents or other intellectual property rights.If we are forced to defend ourselves against intellectual property infringement claims, whether they have merit or are determined in our favor, we mayface costly litigation, diversion of technical and management personnel, limitations on our ability to use our current websites and technologies, and aninability to market or provide our solutions. As a result of any such claim, we may have to develop or acquire non-infringing technologies, pay damages,enter into royalty or licensing agreements, cease providing certain services, adjust our marketing and advertising activities, or take other actions to resolvethe claims. These actions, if required, may be costly or unavailable on terms acceptable to us, or at all.Furthermore, we have licensed proprietary technologies from third parties that we use in our technologies and business, and we cannot be certain that theowners’ rights in their technologies will not be challenged, invalidated, or circumvented. In addition to the general risks described above associated withintellectual property and other proprietary rights, we are subject to the additional risk that the seller of such technologies may not have appropriately created,maintained, or enforced their rights in such technology.Our success depends in large part on our ability to protect and enforce our intellectual property rights. If we are not able to adequately protect ourintellectual property and proprietary technologies to prevent use or appropriation by our competitors, the value of our brand and other intangible assetsmay be diminished, and our business may be adversely affected.Our future success and competitive position depend in large part on our ability to protect our intellectual property and proprietary technologies. We relyon a combination of trademark, patent, copyright, and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish andprotect our proprietary rights, all of which provide only limited protection and may not now or in the future provide us with a competitive advantage.Carbonite, the Carbonite Logo, MAILSTORE, DOUBLETAKE and EVAULT as well as other marks, are registered trademarks of Carbonite, Inc. in numerouscountries throughout the world. The Carbonite trademark is subject to registrations covering over 40 countries. Carbonite also has additional registrationsand pending applications for additional marks in the U.S. and other countries. We cannot assure you that any future trademark registrations will be issued forpending or future applications or that any registered trademarks will be enforceable or provide adequate protection of our proprietary rights. We currentlyhave 67 issued patents and pending applications worldwide. We cannot assure you that any patents will issue from any such patent applications, that patentsthat issue from such applications will give us the protection that we seek, or that any such patents will not be challenged, invalidated, or circumvented. Anypatents that may issue in the future from our pending or future patent applications may not provide sufficiently broad protection and may not be enforceablein actions against alleged infringers. To counter infringement or unauthorized use, we may be required to file patent infringement claims, which can beexpensive and time-consuming to litigate. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or isunenforceable, or may refuse to stop others from using the technology at issue on the grounds that our patent(s) do not cover such technology. An adversedetermination of any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could putour patent applications at risk of not being issued.There can be no assurance that the steps that we take will be adequate to protect our technologies and intellectual property, that our trademark and patentapplications will lead to registered trademarks or issued patents, that others will not develop or patent similar or superior technologies, solutions, or services,or that our trademarks, patents, and other intellectual property will not be challenged, invalidated, or circumvented by others. Furthermore, effectivetrademark, patent, copyright, and trade secret protection may not be available in every country in which our services are available or where we haveemployees or independent contractors. In addition, the legal standards relating to the validity, enforceability, and scope of protection of intellectual propertyrights in internet-related industries are uncertain and still evolving. If our efforts to protect our technologies and intellectual property are inadequate, thevalue of our brand and other intangible assets may be diminished and competitors may be able to mimic our solutions and methods of operations. Any ofthese events could have a material adverse effect on our business, financial condition, and operating results.Confidentiality agreements with employees and others may not adequately prevent disclosure of our trade secrets and proprietary information. Failure toprotect our proprietary information could make it easier for third parties to compete with our solutions and harm our business.We have devoted substantial resources to the development of our proprietary technologies and related processes. In order to protect our proprietarytechnologies and processes, we rely in part on trade secret laws and confidentiality agreements with our employees, licensees, independent contractors, andother advisors. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event ofunauthorized disclosure of confidential18Table of Contentsinformation. In addition, others may independently discover our trade secrets, in which case we would not be able to assert trade secret rights, or developsimilar technologies and processes. Further, laws in certain jurisdictions may afford little or no trade secret protection, and any changes in, or unexpectedinterpretations of, the intellectual property laws in any country in which we operate may compromise our ability to enforce our intellectual property rights.Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure or inability to obtain ormaintain trade secret protection or otherwise protect our proprietary rights could adversely affect our business.Our use of “open source” software could negatively affect our ability to sell our solutions and subject us to possible litigation.A portion of the technologies licensed by us to our customers incorporates so-called “open source” software, and we may incorporate open sourcesoftware in the future. Such open source software is generally licensed by its authors or other third parties under open source licenses. These licenses maysubject us to certain unfavorable conditions, including requirements that we offer our solutions that incorporate the open source software for no cost, that wemake publicly available source code for modifications or derivative works we create based upon, incorporating, or using the open source software, and/or thatwe license such modifications or derivative works under the terms of the particular open source license. Additionally, if a third-party software provider hasincorporated open source software into software that we license from such provider, we could be required to disclose any of our source code that incorporatesor is a modification of such licensed software. If an author or other third party that distributes open source software that we use or license were to allege thatwe had not complied with the conditions of the applicable license, we could be required to incur significant legal expenses defending against suchallegations and could be subject to significant damages, enjoined from the sale of our solutions that contained the open source software, and required tocomply with the foregoing conditions. Any of the foregoing could disrupt the distribution and sale of our solutions and harm our business.We rely on third-party software to develop and provide our solutions, including server software and licenses from third parties to use patented intellectualproperty.We rely on software licensed from third parties to develop and offer our solutions. In addition, we may need to obtain future licenses from third parties touse intellectual property associated with the development of our solutions, which might not be available to us on acceptable terms, or at all. Any loss of theright to use any software required for the development and maintenance of our solutions could result in delays in the provision of our solutions untilequivalent technology is either developed by us, or, if available from others, is identified, obtained, and integrated, which delay could harm our business.Any errors or defects in third-party software could result in errors or a failure of our solutions, which could harm our business.If we are unable to protect our domain names, our reputation, brand, customer base, and revenue, as well as our business and operating results, could beadversely affected.We have registered domain names for websites, or URLs, that we use in our business, such as www.carbonite.com. If we are unable to maintain our rightsin these domain names, our competitors or other third parties could capitalize on our brand recognition by using these domain names for their own benefit. Inaddition, although we own the Carbonite domain name under various global top level domains such as .com and .net, as well as under various country-specific domains, we might not be able to, or may choose not to, acquire or maintain other country-specific versions of the Carbonite domain name or otherpotentially similar URLs. Domain names similar to ours have already been registered in the U.S. and elsewhere, and our competitors or other third partiescould capitalize on our brand recognition by using domain names similar to ours. The regulation of domain names in the U.S. and elsewhere is generallyconducted by internet regulatory bodies and is subject to change. If we lose the ability to use a domain name in a particular country, we may be forced toeither incur significant additional expenses to market our solutions within that country, including the development of a new brand and the creation of newpromotional materials, or elect not to sell our solutions in that country. Either result could substantially harm our business and operating results. Regulatorybodies could establish additional top-level domains, appoint additional domain name registrars, or modify the requirements for holding domain names. As aresult, we may not be able to acquire or maintain the domain names that utilize the name Carbonite in all of the countries in which we currently conduct orintend to conduct business. Further, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietaryrights varies among jurisdictions and is unclear in some jurisdictions. We may be unable to prevent third parties from acquiring and using domain names thatinfringe, are similar to, or otherwise decrease the value of, our brand or our trademarks. Protecting and enforcing our rights in our domain names anddetermining the rights of others may require litigation, which could result in substantial costs, divert management attention, and not be decided favorably tous.19Table of ContentsMaterial defects or errors in our software could harm our reputation, result in significant costs to us, and impair our ability to sell our solutions.The software applications underlying our solutions are inherently complex and may contain material defects or errors, particularly when first introducedor when new versions or enhancements are released. We have from time to time found defects or errors in our solutions, and new defects or errors in ourexisting solutions may be detected in the future by us or our customers. The costs incurred in correcting such defects or errors may be substantial and couldharm our operating results. In addition, we rely on hardware purchased or leased and software licensed from third parties to offer our solutions. Any defects in,or unavailability of, our or third-party software or hardware that cause interruptions to the availability of our solutions could, among other things:•cause a reduction in revenue or delay in market acceptance of our solutions;•require us to issue credits or refunds to our customers or expose us to claims for damages;•cause us to lose existing customers and make it more difficult to attract new customers;•divert our development resources or require us to make extensive changes to our solutions or software, which would increase our expenses;•increase our technical support costs; and•harm our reputation and brand.Risks Related to Ownership of our Common StockOur stock price may be volatile due to fluctuations in our operating results and other factors, each of which could cause our stock price to decline and youmay be unable to sell your shares at or above the price at which you purchased your stock.Shares of our common stock were sold in our initial public offering in August 2011 at a price of $10.00 per share, and our common stock hassubsequently traded as high as $27.00 and as low as $5.75. The market price for shares of our common stock could be subject to significant fluctuations inresponse to various factors, most of which are beyond our control. Some of the factors that may cause the market price for shares of our common stock tofluctuate include:•price and volume fluctuations in the overall stock market from time to time;•fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;•actual or anticipated fluctuations in our key operating metrics, financial condition, and operating results;•loss of existing customers or inability to attract new customers;•actual or anticipated changes in our growth rate;•announcements of technological innovations or new offerings by us or our competitors;•our announcement of actual results for a fiscal period that are lower than projected or expected or our announcement of revenue or earningsguidance that is lower than expected;•changes in estimates of our financial results or recommendations by securities analysts;•failure of any of our solutions to achieve or maintain market acceptance;•changes in market valuations of similar companies;•success of competitive solutions or services;•changes in our capital structure, such as future issuances of securities or the incurrence of debt;•announcements by us or our competitors of significant solutions or services, contracts, acquisitions, or strategic alliances;•regulatory developments in the U.S. or foreign countries;20Table of Contents•actual or threatened litigation involving us or our industry;•additions or departures of key personnel;•general perception of the future of the cloud backup market or our solutions;•share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;•sales of our shares of common stock by our existing stockholders;•changes in general economic, industry, and market conditions; and•major changes in our Board of Directors or management or departures of key personnel.In addition, the stock market in general, and the market for internet-related companies in particular, has experienced extreme price and volumefluctuations that have often been unrelated or disproportionate to the operating performance of those companies. The trading price of our common stockmight also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. Securities class actionlitigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities.Such litigation, if instituted against us, could result in very substantial costs, divert our management’s attention and resources, and harm our business,financial condition, and operating results. In addition, recent fluctuations in the financial and capital markets have resulted in volatility in securities prices.Our failure to raise additional capital or generate the cash flows necessary to expand our operations and invest in our business could reduce our ability tocompete successfully and depress the market price of our common stock.Although we currently anticipate that our available funds will be sufficient to meet our cash needs for the next 12 months, we may require additionalfinancing in the future. Our ability to obtain financing will depend, among other things, on our development efforts, business plans, operating performanceand condition of the capital markets at the time we seek financing. If we need to raise additional funds, we may not be able to obtain debt or equity financingon favorable terms, if at all. If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests, and theper share value of our common stock could decline. If we engage in debt financing, we may be required to accept terms that restrict our ability to incuradditional indebtedness and force us to maintain specified liquidity or other ratios. If we need additional capital and cannot raise it on acceptable terms, wemay not be able to, among other things:•develop or enhance our solutions;•continue to expand our development, sales, and marketing organizations;•acquire complementary technologies, solutions, or businesses;•expand our operations in the U.S. or internationally;•hire, train, and retain employees;•respond to competitive pressures or unanticipated working capital requirements; or•continue our operations.Future sales of shares of our common stock by existing stockholders could depress the market price of our common stock.If our existing stockholders sell, or indicate an intent to sell, a substantial number of shares of our common stock in the public market, the trading priceof our common stock could decline significantly.We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend onappreciation in the price of our common stock.We have never declared or paid any cash dividends on our common stock and do not intend to do so for the foreseeable future. We currently intend toinvest our future earnings, if any, to fund our growth and continuing operations. Therefore, you are not likely to receive any dividends on your shares ofcommon stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in theirvalue. Our common stock may not appreciate in value or even maintain the price at which our stockholders have purchased their shares.21Table of ContentsWe cannot guarantee that we will repurchase our common stock pursuant to our stock repurchase program or that our stock repurchase program willenhance long-term stockholder value. Stock repurchases could also increase the volatility of the price of our common stock and could diminish our cashreserves.Our board of directors has previously authorized a stock repurchase program. Repurchases of our common stock pursuant to our stock repurchaseprogram could affect the market price of our common stock or increase its volatility. For example, the existence of a stock repurchase program could causeour stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock. Additionally,our stock repurchase program could diminish our cash reserves, which may impact our ability to finance future growth and to pursue possible future strategicopportunities and acquisitions. There can be no assurance that any stock repurchases will enhance stockholder value because the market price of our commonstock may decline below the levels at which we determine to repurchase our stock. Although our stock repurchase program is intended to enhance long-termstockholder value, there is no assurance that it will do so and short-term stock price fluctuations could reduce the program’s effectiveness.The conditional conversion feature of our convertible notes, if triggered, may materially and adversely affect our financial condition and operating results.In the event the conditional conversion feature of our outstanding $143.8 million aggregate principal amount of convertible senior notes (the“Convertible Notes”) is triggered, holders of the Convertible Notes will be entitled to convert the Convertible Notes at any time during specified periods attheir option. If one or more holders elect to convert their Convertible Notes, unless we elect to satisfy our conversion obligation by delivering solely shares ofour common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversionobligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their ConvertibleNotes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes as a currentrather than long-term liability, which would result in a material reduction of our net working capital.The accounting method for convertible debt securities that may be settled in cash, such as the Convertible Notes, could have a material effect on ourreported financial results.Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options, which we refer to as ASC 470-20, an entity must separatelyaccount for the liability and equity components of certain convertible debt instruments (such as the Convertible Notes) that may be settled entirely orpartially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for theConvertible Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on ourconsolidated balance sheet, and the value of the equity component would be treated as original issue discount for purposes of accounting for the debtcomponent of the Convertible Notes. As a result, we will be required to record a greater amount of non-cash interest expense in current periods presented as aresult of the amortization of the discounted carrying value of the notes to their face amount over the term of the Convertible Notes. We will report lower netincome (or greater net loss) in our financial results because ASC 470-20 requires interest to include both the current period’s amortization of the debtdiscount and the instrument’s coupon interest, which could adversely affect our reported or future financial results, the market price of our common stock andthe trading price of the Convertible Notes.In addition, under certain circumstances, convertible debt instruments (such as the Convertible Notes) that may be settled entirely or partly in cash arecurrently accounted for utilizing the treasury stock method if we have the ability and intent to settle in cash, the effect of which is that the shares issuableupon conversion of the Convertible Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value ofthe Convertible Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accountedfor as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. Wecannot be sure that we will be able to demonstrate and continue to demonstrate the ability or intent to settle in cash or that the accounting standards in thefuture will continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuableupon conversion of the Convertible Notes, then our diluted earnings per share would be adversely affected.Anti-takeover provisions contained in our certificate of incorporation, bylaws as well as provisions of Delaware law, could impair a takeover attempt.Our certificate of incorporation and bylaws contain provisions that could have the effect of delaying or preventing changes in control or changes in ourmanagement without the consent of our board of directors. These provisions include:22Table of Contents•a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majorityof our board of directors;•no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;•the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation,death, or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;•the ability of our board of directors to determine to issue shares of preferred stock and to determine the price and other terms of those shares,including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostileacquirer;•a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of ourstockholders;•the requirement that a special meeting of stockholders may be called only by the chairman of the board of directors, the chief executive officer, orthe board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action;•limiting the liability of, and providing indemnification to, our directors and officers;•controlling the procedures for the conduct and scheduling of stockholder meetings;•providing the board of directors with the express power to postpone previously scheduled annual meetings of stockholders and to cancel previouslyscheduled special meetings of stockholders;•providing that directors may be removed prior to the expiration of their terms by stockholders only for cause; and•advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to beacted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect theacquirer’s own slate of directors or otherwise attempting to obtain control of us.As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, whichprevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval ofthe holders of substantially all of our outstanding common stock. Any provision of our certificate of incorporation or bylaws or Delaware law that has theeffect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock,and could also affect the price that some investors are willing to pay for our common stock.23Table of ContentsITEM 1B.UNRESOLVED STAFF COMMENTSNone.ITEM 2.PROPERTIESPrincipal Office Locations Our corporate headquarters and executive offices are located in Boston, Massachusetts, in a 52,588 square-foot facility under a lease expiring onDecember 31, 2024. In addition, we operate a 26,019 square-foot facility in Salt Lake City, Utah under a lease expiring on December 31, 2024, and a 22,685square-foot facility in Indianapolis, Indiana under a lease expiring on June 30, 2025. We also have additional offices throughout the United States and invarious international locations. These additional office leases expire between 2018 and 2022.The main purpose and function of each office location is to support business activities such as information technology, research and development,product support, development and management, sales and general administration. All of our facilities are fully adequate and suitable for the functions that areperformed in each location and we have capacity headroom to accommodate infrastructure growth over the near term foreseeable future within our facilities.Data CentersOur principal data centers are located in Ashburn, Virginia; Chandler, Arizona; and Phoenix, Arizona. We have additional data centers throughout theUnited States and in various international locations. Our data center leases expire between 2018 and 2023. We have capacity headroom built into our primaryleases to accommodate infrastructure growth within the lease periods should we need to add more space or power to our existing footprint. ITEM 3.LEGAL PROCEEDINGSSee Note 12 - Commitments and Contingencies – Litigation to our consolidated financial statements included in this Annual Report for informationconcerning litigation. In addition to the lawsuit involving Realtime Data LLC, from time to time, we have been and may become involved in legalproceedings arising in the ordinary course of our business. Although the results of litigation and claims cannot be predicted with certainty, we are notpresently involved in any other legal proceeding in which the outcome, if determined adversely to us, would be expected to have a material adverse effect onour business, operating results, or financial condition. Regardless of the outcome, litigation can have an adverse impact on us because of defense andsettlement costs, diversion of management resources, and other factors.ITEM 4.MINE SAFETY DISCLOSURESNot Applicable.24Table of ContentsPART II ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIESMarket InformationOur common stock is traded on The NASDAQ Global Market under the symbol “CARB.” The following table shows the high and low sale prices pershare of our common stock as reported on The NASDAQ Global Market for the periods indicated: 2017 2016 High Low High LowFirst Quarter$21.50 $15.30 $10.01 $6.50Second Quarter$24.60 $18.20 $10.62 $7.30Third Quarter$24.35 $18.55 $15.48 $9.30Fourth Quarter$27.00 $21.35 $19.63 $14.10HoldersAs of February 28, 2018, we had approximately 23 holders of record of our common stock. This does not include the number of persons whose stock isheld in nominee or “street” name accounts through brokers.DividendsWe have never declared or paid, and do not anticipate declaring or paying, any cash dividends on our common stock. Any future determination as to thedeclaration and payment of dividends, would be at the discretion of our Board of Directors and will depend on then existing conditions, including ourfinancial condition, operating results, contractual restrictions, capital requirements, business prospects, and other factors that our Board of Directors maydeem relevant.Securities Authorized for Issuance under Equity Compensation PlansOur equity plan information required by this item is incorporated by reference to the information in Part III, Item 12 of this Annual Report.Recent Sales of Unregistered SecuritiesNot applicable.Issuer Purchases of Equity SecuritiesPeriodTotal Number ofShares Purchased (1) Average PricePaid per Share(2) Total Number of SharesPurchased as Part ofPublicly AnnouncedPlans or Programs Maximum Number (orApproximate Dollar Value)of Shares that May Yet bePurchased Under the Plans orPrograms (3)October 1, 2017 - October 31, 2017— $— — $5,214,409November 1, 2017 - November 30, 201711,762 $22.75 — $5,214,409December 1, 2017 - December 31, 201711,762 $23.65 — $5,214,409Total23,524 — (1)During the three months ended December 31, 2017, 23,524 shares were withheld to satisfy tax withholding obligations in connection with thevesting of restricted stock units. We did not repurchase any shares of our common stock pursuant to our previously-announced program.(2)The average price per share for each of the months in the fiscal quarter was calculated by dividing (a) the sum for the aggregate value of thetax withholding obligations by (b) the sum of the number of shares withheld.(3)In May 2015, our Board of Directors authorized a $20.0 million share repurchase program that was subsequently increased to $30.0 million onMarch 22, 2017.25Table of ContentsPerformance GraphThe following performance graph compares the cumulative total return to stockholders on our common stock for the period from December 31, 2012through December 31, 2017 against the cumulative total return of The NASDAQ Composite Index and The NASDAQ-100 Technology Sector Index. Thecomparison assumes $100 was invested in our common stock and each of the indices upon the closing of trading on December 31, 2012 and assuming thereinvestment of dividends, if any. We have never declared or paid any cash dividends on our common stock and does not anticipate paying any cashdividends in the foreseeable future.The performance shown on the graph below is based on historical results and are not indicative of, nor intended to forecast, future performance of ourcommon stock.This performance graph shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission for purposes of Section 18of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities under that Section, and shall not be deemedto be incorporated by reference into any filing of Carbonite, Inc. under the Securities Act of 1933, as amended.26Table of ContentsITEM 6.SELECTED FINANCIAL DATAYou should read the following selected consolidated financial and other data below in conjunction with “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and the consolidated financial statements, related notes, and other financial information included in thisAnnual Report. The selected consolidated financial and other data in this section are not intended to replace the consolidated financial statements and arequalified in their entirety by the consolidated financial statements and related notes included elsewhere in this Annual Report.The consolidated statements of operations data for the years ended December 31, 2017, 2016, and 2015 and the consolidated balance sheets data as ofDecember 31, 2017 and 2016 are derived from our audited consolidated financial statements included elsewhere in this Annual Report. The consolidatedstatements of operations data for the years ended December 31, 2014 and 2013 and the consolidated balance sheets data as of December 31, 2015, 2014 and2013 are derived from our audited consolidated financial statements not included in this Annual Report. Historical results are not necessarily indicative ofthe results to be expected in the future. Years Ended December 31, 2017 2016 2015 2014 2013 (in thousands, except share and per share data)Consolidated statements of operations data: Revenue$239,462 $206,986 $136,616 $122,620 $107,194Cost of revenue (1)70,067 60,937 38,784 38,567 34,881Gross profit169,395 146,049 97,832 84,053 72,313Operating expenses (1): Research and development46,160 33,298 28,085 24,132 20,919General and administrative43,331 41,332 37,265 17,862 14,275Sales and marketing90,922 73,347 53,671 49,882 47,349Restructuring charges1,047 856 469 762 322Total operating expenses181,460 148,833 119,490 92,638 82,865Loss from operations(12,065) (2,784) (21,658) (8,585) (10,552)Interest and other income (expense), net(6,866) (122) 40 45 8Other income (expense), net1,252 190 105 (443) (6)Loss before income taxes(17,679) (2,716) (21,513) (8,983) (10,550)(Benefit) provision for income taxes(13,677) 1,383 102 367 55Net loss(4,002) (4,099) (21,615) (9,350) (10,605)Basic and diluted net loss per share attributable to commonstockholders$(0.14) $(0.15) $(0.80) $(0.35) $(0.41)Weighted-average number of common shares used incomputing basic and diluted net loss per share27,779,098 27,028,636 27,187,910 26,816,879 26,166,554(1) Stock-based compensation included in the consolidated statements of operations data above was as follows: Years Ended December 31, 2017 2016 2015 2014 2013 (in thousands)Cost of revenue$1,061 $807 $730 $539 $508Research and development1,969 868 1,171 1,285 955General and administrative7,827 6,161 7,226 3,216 2,250Sales and marketing1,885 1,064 1,089 1,025 1,06427Table of Contents As of December 31, 2017 2016 2015 2014 2013 (in thousands)Consolidated balance sheet data: Cash and cash equivalents$128,231 $59,152 $63,936 $46,084 $50,392Working capital (deficit)24,515 (28,647) (28,217) (23,767) (11,080)Total assets312,819 144,759 125,990 131,754 109,161Deferred revenue, including current portion124,514 107,591 98,703 91,424 84,000Total liabilities274,554 138,925 124,917 117,216 96,340Total stockholders’ equity38,265 5,834 1,073 14,538 12,821 Years Ended December 31, 2017 2016 2015 2014 2013 (in thousands, except percentage data)Key metrics: Bookings$245,864 $209,284 $144,106 $128,183 $115,988Annual retention rate87% 86% 84% 83% 84%Renewal rate85% 84% 82% 80% 80%Adjusted free cash flow$20,233 $18,180 $14,274 $15,072 $5,974Refer to Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Key Business Metrics below for thedefinitions of these key metrics. Bookings and adjusted free cash flow are financial data that are not calculated in accordance with GAAP. The tables belowprovide reconciliation of bookings and adjusted free cash flow to revenue and cash provided by operating activities, respectively, the most directlycomparable financial measures calculated and presented in accordance with GAAP. The presentation of non-GAAP financial information should not beconsidered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.Our management uses annual retention rate to determine the stability of our customer base and to evaluate the lifetime value of our customerrelationships. As customers’ annual and multi-year subscriptions come up for renewal throughout the calendar year based on the dates of their originalsubscriptions, measuring retention on a trailing twelve month basis at the end of each quarter provides our management with useful and timely informationabout the stability of our customer base. Management uses renewal rate to monitor trends in customer renewal activity.Our management uses bookings as a proxy for cash receipts. Bookings represent the aggregate dollar value of customer subscriptions and softwarearrangements, which may include multiple revenue elements, such as software licenses, hardware, professional services and post-contractual support, receivedby us during a period. We initially record a subscription fee as deferred revenue and then recognize it ratably, on a daily basis, over the life of thesubscription period. Management uses bookings and adjusted free cash flow as measures of our operating performance; for planning purposes, including thepreparation of our annual operating budget; to allocate resources to enhance the financial performance of our business; to evaluate the effectiveness of ourbusiness strategies; to provide consistency and comparability with past financial performance; to determine capital requirements; to facilitate a comparisonof our results with those of other companies; and in communications with our Board of Directors concerning our financial performance. We also use bookingsand adjusted free cash flow as factors when determining management’s incentive compensation. Management believes that the use of bookings and adjustedfree cash flow provides consistency and comparability with our past financial performance, facilitates period-to-period comparisons of operations, and alsofacilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.Although bookings and adjusted free cash flow are frequently used by investors and securities analysts in their evaluations of companies, these metricshave limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results of operations as reported underGAAP. Some of these limitations are:•bookings do not reflect our receipt of payment from customers;•adjusted free cash flow does not reflect our future requirements for contractual commitments to vendors;28Table of Contents•adjusted free cash flow does not reflect the non-cash component of employee compensation or depreciation and amortization of property andequipment; and•other companies in our industry may calculate bookings or free cash flow or similarly titled measures differently than we do, limiting theirusefulness as comparative measures.The following tables present reconciliations of our bookings and adjusted free cash flow to revenue and cash provided by operating activities,respectively, the most directly comparable financial measures calculated and presented in accordance with GAAP. Years Ended December 31, 2017 2016 2015 2014 2013 (in thousands)Revenue$239,462 $206,986 $136,616 $122,620 $107,194Add change in deferred revenue, net of foreign exchange (excludingacquired and divested deferred revenue)6,402 2,298 7,490 5,563 8,794Bookings$245,864 $209,284 $144,106 $128,183 $115,988 Years Ended December 31, 2017 2016 2015 2014 2013 (in thousands)Cash provided by operating activities$31,330 $13,165 $13,197 $22,678 $14,625Subtract capital expenditures(17,351) (6,582) (9,730) (14,495) (9,801)Free cash flow13,979 6,583 3,467 8,183 4,824Add payments related to corporate headquarter relocation— — 1,309 3,872 —Add acquisition-related payments5,707 9,989 1,406 2,053 —Add hostile takeover-related payments— — 1,791 100 —Add CEO transition payments— — 29 634 —Add restructuring-related payments359 341 — — —Add cash portion of lease exit charge— 343 887 230 1,150Add litigation-related payments188 924 5,385 — —Adjusted free cash flow$20,233 $18,180 $14,274 $15,072 $5,97429Table of ContentsITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statementsand related notes appearing elsewhere in this Annual Report. The following discussion contains forward-looking statements that reflect our plans,estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause orcontribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in “Risk Factors.”OverviewWe provide backup, disaster recovery, high availability and workload migration technology (the "Carbonite Data Protection Platform"). The CarboniteData Protection Platform supports businesses in locations around the world with secure and scalable global cloud infrastructure. We continue to invest instrategic acquisitions and integrate these acquisitions into our portfolio of data protection solutions, in order to expand our addressable market and increaseour strategic importance to customers.We derive the majority of our revenue from subscription fees with consistently strong retention rates. The remainder of our revenue is derived fromsoftware arrangements, which often contain multiple revenue elements, such as software licenses, hardware, professional services and post-contract customersupport. We sell our solutions globally, and our customers primarily come from the following primary sources: directly from our website, our inside salesteam, acquisitions, or from our network of channel partners, including distributors, value-added resellers, managed service providers, and global systemsintegrators.We invest in customer acquisition because the market for our solutions is highly competitive. We support our sales network with a marketing approachthat leverages our growing brand awareness to generate broad market demand. Our marketing efforts are designed to attract prospective customers and enrollthem as paying customers, either through immediate sales, free trials or communication of the benefits of our solutions and development of ongoingrelationships.On January 31, 2017, we completed the acquisition of all the outstanding capital stock of DoubleTake Software, Inc. for a purchase price of $65.9million. In addition, on August 14, 2017, we entered into an asset purchase agreement with Datacastle Corporation for a purchase price of $9.6 millionpursuant to which we acquired all the assets associated with Datacastle's cloud data backup, caching and analytics software and services for data protectionpurposes. As discussed below, we recently entered into an agreement to acquire all of the issued and outstanding capital stock of Mozy, Inc., a cloud backupservice for businesses and consumers. We believe these acquisitions strengthen our overall leadership position in the data protection market and strengthenour technology portfolio.Our operating costs continue to grow as we invest in strategic acquisitions, new customer acquisition, cross-sell efforts, and research and development.We expect to continue to devote substantial resources to integration, global expansion, customer acquisition, and product innovation. In addition, we expectto invest heavily in our operations to support our anticipated growth. In October 2017, we initiated a restructuring program ("2017 Plan") to streamlineoperations and reduce operating costs. We recorded restructuring charges of $1.0 million for employee severance related to the reduction of our workforce.We estimate that we will incur restructuring charges between $1.5 million and $2.1 million related to the employee severance under the 2017 Plan. Activitiesunder the 2017 Plan are expected to be substantially completed by the end of the first half of 2018.We generally defer revenue over our customers’ subscription periods but expense marketing costs as incurred. As a result of these factors, we expect tocontinue to incur GAAP operating losses on an annual basis for the foreseeable future.Our Business ModelAs the majority of our business is driven by subscription services, we evaluate the profitability of a customer relationship over its lifecycle. We generallyincur customer acquisition costs and capital equipment costs in advance of subscriptions while recognizing revenue ratably over the terms of thesubscriptions. As a result, a customer relationship may not be profitable or result in positive cash flow at the beginning of the subscription period, eventhough it may be profitable or result in positive cash flow over the life of the customer relationship. While we offer monthly, annual and multi-yearsubscription plans, a majority of our customers are currently on annual subscription plans. The annual or multi-year commitments of our customers enhancemanagement’s visibility into revenue, and charging customers at the beginning of the subscription period provides working capital.30Table of ContentsKey Business MetricsOur management regularly reviews a number of financial and operating metrics, including the following key metrics, to evaluate our business. Bookingsand adjusted free cash flow are financial data that are not calculated in accordance with GAAP. The presentation on non-GAAP financial information shouldnot be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. Refer to Item 6.Selected Financial Data for a reconciliation to the most comparable financial measures presented in accordance with GAAP.•Bookings. We calculate bookings as revenue recognized during a particular period plus the change in total deferred revenue, excluding deferredrevenue recorded in connection with acquisitions and divestitures, net of foreign exchange during the same period. Our management uses thismeasure as a proxy for cash receipts. Bookings represent the aggregate dollar value of customer subscriptions and software arrangements, which mayinclude multiple revenue elements, such as software licenses, hardware, professional services and post-contractual support, received by us during aperiod. We initially record a subscription fee as deferred revenue and then recognize it ratably, on a daily basis, over the life of the subscriptionperiod.•Annual retention rate. We calculate annual retention rate as the percentage of subscription customers on the last day of the prior year who remaincustomers on the last day of the current year. Our management uses these measures to determine the stability of our customer base and to evaluatethe lifetime value of our customer relationships.•Renewal rate. We define renewal rate for a period as the percentage of customers who renew annual or multi-year subscriptions that expire during theperiod presented. Our management uses this measure to monitor trends in customer renewal activity.•Adjusted free cash flow. We calculate adjusted free cash flow by subtracting the cash paid for the purchase of property and equipment and addingthe payments related to corporate headquarter relocation, acquisitions, hostile takeover, CEO transition, restructuring, litigation and the cash portionof the lease exit charge from net cash provided by operating activities. Our management uses adjusted free cash flow to assess our businessperformance and evaluate the amount of cash generated by our business.Subscription renewals may vary during the year based on the date of our customers’ original subscriptions. As we recognize subscription revenue ratablyover the subscription period, this generally has not resulted in a material seasonal impact on our revenue but may result in material monthly and quarterlyvariances in one or more of the key business metrics described above.Performance HighlightsFor the years ended December 31, 2017, 2016 and 2015, we had the following results:•We generated revenue of $239.5 million, $207.0 million, and $136.6 million, respectively. Revenue increased by $32.5 million, or 16%, for the yearended December 31, 2017, as compared to the year ended December 31, 2016, and $70.4 million, or 52%, for the year ended December 31,2016, as compared to the year ended December 31, 2015.•Cash flow from operations was $31.3 million, $13.2 million, and $13.2 million, respectively.The following table presents our performance highlights for certain non-GAAP and other key metrics for the periods presented: Years Ended December 31, 2017 2016 2015Key metrics (1):(in thousands, except percentage data)Bookings$245,864 $209,284 $144,106Annual retention rate87% 86% 84%Renewal rate85% 84% 82%Adjusted free cash flow$20,233 $18,180 $14,274(1) Refer to the Key Business Metrics section above for the definition of these key metrics, and refer to Item 6. Selected FinancialData for the reconciliation of bookings and adjusted free cash flow to the most directly comparable financial measures presented inaccordance with GAAP. 31Table of ContentsThe following table presents our bookings by type of customer for the periods presented: Years Ended December 31, 2017 versus 2016 2016 versus 2015 2017 2016 2015 % % (in thousands) Business$164,051 $124,363 $54,471 32 % 128 %Consumer81,813 84,921 89,635 (4)% (5)%Total bookings$245,864 $209,284 $144,106 17 % 45 %Our bookings increased by $36.6 million for the year ended December 31, 2017, compared to the corresponding period in 2016, primarily due to theinclusion of bookings from the acquisition of DoubleTake during 2017 and increased sales of higher priced business solutions. Our bookings increased by$65.2 million for the year ended December 31, 2016, compared to the corresponding period in 2015, primarily due to our acquisition of EVault and increasedsales of our higher priced business solutions. We continue to focus on growing our relationships with active reseller partners, with bookings related to sales ofbusiness solutions representing 67% of total bookings for the year ended December 31, 2017, up from 59% in the year ended December 31, 2016 and 38% inthe year ended December 31, 2015. We expect these trends to continue and therefore expect bookings for our business solutions to continue to represent anincreasing percentage of total bookings. Our total bookings growth rate for the year ended December 31, 2017 was impacted by a decline in our growth ratesin consumer bookings. We do not expect this trend to continue, as we expect an increase in consumer bookings growth rates in the upcoming year.Adjusted free cash flow for the year ended December 31, 2017 increased by $2.1 million compared to the year ended December 31, 2016, primarily dueto the timing of payments, partially offset by an increase in purchases of property, plant and equipment related to the capital investments in our data centers.Adjusted free cash flow for the year ended December 31, 2016 increased by $3.9 million compared to the year ended December 31, 2015, primarily due to a$3.1 million decrease in purchases of property, plant and equipment.Key Components of our Consolidated Statements of OperationsRevenueWe derive our revenue principally from subscription fees related to our service solutions as well as the sale of software arrangements, which often containmultiple revenue elements, such as software licenses, hardware, professional services and post-contract customer support. We initially record a customersubscription fee as deferred revenue and then recognize it as revenue ratably, on a daily basis, over the life of the subscription period.Cost of revenueCost of revenue consists primarily of costs associated with our data center operations and customer support centers, including wages and benefits forpersonnel, depreciation of equipment, amortization of developed technology, rent, utilities and broadband, cost of hardware, equipment maintenance,hosting fees, software license fees, and allocated overhead. The expenses related to hosting our services and supporting our customers are related to thenumber of customers and the complexity of our services and hosting infrastructure. Our cost of storage, on a per gigabyte (GB) basis, has decreased over timedue to decreases in storage prices and greater efficiency in our data center operations. We have also experienced a downward trend in the cost of storageequipment and broadband service, which we expect will continue in the future. Over the long term, we expect these expenses to increase in absolute dollars,but decrease as a percentage of revenue due to improved efficiencies in supporting customers.Gross profit and gross marginHistorically, our gross margins have expanded due to the introduction of higher priced solutions, a downward trend in the cost of storage equipment andservices, and efficiencies of our customer support personnel in supporting our customers. We expect these trends to continue over the long term.Operating expensesResearch and development. Research and development expenses consist primarily of wages and benefits for development personnel, third-partyoutsourcing costs, hosting fees, consulting fees, rent, and depreciation. We focus our research and development efforts on enhancements and ease of use ofour solutions. These efforts result in updated versions and new suites of our solutions, while not changing the underlying technology. The majority of ourresearch and development employees and contractors are located at our corporate headquarters in the U.S. and at our office in Canada. We expect thatresearch and32Table of Contentsdevelopment expenses will increase in absolute dollars and as a percentage of revenue on an annual basis as we continue to enhance and expand our services.General and administrative. General and administrative expenses consist primarily of wages and benefits for management, finance, accounting, humanresources, legal and other administrative personnel, legal and accounting fees, insurance, acquisition and other corporate expenses. We expect that generaland administrative expenses will increase in absolute dollars on an annual basis so that we can support the anticipated growth of our business.Sales and marketing. Sales and marketing expenses consist primarily of wages and benefits for sales and marketing personnel, advertising costs, creativeexpenses for advertising programs, credit card fees, commissions paid to third-party partners and affiliates, and the cost of providing free trials. We expect thatwe will continue to commit significant resources to our sales and marketing efforts to grow our business and awareness of our brand and solutions. We expectthat sales and marketing expenses will continue to increase in absolute dollars on an annual basis.Restructuring charges. Restructuring charges consist of charges related to the Company's restructuring efforts associated with the reorganization andconsolidation of certain operations as well as disposal of certain assets. See Note 13—Restructuring to our consolidated financial statements included in thisAnnual Report for additional information.Results of OperationsThe following table sets forth, for the periods presented, data from our consolidated statements of operations as a percentage of revenue that each lineitem represents. The period-to-period comparison of financial results is not necessarily indicative of future results. The information contained in the tablesbelow should be read in conjunction with financial statements and related notes included elsewhere in this Annual Report. Years Ended December 31, 2017 2016 2015 (% of revenue)Consolidated statements of operations data: Revenue100.0 % 100.0 % 100.0 %Cost of revenue29.3 29.4 28.4Gross profit70.7 70.6 71.6Operating expenses: Research and development19.3 16.1 20.6General and administrative18.1 20.0 27.3Sales and marketing38.0 35.4 39.3Restructuring charges0.4 0.4 0.3Total operating expenses75.8 71.9 87.5Loss from operations(5.1) (1.3) (15.9)Interest (expense) income, net(2.8) (0.1) —Other (expense) income, net0.5 0.1 0.2Loss before income taxes(7.4) (1.3) (15.7)(Benefit) provision for income taxes(5.7) 0.7 0.1Net loss(1.7)% (2.0)% (15.8)%Comparison of Years Ended December 31, 2017, 2016, and 2015Revenue Years Ended December 31, 2017 versus 2016 2016 versus 20152017 2016 2015 Amount%Amount% (in thousands, except percentage data) Revenue$239,462 $206,986 $136,616 $32,47615.7% $70,37051.5%33Table of ContentsRevenue increased by $32.5 million, or 16%, for the year ended December 31, 2017, as compared to the year ended December 31, 2016, primarily due tothe inclusion of revenue from our recently acquired DoubleTake product offerings and increased sales of higher priced business solutions, partially offset bya decline in our growth rates in consumer revenue. Revenue increased by $70.4 million, or 52%, for the year ended December 31, 2016, as compared to theyear ended December 31, 2015, primarily due to our acquisition of EVault and increased sales of our higher priced business solutions. Revenue from ourbusiness solutions were approximately $155.8 million in 2017 compared to $118.4 million in 2016 and $46.1 million in 2015.Cost of revenue, gross profit, and gross margin Years Ended December 31, 2017 versus 2016 2016 versus 20152017 2016 2015 Amount%Amount% (in thousands, except percentage data) Cost of revenue$70,067 $60,937 $38,784 $9,13015.0 % $22,15357.1%Percent of revenue29.3% 29.4% 28.4% Components of cost of revenue: Personnel-related costs$25,992 $23,513 $13,853 $2,47910.5 % $9,66069.7%Hosting and depreciation costs20,528 21,758 19,553 (1,230)(5.7)% 2,20511.3%Amortization8,179 2,632 1,281 5,547210.8 % 1,351105.5%Software and other15,368 13,034 4,097 2,33417.9 % 8,937218.1%Total cost of revenue$70,067 $60,937 $38,784 $9,13015.0 % $22,15357.1%Gross profit$169,395 $146,049 $97,832 $23,34616.0 % $48,21749.3%Gross margin70.7% 70.6% 71.6% Our gross margin increased to 70.7% from 70.6% for the year ended December 31, 2017 as compared to the year ended December 31, 2016, drivenprincipally by an increased percentage of our revenues derived from higher margin business solutions and efficiencies realized in our data centers.Our gross margin decreased to 70.6% from 71.6% for the year ended December 31, 2016, as compared to the year ended December 31, 2015, primarilydue to sales of our EVault solutions, which have a lower gross margin than our other business solutions, partially offset by efficiencies realized in our datacenters and our customer support organization.Cost of revenue increased by $9.1 million for the year ended December 31, 2017, as compared to the year ended December 31, 2016, driven largely bythe costs of sales of our DoubleTake offerings and amortization. Amortization increased by $5.5 million, mainly related to additional developed technologyamortization associated with the DoubleTake acquisition in January 2017. Personnel-related costs increased by $2.5 million associated with supporting ourcustomers. Software and other costs increased $2.3 million associated with an increase of $1.8 million for software and support contracts and $0.7 millionincrease in consulting expenses. These increases were partially offset by a decrease in hosting and depreciation costs of $1.2 million associated withefficiencies realized in our data centers.Cost of revenue increased by $22.2 million for the year ended December 31, 2016, as compared to the year ended December 31, 2015, driven largely bythe costs of sales of our EVault offerings. The increase in software and other costs was driven principally by an increase of $5.1 million in additional software,royalty and consulting largely associated with our EVault service offerings, $2.8 million of hardware costs for customers who purchased an appliance.Amortization increased by $1.4 million related to additional amortization of intangible assets associated with the EVault acquisition in January 2016. Personnel-related costs increased $9.7 million due to additional headcount to deliver our EVault service offerings and support our customers. Hosting anddepreciation costs increased $2.2 million primarily due to $1.2 million in increased rent and $0.9 million of increased broadband costs to support our hostinginfrastructure.34Table of ContentsOperating expensesResearch and development Years Ended December 31, 2017 versus 2016 2016 versus 20152017 2016 2015 Amount%Amount% (in thousands, except percentage data) Research and development$46,160 $33,298 $28,085 $12,86238.6% $5,21318.6 %Percent of revenue19.3% 16.1% 20.6% Components of research and development: Personnel-related costs$34,207 $25,418 $21,179 $8,78934.6% $4,23920.0 %Third-party outsourcing costs1,747 1,230 3,498 51742.0% (2,268)(64.8)%Hosting, outside contractors and other10,206 6,650 3,408 3,55653.5% 3,24295.1 %Total research and development$46,160 $33,298 $28,085 $12,86238.6% $5,21318.6 %Research and development expenses increased by $12.9 million for the year ended December 31, 2017, as compared to the year ended December 31,2016, primarily due to an increase of personnel-related costs of $8.8 million associated with additional research and development headcount driven by theinclusion of acquired DoubleTake and Datacastle research and development employees and an increase of $1.1 million in stock-based compensation expenseassociated with new grants. The increase in hosting, consulting and other expenses was driven by an increase of $2.2 million of consulting and independentcontractor expenses associated with enhancing the functionality and ease of use of our solutions and $0.8 million of acquisition and integration-relatedexpenses associated with the acquisition of DoubleTake. Additionally, third party outsourcing costs increased by $0.5 million.Research and development expenses increased by $5.2 million for the year ended December 31, 2016, as compared to the year ended December 31,2015, primarily as a result of the increase in research and development personnel associated with the EVault acquisition. In addition, an initiative to decreasedependency on outsourced development contributed to the increase in personnel related costs and the reduction in third party outsourcing costs. Theincrease in hosting, consulting and other expenses was driven by $1.0 million of additional facility and depreciation costs, $0.9 million of consulting andacquisition and $0.6 million of integration-related expenses.General and administrative Years Ended December 31, 2017 versus 2016 2016 versus 20152017 2016 2015 Amount%Amount% (in thousands, except percentage data) General and administrative$43,331 $41,332 $37,265 $1,9994.8 % $4,06710.9 %Percent of revenue18.1% 20.0% 27.3% Components of general and administrative: Personnel-related costs$24,515 $21,471 $17,687 $3,04414.2 % $3,78421.4 %Professional fees11,503 11,255 16,451 2482.2 % (5,196)(31.6)%Consulting, taxes and other7,313 8,606 3,127 (1,293)(15.0)% 5,479175.2 %Total general and administrative$43,331 $41,332 $37,265 $1,9994.8 % $4,06710.9 %General and administrative expenses increased by $2.0 million for the year ended December 31, 2017, as compared to the year ended December 31,2016, primarily as a result of increased personnel-related costs associated with additional headcount to support our overall growth and an increase of $1.7million in stock-based compensation expense associated with new grants. The decrease in consulting, taxes and other expenses related to a decrease of $1.7million in one-time transactional tax expense owed to foreign tax authorities, a decrease in bad debt expense of $1.1 million, partially offset by an increase inconsulting and independent contractor expenses of $0.6 million and amortization of intangibles of $0.2 million. Professional fees remained relativelyconsistent for the year ended December 31, 2017 compared to the year ended December 31, 2016.General and administrative expenses increased by $4.1 million for the year ended December 31, 2016, as compared to the year ended December 31,2015, primarily as a result of an increase in general and administrative personnel associated with the EVault acquisition. For the year ended December 31,2016, consulting, taxes and other increased by $5.5 million driven principally by $1.5 million in one-time transactional tax expenses and increased costsassociated with the EVault acquisition.35Table of ContentsProfessional fees decreased because of a $7.8 million decrease in litigation and hostile takeover defense costs, partially offset by an increase of $1.6 millionin acquisition-related costs and $1.1 million in audit and tax-related expenses.Sales and marketing Years Ended December 31, 2017 versus 2016 2016 versus 20152017 2016 2015 Amount%Amount% (in thousands, except percentage data) Sales and marketing$90,922 $73,347 $53,671 $17,57524.0 % $19,67636.7 %Percent of revenue38.0% 35.4% 39.3% Components of sales and marketing: Personnel-related costs$42,350 $31,828 $19,498 $10,52233.1 % $12,33063.2 %Advertising costs16,416 17,833 15,040 (1,417)(7.9)% 2,79318.6 %Costs of credit card transactions and offeringfree trials7,275 6,508 7,383 76711.8 % (875)(11.9)%Agency fees, consulting and other24,881 17,178 11,750 7,70344.8 % 5,42846.2 %Total sales and marketing$90,922 $73,347 $53,671 $17,57524.0 % $19,67636.7 %Sales and marketing expenses increased by $17.6 million for the year ended December 31, 2017, as compared to the year ended December 31, 2016,primarily due to an increase of personnel-related costs of $10.5 million associated with additional sales and marketing headcount driven by the inclusion ofacquired DoubleTake sales and marketing employees. Additionally, agency fees, consulting and other costs increased by $7.7 million associated withpromoting our expanded set of offerings and the inclusion of the DoubleTake business in our consolidated results. This increase was driven by an increase inconsulting and independent contractor expenses of $1.7 million, travel and entertainment expenses of $1.3 million, software and hosted solutions expensesof $1.1 million, integration expenses of $0.9 million and amortization expenses of $0.6 million associated with additional customer relationshipsamortization for the 2017 acquisitions. Advertising costs declined by $1.4 million related to a reduction in our traditional radio media spend compared to theyear ended December 31, 2016.Sales and marketing expenses increased by $19.7 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015,primarily as a result of the EVault acquisition. Advertising costs increased by $2.8 million due to an increase in our overall marketing efforts associated withpromoting our expanded set of offerings to a broader audience. These cost increases were offset by a reduction in free trial offerings and presale support of$0.9 million. The increase in agency fees, consulting and other was due primarily to $3.1 million of go-to-market and branding strategy costs.Restructuring charges Years Ended December 31, 2017 versus 2016 2016 versus 20152017 2016 2015 Amount%Amount% (in thousands, except percentage data) Restructuring$1,047 $856 $469 $19122.3% $38782.5%Percent of revenue0.4% 0.4% 0.3% Restructuring expenses for the year ended December 31, 2017 were $1.0 million, as we initiated a restructuring program in October 2017 to streamlineoperations and reduce operating costs by reducing our workforce, as discussed above. We recorded restructuring charges of $0.9 million for the year endedDecember 31, 2016, primarily related to the reorganization and consolidation of certain operations as well as disposal of certain assets in 2016. Restructuringcharges of $0.5 million were recorded for the year ended December 31, 2015, primarily related to the completion of our data center optimization program aswell as a change in estimate of our lease exit charge for our former Boston, Massachusetts corporate headquarters. Refer to Note 13—Restructuring to ourconsolidated financial statements included in this Annual Report for additional information.Loss from operationsOperating loss for the year ended December 31, 2017 was ($12.1) million, compared to ($2.8) million for the year ended December 31, 2016. Theincrease in operating loss during the year ended December 31, 2017 is primarily a result of increases in sales and marketing expenses, research anddevelopment expenses, and costs of revenue.36Table of ContentsOperating loss for the year ended December 31, 2016 was ($2.8) million, compared to ($21.7) million for the year ended December 31, 2015. Thedecrease in operating loss during the year ended December 31, 2016 is primarily a result of an increase in revenue, partially offset by increases in cost ofrevenue, sales and marking expenses, research and development expenses and general and administrative expenses.Non-operating income (expense) Years Ended December 31, 2017 versus 2016 2016 versus 20152017 2016 2015 Amount%Amount% (in thousands, except percentage data) Interest (expense) income, net$(6,866) $(122) $40 $(6,744)5,527.9% $(162)(405.0)%Percent of revenue(2.8)% (0.1)% —% Other income (expense), net$1,252 $190 $105 $1,062558.9% $8581.0 %Percent of revenue0.5 % 0.1 % 0.2% Interest (expense) income, net increased by $6.7 million for the year ended December 31, 2017 as compared to the year ended December 31, 2016,primarily due to cash interest expense of $2.7 million and amortization of the debt discount and debt issuance costs of $4.5 million related to our convertiblesenior notes (the “Convertible Notes”) issued in April 2017, partially offset by $0.6 million of interest income related to interest on our highly liquidinvestments. Interest (expense) income, net remained relatively consistent for the year ended December 31, 2016 as compared to the year ended December 31,2015.Other income (expense), net primarily represents net foreign exchange gains and losses and other non-operating expense and income items. Other income(expense), net increased by $1.1 million for the year ended December 31, 2017 as compared to the year ended December 31, 2016, primarily due to a gain onthe sale of businesses of $0.8 million. Other income (expense), net remained relatively consistent for the year ended December 31, 2016 as compared to theyear ended December 31, 2015.(Benefit) provision for income taxes Years Ended December 31, 2017 versus 2016 2016 versus 20152017 2016 2015 Amount%Amount% (in thousands, except percentage data) (Benefit) provision for income taxes$(13,677) $1,383 $102 $(15,060)(1,088.9)% $1,2811,255.9%Percent of revenue(5.7)% 0.7% 0.1% We recorded income tax (benefit) provision of ($13.7) million, $1.4 million and $0.1 million for the years ended December 31, 2017, 2016 and 2015,respectively. For the year ended December 31, 2017, our tax provision was primarily driven by a tax benefit for a U.S. valuation allowance release, foreignincome taxes, and refundable Federal Alternative Minimum Tax ("AMT"). The partial release of U.S. valuation allowance is due to a net deferred tax liabilityrecorded in the acquisition of DoubleTake. The U.S. net deferred tax liability primarily relates to non-tax deductible intangible assets recognized in thefinancial statements which generate a deferred tax liability. The net deferred tax liability established is estimated to be a source of income to utilizepreviously unrecognized deferred tax assets in the U.S. Therefore, the Company has recorded a discrete tax benefit of $14.6 million for the release of U.S.valuation allowance related to the deferred tax liability recorded in purchase accounting. The U.S. maintains a valuation allowance on the overall U.S. netdeferred tax asset as it is deemed more likely than not the U.S. net deferred tax asset will not be realized. For the year ended December 31, 2016, our taxprovision was primarily driven by foreign income taxes, Federal AMT and state income taxes. For the year ended December 31, 2015, our tax provision wasprimarily driven by Federal AMT, state income taxes, and foreign income taxes, partially offset by a release of a reserve for an uncertain tax position due tothe close of an audit for one of our foreign subsidiaries. Liquidity and Capital ResourcesAs of December 31, 2017, we had cash and cash equivalents of $128.2 million, of which $106.4 million was held in the United States and $21.8 millionof which was held by our international subsidiaries. If the undistributed earnings of our foreign subsidiaries are needed for our operations in the United States,we would be required to accrue and pay non-U.S. withholding taxes upon repatriation in certain non-U.S. jurisdictions. Our current plans are not expected torequire repatriation of cash and37Table of Contentsinvestments to fund our U.S. operations and, as a result, we intend to indefinitely reinvest our foreign earnings to fund our foreign subsidiaries.Source of fundsWe believe, based on our current operating plan, that our existing cash and cash equivalents and cash provided by operations, as well as access to a newrevolving credit facility that we expect to enter into in connection with the acquisition of Mozy, Inc., will be sufficient to meet our anticipated cash needs forthe foreseeable future.On April 4, 2017, we issued, in a private offering, $143.8 million aggregate principal amount of Convertible Notes. The Convertible Notes accrueinterest at 2.50% per year, payable semiannually in arrears on April 1 and October 1 of each year. The Convertible Notes will mature on April 1, 2022, unlessearlier repurchased, redeemed or converted.We previously had a credit agreement with Silicon Valley Bank (the "Credit Facility"), which provided a revolving credit financing of up to $40.0million, including a $5.0 million sub-limit for letters of credit. On April 4, 2017, in connection with the Convertible Notes, we utilized $39.2 million of thenet proceeds from the offering to repay all amounts outstanding under the Credit Facility and thereafter terminated the facility.From time to time, we may explore additional financing sources to develop or enhance our solutions, fund expansion, respond to competitive pressures,acquire or to invest in complementary products, businesses or technologies, or to lower our cost of capital, which could include equity, equity-linked, anddebt financing. There can be no assurance that any additional financing will be available to us on acceptable terms, if at all. If we raise additional fundsthrough the issuance of equity or convertible debt or other equity-linked securities, our existing stockholders could suffer significant dilution, and any newequity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock.Uses of fundsWe have increased our operating and capital expenditures in connection with the growth in our operations and the increase in our personnel, and weanticipate that we will continue to increase such expenditures in the future. Our future capital requirements may vary materially from those now planned andwill depend on many factors, including:•potential future acquisition opportunities;•potential share repurchases under our share repurchase plan;•the levels of advertising and promotion required to acquire and retain customers;•expansion of our data center infrastructure necessary to support our growth;•growth of our operations in the U.S. and worldwide;•our development and introduction of new solutions; and•the expansion of our sales, customer support, research and development, and marketing organizations. Future capital expenditures will focus on acquiring additional data storage and hosting capacity and general corporate infrastructure. We are notcurrently party to any purchase contracts related to future capital expenditures, other than short-term purchase orders.Cash flowsThe following table provides a summary and description of our net cash inflows (outflow) for 2017, 2016, and 2015. Years Ended December 31, 2017 2016 2015 (in thousands)Net cash provided by operating activities$31,330 $13,165 $13,197Net cash (used in) provided by investing activities(91,655) (16,275) 8,323Net cash provided by (used in) financing activities127,622 (1,404) (3,417)38Table of ContentsOperating activitiesOur cash flows from operating activities are significantly influenced by the amount of our net loss, growth in sales and customer growth, changes inworking capital accounts, the timing of prepayments and payments to vendors, add-backs of non-cash expense items such as depreciation and amortization,and stock-based compensation expense.In the year ended December 31, 2017, cash provided by operating activities was $31.3 million, which was driven by an increase in deferred revenue of$6.1 million, change in working capital items totaling $6.2 million and a net adjustment for non-cash charges of $23.5 million, primarily comprised of $21.7million of depreciation and amortization, $12.7 million of stock-based compensation expense, $4.4 million of interest expense related to the non-cashinterest expense related to the amortization of debt discount, $1.4 million of impairment charges, partially offset by a gain on disposal of equipment of $0.9million, benefit for deferred income taxes of $15.3 million and other non-cash items of $0.5 million. These cash inflows were partially offset by our net loss of$4.0 million and a decrease in other assets and liabilities of $0.5 million.For the year ended December 31, 2016, cash provided by operating activities was $13.2 million, which was driven by an increase in adjustments for non-cash charges of $25.6 million, primarily comprised of $15.9 million of depreciation and amortization, $8.9 million of stock-based compensation expense andother add-backs of $0.8 million, and an increase in deferred revenue of $2.4 million. The cash inflows were partially offset by our net loss of $4.1 million, a$0.6 million decrease in other assets and liabilities, and by changes in working capital items totaling $10.1 million, due to the timing of payments andcustomer receipts.For the year ended December 31, 2015, cash provided by operating activities was $13.2 million, which was primarily driven by a $7.5 million increase indeferred revenue associated with an increase in sales. Net cash inflows from operating activities included other changes in working capital of $3.1 million,due to the timing of payments and customer receipts, increase in other assets and long-term liabilities of $0.7 million and non-cash charges of $23.5 million,including $13.6 million of depreciation and amortization, $10.2 million of stock-based compensation, offset by $0.2 million related to a gain on disposal ofequipment and $0.1 million in other non-cash items. These cash inflows were partially offset by our net loss of $21.6 million.Investing activitiesFor the year ended December 31, 2017, cash used in investing activities was $91.7 million, which was primarily driven by our payment of $69.8 millionin connection with the acquisitions of DoubleTake and Datacastle, capital expenditures of $17.4 million, a purchase of derivatives of $5.0 million and apayment for intangible assets of $1.3 million, partially offset by proceeds from maturities of derivatives of $0.5 million, proceeds from sale of property andequipment and businesses of $1.3 million.For the year ended December 31, 2016, cash used by investing activities was $16.3 million, consisting primarily of $11.6 million in cash that was paidfor the EVault acquisition and $6.6 million for purchases of property and equipment. These uses of cash were partially offset by net proceeds from thepurchase and sale of marketable securities and derivatives of $1.9 million. For the year ended December 31, 2015, cash provided by investing activities was $8.3 million, which was primarily driven by net proceeds frommaturities of marketable securities and derivatives of $18.4 million, decrease in restricted cash of $0.7 million and proceeds from the sale of property andequipment of $0.3 million, offset by the use of cash for capital expenditures of $9.7 million and $1.3 million for 2015 acquisitions.Financing activitiesCash provided by financing activities for the year ended December 31, 2017 was $127.6 million, which was primarily driven by $177.8 million proceedsfrom long-term borrowings, net of debt issuance costs, $5.0 million proceeds from the exercise of stock options and $1.0 million proceeds from issuance oftreasury stock under employee stock purchase plan, partially offset by $39.2 million payments on long-term borrowings, $15.0 million of repurchases ofcommon stock and $2.0 million payments of withholding taxes in connection with restricted stock vesting.Cash used in financing activities for the year ended December 31, 2016 was $1.4 million, consisting of $4.5 million in cash used to repurchase commonstock, $0.5 million payments of withholding taxes in connection with restricted stock vesting, offset by $3.6 million in proceeds received from the exerciseof stock options. Cash used in financing activities for the year ended December 31, 2015 was $3.4 million, consisting primarily of $5.3 million of cash used to repurchasecommon stock, $0.3 million payments of withholding taxes in connection with restricted stock vesting, offset by $2.3 million from the proceeds from theexercise of stock options.39Table of ContentsContractual obligationsThe following table summarizes our contractual obligations at December 31, 2017 (in thousands): Payment Due by Period (1)Total LessThan 1Year 1-3 Years 3-5 Years More Than 5Years (in thousands)Office lease obligations$25,720 $4,323 $7,375 $7,151 $6,871Data center lease obligations (2)10,476 3,483 4,105 2,824 64Convertible notes principal143,750 — — 143,750 —Convertible notes interest16,173 3,594 7,188 5,391 —Hosted software obligations2,937 2,02291915 — —Consulting obligations528 528 — — —Other purchase commitments2,095 1,675 420 — —Total$201,679 $15,625 $20,003 $159,116 $6,935(1) See Note 11—Income Taxes to the consolidated financial statements included in this Annual Report for information related to our uncertain taxpositions. The future payments related to uncertain tax positions have not been presented in the table above due to the uncertainty of theamounts and timing of cash settlement with the taxing authorities.(2) Certain amounts in the table above relating to colocation leases for the Company's servers include usage based charges in addition to base rent.The commitments under our office lease obligations shown above consist primarily of lease payments for our Boston, Massachusetts corporateheadquarters, and our administrative offices in Salt Lake City, Utah and Indianapolis, Indiana.Commitments under our data center lease obligations included above consist primarily of Ashburn, Virginia; Chandler, Arizona; and Phoenix, Arizonadata centers. Additional commitments within this line consist of data center colocation agreements in place with Iron Mountain and DataBank. Additionally, we have non-cancellable commitments to vendors primarily consisting of hosted software obligations, consulting obligations, and otherpurchase commitments, which consist of contractual commitments to various vendors primarily for advertising, marketing, and broadband services.Off-balance sheet arrangementsAs of December 31, 2017, we did not have any off-balance sheet arrangements.Critical Accounting PoliciesOur consolidated financial statements are prepared in accordance with GAAP. The preparation of our financial statements and related disclosures requiresus to make estimates, assumptions, and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures.We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances, but all suchestimates and assumptions are inherently uncertain and unpredictable. We evaluate our estimates and assumptions on an ongoing basis. Actual results maydiffer from those estimates and assumptions, and it is possible that other professionals, applying their own judgment to the same facts and circumstances,could develop and support alternative estimates and assumptions that would result in material changes to our operating results and financial condition.The critical accounting policies requiring estimates, assumptions, and judgments that we believe have the most significant impact on our consolidatedfinancial statements are described below. Refer to Note 2—Summary of Significant Accounting Policies to our consolidated financial statements included inthis Annual Report for additional information related to our accounting policies and our consideration of these critical accounting areas. 40Table of ContentsRevenue recognitionWe derive revenue from Software-as-a-Service ("SaaS") arrangements and multiple element arrangements. We recognize revenue when (i) persuasiveevidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable and (iv) collectability is probable. Our revenue recognitionpolicies for these revenue streams are discussed below.We derive the majority of our revenue from data protection solutions sold as subscriptions. These services are standalone independent service solutions,which are generally contracted for a one- to three-year term. Subscription arrangements include access to use our services via the internet. We recognizerevenue in accordance with Accounting Standards Codification (“ASC”) 605-10, Overall Revenue Recognition. Subscription revenue is recognized ratablyon a daily basis upon activation of service over the subscription period, when persuasive evidence of an arrangement with a customer exists, the subscriptionperiod has been activated, the price is fixed or determinable, and collection is reasonably assured. Amounts received prior to satisfying the above revenuerecognition criteria are recorded as deferred revenue in the accompanying consolidated balance sheets.We enter into multiple element arrangements, which may include a combination of our software and non-software related products and services,including subscription services, software licenses, hardware, professional services and post-contract customer support ("PCS"). In such arrangements, wefollow the multiple element guidance in accordance with ASC 605-25, Revenue Recognition - Multiple-Element Arrangements. We allocate revenue to eachelement based on the relative selling price method to the overall arrangement consideration. The selling price for a deliverable is based on vendor-specificobjective evidence ("VSOE"), if available, Third Party Evidence ("TPE"), if VSOE is not available, or Best Estimate of Selling Price ("BESP"), if neither VSOEnor TPE are available. Typically, we use BESP for these arrangements.For our software arrangements, which often contain multiple revenue elements, such as software licenses, professional services and post-contractcustomer support ("PCS"), we recognize and defer revenue using the residual method in accordance with ASC 985-605, Software. Revenue is allocated toeach element, excluding the software license, based on VSOE. VSOE is limited to the price charged when the element is sold separately or, for an element notyet being sold separately, the price established by management having the relevant authority. We do not have VSOE for our software licenses since they areseldom sold separately. Accordingly, revenue is allocated to the software license using the residual value method. Under the residual value method, revenueequal to VSOE of each undelivered element is initially deferred and any remaining arrangement fee is then allocated to the software license.Hardware revenues are generally recognized upon delivery or upon installation, if required. Professional services are generally provided on a time andmaterials basis and revenue from professional services, including installation services, is recognized as services are performed, or upon installation ifrequired.We exclude any taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction (i.e., sales, use and valueadded) from its revenue and costs. Reimbursement received for shipping costs is recorded as revenue.Deferred product costs represent deferred cost of revenue for product shipments to customers prior to satisfaction of our revenue recognition criteria. Suchcosts are classified as prepaid expense and other current assets if the related deferred revenue is initially classified as current. Deferred product costs arerecorded in other assets if the related deferred revenue is initially classified as long-term, and remain a component of noncurrent assets until such costs arerecognized in the consolidated statement of operations. In certain cases, these costs are recognized ratably over the customer contract term.Business CombinationsIn accordance with ASC 805, Business Combinations ("ASC 805"), we recognize the tangible and intangible assets acquired and liabilities assumedbased on their estimated fair values. Determining these fair values requires management to make significant estimates and assumptions, especially withrespect to intangible assets.We recognize identifiable assets acquired and liabilities assumed at their acquisition date fair value. Goodwill as of the acquisition date is measured asthe excess of consideration transferred over the net of the acquisition date fair value of the assets acquired and the liabilities assumed and represents theexpected future economic benefits arising from other assets acquired that are not individually identified and separately recognized. While we use our bestestimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date,our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from theacquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill to the extent that we identifyadjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of assetsacquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.41Table of ContentsGoodwill and acquired intangible assetsWe record goodwill when consideration paid in a business acquisition exceeds the value of the net assets acquired. Our estimates of fair value are basedupon assumptions believed to be reasonable at that time, but that are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate,and unanticipated events or circumstances may occur, which may affect the accuracy or validity of such assumptions, estimates or actual results.Goodwill is not amortized, but rather is tested for impairment annually or more frequently at the reporting unit level if facts and circumstances warrant areview. We have determined that there is a single reporting unit for the purpose of conducting this goodwill impairment assessment. We estimate the fairvalue of the reporting unit (based on our market capitalization) and compare this amount to the carrying value of the reporting unit (as reflected by our totalstockholders’ equity). If we determine that the carrying value of the reporting unit exceeds its fair value, an impairment charge would be required. Our annualgoodwill impairment test is performed at November 30 of each year. To date, we have not identified any impairment to goodwill.Intangible assets acquired in a business combination are recorded at their estimated fair values at the date of acquisition. We amortize acquiredintangible assets over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern cannot be readilydetermined, on a straight-line basis. We review our intangible assets with definite lives for impairment when events or changes in circumstances indicate thatthe related carrying amount of any of these assets may not be recoverable. The details of our intangible asset impairment assessment are included in Note 4 -Fair Value of Financial Instruments.Income taxesWe provide for income taxes under the liability method. Deferred tax assets and liabilities are determined based on differences between financialreporting and tax bases of assets and liabilities and are measured using the enacted tax rates in effect when the differences are expected to reverse. In certainjurisdictions, deferred tax assets are reduced by a valuation allowance to reflect the uncertainty associated with their ultimate realization. We account foruncertain tax positions recognized in our consolidated financial statements by prescribing a more-likely-than-not threshold for financial statementrecognition and measurement of a tax position taken or expected to be taken in a tax return.Due to a history of losses, we have provided a full valuation allowance against our deferred tax assets in the U.S. and in certain foreign jurisdictions thatare in a deferred tax asset position for which we are uncertain as to their ultimate realization. This is more fully described in Note 11 - Income Taxes to ourconsolidated financial statements, included in the Annual Report. The ability to utilize these deferred tax assets may be restricted or eliminated by changes inour ownership, changes in legislation, and other rules affecting the ability to offset future taxable income with losses or other tax attributes from prior periods.Future determinations on the need for a valuation allowance on our net deferred tax assets will be made on an annual basis.Stock-based compensationWe recognize stock-based compensation as an expense in the financial statements using the estimated grant-date fair value over the individual award'srequisite service period, which equals the vesting periods in all cases but for certain market-based awards. We use the straight-line amortization method forrecognizing stock-based compensation expense. We estimate the fair value of stock options on the date of grant using the Black-Scholes option-pricingmodel and the fair value of stock options and awards with market-based vesting conditions on the date of grant using a Monte Carlo simulation. Thesemodels require the use of highly subjective estimates and assumptions, including expected stock price volatility, expected term of an award, risk-free interestrate, and expected dividend yield. The grant date fair value of restricted stock units granted is based on the fair value of the underlying common stock on thedate of grant.Recent Accounting PronouncementsFor information on recent accounting pronouncements, refer to Note 2 - Summary of Significant Accounting Policies - Recently Issued AccountingPronouncements in the notes to the consolidated financial statements included in this Annual Report.42Table of ContentsITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKWe are exposed to market risks in the ordinary course of our business. The most significant market risk we face is foreign currency exchange risk and to alesser degree, interest rate fluctuation risk.Foreign Currency Exchange Risk We are exposed to foreign currency exchange rate risk inherent in our revenues, expenses, sales commitments, anticipated sales, anticipated purchases,and assets and liabilities denominated in currencies other than the U.S. dollar, primarily the Euro. In addition, we are exposed to foreign currency exchangerate risk, in connection with assets and liabilities of our wholly owned subsidiaries, that are denominated in currencies other than the local and/or functionalcurrency of the entity. These transactions and balances are subject to foreign currency exchange gains and losses when remeasured into local currenciesand/or translated into U.S. dollars. Assets and liabilities of our foreign entities are translated into U.S. dollars at exchange rates in effect at the balance sheetdate, and income and expense items are translated at average rates for the applicable period. Fluctuations in foreign currency exchange rates may cause us torecognize transaction and/or translation gains and losses in our statements of operations, as well as our statements of other comprehensive loss.We routinely enter into short-term foreign currency forward contracts to offset foreign exchange gains and losses generated by the remeasurement ofcertain intercompany loans denominated in non-functional currencies. These contracts are not designated as cash flow or fair value hedges and havehistorically been for periods of less than one year. Changes in the fair value of these derivatives, as well as remeasurement gains and losses on the underlyingintercompany assets and liabilities, are recognized in our consolidated statements of operations within "other income (expense), net". At December 31, 2017and 2016, we had outstanding contracts with a total notional value of $47.8 million and $37.7 million, respectively.We have performed a sensitivity analysis as of December 31, 2017, using a modeling technique that measures hypothetical gains and losses for a one-year period, from a 10% movement in foreign currency exchange rates relative to the U.S. dollar and applicable functional currencies of our subsidiaries thathold assets and/or liabilities in non-functional currencies. The analysis covers all of our foreign currency balances offset by any forward contracts used tooffset the underlying exposures. The foreign currency exchange rates we used were based on market rates in effect on December 31, 2017. We estimate that ahypothetical 10% adverse change in foreign currency exchange rates, based upon our market risk as it existed as of December 31, 2017 and 2016 wouldresult in an increased loss from operations of $1.2 million and $1.2 million, respectively, in our consolidated statements of operations.While we have implemented strategies to mitigate certain risks associated with fluctuations in foreign currency exchange rates, we cannot ensure that wewill not recognize gains or losses from international transactions, as this risk is part of transacting business in an international environment. Our policy doesnot allow speculation in derivative instruments for profit or execution of derivative instrument contracts for which there are no underlying exposures. We donot use financial instruments for trading purposes and are not party to any leveraged derivatives. Not every exposure is or can be hedged and, where hedgesare put in place based on expected foreign exchange exposure, they are based on forecasts for which actual results may differ from the original estimate.Failure to successfully hedge or anticipate currency risks properly could affect our consolidated operating results.As we increase our operations in international markets, our exposure to potentially volatile movements in foreign currency exchange rates increases. Theeconomic impact to us of foreign currency exchange rate movements is linked to variability in real growth, inflation, interest rates, governmental actions andother factors. These changes, if significant, could cause us to adjust our foreign currency risk strategies.Interest Rate RiskWe are exposed to interest rate risk as a result of our cash and cash equivalents. Our cash equivalents consist of cash and money market funds. The moneymarket funds are invested solely in U.S. agency and treasury securities. As of December 31, 2017, the carrying amount of our cash equivalents reasonablyapproximates fair value and have a constant $1 net asset value ("NAV") with daily liquidity. The primary objective of our investment policy is to preserveprincipal, while maximizing income and minimizing risk. Accordingly, due to the nature of our cash equivalents, they are relatively insensitive to interestrate changes. We have conducted a rate sensitivity analysis of our interest rate fluctuation, and have determined that the risk of a 10% increase or decrease ininterest rates would not have a material effect on the fair market value of our portfolio.In April 2017, we issued $143.8 million aggregate principal amount of Convertible Notes, which accrue interest at 2.5% per year. The Convertible Noteshave a fixed annual interest rate of 2.5%, and, therefore, we do not have interest rate exposure on the Convertible Notes.43Table of ContentsITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATACarbonite, Inc.Index to Consolidated Financial Statements PageReports of Independent Registered Public Accounting Firm45Consolidated Balance Sheets47Consolidated Statements of Operations48Consolidated Statements of Comprehensive Loss49Consolidated Statements of Stockholders' Equity 50Consolidated Statements of Cash Flows51Notes to Consolidated Financial Statements5344Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the stockholders and the Board of Directors of Carbonite, Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheet of Carbonite, Inc. and subsidiaries (the "Company") as of December 31, 2017, and the relatedconsolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for the year ended December 31, 2017 and the related notes(collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position ofthe Company as of December 31, 2017, and the results of its operations and its cash flows for the year ended December 31, 2017, in conformity withaccounting principles generally accepted in the United States of America.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company'sinternal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued bythe Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2018, expressed an unqualified opinion on theCompany's internal control over financial reporting.Basis for OpinionThese financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financialstatements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Companyin accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included procedures to assess therisks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Suchprocedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also includedevaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financialstatements. We believe that our audits provide a reasonable basis for our opinion./s/ Deloitte & Touche LLPBoston, MassachusettsMarch 12, 2018We have served as the Company's auditor since 2017.45Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and Shareholders ofCarbonite, Inc.We have audited the accompanying consolidated balance sheet of Carbonite, Inc. as of December 31, 2016, and the related consolidated statements ofoperations, comprehensive loss, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2016. These financialstatements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Carbonite, Inc. atDecember 31, 2016, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2016, inconformity with U.S. generally accepted accounting principles./s/ Ernst & Young LLPBoston, MassachusettsMarch 16, 2017,except for the effects of the adoption of ASU 2016-09 as discussed in Note 2, as to which the date is March 12, 201846Table of ContentsCarbonite, Inc.Consolidated Balance Sheets December 31, 2017 2016 (In thousands, except shareand per share data)ASSETS Current assets: Cash and cash equivalents$128,231 $59,152Trade accounts receivable, less allowances of $994 and $1,58722,219 16,639Prepaid expenses and other current assets6,823 7,325Restricted cash— 135Total current assets157,273 83,251Property and equipment, net28,790 23,872Other assets804 157Acquired intangible assets, net44,994 13,751Goodwill80,958 23,728Total assets$312,819 $144,759LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable$10,842 $5,819Accrued expenses21,675 19,768Current portion of deferred revenue100,241 86,311Total current liabilities132,758 111,898Long-term debt111,819 —Deferred revenue, net of current portion24,273 21,280Other long-term liabilities5,704 5,747Total liabilities274,554 138,925Commitments and contingencies (Note 12) Stockholders’ equity: Preferred stock, $0.01 par value; 6,000,000 shares authorized; no shares issued— —Common stock, $0.01 par value; 45,000,000 shares authorized; 30,130,856 shares issued and 28,182,094shares outstanding at December 31, 2017; 28,545,089 shares issued and 27,394,024 shares outstanding atDecember 31, 2016301 285Additional paid-in capital233,343 177,931Accumulated deficit(169,344) (165,042)Treasury stock, at cost (1,948,762 and 1,151,065 shares as of December 31, 2017 and 2016, respectively)(26,616) (10,657)Accumulated other comprehensive income581 3,317Total stockholders’ equity38,265 5,834Total liabilities and stockholders’ equity$312,819 $144,759The accompanying notes are an integral part of these consolidated financial statements.47Table of ContentsCarbonite, Inc.Consolidated Statements of Operations Years Ended December 31, 2017 2016 2015 (In thousands, except share and per share data)Revenue$239,462 $206,986 $136,616Cost of revenue70,067 60,937 38,784Gross profit169,395 146,049 97,832Operating expenses: Research and development46,160 33,298 28,085General and administrative43,331 41,332 37,265Sales and marketing90,922 73,347 53,671Restructuring charges1,047 856 469Total operating expenses181,460 148,833 119,490Loss from operations(12,065) (2,784) (21,658)Interest (expense) income, net(6,866) (122) 40Other income (expense), net1,252 190 105Loss before income taxes(17,679) (2,716) (21,513)(Benefit) provision for income taxes(13,677) 1,383 102Net loss$(4,002) $(4,099) $(21,615)Basic and diluted net loss per share attributable to common stockholders$(0.14) $(0.15) $(0.80)Weighted-average number of common shares used in computing basic and diluted net lossper share27,779,098 27,028,636 27,187,910The accompanying notes are an integral part of these consolidated financial statements.48Table of ContentsCarbonite, Inc.Consolidated Statements of Comprehensive Loss Years Ended December 31, 2017 2016 2015 (In thousands)Net loss$(4,002) $(4,099) $(21,615)Other comprehensive (loss) income: Net unrealized gain on marketable securities— — 7Foreign currency translation adjustments(2,736) 1,277 1,337Total other comprehensive (loss) income(2,736) 1,277 1,344Total comprehensive loss$(6,738) $(2,822) $(20,271)The accompanying notes are an integral part of these consolidated financial statements.49Table of ContentsCarbonite, Inc.Consolidated Statements of Stockholders’ Equity Common Stock AdditionalPaid-inCapital AccumulatedDeficit TreasuryStock AccumulatedOtherComprehensiveIncome TotalStockholders’Equity Number ofShares Amount in thousands, except share data Balance at December 31, 201427,207,723 $272 $152,920 $(139,328) $(22) $696 $14,538Stock options exercised and vesting of restricted stockunits549,076 6 2,232 2,238Stock-based compensation expense 10,216 10,216Tax benefits relating to share-based payments 23 23Acquisition of treasury stock (5,671) (5,671)Other comprehensive income 1,344 1,344Net loss (21,615) (21,615)Balance at December 31, 201527,756,799 $278 $165,391 $(160,943) $(5,693) $2,040 $1,073Stock options exercised and vesting of restricted stockunits788,290 7 3,553 3,560Stock-based compensation expense 8,983 8,983Tax benefits relating to share-based payments 4 4Acquisition of treasury stock (4,964) (4,964)Other comprehensive income 1,277 1,277Net loss (4,099) (4,099)Balance at December 31, 201628,545,089 $285 $177,931 $(165,042) $(10,657) $3,317 $5,834Stock options exercised and vesting of restricted stockunits1,253,441 13 4,974 4,987Shares issued related to business combinations332,326 3 5,730 5,733Stock-based compensation expense 12,841 119 12,960Issuance of treasury stock in connection withemployee stock purchase plan 116 936 1,052Acquisition of treasury stock (17,014) (17,014)Allocation of equity component related to ConvertibleNotes 31,451 31,451Adjustment resulting from the adoption of ASU2016-09 300 (300) —Other comprehensive loss (2,736) (2,736)Net loss (4,002) (4,002)Balance at December 31, 201730,130,856 $301 $233,343 $(169,344) $(26,616) $581 $38,265The accompanying notes are an integral part of these consolidated financial statements.50Table of ContentsCarbonite, Inc.Consolidated Statements of Cash Flows Years Ended December 31, 2017 2016 2015 (In thousands)Operating activities Net loss$(4,002) $(4,099) $(21,615)Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization21,731 15,869 13,634(Gain) loss on disposal of equipment(907) 748 (192)Accretion of discount on marketable securities— — (9)Intangible asset impairment charges352 — —Impairment of capitalized software1,048 — —Stock-based compensation expense12,742 8,900 10,216Benefit for deferred income taxes(15,392) (15) (24)Non-cash interest expense related to amortization of debt discount4,434 — —Other non-cash items, net(533) 68 (77)Changes in assets and liabilities, net of acquisitions: Accounts receivable1,786 (13,412) (1,406)Prepaid expenses and other current assets389 (1,547) 1,019Other assets(580) 17 2,029Accounts payable5,035 (3,345) 2,864Accrued expenses(995) 8,183 595Other long-term liabilities53 (586) (1,348)Deferred revenue6,169 2,384 7,511Net cash provided by operating activities31,330 13,165 13,197Investing activities Purchases of property and equipment(17,351) (6,582) (9,730)Proceeds from sale of property and equipment and businesses1,250 13 286Proceeds from maturities of marketable securities and derivatives534 3,395 19,149Purchases of derivatives(5,040) (1,476) (750)Decrease in restricted cash— — 693Payment for intangibles(1,250) — —Payment for acquisitions, net of cash acquired(69,798) (11,625) (1,325)Net cash (used in) provided by investing activities(91,655) (16,275) 8,323Financing activities Proceeds from exercise of stock options4,987 3,560 2,254Proceeds from issuance of treasury stock under employee stock purchase plan1,052 — —Payments of withholding taxes in connection with restricted stock unit vesting(2,050) (483) (331)Proceeds from long-term borrowing, net of debt issuance costs177,797 — —Payments on long-term borrowings(39,200) — —Repurchase of common stock(14,964) (4,481) (5,340)Net cash provided by (used in) financing activities127,622 (1,404) (3,417)Effect of currency exchange rate changes on cash1,782 (270) (251)Net increase (decrease) in cash and cash equivalents69,079 (4,784) 17,852Cash and cash equivalents, beginning of period59,152 63,936 46,084Cash and cash equivalents, end of period$128,231 $59,152 $63,936The accompanying notes are an integral part of these consolidated financial statements.51Table of ContentsCarbonite, Inc.Consolidated Statements of Cash Flows (continued)Supplemental disclosure of cash flow information Cash paid for income taxes$820 $1,160 $1,760Cash paid for interest$1,767 $— $—Supplemental disclosure of non-cash investing and financing activities Capitalization of stock-based compensation$218 $83 $—Purchases of property and equipment included in accounts payable and accrued expenses$(641) $894 $(1,805)Issuance of common stock for acquisition$5,733 $— $—The accompanying notes are an integral part of these consolidated financial statements.52Table of ContentsCarbonite, Inc.Notes to Consolidated Financial Statements1. Nature of BusinessThe Company was incorporated in the State of Delaware on February 10, 2005 and provides backup, disaster recovery, high availability and workloadmigration technology (the "Carbonite Data Protection Platform"). The Carbonite Data Protection Platform supports businesses in locations around the worldwith secure and scalable global cloud infrastructure.The Company views its operations and manages its business as one operating segment.2. Summary of Significant Accounting PoliciesPrinciples of ConsolidationThe accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the UnitedStates (“GAAP”) and include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions between theCompany and its subsidiaries have been eliminated in consolidation.During 2016, the Company recorded an adjustment for payments owed to foreign tax authorities inclusive of any interest and penalties that were notaccrued for in prior fiscal years. This adjustment was recorded as an increase to accrued liabilities for approximately $1.2 million with a correspondingexpense recorded in general and administrative expenses in the condensed consolidated statements of operations. Of this $1.2 million adjustment,approximately $0.2 million related to the year ended December 31, 2015 and $1.0 million related to prior years. The Company concluded the effect of theseadjustments were not material to its consolidated financial statements for the current period or any of the prior periods.Use of EstimatesThe preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts ofrevenues and expenses during the reporting period. Although the Company regularly assesses these estimates, actual results could differ materially from theseestimates. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience andvarious other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from management’s estimates if past experienceor other assumptions do not turn out to be substantially accurate, even if such assumptions are reasonable when made.Translation of Foreign CurrenciesThe functional currency of the Company’s foreign subsidiaries is generally the local currency in which they operate. The Company translates foreignsubsidiaries' assets and liabilities at the exchange rates in effect at period-end and revenues and expenses at the average exchange rates in effect during theperiod. Gains and losses from foreign currency translation are recorded as a component of other comprehensive loss.Foreign currency transaction gains and losses are included in other income (expense), net in the consolidated statements of operations, net of losses andgains from any related derivative financial instruments. Transaction gains (losses) were $5.1 million, $(0.8) million and $(3.5) million during the years endedDecember 31, 2017, 2016, and 2015, respectively.Concentration of Credit RiskFinancial instruments that potentially subject the Company to credit risk primarily consist of cash and cash equivalents, derivatives, and accountsreceivable. The Company maintains its cash and cash equivalents and derivatives with high-quality financial institutions and, consequently, the Companybelieves that such funds are subject to minimal credit risk. Cash equivalents consist of investment grade debt securities or money market funds investing insuch securities.The Company regularly reviews its accounts receivable related to customers billed on traditional credit terms and provides an allowance for expectedcredit losses. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by management to be probable in theCompany’s accounts receivable. As of December 31, 2017, no customer represented 10% or more of the Company’s accounts receivable balance, compared toone customer as of December 31, 2016. At both December 31, 2017 and December 31, 2016, no customer represented 10% or more of the Company’s revenuefor all periods presented.53Table of ContentsRevenue RecognitionThe Company derives revenue from Software-as-a-Service ("SaaS") arrangements and multiple element arrangements. The Company recognizes revenuewhen (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable and (iv) collectability is probable. TheCompany's revenue recognition policies for these revenue streams are discussed below.The Company derives the majority of its revenue from data protection solutions sold as subscriptions. These services are standalone independent servicesolutions, which are generally contracted for a one- to three-year term. Subscription arrangements include access to use the Company’s services via theinternet. The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 605-10, Overall Revenue Recognition.Subscription revenue is recognized ratably on a daily basis upon activation of service over the subscription period, when persuasive evidence of anarrangement with a customer exists, the subscription period has been activated, the price is fixed or determinable, and collection is reasonably assured.Amounts received prior to satisfying the above revenue recognition criteria are recorded as deferred revenue in the accompanying consolidated balancesheets.The Company enters into multiple element arrangements, which may include a combination of software and non-software related products and services,including subscription services, software licenses, hardware, professional services and post-contract customer support ("PCS"). In such arrangements, theCompany follows the multiple element guidance in accordance with ASC 605-25, Revenue Recognition - Multiple-Element Arrangements. The Companyallocates revenue to each element based on the relative selling price method to the overall arrangement consideration. The selling price for a deliverable isbased on vendor-specific objective evidence ("VSOE"), if available, Third Party Evidence ("TPE"), if VSOE is not available, or Best Estimate of Selling Price("BESP"), if neither VSOE nor TPE are available. Typically, the Company uses BESP for these arrangements.For its software arrangements, which often contain multiple revenue elements, such as software licenses, professional services and PCS, the Companyrecognizes and defers revenue using the residual method in accordance with ASC 985-605, Software. Revenue is allocated to each element, excluding thesoftware license, based on VSOE. VSOE is limited to the price charged when the element is sold separately or, for an element not yet being sold separately,the price established by management having the relevant authority. The Company does not have VSOE for its software licenses since they are seldom soldseparately. Accordingly, revenue is allocated to the software license using the residual value method. Under the residual value method, revenue equal toVSOE of each undelivered element is initially deferred and any remaining arrangement fee is then allocated to the software license.Hardware revenues are generally recognized upon delivery or upon installation, if required. Professional services are generally provided on a time andmaterials basis and revenue from professional services, including installation services, is recognized as services are performed, or upon installation ifrequired.The Company excludes any taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction (i.e., sales, use andvalue added) from its revenue and costs. Reimbursement received for shipping costs is recorded as revenue.Deferred product costs represent deferred cost of revenue for product shipments to customers prior to satisfaction of the Company's revenue recognitioncriteria. Such costs are classified as prepaid expense and other current assets if the related deferred revenue is initially classified as current. Deferred productcosts are recorded in other assets if the related deferred revenue is initially classified as long-term, and remain a component of noncurrent assets until suchcosts are recognized in the consolidated statement of operations. In certain cases these costs are recognized ratably over the customer contract term.Cash and Cash EquivalentsThe Company considers all highly liquid investments purchased with an original purchase maturity of 90 days or less to be the equivalent of cash for thepurpose of balance sheet and statement of cash flows presentation.Property and EquipmentProperty and equipment are stated at cost. Expenditures for repairs and maintenance are charged to expense as incurred. Upon retirement or sale, the costof the assets disposed of and the related accumulated depreciation and amortization are eliminated from the accounts and any resulting gain or loss isreflected in the consolidated statement of operations.54Table of ContentsDepreciation and amortization is calculated using the straight-line method over the estimated useful lives of the assets, which are as follows:Asset ClassificationEstimated Useful LifeComputer equipment2 - 4 yearsAppliances3 yearsPurchased software3 yearsInternal-use software2 - 7 yearsFurniture and fixtures5 yearsLeasehold improvementsShorter of useful life or remaining life of leaseImpairment of Long-Lived AssetsThe Company reviews property and equipment and intangible assets for impairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. If the recoverability of these assets is considered to be impaired, the impairment to be recognized equalsthe amount by which the carrying value of the assets exceeds their estimated fair value. The details of the Company's impairment assessment are included inNote 4 - Fair Value of Financial Instruments.Business CombinationsIn accordance with ASC 805, Business Combinations ("ASC 805"), the Company recognizes tangible and intangible assets acquired and liabilitiesassumed based on their estimated fair values. Determining these fair values requires management to make significant estimates and assumptions, especiallywith respect to intangible assets.The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair value. Goodwill as of the acquisition date ismeasured as the excess of consideration transferred over the net of the acquisition date fair value of the assets acquired and the liabilities assumed andrepresents the expected future economic benefits arising from other assets acquired that are not individually identified and separately recognized. While theCompany uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed atthe acquisition date, its estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one yearfrom the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill to theextent that it identifies adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of thevalues of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.Goodwill and Acquired Intangible AssetsThe Company records goodwill when consideration paid in a business acquisition exceeds the value of the net assets acquired. The Company’s estimatesof fair value are based upon assumptions believed to be reasonable at that time but that are inherently uncertain and unpredictable. Assumptions may beincomplete or inaccurate, and unanticipated events or circumstances may occur, which may affect the accuracy or validity of such assumptions, estimates oractual results.Goodwill is not amortized, but rather is tested for impairment annually or more frequently at the reporting unit level if facts and circumstances warrant areview. The Company has determined that there is a single reporting unit for the purpose of conducting this goodwill impairment assessment. The Companyestimates the fair value of the reporting unit (based on the Company’s market capitalization) and compares this amount to the carrying value of the reportingunit (as reflected by the Company’s total stockholders’ equity). If the Company determines that the carrying value of the reporting unit exceeds its fair value,an impairment charge would be required. The Company’s annual goodwill impairment test is performed at November 30th of each year. To date, theCompany has not identified any impairment to goodwill.Intangible assets acquired in a business combination are recorded at their estimated fair values at the date of acquisition. The Company amortizesacquired intangible assets over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern cannot be readilydetermined, on a straight-line basis. The Company reviews its intangible assets with definite lives for impairment when events or changes in circumstancesindicate that the related carrying amount may not be recoverable. The details of the Company's intangible asset impairment assessment are included in Note 4- Fair Value of Financial Instruments.55Table of ContentsSoftware Development CostsThe Company accounts for its software and website development costs in accordance with the guidance in ASC 350-40, Internal-Use Software andASC 350-50, Website Development Costs. The costs incurred in the preliminary stages of development are expensed as incurred. Once an application hasreached the development stage, internal and external costs, if direct and incremental, are capitalized until the application is substantially complete and readyfor its intended use, at which point such costs are amortized over the estimated useful life of the software. As of December 31, 2017 and December 31, 2016,the Company had capitalized $6.8 million and $2.4 million of costs associated with internal-use software, respectively. For the years ended December 31,2017, 2016, and 2015, the Company recorded $0.5 million, $0.4 million, and $0.3 million of amortization expense related to capitalized internal-usesoftware, respectively.Purchased software costs that qualify for capitalization are accounted for in accordance with ASC 985, Software, Subtopic 20, Costs of Software to BeSold, Leased, or Marketed ("ASC 985"). Purchased software represents software licenses purchased from third parties. Development costs for software to besold externally incurred subsequent to the establishment of technological feasibility or if it meets the future alternative use criteria, but prior to the generalrelease of the product, are capitalized and, upon general release, are amortized on a straight-line basis over the estimated useful life of the software. The assetassociated with purchased software is included in acquired intangible assets, net in the consolidated balance sheets.Advertising ExpensesThe Company expenses advertising costs as incurred. During the years ended December 31, 2017, 2016, and 2015, the Company incurred approximately$16.4 million, $17.8 million, and $15.0 million of advertising expense, respectively, which is included in sales and marketing expense in the accompanyingstatements of operations.Accounts ReceivableAccounts receivable are recorded at the invoiced amount. The allowance for doubtful accounts reflects the Company’s best estimate of the amount ofprobable credit losses in the Company’s existing accounts receivable. The Company specifically analyzes historical bad debts, the aging of the accountsreceivable, creditworthiness, and current economic trends to evaluate the allowance for doubtful accounts. Past due balances are reviewed individually forcollectability. Account balances are charged against the allowance for doubtful accounts after all means of collection have been exhausted, and the potentialfor recovery is considered remote. The allowance for doubtful accounts is recorded as a reduction in accounts receivable. The Company also maintains anallowance for sales returns and credits to customers for which the Company has the ability to estimate based upon historical experience. The allowance forsales returns and credits is recorded as a reduction in revenue.The following is a rollforward of the Company's accounts receivable reserve and allowance (in thousands): Balance Beginning ofPeriod Charged to Statement ofOperations Deductions (1) Balance End of PeriodYear ended December 31, 2017 $1,587 $(444) $(149) $994Year ended December 31, 2016 $139 $1,462 $(14) $1,587Year ended December 31, 2015 $156 $(17) $— $139(1) Deductions include actual accounts written-off, net of recoveries and credits issued.Income TaxesThe Company provides for income taxes under the liability method. Deferred tax assets and liabilities are determined based on differences betweenfinancial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates in effect when the differences are expected to reverse. Incertain jurisdictions, deferred tax assets are reduced by a valuation allowance to reflect the uncertainty associated with their ultimate realization. TheCompany accounts for uncertain tax positions recognized in the consolidated financial statements by prescribing a more-likely-than-not threshold forfinancial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.Due to a history of losses, the Company has provided a full valuation allowance against its deferred tax assets in the U.S. and in certain foreignjurisdictions that are in a deferred tax asset position for which the Company is uncertain as to their ultimate realization. This is more fully described in Note11- Income Taxes. The ability to utilize these deferred tax assets may be restricted or eliminated by changes in the Company's ownership, changes inlegislation, and other rules affecting the ability to offset future taxable income with losses or other tax attributes from prior periods. Future determinations onthe need for a valuation allowance on the Company's net deferred tax assets will be made on an annual basis.56Table of ContentsSegment InformationOperating segments are defined as components of an enterprise for which separate financial information is regularly evaluated by the chief operatingdecision maker (“CODM”), which is the Company’s chief executive officer, in deciding how to allocate resources and assess performance. The Company’sCODM evaluates the Company’s financial information and resources and assess the performance of these resources on a consolidated basis. The Companyviews its operations and manages its business in one operating segment. Since the Company operates in one operating segment, all required financialsegment information can be found in the consolidated financial statements.Stock-Based CompensationThe Company recognizes stock-based compensation as an expense in the financial statements using the estimated grant-date fair value over theindividual award's requisite service period, which equals the vesting periods in all cases but for certain market-based awards. The Company uses the straight-line amortization method for recognizing stock-based compensation expense. The Company estimates the fair value of stock options on the date of grantusing the Black-Scholes option-pricing model and the fair value of stock options and awards with market-based vesting conditions on the date of grant usinga Monte Carlo simulation. These models require the use of highly subjective estimates and assumptions, including expected stock price volatility, expectedterm of an award, risk-free interest rate, and expected dividend yield. The grant date fair value of restricted stock units granted is based on the fair value of theunderlying common stock on the date of grant.Costs Associated with Exit ActivitiesThe determination of when the Company accrues for employee involuntary termination benefits depends on whether the termination benefits areprovided under an ongoing benefit arrangement or under a one-time benefit arrangement. The Company accounts for employee termination benefits thatrepresent a one-time benefit in accordance with ASC 420, Exit or Disposal Cost Obligations ("ASC 420"). The Company accounts for ongoing benefitarrangements in accordance with ASC 712, Compensation-Nonretirement Postemployment Benefits. Other costs associated with exit activities includecontract termination costs, including costs related to leased facilities to be abandoned or subleased, expensed in accordance with ASC 420.Recently Adopted Accounting StandardsIn March 2016, the FASB issued Accounting Standards Updated ("ASU") 2016-09, Compensation - Stock Compensation (Topic 718): Improvements toEmployee Share-Based Payment Accounting (“ASU 2016-09”). The amendments in this ASU involve several aspects of the accounting for share-basedpayment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement ofcash flows. On January 1, 2017, the Company adopted ASU 2016-09. In connection with the adoption of this standard, the Company changed its accountingpolicy to record actual forfeitures as they occur, rather than estimating forfeitures by applying a forfeiture rate. As this policy change was appliedprospectively, prior periods have not been adjusted. As a result of adoption in 2017, the Company recorded an immaterial impact to retained earnings andadditional paid in capital. The Company retrospectively adjusted the classification of excess tax benefits on the statement of cash flow from financing tooperating; the effect was immaterial.In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business (“ASU 2017-01”). The amendments in this ASU clarify therequirements for a set of activities to be considered a business and narrows the definition of an output. ASU 2017-01 is effective for fiscal years, and interimperiods within, beginning after December 15, 2017. Early adoption is permitted. A reporting entity must apply the amendments in ASU 2017-01 using aprospective approach. For the year ended December 31, 2017, the Company adopted this standard and the adoption did not have a material impact on theconsolidated financial statements.In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting ("ASU 2017-09").The amendments in ASU 2017-09 clarify that modification accounting is required only if the fair value, the vesting conditions, or the classification of theaward (as equity or liability) changes as a result of the changes in terms or conditions. As early adoption was permitted, the Company adopted this standard in2017, which did not have a material impact on the consolidated financial statements.Recently Issued Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”),which updated guidance and disclosure requirements for recognizing revenue. The new revenue recognition standard provides a five-step analysis oftransactions to determine when and how revenue is recognized. The revenue standard is based on the principle that revenue should be recognized to depictthe transfer of promised goods or57Table of Contentsservices to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In March2016, the FASB issued an amendment to the standard, ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus AgentConsiderations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations. In April 2016,the FASB issued an additional amendment to the standard, ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying PerformanceObligations and Licensing (“ASU 2016-10”), which clarifies the guidance on identifying performance obligations and the implementation guidance onlicensing. The collective guidance will be effective for the Company on January 1, 2018. The guidance may be applied retrospectively to each prior periodpresented (full retrospective) or retrospectively with the cumulative effect recognized as of the date of initial adoption (modified retrospective). TheCompany will adopt ASU 2014-09 in the first quarter of 2018.The Company will apply the modified retrospective transition method, which will result in an adjustment to retained earnings for the cumulative effectof applying the standard to all contracts not completed as of the adoption date. The Company does not expect revenue recognition to be significantlyimpacted on the majority of its offerings. The Company expects changes in accounting related to term licenses and software contracts with a minimummonthly commitment which will have the effect of accelerating revenue recognition.Additionally, the Company has also assessed the impact of capitalizing incremental costs associated with obtaining customer contracts, which areprimarily comprised of commission and incentive payments. Currently, these costs are expensed in the period they are incurred. Under the updated guidance,a majority of these costs will be recognized as an asset on the Company's consolidated balance sheets and recognized over the appropriate amortizationperiod.The Company currently expects the impact to retained earnings of adoption to be between $12.0 million and $15.0 million. While the majority of theimpact will result from capitalization of incremental costs associated with obtaining customer contracts, the Company expects an increase in assets anddecrease in liabilities with respect to revenue in the range of $4.5 million and $5.5 million. The Company does not foresee any material impact on itsconsolidated statements of cash flow. The Company is finalizing the impact of the standard on its consolidated financial statements and disclosures, andchanges to its systems, processes, and internal controls. The Company's preliminary assessments are subject to change.In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 requires lessees to recognize the assets and liabilities on theirbalance sheet for the rights and obligations created by most leases and continue to recognize expenses on their income statements over the lease term. It willalso require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. Theguidance is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years, with early adoptionpermitted. The Company is currently evaluating the effect of the standard on its consolidated financial statements, and expects that upon adoption asignificant lease obligation and right to use asset will be recognized. Refer to Note 12 - Commitments and Contingencies for additional information related tothe Company’s lease obligations.In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). Thepurpose of ASU 2016-16 is to simplify the income tax accounting of an intra-entity transfer of an asset other than inventory and to record its effect when thetransfer occurs. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within thoseannual reporting periods and early adoption is permitted. The Company is currently evaluating the effect of the standard on its consolidated financialstatements.In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). ASU 2016-18 requires thatthe statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash orrestricted cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions.The guidance is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those fiscal years. The Company doesnot expect any material impact from adoption of this guidance on the Company's consolidated financial statements.In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. The standard eliminates the second step in the goodwillimpairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill. The standard is effective for annual and interimgoodwill impairment tests conducted in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluatingthe effect of the standard on its consolidated financial statements.3. Net Loss Per ShareBasic net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding during the period. For theperiods in which the Company reports net income, diluted net income per share is58Table of Contentscalculated by dividing net income by the sum of the weighted average number of common shares and potentially dilutive securities outstanding during theperiod using the treasury stock method. For the periods in which the Company reports a net loss, the dilutive effect of the Company's outstanding commonstock equivalents are not included in the calculation of diluted loss per share as they would be anti-dilutive. Accordingly, basis and diluted net loss per sharefor those periods are identical.The following table sets forth the computation of basic and diluted net loss per share: Years Ended December 31, 2017 2016 2015 (In thousands, except share and per share data)Numerator: Net loss$(4,002) $(4,099) $(21,615)Denominator: Weighted average common shares outstanding, basic27,779 27,029 27,188 Effect of potential dilutive common shares— — —Weighted average shares outstanding, diluted27,779 27,029 27,188Basic and diluted net loss per share$(0.14) $(0.15) $(0.80)The following options to purchase common shares and restricted stock units/awards have been excluded from the computation of diluted net loss pershare because they had an anti-dilutive impact, or because they related to share-based awards that were contingently issuable, for which the applicablevesting conditions had not been satisfied (in thousands): Years Ended December 31, 2017 2016 2015Options to purchase common shares (1)1,148 1,585 3,226Restricted stock units/awards1,696 1,853 1,101Total2,844 3,438 4,327(1) Includes shares purchasable under the Company's employee stock purchase plan which were determined to be anti-dilutive.The Company has outstanding convertible senior notes (the "Convertible Notes") issued in April 2017 that have the potential to dilute basic earnings pershare in future periods which have been excluded from the calculation of diluted earnings per share. As the closing price of the Company's common stock onDecember 31, 2017 did not exceed the conversion price on the Convertible Notes of $25.84 and the Company has the ability and intent to settle the notes incash, there was no impact on diluted earnings per share during the year ended December 31, 2017.4. Fair Value of Financial InstrumentsDerivative InstrumentsNon-designated Foreign Currency ContractsThe Company uses foreign currency forward contracts as part of our strategy to manage exposure related to Euro denominated intercompany monetaryassets and liabilities. The Company has not designated these forward contracts as hedging instruments pursuant to ASC 815, Derivatives andHedging. Accordingly, the Company recorded the fair value of these contracts at the end of each reporting period in the consolidated balance sheets, withchanges in the fair value recorded in earnings as other income (expense), net in the consolidated statements of operations. Cash flows from the settlement ofthese non-designated foreign currency contracts are reported in cash flows from investing activities. These currency forward contracts are entered into forperiods consistent with currency transaction exposures, generally less than one year. At December 31, 2017 and 2016, we had outstanding contracts with atotal notional value of $47.8 million and $37.7 million, respectively.59Table of ContentsThe following table provides a quantitative summary of the fair value of derivative instruments not designated as hedging instruments as ofDecember 31, 2017 and 2016 (in thousands): Fair ValueDescriptionBalance Sheet Classification December 31, 2017 December 31, 2016Derivative Assets: (in thousands)Non-Designated Hedging Instruments Foreign currency contractsPrepaid expenses and other current assets $— $380Total Derivative Assets $— $380 Derivative Liabilities: Non-Designated Hedging Instruments Foreign currency contractsAccrued expenses $439 $—Total Derivative Liabilities $439 $—The following tables summarize the (losses) gains related to derivative instruments not designated as hedging instruments for the year endedDecember 31, 2017, 2016 and 2015 (in thousands): Years Ended December 31, Location in Statement of Operations 2017 2016 2015Foreign currency contractsOther income (expense), net $(5,324) $1,700 $3,404Other Fair Value MeasurementsThe Company applies the guidance in ASC 820, Fair Value Measurements and Disclosures, ("ASC 820"), which provides that fair value is based on theprice that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Inorder to increase consistency and comparability in fair value measurements, ASC 820 establishes a fair value hierarchy that prioritizes observable andunobservable inputs used to measure fair value into three broad levels, which are described below:Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. The fair valuehierarchy gives the highest priority to Level 1 inputs.Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets and liabilities or market corroborated inputs.Level 3: Unobservable inputs are used when little or no market data is available, which requires the Company to develop its own assumptions about howmarket participants would value the assets or liabilities. The fair value hierarchy gives the lowest priority to Level 3 inputs.In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservableinputs to the extent possible in its assessment of fair value.60Table of ContentsThe Company’s assets and liabilities that are measured at fair value on a recurring basis, by level, within the fair value hierarchy are summarized asfollows (in thousands): December 31, 2017 December 31, 2016 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 TotalAssets: Cash equivalents—money market funds$96,295 $— $— $96,295 $20,728 $— $— $20,728Foreign currency exchange contracts— — — — — 380 — 380Total$96,295 $— $— $96,295 $20,728 $380 $— $21,108Liabilities: Foreign currency exchange contracts— 439 — 439 — — — —Total$— $439 $— $439 $— $— $— $—The Company’s investments in money market funds are classified within Level 1 of the fair value hierarchy because they are valued using quoted marketprices. Our foreign currency exchange contracts are classified as Level 2 within the fair value hierarchy as they are valued using professional pricing sourcesfor identical or comparable instruments, rather than direct observations of quoted prices in active markets. No assets or liabilities are classified as Level 3within the fair value hierarchy.The Company estimates the fair value of its Convertible Notes using quoted market prices in an inactive market on the last trading day of the reportingperiod and has been classified as Level 2 within the fair value hierarchy. The principal amount, carrying value of the Convertible Notes (the carrying valueexcludes the equity component of the Convertible Notes classified in equity) and related estimated fair value of the Company's Convertible Notes reported inthe consolidated balance sheet as of December 31, 2017 are as follows (in thousands): December 31, 2017 Principal Carrying Value Fair ValueConvertible Notes$143,750 $111,819 $174,548The carrying amounts for cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses approximate fair value because oftheir short maturities.Non-Recurring Fair Value MeasuresCertain non-financial assets, such as goodwill, intangible assets and property and equipment, are measured at fair value on a non-recurring basis and areadjusted to fair value only if an impairment charge is recognized. Such fair value measures are considered to be within the Level 3 valuation hierarchy due tothe subjective nature of the unobservable inputs used.During the year ended December 31, 2017, the Company recorded impairment charges totaling $1.0 million related to capitalized software projects thatwere discontinued. The Company abandoned specific projects as competing technology was acquired that accelerated its time to market. This impairmentassessment utilized company-specific assumptions. The Company recorded the impairment charge in the research and development caption in theconsolidated statements of operations. Additionally, during the year ended December 31, 2017, the Company recorded impairment charges totaling $0.4million related to intangible assets whose carrying values were assessed to be unrecoverable. Of the total impairment charges, $0.2 million was recorded inthe cost of revenue caption in the consolidated statements of operations related to an impairment of developed technology intangible asset, and $0.2 millionwas recorded in the sales and marketing caption in the consolidated statements of operations related to an impairment of customer relationship intangibleasset.5. AcquisitionsAcquisition-Related ExpensesIn the twelve months ended December 31, 2017, 2016 and 2015 acquisition-related expenses were $3.9 million, $4.5 million, $5.6 million, respectively.Acquisition-related expenses have been included primarily in general and administrative expenses in the consolidated statements of operations. TheCompany's current year acquisition costs relate to the acquisitions of Datacastle Corporation ("Datacastle") and DoubleTake Software, Inc. ("DoubleTake")and the prior year acquisition costs primarily relate to the acquisition of certain assets of EVault, Inc. ("EVault").61Table of Contents2017 AcquisitionsDatacastleOn August 14, 2017, the Company entered into an asset purchase agreement with Datacastle to purchase all the assets associated with Datacastle's clouddata backup, caching and analytics software and services for data protection purposes, including Datacastle Red, Datacastle Analytics and DatacastleQuickCache products, for a purchase price of $9.6 million in cash at closing. The acquisition of Datacastle has been accounted for as a business combinationand, the Company has recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. Pro forma information hasnot been presented, as the operating results of Datacastle are not material.The following tables summarize the final purchase price allocation (in thousands):Fair value of consideration transferred: Cash$9,600Fair value of total acquisition consideration$9,600Fair value of assets acquired and liabilities assumed: Accounts receivable$298Prepaid expenses and other current assets90Intangible assets3,440Goodwill6,267Total assets acquired10,095Accrued liabilities(175)Deferred revenue(320)Net assets acquired$9,600 The Company engaged a third-party valuation firm to assist in the valuation of intangible assets and deferred revenue. The fair values of the remainingDatacastle assets and liabilities noted above approximate their carrying values at August 14, 2017. In connection with the acquisition of Datacastle, goodwillwas recognized as the excess purchase price over the fair value of net asset acquired. The goodwill recorded in connection with this transaction is primarilyrelated to the ability to leverage existing sales and marketing capacity and customer base with respect to the acquired product, as well as revenue and cashflow projections associated with future technologies. Goodwill from the acquisition of Datacastle is included within the Company’s one reporting unit andwill be included in the annual review for impairment. The goodwill is fully deductible for tax purposes.The significant intangible assets identified in the purchase price allocation include developed technology and customer relationships, which areamortized over their respective useful lives on a straight line basis which approximates the underlying cash flows. To value the developed technology asset,the Company utilized the income approach, specifically a discounted cash-flow method known as the excess earnings method. The Company utilized thedistributor earnings approach to derive the fair value of the customer relationships. The following table presents the fair values and useful lives of theidentifiable intangible assets acquired and risk-adjusted discount rates used in the valuation: Amount Weighted Average UsefulLife Risk-AdjustedDiscount Rates used inValuation (in thousands) (in years) Developed technology$2,550 7 11.0%Customer relationships890 10 13.0%Total identifiable intangible assets$3,440 DoubleTakeOn January 31, 2017, the Company completed the acquisition of all the outstanding capital stock of DoubleTake for a purchase price of $65.9 million,which was comprised of $59.7 million in cash paid at closing, net of cash acquired, 332,32662Table of Contentsshares of our common stock with a fair value of $5.7 million and the working capital payment of $0.5 million. The working capital settlement was paid inJune 2017. DoubleTake develops, sells, and supports affordable software that allows IT organizations of all sizes to move, manage, protect, and recoverworkloads across any distance and any combination of physical and virtual server environments. DoubleTake’s products and services are marketed and soldworldwide through their direct sales force and a network of business partners and distributors. In connection with the acquisition of DoubleTake, theCompany negotiated a transition services agreement ("TSA") to cover certain consulting, technology and accounting services for up to nine months postclose. The Company incurred $1.2 million under the TSA. The acquisition of DoubleTake has been accounted for as a business combination and theCompany has recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date.The following tables summarize the final purchase price allocation (in thousands):Fair value of consideration transferred: Cash, net of cash acquired$59,740Fair value of equity instruments5,733Working capital payment458Fair value of total consideration$65,931Fair value of assets acquired and liabilities assumed: Accounts receivable$6,058Prepaid and other current assets158Property and equipment428Other long-term assets42Intangible assets36,700Goodwill49,473Total assets acquired92,859Accounts payable(636)Accrued liabilities(2,156)Deferred revenues(9,100)Deferred tax liability(14,918)Other non-current liabilities(118)Net assets acquired$65,931The Company engaged a third-party valuation firm to assist in the valuation of intangible assets consisting of developed technology, customerrelationships, and the Double-Take trade name as well as in the valuation of deferred revenue. The fair values of the remaining DoubleTake assets andliabilities noted above approximate their carrying values at January 31, 2017.In connection with the acquisition of DoubleTake, goodwill of $49.5 million was recognized for the excess purchase price over the fair value of the netassets acquired. The Company believes the goodwill recorded in connection with this transaction is primarily related to the investment value of the futureenhancements of our product offering and solutions offering. Goodwill from the acquisition of DoubleTake is included within the Company’s one reportingunit and will be included in the annual review for impairment. Goodwill is not deductible for tax purposes as this acquisition was a stock purchase.The significant intangible assets identified in the purchase price allocation discussed above include developed technology, trade names and customerrelationships, which are amortized over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern cannot bereadily determined, on a straight-line basis. Developed technology consists of products that have reached technological feasibility and trade names representacquired company and product names. To value the developed technology asset, the Company utilized the income approach, specifically a discounted cash-flow method known as the multi-period excess earnings method. The trade name intangible was valued using a relief from royalty method, which considersboth the market approach and the income approach. Customer relationships represent the underlying relationships with certain customers to provide ongoingservices for products sold. The Company utilized the replacement cost/lost profits methodology to derive the fair value of the customer relationships. TheCompany utilized accounting guidance related to intangible assets which lists the pertinent factors to be considered when estimating the useful life of anintangible asset. These factors include, in part, a review of the expected use by the Company of the assets acquired,63Table of Contentsthe expected useful life of another asset (or group of assets) related to the acquired assets and legal, regulatory or other contractual provisions that may limitthe useful life of an acquired asset.The following table presents the fair values and useful lives of the identifiable intangible assets acquired and risk-adjusted discount rates used in thevaluation: Amount Weighted Average UsefulLife Risk-AdjustedDiscount Rates used inValuation (in thousands) (in years) Developed technology$29,900 5 13.5%Customer relationships4,900 6 12.0%Trade names1,900 8 12.0%Total identifiable intangible assets$36,700 The Company determined that disclosing the amount of DoubleTake related revenue and expenses included in the consolidated statements of operationsis impracticable as certain operations were integrated into the operations of the Company. Furthermore, the Company operates as a one reportable segmentand does not consider DoubleTake a separate reporting segment.Pro Forma Financial Information (unaudited)The following unaudited pro forma information presents the consolidated results of operations of the Company and DoubleTake for the year endedDecember 31, 2016 as if the acquisition of DoubleTake had been completed on January 1, 2016. These pro forma consolidated financial results have beenprepared for comparative purposes only and include certain adjustments that reflect pro forma results of operations, such as increased amortization for the fairvalue of acquired intangible assets, fair value adjustment for deferred revenue, elimination of interest expense with a promissory note due to the parentcompany, and adjustments relating to the tax effect of combining the Carbonite and DoubleTake businesses.The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings which may result from the consolidation of theoperations of the Company and DoubleTake. Accordingly, these unaudited pro forma results are presented for informational purposes only and are notnecessarily indicative of the results of operations that actually would have been achieved had the acquisition occurred as of January 1, 2016, nor are theyintended to represent or be indicative of future results of operations (in thousands, except per share data): Years Ended December 31, 2017 2016Pro forma revenue$242,743 $242,348Pro forma net loss$(4,037) $(13,671)Pro forma net loss per common share: Basic$(0.15) $(0.50)Diluted$(0.15) $(0.50)2016 AcquisitionEVaultOn January 13, 2016, the Company completed the acquisition of the North American cloud-based business continuity and disaster recovery assets ofEVault and the acquisition of the assets used in the European Union operations of EVault was completed on March 31, 2016. The Company acquired EVaultto offer business continuity and disaster recovery solutions designed for SMBs and small enterprises, including EVault Cloud Backup and Recovery, EVaultBackup and Recovery Appliance and EVault Cloud Resiliency Services DRaaS offering.The acquisition of EVault has been accounted for as a business combination and, in accordance with ASC 805, the Company has recorded the assetsacquired and liabilities assumed at their respective fair values as of the acquisition dates.In connection with the acquisition of EVault, the Company negotiated a transition services agreement ("EVault TSA") that provides a credit to be usedagainst future services provided under the terms of the agreement. The Company estimated the fair64Table of Contentsvalue of the EVault TSA credit to be $2.4 million and accounted for it as a reduction in consideration transferred in the purchase price allocation. The EVaultTSA credit was recorded in prepaid expenses and other current assets on the consolidated balance sheet as of the acquisition date. The EVault TSA credit wasfully expensed in 2016, and as such, there is no remaining balance of the EVault TSA credit on the consolidated balance sheet as of December 31, 2017.The following tables summarize the final purchase price allocation (in thousands):Fair value of consideration transferred: Cash$14,000Fair value of prepaid EVault TSA(2,375)Fair value of total acquisition consideration$11,625Fair value of assets acquired and liabilities assumed: Prepaid expenses$1,330Property and equipment6,776Intangible assets9,150Other long-term assets564Goodwill989Total assets acquired18,809Deferred revenue(6,830)Accrued liabilities(354)Net assets acquired$11,625 The significant intangible assets identified in the purchase price allocation discussed above include developed technology, trade names and customerrelationships, which are amortized over their respective useful lives on a straight-line basis. Developed technology consists of products that have reachedtechnological feasibility and trade names represent acquired company and product names. To value the developed technology asset, the Company utilizedthe income approach, specifically a discounted cash-flow method known as the multi-period excess earnings method. The trade name intangible was valuedusing a relief from royalty method, which considers both the market approach and the income approach. Customer relationships represent the underlyingrelationships with certain customers to provide ongoing services for products sold. The Company utilized the replacement cost/lost profits methodology toderive the fair value of the customer relationships.The following table presents the fair values and useful lives of the identifiable intangible assets acquired and risk-adjusted discount rates used in thevaluation: Amount Weighted Average UsefulLife Risk-AdjustedDiscount Rates used inValuation (in thousands) (in years) Developed technology$5,650 4 15%Customer relationships2,500 6 14%Trade names1,000 7 14%Total identifiable intangible assets$9,150 Pro Forma Financial Information (unaudited)The following unaudited pro forma information presents the condensed combined results of operations of the Company and EVault for the twelvemonths ended December 31, 2015 as if the acquisition of EVault had been completed on January 1, 2015. These pro forma condensed consolidated financialresults have been prepared for comparative purposes only and include certain adjustments that reflect pro forma results of operations, such as increasedamortization for the fair value of acquired intangible assets, fair value adjustments (step-downs) for property, plant and equipment and deferred revenue,reversal of revenues and costs directly attributable to assets and products not acquired, and adjustments relating to the tax effect of combining the Companyand EVault businesses.65Table of ContentsThe unaudited pro forma results do not reflect any operating efficiencies or potential cost savings which may result from the consolidation of theoperations of the Company and EVault. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarilyindicative of the results of operations that actually would have been achieved had the acquisition occurred as of January 1, 2015, nor are they intended torepresent or be indicative of future results of operations (in thousands): Year Ended December31, 2015Revenue$220,403Net loss$(102,376) Basic and diluted net loss per share$(3.77)Weighted-average number of common shares used in computing basicand diluted net loss per share27,187,910The pro forma financial information shown above includes a nonrecurring adjustment of $3.3 million, to eliminate transaction costs directly attributableto the acquisition incurred by the Company for the year ended December 31, 2015, in arriving at the pro forma net loss shown above.2015 AcquisitionsSMS BackupOn October 23, 2015, the Company acquired all intellectual property rights in connection with the SMS Backup & Restore and Call Log Backup andRestore applications ("SMS") for total consideration of approximately $0.3 million. The Company recorded identifiable intangible assets related to customerrelationships of $0.3 million. As of the acquisition date, the customer relationships had weighted-average useful lives of 6.0 years. As of December 31, 2017,there was no remaining carrying value associated with this acquisition as the technology was sold.Rebit, Inc.On August 11, 2015, the Company acquired certain assets of Rebit, Inc. ("Rebit") for total consideration of approximately $1.3 million, which includedan initial cash payment of $1.0 million and an estimated fair value of $0.3 million for additional consideration which was paid one year from the date ofacquisition. The Company recorded goodwill in the amount of $0.6 million and identifiable intangible assets of $0.7 million. The goodwill is fullydeductible for tax purposes. As of the acquisition date, developed technology and customer relationships had weighted-average useful lives of 6.0 yearsand 4.0 years, respectively. As of December 31, 2017, there was no remaining carrying value associated with this acquisition as the technology was sold.The results of operations for the 2015 acquisitions have been included in the Company's operations since the date of acquisition and were not materialfor the periods presented. The acquisitions have been accounted for as a business combination and, in accordance with ASC 805, the Company has recordedthe assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The identifiable intangible assets were amortized over theirestimated useful lives on a straight-line basis.6. Goodwill and Acquired Intangible AssetsAs of December 31, 2017 and 2016, the carrying amount of goodwill is $81.0 million and $23.7 million, respectively. The following is a rollforward ofour goodwill balance (in thousands): December 31, 2017 2016Balance at beginning of fiscal period$23,728 $23,105Goodwill acquired55,740 989Goodwill divested(27) —Effect of foreign exchange rates1,517 (366)Balance at end of fiscal period$80,958 $23,72866Table of ContentsPurchased intangible assets related to the Company's acquisitions and purchased software that form the basis of the Company's products consist of thefollowing (in thousands): December 31, 2017 December 31, 2016 Weighted-AverageEstimatedUseful Life(in years) GrossCarryingValue AccumulatedAmortization NetCarryingValue GrossCarryingValue AccumulatedAmortization NetCarryingValueTechnology-related5.3 $46,833 $12,504 $34,329 $13,627 $5,016 $8,611Customer relationships6.7 11,295 3,361 7,934 6,056 2,170 3,886Tradenames7.5 3,677 946 2,731 1,710 456 1,254Non-compete agreements3.0 230 230 — 380 380 —Total5.6 $62,035 $17,041 $44,994 $21,773 $8,022 $13,751The Company recorded amortization expense of $10.3 million, $3.9 million and $2.0 million for the years ended December 31, 2017, 2016 and 2015,respectively. Technology-related intangible assets consist of developed technology acquired and purchased software, which represents software licensespurchased from third parties. Amortization relating to technology-related intangible assets is recorded within cost of revenue, amortization of customerrelationships is recorded within sales and marketing expenses, and amortization of tradenames and non-compete agreements is recorded within general andadministrative expenses on the Company's consolidated statements of operations. Future estimated amortization expense of acquired intangibles is as follows(in thousands):2018$11,182201911,22820209,63120218,43120222,526Thereafter1,996Total$44,994On October 3, 2017, the Company entered into a license and distribution agreement to be utilized in future product offerings. As consideration forgranting the license, the Company agreed to pay $7.0 million in three separate milestone payments. The Company paid $1.25 million upon transfer of alllicensed materials in October 2017. The other two payments of $1.25 million and $4.5 million are contingent upon the completion and acceptance of certaindeliverables. Under ASC 985, these costs are capitalized as incurred and amortized over their estimated useful life on a straight-line basis. The Companycapitalized $1.25 million of costs associated with purchased software as of December 31, 2017.7. Property and EquipmentProperty and equipment consists of the following (in thousands): December 31, 2017 2016Computer equipment$46,113 $61,518Software3,211 3,009Furniture and fixtures2,344 2,192Leasehold improvements11,163 9,907Internal-use software6,793 2,403Appliances1,131 349Total property and equipment70,755 79,378Less accumulated depreciation and amortization(41,965) (55,506)Property and equipment, net$28,790 $23,87267Table of ContentsDepreciation and amortization expense was $11.5 million, $12.0 million, and $11.6 million for the years ended December 31, 2017, 2016, and 2015,respectively.8. Accrued ExpensesAccrued expenses consist of the following (in thousands): December 31, 2017 2016Accrued compensation$9,892 $9,919Accrued tax liabilities2,280 2,267Accrued consulting and professional fees2,162 2,342Accrued sales and marketing1,124 896Accrued facilities1,002 1,033Accrued interest898 —Accrued restructuring688 —Derivative liability439 —Accrued other expenses3,190 3,311Total accrued expenses$21,675 $19,7689. Stockholders' EquityShare Repurchase ProgramOn May 11, 2015, the Company's Board of Directors authorized a $20.0 million share repurchase program, effective from May 15, 2015 through May 15,2018. On March 22, 2017, the Company's Board of Directors authorized an increase to the share repurchase program to an aggregate amount of $30.0 million.Share repurchases are made from time-to-time in the open market, in privately negotiated transactions or otherwise, in accordance with applicable securitieslaws and regulations. The timing and amount of any share repurchases are determined by the Company's management based on an evaluation of marketconditions, the trading price of the stock, and other factors.The Company made the following repurchases under the program during years ended December 31, 2017 and December 31, 2016: December 31, 2017 2016 (total cost, in thousands)Number of shares repurchased767,400 574,118Average repurchase price per share$19.50 $7.81Total cost$14,964 $4,481At December 31, 2017, approximately $5.2 million remained available under the Company's share repurchase program.10. Stock-based AwardsThe Company’s 2005 Stock Incentive Plan (the "2005 Plan") provided for granting of incentive stock options, non-qualified options, restricted stock, orother awards to the Company’s employees, officers, directors, and outside consultants up to an aggregate of 3,601,551 shares of the Company’s commonstock. In conjunction with the effectiveness of the 2011 Equity Award Plan (the "2011 Plan"), the Company’s Board of Directors voted that no further stockoptions or other equity-based awards would be granted under the 2005 Plan.The 2011 Plan provides for the issuance of stock options, restricted stock, restricted stock units, and other stock-based awards to the employees, officers,directors, and consultants of the Company or its subsidiaries. In connection with the approval of the 2011 Plan, the Company reserved 1,662,000 shares ofcommon stock for issuance thereunder. On January 1st of each year, beginning on January 1, 2012, the number of shares reserved under the 2011 Planincreased or will increase by the lesser of 1,500,000 shares, 4.0% of the outstanding shares of common stock and common stock equivalents, or anotheramount determined by the Company’s Board of Directors. As of December 31, 2017, 2,202,005 shares of common stock were available for future grant underthe 2011 Plan.68Table of ContentsStock-based awards granted to employees generally vest over a three- or four-year period, and, in the case of stock options, expire ten years from the dateof grant. Certain awards provide for accelerated vesting if there is a change of control, as defined in the 2005 or 2011 Plan, as applicable. The Company hasgenerally granted stock options at exercise prices not less than the fair market value of its common stock on the date of grant.Stock OptionsThe Company generally estimates the fair value of stock options on the date of grant using the Black-Scholes option-pricing model. This model requiresthe use of highly subjective estimates and assumptions, including expected stock price volatility, expected term of an award, risk-free interest rate, andexpected dividend yield. The Company did not grant any stock options in the year ended December 31, 2017. The assumptions used to estimate the fairvalue of the stock options granted for the years ended December 31, 2016 and 2015 were as follows: Years Ended December 31, 2016 2015Weighted-average exercise price$8.95 $12.97Weighted-average grant-date fair value$4.03 $6.33Black-Scholes Assumptions Risk-free interest rate1.93% 1.54% to 1.85%Expected dividend yield— —Expected volatility44% 48% to 51%Expected term (in years)6.1 5.5 to 6.1Risk-Free Interest RateThe Company bases the risk-free interest rate that it uses in the option valuation model on U.S. Treasury zero-coupon issues with remaining maturitiessimilar to the expected term of the options.Expected Dividend YieldThe Company has not paid, and does not anticipate paying, cash dividends on shares of common stock; therefore, the expected dividend yield isassumed to be zero in the option valuation model.Expected VolatilityThe Company estimates the expected volatility of its common stock at the date of grant based on the historical volatility of comparable publiccompanies over the option’s expected term as well as its own stock price volatility since the Company’s IPO.Expected TermThe expected term is estimated using the “simplified method.” The simplified method is based on the average of the vesting tranches and the contractuallife of each grant.69Table of ContentsThe following table summarizes stock option activity under stock incentive plans for the year ended December 31, 2017: Number ofShares Weighted-AverageExercisePrice perShare Weighted-AverageRemainingContractualLife(in years) AggregateIntrinsicValue(in thousands) (1)Outstanding at December 31, 20161,334,877 $11.32 6.85 $6,787Granted— — Exercised(452,954) 11.05 Cancelled(47,244) 11.45 Outstanding at December 31, 2017834,679 $11.45 5.99 $11,391Exercisable as of December 31, 2017696,382 $11.27 5.77 $9,631(1) The aggregate intrinsic value is calculated as the positive difference between the exercise price of the underlying stock options and the market value ofthe Company’s common stock on December 31, 2017 and December 31, 2016 as reported on the NASDAQ Stock Market.The total intrinsic value of options exercised during the years ended December 31, 2017, 2016, and 2015 was approximately $4.2 million, $1.8 million,and $1.0 million, respectively. As of December 31, 2017, there was approximately $0.7 million of unrecognized stock-based compensation cost related tounvested stock options that is expected to be recognized over a weighted-average period of 1.07 years.Restricted Stock UnitsThe Company recognizes non-cash compensation expense over the vesting term of restricted stock units. The fair value is measured based upon thenumber of units and the closing price of the Company’s common stock underlying such units on the dates of grant. Upon vesting and settlement, eachrestricted stock unit entitles the holder to receive one share of common stock.The following table summarizes all restricted stock unit activity for the year ended December 31, 2017: Number of Shares Weighted Average GrantDate Fair ValueUnvested restricted stock units as of December 31, 20161,369,996 $11.32Restricted stock units granted714,197 19.67Restricted stock units vested(456,687) 11.90Restricted stock units cancelled(209,245) 12.78Unvested restricted stock units as of December 31, 20171,418,261 $15.12As of December 31, 2017, there was approximately $16.3 million of unrecognized stock-based compensation cost related to unvested restricted stockunits that is expected to be recognized over a weighted-average period of 2.31 years.Restricted Stock AwardsThe Company grants restricted stock awards to members of the Board of Directors annually. The fair value is measured based upon the number of unitsand the closing price of the Company’s common stock underlying such units on the dates of grant. Awards to directors vest on the earlier of the firstanniversary of the date of grant or the Company's Annual Meeting.The following table summarizes restricted stock award activity for the year ended December 31, 2017: Number ofShares Weighted AverageGrant Date FairValueUnvested restricted stock awards as of December 31, 2016114,622 $9.55Restricted stock awards granted50,988 21.00Restricted stock awards vested (restriction lapsed)(106,956) 9.52Restricted stock awards forfeited(375) 10.89Unvested restricted stock awards as of December 31, 201758,279 $19.6070Table of ContentsAs of December 31, 2017, there was approximately $0.5 million of unrecognized stock-based compensation cost related to unvested restricted stockunits that is expected to be recognized over a weighted-average period of 0.66 years.Equity Awards with Market-Based Vesting ConditionsDuring the years ended December 31, 2017, 2016, and 2015, the Company granted 168,884, 325,000 and 100,000 restricted stock units with market-based vesting conditions to certain key executives, respectively. These restricted stock units contain both market-based and service vesting conditions. Themarket-based vesting conditions are achieved if the closing price of the Company's common stock meets or exceeds a specified target price for 20consecutive trading days. The awards are subject to additional service vesting which typically occurs in four equal quarterly installments over the one-yearperiod beginning on the date the market-based vesting conditions are met. This vesting is subject to the recipient's continued service to the Companythrough the applicable vesting date.The Company estimated the fair value and derived service period of the restricted stock units with market-based vesting conditions on the date of grantusing a Monte-Carlo simulation. The model requires the use of subjective estimates and assumptions, including expected volatility, risk-free interest rate anddividend yield.The grant-date stock price and assumptions used to estimate the derived service period and fair value of the equity awards with market-based vestingconditions were as follows: As of August 4,As February 10,As of February 1,As of June 3, 2017201720162015Grant-date stock price$21.15$19.15$8.95$11.32Assumptions Expected volatility39%42%40%49%Risk-free interest rate1.44%1.47%1.01%2.38%Expected dividend yield—%—%—%—%The Company recognizes the stock-based compensation expense on equity awards with market-based vesting conditions in the consolidated statementsof operations over the requisite service period. The achievement of certain market-based vesting conditions may result in the acceleration of recognizingstock-based compensation expense compared to the original valuation.The following table summarizes equity awards with market-based vesting conditions activity for the year ended December 31, 2017: Options withMarket-BasedVesting Conditions Weighted AverageGrant Date FairValue Restricted StockUnits with Market-Based VestingConditions Weighted AverageGrant Date FairValueUnvested market-based vesting awards as of December 31,2016125,000 $7.65 367,500 $6.00Market-based vesting awards granted— — 168,884 13.84Market-based vesting awards vested(125,000) 7.65 (295,000) 5.23Market-based vesting awards forfeited— — (22,500) 4.34Unvested market-based vesting awards as of December 31,2017— $— 218,884 $13.26(1) In addition to the unvested market-based vesting options above, there were 250,000 and 125,000 vested market-based vesting options outstandingand exercisable as of December 31, 2017 and December 31, 2016, respectively. As of December 31, 2017, these options had an exercise price of$14.44, a remaining contractual term of 6.92 years, and an intrinsic value of $2.7 million.As of December 31, 2017, there was approximately $1.1 million of unrecognized stock-based compensation cost related to unvested awards with market-based vesting conditions that are expected to be recognized over a weighted-average period of 0.68 years.For the year ended December 31, 2017, the total fair value of restricted stock awards, restricted stock units, performance-based stock awards on the datevested was $17.8 million.71Table of ContentsStock-based Compensation ExpenseStock-based compensation is reflected in the consolidated statements of operations as follows for the years ended December 31, 2017, 2016, and 2015(in thousands): Years Ended December 31, 2017 2016 2015Cost of revenues$1,061 $807 $730Research and development1,969 868 1,171General and administrative7,827 6,161 7,226Sales and marketing1,885 1,064 1,089Total$12,742 $8,900 $10,216Employee Stock Purchase PlanOn May 18, 2017, the Company registered 600,000 shares pursuant to the 2017 Employee Stock Purchase Plan (“2017 ESPP”) on a Form S-8. Under thisplan eligible employees may purchase shares of the Company's common stock, subject to certain limitations, at the lesser of 85% of the beginning or endingwithholding period fair market value as defined in the 2017 ESPP. There are two six-month withholding periods in each fiscal year. As of December 31,2017, rights to acquire 540,819 shares of common stock were available for issuance under the 2017 ESPP.11. Income TaxesOn December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act (“Tax Act”), which significantly changes theexisting U.S. tax laws. The Tax Act includes a reduction in the U.S. corporate tax rate from 34% to 21%, a transition from a worldwide tax system to amodified territorial tax system, new taxes on certain foreign-sourced earnings, limitations on the deductibility of interest expense and executivecompensation, as well as other changes.In response to the Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) which allows registrants to record provisional amountsduring a measurement period, not to extend beyond one year. Pursuant to SAB 118, the Company will complete the accounting for the tax effects of all of theprovisions of the Tax Act within the required measurement period not to extend beyond one year from the enactment date.The Company has remeasured all deferred tax assets and liabilities as of December 31, 2017, based on the provisions of the Tax Act, which include areduction in the federal statutory tax rate from 34% to 21%. The impact of the remeasurement to the net deferred tax asset is a reduction of $8.9 million,which is fully offset by changes in the pre-existing valuation allowance. For the year ended December 31, 2017, the Company recorded a benefit of $0.2million related to the Federal Alternative Minimum Tax ("AMT") credit, which is now refundable under the Tax Act. In regard to the Tax Act’s one-time taxon unrepatriated foreign earnings, the Company has performed an analysis and has determined that the Company does not have a liability as the Companyhas a net deficit of unrepatriated foreign earnings.The domestic and foreign components of loss before (benefit) provision for income taxes were as follows (in thousands): Years Ended December 31, 2017 2016 2015Domestic$(14,171) $(1,911) $(10,120)Foreign(3,508) (805) (11,393)Total loss before (benefit) provision for income taxes$(17,679) $(2,716) $(21,513)72Table of ContentsThe components of the (benefit) provision for income taxes are as follows (in thousands): Years Ended December 31, 2017 2016 2015Current tax provision: Federal$(395) $90 $131State(24) 219 113Foreign2,134 1,089 (118)Total current provision1,715 1,398 126Deferred tax benefit: Federal(12,514) — —State(1,906) 10 4Foreign(972) (25) (28)Total deferred benefit(15,392) (15) (24)Total (benefit) provision for income taxes$(13,677) $1,383 $102A reconciliation of our income tax (benefit) provision to the statutory federal tax rate is as follows: Years Ended December 31, 2017 2016 2015U.S. federal income tax rate34.0 % 34.0 % 34.0 %Change in the valuation allowance83.8 (43.9) (38.7)Nondeductible stock-based compensation21.5 0.7 (4.5)State taxes, net of federal benefit5.9 1.6 1.4Foreign rate differential(11.2) (30.9) (11.8)Corporate restructuring— — 23.0Income tax credits6.9 41.5 4.3Provision for tax reserves0.7 (31.6) (3.5)Non-deductible compensation(8.2) (14.1) (3.0)Meals and entertainment(1.2) (2.4) (0.3)Transaction costs(3.7) (2.8) (0.1)Change in federal rate(50.1) — —Other(1.0) (3.0) (1.3)Effective income tax rate77.4 % (50.9)% (0.5)%The Company recorded a (benefit) provision for income taxes of $(13.7) million, $1.4 million and $0.1 million for the years ended December 31, 2017,2016, and 2015, respectively. For the year ended December 31, 2017, the Company’s tax provision was primarily driven by valuation allowance release,foreign income taxes, and refundable AMT. For the year ended December 31, 2016, the Company’s tax provision was primarily driven by foreign incometaxes, federal AMT, and state income taxes. Our effective tax rate for the year ended December 31, 2017 differed due to the U.S. federal statutory rateprimarily due to changes in the valuation allowance against deferred tax assets, stock-based compensation, offset by the impact of the federal tax rate changeon the deferred tax assets, and a foreign rate differential associated with certain foreign jurisdictions which are subject to significantly lower tax rates than the2017 U.S. federal statutory rate. Our effective tax rate for the year ended December 31, 2016 is lower than the U.S. federal statutory rate primarily due tochanges in the valuation allowance against deferred tax assets, provisions for tax reserves, a foreign rate differential associated with certain foreignjurisdictions which are subject to significantly lower tax rates than the U.S. federal statutory rate, and nondeductible compensation, offset by income taxcredits.73Table of ContentsThe components of the Company’s deferred tax assets and liabilities are as follows (in thousands): 2017 2016Deferred tax assets: Net operating loss carryforwards$27,792 $34,292Research and development tax credit carryforwards6,280 5,751Deferred revenue3,957 7,213Stock compensation2,339 2,693Other7,304 7,230Total deferred tax assets47,672 57,179Valuation allowance for deferred tax assets(28,273) (52,987)Total deferred tax assets, net of valuation allowance19,399 4,192Deferred tax liabilities: Amortization(9,146) (1,452)Convertible debt(7,948) —Other(3,450) (4,133)Total deferred tax liabilities(20,544) (5,585)Net deferred tax liabilities$(1,145) $(1,393)As of December 31, 2017, the Company had U.S. federal, state and foreign net operating loss carryforwards of $107.9 million, $72.7 million, and $6.1million, respectively. The federal net operating loss carryforwards will expire at various dates beginning in 2027 through 2037. State net operating losscarryforwards will expire at various dates beginning in 2020 through 2037. At December 31, 2017, the Company had federal, state, and foreign research anddevelopment tax credit carryforwards available to reduce future income taxes payable of $4.0 million, $2.7 million, and $0.2 million respectively. Thesecredits will expire at various dates beginning in the year 2025 through 2037. As of December 31, 2017, the Company also had refundable federal AMTcredits of approximately $0.2 million.Management has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. As required by the provisions ofASC 740, Income Taxes ("ASC 740"), management has determined that it is not more-likely-than-not that the tax benefits related to the federal, state andforeign deferred tax assets will be realized for financial reporting purposes. Accordingly, the federal, state and certain foreign deferred tax assets have beenfully reserved at December 31, 2017 and 2016. The valuation allowance decreased approximately $24.7 million during the year ended December 31, 2017primarily due to the partial release of U.S. valuation allowance as a result of a net deferred tax liability recorded in the acquisition of DoubleTake. The U.S.net deferred tax liability primarily relates to non-tax deductible intangible assets recognized in the financial statements which generate a deferred taxliability. The net deferred tax liability established is estimated to be a source of income to utilize previously unrecognized deferred tax assets in the U.S.Therefore, we have recorded a tax benefit of $14.6 million for the release of U.S. valuation allowance related to the deferred tax liability recorded in purchaseaccounting. The U.S. maintains a valuation allowance on the overall U.S. net deferred tax asset as it is deemed more likely than not the U.S. net deferred taxasset will not be realized. Furthermore, the 2017 change in valuation allowance is also impacted by a deferred tax liability related to the Convertible Notes aswell as federal tax rate changes on the U.S. deferred tax assets and liabilities. The valuation allowance decreased approximately $2.0 million during the yearended December 31, 2016 due primarily to changes in the net operating loss carryforwards and decreases in the deferred tax assets related to stock-basedcompensation, offset by increases in other deferred tax assets.Future changes in Company ownership may limit the amount of net operating loss carryforwards and research and development credit carryforwards thatcan be utilized annually to offset future taxable income and taxes, respectively. In general, an ownership change, as defined by Section 382 of the InternalRevenue Code of 1986, as amended, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporationby more than 50 percentage points over a three-year period. Based upon the Company’s analysis as of December 31, 2017, there was no ownership changeexperienced during 2017.74Table of ContentsUnrecognized Tax BenefitsA reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): 2017 2016 2015Unrecognized tax benefits, beginning of year$(4,108) $(3,231) $(2,615)Additions based on tax positions related to the current year(673) (943) (1,323)Additions for tax positions of prior years— (14) (35)Reductions for tax positions of prior years1,081 80 142Settlements— — 600Unrecognized tax benefits, end of year$(3,700) $(4,108) $(3,231)The Company accounts for uncertain tax positions under the recognition and measurement criteria of ASC 740. For those tax positions for which it ismore likely than not that a tax benefit will be sustained, we record the largest amount of tax benefit with a greater than 50% likelihood of being realized uponsettlement with a taxing authority that has full knowledge of all relevant information. If we do not believe that it is not more likely than not that a tax benefitwill be sustained, no tax benefit is recognized. As of December 31, 2017, the Company had a total amount of unrecognized tax benefits of $3.7 million, ofwhich $0.1 million represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in futureperiods. The difference between the total amount of unrecognized tax benefits and the amount that would impact the effective tax rate consists of items that,if recognized, would result in a corresponding increase in the valuation allowance.The Company recognizes interest and penalties related to uncertain tax positions as a component in income tax expense. As of December 31, 2017, theCompany had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s consolidatedstatements of operations. The statute of limitations for assessment by the Internal Revenue Service ("IRS") and state tax authorities is open for tax yearsending December 31, 2014, 2015, 2016 and 2017, although carryforward attributes that were generated prior to tax year 2014 may still be adjusted uponexamination by the IRS or state tax authorities if they either have been or will be used in a future period. The statute of limitations for assessments by foreigntaxing authorities is generally not open for years prior to 2013, although carryforward attributes that were generated prior to tax year 2013 may still beadjusted upon examinations.The Company is subject to U.S. federal income tax and various state and local taxes in both domestic and foreign jurisdictions. In the normal course ofbusiness, the Company is subject to examination by taxing authorities within these jurisdictions. The IRS completed its audit of the Company's U.S. federalincome tax return for the tax year ended December 31, 2011 during 2014. The closing of the audit did not result in any proposed adjustments or assessmentsof tax relating to the 2011 tax year. Additionally, during 2015 the Company completed a German tax audit for MailStore for the tax years ended December31, 2011, 2012, 2013 and 2014 with immaterial adjustments.The Company does not reasonably expect that the unrecognized tax benefit will change significantly within the next twelve months.As of December 31, 2017, a deferred tax liability has not been established for approximately $9.3 million of cumulative undistributed earnings of non-U.S. subsidiaries, which are expected to be reinvested indefinitely in operations outside the U.S. Determination of the unrecognized deferred tax liability onunremitted earnings is not practical due to uncertainty regarding the remittance structure, the mix of earnings and earnings for profit pools in the year ofremittance, and overall complexity of the calculation.12. Commitments and ContingenciesOperating LeasesThe Company leases facilities under leases that expire at varying dates through 2025. Certain of these leases contain renewal options and require theCompany to pay operating costs, including property taxes, insurance, and maintenance.The Company has lease agreements to rent office space in Boston, Massachusetts (corporate headquarters); Salt Lake City, Utah; and Indianapolis,Indiana as well as various other locations in North America and Europe. The Company has lease agreements to rent data center space in Ashburn, Virginia;Chandler, Arizona; and Phoenix, Arizona as well as various other locations in North America and Europe. The Company has data center colocationagreements in place with Iron Mountain and75Table of ContentsDataBank to rent colocation space at each of their data centers. The terms of several of these leases include escalating rent and free rent periods. Accordingly,the Company recorded a deferred rent liability related to the free rent and escalating rent payments, such that rent is being recognized on a straight-line basisover the terms of the leases. Rent expense was $8.9 million, $8.1 million and $5.4 million for the fiscal years ended December 31, 2017, 2016 and 2015,respectively. At December 31, 2017 and 2016, $4.7 million and $4.6 million is included in accrued expenses and other long-term liabilities related to thedeferred rent, respectively.In December 2017, the Company entered into new lease agreements for its Salt Lake City, Utah and Indianapolis, Indiana offices. The Salt Lake City,Utah office lease expires on December 31, 2024 and the Indianapolis, Indiana lease expires on June 30, 2025. As part of the new office leases, the Companyreceived a tenant improvement allowance. The rent expense is recorded net of the allowance over the term of the lease. The leasehold improvementsassociated with the office leases are being amortized over the initial term of the lease. Any additional leasehold improvements made during the course ofoccupancy will be amortized over the shorter of the useful life or remaining life of the lease. In December 2017, the Company entered into a new leaseagreement for its Chandler, Arizona data center. The term of the lease expires on January 31, 2023.Future non-cancellable minimum lease payments under all operating leases as of December 31, 2017, are as follows (in thousands):Years Ended December 31,OfficeLeases DataCenterLeases (1) Total2018$4,323 $3,483 $7,80620193,743 2,075 5,81820203,632 2,030 5,66220213,683 2,056 5,73920223,468 768 4,236Thereafter6,871 64 6,935Total$25,720 $10,476 $36,196(1) Certain amounts in the table above relating to colocation leases for the Company's servers include usage based charges in additionto base rent.Other Non-Cancellable CommitmentsAs of December 31, 2017, the Company had non-cancellable commitments to vendors primarily consisting of hosted software, consulting, advertising,marketing and broadband services contracts, as follows (in thousands):Years Ended December 31,Commitments2018$4,22520191,10520202302021—2022—Total$5,560LitigationOn February 27, 2017, Realtime Data LLC (“Realtime Data”) filed a lawsuit against the Company in the U.S. District Court for the Eastern District ofTexas, alleging that certain of the Company’s solutions infringe certain patents held by Realtime Data, and seeking unspecified damages and injunctiverelief. Realtime Data has filed patent suits against others on the asserted patents, which are at issue in a number of pending litigations and patent officeproceedings. In response to Realtime Data’s lawsuit against the Company, the Company moved to dismiss the case for improper venue or alternatively totransfer the case to the U.S. District Court for the District of Massachusetts. On November 22, 2017, the case was transferred to Massachusetts. No trial datehas been set. The Company is not able to assess with certainty the outcome of this lawsuit or the amount or range of potential damages or future paymentsassociated with this lawsuit at this time. The Company intends to defend itself vigorously.76Table of ContentsAlthough results of litigation and claims cannot be predicted with certainty, the Company is not presently involved in any legal proceeding in which theoutcome, if determined adversely to the Company, would be expected to have a material adverse effect on our business, operating results, or financialcondition. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion ofmanagement resources, and other factors.13. RestructuringIn October 2017, the Company initiated a restructuring program ("2017 Plan") to streamline operations and reduce operating costs. The Companyrecorded restructuring charges of $1.0 million for employee severance related to the reduction of its workforce. The Company estimates that it will incurrestructuring charges between $1.5 million and $2.1 million related to the employee severance under the 2017 Plan. Activities under the 2017 Plan areexpected to be substantially completed by the end of the first half of 2018. The following table summarizes the restructuring program activity for the yearended December 31, 2017 (in thousands): Employee Severanceand Related CostsAccrued restructuring as of December 31, 2016$—Charges1,047Cash payments(359)Accrued restructuring as of December 31, 2017$688In 2016, the Company recorded restructuring charges of $0.9 million. These charges were associated with the reorganization and consolidation of certainoperations and the disposal of certain assets during 2016, due to the EVault acquisition. These restructuring activities were completed in March 2016.In 2015, the Company recorded restructuring charges of $0.5 million, primarily related to completion of our data center optimization program that wasinitiated in the fourth quarter of 2014, as well as recording a change in estimate of our lease exit charge for our former Boston, Massachusetts corporateheadquarters. These restructuring activities were completed in 2015.Restructuring-related expenses have been included in restructuring charges within the Company's consolidated statements of operations. The accrual forrestructuring-related expenses have been included in accrued expenses within the Company's consolidated balance sheets.14. Retirement PlanThe Company has a 401(k) defined contribution savings plan for its employees who meet certain employment status and age requirements. The planallows participants to contribute a portion of their annual compensation on a pre-tax basis. Effective January 1, 2012, the Company elected to make amatching contribution of up to 4% of each employee’s wages. For the periods ending December 31, 2017, 2016 and 2015, the total expense for theCompany’s matching contributions to the plan was $2.5 million, $1.8 million, and $1.1 million, respectively.15. Borrowings and Credit ArrangementsConvertible Senior NotesOn April 4, 2017, the Company issued, in a private offering, $143.8 million aggregate principal amount of Convertible Notes. The Convertible Notesaccrue interest at 2.5% per year, payable semiannually in arrears on April 1 and October 1 of each year. The Convertible Notes will mature on April 1, 2022,unless earlier repurchased, redeemed or converted.The conversion rate for the Convertible Notes is initially 38.7034 shares of Company’s common stock per $1,000 principal amount of ConvertibleNotes, which is equivalent to an initial conversion price of approximately $25.84 per share of common stock. Prior to January 1, 2022, the Convertible Noteswill be convertible by the holders only upon satisfaction of the following conditions and during following periods:1.During any calendar quarter commencing after the calendar quarter ending on September 30, 2017 (and only during such calendar quarter), if the lastreported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutivetrading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion priceon each applicable trading day;77Table of Contents2.During the five business day period after any five consecutive trading day period (the “Measurement Period”) in which the trading price per $1,000principal amount of notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price of ourcommon stock and the conversion rate on each such trading day;3.If the Company calls any or all of the notes for redemption at any time prior to the close of business on the second scheduled trading dayimmediately preceding the redemption date; and4.Upon the occurrence of certain specified corporate events.On or after January 1, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders mayconvert their notes at any time. The Company may satisfy any conversion obligations by paying or delivering, as the case may be, cash, shares of its commonstock or a combination of cash and shares of its common stock, at the Company's election in the manner and subject to the terms and conditions provided inthe indenture governing the Convertible Notes.The Company may redeem for cash all or any portion of the Convertible Notes, at its option, on or after April 5, 2020 if the last reported sale price of theCompany's common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), during any30 consecutive trading day period ending on the trading day immediately preceding the date on which the Company provides notice of redemption at aredemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, theredemption date.The Company received $138.7 million in proceeds from the issuance of the Convertible Notes, net of debt issuance costs and the discounts to the initialpurchasers. The Company used $39.2 million of the proceeds to repay all amounts outstanding under its revolving credit facility and $15.0 million of theproceeds to repurchase shares of its common stock from purchasers of Convertible Notes in privately negotiated transactions effected through one or more ofthe initial purchasers or their affiliates conducted concurrently with the pricing of the Convertible Notes. The remaining proceeds will be used for generalcorporate purposes, including potential acquisitions.In accordance with ASC 470-20, Debt with Conversion and Other Options, the Company separated the Convertible Notes into liability and equitycomponents. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associatedconvertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of theliability component from the par value of the Convertible Notes as a whole. The excess of the principal amount of the liability component over its carryingamount (“debt discount”) is amortized to interest expense over the term of the Convertible Notes. The equity component is included in the additional paid-in-capital portion of stockholders’ equity on the Company’s consolidated balance sheet, and is not remeasured as long as it continues to meet the conditionsfor equity classification.In addition, the debt issuance costs and debt discount are allocated between the liability and equity components in proportion to the allocation of theproceeds. The issuance costs and discount allocated to the liability component are capitalized as a reduction of the principal amount of the ConvertibleNotes payable on the Company’s balance sheet and amortized, using the effective-interest method, as additional interest expense over the term of theConvertible Notes. The issuance costs and discount allocated to the equity component are recorded as a reduction to additional paid-in capital. TheConvertible Notes consisted of the following (in thousands): December 31, 2017Liability component: Principal$143,750Less: debt issuance costs(720)Less: debt discount(31,211)Net carrying amount$111,819Equity component$31,45178Table of ContentsFor the year ended December 31, 2017, the Company incurred total interest expense associated with the Convertible Notes as follows (in thousands): Year Ended December 31, 2017Interest expense related to contractual interest coupon$2,655Interest expense related to accretion of the discount4,434Interest expense related to debt issuance costs102Total$7,191As of December 31, 2017, the net carrying value of the Convertible Notes was $111.8 million, which is net of unamortized debt issuance costs of $0.7million. The effective interest rate on the Convertible Notes, including amortization of debt issuance costs and accretion of the discount, is 8.7%. AtDecember 31, 2017, the conversion option value of the Convertible Notes does not exceed their principal amount since the closing market price of theCompany's common stock does not exceed the conversion rate. In addition, as the closing price of the Company's common stock on December 31, 2017 didnot exceed the conversion price on the Convertible Notes of $25.84 and the Company has the ability and intent to settle the notes in cash, there was noimpact on diluted earnings per share during the year ended December 31, 2017.Credit FacilityThe Company and certain of its subsidiaries had a credit agreement with Silicon Valley Bank (the "Credit Facility"), which provided a revolving creditfinancing of up to $40.0 million, including a $5.0 million sub-limit for letters of credit. On April 4, 2017, in connection with the Convertible Notes, theCompany utilized $39.2 million of the net proceeds from the offering to repay all amounts outstanding under its Credit Facility and thereafter terminated thefacility.16. Geographic DataAs more fully described in Note 2 - Summary of Significant Accounting Policies, the Company operates in one operating segment. Revenue bygeographic region was based on physical location of the operations recording the sale. Revenues by geographic region are presented as follows (inthousands): For the Year EndedDecember 31, 2017United States$209,161International30,301Total$239,462For the years ended December 31, 2016 and 2015, revenues by geographic region were not disclosed as revenue outside the United States did not exceed10% of total revenue. No individual country other than the United States accounts for 10% or more of revenues in the years ended December 31,2017, 2016 and 2015. Revenue included in the “International” caption above primarily relates to the Company’s operations in Europe.The Company does not disclose geographic information for long-lived assets, excluding deferred tax assets, goodwill and intangible assets. Long-livedassets, excluding deferred tax assets, goodwill and intangible assets, located outside the United States do not exceed 10% of total assets.17. Subsequent EventsOn February 12, 2018, the Company entered into a definitive and binding Master Acquisition Agreement ("Agreement") with EMC Corporation(“EMC”), Mozy, Inc. ("Mozy") and Dell Technologies, Inc. pursuant to which the Company will acquire all of the issued and outstanding capital stock ofMozy, a provider of online, data and computer backup software, and certain related business assets owned by EMC or its affiliates, for a purchase price of$145.8 million in cash, subject to potential adjustments for working capital. The Agreement contains customary representations, warranties, covenants andindemnities, including a covenant requiring the Company to use its reasonable best efforts to obtain debt financing for the transaction in accordance with theterms of a commitment letter for a $120.0 million revolving credit facility. Consummation of the transaction is also subject to various conditions, includingreceipt of governmental approvals and other customary closing79Table of Contentsconditions. The Agreement contains termination rights, including a right for either party to terminate the Agreement if the closing shall not have occurred onor before July 1, 2018, subject to certain conditions. The Company expects the acquisition to close during the first quarter of 2018.18. Quarterly Information (Unaudited)Quarterly results of operations are as follows (in thousands, except per share amounts): For the Three Months Ended Dec. 31, 2017 Sept. 30, 2017 June 30, 2017 March 31, 2017 Dec. 31, 2016 Sept. 30, 2016 June 30, 2016 March 31, 2016Statements ofOperations Data: Revenue$61,692 $61,637 $59,034 $57,099 $53,488 $51,948 $53,435 $48,115Gross profit$44,881 $44,047 $40,723 $39,744 $38,629 $36,489 $37,571 $33,360Income (loss) fromoperations$555 $(1,094) $(4,653) $(6,873) $(161) $381 $1,447 $(4,451)Net (loss) income$(1,614) $(3,603) $(6,380) $7,595 $(670) $107 $1,160 $(4,696)Basic and diluted net (loss)income per share$(0.06) $(0.13) $(0.23) $0.27 $(0.02) $— $0.04 $(0.17)80Table of ContentsITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.ITEM 9A.CONTROLS AND PROCEDURESDisclosure Controls and ProceduresOur management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controlsand procedures as of December 31, 2017. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the ExchangeAct, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports thatit files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by acompany in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including itsprincipal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that anycontrols and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and managementnecessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosurecontrols and procedures as of December 31, 2017, our chief executive officer and chief financial officer concluded that, as of such date, our disclosurecontrols and procedures were effective at the reasonable assurance level.Management’s Annual Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financialreporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of our principal executiveand principal financial officers and effected by our Board of Directors, management, and other personnel to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies andprocedures that:•pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and disposition of our assets;•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, andthat our receipts and expenditures are being made only in accordance with authorizations of our management and Board of Directors; and•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could havea material effect on our financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. Management based its assessment oncriteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013Framework) ("COSO").Based on management’s assessment of Carbonite, Inc., management has concluded that our internal control over financial reporting was effective as ofDecember 31, 2017. The certifications of our chief executive officer and chief financial officer attached as Exhibits 31.1 and 31.2 to this Annual Reportinclude, in paragraph 4 of such certifications, information concerning our disclosure controls and procedures and internal controls over financial reporting.Deloitte & Touche LLP, an independent registered public accounting firm, has issued a report on our internal control over financial reporting as ofDecember 31, 2017, which is included below.81Table of ContentsChanges in Internal Control over Financial ReportingThere was no change in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect,our internal control over financial reporting.REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the stockholders and the Board of Directors of Carbonite, Inc.Opinion on Internal Control over Financial ReportingWe have audited the internal control over financial reporting of Carbonite, Inc. and subsidiaries (the "Company") as of December 31, 2017, based on criteriaestablished in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteriaestablished in Internal Control - Integrated Framework (2013) issued by COSO.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidatedfinancial statements as of and for the year ended December 31, 2017, of the Company and our report dated March 12, 2018, expressed an unqualified opinionon those financial statements.Basis for OpinionThe Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firmregistered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. Webelieve that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control over Financial ReportingA company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate./s/ Deloitte & Touche LLPBoston, MassachusettsMarch 12, 201882Table of ContentsITEM 9B.OTHER INFORMATIONNone.83Table of ContentsPART IIIITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEExcept as set forth below with respect to the Company’s Code of Business Conduct and Ethics, the information required by this item will be set forth inthe sections entitled “Board of Directors, Corporate Governance & Related Matters”, “Section 16(a) Beneficial Ownership Reporting Compliance”,“Executive Officers” and “Criteria for Procedures Director Nominations” of our definitive proxy statement to be filed with the SEC in connection with our2018 annual meeting of stockholders (the “Proxy Statement”), which is expected to be filed not later than 120 days after the end of our fiscal year endedDecember 31, 2017, and is incorporated in this Annual Report by reference.We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees, including our principal executiveofficer and principal financial officer. The Code of Business Conduct and Ethics is posted on our website at http://investor.carbonite.com/governance.cfm.We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this Code ofBusiness Conduct and Ethics by posting such information on our website, at the address and location specified above and, to the extent required by thelisting standards of The NASDAQ Global Market, by filing a Current Report on Form 8-K with the SEC, disclosing such information.ITEM 11.EXECUTIVE COMPENSATIONThe information required by this item will be set forth in the sections entitled “Compensation Discussion and Analysis”, “Compensation CommitteeInterlocks and Insider Participation” and “Report of the Compensation Committee of the Board of Directors on Executive Compensation” of our ProxyStatement and is incorporated in this Annual Report by reference.ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERSThe information required by this item will be set forth in the sections entitled “Security Ownership of Certain Beneficial Owners and Management” and“Equity Compensation Plan Information” of our Proxy Statement and is incorporated in this Annual Report by reference.ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information, if any, required by this item will be set forth in the sections entitled “Certain Relationships And Related Transactions” and “Board ofDirectors, Corporate Governance & Related Matters - Independence of our Board of Directors” of our Proxy Statement and is incorporated in this AnnualReport by reference.ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information required by this item will be set forth in the section entitled “Audit-Related Matters” of our Proxy Statement and is incorporated in thisAnnual Report by reference.84Table of ContentsPART IVITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES(a)(1) Financial StatementsSee Index to Consolidated Financial Statements on page 44 of this Annual Report, which is incorporated into this Item by reference.(a)(3) ExhibitsSee Exhibit Index to this Annual Report, which is incorporated into this Item by reference. Each management contract or compensatory plan orarrangement required to be filed has been identified.(b) ExhibitsSee Exhibit Index to this Annual Report, which is incorporated into this Item by reference.(c) Financial Statement SchedulesNo schedules are submitted because they are not applicable, not required or because the information is included in the Consolidated FinancialStatements or Notes to Consolidated Financial Statements.ITEM 16.FORM 10-K SUMMARYNone.85Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. CARBONITE, INC. Dated:March 12, 2018By: /s/ Mohamad Ali Mohamad Ali Chief Executive Officer86Table of ContentsPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant inthe capacities and on the dates indicated.Signature Title Date/s/ Mohamad Ali Chief Executive Officer and Director(Principal Executive Officer) March 12, 2018Mohamad Ali /s/ Anthony Folger Chief Financial Officer(Principal Financial Officer) March 12, 2018Anthony Folger /s/ Cassandra Hudson Chief Accounting Officer (Principal Accounting Officer) March 12, 2018Cassandra Hudson /s/ Stephen Munford* Chairman of the Board March 12, 2018Stephen Munford /s/ Marina Levinson* Director March 12, 2018Marina Levinson /s/ Charles Kane* Director March 12, 2018Charles Kane /s/ Todd Krasnow* Director March 12, 2018Todd Krasnow /s/ Peter Gyenes* Director March 12, 2018Peter Gyenes /s/ Scott Daniels* Director March 12, 2018Scott Daniels /s/ David Friend* Director March 12, 2018David Friend March 12, 2018*By: /s/ Mohamad Ali*Mohamad Ali Attorney-in-Fact87Table of ContentsEXHIBIT INDEXExhibit No.Description2.1Stock Purchase Agreement by and Among Carbonite, Inc., Vero Parent, Inc., and Vision Solutions, Inc., dated as of January 31, 2017.(Filed as Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 31,2017, and incorporated herein by reference.)3.1Amended and Restated Certificate of Incorporation of Carbonite, Inc. (Filed as Exhibit 3.1 to Amendment No. 2 to Registrant'sRegistration Statement on Form S-1/A filed with the Securities and Exchange Commission on July 13, 2011, and incorporated byreference.)3.2Amended and Restated By-Laws of Carbonite, Inc. (Filed as the same numbered exhibit to Amendment No. 2 to Registrant’sRegistration Statement on Form S-1 filed with the Securities and Exchange Commission on July 13, 2011, and incorporated herein byreference.)3.3Certificate of Elimination of Series A Junior Participating Preferred Stock, dated as of January 11, 2016. (Filed as Exhibit 3.1 toRegistrant's Current Report on Form 8-K/A filed with the Securities and Exchange Commission on January 13, 2016, and incorporatedby reference.)4.1Form of Common Stock Certificate. (Filed as the same numbered exhibit to Amendment No. 3 to Registrant’s Registration Statementon Form S-1/A filed with the Securities and Exchange Commission on July 25, 2011, and incorporated herein by reference)4.2Indenture (including form of Note), dated as of April 4, 2017, by and between Carbonite, Inc. and U.S. Bank National Association, astrustee. (Filed as Exhibit 4.1 to Form 8-K filed with the Securities and Exchange Commission on April 4, 2017 and incorporated hereinby reference.)10.1#Amended and Restated 2005 Stock Incentive Plan and Form of Incentive Stock Option Agreement, Non-statutory Stock OptionAgreement, and Stock Restriction Agreement under the Amended and Restated 2005 Stock Incentive Plan. (Filed as the samenumbered exhibit to Amendment No. 2 to Registrant’s Registration Statement on Form S-1/A filed with the Securities and ExchangeCommission on July 13, 2011, and incorporated herein by reference.)10.2#2011 Equity Award Plan and Form of Incentive Stock Option Agreement, Non-statutory Stock Option Agreement, and StockRestriction Agreement under the 2011 Equity Award Plan. (Filed as the same numbered exhibit to Amendment No. 2 to Registrant’sRegistration Statement on Form S-1/A filed with the Securities and Exchange Commission on July 13, 2011, and incorporated hereinby reference.)10.3#Form of Indemnification Agreement by and between Carbonite, Inc. and each of its directors and executive officers. (Filed as the samenumbered exhibit to Amendment No. 4 to Registrant’s Registration Statement on Form S-1 filed with the Securities and ExchangeCommission on May 12, 2011, and incorporated herein by reference.)10.4Commercial Lease with Lewiston Properties, LLC, dated as of May 13, 2011. (Filed as Exhibit 10.13 to Amendment No. 1 toRegistrant’s Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on June 15, 2011, andincorporated herein by reference.)10.5Turn Key Datacenter Lease with GIP Wakefield, LLC, dated as of June 3, 2011. (Filed as Exhibit 10.14 to Amendment No. 1 toRegistrant’s Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on June 15, 2011, andincorporated herein by reference.)10.6Turn Key Datacenter Lease with Digital Phoenix Van Buren, LLC, dated as of November 29, 2011. (Filed as Exhibit 10.17 toRegistrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 7, 2012, and incorporatedherein by reference.)10.7First Amendment to the Datacenter Lease with GIP Wakefield, LLC, dated as of September 15, 2011. (Filed as Exhibit 10.1 toRegistrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 3, 2012, and incorporatedherein by reference.)10.8Second Amendment to the Datacenter Lease with GIP Wakefield, LLC, dated as of March 31, 2012. (Filed as Exhibit 10.2 toRegistrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 3, 2012, and incorporatedherein by reference.)10.9Third Amendment to the Datacenter Lease with GIP Wakefield LLC, dated as of June 11, 2012. (Filed as Exhibit 10.24 to Registrant’sAnnual Report on Form 10-K filed with the Securities and Exchange Commission on March 6, 2013, and incorporated herein byreference.)10.10#Offer Letter with Anthony Folger, dated as of November 21, 2012. (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-Kfiled with the Securities and Exchange Commission on January 2, 2013, and incorporated herein by reference.)10.11*Fourth Amendment to the Datacenter Lease with GIP Wakefield, LLC, dated as of February 14, 2013. (Filed as Exhibit 10.19 toRegistrant's Annual Report on Form 10-K with the Securities and Exchange Commission on March 5, 2014, and incorporated hereinby reference.)10.12*Turnkey Datacenter Lease with Digital 2121 South Price, LLC, dated as of December 31, 2013. (Filed as Exhibit 10.24 to Registrant'sAnnual Report on Form 10-K with the Securities and Exchange Commission on March 5, 2014, and incorporated herein by reference.)88Table of Contents10.13*Fifth Amendment to the Datacenter Lease with GIP Wakefield, LLC, dated as of February 6, 2014. (Filed as Exhibit 10.25 toRegistrant's Annual Report on Form 10-K with the Securities and Exchange Commission on March 5, 2014, and incorporated hereinby reference.)10.14#Form of Restricted Stock Unit Agreement under the 2011 Equity Award Plan. (Filed as Exhibit 10.27 to Registrant's Annual Report onForm 10-K with the Securities and Exchange Commission on March 5, 2014, and incorporated herein by reference.)10.15Indenture of Lease by and between Abbey Lafayette Operating LLC and Carbonite, Inc. dated as of May 5, 2014. (Filed as Exhibit10.1 to Registrant's Quarterly Report on Form 10-Q with the Securities and Exchange Commission on May 6, 2014, and incorporatedherein by reference.)10.16#Form of Stock Restriction Agreement under the 2011 Equity Award Plan. (Filed as Exhibit 10.1 to Registrant's Current Report on Form8-K filed with the Securities and Exchange Commission on June 4, 2014, and incorporated herein by reference.)10.17#Amended and Restated Offer Letter with Danielle Sheer, dated as of August 1, 2014. (Filed as Exhibit 10.1 to Registrant's QuarterlyReport on Form 10-Q with the Securities and Exchange Commission on August 5, 2014, and incorporated herein by reference.)10.18#Promotion Letter Agreement with Cassandra Hudson, dated as of October 28, 2014. (Filed as Exhibit 10.1 to Registrant's CurrentReport on Form 8-K filed with the Securities and Exchange Commission on November 3, 2014, and incorporated herein by reference.)10.19*Sixth Amendment to the Datacenter Lease with GIP Wakefield, LLC, dated as of September 30, 2014. (Filed as Exhibit 10.1 toRegistrant's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 6, 2014, andincorporated herein by reference.)10.20#Executive Employment Agreement with Mohamad Ali, dated as of December 3, 2014. (Filed as Exhibit 10.1 to Registrant's CurrentReport on Form 8-K filed with the Securities and Exchange Commission on December 4, 2014).10.21#Amendment to Executive Employment Agreement with Mohamad Ali, dated as of January 8, 2015. (Filed as Exhibit 99.2 toRegistrant's Current Report of Form 8-K filed with the Securities and Exchange Commission on January 9, 2015, and incorporatedherein by reference.)10.22Seventh Amendment to the Datacenter Lease with GIP Wakefield, LLC, dated as of September 30, 2015. (Filed as Exhibit 10.1 toRegistrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2015, andincorporated herein by reference.)10.23#Offer Letter with Paul Mellinger, dated as of December 15, 2015. (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-Kfiled with the Securities and Exchange Commission on December 16, 2015, and incorporated herein by reference.)10.24#Offer Letter with Norman Guadagno, dated as of January 6, 2016. (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-Kfiled with the Securities and Exchange Commission on January 6, 2016, and incorporated herein by reference.)10.25#Executive Severance Plan, dated as of February 2, 2016. (Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed withthe Securities and Exchange Commission on February 4, 2016, and incorporated herein by reference.)10.26Performance-Based Restricted Stock Unit Award Agreement under the 2011 Equity Award Plan. (Filed as Exhibit 10.35 to Registrant’sAnnual Report on Form 10-K filed with the Securities and Exchange Commission on March 8, 2016, and incorporated herein byreference.)10.27First Amendment to Turnkey Datacenter Lease with Digital Phoenix Van Buren, LLC, dated as of February 3, 2016. (Filed as Exhibit10.36 to Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 8, 2016, andincorporated herein by reference.)10.28*Eighth Amendment to Turn Key Datacenter Lease with GIP Wakefield, LLC, dated as of September 30, 2016. (Filed as Exhibit 10.1 toRegistrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2016, andincorporated herein by reference.)10.29*Deed of Turn Key Datacenter Lease with Digital Loudoun Parkway Center North, LLC, dated as of September 30, 2016. (Filed asExhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2016,and incorporated herein by reference.)89Table of ContentsExhibit No.Description10.30*Carbonite, Inc. 2017 Employee Stock Purchase Plan (Filed as Appendix B to the Company’s definitive proxy statement filed with theSecurities and Exchange Commission on March 27, 2017 and incorporated herein by reference.)16.1Letter of Ernst & Young LLP, dated August 17, 2017 (Filed as Exhibit 16.1 to Registrant’s Current Report on Form 8-K filed with theSecurities and Exchange Commission on August 17, 2017, and incorporated herein by reference.)21.1List of subsidiaries.23.1Consent of Deloitte & Touche LLP, independent registered public accounting firm.23.2Consent of Ernst & Young LLP, independent registered public accounting firm.24.1Power of Attorney.31.1Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1Certifications of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2Certifications of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.101.INSXBRL Instance Document.101.SCHXBRL Taxonomy Extension Schema Document.101.CALXBRL Taxonomy Extension Calculation Linkbase Document.101.DEFXBRL Taxonomy Extension Definition Linkbase Document.101.LABXBRL Taxonomy Extension Label Linkbase Document.101.PREXBRL Taxonomy Extension Presentation Linkbase Document.#Indicates a management contract or compensatory plan.*Portions of this exhibit have been omitted pursuant to the Commission's grant of confidential treatment.90Exhibit 21.1Subsidiaries of Carbonite, Inc. Subsidiary JurisdictionCarbonite Securities Corporation United States (Massachusetts)Carbonite China Holdings, LLC United States (Delaware)Carbonite India Holdings, LLC United States (Delaware)Carbonite (China) Co., Ltd. ChinaZmanda Technologies India Pvt. Ltd. IndiaCarbonite Cloud Backup (Canada) Inc. CanadaCabonite GmbH SwitzerlandMailStore Software GmbH GermanyCarbonite Holdings B.V. NetherlandsCarbonite International Holdings, B.V. NetherlandsCarbonite Operations B.V. NetherlandsDouble-Take Software S.A.S (France) FranceCarbonite (UK) Limited United KingdomCarbonite Securities Corporation, Carbonite International Holding B.V., Carbonite India Holdings LLC, Carbonite Holdings B.V., and Carbonite (France)S.A.S. are wholly owned subsidiaries of Carbonite, Inc.Zmanda Technologies India Pvt Ltd. is a wholly owned subsidiary of Carbonite India Holdings LLC.Carbonite China Holdings LLC and Carbonite Operations B.V. are wholly owned subsidiaries of Carbonite International Holdings B.V.Carbonite (China) Co. Ltd. is a wholly owned subsidiary of Carbonite China Holdings LLC.Carbonite Cloud Backup (Canada) Inc., Carbonite GmbH and MailStore Software GmbH are wholly owned subsidiaries of Carbonite Operations B.V.Carbonite (UK) Limited is a wholly owned subsidiary of Carbonite (France) S.A.S.Exhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in Registration Statement Nos. 333-192400 and 333-217440 on Form S-3 and 333-176373, 333-179988, 333-187089, 333-194332, 333-202645, 333-210017, 333-218088 and 333-216757 on Form S-8 of our reports dated March 12, 2018, relating to the financialstatements of Carbonite, Inc. and subsidiaries, and the effectiveness of Carbonite, Inc. and subsidiaries’ internal control over financial reporting, appearing inthis Annual Report on Form 10-K of Carbonite, Inc. for the year ended December 31, 2017./s/ Deloitte & Touche LLPBoston, MassachusettsMarch 12, 2018Exhibit 23.2CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in the following Registration Statements:•Registration Statements (Form S-3 Nos. 333-192400 and 333-217440) of Carbonite, Inc.,•Registration Statement (Form S-8 No. 333-176373) pertaining to the Amended and Restated 2005 Stock Incentive Plan and the 2011 Equity AwardPlan of Carbonite, Inc.,•Registration Statements (Form S-8 Nos. 333-179988, 333-187089, 333-194332, 333-202645, 333-210017 and 333-216757) pertaining to the 2011Equity Award Plan of Carbonite, Inc., and•Registration Statement (Form S-8 No. 333-218088) pertaining to the 2017 Employee Stock Purchase Plan of Carbonite, Inc.,of our report dated March 16, 2017 (except for the effects of the adoption of ASU 2016-09 as discussed in Note 2, as to which the date is March 12, 2018),with respect to the consolidated financial statements of Carbonite, Inc., as of and for the two years ended December 31, 2016 included in this Annual Reporton Form 10-K of Carbonite, Inc. for the year ended December 31, 2017./s/ Ernst & Young LLPBoston, MassachusettsMarch 12, 2018Exhibit 24.1POWER OF ATTORNEYThe undersigned directors of Carbonite, Inc., a Delaware corporation (the “Company”), do hereby nominate, constitute and appoint Mohamad Ali,Anthony Folger and Cassandra Hudson, and each of them individually, the true and lawful attorney or attorneys of the undersigned, with power to act with orwithout the other and with full power of substitution and resubstitution, to execute in the name and on behalf of the undersigned as directors and officers ofthe Company, the Annual Report of the Company on Form 10-K for the fiscal year ended December 31, 2017 and any and all amendments thereto; and eachof the undersigned hereby ratifies and approves all that said attorneys or any of them shall do or cause to be done by virtue hereof.IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney in one or more counterparts on the date set opposite his or hername.Signature Title Date /s/ Stephen Munford Chairman of the Board of Directors March 12, 2018Stephen Munford /s/ Marina Levinson Director March 12, 2018Marina Levinson /s/ Charles Kane Director March 12, 2018Charles Kane /s/ Todd Krasnow Director March 12, 2018Todd Krasnow /s/ David Friend Director March 12, 2018David Friend /s/ Peter Gyenes Director March 12, 2018Peter Gyenes /s/ Scott Daniels Director March 12, 2018Scott Daniels 1Exhibit 31.1CERTIFICATIONSI, Mohamad Ali, certify that: 1I have reviewed this Annual Report on Form 10-K of Carbonite, Inc.; 2Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period coveredby this report; 3Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known tous by others within those entities, particularly during the period in which this report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting.Dated: March 12, 2018 /s/ Mohamad Ali Mohamad AliChief Executive OfficerExhibit 31.2CERTIFICATIONSI, Anthony Folger, certify that: 1I have reviewed this Annual Report on Form 10-K of Carbonite, Inc.; 2Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period coveredby this report; 3Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known tous by others within those entities, particularly during the period in which this report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally accepted accounting principles; c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting.Dated: March 12, 2018 /s/ Anthony Folger Anthony FolgerChief Financial OfficerExhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Carbonite, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2017 as filed with the Securitiesand Exchange Commission on the date hereof (the “Report”), I, Mohamad Ali, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company./s/ Mohamad AliMohamad AliPresident and Chief Executive OfficerMarch 12, 2018A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished tothe Securities and Exchange Commission or its staff upon request.Exhibit 32.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Carbonite, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2017 as filed with the Securitiesand Exchange Commission on the date hereof (the “Report”), I, Anthony Folger, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Anthony FolgerAnthony FolgerChief Financial OfficerMarch 12, 2018A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished tothe Securities and Exchange Commission or its staff upon request.

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