UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2017
OR
☐☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-37493
Ooma, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
06-1713274
(I.R.S. Employer
Identification No.)
1880 Embarcadero Road, Palo Alto, California 94303
(Address of principal executive offices)
(650) 566-6600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $0.0001 per share; Common Stock traded on the New York Stock Exchange LLC
Securities 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 ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). YES ☒
NO ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of Registrant’s
knowledge, 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, or a smaller reporting company. See the definition of “large accelerated
filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
☐
☐ (Do not check if a small reporting company)
Accelerated filer
☒
☐
Non-accelerated filer
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of July 31, 2016, the last business day of the Registrant’s most recently
completed second fiscal quarter, was approximately $79.8 million (based on the closing price of $8.50 per share on July 31, 2016 on the New York Stock Exchange). Shares of the Registrant’s
common stock held by each executive officer, director and holder of 10% or more of the outstanding common stock have been excluded because such persons may be deemed affiliates. This
calculation does not reflect a determination that certain persons are affiliates of the Registrant for any other purpose .
Small reporting company
The number of shares of the Registrant's common stock outstanding as of March 31, 2017 was 18,245,827.
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Part III of this Form 10-K is incorporated by reference to the Registrant's Definitive Proxy Statement for its 2017 Annual Meeting of Stockholders, which proxy
statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Consolidated Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Consolidated Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Signatures
Exhibits
i
Page
3
16
47
47
47
49
50
52
54
72
73
103
103
103
104
104
104
104
104
105
106
107
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for the year ended January 31, 2017, including the sections entitled “Business,” “Risk Factors,” and “Management's
Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “believe,” “will,” “may,” “estimate,”
“continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially” and similar expressions that convey uncertainty of future events or
outcomes are intended to identify forward-looking statements.
These forward-looking statements include, but are not limited to, statements concerning the following:
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our future financial performance, including trends in revenue, cost of revenue, operating expenses and income taxes;
our estimates of the size of our market opportunity and forecasts of market growth;
changes to our business resulting from increased competition or changes in market trends;
our ability to develop, launch or acquire new products and services, improve our existing products and services and increase the value of our
products and services;
our ability to increase our revenue and our revenue growth rate;
our ability to anticipate demand for our products;
our ability to effectively manage our future growth;
our ability to successfully maintain our relationships with our resellers;
our ability to attract and retain customers, including our ability to maintain adequate customer care and manage increases in our churn rate;
our ability to improve local number portability provisioning and obtain direct inward dialing numbers;
our ability to maintain, protect and enhance our brand and intellectual property;
government regulation, including compliance with regulatory requirements and changes in market rules, rates and tariffs;
our ability to comply with the FCC’s regulations regarding E-911 services;
increasing regulation of our services and the imposition of federal, state and municipal sales and use taxes, fees or surcharges on our services;
the effects of industry trends on our results of operations;
server or system failures that could affect the quality or disrupt the services we provide and our ability to maintain data security;
our ability to borrow additional funds and access capital markets, as well as our ability to comply with the terms of our indebtedness and the
possibility that we may incur additional indebtedness in the future;
the differences between our services, including our emergency calling service, compared to traditional phone services;
the sufficiency of our cash and cash equivalents and cash generated from operations to meet our working capital and capital expenditure
requirements;
our ability to successfully enter new markets and manage our international expansion;
our ability to successfully identify, evaluate and consummate acquisitions;
the future trading prices of our common stock; and
other risk factors included under the section titled “Risk Factors”
1
You should not rely upon forward-looking statements a s predictions of future events. We have based the forward-looking statements contained in this
Annual Report on Form 10-K primarily on our current expectations and projections about future events and trends that we believe may affect our business, financia
l condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other
factors described principally in the sections entitled “Risk Factors” and “Management’s D iscussion and Analysis of Financial Condition and Results of
Operations.” Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not
possible for us to predict all risks a nd uncertainties that could have an impact on the forward-looking statements contained in this Annual Report on Form 10-K.
As a result, we cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achi eved or occur, and actual
results, events or circumstances could differ materially from those described in the forward-looking statements contained in this Annual Report on Form 10-K.
The forward-looking statements made in this Annual Report on Form 10-K relate only to events as of the date on which the statements are made. We
undertake no obligation to update any forward-looking statements made in this Annual Report on Form 10-K to reflect events or circumstances after the date of this
Annual Report on Form 10-K or to reflect new information or the occurrence of unanticipated events, 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 with respect to those or other forward-looking statements. Readers are also
urged to carefully review and consider all of the information in this Annual Report on Form 10-K, as well as the other documents we make available through the
Securities and Exchange Commission’s website at www.sec.gov. We may not actually achieve the plans, intentions or expectations disclosed in our forward-
looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or
investments we may make.
Corporate Information
We were incorporated in 2003 as a Delaware corporation. Our headquarters are located at 1880 Embarcadero Road, Palo Alto, CA 94303, and our
telephone number is (650) 566-6600. Our corporate website address is www.ooma.com. The information contained on our website is not incorporated by
reference into this Annual Report on Form 10-K, and you should not consider any information contained on, or that can be accessed through, our website as part of
this Annual Report on Form 10-K or in deciding whether to purchase our common stock. We have included our website address only as an inactive textual
reference and do not intend it to be an active link to our website.
We are subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, or Exchange Act, and, in accordance
therewith, file periodic reports, proxy statements, and other information with the Securities and Exchange Commission, or SEC. Such periodic reports, proxy
statements, and other information are available for inspection and copying at the SEC’s Public Reference Room at 100 F Street, NE., Washington, DC 20549 or
may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at http://www.sec.gov that contains reports, proxy statements,
and other information regarding issuers that file electronically with the SEC. We also post on the Investor Relations page of our website, www.ooma.com, a link to
our filings with the SEC, our Corporate Governance Guidelines, and Code of Ethics and Business Conduct for Employees, Officers and Directors, and the charters
of our Audit Committee, Compensation Committee, and Nominating and Governance Committee of our Board of Directors. Our filings with the SEC are posted
on our website and are available free of charge as soon as reasonably practical after they are filed electronically with the SEC. You can also obtain copies of these
documents free of charge by writing to us at: Corporate Secretary, Ooma, Inc., 1880 Embarcadero Road, Palo Alto, CA 94303.
When we use the terms “Ooma,” the “Company,” “we,” “us” or “our” in this report, we are referring to Ooma, Inc. and its consolidated subsidiary unless
the context requires otherwise. Ooma PureVoice and the Ooma logo are trademarks of Ooma, Inc. All other company and product names may be trademarks of the
respective companies with which they are associated.
2
ITEM 1. BUSINESS
Overview
PART I
Ooma is a leading provider of innovative communications solutions and other connected services to small business, home, and mobile users. Our unique
hybrid SaaS platform, consisting of our proprietary cloud, on-premise appliances, mobile applications, and end-point devices, provides the connectivity and
functionality that power our solutions. Our communications solutions deliver our proprietary PureVoice HD voice quality, advanced features, and integration with
mobile devices, at extremely competitive pricing and value. Our platform helps create smart workplaces and homes by providing value-added communications and
other connected services and by integrating end-point devices to enable the Internet of Things. Our platform and solutions have the power to provide
communications, productivity, automation, monitoring, safety, security, and networking infrastructure applications to our users.
We drive the adoption of our platform by providing communications solutions to the large and growing markets for small business, home, and mobile users
and then accelerate growth by offering new and innovative connected services to our user base. Our small business and home customers adopt our platform by
making a one-time purchase of one of our on-premise appliances, connecting the appliance to the internet, and activating subscription services, for which they
primarily pay on a monthly basis. Our communications solutions are distinguished by the combination of our proprietary PureVoice HD voice quality, exceptional
value, an advanced feature set enhanced by a number of end-point devices, and integration with mobile devices. We believe we have achieved high levels of
customer retention and loyalty by delivering exceptional quality and customer satisfaction.
Our services run on our unique platform consisting of four proprietary elements: our multi-tenant cloud service, custom on-premise appliance, mobile
applications, and end-point devices. Ooma’s cloud provides a high-quality, secure, managed, and reliable connection integrating every element of our platform. Our
on-premise appliances incorporate both a custom-designed, Linux-based computer and a high speed network router, with several key features, including wireless
connectivity to end-point devices and custom firmware and software applications that are remotely upgradable and extensible to new services. Our mobile
applications enable customers to access our product features from anywhere, and our end-point devices enable additional functionality and services. Our platform
powers all aspects of our business, not only providing the infrastructure for the communications portion of our business, but also enabling a number of other current
and future valuable productivity, automation, monitoring, safety, security, and networking infrastructure applications.
We currently offer our solutions in the U.S. and Canadian markets. We believe that our differentiated platform and our long-term customer relationships
uniquely position us to add new connected services and exploit adjacent markets, all without significant capital investment or high customer acquisition costs to
drive their adoption. We offer and/or are developing connected services for the following applications:
•
•
•
Automation,
monitoring,
safety,
and
security.
Our platform enables an ecosystem for connected services by integrating with other automation
solutions. For example, we have integrated Ooma Telo with products from Nest Labs, Inc., a Google company, including the Nest Learning
Thermostat and Nest Protect smoke and carbon monoxide detector, the Amazon Echo and Amazon Alexa voice service, and a variety of products
integrated through the If This Then That (“IFTTT”) platform. By combining Ooma’s communications intelligence with these products’ functions, we
enable innovative and valuable features. For example, if the Nest Protect device detects smoke or carbon monoxide when the user is away from
home, we provide the ability for the user, through the user’s mobile device, to connect with emergency services from the user’s home phone number
and address. This allows users to immediately speak with the correct emergency services personnel, saving valuable time. We continue to develop
additional connected services for small businesses and homes to enable the Internet of Things. For example, we have introduced Ooma Internet
Security powered by Zscaler, a real-time, cloud-based internet security service that protects all devices connected to the home network by blocking
websites that contain viruses, malware and other online threats, and Ooma Home Security, a comprehensive do-it-yourself home security and
monitoring solution that alerts users of events within their homes and provides the option to use the home phone number to dial 911 remotely in the
event of an emergency.
Networking
infrastructure.
Our on-premise appliances include a high-speed router that has the capacity to provide networking infrastructure
solutions. In the future, we expect to launch connected services with applications for networking infrastructure for small businesses and homes.
Productivity.
We offer a small business productivity service, called “Business Promoter”, which provides lead generation services to businesses
using proprietary techniques that leverage local, mobile and social media technologies and platforms to enable small businesses to be found, to
engage with new prospects, and to receive telephone calls from qualified customer leads. In the future, we expect to launch additional connected
services to enhance productivity for small businesses.
3
We beli eve that our platform is particularly well-suited to enable the delivery of connected services because it is always on, monitored and interactive. We
expect the adoption of our connected services to support the continued growth of our recurring revenue str eam.
We have experienced significant revenue and user growth in recent periods, growing our “core users” from approximately 645,000 as of January 31, 2015 to
approximately 933,000 as of January 31, 2017, representing a compound annual growth rate of approximately 20%. We define core users as the number of home
user accounts, office user extensions, and standalone Business Promoter accounts. We believe that we have one of the lowest customer churn rates in the industry,
with an average annual core user churn rate of approximately 7%, excluding Business Promoter for the 12-month period ended January 31, 2017. Additionally, we
had more than 1.7 million and approximately 1.6 million Talkatone monthly active users as of January 31, 2017 and 2016, respectively. We have a predictable
revenue model with growth in recurring revenue, with total revenue of $104.5 million, $88.8 million and $72.2 million in fiscal 2017, fiscal 2016 and fiscal 2015,
respectively. Subscription and services revenue, which represents the recurring portion of our total revenue, has increased as a percentage of our total revenue over
the last three years, from approximately 75% in fiscal 2015 to 87% in fiscal 2017. We have continued to make significant investments in research and development,
brand marketing, and channel development, incurring net losses of $(12.9) million, $(14.1) million and $(6.4) million in fiscal 2017, fiscal 2016 and fiscal 2015,
respectively. Our Adjusted EBITDA was $(1.4) million, $(6.5) million, $(3.5) million in fiscal 2017, fiscal 2016 and fiscal 2015, respectively. See “Item 7.
Management’s Discussion and Analysis of Financial Condition and Result of Operation” for a description of how we define Adjusted EBITDA and why we believe
that it is useful to investors, and a reconciliation to our net loss, which is our most directly comparable financial measure calculated and presented in accordance
with generally accepted accounting principles, or GAAP.
Our Products and Services
Ooma for Small Business
Ooma
Office
for
Small
Businesses
Ooma Office is a fully-featured multi-user communications system for small businesses, providing everything needed to manage communications in and out
of the office with a suite of powerful features at an affordable price.
Unlike pure cloud-based phone services that only work with IP phones, our unique hybrid SaaS platform allows for the use of standard analog phones,
mobile phones, and fax machines as well as select IP phones and internet fax. Ooma Office analog desktop extensions work wirelessly with no wiring
infrastructure. This makes setup intuitive and easy enough for the user to install and manage without assistance from an IT professional.
Ooma Office consists of an on-premise appliance and an Ooma Linx end-point device, which wirelessly connects regular desktop telephones to the user’s
high-speed internet connection. The user can configure the system online, using the Ooma Office Manager web portal. Ooma Office provides features not typically
available to small businesses, including a virtual receptionist, music-on-hold, ring groups, a conference bridge, internet and analog fax capability, and mobility
features, such as voicemail forwarding to a designated e-mail address.
The Ooma Office Mobile HD app allows users to remotely access their business communications system to make, receive and transfer phone calls and
utilize many of the other features, as if they were in the office. The app is compatible with any iOS or Android mobile device and transmits calls over a Wi-Fi or
cellular data connection.
Ooma Office
Mobile HD app
Ooma Office
and Linx
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Ooma Office customers can subscribe to the following calling plans to enhance their business:
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Local
numbers.
Ooma allows businesses to select up to 20 local phone numbers to establish points of presence within a geographic area or for direct
inward dialing to users of the system. Ooma offers phone numbers in all states and provinces in the U.S. and Canada, except the Northwest
Territories of Canada.
Toll
free
numbers.
Ooma toll-free numbers come with 500 minutes of inbound calling included each month. For businesses that expect a large
number of toll-free calls, Ooma offers toll-free calling plans that include an additional 1,000 or 2,500 additional minutes each month at a low cost.
Prepaid.
Ooma Office customers can save on international calling with everyday low rates from Ooma. International calls are charged against a
prepaid account, which is automatically refilled as the balance runs low.
Business
Promoter
Business Promoter is a service that helps businesses generate new customer leads. Business Promoter optimizes a business’s online presence, enabling
potential customers to discover the business and engage with it without requiring time or expertise from the business. Business Promoter utilizes location, mobile
and social technologies and platforms to generate customer leads by delivering phone calls from potential customers to a business. Ooma Office users can also
sign-up for the Business Promoter service on a pay-per-lead basis. Under the pay-per-lead model, users generally pay a price per lead that originates from a
qualified phone call to the business.
Business Promoter also operates on a white-label basis for digital marketing agencies representing tens of thousands of business locations.
Ooma for Residence
Ooma
Telo
for
Home
Ooma Telo is a complete home communications solution designed to serve as the primary phone line in the home, delivering high-quality voice
communications and unique and valuable features.
Users buy an Ooma Telo and plug it into a high-speed internet connection and standard home phone devices. Users have the option to transfer their existing
phone number from their current provider for a one-time fee or to select a new number at no cost. We provide local phone numbers throughout the U.S. and Canada
except in the Northwest Territories of Canada. Once set up, users have access to free nationwide calling, international calling with low rates, and standard features
such as voicemail, call waiting, caller ID, network address book, and 911 calling, with text alerts when 911 is dialed from the home. The base service is free, but
users are required to pay applicable taxes and fees typically ranging from approximately $3.77 to $9.48 per month, depending on the jurisdiction. Based on a
typical monthly phone bill of $40 for standard landline service, we estimate that users can save approximately $1,000 in three years by using an Ooma Telo.
The Ooma Mobile HD app allows Ooma Telo users to make and receive phone calls and access Ooma features and settings with any iOS or Android device
over a Wi-Fi or cellular data connection. The Ooma Mobile HD app is free for Ooma Telo users and includes unlimited outbound calls within the U.S. (subject to
normal residential usage limitations). Another advantage of the Ooma Mobile HD app is it enables users to make international calls on their mobile devices using
Ooma’s attractive international calling plan.
Ooma
Mobile HD app
Ooma Telo
5
Ooma
End-Point
Devices
The Ooma Telo and the Ooma Office support a line of end-point devices to expand the capabilities of the system to serve the needs of an entire household.
HD2 Handset
Linx
Safety Phone
Wireless + Bluetooth Adapter
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The Ooma HD2 Handset is a sophisticated wireless handset with a color display that supports many enhanced Ooma features, including online
contact list syncing, picture caller-ID, instant second line, voicemail screening, and musical ringtones.
The Ooma Linx is a remote phone jack that can be plugged into any electrical socket to allow the user to connect a phone, fax machine, alarm panel,
or anything that requires a phone line to the Ooma phone service, all completely wirelessly.
The Ooma Safety Phone is a wireless, small form-factor, hands-free speakerphone that can be worn as a pendant. Two speed dial buttons can each be
preset with up to three different numbers, including 911. The preset buttons can also be configured to trigger e-mails or SMS notification alerts when
assistance is requested. The Safety Phone supports two-way voice communication and can also be used to answer phone calls.
Ooma Wireless + Bluetooth Adapter adds Wi-Fi and Bluetooth capability to Ooma Telo. With this adapter, users can install the Ooma Telo device
anywhere in the home within range of their wireless network instead of hardwiring the device to a modem or router. Bluetooth is used to pair
Bluetooth-enabled mobile phones to the Ooma Telo so that incoming calls on the user’s mobile phone can ring on the user’s home phones.
Ooma
Premier
Service
for
Telo
The Ooma Premier Service is a suite of over 25 advanced calling features that maximize the utility of the Ooma Telo on a monthly or annual subscription
basis. The Ooma Premier Service helps our users enhance their privacy, stay connected on the go, better manage and access their voicemail, and expand calling
options.
The most popular features of the Ooma Premier Service include:
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Blacklists that block over eight hundred and fifty thousand telemarketers, robocallers, and spammers, as well as a user-configurable list of unwanted
callers.
Instant Second Line that enables two household members to make calls simultaneously over the same phone number.
Nest Product Integration that provides integration of our communications solution with the Nest Protect: Smoke + Carbon Monoxide alarm and Nest
Learning Thermostat, enabling a variety of features and services, including remote emergency calling from a user’s home number, event scheduling
and alerts, and call forwarding based on occupancy sensors.
Multi-Ring that enables calls to ring simultaneously on the home phone, cell phone, and Ooma Mobile application.
Voicemail Monitoring that allows users to listen to and intercept calls as a voicemail message is being recorded.
Voicemail Forwarding that provides users the option to listen to voicemail messages from their e-mail inbox or smartphone.
Unlimited Free Mobile App Calling that allows users to make and receive unlimited phone calls within the U.S. from their mobile devices as if they
were calling from their home number. The availability of unlimited phone calls within the U.S. is subject to normal residential usage limitations.
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Other
Pre
mium
Services
We offer other premium subscription services to our customers, independent of the Ooma Premier Service, including the following services.
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•
International
calling
plan.
We offer an international calling plan that allows users to make unlimited calls to 61 countries around the world for a
monthly or annual fee, or on a pre-paid basis. Calls can be made from the Ooma Telo, or from the Ooma Mobile HD app.
Voicemail
transcription
service.
Users can have their voicemail messages converted into text and have it sent to the user via e-mail so they can read
the content of the voicemail.
Talkatone App
Our Talkatone mobile app is available to anyone with an iOS or Android mobile device. Users download the app from the Apple App Store or Google Play
for free. Users select a phone number that they can use to make free U.S. and Canada calls and texts using a Wi-Fi or cellular data connection within and out of
network. Advertising is displayed within the Talkatone mobile app and users can purchase premium services such as ad-free usage and international calling plans.
Talkatone App Calling
Talkatone App Texting
Segment Information
We operate in one industry segment generating product and services revenue from the sale of on-premise appliances and end-point devices to our end-
customers through our website and from sales through distributors, retailers and resellers.
Backlog
We generally sign monthly and annual contracts for our subscriptions and generally invoice our customers on a monthly basis for the services purchased.
Products are shipped and billed shortly after receipt of an order. We do not believe that our product backlog at any particular time is meaningful because it is not
necessarily indicative of future revenue in any given period as such orders may be rescheduled or cancelled by our partners, or end-user customers, without penalty
prior to shipment. Additionally, the majority of our product revenue comes from orders that are received and shipped in the same quarter. Until such time as these
amounts are invoiced, we do not recognize them as revenues. Accordingly, we believe that fluctuations in backlog are not a reliable indicator of future revenues
and we do not utilize backlog as a key management metric internally.
7
Sales and Marketing
Our sales and marketing objective is to grow and retain our customer base, and sell them additional premium services using an integrated and multi-channel
marketing approach. We continually test and refine our marketing and sales tactics to drive sales at a low customer acquisition cost.
We use television and radio advertising to build awareness and interest for our products and services, which benefits both the Ooma Office and Ooma Telo
solutions. We believe that television advertising provides an opportunity to build the Ooma brand cost-effectively, educate prospects on Ooma’s unique
combination of quality and value, and capture prospects’ attention. Small businesses and consumers who see our television advertising are directed to our web site
and to key retail partners. Radio is used in a highly targeted manner primarily to reach small business owners and decision makers as they commute to and from
their workplace.
We use online marketing including search engine marketing, search engine optimization, online video, display advertising, and social media to attract
customers as they do online research for the products and services we offer. For those prospects who do not purchase immediately, we entice them to provide their
e-mail address and/or phone number by offering helpful information, relevant case studies and demonstrative webinars to assist in making their purchase decision.
We continue to reach out to our prospect leads over time using e-mail and telemarketing until they purchase or the lead is retired.
We actively mobilize our customers to spread word-of-mouth marketing by sharing Ooma news and information through social media and e-mail. We also
encourage our customers to write product reviews on Amazon.com and other online retailer websites. We sell additional services to our existing customer base by
offering free trials and promotional offers, as well as sending e-mail communications and leaving messages on their Ooma voicemail service.
Our small business and home products are sold through direct channels, retail and resellers, with the direct channel and resellers as our primary distribution
channel for small business and the retail channel as our primary distribution channel for home customers. Our direct sales force is focused on small business sales
and includes highly trained sales representatives located in the U.S. responding to inbound telephone calls and sales leads generated through marketing activity and
our website. We consider our retail presence a competitive advantage and we are continuing to add retailers who share our growth objectives. Our retail distribution
includes national and regional consumer electronics, big box retailers, and leading online retailers, including Amazon.com, Best Buy, Costco.com and others.
Additionally, we have certain reseller partnerships with third parties who resell our home communications solution under their brand name. Our Ooma Business
Promoter service is sold primarily to Ooma Office customers and through digital marketing agencies to businesses seeking to generate leads.
Customer Support
Our primary customer support objective is to delight our customers and educate them on the features and benefits of our products to optimize the overall
user experience. In addition to providing support to our customers, we employ an active customer management strategy in which we drive incremental revenue
through cross-selling of products and services. Our customer support teams also manage the porting process for our customers and our customer billing and
payment activities.
We maintain two customer contact centers, one operated by us in Newark, California, which primarily houses our small business support for our Ooma
Office customers, and one operated by our partner Telus in Manila, Philippines, which provides our customer support primarily for our Ooma Telo customers. In
order to maximize customer convenience and ease of use, we utilize a variety of communication media to serve the needs of our customers including telephone,
online chat, online tutorials, and e-mail.
Our Platform
Our unique hybrid SaaS platform consists of our proprietary cloud, on-premise appliances, mobile applications, and end-point devices. They work in concert
to support our advanced features, high-quality, and the ability to offer customized connected services, which are vital to driving our high level of customer
satisfaction and low customer churn.
We take an integrated approach to the development of our technology. Our extensive engineering resources span both hardware and software and our
business scope encompasses the entire platform, giving us the ability to drive new integrated solutions for our customers. We believe our integrated engineering
and business strategy is a significant competitive advantage and makes it feasible for us to leverage our platform to deliver a broad range of productivity,
automation and infrastructure connected services.
8
The integrated approach to our technology allows us to operate at a reduced cost and provides competitive advantages:
Because we designed our on-premise appliances and network elements to work in harmony, we are free to make optimizations that streamline and
simplify the elements of the network.
Our platform enables us to automatically select, on a call-by-call basis, between over a dozen call termination providers based on call cost and
quality. Likewise, our platform allows us to shift our customer base among a several origination vendors. This, combined with our rapid growth
creates a favorable environment to demand low costs from our vendors without sacrificing quality.
The tight integration between our engineering and operations teams, combined with the functional nature of our on-premise appliances, facilitates
our highly automated network operations, enabling us to efficiently scale our operations.
•
•
•
Cloud
Our multi-tenant cloud infrastructure provides a high-quality, secure, managed, and reliable suite of services integrating all elements of the platform. We
have built a proprietary cloud in order to optimize quality of service, reliability and security, which are essential elements of our communications solutions. Our
cloud simplifies the task of offering new services, and provides consistent performance and economies of scale for all of our connected services. Ooma’s key cloud
capabilities include: telecommunications, custom hosted services, interconnections to third party services (cloud-to-cloud), on-premise appliance management,
remote diagnostics support, and billing.
We have engineered our cloud infrastructure to enable:
•
•
•
Quality of Service through transcoding of data to/from our on-premise appliances, routing control, direct connection to internet transit providers, and
strategic location of our data centers;
Security through AES128-encrypted media and provisioning information and layered defenses against malicious cyber-threats; and
Reliability through redundant data centers in Northern California and Virginia.
On-Premise
Appliances
Our purpose-built on-premise appliances are both a custom-designed, Linux-based computer and a high speed network router, with several key features,
including wireless connectivity to end-point devices and custom firmware and software applications that are remotely upgradable and extensible to new services.
9
We harness the power of our on-premise appliances, operating in conjunction with our cloud, to deliver three core technology advantages:
•
•
•
PureVoice
HD
technology
for
improved
call
quality.
A common cause of customer churn for internet communications solutions is poor voice
quality, which is primarily caused by packet loss or jitter from internet bottlenecks. Our PureVoice HD technology addresses these issues with the
following elements:
— High-speed routing with hardware-based quality of service: Ooma’s on-premise appliances include network ports for both the local area
network, or LAN, and the wide area network, or WAN, with a dedicated routing engine connecting the two. The routing engine is capable of
routing 100Mbits per second and prioritizes voice traffic over other traffic in the business or home.
— Advanced voice compression technology: The high processing power of our on-premise appliances makes it possible to employ an advanced
voice compression technology that reduces the bandwidth required for carrying voice traffic over the customer’s internet connection by over
70%, while providing greater error concealment than more commonly used voice compression technologies.
— Adaptive redundancy: Our cloud dynamically detects when packets are being lost or delayed and signals our on-premise appliances to send
redundant data in succeeding packets. Our cloud then reassembles the packets it receives into the proper data stream in real time. The level of
redundancy is dynamically determined based upon the quality of the customer’s internet connection, which optimizes the balance of latency
and quality. Ooma business, home and mobile users can maintain three times packet redundancy while consuming virtually the same
bandwidth as competing systems that use less advanced voice compression technology.
— HD Voice: Our on-premise appliances double the sampling rate and sampling precision compared to a traditional voice call to capture a truer
picture of the actual sound and provide a HD audio experience to the listener.
— Encrypted data transfer: Signaling between our on-premise appliance and our cloud is embedded in an encrypted virtual private network, or
VPN, making it very difficult to illicitly monitor. Likewise, we employ secure real-time protocol, or SRTP, to encrypt the media associated
with voice conversations to and from our on-premise appliances.
Extensibility
to
new
services.
Our on-premise appliance incorporates extra processing power, networking capability and memory capacity to
accommodate future services. We have also incorporated a USB port in the appliance for directly connecting other devices.
Hub
for
the
Internet
of
Things.
Our on-premise appliance supports a wireless networking protocol to facilitate connectivity to other end-point
devices and enable the Internet of Things.
Mobile
Applications
We have made significant investments in developing mobile applications for the iOS and Android operating systems. As a result, nearly every connected
service and feature we deploy enhances or can be enhanced through integration with our customer’s mobile device. We are in the process of integrating our
PureVoice HD technology into our Ooma Mobile HD app. We plan to continue enhancing our mobile apps to incorporate features related to our partners’ services
(such as Nest Labs, Inc.) and other connected services.
End-Point
Devices
Ooma has developed a range of end-point devices that together create a full communications solution for our customers. We also enable several proprietary
features through our end-point devices, such as picture caller ID and address book sync/dial by name using the Ooma HD2 Handset and pre-programmed sequential
dialing by the Ooma Safety Phone.
Operations and Manufacturing
We deliver our services through two separate data centers located in Northern California and Virginia, both hosted in facilities leased from Equinix, Inc.
While our service operations are partially redundant, account provisioning and billing are operated out of the San Jose facility.
Our network operations and carrier operations teams are responsible for designing our core routing and switching infrastructure, managing growth and
maintenance (including the introduction of new services) and orchestrating vendor relationships for hosted services, IP transit and carrier services and daily
operation of our cloud and other services. The design of these services, and the tools for monitoring and managing them, are developed in combination with our
engineering team.
10
We contract with manufacturers in Taiwan that have a manufacturing facility in China to produce our on-pre mise appliances and end-point devices. We
also contract with a manufacturer in Israel to produce components of our home security solutions. We configure and ship to our channel partners and end users
through our internal manufacturing and logistics team ba sed in Newark, California. Our internal logistics team also manages reverse logistics for channel and
warranty returns and works closely with our engineering team to develop tooling and processes that bring new products into production.
Engineering, Research, and Development
We have invested significant time and resources into developing our engineering, research, and development team, resulting in a group with diverse skills,
ranging from digital and radio frequency hardware design to embedded software, network software, telecommunications, database architecture, operations support
systems, billing, security, web design and mobile app development. The team develops all aspects of our platform, including our hosted services, on-premise
appliances, mobile applications, end-point devices, interconnections to third party services and tools and utilities that facilitate customer provisioning, debugging,
billing and reporting. Because our engineering, research, and development team manages all aspects of our solutions, we are able to offer an integrated solution that
works seamlessly between software and hardware and to respond to customer feedback to add in additional features and services that work across the entire
platform.
The engineering, research and development team consists of a core set of engineers located primarily in Palo Alto, California, augmented by contract
development teams in Canada, India, Ukraine, Russia, Serbia and New Zealand.
Competition
The market for communications solutions and other connected services for small business, home, and mobile users is complex, fragmented, and defined by
constant shifts in technology and customer demands. We expect competition to continue increasing in the future. We believe that the defining factors driving
competition in our market include:
•
•
•
•
•
•
•
•
Quality and consistency of communications services;
Lifetime value of initial investment and ongoing cost of services;
Breadth of features and capabilities;
System reliability, availability and performance;
Speed and ease of activation, setup, and configuration;
Ownership and control of the proprietary technology;
Integration with multiple end-point devices and mobile solutions; and
Customer satisfaction and brand loyalty.
We believe that we compete favorably on the basis of the factors listed above.
We face competition from a broad range of providers of communications solutions and other connected services for small business, home, and mobile users.
Some of these competitors include:
•
•
•
•
•
•
established communications providers, such as AT&T Inc., Comcast Corporation and Verizon Communications Inc. in the U.S., and Rogers
Communications Inc. and others in Canada, that resell on-premise hardware, software and hosted solutions;
other communications companies such as 8x8 Inc., magicJack VocalTec Ltd., RingCentral, Inc. and Vonage Holdings Corp.;
companies such as Broadsoft, Inc. and Microsoft Corporation;
traditional on-premise, hardware business communications providers such as Avaya Inc., Cisco Systems, Inc. and ShoreTel, Inc., any of which may
now or in the future also host their solutions through the cloud, and their resellers;
mobile communications app companies providing “over-the-top” solutions, such as Grasshopper (Citrix, Inc.), LINE Corporation, Pinger, Inc., Viber
(Rakuten, Inc.) and WhatsApp, Inc.; and
other large internet companies, such as Google Inc., any of which might launch its own cloud-based business communications services or acquire
other cloud-based business communications companies in the future.
11
Competition
with
Established
Telephone
and
Cable
Companies
Established telephone companies such as AT&T, Verizon and CenturyLink, and national cable companies such as Comcast and Cox Communications and
Time Warner Cable represent a significant portion of our competition in the telecommunications market. These competitors are many times larger and better
capitalized than Ooma, continue to make substantial investments in competitive products, features and services, and take significant advantage of their existing
business relationships with their very large customer bases. For example, these cable and phone companies often bundle home phone service with Internet access
and/or cable television access, and the pricing of these various “bundles” may imply a zero or very low price to the customer for home phone service. While we
believe that we compete favorably based upon our service features, quality and pricing, such aggressive pricing tactics make it more difficult for us to attract the
existing customers of our large competitors.
Competition
with
Non-traditional
Communications
Providers
Non-traditional communication providers such as Facebook, Google Voice, WhatsApp and Pinger offer telephony services at little or no cost as an added
benefit to their existing customers, and/or to attract additional users. Some of these providers arguably are not in compliance with certain regulatory requirements,
for example, to collect certain federal, state and local regulatory taxes and fees, or to provide 911 service, which means their costs to provide telephony services
may be substantially less than ours.
Intellectual Property
Our success depends, in part, on our ability to protect our proprietary technology and other intellectual property rights. We rely on a combination of patents,
trade secrets, copyrights and trademarks, as well as contractual protections to establish and protect our intellectual property rights. We require our employees,
consultants and other third parties to enter into confidentiality and proprietary rights agreements, we control access to our software, documentation and other
proprietary information, and our software is protected by U.S. and international copyright laws. For example, we require our employees and independent
contractors involved in the development of intellectual property on our behalf to enter into agreements acknowledging that all works or other intellectual property
generated or conceived by them on our behalf belong to us, and assigning to us any rights, including intellectual property rights, that they may claim or otherwise
have in those works or property, to the extent allowable under applicable law.
As of January 31, 2017, we had 13 issued patents, 15 patent applications pending for examination in the U.S., and five patent applications pending for
examination in foreign jurisdictions, all of which are related to U.S. applications. Our issued patents will expire between 2028 and 2036. We cannot assure you
whether any of our patent applications will result in the issuance of a patent or whether the examination process will require us to narrow our claims. Any issued
patents may be contested, circumvented, found unenforceable or invalidated, and we may not be able to prevent third parties from infringing them. We are also a
party to various license agreements with third parties who typically grant us the right to use certain third-party technology in conjunction with our products and
services, or to integrate software into our products, including open source software and other software available on commercially reasonable terms.
Although we rely on laws respecting intellectual property rights, including patent, trade secret, copyright and trademark laws, as well as contractual
protections to establish and protect our intellectual property rights, we believe the technological and creative skills of our personnel, the development of new
features and functionality and frequent enhancements to our products and services are the primary methods of establishing and maintaining our technology
leadership position.
Despite our efforts to protect our proprietary technology and our intellectual property rights, unauthorized parties may attempt to misappropriate our rights
or to copy or obtain and use our proprietary technology to develop products and services with the same functionality as ours. Policing unauthorized use of our
technology and intellectual property rights is difficult, and enforcing our intellectual property rights is expensive and uncertain.
Employees and Contractors
As of January 31, 2017, we had 180 full-time employees, all of whom were located in the U.S., including 14 in manufacturing, 35 in customer support and
service, 65 in research and development, 38 in sales and marketing, and 28 in general and administration. None of our employees are either represented by a labor
union or subject to a collective bargaining agreement. We have not experienced any work stoppages and we believe that our employee relations are good.
We also contract with third-party contractors whose employees or subcontractors’ employees perform services for us. As of January 31, 2017, we had 368
of these third-party contractors, including 9 in manufacturing, 138 in customer support and service, 116 in research and development, 99 in sales and marketing,
and 6 in general and administration. As of such date, 138 were located in the U.S. and 230 internationally.
12
Facilities
Our corporate headquarters are located in Palo Alto, California and consist of approximately 18,000 square feet of office space pursuant to a lease
agreement that expires November 30, 2017. We lease additional office space in Palo Alto consisting of approximately 2,379 square feet pursuant to a lease
agreement that expires April 30, 2017 and a multi-use industrial space consisting of 13,800 square feet pursuant to a lease agreement that expires February 28,
2018. Outside of Palo Alto, we lease warehouse and office space totaling 16,200 square feet in Newark, California, and pursuant to co-location agreements, we
lease space from third-party datacenter hosting facilities in Northern California and Virginia that support our cloud infrastructure. We believe that we will be able
to obtain additional space at other locations at commercially reasonable terms to support our continuing expansion.
Regulatory Matters
Overview
of
Regulatory
Environment
Traditional telephone service historically has been subject to extensive federal and state regulation, while Internet services generally have been subject to
less regulation. Because some elements of VoIP resemble the services provided by traditional telephone companies and others resemble the services provided by
internet service providers, the VoIP industry has not fit easily within the existing framework of telecommunications law and until recently has developed in an
environment largely free from regulation.
The Federal Communications Commission, or FCC, the U.S. Congress and various regulatory bodies in the states and in foreign countries have begun to
assert regulatory authority over VoIP providers and are continuing to evaluate how VoIP will be regulated in the future.
Federal
Regulation
As a provider of internet communications services, we are subject to regulation in the U.S. by the FCC. Some of these regulatory obligations include
contributing to the Federal Universal Service Fund (“USF”), the Telecommunications Relay Service Fund and federal programs related to number administration;
providing access to E-911 services; protecting customer information; and porting phone numbers upon a valid customer request.
Our services are also subject to a number of other FCC regulations. Among others, we must comply (in whole or in part) with:
•
•
•
•
•
•
•
•
•
the Communications Assistance for Law Enforcement Act, or CALEA, which requires covered entities to assist law enforcement in undertaking
electronic surveillance;
requirements to provide E-911 to our customers;
contributions to the USF, which requires that we pay a percentage of our interstate end-user telecommunications revenue to support certain federal
programs;
payment of annual FCC regulatory fees based on our interstate and international revenue;
payment of Local Number Portability and North American Numbering Plan Administration fees;
rules pertaining to access to our services by people with disabilities and contributions to the Telecommunications Relay Services fund;
rules requiring reporting to the FCC of certain service outages;
rules requiring notice to the FCC before discontinuing service; and
FCC rules regarding CPNI and other proprietary information, which require, among other things, that we not use CPNI for marketing without
customer approval, subject to certain exceptions, that we file annual reports regarding CPNI protections, and that we disclose breaches to law
enforcement.
If we do not comply with any current or future rules or regulations that apply to our business, we could be subject to substantial fines and penalties, may
have to restructure our service offerings, exit certain markets or raise the price of our services, any of which could ultimately harm our business and results of
operations.
13
Regulatory
Classification
of
VoIP
Services
To date, the FCC has regulated certain VoIP services without concluding that these services are telecommunications services subject to the traditional
common carrier regulation. In various proceedings the FCC has nonetheless imposed certain regulation obligations on interconnected VoIP and certain non-
interconnected VoIP services. The FCC may continue to impose additional regulations on these services without resolving their regulatory classification. The FCC
could also at any time determine that interconnected VoIP or non-interconnected VoIP services are telecommunications services and thus subject to traditional
common carrier regulation. Additional regulation would impose compliance costs and could increase our risk of enforcement or other liability.
VoIP
E-911
Matters
The FCC requires internet voice communications providers, such as our company, to provide E-911 service in all geographic areas covered by the
traditional wire line E-911 network. Under the FCC’s rules, Internet voice communications providers must transmit the caller’s phone number and registered
location information to the appropriate Public Safety Answering Point, or PSAP, for the caller’s registered location.
In Canada, the Canadian Radio-television and Telecommunications Commission (“CRTC”) has imposed similar requirements for fixed/non-native internet
voice communications related to the provision of E-911 services in all areas of Canada where the wireline incumbent carrier offers such 911 services. In the case of
nomadic internet voice communications, service providers are required to ensure that 911 calls are routed to a call center which routes these calls to the appropriate
PSAP based on information provided by the caller or, if the caller is unable to provide location information, based on the last registered address of the caller. The
CRTC also mandates certain customer notification requirements pursuant to which new customers are required to be notified of 911 service limitations and to
consent to the same before their service with us commences and we are required to provide annual update notifications to our customers of the 911 limitations of
our service.
We provide E-911 service in compliance with the CRTC and the FCC’s rules, as applicable, to substantially all of our customers’ interconnected VoIP lines.
Our mobile platform also allows users to make emergency 911 calls from their mobile devices using their home phone number and address. In some circumstances,
911 calls may be routed to a national emergency call center that routes the call to the appropriate PSAP.
On August 8, 2014, the FCC adopted an Order setting text-to-911 requirements. The Order requires all Commercial Mobile Radio Services (“CMRS”)
providers and all interconnected text messaging application providers to be able to deliver text messages to PSAPs, by December 31, 2014, and to begin sending
text messages to a given PSAP within six months of a valid request. Compliance with this mandate and any additional 911 mandates placed on text messaging
providers will impose costs on our business. If we fail to comply with these obligations, we may face significant enforcement liability or other liability risks.
In connection with the regulatory requirements that we provide E-911 to all of our interconnected VoIP customers, we must obtain from each customer,
prior to the initiation of or changes to service, the physical locations at which the service will first be used for each VoIP line. For services that can be utilized from
more than one physical location, we must provide customers one or more methods of updating their physical location and in Canada, these customers must be able
to update their location online. Because we do not validate the physical address at each location where the services may be used by our customers, and because
customers may use the services in locations that differ from the registered location without providing us with the updated information, it is possible that E-911 calls
may be routed to the wrong public safety answering point, or PSAP. We are also aware that certain customer registered addresses are incorrect, or may not have
been updated. If E-911 calls are not routed to the correct PSAP, and if the delay results in serious injury or death, we could be sued and the damages substantial.
We could be subject to enforcement action by the FCC or the CRTC for our customer lines that do not have E-911 service. This enforcement action could
result in significant monetary penalties and restrictions on our ability to offer services.
Customers may in the future attempt to hold us responsible for any loss, damage, personal injury, or death suffered as a result of delayed, misrouted or
uncompleted emergency service calls. The New and Emerging Technologies 911 Improvement Act of 2008 provides that internet voice communications providers
have the same protections from liability for the operation of 911 services as traditional wire-line and wireless providers. Limitations on liability for the provision of
911 services are normally governed by state law, and these limitations typically are not absolute. It is also unclear under the FCC’s rules whether the limitations on
liability would apply to those customer lines for which we do not provide E-911 service. In Canada, provincial consumer protection laws may constrain our ability
to limit liability to our non-business customers for any liability caused due to the 911 shortfalls inherent in internet voice communications services.
14
State
Regulation
The FCC has preempted much regulation of internet voice communications services. However, a number of states have ruled that non-nomadic internet
voice communications services may or do fall within the definition of “telecommunications services” or are otherwise within state telecommunications regulatory
jurisdiction and therefore those states assert that they have authority to regulate the service. No states currently require certification for nomadic internet voice
communications service providers. Nevertheless, a number of states have imposed certain traditional telecommunications requirements on such services, including
assessing state USF or other surcharge requirements, E-911 support and fees and other surcharges on nomadic VoIP providers. A number of states require us to
contribute to state USF and E-911, and pay other surcharges, while others are actively considering extending their public policy programs to include the services
we provide. We pass USF, E-911 fees and other surcharges through to our customers, which may result in our services becoming more expensive or require that we
absorb these costs. We expect that state public utility commissions will continue their attempts to apply state telecommunications regulations to internet voice
communications services like ours. If the FCC determines that VoIP services are telecommunications services, the risk of state regulation will increase
significantly.
International
Regulation
As we expand internationally, we will be subject to laws and regulations in the countries in which we offer our services. Regulatory treatment of internet
communications services outside the U.S. varies from country to country, is often unclear, and may be more onerous than imposed on our services in the U.S. In
Canada, our service is regulated by the CRTC, which, among other things, imposes requirements similar to the U.S. related to the provision of E-911 services in all
areas of Canada where the traditional telephone carrier offers such 911 services. Our regulatory obligations in foreign jurisdictions could have a material adverse
effect on our ability to expand internationally, and on the use of our services in international locations. See “Item 1A. Risk Factors” for more information.
15
ITEM 1A. RISK FACTORS
Our
current
and
prospective
investors
should
carefully
consider
the
risks
and
uncertainties
described
below,
together
with
all
of
the
other
information
in
this
Annual
Report
on
Form
10-K,
including
our
consolidated
financial
statements
and
the
related
notes,
“Management’s
Discussion
and
Analysis
of
Financial
Condition
and
Results
of
Operations”
and
the
“Cautionary
Note
Regarding
Forward-Looking
Statements,”
before
making
investment
decisions
regarding
our
common
stock.
The
risks
and
uncertainties
described
below
may
not
be
the
only
ones
we
face,
but
include
the
most
significant
factors
currently
known
by
us.
Additional
risks
and
uncertainties
that
we
are
unaware
of,
or
that
we
currently
believe
are
not
material,
also
may
become
important
factors
that
affect
us.
If
any
of
the
risks
actually
occur,
our
business,
financial
condition,
results
of
operations
could
be
materially
and
adversely
affected.
In
that
event,
the
trading
price
of
our
common
stock
could
decline,
and
you
could
lose
part
or
all
of
your
investment.
Risks Related to Our Business and Our Industry
If
we
are
unable
to
attract
new
users
of
our
services
on
a
cost-effective
basis,
our
business
will
be
materially
and
adversely
affected.
In order to grow our business, we must continue to attract new users on a cost-effective basis. We use and periodically adjust the mix of advertising and
marketing programs to promote our services. Significant increases in the pricing of one or more of our advertising channels could increase our advertising costs or
may cause us to choose less expensive and perhaps less effective channels to promote our services. As we add to or change the mix of our advertising and
marketing strategies, we may need to expand into channels with significantly higher costs than our current programs, which could materially and adversely affect
our results of operations. We will incur advertising and marketing expenses in advance of when we anticipate recognizing any revenue generated by such expenses,
and we may fail to experience an increase in revenue or brand awareness as a result of such expenditures. We have made in the past, and may make in the future,
significant expenditures and investments in new advertising campaigns, and we cannot assure you that any such investments will lead to the cost-effective
acquisition of additional customers. New users are drawn to our products and services by rankings circulated by organizations such as Amazon.com, Apple and
Google app stores and highly regarded publications such as PC
Magazine
. If we are unable to maintain effective advertising programs and garner favorable
rankings, our ability to attract new customers could be materially and adversely affected, our advertising and marketing expenses could increase substantially, and
our results of operations may suffer.
We market our products and services principally to small businesses and households. Many of these consumers tend to be less technically knowledgeable
and may be resistant to new technologies such as our cloud-based communications solutions and our connected services. Because our potential customers need to
connect additional hardware at their location and take other technical steps not required for the use of traditional communications services such as telephone, fax
and e-mail, these consumers may be reluctant to use our service. These customers may also lack sufficient resources, financial or otherwise, to invest in learning
about our services, and therefore may be unwilling to adopt them. If these consumers choose not to adopt our services, our ability to grow our business will be
limited.
Our
customers
may
terminate
their
subscriptions
for
our
service
at
any
time
without
penalty,
and
increased
customer
turnover,
or
costs
we
incur
to
retain
our
customers
and
encourage
them
to
add
users
and,
in
the
future,
to
purchase
additional
functionalities
and
premium
service
editions,
could
materially
and
adversely
affect
our
financial
performance.
Our customers generally do not have long-term contracts with us, and they may terminate their subscription for our service at any time without penalty or
early termination charges. We cannot accurately predict the rate of customer terminations or average monthly service cancellations or failures to renew, which we
refer to as churn. Our Ooma Office customers may choose to reduce the number of lines or remove some of the solutions to which they subscribe. Additionally, our
Ooma Telo customers subscribing to Premium Services have no obligation to renew their subscriptions for such services and may elect to terminate their
subscription for any number of reasons, including changes in financial or employment status, perceived reduction in quality or value, and other unique and personal
reasons.
16
We may not be able to predict the renewal rates for our customers. In addition, small business customers generally pay more for their subscriptions than
home or mobile customers, so any increased churn in small business customers could materially and adversely affect our financial performance and user churn,
resulting in a significant impact on our results of operations, and an increase in the cost we incur in our efforts to retain our customers and encourage them to
upgrade their services and increase their number of users. Our core user churn rate could increase in the future if customers are not satisfied with our service, the
value proposition of our services or our ability to otherwise meet their needs and expectations. Churn and reductions in the number of users for whom a small
business customer subscribes may also increase due to factors beyond our control. Because of churn and reductions in the number of users for whom a customer
subscribes, we have to acquire new customers, or acquire new users within our exis ting customer base, on an ongoing basis simply to maintain our existing level of
customers and revenue. If a significant number of customers terminate, reduce or fail to renew their subscriptions, we may need to incur significantly higher
marketing expendi tures than we currently anticipate in order to increase the number of new customers or to sell existing customers additional services, and such
additional marketing expenditures could harm our business and results of operations. Different factors may affec t the churn of business, home, and mobile
customers, and Talkatone customers differently. As a result, our business is susceptible to a broad array of market forces, and any of our efforts to mitigate risk of
customer churn due to one factor may divert man agement’s time and focus away from efforts to mitigate risk of customer churn due to other factors. This broad-
based susceptibility to churn could materially and adversely affect our financial performance.
Our future success also depends in part on our ability to sell additional subscriptions and additional functionalities to our current customers. This may
require increasingly sophisticated and costlier sales efforts and a longer sales cycle. Any increase in the costs necessary to upgrade, expand and retain existing
customers could materially and adversely affect our financial performance. If our efforts to convince customers to add users and, in the future, to purchase
additional functionalities are not successful, our business may suffer. In addition, such increased costs could cause us to increase our subscription rates, which
could increase our turnover rate.
We
face
competition
in
our
markets
by
our
competitors
and
may
lack
sufficient
financial
or
other
resources
to
compete
successfully.
The cloud-based communications and connected services industries are highly competitive. We face continued competition from (i) established
communications providers, such as AT&T Inc., Comcast Corporation and Verizon Communications Inc. in the U.S., and Rogers Communications Inc. and others
in Canada; (ii) other communications companies such as 8x8, Inc., magicJack VocalTec Ltd., RingCentral, Inc. and Vonage Holdings Corp.; (iii) companies such
as Broadsoft, Inc. and Microsoft Corporation (that generally license their software) and their resellers; (iv) traditional on-premise, hardware communications
providers, such as Avaya Inc., Cisco Systems, Inc., ShoreTel, Inc. and their resellers; (v) mobile communications app companies providing “over-the-top”
solutions, such as LINE Corporation, Pinger, Inc., Viber (Rakuten, Inc.) and WhatsApp Inc.; and (vi) large internet companies, such as Google Inc. All of these
companies currently or may in the future host their solutions through the cloud. In addition, as we expand our connected services, we face competition from lead-
generation and internet search engine optimization companies and home automation companies.
Aggressive
business
tactics
by
our
competitors
may
reduce
our
revenue.
Increased competition may result in aggressive business tactics by our competitors, including:
•
•
•
•
offering products similar to our platform and solutions on a bundled basis at no charge;
announcing competing products combined with extensive marketing efforts;
providing financial incentives to consumers; and
asserting intellectual property rights irrespective of the validity of the claims.
Our retail partners may offer the products and services of competing companies, which would adversely affect our business. Competition from other
companies may also adversely affect our negotiations with service providers and suppliers, including, in some cases, requiring us to lower our prices. We may not
be able to compete successfully with the offerings and sales tactics of other companies, which could result in the loss of customers and, as a result, our revenue and
profitability could be adversely affected.
17
Mergers
or
other
strategic
transactions
involving
our
competitors
could
weaken
our
competitive
position,
which
could
adversely
affect
our
ability
to
compete
effective
ly
and
harm
our
results
of
operations;
additionally,
mergers
or
other
strategic
transactions
we
engage
in
may
not
be
successful.
We believe that some of our existing competitors may consolidate or be acquired. In addition, some of our competitors may enter into new alliances with
each other or may establish or strengthen cooperative relationships with systems integrators, third-party consulting firms or other parties. Any such consolidation,
acquisition, alliance or cooperative relationship could adversely affect our ability to compete effectively and lead to pricing pressure and our loss of market share,
and could result in a competitor with greater financial, technical, marketing, service and other resources, all of which could harm our business, results of operations
and financial condition.
In the past we have decided, and in the future may decide, to enter into mergers or other strategic transactions in which we acquire other companies. We
cannot guarantee we will be able to successfully integrate the teams, assets, or business of these target companies into our business, that we will be able to fully
recover the costs of such transactions or that we will be successful in leveraging such strategic transactions into increased business for our products.
We
rely
significantly
on
retailers
and
reseller
partnerships
to
sell
our
products;
our
failure
to
effectively
develop,
manage,
and
maintain
our
retail
sales
and
reseller
partnership
channels
could
materially
and
adversely
affect
our
revenue.
We currently sell our Ooma Telo and Ooma Office products through a combination of direct sales, leading retailers such as Amazon.com, Costco.com, Best
Buy, Fry’s Electronics and Walmart, and our reseller partnerships and a significant portion of our product sales are made through our retail and reseller partnership
channels. Similarly, to date, the vast majority of our Business Promoter accounts are obtained through a limited number of reseller partnerships. In addition, our
Talkatone application relies significantly on the Apple and Google app stores for distribution. Our future success depends on our continued ability to establish and
maintain a network of productive retailers, to maintain and expand our reseller partnership arrangements, and to maintain the ability of Talkatone to be distributed
through the app stores and increase Talkatone’s visibility therein. We expect that we will need to maintain and expand our retail channel and reseller partnership
sales and Talkatone’s distribution and visibility in the app stores as we seek to expand our customer base. We generally do not have long-term contracts with our
retailers, distributors and reseller partners, and we have in the past and may in the future experience a loss of or reduction in sales through any of these third parties,
which could materially reduce our revenue. For example, our reseller partnership with Vivint has not produced significant sales to end users and to our knowledge,
Vivint is not currently reselling our home communications solution to new customers. In addition, if Apple or Google determine that Talkatone is non-compliant
with their app store vendor policies, they may revoke our rights to sell Talkatone through their app store at any time. Our competitors may in some cases be
effective in causing our current and potential retailers, and reseller partners to favor their services or prevent or reduce sales of our services. If we fail to maintain
relationships with current retailers and reseller partners, fail to develop relationships with new retailers and reseller partners in new markets or expand the number
of retailers and reseller partners in existing markets, fail to manage, train, or provide appropriate incentives to our existing retailers and reseller partners, or if they
are not successful in their sales efforts, sales of our products and services may decrease and our results of operations would suffer.
We
depend
on
a
small
number
of
vendors
to
manufacture
the
on-premise
appliances,
end-point
devices
and
home
security
systems
we
sell,
and
any
delay
or
interruption
in
manufacturing,
configuring
and
delivering
by
these
third
parties
would
result
in
delayed
or
reduced
shipments
to
our
customers
and
may
harm
our
business.
We primarily rely on Mitac Computing Technology Corporation for production of our on-premise appliances, Hualin Precision Technology Co., Ltd.
(“Hualin”) for production of our end‑point devices, and Hualin and Crow Corporation for production of our home security systems we sell to our customers. We
currently do not have long-term contracts with these vendors. As a result, these third parties are not obligated to provide products to or perform services for us for
any specific period, in any specific quantities or at any specific price, except as may be provided in a particular purchase order. If these third parties are unable to
deliver on‑premise appliances or end-point devices of acceptable quality or in a timely manner, our ability to bring services to market, the reliability of our services
and our reputation could suffer. We expect that it could take several months to effectively transition to new third-party manufacturers or fulfillment agents.
Additionally, several components used in our on-premise appliances and end-point devices are “single sourced” and any interruption in the suppliers of such
components could cause our business to suffer as we identify alternative sources of components. In the past, labor strikes in West Coast ports have delayed
shipments of our products from our manufacturers. Future repetition of such delays could negatively affect our ability to deliver product to our customers in a
timely manner and may harm our business and hinder our growth.
18
To
deliver
our
services,
we
rely
on
third
parties
for
our
network
connectivity
and
co
‑‑location
facilities
for
certain
features
in
our
services
and
for
certain
elements
of
providing
our
services.
We currently use the infrastructure of third-party service providers for hosting, internet access and other services that are vital to our service offering.
Equinix, Inc. provides data center facilities; Comcast, NTT Inc. and others provide backbone internet access; and Bandwidth.com, Onvoy and others provide
origination services. We also rely on third-party services for our SMS and speech-to-text services which are sole-sourced. Intrado is our sole provider of 911
services. We expect that we will continue to rely heavily on third-party network service providers to provide these services for the foreseeable future. If any of
these network service providers stop providing us with access to their infrastructure, fail to provide these services to us on a cost-effective basis, cease operations,
or otherwise terminate these services, the delay caused by qualifying and switching to another third-party network service provider, if one is available, could have a
material adverse effect on our business and results of operations.
We may be required to transfer our servers to new data center facilities if we are unable to renew our leases on acceptable terms, if at all, or the owners of
the facilities decide to close their facilities, and we may incur significant costs and possible service interruption in connection with doing so. In addition, any
financial difficulties, such as bankruptcy or foreclosure, faced by our third-party data center operators or any of the service providers with which we or they
contract, may have negative effects on our business, the nature and extent of which are difficult to predict. Additionally, if our data centers are unable to keep up
with our increasing needs for capacity, our ability to grow our business could be materially and adversely impacted.
If problems occur with any of these third-party network or service providers, it may cause errors or reduced quality in our services, and we could encounter
difficulty identifying the source of the problem. The occurrence of errors or reduced quality in our service, whether caused by our systems or a third-party network
or service provider, may result in the loss of our existing customers, delay or loss of market acceptance of our services, termination of our relationships and
agreements with our resellers or liability for failure to meet service level agreements, and may seriously harm our business and results of operations.
We rely on purchased or leased hardware and software licensed from third parties in order to offer our service. In some cases, we integrate third-party
licensed software components into our platform. This hardware and software may not continue to be available at reasonable prices or on commercially reasonable
terms, or at all. Any loss of the right to use any of this hardware or software could significantly increase our expenses and otherwise result in delays in the
provisioning of our service until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated. Any errors or defects in
third-party hardware or software could result in errors or a failure of our service which could harm our business.
We also contract with third parties to provide enhanced 911, or E-911, services, including assistance in routing emergency calls and terminating E-911 calls.
Our providers operate a national call center that is available 24 hours a day, seven days a week, to receive certain emergency calls and maintain public service
answering point, or PSAP, databases for the purpose of deploying and operating E-911 services. On mobile devices, we generally rely on the underlying cellular or
wireless carrier to provide E-911 services. Any failure to perform, including interruptions in service, by our vendors, could cause failures in our customers’ access
to E-911 services and expose us to significant liability and damage our reputation.
Interruptions
in
our
services
could
harm
our
reputation,
result
in
significant
costs
to
us
and
impair
our
ability
to
sell
our
services.
Because our technology platform is complex, incorporates a variety of new computer hardware, and the platform continues to evolve, our services may have
errors or defects that are identified after customers begin using such services, which could result in unanticipated service interruptions. Although we test our
services to detect and correct errors and defects before their initial release and before we make updates or other changes to such services, we have occasionally
experienced significant service interruptions as a result of undetected errors or defects and may experience future interruptions of service if we fail to detect and
correct errors and defects. For example, in April and May 2015 while working to upgrade our network, we encountered unexpected problems with the
communications between our data centers, as well as certain server capacity issues, which led to multiple intermittent service outages, some of which lasted for up
to approximately eight hours for some of our customers. While we have identified root causes of these service outages, and in each case were able to restore service
to all of the affected customers, we continue to take corrective actions to address these root causes. We were able to correct such root causes without incurring
material expenses, and the outages in April and May 2015 did not materially affect our results of operations. However, the costs incurred in correcting root causes
for future service outages may be substantial and these and other related consequences could negatively impact our results of operations.
19
We currently serve our customers from two data center hosting facilities located in Northern California and Virginia, where we lease space from Equinix,
Inc. While we believe that the additional data center and certain procedures we have adopted will enable us to restore services quickly in the event of a service
outage, these procedures and our data centers, by themselves, will not prevent future outages. Any damage to, or fa ilure of, these facilities, the communications
network providers with whom we or they contract or with the systems by which our communications providers allocate capacity among their customers, including
us, could result in interruptions in our service. Ad ditionally, in connection with the expansion or consolidation of our existing data center facilities, we may move
or transfer our data and our customers’ data to other data centers. Despite precautions we take during this process, any unsuccessful data tra nsfers may impair or
cause disruptions in the delivery of our service.
Despite precautions taken at our hosting facilities, the occurrence of a natural disaster or an act of terrorism or other unanticipated problems at these
facilities could result in lengthy interruptions in our service. Even with the disaster recovery arrangements that we have in place, our service could be interrupted.
Any defects in, or unavailability of, the components of our platform that cause interruptions of our services could, among other things:
•
•
•
•
•
•
cause a reduction in revenue or a delay in market acceptance of our services;
require us to issue 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 software, which would increase our expenses and slow innovation;
increase our technical support costs; and
harm our reputation and brand.
We
rely
on
third
parties
for
some
of
our
software
development,
quality
assurance
and
operations.
We currently depend on various third parties for some of our software development efforts, quality assurance and operations. Specifically, we outsource
some of our software development and design, quality assurance and operations activities to third-party contractors that have employees and consultants located in
Canada, China, India, New Zealand, Russia, Serbia and Ukraine. Our dependence on third-party contractors creates a number of risks, in particular, the risk that we
may not maintain control or effective management with respect to these business operations.
Our agreements with these third-party contractors are either not terminable by them (other than at the end of the term or upon an uncured breach by us) or
require at least 30 days’ prior written notice of termination. If we experience problems with our third-party contractors, the costs charged by our third-party
contractors increase or our agreements with our third-party contractors are terminated, we may not be able to develop new solutions, enhance or operate existing
solutions or provide customer support in an alternate manner that is equally or more efficient and cost-effective.
We anticipate we will continue to depend on these and other third-party relationships in order to grow our business for the foreseeable future. If we are
unsuccessful in maintaining existing and, if needed, establishing new relationships with third parties, our ability to efficiently operate existing services or develop
new services and provide adequate customer support could be impaired, and as a result, our competitive position or our results of operations could suffer.
We
rely
on
third
parties
to
provide
the
majority
of
our
customer
service
and
support
representatives.
If
these
third
parties
do
not
provide
our
customers
with
reliable,
high‑‑quality
service,
our
reputation
will
be
harmed,
and
we
may
lose
customers.
We offer customer support through both our online account management website and our toll-free customer support number. Our customer support is
currently provided via a third-party provider located in the Philippines, as well as our employees in the U.S. We currently offer support almost exclusively in
English. Our third-party providers generally provide customer service and support to our customers without identifying themselves as independent parties. The
ability to support our customers may be disrupted by natural disasters, inclement weather conditions, civil unrest, strikes, acts of terrorism and other adverse events
in the Philippines. Furthermore, as we expand our operations internationally, we may need to make significant expenditures and investments in our customer
service and support to adequately address the complex needs of international customers, such as support in multiple foreign languages.
20
If any of these third parties do not provide reliable, high-quality service, our reputation and our business will be harmed and we may be exposed to
significant liability. In addition, a significa nt service outage may cause a high volume of customer support inquiries, and our third ‑party customer service call
center might be unable to respond to a significant spike in customer support inquiries in a timely manner. In addition, industry consolidatio n among providers of
services to us may impact our ability to obtain these services or increase our costs for these services.
Our
limited
operating
history
makes
it
difficult
to
evaluate
our
current
business
and
future
prospects,
which
may
increase
the
risk
of
investing
in
our
stock.
Although we were incorporated in 2003, we did not formally introduce Ooma Telo until 2009 or Ooma Office until 2013. In addition, we acquired our
Business Promoter business in 2012 and our Talkatone business in 2014. Our limited operating history limits our ability to plan for and model future growth. We
have encountered and expect to continue encountering risks and uncertainties frequently experienced by growing companies in rapidly changing markets. If our
assumptions regarding these uncertainties are incorrect or change in reaction to changes in our markets, or if we do not manage or address these risks successfully,
our results of operations could differ materially from our expectations, and our business could suffer. Any success we may experience in the future will depend, in
large part, on our ability to, among other things:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
retain and expand our customer base;
increase revenue from existing customers as they add users and, in the future, purchase additional functionalities and premium service subscriptions;
successfully acquire customers on a cost-effective basis;
improve the performance and capabilities of our services, applications, and hardware through research and development;
successfully expand our business domestically and internationally;
successfully compete in our markets;
continue to innovate and expand our service offerings;
continue our relationships with strategic partners like Amazon, Nest Labs, Inc. and our reseller partners;
continue our relationships with our current retail partners and develop relationships with additional retail partners;
continue our relationships with our digital marketing agency partners, advertising agencies and digital advertising networks;
continue our relationships with third-party vendors that enable our solutions;
successfully protect our intellectual property and defend against intellectual property infringement claims;
generate leads and convert potential customers into paying customers;
maintain and enhance our third-party data center hosting facilities to minimize interruptions in the use of our services;
determine appropriate prices for the marketplace; and
hire, integrate and retain professional and technical talent.
We
have
incurred
significant
losses
and
negative
cash
flows
in
the
past
and
anticipate
continuing
to
incur
losses
and
negative
cash
flows
for
the
foreseeable
future,
and
we
may
therefore
not
be
able
to
achieve
or
sustain
profitability
in
the
future.
We have incurred substantial net losses since our inception, including net losses of approximately $12.9 million, $14.1 million and $6.4 million for the fiscal
year ended January 31, 2017, 2016 and 2015, respectively. We had an accumulated deficit of $77.8 million and $64.8 million as of January 31, 2017 and 2016,
respectively. We have spent considerable amounts of time and money since inception to develop new communications solutions and connected services.
Additionally, we have incurred substantial losses and expended significant resources to market, promote, develop and sell our products and solutions. We also
expect to continue investing for future growth, including for advertising, customer acquisition, technology infrastructure, storage capacity, services development
and international expansion. In addition, as a public company, we may incur additional accounting, legal and other expenses.
21
As a result of our increased expenditures, we may have negative operating cash flows for the foreseeable future and will have to generate and sustain
increased revenue to achieve fu ture profitability. Achieving profitability will require us to increase revenue, manage our cost structure and avoid significant
liabilities. Revenue growth may slow, revenue may decline or we may incur significant losses in the future for a number of poss ible reasons, including general
macroeconomic conditions, increasing competition (including competitive pricing pressures), a decrease in the growth of the markets in which we compete or
failure for any reason to continue capitalizing on growth opportuniti es. Additionally, we may encounter unforeseen operating expenses, difficulties, complications,
delays, service delivery and quality problems and other unknown factors that may result in losses in future periods. If these losses exceed our expectations or o ur
revenue growth expectations are not met in future periods, our financial performance will be harmed and our stock price could be volatile or decline.
Our
business
could
suffer
if
we
cannot
obtain
or
retain
direct
inward
dialing
numbers,
or
DIDs,
are
prohibited
from
obtaining
local
or
toll-free
numbers,
or
are
limited
to
distributing
local
or
toll-free
numbers
to
only
certain
customers.
Our future success depends on our ability to procure large quantities of local and toll-free DIDs in the U.S. and foreign countries in desirable locations at a
reasonable cost and without restrictions. Our ability to procure and distribute DIDs depends on factors outside of our control, such as applicable regulations, the
practices of the communications carriers that provide DIDs, the cost of these DIDs, and the level of demand for new DIDs. Due to their limited availability, there
are certain popular area code prefixes we generally cannot obtain. Our inability to acquire DIDs for our operations would make our services less attractive to
potential customers in the affected local geographic areas. In addition, future growth in our customer base, together with growth in the customer bases of other
providers of internet-based business communications, has increased, which increases our dependence on needing sufficiently large quantities of DIDs.
If
we
are
unable
to
effectively
process
local
number
and
toll-free
number
portability
provisioning
in
a
timely
manner,
our
growth
may
be
negatively
affected.
We support local number and toll-free number portability, which allows our customers to transfer to us and thereby retain their existing phone numbers
when subscribing to our small business, home, and mobile services. Transferring numbers can be a manual process that can take up to 15 business days or longer to
complete. A new customer of our services must maintain both our service and the customer’s existing phone service during the number transferring process. Any
delay we experience in transferring these numbers typically results from the fact that we depend on third-party carriers to transfer these numbers, a process we do
not control, and these third-party carriers may refuse or substantially delay the transfer of these numbers to us. Local number portability is considered an important
feature by many potential customers, and if we fail to reduce any related delays, we may experience increased difficulty in acquiring new customers. Moreover, the
FCC requires us to comply with specified number porting timeframes when customers leave our service for the services of another provider. In Canada, the
Canadian Radio-television and Telecommunications Commission, or CRTC, has imposed a similar number portability requirement on service providers like us. If
we, or our third-party carriers, are unable to process number portability requests within the requisite timeframes, we could be subject to fines and penalties.
Additionally, in the U.S., both customers and carriers may seek relief from the relevant state public utility commission, the FCC, or in state or federal court for
violation of local number portability requirements.
If
small
businesses
opt
to
perform
advertising
tasks
on
their
own,
demand
for
our
lead‑‑generation
services
would
decrease,
thereby
negatively
affecting
our
revenue.
Large internet marketing providers such as Google, Yahoo! and Microsoft offer online advertising products to small businesses through self-service
platforms. As small businesses become more familiar with such platforms, they may increasingly choose to actively manage their own internet presence and their
demand for the lead-generation services may decrease. We cannot predict the evolving experiences and preferences of small businesses and cannot assure you that
we can develop our lead generation business, or develop similar new services, in a manner that will suit their needs and expectations faster or more effectively than
our competitors, or at all. If we are not able to do so, our results of operations would suffer.
22
Our
access
to
the
majority
of
our
lead-gener
ation
customers
is
currently
through
a
limited
number
of
digital
agencies,
which
creates
a
significant
risk
that
we
could
lose
a
majority
of
our
lead
generation
service
customers
due
to
factors
beyond
our
control.
We currently contract with several digital agencies to provide our lead-generation services as a component of their service to third parties who we include as
our core users. If our relationship with these digital agencies degrades, they could elect not to use our lead-generation service, which would lead to the loss of a
portion of our lead generation business revenue as well as a number of our core users. Also, for reasons beyond our control, the digital agencies we work with may
lose their business relationships with third parties who purchase lead generation services for their customers, causing the digital agency to terminate its business
relationship with us and the loss of such lead generation business revenue. The concentration of our access to lead generation customers creates volatility in our
revenue and in the churn of our core users, which risk will remain unless and until we significantly grow the number of digital agencies we contract with, and/or
increase the number of small businesses that obtain lead generation services directly from us.
If
we
fail
to
continue
developing
our
brand
or
our
reputation
is
harmed,
our
business
may
suffer.
We believe that continuing to strengthen our current brand will be critical to achieving widespread acceptance of our services and will require continued
focus on active marketing efforts. The demand for and cost of online and traditional advertising have been increasing and may continue to increase. Accordingly,
we may need to increase our investment in, and devote greater resources to, advertising, marketing, and other efforts to create and maintain brand loyalty among
users. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses incurred in building our
brands. If we fail to promote and maintain our brand, or if we incur substantial expense in an unsuccessful attempt to promote and maintain our brands, our
business could be materially and adversely affected.
Our services, as well as those of our competitors, are regularly reviewed and commented upon by online and social media sources, as well as computer and
other business publications. Negative reviews, or reviews in which our competitors’ products and services are rated more highly than our solutions, could
negatively affect our brand and reputation. From time to time, our customers have expressed dissatisfaction with our services, including dissatisfaction with our
customer support, our billing policies and the way our services 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 to terminate, reduce or not to renew their subscriptions. In addition, many of our customers
participate in social media and online blogs about internet-based services, including our services, and our success depends in part on our ability to minimize
negative and generate positive customer feedback through such online channels where existing and potential customers seek and share information. If actions we
take or changes we make to our services upset these customers, their blogging could negatively affect our brand and reputation. Complaints or negative publicity
about our services or customer service could materially and adversely impact our ability to attract and retain customers and our business, financial condition and
results of operations.
23
A
security
breach
could
delay
or
interrupt
service
to
our
customers,
compromise
the
integrity
of
our
systems
or
data
that
we
collect,
result
in
the
loss
of
our
intellectual
property
or
confidential
information,
harm
our
reputation,
or
subject
us
to
significant
liability.
Our operations depend on our ability to protect our network from interruption or damage resulting from unauthorized access or entry, computer viruses or
malware or other events beyond our control. In the past, we may have been subject to undetected distributed denial-of-service, or DDOS, cyberattacks by hackers
intent on bringing down our services, and we may be subject to DDOS and other forms of cyberattacks in the future. We cannot assure you that our backup
systems, regular data backups, physical, technological and organizational security protocols and measures and other procedures that are currently in place, or that
may be in place in the future, will be adequate to prevent unauthorized access to our systems, significant damage, system interruption, degradation or failure, or
data loss or to respond to a cyberattack once launched. Additionally, hackers may attempt to directly gain access to a customer’s on-premise appliance, which may
delay or interrupt services, or may subject our customers to further security risks, including in relation to any connected household devices a customer might have
now or in the future, such as Nest devices or other household sensors, or to our network more generally. Also, our services are web-based, and the amount of data
we store for our users on our servers has been increasing as our business has grown. Despite the implementation of security measures, our infrastructure may be
vulnerable to hackers, computer viruses, worms, other malicious software programs or similar disruptive problems caused by our customers, employees,
consultants or other internet users who attempt to invade public and private data networks. In some cases we do not have in place disaster recovery facilities for
certain ancillary services, such as email delivery of messages. Currently, nearly all of our customers authorize us to bill their credit or debit card accounts directly
for all transaction fees that we charge. We rely on encryption and authentication technology to ensure secure transmission of confidential information, including
customer credit and debit card numbers. Despite our efforts to encrypt and secure customer payment card information, hackers with sufficiently sophisticated
technology or methods may still be able to infiltrate our systems to gain unauthorized access to payment card information. Further, advances in computer
capabilities, new discoveries in the field of cryptography or other developments may result in a compromise or breach of the technology we use to protect
transaction data.
Additionally, third parties may attempt to fraudulently induce domestic and international employees, consultants or customers into disclosing sensitive
information, such as user names, passwords or customer proprietary network information, or CPNI, or other information in order to gain access to our customers’
data or to our data. CPNI includes information such as the phone numbers called by a customer, the frequency, duration, and timing of such calls, and any services
purchased by the customer, such as call waiting, call forwarding and caller ID, in addition to other information that may appear on a customer’s bill. Third parties
may also attempt to fraudulently induce employees, consultants or customers into disclosing sensitive information regarding our intellectual property and other
confidential business information, or our information technology systems. In addition, because the techniques used to obtain unauthorized access, or to sabotage
systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement
adequate preventative measures. Any system failure or security breach that causes interruptions or data loss in our operations or in the computer systems of our
customers or leads to the misappropriation of our or our customers’ confidential or personal information, or CPNI, could result in significant liability to us. Such
failure or breach could cause our service to be perceived as not being secure, subject us to regulatory requirements such as FCC notification, result in significant
monetary costs, such as fines, legal fees and expenditures to improve and enhance our security measures, cause considerable harm to us and our reputation
(including requiring notification to customers, regulators or the media) and deter current and potential customers from using our services. Additionally, we could
incur significant costs, both monetary and with respect to management’s time and attention, to investigate and remediate a data security breach. Because our
onboarding and billing functions are conducted primarily through a single data center, any security breach in that data center may cause an interruption in our
business operations. Any of these events could have a material adverse effect on our business, results of operations and financial condition.
24
Failures
in
internet
infrastructure
or
interference
with
broadband
access
could
cause
current
or
potential
customers
to
believe
that
our
systems
are
unreliable,
leading
our
current
customers
to
switch
to
our
competitors
or
potential
customers
to
avoid
using
our
services.
Many of our services depend on our customers’ broadband access to the internet, usually provided through a cable or digital subscriber line, or DSL,
connection. In addition, users who access our services and applications through mobile devices, such as smartphones and tablets, must have a high-speed
connection, such as Wi-Fi, 3G, 4G or LTE, to use our services and applications. Currently, this access is provided by companies that have significant and
increasing market power in the broadband and internet access marketplace, including incumbent phone companies, cable companies and wireless companies.
Increasing numbers of users and increasing bandwidth requirements may degrade the performance of internet and mobile infrastructure, resulting in outages or
deteriorations in connectivity and negatively impacting the quality with which we can deliver our solutions. As our customer base grows and their usage of
communications capacity increases, we will be required to make additional investments in network capacity to maintain adequate data transmission speeds, the
availability of which may be limited, or the cost of which may be on terms unacceptable to us. If adequate capacity is not available to us as our customers’ usage
increases, our network may be unable to achieve or maintain sufficiently high data transmission capacity, reliability or performance. Furthermore, as the rate of
adopting new technologies increases, the networks on which our services and applications rely may not be able to sufficiently adapt to the increased demand for
these services, including ours. In the past, we have experienced disruptions to our service. For example, in August 2011, we experienced an outage for
approximately three hours, and in April and May 2015, we experienced multiple intermittent service outages that lasted for up to eight hours for some of our
customers. Frequent or persistent interruptions could cause current or potential users to believe that our systems or services are unreliable, leading them to switch to
our competitors or to avoid our services, and could permanently harm our reputation and brands. Because some of our services rely on integration between features
that use both wired and wireless infrastructures, any of the aforementioned problems with either wired or wireless infrastructure may result in the inability of
customers to take advantage of our integrated services and therefore may decrease the attractiveness of our collective services to current and potential customers.
The
success
of
our
business
relies
on
customers’
continued
and
unimpeded
access
to
broadband
service.
Providers
of
broadband
services
may
be
able
to
block
our
services
or
charge
their
customers
more
for
using
our
services,
which
could
adversely
affect
our
revenue
and
growth.
Some of the providers of broadband internet access and high-speed mobile access, such as AT&T and Verizon, offer products and services that directly
compete with our own offerings, which can potentially give such providers a competitive advantage. For example, these providers may market and sell a bundle of
services to our current and potential customers that includes services directly competitive to ours, and our current and potential customers may prefer these bundled
offerings. Some providers of broadband access, including providers outside of the U.S., may take measures that affect their customers’ ability to use our service,
such as degrading the quality of the data packets we transmit over their lines, giving those packets low priority, giving other packets higher priority than ours,
blocking our packets entirely or attempting to charge their customers more for also using our services. While actions like these by U.S. providers would violate the
net neutrality rules recently adopted by the FCC and described below, most foreign countries have not adopted formal net neutrality or open internet rules, and
there continues to be some uncertainty regarding whether the net neutrality rules will be upheld by courts or modified by legislative action.
On March 12, 2015 the FCC released new network neutrality and open internet rules that it had adopted on February 26, 2015. In that order, the FCC
reclassified broadband Internet access services as a telecommunications service subject to some elements of common carrier regulation, including the obligation to
provide service on just and reasonable terms, requirements related to customer privacy and requirements for accessibility for people with disabilities. The order also
prohibits blocking or discriminating against lawful services and applications and prohibits “paid prioritization,” or providing faster speeds or other benefits in
return for compensation. The order went into effect on June 12, 2015 and is the subject of pending appeals by several parties. The net neutrality rules could affect
the market for broadband internet access service in a way that impacts our business, for example by increasing the cost of broadband internet service and thereby
depressing demand for our services or by increasing the costs of services we purchase.
Our
quarterly
and
annual
results
of
operations
have
fluctuated
in
the
past
and
may
continue
to
do
so
in
the
future.
As
a
result,
we
may
fail
to
meet
or
to
exceed
the
expectations
of
research
analysts
or
investors,
which
could
cause
our
stock
price
to
fluctuate.
Our quarterly and annual results of operations have varied historically from period to period, and we expect that they will continue to fluctuate due to a
variety of factors, many of which are outside of our control, including:
•
•
•
our ability to retain existing customers and attract new customers;
our ability to sell premium solutions to our existing customers;
our ability to introduce new solutions;
25
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the actions of our competitors, including pricing changes or the introduction of new solutions;
our ability to effectively manage our growth;
our ability to successfully penetrate the communications and connected services markets for small businesses, home, and mobile;
the number of monthly and annual subscriptions at any given time;
the timing, cost and effectiveness of our advertising and marketing efforts;
the timing, operating cost and capital expenditures related to the operation, maintenance, and expansion of our business;
the timing of our decisions with regard to product resource allocation;
seasonality of consumers’ purchasing patterns and seasonality of advertising patterns;
service outages or security breaches and any related impact on our reputation;
our ability to accurately forecast revenue and appropriately plan our expenses;
costs associated with defending and resolving intellectual property infringement and other claims;
changes in tax laws, regulations, or accounting rules;
the timing and cost of developing or acquiring technologies, services or businesses and our ability to successfully manage any such acquisitions; and
the impact of worldwide economic, industry, and market conditions.
Any one of the factors above, or the cumulative effect of some or all of the factors referred to above, may result in significant fluctuations in our quarterly
and annual results of operations. This variability and unpredictability could result in our failure to meet our internal operating plan or the expectations of securities
analysts or investors for any period, which could cause our stock price to decline. In addition, a significant percentage of our operating expenses is fixed in nature
and is based on forecasted revenue trends. Accordingly, in the event of revenue shortfalls, we may not be able to mitigate the negative impact on net income (loss)
and margins in the short term. If we fail to meet or exceed the expectations of research analysts or investors, the market price of our shares could fall substantially
and we could face costly lawsuits, including securities class-action suits.
We
may
require
additional
capital
to
pursue
our
business
objectives
and
to
respond
to
business
opportunities,
challenges
or
unforeseen
circumstances.
If
capital
is
not
available
to
us
or
only
under
unfavorable
terms,
our
business,
results
of
operations
and
financial
condition
may
be
adversely
affected.
We intend to continue making expenditures and investments to support the growth of our business and may require additional capital to pursue our business
objectives and respond to business opportunities, challenges or unforeseen circumstances, including the need to develop new solutions or enhance our existing
solutions, enhance our operating infrastructure, and acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt
financings to secure additional funds. However, additional funds may not be available when we need them on terms acceptable to us, or at all. Our credit
agreements include restrictive covenants and any debt financing we secure in the future could involve further restrictive covenants, which may make it more
difficult for us to obtain additional capital and to pursue business opportunities.
In addition, volatility in the credit markets may have an adverse effect on our ability to obtain debt financing. If we raise additional funds through further
issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have
rights, preferences, and privileges superior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms
satisfactory to us, our ability to continue pursuing our business objectives and to respond to business opportunities, challenges or unforeseen circumstances could
be significantly limited, and our business, results of operations, financial condition and prospects could be materially and adversely affected.
26
Growth
may
place
significant
demands
on
our
management
and
our
infrastructure.
We have recently experienced substantial growth in our business, including an increase in the number of customers we consider to be our core users. This
growth has placed and may continue to place significant demands on our management and our operational and financial infrastructure. As our operations grow in
size, scope and complexity, we will need to increase our sales and marketing efforts and add additional sales and marketing personnel worldwide and to improve
and upgrade our systems and infrastructure to attract, service, and retain an increasing number of users. For example, we expect the volume of simultaneous calls to
increase significantly as our user base grows. Our network hardware and software may not be able to accommodate this additional simultaneous call volume. The
expansion of our systems and infrastructure will require us to commit substantial financial, operational and technical resources in advance of an increase in the
volume of business, with no assurance that the volume of business will increase. Any such additional capital investments will increase our cost base. Continued
growth could also strain our ability to maintain reliable service levels for our users, develop and improve our operational, financial and management controls,
enhance our reporting systems and procedures and recruit, train, and retain highly skilled personnel. If we fail to achieve the necessary level of efficiency in our
organization as we grow, our business, results of operations, and financial condition could be materially and adversely affected.
Shifts
in
trends
or
the
emergence
of
new
technologies
may
render
our
solutions
obsolete
or
require
us
to
expend
significant
resources
to
develop,
license,
or
acquire
new
services
or
applications
on
a
timely
and
cost-effective
basis
in
order
to
remain
competitive.
The cloud-based communications and connected services industries are emerging markets characterized by rapid changes in customer requirements,
frequent introductions of new and enhanced services, and continuing and rapid technological advancement. We cannot predict the effect of technological changes
on our business. To compete successfully in these emerging markets, we must anticipate and adapt to technological changes and evolving industry standards and
continue to design, develop, manufacture and sell new and enhanced services that provide increasingly higher levels of performance and reliability at lower cost.
We derived approximately 72% of our revenue from Ooma Telo for the fiscal year ended January 31, 2017. We expect Ooma Telo will continue to account for a
majority of our revenue for the foreseeable future. However, our future success will also depend on our ability to introduce and sell new services, features and
functionality that enhance or are beyond the voice, fax, text and connected services we currently offer, as well as to improve usability and support and increase
customer satisfaction. Our failure to develop solutions that satisfy customer preferences in a timely and cost-effective manner may harm our ability to renew our
subscriptions with existing customers and to create or increase demand for our services and may materially and adversely impact our results of operations.
The introduction of new services by competitors or the development of entirely new technologies to replace existing offerings could make our solutions
obsolete or adversely affect our business and results of operations. Announcements of future releases and new services and technologies by our competitors or by
us could cause customers to defer purchases of our existing services, which also could have a material adverse effect on our business, financial condition or results
of operations. We may experience difficulties with software development, operations, design or marketing that could delay or prevent our development,
introduction or implementation of new or enhanced services and applications. We have in the past experienced delays in the planned release dates of new features
and upgrades, and have discovered defects in new services and applications after their introduction. We cannot assure you that new features or upgrades will be
released according to schedule, or that, when released, they will not contain defects. Either of these situations could result in adverse publicity, loss of revenue,
delay in market acceptance or claims by customers brought against us, all of which could harm our reputation, business, results of operations, and financial
condition. Moreover, the development of new or enhanced services or applications may require substantial investment, and we must continue to invest a significant
amount of resources in our research and development efforts to develop these services and applications to remain competitive. We do not know whether these
investments will be successful. If customers do not widely adopt any new or enhanced services and applications, we may not be able to realize a return on our
investment. If we are unable to develop, license or acquire new or enhanced services and applications on a timely and cost‑effective basis, or if such new or
enhanced services and applications do not achieve market acceptance, our business, financial condition and results of operations may be materially and adversely
affected.
Our
success
depends
on
the
public
acceptance
of
our
connected
services
and
applications.
Our future growth depends on our ability to significantly increase revenue generated from our communications solutions and other connected services that
integrate voice communications technology with other functions, such as business promotion, automation, security and others. The markets for cloud-based
communications and connected services are evolving rapidly and are characterized by an increasing number of market entrants. As is typical of a rapidly evolving
industry, the demand for, and market acceptance of, these applications is uncertain. If the markets for cloud-based communications solutions or for other connected
services fail to develop, develop more slowly than we anticipate or develop in a manner different than we expect, our services could fail to achieve market
acceptance, which in turn could materially and adversely affect our business.
27
Our future growth in the small business market depends on the continued use of voice communications by businesses, as compared to e-mail and other data-
based methods. A decline in the o verall rate of voice communications by businesses would harm our business. Furthermore, our continued growth depends on
future demand for and adoption of internet voice communications systems and services and on future demand for connected communications s ervices. Although
the number of broadband subscribers worldwide has grown significantly in recent years, only a small percentage of businesses have adopted internet voice
communications services to date. For demand and adoption of internet voice communicat ions services by businesses to increase, internet voice communications
networks must improve the quality of their service for real-time communications by managing the effects of and reducing packet loss, packet delay, and packet
jitter, as well as unreliab le bandwidth, so that high-quality service can be consistently provided. Additionally, the cost and feature benefits of internet voice
communications must be sufficient to cause customers to switch from traditional phone service providers. We must devote s ubstantial resources to educate
potential customers about the benefits of internet voice communications solutions, in general, and of our services in particular. If any or all of these factors fail to
occur, our business may be materially and adversely aff ected.
Our Ooma Telo product and services are being sold to individuals and families. With the growth in cellular and other mobile technologies, many consumers
have chosen to eliminate altogether their home telephone service. Our ability to continue growing our user base depends on our ability to convince our customers
and potential customers that our service is sufficiently useful and cost-effective, such that it makes sense to maintain or reestablish home telephone services with
us. Our growth could slow and our financial condition could be adversely affected if the trend of eliminating home telephone service continues or accelerates.
Our mobile platform, available to any consumer with a Wi-Fi or cellular data connected mobile device, operates in a market that is fragmented and difficult
to get noticed by consumers. Many of our competitors in this market have been able to establish a significant user base and reputation in the market, which may
make it more difficult for our products to be adopted. Furthermore, as new mobile devices are released, we may encounter difficulties supporting these devices and
services, and we may need to devote significant resources to the creation, support, and maintenance of our mobile applications. Additionally, our competitors may
allocate additional resources to marketing and promotion of their products, making it even more difficult to be noticed. It is also unclear how the adoption of “over-
the-top” based communications will continue to grow. If the number of consumers using “over-the-top” based communications stagnates or declines, such
movement may result in an intensified competition for consumers in this space.
Accusations
of
infringement
of
third-party
intellectual
property
rights
could
materially
and
adversely
affect
our
business.
There has been substantial litigation in the areas in which we operate regarding intellectual property rights. In the past, we have been sued by third parties
claiming infringement of their intellectual property rights and we may be sued for infringement from time to time in the future. In the past, we have settled
infringement litigation brought against us; however, we cannot assure you that we will be able to settle any future claims or, if we are able to settle any such claims,
that the settlement will be on terms favorable to us. Our broad range of technology may increase the likelihood that third parties will claim that we infringe their
intellectual property rights.
We have in the past received, and may in the future receive, notices of claims of infringement, misappropriation or misuse of other parties’ proprietary
rights, such as the Deep Green Wireless Litigation described in Part II, Item 1 (Legal Proceedings). Notwithstanding their merits, accusations and lawsuits like
these often require significant time and expense to defend, may negatively affect customer relationships, may divert management’s attention away from other
aspects of our operations and, upon resolution, may have a material adverse effect on our business, results of operations, financial condition and cash flows.
Certain technology necessary for us to provide our services may, in fact, be patented by other parties either now or in the future. If such technology were
validly patented by another person, we would have to negotiate a license for the use of that technology. We may not be able to negotiate such a license at a price
that is acceptable to us or at all. The existence of such a patent, or our inability to negotiate a license for any such technology on acceptable terms, could force us to
cease using the technology and cease offering products and services incorporating the technology, which could materially and adversely affect our business and
results of operations.
If we were found to be infringing on the intellectual property rights of any third party, we could be subject to liability for such infringement, which could be
material. We could also be prohibited from using or selling certain products or services, prohibited from using certain processes, or required to redesign certain
products or services, each of which could have a material adverse effect on our business and results of operations.
These and other outcomes may:
•
•
•
result in the loss of a substantial number of existing customers or prohibit the acquisition of new customers;
cause us to pay license fees for intellectual property we are deemed to have infringed;
cause us to incur costs and devote valuable technical resources to redesigning our services;
28
•
•
•
•
•
•
•
cause our cost of goods sold to increase;
cause us to accelerate expenditures to preserve existing revenue;
cause existing or new vendors to require prepayments or letters of credit;
materially and adversely affect our brand in the marketplace and cause a substantial loss of goodwill;
cause us to change our business methods or services;
require us to cease certain business operations or offering certain products, services or features; and
lead to our bankruptcy or liquidation.
Our
limited
ability
to
protect
our
intellectual
property
rights
could
materially
and
adversely
affect
our
business.
We rely, in part, on patent, trademark, copyright and trade secret law to protect our intellectual property in the U.S. and abroad. We cannot assure you that
the particular forms of intellectual property protection we seek, including business decisions about when to file patents and when to maintain trade secrets, will be
adequate to protect our business. We seek to protect our technology, software, documentation and other information under trade secret and copyright law, which
afford only limited protection. For example, we typically enter into confidentiality agreements with our employees, consultants, third-party contractors, customers
and vendors in an effort to control access to use and distribution of our technology, software, documentation and other information. These agreements may not
effectively prevent unauthorized use or disclosure of confidential information and may not provide an adequate remedy in the event of such unauthorized use or
disclosure, and it may be possible for a third party to legally reverse engineer, copy or otherwise obtain and use our technology without authorization. In addition,
improper disclosure of trade secret information by our current or former employees, consultants, third-party contractors, customers or vendors to the public or
others who could make use of the trade secret information would likely preclude that information from being protected as a trade secret.
We also rely, in part, on patent law to protect our intellectual property in the U.S. and internationally. Our intellectual property portfolio includes 13 issued
U.S. patents, which we expect to expire between 2028 and 2036. We also have 15 patent applications pending for examination in the U.S. and five patent
applications pending for examination in foreign jurisdictions, all of which are related to U.S. applications. We cannot predict whether such pending patent
applications will result in issued patents or whether any issued patents will effectively protect our intellectual property. Even if a pending patent application results
in an issued patent, the patent may be circumvented or its validity may be challenged in various proceedings in U.S. District Court, before the U.S. Patent and
Trademark Office or before their foreign equivalents, such as reexamination, which may require legal representation and involve substantial costs and diversion of
management time and resources. In addition, we cannot assure you that every significant feature of our solutions is protected by our patents, or that we will mark
our products with any or all patents they embody. As a result, we may be prevented from seeking damages in whole or in part for infringement of our patents.
The unlicensed use of our brand, including domain names, by third parties could harm our reputation, cause confusion among our customers and impair our
ability to market our products and services. To that end, we have registered numerous trademarks and service marks, have applied for registration of additional
trademarks and service marks and have acquired a number of domain names in and outside the U.S. to establish and protect our brand names as part of our
intellectual property strategy. If our applications receive objections or are successfully opposed by third parties, it will be difficult for us to prevent third parties
from using our brand without our permission. Moreover, successful opposition to our applications might encourage third parties to make additional oppositions or
commence trademark infringement proceedings against us, which could be costly and time consuming to defend against. There have been in the past, and may be in
the future, instances where third parties have used our trade names, or have adopted confusingly similar trade names to ours. We have been successful in asserting
our rights in our trade names and causing such third parties to cease such use, but we may not be successful in the future. If we are not successful in protecting our
trademarks, our trademark rights may be diluted and subject to challenge or invalidation, which could materially and adversely affect our brand.
29
Despite our efforts to implement our intellectual property strategy, we may not be able to protect or enforce our proprietary rights in the U.S. or
internationally (where effective i ntellectual property protection may be unavailable or limited). For example, we have entered into agreements containing
confidentiality and invention assignment provisions in connection with the outsourcing of certain software development, quality assuranc e and development
activities to third-party contractors located in Canada, India, New Zealand, Russia, Serbia and Ukraine. We have also entered into an agreement containing a
confidentiality provision with a third-party contractor located in the Philippine s, where we have outsourced a significant portion of our customer support function.
We cannot assure you that agreements with these third-party contractors or their agreements with their employees and contractors will adequately protect our
proprietary rig hts in the applicable jurisdictions and foreign countries, as their respective laws may not protect proprietary rights to the same extent as the laws of
the U.S. In addition, our competitors may independently develop technologies similar or superior to our technology, duplicate our technology in a manner that does
not infringe our intellectual property rights or design around any of our patents. Furthermore, detecting and policing unauthorized use of our intellectual property is
difficult and resource-inten sive. Moreover, litigation may be necessary in the future to enforce our intellectual property rights, to determine the validity and scope
of the proprietary rights of others, or to defend against claims of infringement or invalidity. Such litigation, whet her successful or not, could result in substantial
costs and diversion of management time and resources and could have a material adverse effect on our business, financial condition and results of operations.
We
license
technology
from
third
parties
we
do
not
control
and
cannot
be
assured
of
retaining
such
licenses.
We rely upon certain technology, including hardware and software, licensed from third parties. There can be no assurance that the technology licensed by us
will continue to provide competitive features and functionality or that the licenses for technology currently utilized by us or other technology which we may seek to
license in the future, will be available to us on commercially reasonable terms or at all. The loss of, or inability to maintain, existing licenses could result in
shipment delays or reductions until equivalent technology or suitable alternative products are developed, identified, licensed and integrated, and could harm our
business. These licenses are typically offered on standard commercial terms made generally available by the companies providing the licenses. The cost and terms
of these licenses individually are not material to our business.
30
If
we
experience
excessive
fraudulent
activity
or
cannot
meet
evolving
credit
card
asso
ciation
merchant
standards,
we
could
incur
substantial
costs
and
lose
the
right
to
accept
credit
cards
for
payment,
which
could
cause
our
customer
base
to
decline
significantly.
Nearly all of our customers authorize us to bill their credit card accounts directly for service fees that we charge. If people pay for our services with stolen
credit cards, we could incur substantial third-party vendor costs for which we may not be reimbursed. Further, our customers provide us with credit card billing
information online or over the phone, and we do not review the physical credit cards used in these transactions, which increases our risk of exposure to fraudulent
activity. We also incur charges, which we refer to as chargebacks, from the credit card companies’ claims that the customer did not authorize the credit card
transaction to purchase our service, something we have experienced in the past. If the number of unauthorized credit card transactions becomes excessive, we could
be assessed substantial fines for excess chargebacks and we could lose the right to accept credit cards for payment. We have also been affected by the credit card
breaches at various retail stores, which have caused millions of consumers to cancel credit cards as a result of the breach. We have found that some consumers do
not renew their services after a card cancellation, which can have a material negative impact on our revenue. In addition, credit card issuers may change merchant
standards, including data protection and documentation standards, required to utilize their services from time to time. We are currently not in compliance with all of
the applicable technical requirements of the Payment Card Industry Data Security Standard, or PCI, but we are working to become fully compliant as soon as is
practicable. If we fail to become compliant or maintain compliance with current merchant standards, such as PCI, or fail to meet new standards, the credit card
associations may fine us or, while unusual, may impose certain restrictions on our ability to accept credit cards or terminate our agreements with them, rendering us
unable to accept credit cards as payment for our services. Our services have been in the past, and may also be in the future, subject to fraudulent or abusive usage in
violation of applicable law or our acceptable use policies, including but not limited to revenue share fraud, domestic traffic pumping, subscription fraud, premium
text message scams, and other fraudulent schemes, any of which could result in our incurring substantial costs for the completion of calls. Although our customers
are required to set passwords and Personal Identification Numbers, or PINs, to protect their accounts and may configure in which destinations international calling
is enabled from their extensions, third parties have accessed and used our customers’ accounts and extensions through fraudulent means in the past, and they may
do so in the future, which also could result in substantial call completion and other costs for us. In addition, third parties may have attempted in the past, and may
attempt in the future, to fraudulently induce domestic and international employees or consultants into disclosing customer credentials and other account
information. Communications fraud can result in unauthorized access to customer accounts and customer data, unauthorized use of customers’ services, and
charges to customers for fraudulent usage and expenses we must pay to carriers. We may be required to pay for these charges and expenses with no reimbursement
from the customer, and our reputation may be harmed if our services are subject to fraudulent usage. Although we implement multiple fraud prevention and
detection controls, we cannot assure you that these controls will be adequate to protect against fraud. Substantial losses due to fraud or our inability to accept credit
card payments, which could cause our paid customer base to significantly decrease, could have a material adverse effect on our results of operations, financial
condition and ability to grow our business.
Potential
problems
with
our
information
systems
could
interfere
with
our
business
and
operations.
We rely on our information systems and those of third parties for processing customer orders, distribution of our services, billing our customers, processing
credit card transactions, customer relationship management, supporting financial planning and analysis, accounting functions and financial statement preparation
and otherwise running our business. Information systems may experience interruptions, including interruptions of related services from third-party providers, which
may be beyond our control. Such business interruptions could cause us to fail to meet customer requirements. All information systems, both internal and external,
are potentially vulnerable to damage or interruption from a variety of sources, including without limitation, computer viruses, security breaches, energy blackouts,
natural disasters, terrorism, war, telecommunication failures and employee or other theft, as well as third-party provider failures. Any disruption in our information
systems and those of the third parties upon which we rely could have a significant impact on our business.
We may implement enhanced information systems in the future to meet the demands resulting from our growth and to provide additional capabilities and
functionality. The implementation of new systems and enhancements is frequently disruptive to the underlying business of an enterprise, and can be time-
consuming and expensive, increase management responsibilities and divert management attention. Any disruptions relating to our systems enhancements or any
problems with the implementation, particularly any disruptions impacting our operations or our ability to accurately report our financial performance on a timely
basis during the implementation period, could materially and adversely affect our business. Even if we do not encounter these material and adverse effects, the
implementation of these enhancements may be much costlier than we anticipated. If we are unable to successfully implement the information systems
enhancements as planned, our financial position, results of operations and cash flows could be negatively impacted.
31
Our
use
of
open
source
technology
could
impose
limitations
on
our
ability
to
commercialize
our
services.
We use open source software in our platform on which our services operate. There is a risk that the owners of the copyrights in such software may claim
that such licenses impose unanticipated conditions or restrictions on our ability to market or provide our services. If such owners prevail in such claim, we could be
required to make the source code for our proprietary software (which contains our valuable trade secrets) generally available to third parties, including competitors,
at no cost, to seek licenses from third parties in order to continue offering our services, to re-engineer our technology, or to discontinue offering our services in the
event re-engineering cannot be accomplished on a timely basis or at all, any of which could cause us to discontinue our services, harm our reputation, result in
customer losses or claims, increase our costs or otherwise materially and adversely affect our business and results of operations. If a copyright holder of such open
source software were to allege we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses
defending against such allegations and could be subject to significant damages, enjoined from the sale of our solutions that contained the open source software and
required to comply with the foregoing conditions, which could disrupt the distribution and sale of some of our solutions.
We
depend
largely
on
the
continued
services
of
our
senior
management
and
other
key
employees,
the
loss
of
any
of
whom
could
adversely
affect
our
business,
results
of
operations
and
financial
condition.
Our future performance depends on the continued services and contributions of our senior management and other key employees to execute on our business
plan, and to identify and pursue opportunities and services innovations. The loss of services of senior management or other key employees could significantly delay
or prevent the achievement of our development and strategic objectives. In particular, we depend to a considerable degree on the vision, skills, experience and
effort of our Chief Executive Officer, Eric B. Stang. All of our executive officers and senior management may terminate employment with us at any time with no
advance notice. The replacement of any of these senior management personnel would likely involve significant time and costs, and such loss could significantly
delay or prevent the achievement of our business objectives. Many members of our senior management have been our employees for many years and therefore have
significant experience and understanding of our business that would be difficult to replace. Our inability to attract and retain the necessary personnel could
adversely affect our business, financial condition or results of business. We do not maintain key person insurance for any of our personnel.
If
we
are
unable
to
hire,
retain
and
motivate
qualified
personnel,
our
business
will
suffer.
Our future success depends, in part, on our continued ability to attract and retain highly skilled personnel. We believe there is, and will continue to be,
intense competition for highly skilled technical and other personnel with experience in our industry in the San Francisco Bay Area, where our headquarters is
located, and in other locations where we may maintain offices in the future. We must provide competitive compensation packages and a high-quality work
environment to hire, retain and motivate employees. If we are unable to retain and motivate our existing employees or attract qualified personnel to fill key
positions, we may be unable to manage our business effectively, including the development, marketing and sale of existing and new services, which could have a
material adverse effect on our business, financial condition, and results of operations. To the extent we hire personnel from competitors, we may be subject to
allegations such personnel have been improperly solicited or divulged proprietary or other confidential information.
We
may
expand
through
acquisitions
of,
or
investments
in,
other
companies,
each
of
which
may
divert
our
management’s
attention,
result
in
additional
dilution
to
our
stockholders,
increase
expenses,
disrupt
our
operations
and
harm
our
results
of
operations.
Our business strategy may, from time to time, include acquiring or investing in complementary services, technologies or businesses. We cannot assure you
we will successfully identify suitable acquisition candidates, integrate or manage disparate technologies, lines of business, personnel and corporate cultures, realize
our business strategy or the expected return on our investment, or manage a geographically dispersed company. Any such acquisition or investment could
materially and adversely affect our results of operations. Acquisitions and other strategic investments involve significant risks and uncertainties, including:
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the potential failure to achieve the expected benefits of the combination or acquisition;
unanticipated costs and liabilities;
difficulties in integrating new products and services, software, businesses, operations and technology infrastructure in an efficient and effective
manner;
difficulties in maintaining customer relations;
the potential loss of key employees of the acquired businesses;
the diversion of the attention of our senior management from the operation of our daily business;
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the potential adverse effect on our cash position to the extent that we use cash for the purchase price;
the potential significant increase of our interest expense, leverage, and debt service requirements if we incur additional debt to pay for an acquisition;
the potential issuance of securities that would dilute our stockholders’ percentage ownership;
the potential to incur large and immediate write-offs and restructuring and other related expenses; and
the inability to maintain uniform standards, controls, policies and procedures.
Any acquisition or investment could expose us to unknown liabilities. Moreover, we cannot assure you that we will realize the anticipated benefits of any
acquisition or investment. In addition, our inability to successfully operate and integrate newly acquired businesses appropriately, effectively, and in a timely
manner could impair our ability to take advantage of future growth opportunities and other advances in technology, as well as on our revenue, gross margins and
expenses.
We
are
expanding
our
international
operations,
which
may
expose
us
to
significant
risks.
To date, we have not generated significant revenue from outside of the U.S. and Canada, but we expect to grow our international revenue in the future. The
future success of our business will depend, in part, on our ability to expand our operations and customer base worldwide. Operating in international markets
requires significant resources and management attention and will subject us to regulatory, economic and political risks different from those in the U.S. Because of
our limited experience with international operations and developing and managing sales and distribution channels in international markets, our international
expansion efforts may not be successful. In addition, we will face risks in doing business internationally that could materially and adversely affect our business,
including:
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•
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our ability to comply with differing technical and environmental standards, data privacy and telecommunications regulations, and certification
requirements outside the U.S.;
potential contractual and other liability to our business partners if we fail to meet their aggressive expansion schedules in new locations;
difficulties and costs associated with staffing and managing foreign operations;
potentially greater difficulty collecting accounts receivable and longer payment cycles;
the need to adapt and localize our services for specific countries;
the need to offer customer care in various native languages;
reliance on third parties over which we have limited control, including international resellers, for marketing and reselling our services;
availability of reliable broadband connectivity and wide area networks in targeted areas for expansion;
lower levels of adoption of credit or debit card usage for internet related purchases by foreign customers and compliance with various foreign
regulations related to credit or debit card processing and data privacy requirements;
difficulties in understanding and complying with local laws, regulations, and customs in foreign jurisdictions;
export controls and trade and economic sanctions administered by the Department of Commerce Bureau of Industry and Security and the Treasury
Department’s Office of Foreign Assets Control;
tariffs and other non-tariff barriers, such as quotas and local content rules and the possibility of additional import tariffs imposed by the new
administration;
compliance with various anti-bribery and anti-corruption laws such as the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA;
limited protection for intellectual property rights in some countries;
adverse tax consequences;
fluctuations in currency exchange rates, which could increase the price of our services outside of the U.S., increase the expenses of our international
operations, including expenses related to foreign contractors, and expose us to foreign currency exchange rate risk;
exchange control regulations, which might restrict or prohibit our conversion of other currencies into U.S. Dollars;
33
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restrictions on the transfer of funds;
deterioration of political relations between the U.S. and other countries; and
political or social unrest or economic instability in a specific country or region, which could have an adverse impact on our third-party software
development and quality assurance operations there.
Our failure to manage any of these risks successfully could harm our future international operations and our overall business.
We
may
not
be
able
to
manage
our
inventory
levels
effectively,
which
may
lead
to
excess
inventory
or
inventory
obsolescence
that
would
force
us
to
incur
inventory
write-downs.
Our vendor-supplied on-premise appliances and end-point devices have lead times of up to 32 weeks for delivery and are built to satisfy our demand
forecasts that are necessarily imprecise. It is likely that from time to time we will have either excess or insufficient product inventory. In addition, because we rely
on third-party vendors for the supply of our devices, our inventory levels are subject to the conditions regarding the timing of purchase orders and delivery dates
not within our control. Excess inventory levels would subject us to the risk of inventory obsolescence, while insufficient levels of inventory may negatively affect
relations with customers. For instance, our customers rely upon our ability to meet committed delivery dates, and any disruption in the supply of our services could
result in loss of customers or harm to our ability to attract new customers. Retailers may elect to return any unsold inventory without any penalty, which could
result in a write down for excess inventory. Any of these factors could have a material adverse effect on our business, financial condition or results of operations.
Our
corporate
headquarters,
one
of
our
data
center
and
co-location
facilities
and
our
third-party
customer
service
and
support
facility
are
located
near
known
earthquake
fault
zones,
and
the
occurrence
of
an
earthquake,
tsunami
or
other
catastrophic
disaster
could
damage
our
facilities
or
the
facilities
of
our
contractors,
which
could
cause
us
to
curtail
our
operations.
Increased
energy
costs,
power
outages
and
limited
availability
of
electrical
resources
may
adversely
affect
our
operating
results.
Our corporate headquarters, one of our data center and our customer service call center for Ooma office are located in Northern California, our other
customer service call center operated by our contractor is located in the Philippines, and our contract manufacturer facilities are located near the coast in China. All
of these locations are on the Pacific Rim near known earthquake fault zones and, therefore, are vulnerable to damage from earthquakes and tsunamis. Additionally,
our sole third-party customer service and support facility in the Philippines are located in areas subject to typhoons. We and our contractors are also vulnerable to
other types of disasters, such as power loss, fire, floods, pandemics, cyber-attack, war, political unrest and terrorist attacks and similar events that are beyond our
control. If any disasters were to occur, our ability to operate our business could be seriously impaired, and we may endure system interruptions, reputational harm,
loss of intellectual property, delays in our services development, lengthy interruptions in our services, breaches of data security and loss of critical data, all of which
could harm our future results of operations. In addition, we do not carry earthquake insurance and we may not have adequate insurance to cover our losses resulting
from other disasters or other similar significant business interruptions. Any significant losses not recoverable under our insurance policies could seriously impair
our business and financial condition.
Changes
in
effective
tax
rates,
or
adverse
outcomes
resulting
from
examination
of
our
income
or
other
tax
returns,
could
adversely
affect
our
results
of
operations
and
financial
condition.
Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:
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changes in the valuation of our deferred tax assets and liabilities;
expiration of, or lapses in, the research and development tax credit laws;
expiration or non-utilization of net operating loss carryforwards;
tax effects of share-based compensation;
certain non-deductible expenses as a result of acquisitions;
expansion into new jurisdictions;
potential challenges to and costs related to implementation and ongoing operation of our intercompany arrangements; and
changes in tax laws and regulations and accounting principles, or interpretations or applications thereof.
34
As we expand our operations outside the U.S. and Canada, certain changes to U.S. tax laws, including limitations on t he ability to defer U.S. taxation on
earnings outside of the U.S. until those earnings are repatriated to the U.S. could affect the tax treatment of our foreign earnings. Any changes in our effective tax
rate could adversely affect our results of operatio ns.
We
may
be
unable
to
use
some
or
all
of
our
net
operating
loss
carryforwards,
which
could
materially
and
adversely
affect
our
reported
financial
condition
and
results
of
operations.
As of January 31, 2017, we had federal and state net operating loss carryforwards, or NOLs, of $72.9 million and $57.5 million, respectively, available to
offset future taxable income. If not utilized, both the federal and California NOLs will begin to expire in 2030. We also have federal and California research and
development tax credit carryforwards that will begin to expire in 2030. Realization of these net operating loss and research tax credit carryforwards depends on
future income, and there is a risk that our existing carryforwards could expire unused and be unavailable to offset future income tax liabilities, which could
materially and adversely affect our results of operations.
Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, our ability to utilize net operating loss carryforwards or other tax
attributes, such as research tax credits, in any taxable year may be limited if we experience an “ownership change.” A Section 382 “ownership change” generally
occurs if one or more stockholders or groups of stockholders, who own at least 5% of our stock, increase their ownership by more than 50 percentage points over
their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. We completed a Section 382 analysis through
January 31, 2017 and determined that an ownership change, as defined under Section 382 of the Internal Revenue Code, occurred in prior years. Based on the
analysis, we determined that we had undergone four ownership changes. The first and second ownership changes occurred in April 2005, the third change occurred
in February 2009 and the fourth change occurred in January 2017. NOLs presented account for any limited and potential lost attributes due to the ownership
changes and their respective expiration dates.
No deferred tax assets have been recognized on our balance sheet related to these NOLs, as they are fully reserved by a valuation allowance. If we have
previously had, or have in the future, one or more Section 382 “ownership changes”, or if we do not generate sufficient taxable income, we may not be able to
utilize a material portion of our NOLs, even if we achieve profitability. If we are limited in our ability to use our NOLs in future years in which we have taxable
income, we will pay more taxes than if we were able to fully utilize our NOLs. This could materially and adversely affect our results of operations.
The
estimates
of
market
opportunity
and
forecasts
of
market
growth
included
in
this
report
may
prove
to
be
inaccurate,
and
even
if
the
market
in
which
we
compete
achieves
the
forecasted
growth,
our
business
could
fail
to
grow
at
similar
rates,
if
at
all.
Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to
be accurate. The estimates and forecasts in this report relating to the size and expected growth of our market, including our estimated annual recurring revenue
based on various assumptions, may prove to be inaccurate. Even if the market in which we compete meets the size estimates and growth forecasted in this report,
our business could fail to grow at similar rates, if at all.
Risks Related to Federal, State and International Regulation
Our
services
are
subject
to
regulation
and
future
legislative
or
regulatory
actions
could
adversely
affect
our
business
and
expose
us
to
liability.
Federal
Regulation
Our business is regulated by the Federal Communications Commission, or FCC. As a communications services provider, we are subject to FCC regulations
relating to privacy, disability access, porting of numbers, Federal Universal Service Fund, or USF, contributions, E‑911, and other matters. If we do not comply
with FCC rules and regulations, we could be subject to FCC enforcement actions, fines, loss of licenses, and possibly restrictions on our ability to operate or offer
certain of our services. Any enforcement action by the FCC, which may include a public process, would hurt our reputation in the industry, possibly impair our
ability to sell our services to customers and could have a materially adverse impact on our revenue.
If the FCC classifies interconnected VoIP service as a telecommunications service subject to common carrier regulation, we could be subject to additional
regulation under federal and state telecommunications laws. Compliance with such laws could increase our cost of doing business.
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State
Regulation
We are also subject to state consumer protection laws, as well as U.S. state, municipal and local sales, use, excise, utility user and ad valorem taxes, fees or
surcharges. The imposition of such regulatory obligations or the imposition of additional taxes on our services could increase our cost of doing business and limit
our growth.
International
Regulation
As we expand internationally, we may be subject to telecommunications, consumer protection, data privacy and other laws and regulations in the foreign
countries where we offer our services. For example, we are a provider of internet voice telecommunications services in Canada. As a provider of internet voice
communications services, we are subject to regulation in Canada by the CRTC. We are also subject to Canadian federal privacy laws and provincial consumer
protection legislation.
In addition, our international operations are potentially subject to country-specific governmental regulation and related actions that may increase our cost or
impact our product and service offerings or prevent us from offering or providing our products and services in certain countries. Certain of our services may be
used by customers located in countries where VoIP and other forms of IP communications may be illegal or require special licensing. In countries where local laws
and regulations prohibit (or come to prohibit) the use of our products, users may continue to use our products and services, which could subject us to costly
penalties or governmental action adverse to our business and damaging to our brand and reputation, our international expansion efforts, or our business and
operating results.
The
FCC
continues
to
consider
additional
911
requirements,
including
requiring
us
to
deploy
an
E-911
service
that
automatically
determines
the
location
of
our
customers.
The
adoption
of
such
requirements
could
increase
our
costs
that
could
make
our
service
more
expensive,
decrease
our
profit
margins,
or
both.
The FCC is actively considering additional 911 requirements for interconnected VoIP providers, non-interconnected VoIP providers and texting providers.
The outcome of the FCC’s proceedings cannot be determined at this time and we may or may not be able to comply with any such obligations that may be adopted.
At present, we have no means to automatically identify the physical location of our customers on the internet. Changes to the FCC’s VoIP E‑911 rules may
adversely affect our ability to deliver our service to new and existing customers in all geographic regions or to nomadic customers who move to a location where
emergency calling services compliant with the FCC’s mandates are unavailable. Our compliance with the FCC’s VoIP E-911 order and related costs puts us at a
competitive disadvantage to VoIP service providers who are either not subject to the requirements or have chosen not to comply with the FCC’s mandates. We
cannot guarantee emergency calling service consistent with the VoIP E‑911 order will be available to all of our customers, especially those accessing our services
on a mobile device or from outside of the U.S. The FCC’s current VoIP E-911 order or follow-on orders or clarifications, the impact on our customers due to
service price increases or other factors could have a material adverse effect on our business, financial condition or operating results.
The
FCC
order
reforming
the
system
of
payments
between
regulated
carriers
we
partner
with
to
interface
with
the
public
switched
telephone
network,
or
PSTN,
could
increase
our
costs
of
providing
service,
which
could
result
in
increased
rates
for
service,
making
our
offerings
less
competitive
than
others
in
the
marketplace,
or
reduce
our
profitability.
In 2011, the FCC reformed the system under which regulated providers of telecommunications services compensate each other for various types of traffic,
including VoIP traffic that terminates on the PSTN and applied new call signaling requirements to VoIP and other service providers. The FCC’s rules concerning
charges for transmission of VoIP traffic could result in an increased cost to terminate the traffic, could reduce the availability of services or increase the price of
services from our underlying providers, or could otherwise impact the wholesale telecommunications market in a way that adversely impacts our business. To the
extent that we transmit traffic not subject to a specific intercarrier compensation arrangement and another provider were to assert that the traffic we exchange with
them is subject to higher levels of compensation than what we, or the third parties terminating our traffic to the PSTN, pay today (if any), our termination costs
could increase.
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If
we
cannot
comply
with
the
FCC’s
rules
imposing
call
signaling
requirements
on
VoIP
providers
like
us,
we
may
be
subject
to
fines,
cease
and
desist
orders,
or
other
penalties.
The FCC order reforming the system of compensation for various types of traffic also included rules to address calls for which identifying information is
missing or masked in ways that impede billing for such traffic. The FCC’s rules require, among other things, interconnected VoIP providers like us, who originate
interstate or intrastate traffic destined for the PSTN, to transmit the telephone number associated with the calling party to the next provider in the call path.
Intermediate providers must pass unaltered calling party number or charge number signaling information they receive from other providers to subsequent providers
in the call path. To the extent that we pass traffic that does not have appropriate calling party number or charge number information, we could be subject to fines,
cease and desist orders, or other penalties.
We
may
not
be
able
to
comply
with
FCC
rules
governing
completion
of
calls
to
rural
areas
and
related
reporting
requirements.
On November 8, 2013, the FCC issued a Report and Order and Further Notice of Proposed Rulemaking adopting rules to address problems with rural call
completion and proposing additional requirements. The new rules apply to interconnected VoIP providers like us. The Commission imposed recording, retention,
and reporting requirements to increase its ability to monitor and redress rural call completion problems. These new rules also support the Commission’s efforts to
enforce restrictions on blocking, choking, reducing, or restricting calls. Under the rules, a covered provider must record and retain, for at least nine months,
information about calls attempts to rural areas and must report that data to the FCC on a quarterly basis. If we cannot comply with these rules, we could be subject
to investigation and enforcement action and could be exposed to substantial liability. In addition, complying with these rules may increase our cost of doing
business and may also increase the cost of services we purchase from our underlying telecommunications providers. The FCC also has increased enforcement
activity related to completion of calls to rural customers, and we could be subject to substantial fines and to conduct requirements that could increase our costs if
we are the subject of an enforcement proceeding and cannot demonstrate calls from our customers to rural customers are completed at a satisfactory rate.
The
FCC
has
continued
to
increase
regulation
of
interconnected
VoIP
services
and
may
at
any
time
determine
certain
VoIP
services
are
telecommunications
services
subject
to
traditional
common
carrier
regulation.
The FCC is considering, in various proceedings, issues arising from the transition from traditional copper networks to IP networks. It has, among other
things, launched a series of trials and experiments designed to gather data about this transition, and to support the FCC’s effort to ensure public safety, enable
universal access, and protect consumers and competition. The FCC is also considering whether interconnected VoIP services should be treated as
telecommunications services, which could subject interconnected VoIP services to additional common carrier regulation. The FCC’s efforts may result in additional
regulation of IP network and service providers, which may negatively affect our business.
The
FCC
adopted
rules
concerning
disabilities
access
requirements
that
may
expand
disabilities
access
requirements
to
additional
services
we
offer.
In October 2010, the Twenty-First Century Communications and Video Accessibility Act, or the CVAA, was signed into law. The CVAA and the FCC’s
implementing rules imposes disability access, recordkeeping, certification, and other compliance obligations on interconnected VoIP providers and on providers of
other Advanced Communications services, including non-interconnected VoIP and electronic messaging services. In addition, the CVAA and the FCC’s
implementing rules include complaint filing procedures to address accessibility complaints. These new obligations could increase our expenses, which would have
an adverse effect on our operating results. Failure to comply with these obligations could expose us to FCC enforcement actions and liability.
Reform
of
federal
and
state
Universal
Service
Fund
programs
could
increase
the
cost
of
our
service
to
our
customers,
diminishing
or
eliminating
our
pricing
advantage.
The FCC and a number of states are considering reform or other modifications to Universal Service Fund programs. The way we calculate our contribution
may change if the FCC or certain states engage in reform or adopt other modifications. In April 2012, the FCC released a Further Notice of Proposed Rulemaking
to consider reforms to the manner in which companies, like us, contribute to the federal Universal Service Fund program, and in August 2014, the FCC ordered the
Federal-State Joint Board on Universal Service to make a recommendation on how to reform the universal service contribution rules by April 7, 2015, although the
recommendation has not been released as of the date hereof. In addition, the FCC is considering whether non-interconnected VoIP providers, texting providers, and
broadband providers, among others, should contribute to the USF. We cannot predict the outcome of this proceeding nor its impact on our business at this time.
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Should the FCC or certain states adopt new contribution mechanisms or otherwise modify contribution obligations that increase our contribution burden, we
will eith er need to raise the amount we currently collect from our customers to cover this obligation or absorb the costs, which would reduce our profit margins.
Furthermore, the FCC has ruled that states can require us to contribute to state Universal Service Fund programs. A number of states already require us to
contribute, while others are actively considering extending their programs to include the services we provide. We currently pass through Universal Service Fund
contributions to our customers which may res ult in our services becoming less competitive as compared to those provided by others.
Our
products
must
comply
with
industry
standards,
FCC
regulations,
state,
local,
country‑‑specific
and
international
regulations,
and
changes
may
require
us
to
modify
existing
products
and/or
services.
In addition to reliability and quality standards, the market acceptance of telephony over broadband IP networks is dependent upon the adoption of industry
standards so that products from multiple manufacturers are able to communicate with each other. Our unique hybrid SaaS connectivity platform relies on
communication standards such as SIP, SRTP and network standards such as TCP/IP and UDP to interoperate with other vendors’ equipment. There is currently a
lack of agreement among industry leaders about which standard should be used for a particular application and about the definition of the standards themselves.
These standards, as well as audio and video compression standards, continue to evolve. We also must comply with certain rules and regulations of the FCC
regarding electromagnetic radiation and safety standards established by Underwriters Laboratories, as well as similar regulations and standards applicable in other
countries. Standards are frequently modified or replaced. As standards evolve, we may be required to modify our existing products or develop and support new
versions of our products. We must comply with certain federal, state and local requirements regarding how we interact with our customers, including marketing
practices, consumer protection, privacy, and billing issues, the provision of 9-1-1 emergency service and the quality of service we provide to our customers. The
failure of our products and services to comply, or delays in compliance, with various existing and evolving standards could delay or interrupt volume production of
our VoIP telephony products, subject us to fines or other imposed penalties, or harm the perception and adoption rates of our service, any of which would have a
material adverse effect on our business, financial condition or operating results.
Failure
to
comply
with
communications
and
telemarketing
laws
could
result
in
significant
fines
or
place
significant
restrictions
on
our
business.
We rely on a variety of marketing techniques, including telemarketing and email marketing campaigns. We also record certain telephone calls between our
customers or potential customers and our sales and service representatives for training and quality assurance purposes. These activities are subject to a variety of
state and federal laws such as the Telephone Consumer Protection Act of 1991 (also known as the Federal Do-Not-Call law, or the TCPA), the Telemarketing Sales
Rule, the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (also known as the CAN-SPAM Act) and various U.S. state laws
regarding telemarketing and telephone call recording. These laws are subject to varying interpretations by courts and governmental authorities and often require
subjective interpretation, making it difficult to predict their application and therefore making our compliance efforts more challenging. We cannot be certain our
efforts to comply with these laws, rules and regulations will be successful, or, if they are successful, that the cost of such compliance will not be material to our
business. Changes to these or similar laws, or to their application or interpretation, or new laws, rules and regulations governing our communication and marketing
activities could adversely affect our business. In the event that any of these laws, rules or regulations significantly restricts our business, we may not be able to
develop adequate alternative communication and marketing strategies. Further, non-compliance with these laws, rules and regulations carries significant financial
penalties and the risk of class action litigation, which would adversely affect our financial performance and significantly harm our reputation and our business.
38
We
process,
store,
and
use
personal
information
and
other
data,
whic
h
subjects
us
and
our
customers
to
a
variety
of
evolving
governmental
regulation,
industry
standards
and
self
‑‑regulatory
schemes,
contractual
obligations,
and
other
legal
obligations
related
to
privacy,
which
may
increase
our
costs,
decrease
adoption
and
u
se
of
our
products
and
services,
and
expose
us
to
liability.
There are a number of U.S. federal, state and local, and foreign laws and regulations, as well as contractual obligations and industry standards, that provide
for certain obligations and restrictions with respect to data privacy and security, and the collection, storage, retention, protection, use, processing, transmission,
sharing, disclosure, and protection of personal information and other customer data. The scope of these obligations and restrictions is changing, subject to differing
interpretations, and may be inconsistent among countries or conflict with other rules, and their status remains uncertain. Within the European Union, or EU, strict
laws already apply in connection with the collection, storage, retention, protection, use, processing, transmission, sharing, disclosure, and protection of personal
information and other customer data. The EU model has been replicated in many jurisdictions outside the U.S., including Asia‑Pacific Economic Cooperation
countries. Regulators have the power to impose significant fines on non-compliant organizations. As internet commerce, communication technologies and the
Internet of Things continue to evolve, increasing online service providers’ and network users’ capacity to collect, store, retain, protect, use, process and transmit
large volumes of personal information, increasingly restrictive regulation by federal, state or foreign agencies becomes more likely. For example, a variety of
regulations that would increase restrictions on online service providers in the area of data privacy are currently being proposed, both in the U.S. and in other
jurisdictions, and we believe that the adoption of increasingly restrictive regulation in the field of data privacy and security is likely. In Canada, new anti-spam
legislation prescribing certain rules regarding the use of electronic messages for commercial purposes took effect on July 1, 2014. This new law also contains
provisions that took effect in January 2015, which impose certain restrictions on a service provider’s ability to electronically automatically update or change
software used in a customer’s service without the customer’s consent. Penalties for non-compliance with the new Canadian anti-spam legislation are considerable,
including administrative monetary penalties of up to $10 million and a private right of action. Obligations and restrictions imposed by current and future applicable
laws, regulations, contracts and industry standards may affect our ability to provide all the current features of our small business, home and mobile products and
services and our customers’ ability to use our products and services, and could require us to modify the features and functionality of our products and services.
Such obligations and restrictions may limit our ability to collect, store, process, use, transmit and share data, and to allow our customers to collect, store, retain,
protect, use, process, transmit, share and disclose data with others through our products and services. Compliance with such obligations and restrictions could
increase the cost of our operations. Failure to comply with obligations and restrictions related to data privacy and security could subject us to lawsuits, fines,
criminal penalties, statutory damages, consent decrees, injunctions, adverse publicity and other losses that could harm our business.
Our customers can use our services to store contact and other personal or identifying information, and to process, transmit, receive, store and retrieve a
variety of communications and messages, including, for our Ooma Office customers, information about their own customers and other contacts. In addition,
customers may use our services to transmit and store protected health information, or PHI, that is protected under the Health Insurance Portability and
Accountability Act, or HIPAA. Noncompliance with laws and regulations relating to privacy such as HIPAA, as amended, and the HIPAA regulations, may lead to
significant fines, penalties or liabilities. Our actual compliance, our customers’ perception of our compliance, costs of compliance with such regulations and
customer concerns regarding their own compliance obligations (whether factual or in error) may limit the use and adoption of our service and reduce overall
demand. Furthermore, privacy concerns, including the inability or impracticality of providing advance notice to customers of privacy issues related to the use of our
services, may cause our customers’ customers to resist providing the personal data necessary to allow our customers to use our services effectively. Even the
perception of privacy concerns, whether or not valid, may inhibit market adoption of our service in certain industries.
In addition to government activity, privacy advocacy groups and industry groups have adopted and are considering the adoption of various self-regulatory
standards and codes of conduct that may place additional burdens on us and our customers, which may further reduce demand for our services and harm our
business.
While we try to comply with all applicable data protection laws, regulations, standards, and codes of conduct, as well as our own posted privacy policies and
contractual commitments to the extent possible, any failure by us to protect our users’ privacy and data, including as a result of our systems being compromised by
hacking or other malicious or surreptitious activity, could result in a loss of user confidence in our services and ultimately in a loss of users, which could materially
and adversely affect our business. Our customers may also accidentally disclose their passwords, store them on a mobile device that is lost or stolen, or otherwise
fall prey to attacks outside our system, creating the perception that our systems are not secure against third-party access. Additionally, our third-party contractors in
Canada, China, India, Philippines, New Zealand, Russia, Serbia and Ukraine may have access to customer data. If these or other third-party vendors violate
applicable laws or our policies, such violations may also put our customers’ information at risk and could in turn have a material and adverse effect on our business.
39
Use
or
delivery
of
our
services
may
become
subject
to
new
or
increased
regulatory
requirements,
taxes
or
fees.
The increasing growth and popularity of internet voice communications heighten the risk that governments will regulate or impose new or increased fees or
taxes on internet voice communications services. To the extent the use of our services continues to grow, regulators may be more likely to seek to regulate or
impose new or additional taxes, surcharges or fees on our services. Similarly, advances in technology, such as improvements in locating the geographic origin of
internet voice communications, could cause our services to become subject to additional regulations, fees or taxes, or could require us to invest in or develop new
technologies, which may be costly. In addition, as we continue to expand our user base and offer more services, we may become subject to new regulations, taxes,
surcharges or fees. Increased regulatory requirements, taxes, surcharges or fees on internet voice communications services, which could be assessed by
governments retroactively or prospectively, would substantially increase our costs, and, as a result, our business would suffer. In addition, the tax status of our
services could subject us to conflicting taxation requirements and complexity with regard to the collection and remittance of applicable taxes. Any such additional
taxes could harm our results of operations.
We
are
subject
to
anti-corruption
and
anti-money
laundering
laws
with
respect
to
our
operations
and
non-compliance
with
such
laws
can
subject
us
to
criminal
and/or
civil
liability
and
harm
our
business.
We are subject to the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, and possibly
other anti-bribery and anti‑money laundering laws in countries in which we conduct activities. Anti-corruption laws are interpreted broadly and prohibit companies
and their employees and third-party intermediaries from authorizing, offering, or providing, directly or indirectly, improper payments or benefits to recipients in the
public or private sector. We use third-party representatives for product testing, customs, export, and import matters outside of the U.S. In addition, as we increase
our international sales and business, we may engage with business partners and third party intermediaries to sell our products and services abroad and to obtain
necessary permits, licenses, and other regulatory approvals. We or our third-party intermediaries may have direct or indirect interactions with officials and
employees of government agencies or state-owned or affiliated entities. We can be held liable for the corrupt or other illegal activities of these third-party
intermediaries, our employees, representatives, contractors, partners, and agents, even if we do not explicitly authorize such activities.
Noncompliance with anti-corruption and anti-money laundering laws could subject us to whistleblower complaints, investigations, sanctions, settlements,
prosecution, other enforcement actions, disgorgement of profits, significant fines, damages, other civil and criminal penalties or injunctions, suspension and/or
debarment from contracting with certain persons, the loss of export privileges, reputational harm, adverse media coverage, and other collateral consequences. If any
subpoenas or investigations are launched, or governmental or other sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our
business, results of operations and financial condition could be materially harmed. In addition, responding to any action will likely result in a materially significant
diversion of management’s attention and resources, significant defense costs and other professional fees. Enforcement actions and sanctions could further harm our
business, results of operations, and financial condition.
We
are
subject
to
governmental
export
and
import
controls,
economic
embargoes
and
trade
sanctions
that
could
impair
our
ability
to
expand
our
business
to,
and
compete
in,
international
markets
and
could
subject
us
to
liability
if
we
are
not
in
compliance
with
applicable
laws.
Our products and services are subject to export and import laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs
regulations and various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls. Exports of
our products and services must be made in compliance with these laws and regulations. Obtaining the necessary authorizations, including any required license, for a
particular sale may be time-consuming, is not guaranteed and may result in the delay or loss of sales opportunities. If we fail to comply with these laws and
regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including the possible loss of export or import privileges,
fines which may be imposed on us and responsible employees or managers, and, in extreme cases, the incarceration of responsible employees or managers.
Moreover, U.S. export control laws and economic sanctions programs generally prohibit the export of certain products and services to countries,
governments and persons subject to U.S. economic embargoes and trade sanctions unless a license, approval, or other authorization is obtained from the
U.S. Government. Obtaining such licenses and authorizations may be time‑consuming and is not guaranteed. Any violations of such economic embargoes and trade
sanctions regulations could have negative consequences, including government investigations, penalties and reputational harm.
40
In addition, any changes in our products or services, or changes in applicable export, import, embargo and trade sanctions regulations, may create delays in
the introduction and sale of our products and services in international markets or, in some cases, prevent the export or imp ort of our products and services to
certain countries, governments, or persons altogether. Any change in export, import, embargo, or trade sanctions regulations, shift in the enforcement or scope of
existing regulations, or change in the countries, governm ents, persons or technologies targeted by such regulations, could also result in decreased use of our
products and services, or in our decreased ability to export or sell our products and services to existing or potential customers with international opera tions. Any
decreased use of our products and services or limitation on our ability to export or sell our products and services would likely adversely affect our business.
We
may
be
subject
to
liabilities
on
past
services
for
taxes,
surcharges
and
fees.
We collect and remit state or municipal sales, use, excise, utility user and ad valorem taxes, fees, or surcharges on the charges to our customers for our
services or goods in only those jurisdictions where we believe we have a legal obligation to do so or for business reasons to reduce risk. In addition, we have
historically substantially complied with the collection of certain California sales/use taxes and financial contributions to the California 9-1-1 system (the
Emergency Telephone Users Surcharge) and federal USF. With limited exception, we believe we are generally not subject to taxes, fees, or surcharges imposed by
other state and municipal jurisdictions or that such taxes, fees, or surcharges do not apply to our service. There is uncertainty as to what constitutes sufficient “in
state presence” for a state or local municipality to levy taxes, fees and surcharges for sales made over the internet. Taxing authorities have in the past, and likely
will in the future, challenge our position on the lack of enforceability of such taxes, fees and surcharges where we have no relevant presence, and audit our business
and operations with respect to sales, use, telecommunications and other taxes, which could result in increased tax liabilities for us or our customers, which could
materially and adversely affect our results of operations and our relationships with our customers. We have seen an increase recently in the number and frequency
of such state and local tax authority challenges, audits and related demands, which we are defending against vigorously. Complaints were filed by the County of
Berks, Pennsylvania and the State of Alabama on January 21, 2016 and November 12, 2015, respectively, alleging that we are subject to their taxes, fees and
surcharges and have failed to remit the required 911 charges. In addition, on November 28, 2016, Ooma filed a complaint against the Oregon Department of
Revenue contesting a tax assessment against the Company for the Oregon Emergency Communications Tax, to which the Department of Revenue alleges we are
subject.
Finally, the application of other indirect taxes (such as sales and use tax, value added tax, or VAT, goods and services tax, business tax, and gross receipt
tax) to e-commerce businesses, such as ours, is a complex and evolving area. In November 2007, the U.S. federal government enacted legislation extending the
moratorium on states and other local authorities imposing access or discriminatory taxes on the internet through November 2014. This moratorium does not
prohibit federal, state, or local authorities from collecting taxes on our income or from collecting taxes due under existing tax rules. The application of existing,
new, or future laws, whether in the U.S. or internationally, could have adverse effects on our business, prospects, and results of operations. There have been, and
will continue to be, substantial ongoing costs associated with complying with the various indirect tax requirements in the numerous markets in which we conduct or
will conduct business.
Risks Related to Being a Public Company
If
we
fail
to
develop
and
maintain
an
effective
system
of
internal
control
over
financial
reporting,
we
may
not
be
able
to
accurately
report
our
financial
results
in
a
timely
manner,
which
may
adversely
affect
investor
confidence
in
our
company
and,
as
a
result,
the
value
of
our
common
stock.
We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our
internal control over financial reporting as of January 31, 2017. This assessment includes disclosure of any material weaknesses identified by our management in
our internal control over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting
such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely
basis.
If we identify one or more material weaknesses in our internal control over financial reporting in the future, we will be unable to assert that our internal
controls are effective. If we are unable to conclude that our internal control over financial reporting is effective, or if we are required to restate our financial
statements as a result of ineffective internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial
reports, which would cause the price of our common stock to decline.
41
We are required to disclose material changes made in our internal control and procedures on a quarterly basis. To comply with the requirements of being a
public company, we have undertaken various actions, such a s implementing new internal controls and procedures and hiring of an internal audit firm. Our
independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting pursuant to
Section 404 of the Sarbanes-Oxley Act until the later of the year following our first annual report required to be filed with SEC, or the date we are no longer an
“emerging growth company,” as defined by the Jumpstart Our Business Startups Act (“JOBS Act” ). At such time, our independent registered public accounting
firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation
efforts may not enable us to avoid a material weakness in the future.
Our
actual
operating
results
may
differ
significantly
from
our
guidance.
From time to time, we plan to release guidance in our quarterly earnings conference calls, quarterly earnings releases, or otherwise, regarding our future
performance that represents our management’s estimates as of the date of release. This guidance, which will include forward‑looking statements, will be based on
projections prepared by our management. These projections will not be prepared with a view toward compliance with published guidelines of the American
Institute of Certified Public Accountants, and neither our registered public accountants nor any other independent expert or outside party compiles or examines the
projections. Accordingly, no such person will express any opinion or any other form of assurance with respect to the projections.
Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant
business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect
to future business decisions, some of which will change. We intend to state possible outcomes as high and low ranges which are intended to provide a sensitivity
analysis as variables are changed but are not intended to imply that actual results could not fall outside of the suggested ranges. The principal reason that we release
guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. We do not accept any responsibility for any
projections or reports published by any such third parties.
Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the guidance furnished by us will not
materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of
release. Actual results may vary from our guidance and the variations may be material. In light of the foregoing, investors are urged not to rely upon our guidance
in making an investment decision regarding our common stock.
Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in this “Risk Factors” section
in this report could result in the actual operating results being different from our guidance, and the differences may be adverse and material.
The
requirements
of
being
a
public
company
may
strain
our
resources
and
divert
management’s
attention.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd‑Frank Wall Street Reform and
Consumer Protection Act, or the Dodd-Frank Act, the listing requirements of the New York Stock Exchange and other applicable securities rules and regulations.
Compliance with these rules and regulations has increased and will continue to increase our legal and financial compliance costs, and has made and will continue to
make some activities more difficult, time-consuming or costly, and increase demand on our systems and resources, particularly after we are no longer an “emerging
growth company.” The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and results of
operations. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial
reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard,
significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could
harm our business and results of operations. Although we have already hired additional employees to comply with these requirements, we may need to hire more
employees in the future or engage outside consultants, which will increase our costs and expenses.
42
The expenses incurred by public companies for reporting and corporate governance purposes have increased dramatically over the past several years. We
expect these rules and regulations to increase our legal and financial compliance costs substantially and to make some activities more time consuming and costly.
However, for as long as we remain an “emerging growth company” as defined in the JOBS Act, we will take advantage of certain exemptions from various
reporting requirements applicable to other public companies that are not “emerging growth companies,” including, but not limited to, exemption from the
requirement to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive
compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory v ote on executive
compensation and stockholder approval of any golden parachute payments not previously approved. We will take advantage of these reporting exemptions until we
are no longer an “emerging growth company.”
We will cease to be an “emerging growth company” upon the earliest of (i) January 31, 2021, (ii) the last day of the first fiscal year in which our annual
gross revenue exceeds $1.0 billion, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt
securities or (iv) as of the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the
second quarter of that fiscal year.
As a result of filings required of a public company, our business and financial condition has become more visible, which we believe may result in more
litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could be materially and adversely
affected, even if the claims do not result in litigation or are resolved in our favor. These claims, and the time and resources necessary to resolve them, could divert
the resources of our management and materially and adversely affect our business and results of operations.
We
are
an
“emerging
growth
company,”
and
we
cannot
be
certain
if
the
reduced
disclosure
requirements
applicable
to
emerging
growth
companies
will
make
our
common
stock
less
attractive
to
investors.
We are an “emerging growth company,” as defined in the JOBS Act, and are taking advantage of certain exemptions from various reporting requirements
that are applicable to public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor
attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and
proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden
parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions.
If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and our stock price may be
more volatile and may decline.
Risks Related to Owning Our Common Stock
Sales
of
a
substantial
number
of
shares
of
our
common
stock
in
the
public
market,
or
the
perception
these
sales
might
occur,
could
cause
our
stock
price
to
decline.
Sales of a substantial number of shares of our common stock in the public market, or the perception these sales might occur, could cause the market price of
our common stock to decline and could impair our ability to raise capital through the sale of additional equity securities. At January 31, 2017, we had 17,995,555
shares of common stock outstanding of which 13,227,717 shares were freely tradable.
In addition, we have registered shares of common stock which we may issue under our 2015 Stock Plan and 2015 Employee Stock Purchase Plan and they
may be sold freely in the public market upon issuance.
We may issue our shares of common stock or securities convertible into our common stock from time to time in connection with a financing, acquisition,
and investments or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the trading price of our common stock to
decline.
43
Worldview
Technology
Partners
and
its
affiliates
own
a
significant
portion
of
our
stock
and
may
limit
your
ability
to
influence
corporate
matters.
As of January 31, 2017, Worldview Technology Partners beneficially owned approximately 19% of our outstanding voting securities. This significant
concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in
companies with controlling stockholders. Also, Worldview Technology Partners will be able to control our management and affairs and matters requiring
stockholder approval, including the election of directors and the approval of significant corporate transactions, such as mergers, consolidations or the sale of
substantially all of our assets. Consequently, this concentration of ownership may have the effect of delaying or preventing a change of control, including a merger,
consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control,
even if that change of control would benefit our other stockholders. In March 2017, Worldview Technology Partners sold an aggregate of 3,290,483 shares of our
common stock in a secondary offering and thus owned less than 1% of our outstanding voting securities after this offering.
If
securities
analysts
do
not
publish
or
cease
publishing
research
or
reports
about
our
business
or
if
they
publish
negative
evaluations
of
our
stock,
the
price
of
our
stock
could
decline.
We expect that the trading price for our common stock will be affected by any research or reports that industry or financial analysts publish about us or our
business. If one or more of the analysts who elect to cover us downgrade their evaluations of our stock or provide more favorable relative recommendations about
our competitors, the price of our stock could decline. If one or more of these analysts cease coverage of our company, our stock may lose visibility in the market,
which in turn could cause its price to decline.
We
have
never
paid
cash
dividends
and
do
not
anticipate
paying
any
cash
dividends
on
our
common
stock.
We do not anticipate paying any cash dividends on our common stock in the foreseeable future. If we do not pay cash dividends, you would receive a return
on your investment in our common stock only if the market price of our common stock increases before you sell your shares. Furthermore, we are party to credit
agreements which contain negative covenants that limit our ability to pay dividends.
Our
charter
documents
and
Delaware
law
could
prevent
a
takeover
that
stockholders
consider
favorable
and
could
also
reduce
the
market
price
of
our
stock.
Our Amended and Restated Certificate of Incorporation and our Amended and Restated Bylaws contain provisions that could delay or prevent a change in
control of our company. These provisions could also make it more difficult for stockholders to elect directors and take other corporate actions. These provisions
include:
•
•
•
•
•
•
•
providing for a classified board of directors with staggered, three year terms;
authorizing the issuance of “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares to
discourage a takeover attempt;
prohibiting cumulative voting in the election of directors;
providing that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum;
prohibiting stockholder action by written consent;
limiting the persons who may call special meetings of stockholders; and
requiring advance notification of stockholder nominations and proposals.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for
stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, the provisions of
Section 203 of the Delaware General Corporate Law govern us. These provisions may prohibit large stockholders, in particular those owning 15% or more of our
outstanding voting stock, from merging or combining with us for a certain period of time without the consent of our board of directors.
These and other provisions in our amended and restated certificate of incorporation and our bylaws and under Delaware law could discourage potential
takeover attempts, reduce the price investors might be willing to pay in the future for shares of our common stock and result in the market price of our common
stock being lower than it would be without these provisions.
44
Our
amended
and
restated
certificate
of
incorporation
provides
that
the
Court
of
Chancery
of
the
State
of
Delaware
will
be
the
exclusive
forum
for
substantially
all
disputes
between
us
and
our
stockholders,
which
could
limit
our
stockholders’
ability
to
obtain
a
favorable
judicial
forum
for
disputes
with
us
or
our
directors,
officers
or
other
employees.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the sole and exclusive forum for any
derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty owed by any of our directors, officers or other employees to
us or our stockholders, any action asserting a claim against us arising pursuant to any provisions of the General Corporation Law of the State of Delaware, our
amended and restated certificate of incorporation or our amended and restated bylaws, or any action asserting a claim against us that is governed by the internal
affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or
our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. If a court were to find
the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur
additional costs associated with resolving such action in other jurisdictions.
The
market
price
of
our
common
stock
is
likely
to
be
volatile
and
could
fluctuate
or
decline,
resulting
in
a
substantial
loss
of
your
investment.
The market price of our common stock could be subject to wide fluctuations in response to, among other things, the factors described in this “Risk Factors”
section or otherwise, and other factors beyond our control, such as fluctuations in the valuations of companies perceived by investors to be comparable to us.
Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity
securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad
market fluctuations, as well as general economic, systemic, political and market conditions, such as recessions, interest rate changes or international currency
fluctuations, may negatively affect the market price of our common stock.
Factors that could cause the market price of our common stock to fluctuate significantly include:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our operating and financial performance and prospects and the performance of other similar companies;
our quarterly or annual earnings or those of other companies in our industry;
conditions that impact demand for our services;
the public’s reaction to our press releases, financial guidance, and other public announcements, and filings with the Securities and Exchange
Commission, or SEC;
changes in earnings estimates or our failure to meet earnings estimates or the expectations of investors,
failure of securities analysts to cover or track our common stock;
market and industry perception of our success, or lack thereof, in pursuing our growth strategy;
strategic actions by us or our competitors, such as acquisitions or restructurings;
changes in government and other regulations;
changes in accounting standards, policies, guidance, interpretations or principles;
arrival and departure of key personnel;
the number of shares to be publicly traded after the lock-up agreements expire;
sales of common stock by us, our investors or members of our management team; and
changes in general market, economic, and political conditions in the U.S. and global economies or financial markets, including those resulting from
natural disasters, telecommunications failure, cyber-attack, civil unrest in various parts of the world, acts of war, terrorist attacks, or other
catastrophic events.
In the past, many companies that have experienced volatility in the market price of their stock have become subject to securities class action litigation. We
may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from
other business concerns, which could harm our business.
45
We
are
currently
subject
to
securities
class
action
litigation
in
connection
with
our
initial
public
offering
and
may
be
subject
to
similar
litigation
in
the
future.
If
the
outcome
of
this
litigation
is
unfavorable,
i
t
could
have
a
material
adverse
effect
on
our
financial
condition,
results
of
operations
and
cash
flows.
The Company, its directors, and certain officers have been named as defendants in a consolidated securities class actions (“the Securities Litigation”). See
Item 3 (“Legal Proceedings”) for a detailed description of the Securities Litigation and the allegations currently made therein. The Company is vigorously
defending itself against the allegations in the Securities Litigation. However, as with all litigation, the Company cannot predict the outcome of the proceedings or
estimate the losses that it may incur in connection with the Securities Litigation. The Company will, however, incur certain costs and fees associated with its
defense, including costs related to its obligation to indemnify certain parties named in the action. While the Company carries insurance that may offset some of the
costs associated with the Securities Litigation, the Company may incur substantial costs, expenses and burdens not covered by insurance. In addition, the pendency
of the Securities Litigation may cause burdens and distractions to the Company’s management. Any adverse judgments, settlements, or consequences of the
Securities Litigation could have a material, adverse effect on the Company’s business and financial condition.
In the future, especially following periods of volatility in the market price of our shares, other purported class action or derivative complaints may be filed
against us. The outcome of the pending and potential future litigation is difficult to predict and quantify and the defense of such claims or actions can be costly. In
addition to diverting financial and management resources and general business disruption, we may suffer from adverse publicity that could harm our brand or
reputation, regardless of whether the allegations are valid or whether we are ultimately held liable. A judgment or settlement that is not covered by or is
significantly in excess of our insurance coverage for any claims, or our obligations to indemnify the underwriters and the individual defendants, could materially
and adversely affect our financial condition, results of operations and cash flows.
46
ITEM 1B. UNRESOLVE D STAFF COMMENTS
None
ITEM 2. PROPERTIES
Our corporate headquarters are located in Palo Alto, California and consist of approximately 18,000 square feet of office space pursuant to a lease
agreement that expires November 30, 2017. We lease additional office space in Palo Alto consisting of approximately 2,379 square feet pursuant to a lease
agreement that expires April 30, 2017 and a multi-use industrial space consisting of 13,800 square feet pursuant to a lease agreement that expires February 28,
2018. Outside of Palo Alto, we lease warehouse and office space totaling 16,200 square feet in Newark, California, and pursuant to co-location agreements, we
lease space from third-party datacenter hosting facilities in Northern California and Virginia that support our cloud infrastructure. We believe that we will be able
to obtain additional space at other locations at commercially reasonable terms to support our continuing expansion.
ITEM 3. LEGAL PROCEEDINGS
Oregon
Litigation
On August 30, 2016 the Oregon Department of Revenue (the “DOR”) issued tax assessments against the Company for the Oregon Emergency
Communications Tax (the “Tax”), which the DOR alleges Ooma should have collected from its subscribers in Oregon and remitted to the DOR during the period
starting on January 1, 2013 and ending on March 31, 2016 (collectively, the “Assessments”). On November 28, 2016 the Company filed a complaint in the Oregon
Tax Court, asserting that the Assessments against Ooma are in violation of applicable Oregon law and are barred by the United States Constitution, and asking the
Oregon Tax Court to abate the Assessments in full (the “Complaint”, and such dispute, the “Oregon Tax Litigation”). On February 10, 2016 the DOR filed an
answer to the Complaint. The Company believes that the Commerce Clause of the United States Constitution bars the application of the Tax to the Company, since
the Company has no employees, property or other indicia of a “substantial nexus” with the State of Oregon, and therefore the application of the Tax against Ooma
and the Assessments are barred by the United States Constitution. The Company will continue to vigorously litigate the Complaint in pursuit of the full abatement
of the Assessments. However, litigation is unpredictable and there can be no assurances that we will obtain a favorable final outcome or that we will be able to
avoid unfavorable preliminary or interim rulings in the course of litigation that may significantly add to the expense of our defense and could result in substantial
costs and diversion of resources. Based on our current knowledge, we have determined that the amount of any material loss or range of material losses that is
reasonably possible to result from the Oregon Tax Litigation is not reasonably estimable.
Deep
Green
Wireless
Litigation
On June 8, 2016, plaintiff Deep Green Wireless LLC filed a complaint in the U.S. District Court for the Eastern District of Texas against Ooma, Inc.,
alleging infringement of U.S. Patent No. RE42,714 (the “Deep Green Wireless Litigation”). The complaint seeks unspecified monetary damages, costs, attorneys’
fees and other appropriate relief. On July 29, 2016 we filed our answer, affirmative defenses and counterclaims, on August 2, 2016 we filed a motion to transfer the
case to the Northern District of California, and on February 21, 2017 magistrate judge Roy S. Payne granted our motion to transfer the case. Based upon our
investigation, we do not believe that our products infringe any valid or enforceable claim of the aforementioned patent, and we plan to continue vigorously
defending against the plaintiff’s claim. However, litigation is unpredictable and there can be no assurances that we will obtain a favorable final outcome or that we
will be able to avoid unfavorable preliminary or interim rulings in the course of litigation that may significantly add to the expense of our defense and could result
in substantial costs and diversion of resources. Based on our current knowledge, we have determined that the amount of any material loss or range of any losses that
is reasonably possible to result from the Deep Green Wireless Litigation is not reasonably estimable.
47
Securities
Litigation
On January 14, 2016, Michael Barnett filed a purported stockholder class action in the San Mateo County Superior Court of the State of California (Case
No. CIV536959) against Ooma, certain of its officers and directors, and certain of the underwriters of our Initial Public Offering on July 17, 2015 (the “IPO”).
Since that time two additional purported class actions making substantially the same allegations against the same defendants were filed, and on May 18, 2016 all
three complaints were combined into a “consolidated complaint” filed in the same court (the “Securities Litigation”). The consolidated complaint purports to be
brought on behalf of all persons who purchased shares of common stock in our IPO in reliance upon the Registration Statement and Prospectus we filed with the
Securities and Exchange Commission (the “SEC”). The consolidated complaint alleges that Ooma and the other defendants violated the Securities Act of 1933, as
amended (the “Securities Act”) by issuing the Registration Statement and Prospectus, which the plaintiffs allege contained material misstatements and omissions in
violation of Sections 11, 12(a)(2) and 15 of the Securities Act. The plaintiffs seek class certification, compensatory damages, attorneys’ fees and costs, rescission or
a rescissory measure of damages, equitable and/or injunctive relief, and such other relief as the court may deem proper. On July 1, 2016 Ooma filed its answer to
the complaint, and on August 26, 2016 Ooma filed a motion for judgment on the pleadings. Ooma believes that the plaintiffs’ claims are without merit and we are
vigorously defending against the Securities Litigation and will continue to do so. However, litigation is unpredictable and there can be no assurances that we will
obtain a favorable final outcome or that we will be able to avoid unfavorable preliminary or interim rulings in the course of litigation that may significantly add to
the expense of our defense and could result in substantial costs and diversion of resources. Based on our current knowledge, we have determined that the amount
of any material loss or range of any losses that is reasonably possible to result from the Securities Litigation is not reasonably estimable.
Berks
County
Litigation
On January 21, 2016 the County of Berks, Pennsylvania filed a lawsuit in the Berks County Court of Common Pleas naming the Company and 113 other
telephone service providers as defendants (the “Berks County Litigation”), alleging breach of fiduciary duty, fraud, and negligent misrepresentation in connection
with alleged violations of the Pennsylvania 911 Emergency Communication Services Act, 35 Pa.C.S.A. §5301 et seq. (“PA 911 Act”) for failure to collect from
subscribers and remit certain fees pursuant to the PA 911 Act. The plaintiff seeks a declaratory judgment that we must comply with the PA 911 Act, compensatory
and punitive damages, attorneys’ fees and costs, equitable and/or injunctive relief and such other relief as the court may deem proper. On May 17, 2016 the court
issued an order overruling the defendants’ joint preliminary objections, which are, in essence, the Pennsylvania equivalent of a motion to dismiss. Notwithstanding
such adverse order, the Company believes that the Commerce Clause of the United States Constitution bars the application of the PA 911 Act to the Company,
since the Company has no employees, property or other indicia of a “substantial nexus” with the State of Pennsylvania, and therefore the plaintiff’s claims are
without merit. The Company intends to continue vigorously defending this lawsuit. However, litigation is unpredictable and there can be no assurances that we will
obtain a favorable final outcome or that we will be able to avoid unfavorable preliminary or interim rulings in the course of litigation that may significantly add to
the expense of our defense and could result in substantial costs and diversion of resources. Based on our current knowledge, we have determined that the amount of
any material loss or range of material losses that is reasonably possible to result from the Berks County Litigation is not reasonably estimable.
Alabama
Litigation
On November 12, 2015 the Alabama Statewide 9-1-1 Board filed a lawsuit in the Circuit Court of Montgomery, Alabama against the Company (the
“Alabama Litigation”). The lawsuit alleges that the Company has failed to collect from its subscribers and remit certain fees pursuant to the Alabama Emergency
Telephone Services Act (the “AETS Act”). The plaintiff seeks a declaratory judgment that we must comply with the AETS Act, compensatory and punitive
damages, attorneys’ fees and costs, equitable and/or injunctive relief and such other relief as the court may deem proper. The Company believes that the
Commerce Clause of the United States Constitution bars the application of the AETS Act to the Company, since the Company has no employees, property or other
indicia of a “substantial nexus” with the State of Alabama, and therefore the plaintiff’s claims are without merit. On January 31, 2017 the Alabama Litigation was
dismissed with prejudice pursuant to a confidential settlement agreement between the parties, without resulting in a material loss to the Company.
In addition to the litigation matters described above, from time to time, we may be involved in a variety of other claims, lawsuits, investigations, and
proceedings relating to contractual disputes, intellectual property rights, employment matters, regulatory compliance matters, and other litigation matters relating to
various claims that arise in the normal course of business. Defending such proceedings is costly and can impose a significant burden on management and
employees, we may receive unfavorable preliminary or interim rulings in the course of litigation, and there can be no assurances that favorable final outcomes will
be obtained.
48
We determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estim
ated. We assess our potential liability by analyzing specific litigation and regulatory matters using reasonably available information. We develop our views on
estimated losses in consultation with inside and outside counsel, which involves a subjective an alysis of potential results and outcomes, assuming various
combinations of appropriate litigation and settlement strategies. Legal fees are expensed in the period in which they are incurred.
Other than the Oregon Tax litigation, Deep Green Wireless Litigation, Securities Litigation and the Berks County Litigation we currently are not a party to
any material litigation or other proceedings, and as of January 31, 2017, we did not have any material accrued liabilities recorded for loss contingencies in the
condensed consolidated financial statements.
ITEM 4. MINE SAFETY DISCLOSURES
None
49
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market
Information
Our common stock has been trading on the New York Stock Exchange, or the NYSE under the symbol “OOMA” since July 17, 2015.
Price
Range
of
Our
Common
Stock
The following table sets forth for the periods indicated the high and low sales prices per share of our common stock as quoted on the NYSE:
Fiscal Year Ended January 31, 2017
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Fiscal Year Ended January 31, 2016
Fourth Quarter
Third Quarter
Second Quarter (from July 17, 2015)
Holders
of
Record
High
Low
$
$
$
$
$
$
$
9.90 $
9.92 $
8.67 $
7.30 $
8.45 $
11.45 $
12.44 $
8.40
8.03
6.22
5.43
5.66
6.18
9.84
As of January 31, 2017, there were approximately 107 holders of record of our common stock. Because many of our shares of common stock are held by
brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Dividend
Policy
We have never declared or paid, and do not anticipate declaring or paying in the foreseeable future, any cash dividends on our capital stock. Any future
determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on our financial
condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant.
50
Stoc
k
Price
Performance
Graph
This
performance
graph
shall
not
be
deemed
“filed”
for
purposes
of
Section
18
of
the
Exchange
Act,
or
incorporated
by
reference
into
any
filing
of
Ooma,
Inc.
under
the
Securities
Act
of
1933,
as
amended,
or
the
Securities
Act,
except
as
shall
be
expressly
set
forth
by
specific
reference
in
such
filing.
The
stock
price
performance
on
this
performance
graph
is
not
necessarily
indicative
of
future
stock
price
performance.
Recent
Sales
of
Unregistered
Securities
During the year ended January 31, 2017, we did not issue equity securities that were not registered under the Securities Act of 1933.
Use
of
Proceeds
from
Public
Offering
of
Common
Stock
On July 17, 2015, our registration statement on Form S-1 was declared effective by the Securities and Exchange Commission for the IPO of our common
stock. In connection with the IPO, we issued 5,000,000 shares of our common stock at an offering price of $13.00 per share for aggregate net proceeds of $56.9
million, after deducting the underwriters’ discounts, commissions and offering costs. We used approximately $10.3 million of the proceeds to repay outstanding
debt and $0.6 million to cash settle a warrant to purchase 70,287 shares of our convertible preferred stock. The remaining proceeds have been invested in money
market funds and short-term marketable securities as of January 31, 2017 .
51
ITEM 6. SELECTED CONSOL IDATED FINANCIAL DATA
The selected consolidated statements of operations data for the years ended January 31, 2017, 2016 and 2015 and the consolidated balance sheet data as of
January 31, 2017 and 2016 are derived from our audited consolidated financial statements included elsewhere in this report and should be read together with
“Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and Item 8, “Consolidated financial statements and Supplementary
Data”. We derived selected consolidated statement of operations data for the years ended January 31, 2014 and 2013 and the consolidated balance sheet data as of
January 31, 2015 and 2014 from audited financials not included in this report. Our historical results are not necessarily indicative of our results in any future period.
Consolidated Statements of Operations Data:
Revenue:
Subscription and services
Product and other
Total revenue
Cost of revenue:
Subscription and services
Product and other
Total cost of revenue (1)
Gross profit
Operating expenses:
Sales and marketing (1)
Research and development (1)
General and administrative (1)
Total operating expenses
Loss from operations
Other income (expense):
Interest income (expense), net
Change in fair value of warrants
Other expense, net
Loss before income taxes
Income tax benefit
Net loss
Net loss per share of common stock:
Basic and diluted
Weighted-average number of shares used in per share
amounts:
Basic and diluted
2017
Fiscal Year Ended January 31,
2016
2015
(in thousands, except share and per share data)
2014
2013
$
91,127 $
13,397
104,524
29,650
15,545
45,195
59,329
33,768
24,239
14,598
72,605
(13,276)
370
—
(43)
(12,949)
—
$
(12,949) $
73,064 $
15,711
88,775
25,715
16,150
41,865
46,910
28,534
18,502
12,561
59,597
(12,687)
(881)
(442)
(42)
(14,052)
—
(14,052) $
53,828 $
18,373
72,201
35,377 $
18,288
53,665
18,284
18,440
36,724
35,477
22,276
12,290
6,650
41,216
(5,739)
(323)
(795)
(55)
(6,912)
502
(6,410) $
15,894
15,573
31,467
22,198
13,192
7,888
2,573
23,653
(1,455)
(269)
(250)
(26)
(2,000)
—
(2,000) $
24,107
15,126
39,233
13,899
11,590
25,489
13,744
7,471
7,023
2,508
17,002
(3,258)
(550)
153
(8)
(3,663)
—
(3,663)
$
(0.74) $
(1.38) $
(2.81) $
(1.18) $
(3.54)
17,490,448
10,173,095
2,284,241
1,688,846
1,035,957
(1) Stock-based compensation and related taxes are included in our results of operations as follows (in thousands):
Total cost of revenue
Sales and marketing
Research and development
General and administrative
Total
2017
Fiscal Year Ended January 31,
2015
2014
2016
2013
$
$
1,038 $
1,455
3,619
3,754
9,866 $
437 $
611
1,683
1,922
4,653 $
36 $
41
169
180
426 $
7 $
6
26
33
72 $
11
1
50
111
173
52
Consolidated Balance Sheet Data:
Cash and cash equivalents
Short-term investments
Working capital (deficit)
Total assets
Convertible preferred stock warrant liability, current and
non-current
Debt and lease obligations, current and non-current
Deferred revenue, current and non-current
Total liabilities
Convertible preferred stock (1)
Total stockholders' equity (deficit)
2017
2016
2015
2014
As of January 31,
(in thousands)
$
3,990 $
49,211
34,299
73,338
—
—
16,030
33,518
—
39,820
27,413 $
27,991
35,891
76,536
—
632
15,072
33,646
—
42,890
9,133 $
—
(5,863)
31,277
1,217
11,960
14,383
42,785
33,637
(45,145)
6,364
—
(6,959)
17,716
361
2,415
10,356
24,034
33,541
(39,859)
(1) All of the outstanding convertible preferred stock was converted to common stock following the close of the Company’s IPO in July 2015.
53
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS O F FINANCIAL CONDITION AND RESULT OF OPERATION
The
following
discussion
and
analysis
of
our
financial
condition
and
results
of
operations
should
be
read
in
conjunction
with
our
consolidated
financial
statements
and
the
related
notes
to
those
statements
included
elsewhere
in
this
Annual
Report
on
Form
10-K.
In
addition
to
historical
financial
information,
the
following
discussion
and
analysis
contains
forward-looking
statements
that
involve
risks,
uncertainties
and
assumptions.
Our
actual
results
could
differ
materially
from
those
anticipated
in
these
forward-looking
statements
as
a
result
of
many
factors,
including
those
discussed
under
“Risk
Factors”
and
elsewhere
in
this
Annual
Report
on
Form
10-K.
The
last
day
of
our
fiscal
year
is
January
31,
and
we
refer
to
our
fiscal
year
ended
January
31,
2015
as
fiscal
2015,
our
fiscal
year
ended
January
31,
2016
as
fiscal
2016,
and
our
fiscal
year
ended
January
31,
2017
as
fiscal
2017.
All
other
references
to
years
are
references
to
calendar
years.
Overview
We are a leading provider of innovative communications solutions and other connected services to small business, home, and mobile users. Our unique
hybrid SaaS platform, consisting of our proprietary cloud, on-premise appliances, mobile applications, and end-point devices, provides the connectivity and
functionality that power our solutions. Our communications solutions deliver our proprietary HD voice quality, advanced features, and integration with mobile
devices, at extremely competitive pricing and value. Our platform helps create smart workplaces and homes by providing value-added communications and other
connected services and by integrating end-point devices to enable the Internet of Things. Our platform and solutions have the power to provide communications,
productivity, automation, monitoring, safety, security, and networking infrastructure applications to our users.
We drive the adoption of our platform by providing communications solutions to the large and growing markets for small business, home, and mobile users
and then accelerate growth by offering new and innovative connected services to our user base. Our small business and home customers adopt our platform by
making a one-time purchase of one of our on-premise appliances, connecting the appliance to the internet and activating services, for which they primarily pay on a
monthly basis. Our communications solutions are distinguished by the combination of our proprietary HD voice quality, exceptional value, an advanced feature set
enhanced by a number of end-point devices and integration with mobile devices. We believe we have achieved high levels of customer retention and loyalty by
delivering exceptional quality and customer satisfaction.
We generate our subscription and services revenue by selling subscriptions and other services for our communications solutions, as well as other connected
services. We have experienced significant revenue and user growth in recent periods, growing our core users from approximately 645,000 as of January 31, 2015 to
approximately 933,000 as of January 31, 2017, representing a compound annual growth rate of approximately 20%. We define core users as the number of home
user accounts, office user extensions and standalone Business Promoter accounts, which means Business Promoter users who do not subscribe to any other services
from us. We derive our subscription and services revenue primarily from recurring monthly and annual payments related to our services, such as Ooma Premier,
Ooma Office, international calling plans and other subscriptions. Our subscription and services revenue also includes revenue generated from payments for
qualified lead generation, prepaid minutes for international calling and directory assistance, and the display of advertisements through our Talkatone mobile app.
We believe that our recurring subscription and services revenue is reliable and predictable, and provides us with visibility into our near-term results. Our
subscription and services revenue has increased as a percentage of our total revenue in recent periods, from 75% for fiscal 2015 to 87% for fiscal 2017. We expect
our subscription and services revenue to continue to increase for the foreseeable future as we add new users, retain a high proportion of our existing user base and
introduce subscriptions to new connected services.
We generate our product and other revenue from the sale of our on-premise appliances and our end-point devices, as well as from porting fees to enable
customers to transfer their existing phone numbers to the Ooma Office or Telo. Our product and other revenue has decreased as a percentage of our total revenue in
recent periods, from 25% for fiscal 2015 to 13% for fiscal 2017. We expect our product and other revenue to remain relatively flat on a year-over-year basis.
We believe that our integrated multi-channel sales and marketing strategy enables us to effectively grow our sales at a relatively low cost of customer
acquisition. Our sales and marketing strategy utilizes multiple retail and online channels, our direct sales organization, and select reseller partners. We support our
retail, online and direct sales channels through a combination of television, print and online advertising that builds brand awareness amongst small business, home
and mobile customers. We maintain retail channel relationships with online and traditional retailers in the U.S. and Canada, including national retailers such as
Amazon.com, Best Buy, Costco.com, Staples, OfficeMax, and Walmart and various regional retailers.
We have experienced significant growth in recent periods, with total revenues of $104.5 million, $88.8 million and $72.2 million in fiscal 2017, 2016 and
2015, respectively, generating year-over-year increases of 18% and 23%, respectively. We have made significant investments in research and development, brand
marketing and channel development and incurred net losses of $12.9 million, $14.1 million and $6.4 million in fiscal 2017, 2016 and 2015, respectively.
54
Key Factors Affecting Our Performance
Our historical financial performance and key business metrics have been, and we expect that our financial performance and key business metrics in the
future will be, primarily driven by the following factors.
•
•
•
•
Core
user
growth.
Our core user growth is a key indicator of our market penetration, the growth of our business and our anticipated future
subscription and services revenue.
Low
core
user
churn
. We believe that maintaining our current low core user churn is an important factor in our ability to continue to improve our
financial performance and is a distinguishing advantage over many of our competitors. We focus on providing high-quality services and support to
our users so they are motivated to remain with us. Our core user churn rate is higher for Ooma Small Business customers than Ooma Residential
customers, which is driven in part by the failure rate of small businesses. Accordingly, we expect that our overall core user churn rate will increase if
sales of Ooma Small Business products increase relative to sales of Ooma Residential products, or if churn rate of our Business Promoter customers
increases.
Growth
in
additional
services.
We believe that there is a significant opportunity for us to increase the additional subscription services that our
customers purchase from us. Customers who purchase additional subscription services from us generate more value to us over the life of our
customer relationship. In order to drive adoption of additional subscription services, we will need to continually add valuable new features to our
existing solutions and develop new connected services.
Investing
in
growth.
We intend to continue focusing on long-term revenue growth. We believe that our market opportunity is large and we intend to
continue investing in sales and marketing to grow our user base. We also expect to continue investing in research and development to enhance our
platform and develop additional connected services. We also may acquire complementary technologies or additional connected services. To support
our expected growth and our operation as a public company, we intend to invest in other operational and administrative functions.
Key Business Metrics
We regularly review a number of metrics, including the following key business metrics, to evaluate our business, measure our performance, identify trends
affecting our business, formulate financial projections and make strategic decisions.
Core
Users
We believe that the number of our core users is an indicator of our market penetration, the growth of our business and our anticipated future subscription
and services revenue. We define our core users as the number of home user accounts, office user extensions and standalone Business Promoter accounts, which
means Business Promoter users who do not subscribe to any other services from us. Talkatone users are excluded from the total number of core users. We believe
that the relationship that we establish with our core users positions us to sell additional premium communications services and other new connected services to
them.
Core Users
Annualized
Exit
Recurring
Revenue
2017
As of January 31,
2016
933,000
800,000
2015
645,000
We believe that our annualized exit recurring revenue, or AERR, for our core users is an indicator of recurring subscription and services revenue for near-
term future periods. We estimate our AERR as of the end of a quarter by dividing our recurring revenue (which is defined as total subscription and service revenue,
excluding Talkatone revenue) for a quarter by the average of the number of core users at the beginning and end of that quarter, and annualize by multiplying by
four. We then multiply that result by the number of core users at the end of the period to calculate AERR. We have generally experienced a year-over-year increase
in AERR due to an increase in the number of core users.
Annualized Exit Recurring Revenue
$
89,425 $
76,938 $
61,907
2017
As of January 31,
2016
(in thousands)
2015
55
Annual
Net
Dollar
Subscription
Retention
Rate
We believe that our annual net dollar subscription retention rate for our core users, or our annual net dollar retention rate, provides insight into our ability to
retain and grow our subscription and services revenue, and is an indicator of the long-term value of our customer relationships and the stability of our revenue base.
Our annual net dollar retention rate measures the percentage year-over-year change in our recurring revenue (which is defined as total subscription and service
revenue, excluding Talkatone revenue) for the period per core user, which is then adjusted by factoring in the percentage of our core users we have retained during
the same period. Our annual net dollar retention rate is affected by changes in average amounts that our core users pay to us, fluctuations in the number of our core
users, and our core user churn rate.
We calculate our estimated annual net dollar subscription retention rate for our core users by multiplying:
(i)
our year-over-year percentage change in annual recurring revenue per core user, which is calculated by:
•
•
determining the annual recurring revenue per core user by dividing annual recurring revenue for the period ended by the number of core users
at the end of that particular period; and
calculating the year-over-year percentage change in annual recurring revenue per core user by dividing the current period recurring revenue
per core user by the annual recurring revenue per core user for the same period in the prior year.
by:
(ii)
our core user annual retention rate, which is calculated by:
•
•
•
determining our core user churn, by identifying the number of paying core users who terminate service during a month, excluding infant
churn, which we define as office extensions and home users who terminate service prior to the end of the second full calendar month after
their activation date;
calculating our monthly churn rate by dividing our churn in a month by the number of core users at the beginning of that month; and
calculating our annual retention rate as one minus the sum of our monthly churn rates for the preceding 12-month period.
Annual Net Dollar Subscription Retention Rate
2017
91%
As of January 31,
2016
94%
2015
102%
Net Dollar Subscription Retention Rate decreased year over year primarily due to decline in average revenue per user from our Business Promoter users on
a year-over-year basis.
Adjusted
EBITDA
We use Adjusted EBITDA to manage our business, evaluate our performance and make planning decisions. We consider this measure to be a useful
measure of the operating performance of the Company, because it contains adjustments for unusual events or factors that do not directly affect what management
considers to be the core operating performance, and are used by the management for that purpose. We also believe that this measure enables us to better evaluate
our performance by facilitating a meaning comparison of our core operating results in a given period to those in prior and future periods. In addition, investors
often use similar measures to evaluate the operating performance with competitors. Adjusted EBITDA represents net loss before interest and other (income)
expense, net, write-off of non-cash deferred debt issuance costs, depreciation and amortization, stock-based compensation and related taxes, income tax benefit,
change in the fair value of our warrants and change in fair value of our acquisition-related contingent consideration.
56
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported
under GAAP. Some of these limitations are:
•
•
•
•
Adjusted EBITDA does not consider any expenses for assets being depreciated and amortized that are necessary to operate our business;
Adjusted EBITDA does not consider the impact of stock-based compensation and related taxes, change in fair value of warrants, change in fair value
of acquisition-related contingent consideration or write-off of non-cash deferred debt issuance costs;
Adjusted EBITDA does not reflect other non-operating expenses, net of other non-operating income, including net interest expense (income); and
other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative
measure.
Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including net loss and our other
GAAP results.
The following table provides a reconciliation of net loss (the most directly comparable GAAP financial measure) to Adjusted EBITDA for each of the
periods indicated (in thousands):
Reconciliation of net loss to Adjusted EBITDA:
Net loss
Reconciling items:
Interest and other (income) expense, net
Write-off of non-cash deferred debt issuance costs
Depreciation and amortization
Amortization of intangibles
Stock-based compensation and related taxes
Income tax benefit
Change in fair value of warrant liability
Change in fair value of acquisition-related contingent consideration
Adjusted EBITDA
Components of Results of Operations
Revenue
2017
Fiscal Year Ended January 31,
2016
2015
$
(12,949)
$
(14,052)
$
(6,410)
(327)
—
1,648
348
9,866
—
—
—
(1,414) $
591
332
1,410
393
4,653
—
442
(281)
(6,512) $
378
—
896
306
426
(502)
795
656
(3,455)
$
We generate revenue primarily through the sale of subscriptions to our communications solutions and other connected services. We also generate revenue
from the sale of our on-premise appliances and end-point devices that enable our solutions, as well as from porting fees to enable our customers to transfer their
existing phone numbers to the Ooma service.
Subscription
and
services
revenue
. Our subscription and services revenue consists primarily of fees we bill to our customers in connection with their
subscriptions to our communications solutions. Our revenue varies based upon the services and features utilized by our core users. We derive subscription and
services revenue primarily from recurring monthly payments related to service plans, such as Ooma Premier, Ooma Office, international calling plans, and other
subscriptions, which we refer to as service subscription plans. Subscription and services revenue also includes revenue generated from payments for qualified lead
generation, prepaid international and directory assistance. We also earn revenue from the display of advertisements through our Talkatone mobile application,
primarily based on advertisement impressions displayed. We expect our subscription and services revenue to continue to increase as we expand our user base.
Product
and
other
revenue.
Our product and other revenue consists primarily of the sale of our on-premise appliances and end-point devices used in
connection with our services and includes shipping and handling fees. We also generate other revenue from porting fees we charge our customers to enable them to
transfer their existing phone numbers to Ooma Office or Telo. We expect our product and other revenue to remain relatively flat on a year-over-year basis.
57
Cost
of
Revenue
Our cost of revenue consists of the cost of our subscription and services revenue and the cost of our product and other revenue.
Cost
of
subscription
and
services
revenue.
Our cost of subscription and services revenue primarily consists of payments we make for third-party network
operations and telecommunications services, credit card processing fees, costs to maintain data centers, including co-location fees for the right to place our servers
in data centers owned by third parties, depreciation of servers and equipment, along with related utilities and maintenance costs, personnel costs associated with
customer care and network operations support, and allocated costs of facilities and information technology.
Cost
of
product
and
other
revenue.
Cost of product and other revenue is comprised primarily of the costs associated with the manufacturing of our on-
premise appliances and end-point devices, as well as personnel costs for employees and contractors, costs related to porting our customers’ phone numbers to our
service, shipment of on-premise appliances and end-point devices, and allocated costs of facilities and information technology.
Gross
Margin
Our gross margin consists of our subscription and services gross margin and our product and other gross margin.
Subscription
and
services
gross
margin.
Subscription and services gross margin, which we define as subscription and services revenue minus cost of
subscription and services revenue expressed as a percentage of subscription and services revenue, can fluctuate based on a number of factors, including the costs
we pay to third-party telecommunications providers, the timing of capital expenditures and related depreciation charges and changes in headcount. We expect to
continue investing in our network infrastructure and customer support function to support our growth and maintain quality of service and security. We expect our
subscription and services gross margin to increase over the long term in part as our small business revenue becomes a significant portion of the overall subscription
revenue. We also expect the subscription and services gross margin to increase as users adopt additional connected services we introduce in the future, although our
subscription and services gross margin may fluctuate from period to period depending on the interplay of all of these factors.
Product
and
other
gross
margin.
Product and other gross margin, which we define as product and other revenue minus cost of product and other revenue
expressed as a percentage of product and other revenue, can fluctuate based on a number of factors, including the number of our on-premise appliances and end-
point devices we sell during a period, as compared to the cost to produce those units and the relatively fixed personnel costs for employees and contractors incurred
during the period. We sell our on-premise appliances at an aggressive price point to our customers to facilitate the adoption of our platform. We therefore expect
our product and other gross margin to continue to be negative for the foreseeable future.
Our subscription and services gross margin is significantly higher than our product and other gross margin. As a result, any significant change in the mix
between subscription and services revenue and product and other revenue will cause our total gross margin to change. For example, in periods where we sell
significantly more on-premise appliances, we would expect our total gross margin to decline.
Operating
Expenses
We classify our operating expenses as sales and marketing expenses, research and development expenses, and general and administrative expenses.
Sales
and
marketing
expenses.
Our sales and marketing expenses are the largest component of our operating expenses and consist primarily of personnel
costs for employees and contractors directly associated with our sales and marketing activities, internet, television, radio and billboard advertising fees, public
relations expenses, commissions we pay to resellers and other third parties, trade show expenses, travel expenses, marketing and promotional activities and
allocated costs of facilities and information technology. We expect our sales and marketing expenses to continue increasing in absolute dollars and as a percentage
of total revenue as we continue to actively grow our core users and expand our operations internationally.
Research
and
development
expenses.
Our research and development efforts are focused on developing new and expanded features for our services and
improvements to our platform and backend architecture. Our research and development expenses consist primarily of personnel costs for employees and contractors
and allocated costs of facilities and information technology, software tools, and product certification. We expense research and development costs as incurred. We
expect our research and development expenses to grow in absolute dollars and increase slightly as a percentage of total revenue going forward.
58
General
and
administrative
expenses.
Our general and administrative expenses consist primarily of personnel costs for employees engaged in
administrative activities to support the day-to-day operations of our business. Other significant components of our general and a dministrative expenses include
professional service fees, legal fees and allocated costs of facilities and information technology. We expect our general and administrative expenses to remain
relatively flat or decrease slightly as a percentage of total rev enue going forward.
Consolidated Results of Operations
The following table sets forth selected consolidated statements of operations data and such data as a percentage of total revenue for each of the periods
indicated (in thousands):
Revenue:
Subscription and services
Product and other
Total revenue
Cost of revenue:
Subscription and services
Product and other
Total cost of revenue (1)
Gross profit
Operating expenses:
Sales and marketing (1)
Research and development (1)
General and administrative (1)
Total operating expenses
Loss from operations
Interest income (expense), net
Change in fair value of warrants
Other expense, net
Loss before income taxes
Income tax benefit
Net loss
(1)
Includes stock-based compensation and related taxes as follows (in thousands):
Total cost of revenue
Sales and marketing
Research and development
General and administrative
Total
59
2017
Fiscal Year Ended January 31,
2016
2015
$
91,127 $
13,397
104,524
73,064 $
15,711
88,775
29,650
15,545
45,195
59,329
33,768
24,239
14,598
72,605
(13,276)
370
—
(43)
(12,949)
—
25,715
16,150
41,865
46,910
28,534
18,502
12,561
59,597
(12,687)
(881)
(442)
(42)
(14,052)
—
$
(12,949) $
(14,052) $
2017
Fiscal Year Ended January 31,
2016
2015
$
$
1,038 $
1,455
3,619
3,754
9,866 $
437 $
611
1,683
1,922
4,653 $
53,828
18,373
72,201
18,284
18,440
36,724
35,477
22,276
12,290
6,650
41,216
(5,739)
(323)
(795)
(55)
(6,912)
502
(6,410)
36
41
169
180
426
The following table sets forth selected consolidated statements of operations, expressed as a percentage of total revenue, for each of the periods indicated:
Revenue:
Subscription and services
Product and other
Total revenue
Cost of revenue:
Subscription and services
Product and other
Total cost of revenues
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Total operating expenses
Loss from operations
Interest income (expense), net
Change in fair value of warrants
Other expense, net
Loss before income taxes
Income tax benefit
Net loss
2017
Fiscal Year Ended January 31,
2016
2015
87%
13
100
28
15
43
57
32
23
14
69
(12)
—
—
—
(12)
—
(12%)
82%
18
100
29
18
47
53
32
21
14
67
(14)
(1)
—
—
(15)
—
(15%)
75%
25
100
25
26
51
49
31
17
9
57
(8)
—
(2)
—
(10)
1
(9%)
Consolidated Statement of Operations:
Comparison of years ended January 31, 2017 and 2016 (in thousands):
Revenue
Revenue:
Subscription and services
Product and other
Total revenue
Percentage of revenue:
Subscription and services
Product and other
Total
Fiscal Year Ended January 31,
2017 to 2016
2017
2016
$ Change
% Change
$
$
91,127
13,397
104,524
$
$
73,064
15,711
88,775
$
$
18,063
(2,314)
15,749
25%
(15%)
18%
87%
13%
100%
82%
18%
100%
Our total revenue increased by $15.7 million due to an increase in subscription and services revenue, offset by a decline in product and other revenue.
Our subscription and services revenue increased by $18.1 million in fiscal 2017 as compared to fiscal 2016, primarily due to a growth in our core users
which increased to approximately 933,000 core users as of January 31, 2017 from approximately 800,000 core users as of January 31, 2016. The increase in
subscription and services revenue was also in part due to an increase in our small business revenue driven by growth in Ooma Office.
Our product and other revenue decreased by $2.3 million in fiscal 2017 as compared to fiscal 2016, primarily due to a decrease in the volume of units sold
and lower average selling prices as we continued to sell our on-premises appliances at an aggressive price to our customers.
60
Cost
of
Revenue
and
Gross
Margin
Cost of revenue:
Subscription and services
Product and other
Total cost of revenue
Gross profit:
Subscription and services
Product and other
Total
Gross margin:
Subscription and services
Product and other
Total
Fiscal Year Ended January 31,
2016
2017
2017 to 2016
$ Change
% Change
$
$
$
$
29,650
15,545
45,195
61,477
(2,148)
59,329
$
$
$
$
67%
(16%)
57%
25,715
16,150
41,865
47,349
(439)
46,910
$
$
$
$
65%
(3%)
53%
3,935
(605)
3,330
14,128
(1,709)
12,419
15%
(4%)
8%
30%
389%
26%
Total gross margin increased to 57% in fiscal 2017 as compared to 53% in fiscal 2016, primarily due to higher growth of subscription and services revenue
as compared to product and other revenue, as subscription and services revenue carries higher gross margin. The improvement in subscription and services revenue
gross margin was primarily due to increase in revenue from Ooma Office and also due to economies of scale as our subscriber base increased.
The total gross profit increased by $12.4 million in fiscal 2017 as compared to fiscal 2016, due to an increase in subscription and services gross profit of
$14.1 million which was offset by a decrease in product and other gross profit of $1.7 million.
The increase in cost of subscription and services revenue of $3.9 million was primarily attributable to an increase in telecom and hosting fees of $1.6 million
driven by a growth in our core users, an increase in credit card processing fee of $0.9 million, an increase in personnel and consultant costs of $0.7 million driven
by increased headcount and growth in business, and an increase in stock-based compensation of $0.5 million.
The decrease in cost of product and other revenue of $0.6 million was primarily due to a decrease in the number of on-premise appliances sold in fiscal 2017
as compared to fiscal 2016, offset by an increase in the number of end-point devices sold to both our residential and small business customers .
Operating
Expenses
Sales and marketing
Research and development
General and administrative
Total operating expenses
Fiscal Year Ended January 31,
2017 to 2016
2017
2016
$ Change
% Change
$
$
33,768 $
24,239
14,598
72,605 $
28,534 $
18,502
12,561
59,597 $
5,234
5,737
2,037
13,008
18%
31%
16%
22%
Sales and marketing expenses increased by $5.2 million in fiscal 2017 as compared to fiscal 2016. The increase was primarily due to an increase in
personnel and consultant related costs of $3.2 million driven by increased headcount and growth in business, an increase in stock-based compensation of $0.8
million, an increase in marketing activities of $0.7 million and an increase in facilities and equipment related costs of $0.4 million.
Research and development expenses increased by $5.7 million in fiscal 2017 as compared to fiscal 2016. The increase was primarily attributable to an
increase in personnel and consultant related costs of $3.2 million driven by increased headcount primarily to support our growth of our Ooma Office, an increase in
stock-based compensation of $1.9 million and an increase in facilities and equipment related costs of $0.5 million.
61
General and administrative expenses increased by $2.0 million in fiscal 201 7 as compared to fiscal 2016. The increase was primarily attributable to an
increase in stock-based compensation of $1.8 million and an increase in legal and professional services fees of $0.4 million, offset by a decrease in consultant costs
of $0.3 milli on.
Other
Income
(Expense),
net
Interest income (expense), net
Change in fair value of warrants
Other expense, net
Total other income (expense)
*
Not meaningful
Fiscal Year Ended January 31,
2017 to 2016
2017
2016
$ Change
% Change
$
$
370 $
—
(43)
327 $
(881) $
(442)
(42)
(1,365) $
1,251
442
(1)
1,692
NM*
NM*
NM*
Other income (expense) is comprised mainly of interest income related to our short-term investments, interest expense related to the outstanding debt and
change in fair value of warrants. Other income (expense), net increased by $1.7 million in fiscal 2017 as compared to fiscal 2016. The increase was primarily
attributed to a decrease in interest expense of $0.9 million due to the payoff of our outstanding debt in July 2015 and an increase in interest income related to short-
term investments of $0.4 million. In addition, due to the conversion and cash settlement of preferred stock warrants during the second quarter of fiscal 2016, change
in fair value of warrants was zero and $(0.4) million in fiscal 2017 and fiscal 2016, respectively.
Comparison of years ended January 31, 2016 and 2015 (in thousands):
Revenue
Revenue:
Subscription and services
Product and other
Total revenue
Percentage of revenue:
Subscription and services
Product and other
Total
Fiscal Year Ended January 31,
2016 to 2015
2016
2015
$ Change
% Change
$
$
73,064
15,711
88,775
$
$
53,828
18,373
72,201
$
$
19,236
(2,662)
16,574
36%
(14%)
23%
82%
18%
100%
75%
25%
100%
Our subscription and services revenue increased by $19.2 million, primarily due to a 24% growth in our core users, which increased to approximately
800,000 as of January 31, 2016 from approximately 645,000 core users as of January 31, 2015. In addition to the increase in our core users, our average annual
subscription and services revenue per core user increased year-over-year.
Our product and other revenue decreased by $2.7 million due to a decrease in sales of our on-premise appliances and end-point devices in fiscal 2016 as
compared to fiscal 2015. In fiscal 2015, we experienced a large, non-recurring order by one of our reseller partners, which was not repeated by that partner in fiscal
2016 and was the primary driver for the decrease in product revenue. In addition, the decrease in product and other revenue was also due to lower average selling
prices as we continued to sell our on-premise appliances at an attractive price to facilitate the adoption of our platform.
62
Cost
of
Revenue
and
Gross
Margin
Cost of Revenue:
Subscription and services
Product and other
Total cost of revenue
Gross profit:
Subscription and services
Product and other
Total
Gross margin:
Subscription and services
Product and other
Total
Fiscal Year Ended January 31,
2015
2016
2016 to 2015
$ Change
% Change
$
$
$
$
25,715
16,150
41,865
47,349
(439)
46,910
$
$
$
$
65%
(3%)
53%
18,284
18,440
36,724
$
$
35,544
$
(67)
$
35,477
66%
—
49%
7,431
(2,290)
5,141
11,805
(372)
11,433
41%
(12%)
14%
33%
555%
32%
Total gross margin increased to 53% for fiscal 2016 from 49% for fiscal 2015 primarily due to higher growth of subscription and other services revenue as
compared to product and other revenue, as subscription and services revenue carries higher gross margin.
The total gross profit increased by $11.4 million for fiscal 2016, as compared to fiscal 2015, due to an increase in subscription and services gross profit of
$11.8 million, which was offset in part by a decrease in product and other gross profit of $0.4 million.
The increase in cost of subscription and services revenue of $7.4 million was primarily attributable to an increase in personnel and consultant costs of
$2.6 million as we increased headcount to support our growth, an increase in telecommunication provider fees and hosting and bandwidth fees of $2.1 million, an
increase in information technology and facilities costs allocation of $1.1 million due to additional facilities leased during the year to support growth, an increase in
credit processing fees of $0.7 million and an increase in stock-based compensation of $0.3 million.
The decrease in cost of product and other revenue of $2.3 million was primarily attributable to a $2.1 million decrease in the product costs which was due to
a decrease in the number of units sold and in part also attributable to a decrease in the manufacturing costs of our on-premise appliances with our contract
manufacturers as well as a decrease in freight costs of $0.3 million. The decrease in the product and other costs was offset in part by an increase of $0.3 million in
personnel and consulting related costs.
Operating
Expenses
Sales and marketing
Research and development
General and administrative
Total operating expenses
Fiscal Year Ended January 31,
2016 to 2015
2016
2015
$ Change
% Change
$
$
28,534 $
18,502
12,561
59,597 $
22,276 $
12,290
6,650
41,216 $
6,258
6,212
5,911
18,381
28%
51%
89%
45%
The increase in sales and marketing expenses of $6.3 million was mainly due to an increase in advertising and marketing expenses of $2.0 million, as we
expanded customer and partner programs and lead generation activities, an increase in personnel-related costs of $1.7 million as we increased sales and marketing
headcount to support growth and an increase in consulting costs of $1.3 million to supplement our direct sales team. The increase was also attributable to an
increase in facilities-related costs of $0.6 million and an increase in stock-based compensation of $0.6 million.
The increase in research and development expenses of $6.2 million was primarily attributable to an increase in personnel-related costs of $3.1 million due to
an increased headcount, an increase in stock-based compensation of $1.5 million, an increase in consultant costs of $1.0 million and an increase in facilities-related
costs of $0.3 million.
63
The increas e in general and administrative expenses of $5.9 million was primarily attributable to an increase in personnel and consultant related costs of
$2.8 million due to an increased headcount, an increase in stock-based compensation of $1.7 million and an incre ase in professional services fees of $1.3 million to
support the growth of our business and in preparing to be and subsequently becoming a publicly held company.
Other
Income
(Expense),
net
Interest (expense) income, net
Change in fair value of warrants
Other expense, net
Total other income (expense)
*
Not meaningful
Fiscal Year Ended January 31,
2016 to 2015
2016
2015
$ Change
% Change
$
$
(881) $
(442)
(42)
(1,365) $
(323) $
(795)
(55)
(1,173) $
(558)
353
13
(192)
173%
(44%)
NM*
I nterest expense increased by $0.6 million due to the increase in our outstanding debt in the later part of fiscal 2015. Included in interest expense was $0.3
million of non-cash deferred issuance costs that was written-off due to the repayment of all outstanding debt in July 2015.
The change in fair value of the convertible preferred stock warrants of $0.4 million resulted from an expense associated with the change in fair value of
convertible preferred stock warrants, which resulted from a change in the fair value of the warrants period over period. On the closing of our initial public offering,
the warrants to purchase preferred stock were either exercised and converted to common stock or converted to common warrants to purchase common stock or
settled in cash. We reclassified the fair value of the warrants from liabilities to additional paid-in capital and ceased to record any additional fair value adjustments.
Income
Tax
Benefit
Income tax benefit
*
Not meaningful
Fiscal Year Ended January 31,
2016 to 2015
2016
2015
$ Change
% Change
$
—
$
502
$
(502)
NM*
In fiscal 2015, we acquired Talkatone, Inc., or Talkatone, a privately held provider of telephony and texting services over Wi-Fi networks. We recorded a
tax benefit of $0.5 million arising from the release of deferred tax valuation allowances subsequent to the acquisition of Talkatone. The release of the valuation
allowances was triggered by the recognition of $0.5 million of net deferred tax liabilities that were primarily related to the acquired intangible assets and R&D
credits recorded upon the acquisition of Talkatone.
Non-GAAP Financial Measures
In addition to disclosing financial measures prepared in accordance with GAAP, this Form 10-K contains certain non-GAAP financial measures, including
non-GAAP net loss and non-GAAP net loss per share.
These non-GAAP financial measures exclude non-cash or non-recurring expenses including stock-based compensation expense and related taxes,
amortization of intangibles , change in fair value of our acquisition-related contingent consideration, change in fair value of warrants and write-off of non-cash
deferred debt issuance costs and income tax benefit.
These non-GAAP financial measures are presented to provide investors with additional information regarding our financial results and core business
operations. Ooma considers these non-GAAP financial measures to be useful measures of the operating performance of the Company, because they contain
adjustments for unusual events or factors that do not directly affect what management considers to be Ooma’s core operating performance, and are used by the
Company’s management for that purpose. Management also believes that these non-GAAP financial measures allow for a better evaluation of the Company’s
performance by facilitating a meaningful comparison of the Company’s core operating results in a given period to those in prior and future periods. In addition,
investors often use similar measures to evaluate the operating performance of a company.
64
Non-GAAP finan cial measures are presented for supplemental informational purposes only to aid an understanding of the Company’s operating results.
The non-GAAP financial measures should not be considered a substitute for financial information presented in accordance wit h GAAP, and may be different from
non-GAAP financial measures presented by other companies. A limitation of the non-GAAP financial measures presented is that the adjustments relate to items
that the Company generally expects to continue to recognize. The a djustment of these items should not be construed as an inference that the adjusted gains or
expenses are unusual, infrequent or non-recurring. Therefore, both GAAP financial measures of Ooma’s financial performance and the respective non-GAAP
measures shou ld be considered together.
Reconciliations of our GAAP and non-GAAP financial measures were as follows (in thousands, except per share amounts):
GAAP Net Loss
Stock-based compensation and related taxes
Amortization of intangibles
Change in fair value of acquisition-related contingent consideration
Change in fair value of warrant liability
Write-off of non-cash deferred debt issuance costs
Income tax benefit
Non-GAAP Net Loss
Basic and Diluted Net Loss per share on a GAAP basis
Stock-based compensation and related taxes
Amortization of intangibles
Change in fair value of acquisition-related contingent consideration
Change in fair value of warrant liability
Write-off of non-cash deferred debt issuance costs
Income tax benefit
Basic and Diluted Net Loss per share on a Non-GAAP basis
65
2017
Fiscal Year Ended January
2016
2015
$
$
$
$
(12,949) $
9,866
348
—
—
—
—
(2,735) $
(0.74) $
0.56
0.02
—
—
—
—
(0.16) $
(14,052) $
4,653
393
(281)
442
332
—
(8,513) $
(1.38) $
0.46
0.04
(0.03)
0.04
0.03
—
(0.84) $
(6,410)
426
306
656
795
—
(502)
(4,729)
(2.81)
0.19
0.13
0.29
0.35
—
(0.22)
(2.07)
Quarterly Results of Operations
The following table sets forth our unaudited quarterly statements of operations for each of the eight quarters ended January 31, 2017. In our opinion the data
has been prepared on a basis consistent with our audited annual financial statements included in this Annual Report on Form 10-K and include, in our opinion, all
normal recurring adjustments necessary for the fair statement of the financial information contained in those statements. Our historical results are not necessarily
indicative of the results that may be expected in the future for a full year or any other period. The following quarterly financial data should be read in conjunction
with our audited financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.
The following table sets forth our results of operations for the periods presented (in thousands):
January 31,
2017
October 31,
2016
July 31,
2016
Three Months Ended
April 30,
2016
January 31,
2016
October 31,
2015
July 31,
2015
April 30,
2015
$
24,041 $
3,523
27,564
23,179 $
3,828
27,007
22,417 $
3,077
25,494
21,490 $
2,969
24,459
20,569 $
3,742
24,311
19,470 $
4,006
23,476
17,449 $ 15,576
3,687
4,276
21,136 19,852
7,547
4,229
11,776
15,788
8,793
6,415
3,493
18,701
(2,913)
7,388
4,276
11,664
15,343
8,302
6,244
3,705
18,251
(2,908)
7,444
3,501
10,945
14,549
8,578
5,839
3,545
17,962
(3,413)
7,271
3,539
10,810
13,649
8,095
5,741
3,855
17,691
(4,042)
7,066
4,083
11,149
13,162
8,287
5,173
2,895
16,355
(3,193)
6,715
4,277
10,992
12,484
7,539
4,948
3,499
15,986
(3,502)
5,624
6,310
4,207
3,583
9,893
9,831
11,243 10,021
5,895
6,813
4,097
4,284
3,206
2,961
14,303 12,953
(2,932)
(3,060)
111
—
(30)
81
(2,832) $
95
—
(8)
87
(2,821) $
100
—
(27)
73
(3,340) $
64
—
22
86
(3,956) $
21
—
(11)
10
(3,183) $
(10)
—
(19)
(29)
(3,531) $
(607)
274
(10)
(343)
(285)
(716)
(2)
(1,003)
(3,403) $ (3,935)
$
Revenue:
Subscription and services
Product and other
Total revenue
Cost of revenue:
Subscription and services
Product and other
Total cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest income (expense), net
Change in fair value of warrants
Other (expense) income, net
Total other income (expense)
Net loss
Quarterly Trends
Revenue
Our subscription and service revenue has grown quarter-over-quarter primarily due to the continued growth in our subscriber base driven by an increase in
our core users. Our product revenue ranged from $3.0 million to $4.3 million during the periods presented and generally declined as a percentage of total revenue.
We believe that comparisons of our quarterly product revenue on a year-over-year basis are more meaningful than comparisons of our quarterly product revenue on
a sequential basis due to factors such as seasonality and the timing of product purchases by our reseller partners. During the first quarter of fiscal 2017, we
experienced a decrease in product revenue year over year mainly due to a large, non-recurring order by one of our customers in the first quarter of fiscal 2016,
which was not repeated during the first quarter of 2017. In addition, the decrease in our product and other revenue was also in part due to lower average selling
prices as we continued to sell our on-premise appliances at an aggressive price to our customers.
Gross
Profit
and
Gross
Margin
Our gross profit has increased quarter-over-quarter in absolute dollars and our gross margin has increased from 51% to 57% during the periods presented, as
a result of the increasing mix of subscription and services revenue as a percentage of total revenue.
66
Operating
Expenses
Quarterly operating expenses in absolute dollars increased sequentially for all the periods presented, primarily driven by an increase in headcount and
personnel-related expenses, including stock-based compensation and consultant expenses, and marketing and advertising expenses associated with our efforts to
increase our overall subscriber base and product sales. During the fourth quarter of fiscal 2016, we experienced a reduction in the general and administrative
expense due to the fair value remeasurement of acquisition related earn-out provisions for Talkatone.
Liquidity and Capital Resources
As of January 31, 2017, we had $53.2 million of cash and cash equivalents and short-term investments. To date we have funded our operations through sales
to our customers, proceeds from issuance of common stock in the initial public offering, borrowings under the credit facilities and issuance of convertible preferred
stock. In April 2015 , we raised $5.0 million in proceeds from the sale of our Series Beta convertible preferred stock. In July 2015, we completed our IPO and sold
5,000,000 shares of our common stock at $13.00 per share for an aggregate net proceeds of $56.9 million, after deducting underwriters’ discounts, commissions
and offering costs. We used approximately $10.3 million of the IPO proceeds to repay our outstanding debt and $0.6 million to cash settle a warrant to purchase
70,287 shares of our convertible preferred stock.
We believe that our existing cash and cash equivalents and short-term investments will be sufficient to meet our cash needs for at least the next 12 months.
Our future capital requirements will depend on many factors, including our growth rate, our needs for increased data center capacity to support our expanding
customer base, the timing and extent of our sales and marketing and research and development expenditures, and the continuing market acceptance of our solutions.
The table below provides selected cash flow information, for the periods indicated (in thousands):
Net cash provided by (used in) operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Net
Cash
Provided
by
(Used
in)
Operating
Activities
2017
Fiscal Year Ended January 31,
2016
2015
$
$
$
385
(22,969)
(839)
(23,423) $
$
(470)
(30,962)
49,712
18,280 $
(4,067)
(1,858)
8,694
2,769
The table below provides selected cash flow information, for the periods indicated (in thousands):
Net loss
Add back non-cash charges
Net loss before non-cash charges
(Increase) decrease in inventories
Decrease (increase) in deferred inventory costs
(Decrease) increase in accounts payable and accrued expenses
Decrease (increase) in accounts receivable
Increase in deferred revenue
Others
Net cash provided by (used in) operating activities
2017
Fiscal Year Ended January 31,
2016
2015
$
$
$
(12,949)
11,979
(970)
(819)
393
(99)
895
958
27
385 $
$
(14,052)
7,013
(7,039)
3,070
235
4,392
(1,215)
689
(602)
(470) $
(6,410)
2,634
(3,776)
(3,206)
(751)
1,212
(2,095)
4,014
535
(4,067)
For the fiscal year ended January 31, 2017, our net loss of $12.9 million included non-cash charges of $12.0 million primarily related to stock-based
compensation of $9.8 million and depreciation and amortization of $2.2 million. Operating asset and liability changes for the fiscal year ended January 31, 2017
included:
•
•
•
an increase of $0.8 million in our raw material and finished goods inventory to scale our business
a decrease of $0.4 million of deferred inventory costs due to lower inventory levels at channel partners
a decrease of $0.1 million of accounts payable and accrued liabilities primarily due to the timing of payments
67
•
•
a decrease of $0.9 million in accounts receivable primarily due to timing of billing and our collection efforts
an increase of $1.0 million in deferred revenue due to an increase of $1.8 million in deferred revenue from subscription and other driven by a growth
in our core users, offset by a decrease of $0.8 million in deferred product revenue associated with lower inventory levels at channel partners.
For the fiscal year ended January 31, 2016, our net loss of $14.1 million included non-cash charges of $7.0 million primarily related to $4.7 million of
stock-based compensation, $1.8 million of depreciation and amortization expense, $0.3 million of write-off of non-cash deferred debt issuance costs due to the
repayment of debt and $0.2 million of expense due to change in fair value of preferred warrant liability and acquisition-related contingent consideration. Operating
asset and liability changes for the fiscal year ended January 31, 2016 included:
•
•
•
•
•
a decrease of $3.1 million in inventory primarily due to usage of raw material and finished goods
a decrease of $0.2 million of deferred inventory costs due to lower inventory levels at channel partners
an increase of $4.4 million of accounts payable and accrued liabilities due to the timing of payments and invoices primarily in advertising expenses
an increase of $1.2 million in accounts receivable primarily due to the timing of billings to our channel partners and also due to increase in
receivables related to services
an increase of $0.7 million in deferred revenue resulting from an increase of $2.1 million increase in deferred revenue from subscription and other
services due to an increase in core users primarily in part driven by the growth in the premium users offset in part by a decrease of $1.4 million in
deferred product revenue associated with lower inventory levels at channel partners.
For the fiscal year ended January 31, 2015, our net loss of $6.4 million included non-cash charges of $2.6 million primarily related to $1.2 million of
depreciation and amortization expense, $1.5 million of expense due to change in fair value of preferred warrant liability and acquisition-related earn out, $0.4
million of stock-based compensation offset by $0.5 million in income tax benefit due to the acquisition of Talkatone, Inc. Operating asset and liability changes for
the fiscal year ended January 31, 2015 included:
•
•
•
•
•
an increase of $3.2 million in our raw material and finished goods inventory to scale our business
an increase of $0.8 million in deferred inventory costs due to increased inventory levels at our channel partners
an increase of $1.2 million of accounts payable and accrued liabilities due to the timing of payments
an increase of $2.1 million in accounts receivable due to the timing of shipments and billings to our channel partners and also due to increase in
receivables related to services
an increase of $4.0 million in deferred revenue primarily due to an increase of $1.9 million of deferred product revenue associated with increased
inventory levels at our channel partners and $2.1 million increase in deferred revenue from subscription and other services due to an increase in our
core users primarily driven by growth in our premium users
Net
Cash
Used
in
Investing
Activities
Our investing activities include purchases of short-term investments, capital expenditures for property and equipment purchases and business acquisitions.
Our capital expenditures have primarily been for general business purposes, including expansion of our network operations centers, computer equipment used
internally, and leasehold improvements as we have expanded our office space to accommodate our growth in headcount.
During the fiscal year ended January 31, 2017, we used $23.0 million in investing activities for purchases of short-term investments of $59.0 million and
purchases of property and equipment of $1.6 million, offset by proceeds from maturity and sale of short-term investments of $37.6 million.
During the fiscal year ended January 31, 2016 we used $28.1 million for purchases of short-term investments and $2.9 million for purchases of property and
equipment in investing activities.
During the fiscal year ended January 31, 2015 we used $1.2 million for purchases of property and equipment and $0.7 million in connection with a business
acquisition in investing activities.
68
Net
Cash
(Used
in)
Provided
by
Financing
Activities
Cash generated from financing activities includes proceeds from borrowings under our credit facilities, proceeds from issuance of common stock related to
warrants and employee stock benefit plans, proceeds from the issuance of preferred stock and proceeds from the sale of common stock in our IPO in July 2015.
Cash used in financing activities includes payment of shares repurchased for tax withholdings on vesting of restricted stock units, repayment of debt and capital
leases, payment of preferred warrant liability and payment of acquisition related earn-out.
During fiscal 2017, financing activities used $0.8 million of cash, which consisted of payment of $1.6 million related to shares repurchased for tax
withholdings on vesting of restricted stock units, repayment of $0.6 million of capital lease obligations and payment of $0.1 million of acquisition-related earn-out,
offset by proceeds of $1.5 million from the exercise of options and issuance of common stock related to employee stock purchase plan .
During fiscal 2016, financing activities provided $49.7 million of cash. During fiscal 2016 , we generated net cash proceeds of $57.0 million from the
issuance of common stock from our IPO, after adjusting for underwriting discounts and commissions of $4.5 million and offering costs of $3.6 million, all of which
were paid as of January 31, 2016.
Cash provided from financing activities also included $5.0 million from issuance of Series Beta preferred stock and $0.2
million in proceeds from the exercise of options and warrants and issuance of common stock under employee stock purchase plan, offset by repayment of $11.6
million of outstanding debt, payment of $0.6 million of preferred warrant liability and payment of $0.3 million of acquisition-related earn-out .
During fiscal 2015, we had net proceeds of $8.7 million from financing activities, primarily due to $9.9 million from borrowings under our credit facility
and $0.4 million from our issuance of common stock in connection with employee stock option exercises, offset by $1.5 million in repayment of debt and capital
leases, and payment of $0.1 million in deferred offering costs.
Contractual Obligations and Commitments
Set forth below is information concerning our contractual commitments and obligations as of January 31, 2017 (in thousands):
Operating lease obligations
Total
Total
Less Than
1 Year
1-3 Years
3-5 Years
$
$
$
1,401
1,401 $
1,297
1,297
$
$
94 $
$
94
10
10
The contractual commitment amounts in the table above are associated with enforceable and legally binding agreements.
As of January 31, 2017, non-cancelable purchase commitments with our contract manufacturers were $4.0 million.
As of January 31, 2017, we had no tax liabilities related to uncertainty in income tax positions.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, including entities such as structured finance or special purpose
entities that were established for the purpose of facilitating off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been
prepared in accordance with U.S. GAAP which requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and
expenses, cash flows and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions
we believe to be reasonable under the circumstances. Actual results may differ from these estimates. Our future consolidated financial statements will be affected to
the extent that our actual results materially differ from these estimates. Our most critical accounting policies are summarized below. For further information on our
significant accounting policies, see Note 1 in the accompanying notes to our consolidated financial statements.
Revenue
Recognition
We derive revenue from two sources: (1) subscription and services revenue, which is generated from the sale of subscription plans and other services; and
(2) product and other revenue. Products and services are sold directly to end-customers via our website and through distributors and retailers.
69
We recognize revenue when the following criteria are met:
•
•
•
•
persuasive evidence of an arrangement exists;
delivery has occurred;
collection of the fees is reasonably assured and
the fee is fixed or determinable
Subscription
and
Services
Revenue
We generate subscription and services revenue by selling subscriptions for communications solutions, as well as other connected services. Subscription
revenue is derived primarily from recurring monthly and annual payments related to service plans such as Ooma Office, Ooma Basic and Premier, international
calling plans, and other subscriptions. Subscription revenue is recognized on a straight-line basis over the applicable contractual service term. Subscription and
services revenue also includes revenue generated from payments for qualified lead generation, prepaid international calling and directory assistance, which are
recognized based on actual usage. We also earn revenue from the display of advertisements through our Talkatone mobile application, primarily based on
advertisement impressions displayed. We recognize revenue from mobile advertising on a net basis, because we are not the primary obligor to advertisers.
Deferred revenue primarily consists of billings or payments received in advance of meeting revenue recognition criteria. Our telephony services are sold as
monthly or annual subscriptions, payable in advance. We recognize deferred telephony services revenue on a ratable basis over the term of the contract as the
services are provided. For all arrangements, any revenue that has been deferred and is expected to be recognized beyond one year is classified as long-term deferred
revenue in other long-term liabilities in our consolidated balance sheets.
Product
and
Other
Revenue
We generate product revenue from the sale of on-premise appliances and end-point devices, including shipping and handling fees. We generate other
revenue from porting fees to enable customers to transfer their existing phone numbers. Product and other revenue for direct end-customers is billed to our
customer’s credit card at the time an online order is submitted by the customer via our website and is recognized when the product has been shipped to the
customer. We also generate product revenue from sales through distributors, retailers and resellers, or our channel partners, which are based on written purchase
authorizations. Our distribution agreements with our channel partners typically contain clauses for price protection and rights of return, which results in prices for
these transactions not being fixed or determinable, and increases the difficulty of estimating returns from our channel partners. Accordingly, we record shipments to
our channel partners, where the right of return exists, as deferred revenue and we defer recognition of revenue on these sales until the title transfers to the end-
customer. We assess the ability to collect from our channel partners based on a number of factors, including credit worthiness and payment history of the channel
partner. We record revenue net of any sales-related taxes that are billed to our customers.
Substantially all of our arrangements are multiple-element arrangements, which consist of an on-premise appliance and communication services. The
arrangement may also contain a bundled end-point device and a subscription plan for communication services. Monthly communication services and end-point
devices purchased after the original multi-element arrangement are optional purchases that are accounted for as separate arrangements and are not considered a
deliverable in the sale of the on-premise appliance.
We have determined that each unit of accounting has stand-alone value and account for each separately. We allocate revenue to each unit of accounting
based on an estimated selling price at the inception of the arrangement. The total arrangement consideration is allocated to each separate unit of accounting using
the relative selling price of each unit.
We determine the estimated selling price for each deliverable using vendor-specific objective evidence, or VSOE, of selling price or third-party evidence,
or TPE, of selling price, if it exists. If neither VSOE nor TPE of selling price exists for a deliverable, we use the best estimate of selling price, or BESP, of each
deliverable in its allocation of arrangement consideration. Revenue allocated to each deliverable, limited to the amount not contingent on future performance, is
then recognized when the basic revenue recognition criteria are met for the respective deliverable.
70
We determine VSOE of selling price for telephony services and end-point de vices based on historical standalone sales to customers. In determining VSOE
of selling price, we require that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range of the median
selling price. We do not have VSOE or TPE for our on-premise appliances; we estimate BESP by considering company-specific factors such as pricing strategies,
direct product and other costs, and bundling and discounting practices.
We record reductions to revenue for estimated sales returns from end users and customer credits at the time the related revenue is recognized. Sales returns
and customer credits are estimated based on historical experience, current trends and expectations regarding future experience. We monitor the accuracy of our
sales reserve estimates by reviewing actual returns and credits and adjusts them for future expectations to determine the adequacy of current reserve needs. If actual
future returns and credits differ from past experience, additional reserves may be required.
Inventories
Inventories, which consist of raw materials and finished goods, are stated at the lower of cost to purchase or the market value of such inventory. Cost is
determined on a first-in, first-out basis.
We regularly review inventory quantities in consideration of actual loss experiences, projected future demand, and remaining shelf life to record a provision
for excess and obsolete inventory when appropriate. Inventory write downs are recorded for excess and obsolete inventory. We periodically assess the
recoverability of all inventory to determine whether write downs for impairment are required. We evaluate the projected future demand as compared to the
remaining shelf life and other obsolescence and excess criteria in assessing the recoverability of our inventory. In determining the adequacy of reserves, we analyze
the following, among other things:
•
•
•
•
•
•
•
current inventory quantity on hand;
product acceptance in the marketplace;
customer demand;
historical sales;
forecast sales:
product obsolescence and
technological innovations
Any inventory write downs are recorded in cost of goods sold within the consolidated statement of operations during the period in which such write-downs
are determined as necessary by management.
If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required. We
recorded inventory write downs of $0.1 million, $0.2 million and $0.3 million for fiscal 2017, 2016 and 2015, respectively.
Stock-Based
Compensation
We grant stock-based awards which include stock options and restricted stock units (“RSUs”) under the 2015 Equity Incentive Plan, and purchase rights
under the employee stock purchase plan (“ESPP”). Stock-based compensation expense for all stock-based awards granted to employees is measured at the grant
date based on the fair value of the equity award and is recognized as expense over the requisite service period, which is generally the vesting period. The fair value
of options granted is estimated on the date of grant using the Black-Scholes option pricing model. The fair value of each RSU granted is determined using the fair
value of our common stock on the date of grant. The fair value of each stock purchase right under our ESPP is calculated based on the closing price of our stock on
the date of grant and the value of put and call options estimated using the Black-Scholes option pricing model. The Black-Scholes pricing model requires
assumptions including the market value of our common stock, expected term of the award, expected volatility of the price of our common stock, risk-free interest
rates, and expected dividend yield.
Stock-based compensation expense for options granted to non-employees is calculated using the Black-Scholes option pricing model and is recognized in
the consolidated statements of operations over the service period. Compensation expense for non-employee stock options subject to vesting is remeasured as of
each reporting date until the stock options are vested, and any change in value is recognized in the consolidated statement of operations during the period the
related services are performed.
71
We adopted Accounting Standards Update (“ASU”) 2016-09, Improvements
to
Employee
Shar
e-Based
Payment
Accounting
in the third quarter of fiscal
2017 and elected to account for forfeitures as they occur rather than estimate expected forfeiture. See Note 1 in the accompanying notes to our consolidated
financial statements for more information .
We recognize stock-based compensation expense on the straight-line method for our equity awards. Determining the fair value of stock-based awards at the
grant date requires judgment, including estimating the expected volatility, expected term, risk-free interest rate, and expected dividends.
Income
Taxes
We account for income taxes in accordance with ASC Topic 740, Income
Taxes
, under which deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities and net operating
loss and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. As of
January 31, 2017 and January 31, 2016, we have recorded a full valuation allowance against our deferred tax assets, respectively.
We use a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. A tax position is recognized when it is more likely than not that the tax position will be sustained upon examination, including resolution of
any related appeals or litigation processes. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that
is greater than 50% likely of being realized upon ultimate settlement with a taxing authority. The standard also provides guidance on derecognition of tax benefits,
classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure and transition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We had cash and cash equivalents and short-term investments of $53.2 million and $55.4 million as of January 31, 2017 and 2016, respectively. We hold
our cash and cash equivalents and short-term investments for working capital purposes. Our cash and cash equivalents are held in cash and short-term money
market funds. Our investments are held in U.S. treasury securities, U.S. agency debt securities, commercial papers, corporate debt securities and asset-backed
securities. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment
portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce our future interest income. The effect of a hypothetical 100 basis
point increase or decrease in interest rates would not have had a material impact on the fair value of our available-for-sale securities as of January 31, 2017 and
2016, or our interest income for fiscal 2017, 2016 and 2015. W e did not hold any outstanding debt with variable interest rates as of January 31, 2017 and 2016.
To date, all of our revenue has been denominated in U.S. and Canadian dollars. As a result some of our revenue is subject to fluctuations due to changes in
the Canadian dollar relative to the US dollar. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in
our statements of operations. To date, foreign currency transaction realized gains and losses have not been material to our consolidated financial statements, and we
have not engaged in any foreign currency hedging transactions. A hypothetical 10% increase or decrease in overall foreign currency rates would not have had a
material impact on our consolidated financial statements. As our international operations grow, we will continue to reassess our approach to managing the risks
relating to fluctuations in currency rates.
72
ITEM 8. CONSOLIDATED FINANCIAL ST ATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
73
74
75
76
77
78
79
81
REPORT OF INDEPENDENT REGIST ERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Ooma, Inc.
Palo Alto, California
We have audited the accompanying consolidated balance sheets of Ooma, Inc. and its subsidiary (the “Company”) as of January 31, 2017 and 2016, and the related
consolidated statements of operations, comprehensive loss, convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the three years
in the period ended January 31, 2017. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit includes considerations of internal control over
financial reporting as basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion .
An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Ooma, Inc. and its subsidiary as of January 31,
2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2017, in conformity with
accounting principles generally accepted in the United States of America.
/s/
DELOITTE
&
TOUCHE
LLP
San Jose, California
April 11, 2017
74
OOMA, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
January 31,
2017
January 31,
2016
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventories
Deferred inventory costs
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
Other assets
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
Accrued expenses
Short-term capital lease
Deferred revenue
Total current liabilities
Other liabilities
Total liabilities
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock $0.0001 par value: 10,000,000 shares authorized; no shares issued and
outstanding on January 31, 2017 and January 31, 2016, respectively
Common stock $0.0001 par value: 100,000,000 shares authorized; 17,995,555 and 16,916,250 shares
issued and outstanding on January 31, 2017 and January 31, 2016, respectively
Additional paid-in capital
Accumulated other comprehensive (loss) income
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
See notes to consolidated financial statements.
75
$
$
$
$
3,990 $
49,211
4,714
5,830
1,620
1,891
67,256
4,176
537
1,117
252
73,338 $
5,857 $
11,579
—
15,521
32,957
561
33,518
27,413
27,991
5,609
5,011
2,013
1,318
69,355
4,291
885
1,117
888
76,536
4,786
13,010
632
15,036
33,464
182
33,646
—
—
2
117,639
(11)
(77,810)
39,820
73,338 $
2
107,679
17
(64,808)
42,890
76,536
Revenue:
Subscription and services
Product and other
Total revenue
Cost of revenue:
Subscription and services
Product and other
Total cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest income (expense), net
Change in fair value of warrants
Other expense, net
Loss before income taxes
Income tax benefit
Net loss
Net loss per share of common stock:
Basic and diluted
OOMA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
2017
Fiscal Year Ended January 31,
2016
2015
$
91,127 $
13,397
104,524
73,064 $
15,711
88,775
29,650
15,545
45,195
59,329
33,768
24,239
14,598
72,605
(13,276)
370
—
(43)
(12,949)
—
25,715
16,150
41,865
46,910
28,534
18,502
12,561
59,597
(12,687)
(881)
(442)
(42)
(14,052)
—
(12,949) $
(14,052) $
53,828
18,373
72,201
18,284
18,440
36,724
35,477
22,276
12,290
6,650
41,216
(5,739)
(323)
(795)
(55)
(6,912)
502
(6,410)
$
$
(0.74) $
(1.38) $
(2.81)
17,490,448
10,173,095
2,284,241
Weighted-average number of shares used in per share amounts:
Basic and diluted
See notes to consolidated financial statements.
76
OOMA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Amounts in thousands)
Net loss
Other comprehensive (loss) income
Unrealized (loss) gain on short-term investment
Comprehensive loss
2017
Fiscal Year Ended January 31,
2016
2015
(12,949)
$
(14,052)
$
(6,410)
(28)
(12,977) $
17
(14,035) $
—
(6,410)
$
$
See notes to consolidated financial statements.
77
OOMA, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
(Amounts in thousands, except share data)
BALANCE - January 31, 2014
Issuance of common stock for stock
option exercises
Issuance of preferred stock upon warrant
exercise
Issuance of common stock upon warrant
exercise
Issuance of common stock in conjunction
with acquisition
Vesting of early exercised stock options
and restricted stock
Issuance of common stock warrants in
conjunction with debt
Stock-based compensation
Net loss
BALANCE - January 31, 2015
Issuance of Series Beta preferred stock,
net
Conversion of convertible preferred stock
to common stock
upon initial public offering
Issuance of common stock upon initial
public offering, net
of issuance costs
De-recognition of preferred warrant
liability to additional
paid-in capital
Issuance of common stock in conjunction
with acquisition-
related earn-out
Vesting of early exercised stock options
and restricted stock
Issuance of common stock related to
employee stock purchase plan
Exercise of common stock warrants to
common stock
Exercise of preferred stock warrants to
common stock
Issuance of common stock for stock
option exercises
Stock-based compensation
Other comprehensive income
Net loss
BALANCE - January 31, 2016
Issuance of common stock in conjunction
with acquisition-
related earn-out
Vesting of early exercised stock options
and restricted stock
Issuance of common stock related to
employee stock purchase plan
Issuance of common stock upon vesting
of restricted stock units
Shares repurchased for tax withholdings
on vesting of restricted stock units
Issuance of common stock for stock
option exercises
Stock-based compensation
Other comprehensive loss
Cumulative stock-based compensation
forfeiture adjustment
Net loss
BALANCE - January 31, 2017
Series Alpha Convertible
Preferred Stock
Series Alpha-1
Convertible Preferred
Stock
Series Beta Convertible
Preferred Stock
Common Stock
Additional
Paid-In
Accumulated
Other
Comprehensive
Income
Accumulated
Deficit
Total
Stockholders'
Equity
(Deficit)
Shares
7,848,198 $
Amount
Shares
Amount
Shares
Shares
Amount
Capital
Amount
—
— $
30,536
485,143 $
3,005
1,927,177 $
— $
4,487 $
— $
(44,346 ) $
(39,859 )
—
—
—
—
20,407
96
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
7,868,605
—
—
—
30,632
—
—
—
485,143
—
—
—
3,005
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
135,564
—
19
—
—
—
2,326
—
11
90,246
—
338
359,752
—
68
—
—
—
2,515,065
—
—
—
—
262
426
—
5,611
—
—
—
—
241,469
5,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
19
—
11
338
68
—
—
(6,410 )
(50,756 )
262
426
(6,410 )
(45,145 )
—
—
(7,868,605 )
(30,632 )
(485,143 )
(3,005 )
(241,469 )
(5,000 )
8,878,857
1
38,636
—
—
38,637
—
—
—
—
—
—
5,000,000
1
56,878
—
—
56,879
—
—
—
—
—
—
—
—
1,075
—
—
1,075
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
49,159
—
327,349
—
15,569
—
451
154
111
30,573
—
31
16,521
—
13
83,157
—
—
—
16,916,250
—
—
—
—
2
66
4,653
—
—
107,679
—
—
—
—
—
—
—
17
—
17
26,375
—
165
—
123,221
—
81
234,792
—
1,176
657,034
—
—
(170,281 )
—
(1,588 )
208,164
—
—
—
—
—
301
9,772
—
—
—
17,995,555 $
—
—
53
—
2 $ 117,639 $
—
—
—
—
—
—
(28 )
—
—
(11 ) $
—
—
—
—
—
451
154
111
31
13
—
—
—
(14,052 )
(64,808 )
66
4,653
17
(14,052 )
42,890
—
—
165
81
—
1,176
—
—
—
(1,588 )
—
—
—
(53 )
(12,949 )
(77,810 ) $
301
9,772
(28 )
—
(12,949 )
39,820
See notes to consolidated financial statements.
78
OOMA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Stock-based compensation expense
Depreciation and amortization
Amortization of intangible assets
Deferred income taxes
Others
Write-off of non-cash deferred debt issuance costs
Change in fair value of acquisition related contingent consideration
Change in fair value of warrant liability
Changes in operating assets and liabilities:
Accounts receivable, net
Inventories
Deferred inventory costs
Prepaid expenses and other assets
Accounts payable and accrued expenses
Other liabilities
Deferred revenue
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Purchases of short-term investments
Proceeds from maturity of short-term investments
Proceeds from sale of short-term investments
Purchases of property and equipment
Business acquisition, net of cash assumed
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from initial public offering, net
Proceeds from Series Beta preferred stock, net
Repayment of debt and capital leases
Proceeds from issuance of debt
Payment of preferred warrant liability
Payment of acquisition related earn-out
Shares repurchased for tax withholdings on vesting of restricted stock units
Proceeds from issuance of common stock related to warrants and employee stock
benefit plans
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
2017
Fiscal Year Ended January 31,
2016
2015
$
(12,949) $
(14,052) $
(6,410)
9,772
1,849
348
—
10
—
—
—
895
(819)
393
84
(99)
(57)
958
385
(59,007)
32,330
5,266
(1,558)
—
(22,969)
—
—
(628)
—
—
(100)
(1,588)
4,653
1,410
393
—
64
332
(281)
442
(1,215)
3,070
235
(470)
4,392
(132)
689
(470)
(28,078)
—
—
(2,884)
—
(30,962)
57,021
5,000
(11,620)
—
(584)
(326)
—
1,477
(839)
(23,423)
27,413
3,990 $
221
49,712
18,280
9,133
27,413 $
$
426
896
306
(502)
57
—
656
795
(2,095)
(3,206)
(751)
331
1,212
204
4,014
(4,067)
—
—
—
(1,186)
(672)
(1,858)
(142)
—
(1,508)
9,921
—
—
—
423
8,694
2,769
6,364
9,133
See notes to consolidated financial statements.
79
OOMA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Supplemental disclosure of cash flow information
Income taxes paid
Interest paid
Non-cash investing and financing activities:
Unpaid portion of property and equipment purchases
Shares issued as consideration in business acquisition and related earn-out
Conversion of preferred stock to common stock
De-recognition of warrant liability to additional paid-in capital
Unpaid offering costs
Issuance of warrants in connection with long-term debt
Purchase of equipment acquired on capital lease
2017
Fiscal Year Ended January 31,
2016
2015
$
$
$
$
$
$
$
$
$
3 $
18 $
122 $
165 $
— $
— $
— $
— $
— $
2 $
573 $
78 $
451 $
38,637 $
1,075 $
— $
— $
— $
1
173
162
338
—
—
351
323
1,321
See notes to consolidated financial statements.
80
OOMA, Inc.
Notes to Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description
of
Business
— Ooma, Inc. (the “Company”) is a leading provider of innovative communications solutions and other connected services to small
business, home, and mobile users. The Company’s unique hybrid Software-as-a-Service (“SaaS”) platform, consisting of its proprietary cloud, on-premises
appliances, mobile applications, and end-point devices, provides the connectivity and functionality that enables solutions. The Company was incorporated in
Delaware on November 19, 2003 and is headquartered in Palo Alto, California.
Principles
of
Consolidation
—The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United
States (“GAAP”) and includes the accounts of the Company and its wholly owned subsidiary. All intercompany transactions and balances have been eliminated
upon consolidation.
Fiscal
Year
End—
The last day of Company’s fiscal year is January 31, fiscal year end January 31, 2017 is referred as fiscal 2017, fiscal year end January 31, 2016
is referred as fiscal 2016 and fiscal year end January 31, 2015 is referred as fiscal 2015.
Use
of
Estimates
—The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates include, but are not limited to, those related to
revenue recognition, the allowance for returns, stock-based compensation and warrants, valuation of goodwill and intangible assets, inventory valuation, regulatory
fees and indirect tax accruals, and accounting for income taxes, including valuation allowances and fair value measurements. Estimates are based on historical
experience, where applicable, and other assumptions believed to be reasonable by management. Actual results could differ from those estimates. These estimates
are based on information available as of the date of the condensed consolidated financial statements, and assumptions are inherently subjective in nature; therefore,
actual results could differ from management’s estimates.
Reverse
Stock
Split
— Effective July 6, 2015, the Company completed a one-for-two reverse stock split of its outstanding common stock, convertible preferred
stock, stock options, warrants to purchase preferred stock and warrants to purchase common stock, as approved by its Board of Directors (the “Board”). All shares
and warrants and per share and warrant amounts set forth herein give effect to this reverse stock split.
Initial
Public
Offering
— In July 2015, the Company completed its initial public offering (the “IPO”) and issued 5,000,000 shares of its common stock at the
initial public offering price of $13.00 per share. The net proceeds from the sale of the shares was $56.9 million after deducting the underwriters’ discounts and
commissions of $4.5 million and $3.6 million of offering costs. See “Note 7. Convertible Preferred Stock Warrant Liability” and “Note 8. Common Stock and
Preferred Stock” for more information related to the IPO.
Secondary
Offering
— In January 2017, the Company completed a secondary offering, in which certain stockholders of the Company affiliated with Worldview
Technology Partners (the “Selling Stockholders”) sold an aggregate of 3,275,000 shares of our common stock at a public offering price of $8.65 per share,
including 425,000 shares of common stock sold upon the underwriters’ exercise of the overallotment option. The Company did not receive any of the proceeds
from the offering.
Revenue
Recognition
—The Company derives revenue from two sources: (1) subscription and services revenue, which are generated from the sale of subscription
plans and other services; and (2) product and other revenue. Products and services are sold directly to end-customers via the Company’s website and through
distributors and retailers.
The Company recognizes revenue when the following criteria are met:
•
•
•
•
Persuasive
evidence
of
an
arrangement
exists.
Delivery
has
occurred.
Collection
of
the
fees
is
reasonably
assured
.
The
fee
is
fixed
or
determinable.
81
Subscription and Services Revenue
The Company generates subscription and services revenue by selling subscriptions for communications solutions, as well as other connected services. Subscription
revenue is derived primarily from recurring monthly and annual payments related to service plans such as Ooma Basic, Ooma Office and Premier, international
calling plans, and other subscriptions. Subscription revenue is recognized on a straight-line basis over the contractual service term. Subscription and services
revenue also includes revenue generated from payments for qualified lead generation, prepaid international calls and directory assistance, which are recognized
based on actual usage. The Company also earns revenue from the display of advertisements through the Talkatone mobile application, primarily based on
advertisement impressions displayed. The Company recognizes revenue from mobile advertising on a net basis, because it is not the primary obligor to advertisers.
Deferred revenue primarily consists of billings or payments received in advance of meeting revenue recognition criteria. The Company’s telephony services are
sold as monthly or annual subscriptions, payable in advance. The Company recognizes deferred telephony services revenue on a ratable basis over the term of the
contract as the services are provided. For all arrangements, any revenue that has been deferred and is expected to be recognized beyond one year is not significant
and is included in long term liabilities in the consolidated balance sheets.
Product and Other Revenue
The Company generates product revenue from the sale of on-premise appliances and end-point devices, including shipping and handling fees. The Company also
generates other revenue from porting fees to enable customers to transfer their existing phone numbers. Product and other revenue for direct end-customers are
billed to the customer’s credit card at the time an on-line order is submitted by the customer via the Company’s website and recognized when the product has been
shipped to the customer. The Company also generates product revenue from sales through distributors, retailers and resellers (collectively the “channel partners”)
which are based on written purchase authorizations. The Company’s distribution agreements with its channel partners typically contain clauses for price protection
and rights of return, which result in prices for these transactions not being fixed or determinable and increases the difficulty of estimating returns from the channel
partners. Accordingly, the Company records shipments to the channel partners, where the right of return exists, as deferred revenue and defers recognition of
revenue on these sales until the title transfers to the end-customer. The Company assesses the ability to collect from its channel partners based on a number of
factors, including credit worthiness and payment history of the distributor or retail partner. The Company records revenue net of any sales-related taxes that are
billed to its customers.
Substantially all of the Company’s arrangements are multiple-element arrangements, which consist of an on-premise appliance and telephony services. The
arrangement may also contain a bundled end-point device and a subscription plan for telephony services. Monthly telephony services and end-point devices
purchased after the original multi-element arrangement are optional purchases that are accounted for as separate arrangements and are not considered a deliverable
in the sale of the on-premise appliance.
The Company has determined that each unit of accounting has stand-alone value and accounts for each separately. The Company allocates revenue to each unit of
accounting based on an estimated selling price at the inception of the arrangement. The total arrangement consideration is allocated to each separate unit of
accounting using the relative selling price of each unit.
The Company determines the estimated selling price for each deliverable using vendor-specific objective evidence, or VSOE, of selling price or third-party
evidence, or TPE, of selling price, if it exists. If neither VSOE nor TPE of selling price exists for a deliverable, the Company uses the best estimate of selling price,
or BESP, of each deliverable in its allocation of arrangement consideration. Revenue allocated to each deliverable, limited to the amount not contingent on future
performance, is then recognized when the basic revenue recognition criteria are met for the respective deliverable.
The Company determines VSOE of selling price for telephony services and end-point devices based on historical standalone sales to customers. In determining
VSOE of selling price, the Company requires that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range
of the median selling price. The Company does not have VSOE or TPE for its on-premise appliance and estimates BESP by considering company-specific factors
such as pricing strategies, direct product and other costs, and bundling and discounting practices.
The Company records reductions to revenue for estimated sales returns from end-users and customer credits at the time the related revenue is recognized. Sales
returns and customer credits are estimated based on historical experience, current trends and expectations regarding future experience. The Company monitors the
accuracy of its sales reserve estimates by reviewing actual returns and credits and adjusts them for future expectations to determine the adequacy of current reserve
needs. If actual future returns and credits differ from past experience, additional reserves may be required.
82
Cash
Equivalents
and
Short-term
investments
— The Company considers all highly liquid investments with an original maturity of three months or less at the
date of purchase to be cash equivalents. Short-term inv estments are classified as available-for-sale for use in current operations, if required, and are reported at fair
value, with unrealized gains and losses, net of tax, presented as a separate component of stockholders’ equity (deficit) within accumulated o ther comprehensive
(loss) income. All realized gains and losses and unrealized losses resulting from declines in fair value that are other-than-temporary are recorded in other expense,
net in the period of occurrence. The Company uses the specific identifi cation method to determine the realized gains and losses on investments. For all investments
in marketable securities, the Company assesses whether the impairment is other-than-temporary. If the fair value of a security is less than its amortized cost basi s,
an impairment is considered other-than-temporary if (i) the Company has the intent to sell the security or it is more likely than not that the Company will be
required to sell the security before recovery of its entire amortized cost basis, or (ii) the Company does not expect to recover the entire amortized cost of the
security. If an impairment is considered other-than-temporary based on condition (i), the entire difference between the amortized cost and the fair value of the
security is recognized in e arnings. If an impairment is considered other-than-temporary based on condition (ii), the amount representing credit losses, defined as
the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the security, will be recognized in earnings, and
the amount relating to all other factors will be recognized in other comprehensive income. The Company evaluates both qualitative and quantitative factors such as
duration and severity of the unrealized losses, credit ratings, default and loss rates of the underlying collateral, structure and credit enhancements to determine if a
credit loss may exist.
Fair
Value
of
Financial
Instruments
— The Company records its financial assets and liabilities at fair value. The accounting guidance for fair value provides a
framework for measuring fair value, clarifies the definition of fair value, and expands disclosures regarding fair value measurements. Fair value is defined as the
price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date.
The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company recognizes transfers among Level 1, Level 2 and Level 3 classifications as of the actual date of the events or change in circumstances that caused the
transfers.
The carrying value of certain of the Company’s financial instruments, including cash equivalents, accounts receivable, inventory, accounts payable and other
current assets and current liabilities approximates fair value due to their short maturities.
Segment
Reporting
—
The chief operating decision maker for the Company is the Chief Executive Officer. The Chief Executive Officer reviews financial
information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Accordingly, management has determined
that the Company operates in one reportable segment.
The Company markets its products and services in the United States and in foreign countries through its direct sales force and indirect distribution channels.
Substantially all of the Company’s revenue, based on the customer’s billing address, was derived from customers in the United States for the years ended
January 31, 2017, 2016 and 2015.
All of the Company’s long-lived assets were attributable to operations in the United States as of January 31, 2017 and 2016.
Comprehensive
Income
(Loss)
—The purpose of reporting comprehensive income (loss) is to report a measure of all changes in equity of an entity that result from
recognized transactions and other economic events of the period resulting from transactions from non-owner sources. In fiscal 2017 and 2016, the Company’s other
comprehensive loss includes unrealized (loss) gain of $(28,000) and $17,000, respectively, from its available-for-sale securities. The Company did not have any
components of other comprehensive income (loss) in fiscal 2015, as such the net loss for fiscal 2015 reported equaled the comprehensive loss.
83
Net
Loss
per
Share
of
Common
Stock
—Basic net loss per common sha re is calculated by dividing the net loss by the weighted-average number of common
shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss by the
weigh ted-average number of common shares and potentially dilutive securities outstanding for the period determined using the treasury-stock and if-converted
methods. Prior to the completion of the Company’s initial public offering, the Company applied the two-c lass method for calculating and presenting earnings per
share as Series Alpha, Series Alpha -1 and Series Beta convertible preferred stock was considered participating securities due to the rights of cumulative preferred
return. The Company’s participating securities did not have a contractual obligation to share in the Company’s losses. As such, the net loss was attributed entirely
to common stockholders. Because the Company has reported a net loss for all periods presented, diluted net loss per common sha re is the same as basic net loss per
common share for those periods.
Concentration
of
Credit
Risk
—Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents,
short-term investments and accounts receivables. Substantially all of the Company’s cash and cash equivalents and short-term investments are held by financial
institutions that management believes are of high-credit quality. Such investments and deposits may, at times, exceed federally insured limits.
The Company performs credit evaluations of its channel partners’ financial condition and generally does not require collateral for sales made on credit. One
customer accounted for more than 10% of the Company’s accounts receivable balances at January 31, 2017 and January 31, 2016, respectively. The concentration
of accounts receivable was as follows:
Customer A
Customer B
*
represents less than 10% during the period
As of January 31,
2017
2016
11%
*
*
13%
There were no customers that individually exceeded 10% of revenue during fiscal 2017, 2016 and 2015.
Accounts
Receivable
and
Allowance
for
Returns
—The Company’s receivables are recorded when billed. The carrying value of the accounts receivable, net of the
allowance for returns represents their estimated net realizable value. The Company determines allowances for returns based on its historical experience. As of
January 31, 2017 and January 31, 2016, the Company recorded allowance for doubtful accounts and allowance for returns of $0.2 million and $0 on the
consolidated balance sheets, respectively.
Inventories
—Inventories, which consist of raw materials and finished goods, are stated at the lower of cost to purchase or the market value of such inventory, and
include the cost to purchase manufactured products, allocated labor and overhead. Inventory is valued using the first-in, first-out method for all inventories. The
Company writes down the inventory value for estimated excess and obsolete inventory based on management’s assessment of future demand and market
conditions, and establishes a new cost basis for the inventory.
Deferred
Inventory
Costs
—Deferred inventory cost represents the inventory that has been shipped to a channel partner for which the retailer or distributor has a
right of return. The cost of the product sold is recognized contemporaneously with the recognition of revenue, when the end customer has purchased the on-premise
appliance or end-point device.
Website
Development
Costs
—The Company capitalizes certain costs to develop its websites when preliminary development efforts are successfully completed,
management has authorized and committed project funding, and it is probable that the project will be completed and the software will be used as intended. Such
costs are amortized on a straight-line basis over the estimated useful life of the related assets, which approximates two years. Costs related to preliminary project
activities and post-implementation activities are expensed as incurred. The Company capitalized approximately $0.4 million and $0.5 million of website
development costs in fiscal 2017 and 2016, respectively.
Property
and
Equipment
—Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed over the estimated useful lives of
the assets, using the straight-line method, generally three to five years. Leasehold improvements are amortized over the shorter of the lease term or estimated useful
lives of the respective assets. Repairs and maintenance costs that do not extend the life or improve the asset are expensed as incurred.
84
Goodwill
and
Intangible
Assets
— The Company records the excess of the acquisition purchase price over the fair value of the tangible and identifiable intangible
assets acquired as goodwill. Goodwill of $1.1 million was recognized following the acquisition of Talkatone in fiscal 2015. The Company performs an impairment
test of its goodwill in the fourth quarter of its fiscal ye ar, or more frequently if indicators of potential impairment arise. The Company has a single reporting unit
and consequently evaluates goodwill for impairment based on an evaluation of the fair value of the Company as a whole. No impairment has been recogn ized
related to the goodwill balance as of January 31, 2017 and January 31, 2016. The Company records purchased intangible assets at their respective estimated fair
values at the date of acquisition. Purchased intangible assets are being amortized using th e straight-line method over their remaining estimated useful lives, which
range from one to seven years.
Impairment
of
Long-Lived
Assets
—Long-lived assets, such as property and equipment, capitalized website development costs, and intangible assets are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If
the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the
asset exceeds the fair value of the asset. The Company did not record any impairment charges in any of the periods presented.
Convertible
Preferred
Stock
—The Company recorded convertible preferred stock at fair value on the dates of issuance, net of issuance costs. The convertible
preferred stock was recorded outside of stockholders’ equity because the shares contained liquidation features that were not solely within the Company’s control.
The Company had elected not to adjust the carrying values of the convertible preferred stock to the liquidation preferences of such shares because it was uncertain
whether or when an event would occur that would obligate the Company to pay the liquidation preferences to holders of shares of convertible preferred stock. Upon
the completion of the IPO all shares of the convertible preferred stock were converted to shares of common stock.
Convertible
Preferred
Stock
Warrant
Liability
—The Company did not have outstanding warrants to purchase convertible preferred stock as of January 31, 2017
and January 31, 2016. Prior to the completion of the IPO in July 2015, the Company had recorded freestanding warrants to purchase convertible preferred stock as
derivative financial liabilities as the terms of the warrants are not fixed due to potential adjustments in the exercise price and the number of shares issuable under
the warrants. Some of the warrants issued in connecting with debt financing provided for adjustment of the exercise price and the number of shares upon an equity
financing at a lower price and also provided for a contingent cash settlement, both of which preclude equity classification of the warrants.
The convertible preferred stock warrants were initially recorded at fair value when issued, with gains and losses arising from changes in fair value recognized in
other expense in the consolidated statements of operations at each period end while such instruments were outstanding and classified as liabilities. The estimated
fair values of outstanding preferred stock warrant liabilities were measured using Monte-Carlo simulation and Black-Scholes valuation models. The fair value of
the convertible preferred stock warrants issued in connection with debt agreements was recorded as a debt discount that was amortized as non-cash interest expense
in the consolidated statement of operations over the expected repayment period of the debt agreement. The Company adjusted the liability for changes in fair value
until the completion of the IPO in July 2015. Upon conversion of the underlying preferred stock to common stock, the related warrant liability was remeasured to
fair value and the remaining liability was reclassified to additional paid-in capital. The warrant that was subject to contingent cash settlement was settled and the
warrant holder was paid $0.6 million.
Shipping
and
Handling
Costs
—Shipping and handling costs are expensed as incurred and are included in cost of product and other revenue.
Research
and
Development
—Research and development costs, including new product development, are charged to operating expenses as incurred in the
consolidated statements of operations. Such costs included personnel-related costs, including stock-based compensation, supplies, services, depreciation, and
allocated facilities costs.
Advertising
—The Company expenses all advertising costs as incurred, except for the cost of producing television advertising, which is expensed on the first date
of airing. Advertising costs included in sales and marketing expenses were $16.5 million, $13.9 million and $14.8 million for the years ended January 31, 2017,
2016 and 2015, respectively.
Advertising costs incurred by channel partners are recorded as reduction of revenue. These costs totaled $0.3 million, $0.5 million and $0.8 million for the years
ended January 31, 2017, 2016 and 2015, respectively.
Stock-Based
Compensation
—Stock-based compensation expense is recognized under ASC 718, Compensation—Stock
Compensation
. ASC 718 requires
companies to recognize the cost of employee services received in exchange for awards of equity instruments based upon the fair value of those awards on the grant
date.
85
The Company’s stock-based awards include stock options, restricted s tock units (“RSUs”) and purchase rights under the employee stock purchase plan (“ESPP”).
Stock-based compensation expense for all stock-based awards granted to employees is measured at the grant date based on the fair value of the equity award and is
recog nized as expense over the requisite service period, which is generally the vesting period. The fair value of options granted is estimated on the date of grant
using the Black-Scholes option pricing model. The fair value of each RSU granted is determined us ing the fair value of the Company’s common stock on the date
of grant. The fair value of each stock purchase right under the Company's ESPP is calculated based on the closing price of the Company's stock on the date of grant
and the value of a call and put option estimated using the Black-Scholes pricing model. The Black-Scholes pricing model requires assumptions including the
market value of the Company's common stock, expected term of the award, expected volatility of the price of the Company's common sto ck, risk-free interest
rates, and expected dividend yield.
Stock-based compensation expense for options granted to non-employees is calculated using the Black-Scholes option pricing model and is recognized in the
consolidated statements of operations over the service period. Compensation expense for non-employees’ stock options subject to vesting is remeasured as of each
reporting date until the stock options are vested, and the change in value, if any, is recognized in the consolidated statement of operations during the period the
related services are performed.
The Company adopted Accounting Standards Update (“ASU”) 2016-09, Improvements
to
Employee
Share-Based
Payment
Accounting
in the third quarter of fiscal
2017 and elected to account for forfeitures as they occur rather than estimate expected forfeiture. Refer to “Recently Adopted Accounting Standard” for more
information.
The Company recognizes stock-based compensation expense on the straight-line method for its equity awards. Determining the fair value of stock-based awards at
the grant date requires judgment, including estimating the expected volatility, expected term, risk-free interest rate, and expected dividends.
Income
Taxes
—The Company accounts for income taxes in accordance with ASC 740, Income
Taxes
, under which deferred tax liabilities and assets are
recognized for the expected future tax consequences of temporary differences between financial statement carrying amounts and the tax basis of assets and
liabilities and net operating loss and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount
expected to be realized.
A tax position is recognized when it is more likely than not that the tax position will be sustained upon examination, including resolution of any related appeals or
litigation processes. A tax position that meets the more likely than not recognition threshold is measured at the largest amount of benefit that is greater than 50%
likely of being realized upon ultimate settlement with a taxing authority.
Recently
Adopted
Accounting
Standard
In July 2015, the Financial Accounting Standard Board (“FASB”) issued ASU 2015-11 (ASC 330) ,
Simplifying
the
Measurement
of
Inventory
. This guidance
requires companies to measure inventory using the lower of cost and net realizable value. It is effective for annual reporting periods beginning after December 15,
2016 and interim periods within those fiscal years. Early adoption is permitted. The Company adopted ASU 2015-11 as of January 31, 2017 on a prospective basis
and there was no impact of this guidance on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Improvements
to
Employee
Share-Based
Payment
Accounting
. This ASU is designed to simplify several aspects
of accounting for share-based payment award transactions which include the income tax consequences, classification of awards as either equity or liabilities,
classification on the statement of cash flows and forfeiture rate calculations. The Company early adopted ASU 2016-09 during the third quarter of fiscal 2017. The
Company has elected to account for forfeitures as they occur rather than estimate expected forfeiture using a modified retrospective transition method. As a result
of this the Company recorded a cumulative-effect adjustment of $0.1 million to accumulated deficit and additional paid-in capital. Additionally, under ASU 2016-
09, excess tax benefits and deficiencies are required to be recognized prospectively as part of provision for income taxes rather than additional paid-in capital. The
adoption did not have any material impact on our accounting of provision for income taxes. Finally, ASU 2016-09 requires excess tax benefits to be presented as a
component of operating cash flows rather than financing cash flows. The Company has adopted this requirement prospectively and accordingly, prior periods have
not been adjusted. Excess tax benefits were not material for all periods presented.
86
In November 2015, the FASB issued ASU 2015-17, Balance
Sheet
Classification
of
Deferred
Taxes
, which simplifies the presentation of deferred income taxes.
The ASU requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position, thereby simpli fying the current guidance
that requires an entity to separate deferred assets and liabilities into current and noncurrent amounts. The Company early adopted ASU 2015-17 as of January 31,
2016 on a prospective basis. The statement of financial position as of January 31, 2016 reflects the classification of deferred tax assets and liabilities as noncurrent.
Recent
Accounting
Pronouncements
Not
Yet
Adopted
In January 2017, the FASB issued ASU 2017-04, Intangibles
–
Goodwill
and
Other
(Topic
350)
that will eliminate the requirement to calculate the implied fair
value of goodwill to measure a goodwill impairment charge. Instead, impairment charge will be based on the excess of a reporting unit's carrying amount over its
fair value. The guidance is effective for the Company in the first quarter of fiscal 2023. Early adoption is permitted. The Company does not anticipate the adoption
of this guidance to have a material impact on its consolidated financial statements, absent any goodwill impairment.
In August 2016, the FASB issued ASU 2016-15, Statement
of
Cash
Flows:
Classification
of
Certain
Cash
Receipts
and
Cash
Payments
, which provides guidance
to reduce diversity in practice for eight cash flow classification issues, such as debt prepayment or debt extinguishment cost, contingent consideration payment
made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies and
distributions received from equity method investees. ASU 2016-15 will become effective for the Company in the first quarter of fiscal 2019. Early adoption is
permitted. The Company is currently evaluating the impact of this guidance on its condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases
. This ASU requires assets and liabilities arising from leases, including operating leases, to be
recognized on the balance sheet. ASU 2016-02 will become effective for the Company in the first quarter of fiscal 2020, and requires adoption using a modified
retrospective approach. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15 (ASC 205) ,
Disclosure
of
Uncertainties
About
an
Entity’s
Ability
to
Continue
as
a
Going
Concern
. The new
standard provides guidance around management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going
concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue
from
Contracts
with
Customers
(Topic 606), which affects any entity that either enters into contracts with
customers to transfer goods and services or enters into contracts for the transfer of nonfinancial assets. ASU 2014-09 will replace most existing revenue recognition
guidance in GAAP when it becomes effective. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services
to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services, and requires
expanded qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with
customers, including significant judgments and estimates used by management.
In August 2015, the FASB issued ASU 2015-14 and approved a one-year deferral of the effective date of ASU 2014-09. In March 2016, April 2016 and May 2016,
the FASB issued ASU 2016-08, ASU 2016-10 and ASU 2016-12, respectively that clarify the implementation guidance on principal versus agent considerations,
identification of performance obligations, collectability criterion and noncash consideration of the new standard. ASU 2014-09 will become effective for the
Company in the first quarter of fiscal 2019. Early adoption is permitted and the new standard can be adopted by using (i) a full retrospective approach for all
periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at
the date of initial application and providing certain additional disclosures. The Company does not plan to early adopt the new standard. The Company is in the early
stages of evaluating the impact of the new standard on its accounting policies, processes, and system requirements and has not made a final decision regarding the
adoption method. The Company's final determination will depend on a number of factors, such as the significance of the impact of the new standard on its financial
results, system readiness, including that of software procured from third-party providers, and its ability to accumulate and analyze the information necessary to
assess the impact on prior period financial statements, as necessary. While the Company continues to assess the potential impacts of the new standard, the
Company cannot reasonably estimate quantitative information related to the impact of the new standard on its financial statements at this time.
87
2 . FAIR VALUE MEASUREMENT
The Company’s financial assets and liabilities that are measured at fair value on a recurring basis by level within the fair value hierarchy were as follows (in
thousands):
Assets:
Cash and cash equivalents:
Money market funds
Total cash equivalents
Cash
Total cash and cash equivalents
Short-term investments:
U.S. government securities
Corporate debt securities
Commercial paper
U.S. agency securities
Asset-backed securities
Total short-term investments
Assets:
Cash and cash equivalents:
Money market funds
Commercial paper
Total cash equivalents
Cash
Total cash and cash equivalents
Short-term investments:
U.S. government securities
Corporate debt securities
Commercial paper
U.S. agency securities
Total short-term investments
Liabilities:
Acquisition-related contingent consideration
Total liabilities
Level 1
Level 2
Level 3
Total
As of January 31, 2017
951 $
951 $
— $
— $
17,798 $
—
—
—
—
17,798 $
— $
18,436
5,386
5,777
1,814
31,413 $
— $
— $
$
— $
—
—
—
—
— $
951
951
3,039
3,990
17,798
18,436
5,386
5,777
1,814
49,211
Level 1
Level 2
Level 3
Total
As of January 31, 2016
3,462 $
—
3,462 $
— $
3,499
3,499 $
7,494 $
—
—
—
7,494 $
— $
7,845
4,986
7,666
20,497 $
— $
—
— $
$
— $
—
—
—
— $
3,462
3,499
6,961
20,452
27,413
7,494
7,845
4,986
7,666
27,991
— $
— $
— $
— $
288 $
288 $
288
288
$
$
$
$
$
$
$
$
$
$
There were no transfers into or out of the Level 3 category during fiscal 2017 and 2016.
As of January 31, 2016, the Level 3 liabilities consisted of acquisition-related contingent consideration of $0.3 million, which the Company paid out using $0.1
million in cash and $0.2 million in shares of common stock during fiscal 2017 .
The Company did not hold Level 3 assets and liabilities as of January 31, 2017.
The Company estimated the fair value of the acquisition-related contingent consideration using a probability-weighted discounted cash flow model. Key
assumptions include the level and timing of expected future revenue and expenses of the acquired business, and discount rates consistent with the level of risk and
economy in general. This fair value measure was based on significant inputs not observed in the market and thus represented a Level 3 instrument. The change in
fair value of acquisition-related contingent consideration is included in general and administrative expenses in the consolidated statements of income, and the
contingent consideration is included in accrued liabilities on the consolidated balance sheets. The Company remeasured the contingent consideration in fiscal 2016
and recorded a $0.3 million reduction in the previously recorded expense.
88
Changes in the Le vel 3 fair value category for the periods presented were as follows (in thousands):
Balance at January 31, 2016
Payout of consideration
Issuance of shares
Balance at January 31, 2017
Acquisition-Related
Contingent
Consideration
$
$
288
(123)
(165)
—
The carrying value of the Company’s accounts receivable, inventory, accounts payable and other current assets and current liabilities approximates fair value due to
short maturities.
3. SHORT-TERM INVESTMENTS
Short-term investments consisted of the following (in thousands):
Corporate debt securities
Commercial paper
U.S. agency securities
U.S. government securities
Asset-backed securities
Total short-term investments
Corporate debt securities
Commercial paper
U.S. agency securities
U.S. government securities
Total short-term investments
Amortized Cost
$
As of January 31, 2017
Unrealized Losses
Unrealized
Gains
Fair Value
(20) $
—
—
(2)
—
(22) $
1 $
—
3
7
—
11 $
18,436
5,386
5,777
17,798
1,814
49,211
$
$
Amortized Cost
$
As of January 31, 2016
Unrealized Losses
Unrealized Gains
Fair Value
(6) $
—
—
—
(6) $
— $
1
5
17
23 $
7,845
4,986
7,666
7,494
27,991
18,455 $
5,386
5,774
17,793
1,814
49,222 $
7,851 $
4,985
7,661
7,477
27,974 $
The gross realized gains and losses related to the Company’s short-term investments were not material for the year ended January 31, 2017. The Company did not
have any gross realized gains and gross realized losses for the years ended January 31, 2016 and 2015.
The cost basis and fair value of the short-term investments by contractual maturity were as follows (in thousands):
As of January 31, 2017
As of January 31, 2016
One year or less
Over one year and less than two years
Total
Amortized Value
$
44,806 $
4,416
49,222 $
Fair Value
Amortized Value
Fair Value
44,794 $
4,417
49,211 $
19,143 $
8,831
27,974 $
19,145
8,846
27,991
$
Investments in an unrealized loss position consisted of the following (in thousands):
Corporate debt securities
U.S. government securities
Total
As of January 31, 2017
As of January 31, 2016
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
18,436 $
17,798
36,234 $
(20) $
(2)
(22) $
7,845 $
—
7,845 $
(6)
—
(6)
$
$
89
The Company reviews the individual securities in its portfolio to determine whether a decline in a security’s fair value below the amortized cost basis is other-t
han-temporary. The Company determined that as of January 31, 2017 and 2016 there were no investments in its portfolio that were other-than-temporarily
impaired. The Company does not intend to sell any of these investments, and it is not more likely than no t that the Company would be required to sell these
investments before recovery of their amortized cost basis, which may be at maturity.
4. GOODWILL AND INTANGIBLE ASSETS
The Company recognized $1.5 million in intangibles and $1.1 million in goodwill following the acquisition of Talkatone, Inc. in fiscal 2015. There was no change
to goodwill subsequent to the acquisition.
The carrying values of intangible assets other than goodwill were as follows (in thousands):
As of January 31, 2017
As of January 31, 2016
Developed technology
User relationships
Trade name
Non-compete agreement
Patents and licenses
Total
Estimated
Life
(in years)
5
3.5
5
2
3.8-7
$
Gross
Value
815
458
103
118
714
$
Accumulated
Amortization
(448)
$
(360)
(56)
(118)
(689)
$
2,208 $
(1,671) $
$
367
98
47
—
25
537 $
Net
Carrying
Amount
Gross
Value
At January 31, 2017 the estimated amortization expense related to the intangible assets is as follows (in thousands):
$
Accumulated
Amortization
(285)
$
(229)
(36)
(104)
(669)
815
458
103
118
714
2,208 $
(1,323) $
$
$
Net
Carrying
Amount
530
229
67
14
45
885
291
190
53
3
—
537
Fiscal Years Ending January 31,
2018
2019
2020
2021
2022 and thereafter
Total
5. BALANCE SHEET COMPONENTS
Inventories consist of the following (in thousands):
Finished goods
Raw material
Total inventory
Deferred revenue, consists of the following (in thousands):
Deferred revenue:
Subscription and services
Product and other
Total deferred revenue
Less: current portion of deferred revenue
Deferred revenue, noncurrent portion included in other
long-term liabilities
$
$
$
As of January 31,
2017
2016
4,847 $
983
5,830 $
4,633
378
5,011
As of January 31,
2017
2016
13,770 $
2,260
16,030
15,521
11,954
3,118
15,072
15,036
36
$
509
$
90
Property and equipment, net consists of the following (in thousands):
Software and computer equipment
Website development costs
Machinery and equipment
Office furniture and fixtures
Leasehold improvements
Total property and equipment
Less: accumulated depreciation and amortization
Property and equipment, net
Estimated
Life
(in years)
3-4
2
3
5
shorter of estimated life of asset
or remaining lease term
As of January 31,
2017
2016
$
$
$
$
5,605
1,973
1,304
62
518
9,462
(5,286)
4,176
$
$
6,615
1,675
1,207
57
372
9,926
(5,635)
4,291
Depreciation and amortization of property and equipment totaled $1.6 million, $1.4 million and $0.9 million for the years ended January 31, 2017, 2016 and 2015,
respectively. During fiscal 2017 the Company wrote off certain computer equipment and software with original cost and accumulated depreciation of $1.9 million
and $1.9 million, respectively, and recorded a loss of $14,000 in other expense, net in the consolidated statements of operations.
Computer equipment under a capital lease agreement and the related accumulated depreciation at January 31, 2016 was $1.5 million and $0.5 million,
respectively. The Company did not have any outstanding capital lease as of January 31, 2017.
Accrued expenses consist of the following (in thousands):
Accrued regulatory fees and taxes
Accrued payroll and related expenses
Acquisition-related contingent consideration
Other accrued expenses
Total accrued expenses
6. DEBT
As of January 31,
2017
2016
$
$
4,315 $
4,546
—
2,718
11,579 $
5,216
3,559
288
3,947
13,010
As of January 31, 2016, short-term debt of $0.6 million on the consolidated balance sheets related to equipment acquired under capital lease. The Company repaid
this outstanding debt in April 2016 and did not have any debt as of January 31, 2017.
In April 2012, (amended in October 2012), the Company entered into a secured debt agreement (“Term Debt”) in the amount of $4.0 million, with an original
maturity date in September 2015 and a fixed interest rate of 5.75%. In December 2012, the Company entered into an amended secured debt agreement, adding a
revolving line of credit in the amount of $6.0 million (“the Revolver”) with original maturity of December 2014. The interest rate on the Revolver is 2.75% above
the prime rate. In July 2014, the Company entered into an amended agreement to extend the maturity date of the Revolver until July 2016. In July 2015, the
Company repaid the outstanding balance of $5.3 million under the Term Debt and the Revolver using a portion of the IPO proceeds. In July 2016, the Company
entered into an amended agreement to extend the maturity of the Revolver to August 2016. The Revolver matured in August 2016.
In January 2015, the Company entered into an amended line of credit under a loan and security agreement with its current lender which increased the amount
available under the Revolver to $12.0 million and added a new line of credit of up to $10.0 million. In January 2015, the Company drew down $5.0 million of this
new line of credit. The interest rate on advances under the line of credit is 11%. The original maturity date of the line of credit was January 2018. The Company
repaid this outstanding debt of $5.0 million in July 2015 using a portion of the IPO proceeds. In connection with the agreement, the Company issued warrants to
purchase 76,630 shares of the Company’s common stock with an exercise price of $6.04 per share that are exercisable until January 2025. As of January 31, 2017,
these warrants remained outstanding.
91
The Company has certain non-financial covenants in connecti on with the borrowings. As of January 31, 2016 the Company was in compliance with all the
covenants under the Revolver agreement.
Total interest expense recognized was $18,000, $0.9 million and $0.3 million in each year ended January 31, 2017, 2016 and 2015, respectively. Total amortization
of debt issuance costs recognized was zero, $0.1 million and $0.1 million in each year ended January 31, 2017, 2016 and 2015, respectively. Total interest expense
recognized in fiscal 2016 included $0.3 million related to the write-off of non-cash deferred issuance costs due to the repayment of all of the outstanding debt in
July 2015.
7. CONVERTIBLE PREFERRED STOCK WARRANT LIABILITY
The Company did not have any outstanding warrants to purchase convertible preferred stock as of January 31, 2017 and January 31, 2016.
In December 2010, the Company issued a warrant to purchase 70,287 shares of Series Alpha convertible preferred stock at an exercise price of $4.70 per share. The
warrant was initially measured at its fair value and recorded as a derivative liability. On each reporting date the change in fair value of the warrant was determined
based on Monte-Carlo model or IPO pricing on payout. The Company recorded a remeasurement loss of $0.1 million and $0.3 million, respectively, in other
expense, net in the consolidated statement of operations during fiscal 2016 and 2015, respectively. Upon completion of the IPO in July 2015, the fair value of the
warrant was determined to be $0.6 million at the IPO price of $13.00 per share. The warrant was cash settled and the Company paid $0.6 million to the warrant
holder upon the closing of the IPO.
In May and June 2009, the Company issued warrants to purchase 55,696 shares of Series Alpha convertible preferred stock. These warrants were initially measured
at their fair value and recorded as a derivative liability. On each reporting date the change in fair value of the warrants were determined using the Black Scholes
model. The Company recorded a remeasurement loss of $0.1 million and $0.3 million, respectively, in other expense, net in the consolidated statement of
operations during fiscal 2016 and 2015. Upon the completion of the IPO in July 2015, t he total aggregate liability of $0.4 million related to these warrants was
derecognized and reclassified to additional paid-in capital which then automatically converted these warrants to purchase shares of Series Alpha convertible stock
into warrants to purchase shares of common stock.
In April 2012, December 2012 and October 2014, the Company issued warrants to purchase an aggregate of 66,026 shares of Series Alpha convertible preferred
stock in connection with a debt agreement with a lender. The Company recorded the warrants as a derivative liability. The warrants were initially measured at fair
value and remeasured at every reporting period date using Monte-Carlo valuation. The Company recorded a remeasurement loss of $0.3 million and $0.2 million,
respectively, in the consolidated statement of operations during fiscal 2016 and 2015. Upon completion of the IPO in July, 2015, the total aggregate liability of $0.7
million related to these warrants was derecognized and reclassified to additional paid-in capital which then automatically converted these warrants to purchase
shares of Series Alpha convertible stock into warrants to purchase shares of common stock on a 1:1 basis. During the fourth quarter of fiscal 2016, the lender net
exercised warrants to purchase 66,026 shares of Series Alpha convertible stock at an exercise price of $4.70 per share to 21,421 shares of common stock.
8. COMMON STOCK AND PREFERRED STOCK
Convertible
Preferred
Stock
Upon the closing of the IPO in July 2015, all of the Company's outstanding Series Alpha and Series Alpha-1 convertible preferred stock converted into 8,353,748
shares of common stock on a 1:1 basis and 241,469 shares of Series Beta preferred stock converted into 525,109 shares of common stock.
Common
Stock
and
Preferred
Stock
In July 2015, the Company filed an amended and restated certificate of incorporation to increase the amount of common stock authorized for issuance
to 100,000,000 shares with a par value of $0.0001 per share and 10,000,000 shares with a $0.0001 par value per share of preferred stock.
92
Common
Stock
Reserved
for
Future
Issuance
The Company had shares of common stock reserved for issuance as follows:
Warrants to purchase common stock
Options to purchase common stock
Shares available for future issuance under stock plans
Shares reserved under Employee Stock Purchase Plan
Restricted stock units outstanding
Total shares reserved for issuance
Early
Exercise
of
Common
Stock
Fiscal Year Ended January 31,
2016
2017
97,931
1,777,365
918,260
532,597
1,859,196
5,185,349
97,931
2,087,584
1,254,404
425,596
1,056,905
4,922,420
During the years ended January 31, 2017, 2016 and 2015, 1,771, 0 and 131,810 shares of stock options were early exercised prior to their vesting dates. The
amounts received from all such early exercises is recorded in accrued expenses and other liabilities on the consolidated balance sheets and reclassified to
stockholders’ equity as the options vest. The unvested shares are subject to the Company’s repurchase right at the original purchase price, which lapses over the
vesting term of the original option grant. As of January 31, 2017 and 2016, there were 53,821 and 173,404 shares, respectively, legally outstanding, but not
included within common stock outstanding for accounting purposes as a result of the early exercise of common stock options that were not yet vested. As of
January 31, 2017 and 2016, the aggregate price of shares subject to repurchase recorded in accrued expenses and other liabilities totaled $0.1 million and $0.2
million, respectively.
9. STOCKHOLDERS’ EQUITY
Equity
Award
Plans
2015
Equity
Incentive
Plan
In June 2015, the Company amended and restated its 2005 Stock Plan (the “2005 Plan”) in the form of 2015 Equity Incentive Plan (the “2015 Plan”) which became
effective immediately upon the effectiveness of the Company’s IPO. T he terms of the 2005 Plan will continue to govern the terms and conditions of the
outstanding awards previously granted thereunder.
T he 2015 Plan provides for the grant of incentive stock options to its employees and any of its subsidiary corporations’ employees, and for the grant of non-
statutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares to its employees, directors and
consultants and its subsidiary corporations’ employees and consultants. The maximum aggregate number of shares that may be issued under the 2015 Plan is
6,638,930. In addition, pursuant to the terms of the 2015 Plan, the number of shares available for issuance under the 2015 Plan will be annually increased on the
first day of each of its fiscal years beginning with fiscal 2017, by an amount equal to the lessor of (i) 5% of the outstanding shares of its common stock as of the last
day of its immediately preceding fiscal year; and (ii) such other amount as the Company’s Board may determine. In the first quarter of fiscal 2017, the Company’s
Board approved an increase of 854,483 shares of common stocks for future issuance under the 2015 Plan.
As of January 31, 2017, the Company had 918,260 shares of common stock available for future issuance.
Employee
Stock
Purchase
Plan
In conjunction with the completion of its IPO, the Company adopted the 2015 Employee Stock Purchase Plan (“ESPP”) and 441,165 shares of common stock were
initially authorized for issuance. The number of authorized shares under the ESPP is subject to increase on an annual basis. In the first quarter of fiscal 2017, the
Company’s Board approved an increase of 341,793 shares for future issuance pursuant to the terms of the ESPP. The ESPP allows eligible employees to purchase
shares of common stock at a discount through payroll deductions of up to 15% of their eligible compensation subject to plan limitations. The ESPP provides for a
24-month offering period comprised of four purchase periods of approximately six months. Employees are able to purchase shares at 85% of the lower of the fair
market value of the Company’s common stock (i) at the date of commencement of the offering period or (ii) at the last day of the purchase period. The offering
periods are scheduled to start on the first trading day on or after March 15 and September 15 of each year, except for the first offering period, which commenced on
the first trading day upon the completion of the Company’s IPO, or July 17, 2015, and ends on September 15, 2017. During fiscal 2017 and 2016, there were ESPP
purchases that resulted in the issuance of 234,792 shares and 15,569 shares of common stock at a weighted purchase price of $5.01 and $7.12 per share,
respectively.
93
T he Company recorded stock-based compensation expense of $1.0 million and $0.4 million rel ated to the ESPP during the years ended January 31, 2017 and
2016, respectively .
Stock
Options
Options to purchase shares of common stock may be granted to employees, directors, and consultants. These options vest from date of grant to up to five years and
expire ten years from the date of grant. Options may be exercised anytime during their term in accordance with the vesting/exercise schedule specified in the
recipient’s stock option agreement and in accordance with the plan provisions. Shares issued upon exercise prior to vesting, are subject to a right of repurchase,
which lapses according to the original option vesting schedule.
The following table summarizes the Company’s stock option activities:
Balance as of January 31, 2016
Options exercised
Options canceled
Balance as of January 31, 2017
Vested and exercisable - January 31, 2017
Vested and expected to vest - January 31, 2017
Number of
Shares
Weighted Average
Weighted Average
Exercise Price
Per Share
Contractual Term
(in years)
Aggregate
Intrinsic Value
(in thousands)
2,087,584 $
(213,164)
(97,055)
1,777,365 $
1,069,258 $
1,777,365 $
5.59
1.43
12.06
5.74
4.63
5.74
7.9 $
4,843
7.0 $
6.4 $
7.0 $
7,864
5,776
7,864
The aggregate intrinsic value of vested options exercised during the years ended January 31, 2017, 2016 and 2015 was $1.3 million, $0.8 million and $0.5 million,
respectively.
The weighted average grant date fair value of options granted during the years ended January 31, 2016 and 2015 was $6.92 and $5.20 per share, respectively. The
Company did not grant any stock options during fiscal 2017.
Restricted
Stock
Units
Restricted Stock Units (“RSUs”) were granted to employees, non-employee board members and consultants. These RSUs vest ratably over a period of time which
ranges from one to four years, and are subject to the participant’s continuing service to the Company over that period. Until vested, RSUs do not have the voting
and dividend participation rights of common stock and the shares underlying the awards are not considered issued and outstanding.
The following table summarizes the Company’s RSUs activities:
Balance as of January 31, 2016
RSUs granted
RSUs vested
RSUs canceled
Balance as of January 31, 2017
Number of
Shares
Weighted Average
Grant-Date Fair
Value Per Share
Weighted Average
Remaining Vesting
Period (in years)
Aggregate
Intrinsic
Value
(in thousands)
1,056,905 $
1,596,750
(657,034)
(137,425)
1,859,196 $
9.60
7.25
8.76
8.01
7.65
1.4
$
7,176
1.4 $
17,941
The Company did not grant any RSUs prior to fiscal 2016. The number of RSUs vested includes shares that the Company withheld on behalf of certain employees
to satisfy the minimum statutory tax withholding requirements, as defined by the Company. During fiscal 2017, the Company withheld 170,281 shares of stock for
an aggregate amount of $1.6 million and classified such amount as financing cash outflows in the consolidated statements of cash flows. The Company canceled
and returned these shares to the 2015 Plan, which are available under the plan terms for future issuance.
Common
Stock
Warrants
As of January 31, 2017, the Company had warrants to purchase 97,931 shares of common stock outstanding with exercise prices ranging from $4.70 to $6.04 per
share. These warrants have expiration dates through January 2025.
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10. STOCK-BASED COMPENSATION
The total stock-based compensation the Company recognized for stock-based awards in the consolidated statements of operations is as follows (in thousands):
Total cost of revenue
Sales and marketing
Research and development
General and administrative
Total stock-based compensation expense
The following table presents stock-based compensation expense by award-type (in thousands):
Stock options
Restricted stock units
Employee stock purchase plan
Total stock-based compensation expense
2017
Fiscal Year Ended January 31,
2016
2015
1,026 $
1,438
3,586
3,722
9,772 $
$
437
611
1,683
1,922
4,653 $
2017
Fiscal Year Ended January 31,
2016
2015
2,468 $
6,272
1,032
9,772 $
2,607 $
1,644
402
4,653 $
36
41
169
180
426
426
—
—
426
$
$
$
$
As of January 31, 2017, there was $3.2 million, $12.5 million and $1.0 million of unrecognized share-based compensation expense related to non-vested stock
option grants, unvested RSUs and ESPP, respectively, which will be recognized on a straight-line basis over the remaining weighted-average vesting periods of
approximately 1.6 years, 2.7 years and 0.9 years, respectively.
Total outstanding non-employee stock options were 109,315 and 70,199 at January 31, 2017 and 2016, respectively. The total outstanding non-employee RSUs
were 73,453 and 70,500 at January 31, 2017 and 2016, respectively. The non-employee stock-based compensation expense for stock options and RSUs was $0.1
million and $0.2 million, respectively for fiscal year ended January 31, 2017. The non-employee stock-based compensation expense for stock options and RSUs
was $0.2 million and $0.1 million, respectively for fiscal year ended January 31, 2016. The non-employee stock-based compensation expense for stock options and
RSUs was not material for fiscal year ended January 31, 2015.
The fair value of the shares of common stock underlying stock options is based on the closing price of the Company’s common stock as reported on the New York
Stock Exchange on the grant date. The Company has consistently used peer company volatilities for calculating the expected volatilities for employee stock options
and the ESPP. The expected term of options granted to employees is based on the simplified method as the Company does not have sufficient historical exercise
data, and the expected term of the ESPP is based on the contractual term. The risk-free interest rate for the expected term of the options and the ESPP is based on
the U.S. Treasury yield curve in effect at the time of grant. The Company recognizes its stock-based compensation related to options and RSUs using a straight-line
method over the vesting term. The Company recognizes its stock-based compensation related to ESPP using a straight-line method over the offering period.
The Company did not grant any stock options during fiscal 2017. For the years ended January 31, 2016 and 2015, the fair value of employee stock options grants
was estimated using the Black–Scholes model with the following assumptions:
Stock Options:
Expected volatility
Expected term (in years)
Risk-free interest rate
Dividend yield
Fiscal Year Ended January 31,
2016
2015
54%-62%
5.3-6.1
1.6%-1.9%
—%
69%-81%
5.4-6.3
1.5%-2.0%
—%
95
The Company did not offer ESPP prior to fiscal 2016. For the years ended January 31, 2017 and 2016, t he fair value of the Company’s ESPP was estimated using
the Black-Scholes model with the following assumptions:
ESPP:
Expected volatility
Expected term (in years)
Risk-free interest rate
Dividend yield
11. INCOME TAXES
Fiscal Year Ended January 31,
2017
2016
37%-50%
0.5-2.0
0.5%-1.0%
—%
35%-44%
0.5-2.2
0.1%-0.8%
—%
Income tax expense differed from the amount computed by applying the federal statutory income tax rate of 34% to pretax loss as a result of the following (in
thousands):
Federal tax at statutory rate
Change in valuation allowance
State taxes
Stock-based compensation
Research and development credit
Permanent tax adjustment
Other
Total
2017
Rate
Fiscal Year Ended January 31,
2016
Rate
2015
Rate
$
$
(4,403)
4,881
(230)
387
(738)
103
—
—
34% $
(38)%
2%
(3)%
6%
(1)%
—
—
$
(4,787)
4,502
(261)
691
(273)
128
—
—
34% $
(32)%
2%
(5)%
2%
(1)%
—
—
$
(2,350)
2,132
(437)
92
(192)
23
230
(502)
34%
(31)%
6%
(1)%
3%
—
(3)%
8%
Income tax expense differs from the amount computed by applying the statutory federal income tax rate primarily as the result of changes in the valuation
allowance.
The tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax assets and liabilities related to the following (in
thousands):
Deferred tax assets:
Accruals and reserves
Stock-based compensation
Intangible assets amortization
Deferred revenue
Net operating loss carry forwards
Tax credit carryover
Gross deferred tax assets
Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Acquired intangible assets
Fixed assets depreciation
Gross deferred tax liabilities
Total deferred tax assets
As of January 31,
2017
2016
$
$
$
$
$
2,623 $
1,887
101
182
28,120
2,296
35,209
(34,900)
309 $
(183) $
(126)
(309) $
— $
2,297
1,334
110
13
24,869
1,558
30,181
(29,868)
313
(301)
(12)
(313)
—
96
Income taxes are recorded using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabiliti es and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income (or loss) in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, is not more likely
than not to be realized.
Management believes that, based on available evidence, both positive and negative, it is more likely than not that the deferred tax assets will not be utilized, such
that a full valuation allowance has been recorded. The valuation allowance for deferred tax assets was $34.9 million, $29.9 million and $25.8 million as of
January 31, 2017, 2016 and 2015, respectively. The net change in the total valuation allowance for the year ended January 31, 2017 was an increase of $5.0 million.
On January 31, 2017, the Company had approximately $72.9 million and $57.5 million of net operating loss (NOL) carryforwards available to offset future taxable
income for both federal and state purposes, respectively. If not utilized, these available carryforward losses will expire in various amounts for federal and state tax
purposes beginning in 2030.
In addition, the Company had approximately $2.4 million and $2.1 million of federal and state research and development tax credits, respectively, available to
offset future taxes. If not utilized, the available federal credits will begin to expire in 2030. California state research and development tax credits can be carried
forward indefinitely.
Under Section 382 of the Internal Revenue Code of 1986, as amended, utilization of the NOL carryforwards and credits may be subject to substantial annual
limitation due to the ownership change limitations and similar state provisions. If there should be an additional ownership change, the annual limitation may result
in the expiration of NOLs and credits before utilization.
The Company completed a Section 382 analysis through January 31, 2017 and determined that an ownership change, as defined under Section 382 of the Internal
Revenue Code, occurred in prior years. Based on the analysis, the Company determined that it has undergone four ownership changes. The first and second
ownership changes occurred in April 2005, the third change occurred in February 2009 and the fourth change occurred in January 2017. NOLs presented account
for any limited and potential lost attributes due to such ownership changes and their respective expiration dates.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This ASU affects entities that issue share-based
payment awards to their employees. The ASU is designed to simplify several aspects of accounting for share-based payment award transactions which include the
income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations. The
Company early adopted ASU 2016-09 during the third quarter of fiscal 2017. Under ASU 2016-09, excess tax benefits and deficiencies are required to be
recognized prospectively as part of provision for income taxes rather than additional paid-in capital. The adoption did not have any material impact on our
accounting of provision for income taxes. The Company has adopted this requirement prospectively and accordingly; prior periods have not been adjusted. Excess
tax benefits were not material for all periods presented and is fully offset by valuation allowance.
The Company had unrecognized tax benefits (“UTBs”) of approximately $1.8 million as of January 31, 2017. All of the deferred tax assets associated with these
UTBs are fully offset by a valuation allowance. The following table summarizes the activity related to UTBs (in thousands):
Balance at January 31, 2015
(Decrease) related to prior year positions
Increase related to current year tax positions
Balance at January 31, 2016
(Decrease) related to prior year positions
Increase related to current year tax positions
Balance at January 31, 2017
$
$
1,029
(16)
204
1,217
—
598
1,815
All of these UTBs, if recognized, would not affect the effective tax rate before consideration of the valuation allowance.
The Company’s policy is to classify interest and penalties associated with unrecognized tax benefits as income tax expense. The Company had no interest or
penalty accruals associated with uncertain tax benefits in its balance sheets and statements of operations for both fiscal 2017 and 2016.
97
The Company does not have any tax positions for which it is reasonably possible the total amount of gross unrecognized benefits will increase or decrease within
12 months of the year ended January 31, 2017.
Because the Company has net operating loss and credit carryforwards, there are open statutes of limitations in which federal, state and foreign taxing authorities
may examine the Company’s tax returns for all years from 2005 through the current period.
12. RETIREMENT PLAN
The Company offers a qualified 401(k) plan to eligible employees. The plan allows for discretionary employer matching and profit-sharing contributions. The plan
covers all full-time employees over the age of 21 and provides employees with tax deferred salary deductions. Employees may contribute up to a maximum of
$18,000 per year, or $24,000 for employees over 50 years of age, and the Company matches 50% of the contribution of the employee up to 6% of the deferred
salary amount. Contributions made by the Company vest 100% upon contribution. The Company’s contributions to the 401(k) defined contribution plan, which are
expensed immediately as compensation costs, were $0.4 million, $0.3 million and $0.2 million for the years ended January 31, 2017, 2016 and 2015, respectively.
13. COMMITMENTS AND CONTINGENCIES
Leases and Purchase Commitments —The Company leases office space in Palo Alto and Newark, California and office equipment under operating leases with
lease periods expiring through November 2020. As of January 31, 2017, future minimum rental commitments under non-cancelable operating leases were as
follows (in thousands):
Fiscal Year Ending January 31,
2018
2019
2020
2021
Total
Operating
Leases
1,297
71
23
10
1,401
$
$
In January 2015, the Company entered into a capital lease for computer equipment that was scheduled to mature in December 2016 with the right to purchase the
equipment at maturity for one dollar. The Company paid the outstanding balance of $0.6 million in fiscal 2017.
Rent expense was $2.0 million, $1.7 million, and $0.9 million for the years ended January 31, 2017, 2016 and 2015, respectively.
As of January 31, 2017, non-cancelable purchase commitments were $4.0 million.
Legal Proceedings —The Company is party to actions and proceedings incident to the Company’s business in the ordinary course of business, including litigation
regarding its intellectual property, challenges to the enforceability or validity of its intellectual property, and claims that the Company’s products or services
infringe on the intellectual property rights of others. The Company accrues a liability for such matters when it is probable that future expenditures will be made and
such expenditures can be reasonably estimated.
Oregon
Litigation
On August 30, 2016 the Oregon Department of Revenue (the “DOR”) issued tax assessments against the Company for the Oregon Emergency Communications
Tax (the “Tax”), which the DOR alleges Ooma should have collected from its subscribers in Oregon and remitted to the DOR during the period starting on January
1, 2013 and ending on March 31, 2016 (collectively, the “Assessments”). On November 28, 2016 the Company filed a complaint in the Oregon Tax Court,
asserting that the Assessments against Ooma are in violation of applicable Oregon law and are barred by the United States Constitution, and asking the Oregon Tax
Court to abate the Assessments in full (the “Complaint”, and such dispute, the “Oregon Tax Litigation”). On February 10, 2016 the DOR filed an answer to the
Compliant. The Company believes that the Commerce Clause of the United States Constitution bars the application of the Tax to the Company, since the Company
has no employees, property or other indicia of a “substantial nexus” with the State of Oregon, and therefore the application of the Tax against Ooma and the
Assessments are barred by the United States Constitution. The Company will continue to vigorously litigate the Complaint in pursuit of the full abatement of the
Assessments.
98
Deep
Green
Wireless
Litigation
On June 8, 2016, plaintiff Deep Green Wireless LLC filed a complaint in the U.S. District Court for the Eastern District of Texas against Ooma, Inc., alleging
infringement of U.S. Patent No. RE42,714 (the “Deep Green Wireless Litigation”). The complaint seeks unspecified monetary damages, costs, attorneys’ fees and
other appropriate relief. On July 29, 2016 the Company filed its answer, affirmative defenses and counterclaims, on August 2, 2016 the Company filed a motion to
transfer the case to the Northern District of California, and on February 21, 2017 magistrate judge Roy S. Payne granted the Company’s motion to transfer the case.
Based upon its investigation, the Company does not believe that its products infringe any valid or enforceable claim of the aforementioned patent, and plans to
continue vigorously defending against the plaintiff’s claim.
Securities
Litigation
On January 14, 2016, Michael Barnett filed a purported stockholder class action in the San Mateo County Superior Court of the State of California (Case No.
CIV536959) against Ooma, certain of its officers and directors, and certain of the underwriters of our Initial Public Offering on July 17, 2015 (the “IPO”). Since
that time two additional purported class actions making substantially the same allegations against the same defendants were filed, and on May 18, 2016 all three
complaints were combined into a “consolidated complaint” filed in the same court (the “Securities Litigation”). The consolidated complaint purports to be brought
on behalf of all persons who purchased shares of common stock in our IPO in reliance upon the Registration Statement and Prospectus the Company filed with the
Securities and Exchange Commission (the “SEC”). The consolidated complaint alleges that Ooma and the other defendants violated the Securities Act of 1933, as
amended (the “Securities Act”) by issuing the Registration Statement and Prospectus, which the plaintiffs allege contained material misstatements and omissions in
violation of Sections 11, 12(a)(2) and 15 of the Securities Act. The plaintiffs seek class certification, compensatory damages, attorneys’ fees and costs, rescission or
a rescissory measure of damages, equitable and/or injunctive relief, and such other relief as the court may deem proper. On July 1, 2016 Ooma filed its answer to
the complaint, and on August 26, 2016 Ooma filed a motion for judgment on the pleadings. Ooma believes that the plaintiffs’ claims are without merit and is
vigorously defending against the Securities Litigation.
Berks
County
Litigation
On January 21, 2016 the County of Berks, Pennsylvania filed a lawsuit in the Berks County Court of Common Pleas naming the Company and 113 other telephone
service providers as defendants (the “Berks County Litigation”), alleging breach of fiduciary duty, fraud, and negligent misrepresentation in connection with
alleged violations of the Pennsylvania 911 Emergency Communication Services Act, 35 Pa.C.S.A. §5301 et seq. (“PA 911 Act”) for failure to collect from
subscribers and remit certain fees pursuant to the PA 911 Act. The plaintiff seeks a declaratory judgment that we must comply with the PA 911 Act, compensatory
and punitive damages, attorneys’ fees and costs, equitable and/or injunctive relief and such other relief as the court may deem proper. On May 17, 2016 the court
issued an order overruling the defendants’ joint preliminary objections, which are, in essence, the Pennsylvania equivalent of a motion to dismiss. Notwithstanding
such adverse order, the Company believes that the Commerce Clause of the United States Constitution bars the application of the PA 911 Act to the Company,
since the Company has no employees, property or other indicia of a “substantial nexus” with the State of Pennsylvania, and therefore the plaintiff’s claims are
without merit. The Company intends to continue vigorously defending this lawsuit.
Alabama
Litigation
On November 12, 2015 the Alabama Statewide 9-1-1 Board filed a lawsuit in the Circuit Court of Montgomery, Alabama against the Company (the “Alabama
Litigation”). The lawsuit alleges that the Company has failed to collect from its subscribers and remit certain fees pursuant to the Alabama Emergency Telephone
Services Act (the “AETS Act”). The plaintiff seeks a declaratory judgment that we must comply with the AETS Act, compensatory and punitive damages,
attorneys’ fees and costs, equitable and/or injunctive relief and such other relief as the court may deem proper. The Company believes that the Commerce Clause
of the United States Constitution bars the application of the AETS Act to the Company, since the Company has no employees, property or other indicia of a
“substantial nexus” with the State of Alabama, and therefore the plaintiff’s claims are without merit. On January 31, 2017 the Alabama Litigation was dismissed
with prejudice pursuant to a confidential settlement agreement between the parties, without resulting in a material loss to the Company.
In connection with the Oregon Litigation, Deep Green Wireless Litigation, Securities Litigation and the Berks County Litigation proceedings, the Company has
determined that the amount of any material loss or range of any material losses that is reasonably possible to result from each such proceeding is not reasonably
estimable. Accordingly, no material reserves have been recorded in the Company’s consolidated financial statements with respect to any of such litigations.
99
Indemnification —The Company enters into standard indemnification arrangements in the ordinary course of business. Pursuant to these arrangements, the
Company indemnifies, holds harmless, and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified party, in connection with
any trade secret, copyright, patent or other intellectual property infringement claim by a ny third party with respect to the Company’s technology. The term of these
indemnification agreements is generally perpetual. The maximum potential amount of future payments the Company could be required to make under these
agreements is not determinable b ecause it involves claims that may be made against the Company in the future, but have not yet been made.
The Company has entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers
against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct of the individual.
The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the
Company has director and officer insurance coverage that reduces the Company’s exposure and enables the Company to recover a portion of any future amounts
paid.
To date the Company has not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. No liability associated with such
indemnifications has been recorded to date.
14. ACQUISITIONS
Talkatone, Inc. —In fiscal 2015, the Company acquired all of the issued and outstanding securities of Talkatone, Inc. (“Talkatone”) a privately held provider of
telephony services over Wi-Fi networks in order to expand its service offerings in the mobile application marketplace. The total consideration for this transaction
was approximately $2.3 million on the acquisition date and consisted of the following (dollars in thousands):
Cash consideration paid at closing
Common stock (90,426 shares)
Contingent consideration
Total consideration
$
$
887
338
1,039
2,264
At the time of the Talkatone acquisition, the Company was obligated to pay additional amounts for certain deferred earn-out payments based upon the achievement
of certain performance targets. The Company determined the fair market value of these earn-outs based on probability analysis. The fair market value and gross
amount of these earn-out payments were $1.0 million and $2.2 million, respectively. The fair value measurement is based on significant inputs not observed in the
market and thus represents a Level 3 measurement.
Transaction costs associated with the acquisition were $12,000 and are included in general and administrative expense in the accompanying consolidated statement
of operations.
The Company accounted for the Talkatone acquisition under the acquisition method of accounting as a business combination. The assets acquired and liabilities
assumed were recorded at fair market value determined by management. The excess of the purchase price over the fair value of the net tangible and identifiable
intangible assets acquired was recorded as goodwill. The goodwill generated from the business combination is primarily related to the employee workforce and the
expected synergies. Goodwill is not subject to any amortization and is not tax deductible.
During fiscal 2017 and 2016, the Company paid $0.1 million and $0.7 million in cash and issued 26,375 shares and 49,159 shares as earn-out consideration,
respectively.
100
The purchase price was allocated as follows (in thousands):
Cash
Net liabilities assumed
Intangible assets:
Trade name
Developed technology
Non-compete agreement
User relationships
Non-current deferred tax liabilities
Goodwill
Net assets acquired
$
$
215
(60)
103
815
118
458
(502)
1,117
2,264
The intangible assets acquired are reported, net of accumulated amortization, in the accompanying consolidated balance sheets as of January 31, 2017 and 2016.
Amortization expense related to the acquired intangible assets was $0.3 million, $0.4 million and $0.2 million for fiscal 2017, 2016 and 2015, respectively, which
was included as a component of operating expenses and cost of revenue in the consolidated statement of operations. The operating results of Talkatone have been
included in the accompanying consolidated financial statements from the date of acquisition.
Pro forma results of operations for the acquisition completed have not been presented because the effect of the acquisition was not material to the Company’s
financial results.
15. NET LOSS PER SHARE
Basic and diluted net loss per share of common stock is calculated by dividing the net loss allocable to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted net loss per share of common stock is the same as basic net loss per share of common stock because the
effects of potentially dilutive securities are antidilutive. Upon completion of the IPO in July 2015, all outstanding convertible preferred stock was converted to
common stock and are included in the weighted average number of common shares used to compute net loss per share from the conversion date.
The following table sets forth the computation of the Company’s basic and diluted net loss per share of common stock (in thousands, except share and per share
data):
Numerator
Net loss
Denominator
Weighted-average common shares for basic and diluted net loss per share
Basic and diluted net loss per share
2017
Fiscal Year Ended January 31,
2016
2015
$
$
(12,949) $
(14,052) $
(6,410)
17,490,448
10,173,095
(0.74) $
(1.38) $
2,284,241
(2.81)
The following table sets forth the potentially dilutive securities excluded from the computation of diluted net loss per share because such securities have an anti-
dilutive impact due to losses reported:
Options to purchase common stock
Employee stock purchase plan
Convertible preferred stock
Restricted stock units
Warrants to purchase convertible preferred stock
Warrants to purchase common stock
Common stock subject to repurchase
Potential shares excluded from diluted net loss per share
101
2017
Fiscal Year Ended January 31,
2016
1,777,365
338,756
—
1,859,196
—
97,931
53,821
4,127,069
2,087,584
381,066
—
1,056,905
—
97,931
173,404
3,796,890
2015
1,893,239
—
8,353,748
—
192,009
87,828
502,359
11,029,183
16. RELATED PARTY TRANSACTION
One of the Company’s board of director is affiliated with a professional firm that provides public relations service to the Company. In fiscal 2017, the Company
incurred expenses of approximately $0.3 million for the service provided by the firm.
17 . SUBSEQUENT EVENTS
In March 2017, the Company completed a secondary offering, in which certain stockholders of the Company affiliated with Worldview Technology Partners (the
“Selling Stockholders”) sold an aggregate of 3,290,483 shares of our common stock at a public offering price of $8.85 per share, including 429,193 shares of
common stock sold upon the underwriters’ exercise of the overallotment option. After this offering, Worldview Technology Partners owned less than 1% of the
Company’s outstanding voting securities. The Company did not receive any of the proceeds from the offering.
102
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOU NTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation
of
Disclosure
Controls
and
Procedures
Our Management, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our disclosure controls
and procedures as of January 31, 2017. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, 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 that it 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 a company in the reports that it files
or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of January 31, 2017, our chief
executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Management's
Annual
Report
on
Internal
Control
Over
Financial
Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act). Management conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal
Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on the assessment,
management has concluded that its internal control over financial reporting was effective as of January 31, 2017 to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP. This annual report does not include an attestation report
of our registered public accounting firm due to a transition period established by rules of the SEC for newly public companies under the JOBS Act.
Changes
in
Internal
Control
over
Financial
Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d)
of the Exchange Act that occurred during the quarter ended January 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
None
103
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item will be included under the caption “Directors, Executive Officers and Corporate Governance” in our Proxy Statement
for the 2017 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended January 31, 2017, which we refer to as our 2017
Proxy Statement, and is incorporated herein by reference.
The Company has a “Code of Ethics and Business Conduct for Employees, Officers and Directors” that applies to all of our employees, including our
Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer and our Board of Directors. A copy of this code is available on our website at
http://investors.ooma.com . We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of
our Code of Ethics and Business Conduct for Employees, Officers and Directors by posting such information on our investor relations website under the heading
“Governance—Governance Documents” at http://investors.ooma.com .
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be included under the captions “Executive Compensation” and under the subheadings “Board’s Role in Risk
Oversight, “Outside Director Compensation,” and “Compensation Committee Interlocks and Insider Participation” under the heading “Directors, Executive
Officers and Corporate Governance” in the 2017 Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item will be included under the captions “Security Ownership of Certain Beneficial Owners and Management” and under
the subheading “Potential Payments upon Termination or Change in Control” and “Equity Compensation Plan Information” under the heading “Executive
Compensation” in the 2017 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item will be included under the captions “Certain Relationships and Related Transactions” and “Directors, Executive
Officers and Corporate Governance—Director Independence” in the 2017 Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item will be included under the caption “Proposal Two: Ratification of Selection of Independent Registered Public
Accountants” in the 2017 Proxy Statement and is incorporated herein by reference.
104
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Documents filed as part of this report are as follows:
(a)
Consolidated Financial Statements
PART IV
Our Consolidated Financial Statements are listed in the “Index to Consolidated Financial Statements” Under Part II, Item 8 of this Annual Report on Form
10-K
(b)
Consolidated Financial Statement Schedules
All financial statement schedules are omitted because the information called for is not required or is shown either in the consolidated financial statements or
in the notes thereto.
(c)
Exhibits
The exhibits filed or incorporated by reference as part of this Annual Report on Form 10-K are listed in the Exhibit Index immediately preceding the
exhibits. We have identified in the Exhibit Index each management contract and compensation plan filed as an exhibit to this Annual Report on Form 10-K in
response to Item 15(a)(3) of Form 10-K.
The documents listed in the Exhibit Index of this report are incorporated by reference or are filed with this Annual Report on Form 10-K, in each case as
indicated therein (numbered in accordance with Item 601 of Regulation S-K).
105
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized .
April 11, 2017
Ooma, Inc.
SIGNATUR ES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
By : /s/ Eric B. Stang
Eric B. Stang
President
and
Chief
Executive
Officer
Signature
/s/ Eric B. Stang
Eric B. Stang
/s/ Ravi Narula
Ravi Narula
/s/ Susan Butenhoff
Susan Butenhoff
/s/ Alison Davis
Alison Davis
/s/ Andrew H. Galligan
Andrew H. Galligan
/s/ Peter J. Goettner
Peter J. Goettner
/s/ Russell Mann
Russell Mann
/s/ William D. Pearce
William D. Pearce
/s/ James Wei
James Wei
Title
President and Chief Executive Officer and Chairman of the
Board of Directors
(Principal Executive Officer)
Date
April 11, 2017
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
April 11, 2017
Director
Director
Director
Director
Director
Director
Director
106
April 11, 2017
April 11, 2017
April 11, 2017
April 11, 2017
April 11, 2017
April 11, 2017
April 11, 2017
Exhibit Number
Description
EXHI BITS
Filed / Furnished /
Incorporated by
Reference from Form
Incorporated by
Reference from Exhibit
Number
3.1
3.2
4.1
4.2
Amended and Restated Certificate of Incorporation
Amended and Restated Bylaws
Form of common stock certificate.
Fourth Amended and Restated Investors’ Rights
Agreement, by and among the Registrant and certain of
its stockholders dated as of April 24, 2015.
4.3
Form of Indenture
10.1+
2005 Stock Incentive Plan and forms of
agreements thereunder.
10.2+
2015 Equity Incentive Plan and forms of agreements
thereunder.
10.3+
2015 Employee Stock Purchase Plan and form of
10.4+
10.5+
agreement thereunder.
Executive Incentive Bonus Plan.
Executive Change in Control and Severance Agreement
by and between the Company and
Eric B. Stang, dated June 9, 2015.
10.6+
Form of Executive Change in Control and
Severance Agreement
10.7+
Offer Letter by and between the Company and James A.
Gustke, dated July 30, 2010.
10-Q
10-Q
S-1/A
S-1
S-3
S-1
S-1/A
S-1/A
S-1
S-1
S-1
S-1
10.8
Change in Control Letter Agreement between the
Filed herewith.
Company and James A. Gustke, dated August 31, 2016.
10.9
Form of Indemnification Agreement between the
Registrant and each of its directors and executive
officers.
10.10
Amended and Restated Loan and Security Agreement,
dated December 17, 2012, by and between the Company
and Silicon Valley Bank.
10.11.1
First Amendment to Amended and Restated Loan and
Security Agreement, dated July 21, 2014, by and
between the Company and Silicon Valley Bank.
10.11.2
Second Amendment to Amended and Restated Loan and
Security Agreement, dated January 5, 2015, by and
between the Company and Silicon Valley Bank.
S-1
S-1
S-1
S-1
107
3.1
3.2
4.1
4.2
4.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Date Filed
9/11/2015
9/11/2015
7/6/2015
6/15/2015
12/16/2016
6/15/2015
7/6/2015
7/6/2015
6/15/2015
6/15/2015
6/15/2015
6/15/2015
6/15/2015
6/15/2015
10.10.1
6/15/2015
10.10.2
6/15/2015
Date Filed
6/15/2015
6/15/2015
6/15/2015
Exhibit Number
Description
Filed / Furnished /
Incorporated by
Reference from Form
Incorporated by
Reference from Exhibit
Number
10.11
10.12
21.1
10.12
10.13
21.1
23.1
31.1
31.2
32.1
32.2
Mezzanine Loan and Security Agreement, dated January
5, 2015, by and between the Company and Silicon
Valley Bank.
Office Lease, effective December 1, 2012, by and
between DP Ventures, LLC and the Company.
List of subsidiaries of the Registrant.
Consent of Deloitte & Touche LLP, Independent
Registered Public Accounting Firm.
Certification pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002, Rule 13(a)‑14(a)/15d-14(a), by
President and Chief Executive Officer.
Certification pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002, Rule 13(a)‑14(a)/15d-14(a), by
President and Chief Financial Officer.
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, by President and Chief Executive Officer.
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, by President and Chief Executive Officer.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
101.DEF
XBRL Taxonomy Extension Calculation Linkbase
Document
XBRL Taxonomy Extension Definition Linkbase
Document
S-1
S-1
S-1
Filed herewith.
Filed herewith.
Filed herewith.
Furnished herewith.
Furnished herewith.
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
Filed herewith.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
Document
Filed herewith.
+ Indicates a management contract or compensatory plan.
108
Exhibit 10.8
1880 Embarcadero Road
Palo Alto, CA 94303
Phone: 650.566.6600
Fax: 650.325.7197
www.ooma.com
August 31, 2016
Jim Gustke
33 Piedmont Court
Piedmont, CA 94611
Dear Jim,
I am pleased to confirm the following benefits in connection with your employment by Ooma, Inc. (the “ Company
” or “ Ooma
”).
In the event a Change of Control occurs (as defined in the Company’s 2015 Equity Incentive Plan (the “ Plan
”)) and within 3 months prior to or 12 months
following such Change of Control, either, (i) the Company (or any parent, subsidiary or successor of the Company) terminates your employment without Cause, or
(ii) you terminate your employment with the Company (or any parent, subsidiary or successor of the Company) for Good Reason, then you shall vest in 100% of
any then outstanding and unvested Equity Awards. The Equity Awards will otherwise remain subject to the terms and conditions of the applicable Equity Award
agreement. Notwithstanding anything stated herein or elsewhere to the contrary, if the successor to the Company or any affiliate of such successor does not agree
to assume, substitute or otherwise continue any then outstanding Equity Awards at the time of a Change in Control, then 100% of the then-unvested shares subject
to the Equity Awards shall fully vest and, if applicable, become exercisable, as of immediately prior to, and contingent upon, the consummation of such Change in
Control, regardless of whether your employment with the Company (or any parent, subsidiary or successor of the Company) continues or terminates for any reason.
The acceleration benefit described above is subject to you signing and not revoking a general release of all claims in a form provided by the Company, and such
release becoming effective and irrevocable no later than the sixtieth (60th) day following your termination (such deadline, the “ Release
Deadline
”). No benefits
will be provided pursuant to this letter agreement until the release becomes effective and irrevocable.
If the Company terminates your employment as a result of your Disability where you are no longer willing or able to continuing performing services for the
Company, or your employment terminates due to your death, then you (or your estate) will not be entitled to receive the acceleration benefits described in this letter
agreement.
Capitalized terms used in this letter agreement but not otherwise defined have the meaning given them in the Plan. For the purposes of this letter agreement:
“ Cause
” means you are terminated by the Company for any of the following reasons: (i) willful failure substantially to perform you duties and
responsibilities to the Company or deliberate violation of a Company policy; (ii) commission of any act of fraud, embezzlement, dishonesty or any other
willful misconduct that has caused or is reasonably expected to result in material injury to the Company; (iii) unauthorized use or disclosure
of any proprietary information or trade secrets of the Company or any other party to whom you owe an obligation of nondisclosure as a result of your
relationship with the Company; or (iv) your willful breach of any of your obligations under any written agreement or covenant with the Company. The
determination as to whether you are being terminated for Cause shall be made in good faith by the Company and shall be final and binding on you. The
foregoing definition does not in any way limit the Company’s ability to terminate your employment or consulting relationship at any time, and the term
“Company” will be interpreted to include any subsidiary, parent or affiliate, as appropriate.
“ Equity
Award
” means each then outstanding award relating to the Company’s common stock (whether stock options, stock appreciation rights, shares of
restricted stock, restricted stock units, performance shares, performance units or other similar awards).
“ Good
Reason
” means your resignation due to the occurrence of any of the following conditions which occurs without your written consent, provided that
the requirements regarding advance notice and an opportunity to cure set forth below are satisfied:
(i)
A material adverse change to your authority, duties or responsibilities, taken as a whole, relative to your authority, duties or responsibilities, taken as a
whole, in effect immediately prior to such change;
(ii) A 10% or more reduction in your then-current base salary or a 10% or more reduction in your base compensation (including base salary and bonus); or
(iii) The Company conditions your continued service with the Company on the relocation of your principal work location to a location that is more than
twenty-five (25) miles from Palo Alto, California (or your then current principal work location) and such relocation results in an increase in your one-
way commuting distance from your home by twenty-five (25) miles or more.
In order for you to resign for Good Reason, you must provide written notice to the Company of the existence of the Good Reason condition within ninety (90) days
of the initial existence of such Good Reason condition. Upon receipt of such notice, the Company will have thirty (30) days during which it may remedy the Good
Reason condition and not be required to provide the benefits described herein as a result of such proposed resignation. If the Good Reason condition is not
remedied within such thirty (30) day cure period, you may resign based on the Good Reason condition specified in the notice effective no later than ninety (90)
days following the expiration of the thirty (30) day cure period.
To the extent the terms set forth herein differ from the terms set forth in any offer letter, employment agreement, stock option agreement or any other agreement,
written or oral, that you previously entered into with the Company, or that you enter into with the Company after the date of this letter agreement (each, an “
Agreement
”), the terms of such Agreement are hereby superseded unless specifically provided otherwise in a written agreement entered into by and between you
and the Company (with respect to Agreements entered into after the date of this letter agreement, specific reference must be made to this letter agreement in order
to supersede the terms set forth herein). All other terms of each Agreement shall remain in full force and effect.
Except as expressly set forth herein, the foregoing sets forth the entire agreement and understanding of the parties relating to the subject matter herein and merges
all prior discussions between them. Nothing in this letter in intended to change the “at will” nature of your current employment relationship with Ooma. This
means that you are free to resign at any time with or without cause or prior notice. Similarly, the Company is free to terminate our employment relationship with
you at any time, with or without cause or prior notice. Although your job duties, title, compensation and benefits, as well as the Company's policies and
procedures, may change from time-to-time, the “at-will” nature of your employment may only be changed in a document signed by you and the CEO of the
Company. In addition, your employment with the Company is subject to the Company's general employment policies, many of which are described in the
Company's Employee Handbook.
To indicate your acceptance of this letter, please sign and date this letter and return one original copy to me. This letter may be executed in two or more
counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument.
Sincerely,
/s/ Eric B. Stang
Eric Stang, CEO
Agreed and Accepted:
/s/ Jim Gustke
Date: 9/27/2016
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in this Registration Statement on Form S-8 of our report dated April 11, 2017, relating to the consolidated financial
statements of Ooma, Inc. and its subsidiary appearing in the Annual Report on Form 10-K of Ooma, Inc. for the year ended January 31, 2017.
Exhibit 23.1
/s/ DELOITTE & TOUCHE LLP
San Jose, California
April 11, 2017
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Eric B. Stang, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Ooma, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a)
(b)
(c)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) 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)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
Date: April 11, 2017
By:
/s/ Eric B. Stang
Eric B. Stang
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Ravi Narula, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Ooma, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a)
(b)
(c)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) 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)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
Date: April 11, 2017
By:
/s/ Ravi Narula
Ravi Narula
Chief Financial Officer and Treasurer
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
I, Eric B. Stang, certify pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) and Section 1350 of Chapter
63 of Title 18 of the United States Code (18 U.S.C. §1350), as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K
of Ooma, Inc. for the fiscal year ended January 31, 2017, fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act and that the
information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and result of operations of Ooma, Inc.
Date: April 11, 2017
By:
/s/ Eric B. Stang
Eric B. Stang
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF
CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
I, Ravi Narula, certify pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) and Section 1350 of Chapter
63 of Title 18 of the United States Code (18 U.S.C. §1350), as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K
of Ooma, Inc. for the fiscal year ended January 31, 2017, fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act and that the
information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and result of operations of Ooma, Inc.
Date: April 11, 2017
By:
/s/ Ravi Narula
Ravi Narula
Chief Financial Officer and Treasurer